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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 March 31, 2021

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.)

 

 

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 May 12, 2021, the registrant had 16,701,916 shares of Class A Common Stock, $2.00 par value, outstanding and 2,631,076 shares of Class C Common Stock, $2.00 par value, outstanding. 


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2021

 

Table of Contents

 

 

 

Page No.

 

Part I - Financial Information

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020

3-4

 

Condensed Consolidated Statements of Earnings for the three months
ended March 31, 2021 and 2020 (unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (unaudited)

6

 

Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2021 and March 31, 2020 (unaudited)

7

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

8-9

 

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2.

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

50

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

55

 

Part II - Other Information

 

Item 1.

Legal Proceedings

56

Item 1A.

Risk Factors

56

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

57

 

Signature Page

59


2


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Part I - Financial Information

 

Item 1. Financial Statements. 

 

Assets

March 31
2021
(Unaudited)

 

December 31
2020

Investments:

 

 

 

Fixed maturity securities, available for sale, at estimated fair value
(amortized cost of $256,894,421 and $265,150,484 for 2021 and 2020)

$279,550,528 

 

$294,656,679 

Equity securities at estimated fair value (cost of $8,913,275 and $9,698,490 for 2021 and 2020)

11,154,495 

 

11,324,239 

Mortgage loans held for investment (net of allowances for loan losses of $1,897,155 and $2,005,127 for 2021 and 2020)

244,951,952 

 

249,343,936 

Real estate held for investment (net of accumulated depreciation of $14,473,417 and $13,800,973 for 2021 and 2020)

157,040,536 

 

131,684,453 

Real estate held for sale

5,556,866 

 

7,878,807 

Other investments and policy loans (net of allowances for doubtful accounts of $1,662,394 and $1,645,475 for 2021 and 2020)

74,690,150 

 

73,696,661 

Accrued investment income

6,266,403 

 

5,360,523 

Total investments

779,210,930 

 

773,945,298 

Cash and cash equivalents

144,159,566 

 

106,219,429 

Loans held for sale at estimated fair value

304,030,372 

 

422,772,418 

Receivables (net of allowances for doubtful accounts of $1,698,691
and $1,685,382 for 2021 and 2020)

13,970,177 

 

10,899,207 

Restricted assets (including $4,160,721 and $3,989,415 for 2021 and 2020 at estimated fair value)

16,494,477 

 

16,150,036 

Cemetery perpetual care trust investments (including $2,947,117 and $2,810,070 for 2021 and 2020 at estimated fair value)

6,602,118 

 

6,413,167 

Receivable from reinsurers

15,836,062 

 

15,569,156 

Cemetery land and improvements

8,524,629 

 

8,761,436 

Deferred policy and pre-need contract acquisition costs

101,695,734 

 

100,075,276 

Mortgage servicing rights, net

42,779,361 

 

35,210,516 

Property and equipment, net

14,836,721 

 

12,473,345 

Value of business acquired

8,748,055 

 

8,955,249 

Goodwill

3,519,588 

 

3,519,588 

Other

27,819,736 

 

27,976,357 

Total Assets

$1,488,227,526 

 

$1,548,940,478 

 

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


3


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

 

March 31
2021
(Unaudited)

 

December 31
2020

Liabilities and Stockholders' Equity

 

 

 

Liabilities

 

 

 

Future policy benefits and unpaid claims

$846,737,059  

 

$844,790,087  

Unearned premium reserve

3,265,505  

 

3,328,623  

Bank and other loans payable

245,973,378  

 

297,824,368  

Deferred pre-need cemetery and mortuary contract revenues

13,514,055  

 

13,080,179  

Cemetery perpetual care obligation

4,130,579  

 

4,087,704  

Accounts payable

10,404,210  

 

8,932,683  

Other liabilities and accrued expenses

64,282,931  

 

87,650,981  

Income taxes

28,051,968  

 

25,258,800  

Total liabilities

1,216,359,685  

 

1,284,953,425  

 

 

 

 

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 16,672,236 shares in 2021 and 16,595,783 shares in 2020

33,344,472  

 

33,191,566  

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 2,631,076 shares in 2021 and 2,679,603 shares in 2020

5,262,152  

 

5,359,206  

Additional paid-in capital

50,650,188  

 

50,287,253  

Accumulated other comprehensive income, net of taxes

17,854,611  

 

23,243,133  

Retained earnings

165,867,882  

 

153,739,167  

Treasury stock at cost - 77,825 Class A shares and 56,276 Class C shares in 2021; and 227,852 Class A shares and 10,985 Class C shares  in 2020

(1,111,464) 

 

(1,833,272) 

 

 

 

 

Total stockholders' equity

271,867,841  

 

263,987,053  

Total Liabilities and Stockholders' Equity

$1,488,227,526  

 

$1,548,940,478  

 

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

 

2021

 

2020

Revenues:

 

 

 

Mortgage fee income

$72,998,612  

 

$40,281,761  

Insurance premiums and other considerations

23,350,210  

 

22,291,276  

Net investment income

14,293,887  

 

13,400,499  

Net mortuary and cemetery sales

5,942,126  

 

4,458,091  

Gains (losses) on investments and other assets

1,960,113  

 

(3,212,247) 

Other

4,113,658  

 

2,389,569  

Total revenues

122,658,606  

 

79,608,949  

 

 

 

 

Benefits and expenses:

 

 

 

Death benefits

18,312,006  

 

13,407,627  

Surrenders and other policy benefits

1,077,644  

 

1,070,475  

Increase in future policy benefits

4,254,658  

 

7,038,033  

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

3,576,865  

 

3,515,057  

Selling, general and administrative expenses:

 

 

 

Commissions

32,729,680  

 

16,554,743  

Personnel

24,371,505  

 

18,719,998  

Advertising

1,800,998  

 

1,005,317  

Rent and rent related

1,865,898  

 

1,614,741  

Depreciation on property and equipment

501,645  

 

516,213  

Costs related to funding mortgage loans

2,937,225  

 

1,956,282  

Other

11,949,864  

 

10,075,542  

Interest expense

1,825,599  

 

1,818,609  

Cost of goods and services sold-mortuaries and cemeteries

1,099,964  

 

842,078  

Total benefits and expenses

106,303,551  

 

78,134,715  

 

 

 

 

Earnings before income taxes

16,355,055  

 

1,474,234  

Income tax expense

(4,226,340) 

 

(49,785) 

 

 

 

 

Net earnings

$12,128,715  

 

$1,424,449  

 

 

 

 

Net earnings per Class A Equivalent common share (1)

$0.63  

 

$0.08  

 

 

 

 

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

$0.61  

 

$0.08  

 

 

 

 

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

19,124,001  

 

18,641,950  

 

 

 

 

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

20,008,050  

 

18,833,396  

 

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

 

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


5


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended March 31

 

2021

 

2020

Net earnings

$12,128,715  

 

$1,424,449  

Other comprehensive income:

 

 

 

Unrealized gains (losses) on fixed maturity securities available for sale

$(6,805,903) 

 

(11,181,151) 

Unrealized gains (losses) on restricted assets

(10,428) 

 

(13,085) 

Unrealized gains (losses) on cemetery perpetual care trust investments

(8,197) 

 

(12,046) 

Foreign currency translation adjustments

2,835  

 

(445) 

Other comprehensive income (loss), before income tax

(6,821,693) 

 

(11,206,727) 

Income tax benefit (expense)

1,433,171  

 

2,354,414  

Other comprehensive income (loss), net of income tax

(5,388,522) 

 

(8,852,313) 

Comprehensive income (loss)

$6,740,193  

 

$(7,427,864) 

 

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


6


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Three Months Ended March 31, 2021

 

 

Class A Common Stock

 

Class C Common Stock

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income

 

Retained Earnings

 

Treasury Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2021

 

$33,191,566 

 

$5,359,206  

 

$50,287,253 

 

$23,243,133  

 

$153,739,167 

 

$(1,833,272) 

 

$263,987,053  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

- 

 

 

 

- 

 

 

 

12,128,715 

 

 

 

12,128,715  

Other comprehensive loss

 

- 

 

 

 

- 

 

(5,388,522) 

 

- 

 

 

 

(5,388,522) 

Stock-based compensation expense

 

- 

 

 

 

39,153 

 

 

 

- 

 

 

 

39,153  

Exercise of stock options

 

55,852 

 

 

 

33,401 

 

 

 

- 

 

 

 

89,253  

Sale of treasury stock

 

- 

 

 

 

290,381 

 

 

 

- 

 

1,632,041  

 

1,922,422  

Purchase of treasury stock

 

- 

 

 

 

- 

 

 

 

- 

 

(910,233) 

 

(910,233) 

Conversion Class C to Class A

 

97,054 

 

(97,054) 

 

- 

 

 

 

- 

 

 

 

 

March 31, 2021

 

$33,344,472 

 

$5,262,152  

 

$50,650,188 

 

$17,854,611  

 

$165,867,882 

 

$(1,111,464) 

 

$271,867,841  

 

 

 

Three Months Ended March 31, 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  


 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Three Months Ended March 31

 

2021

 

2020

Cash flows from operating activities:

 

 

 

Net cash provided by (used in) operating activities

$100,975,851  

 

$(63,771,244) 

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases of fixed maturity securities

(1,753,606) 

 

(28,691,834) 

Sales, calls and maturities of fixed maturity securities

9,993,624  

 

44,166,424  

Purchases of equity securities

(367,786) 

 

(10,650,102) 

Sales of equity securities

1,376,669  

 

7,576,507  

Net changes in restricted assets

179,052  

 

753,326  

Net changes in perpetual care trusts

(47,841) 

 

(107,286) 

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

(200,084,136) 

 

(153,050,405) 

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

203,929,458  

 

149,366,124  

Purchases of property and equipment

(2,865,020) 

 

(534,737) 

Purchases of real estate

(23,554,515) 

 

(750,018) 

Sales of real estate

5,147,199  

 

4,153,329  

Net cash provided by (used in) investing activities

(8,046,902) 

 

12,231,328  

 

 

 

 

Cash flows from financing activities:

 

 

 

Investment contract receipts

2,542,681  

 

2,640,020  

Investment contract withdrawals

(4,386,172) 

 

(4,662,891) 

Proceeds from stock options exercised

89,253  

 

10,892  

Purchases of treasury stock

(910,233) 

 

(129,608) 

Repayment of bank loans

(46,367,270) 

 

(810,623) 

Proceeds from bank loans

54,896,199  

 

20,172,821  

Net change in warehouse line borrowings for loans held for sale

(60,432,330) 

 

16,982,783  

Net cash provided by (used in) financing activities

(54,567,872) 

 

34,203,394  

 

 

 

 

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

38,361,077  

 

(17,336,522) 

 

 

 

 

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

115,465,086  

 

137,735,673  

 

 

 

 

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

$153,826,163  

 

$120,399,151  

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

Cash paid during the year for:

 

 

 

Interest

$2,142,375  

 

$1,845,747  

Income taxes (net of refunds)

 

 

 

 

 

 

 

Non Cash Operating, Investing and Financing Activities:

 

 

 

Accrued real estate construction costs and retainage

$4,521,048  

 

$399,976  

Benefit plans funded with treasury stock

1,922,422  

 

482,361  

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

1,082,388  

 

3,271,518  

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

389,145  

 

 

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

201,951  

 

8,933,676  

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

 

 

9,394  


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

 

2021

 

2020

Cash and cash equivalents

$144,159,566 

 

$103,769,066 

Restricted assets

9,256,997 

 

15,347,648 

Cemetery perpetual care trust investments

409,600 

 

1,282,437 

 

 

 

 

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

$153,826,163 

 

$120,399,151 

 

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


9


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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, 2020, 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

 

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

 

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

 

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

 

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

 

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


10


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)


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.

 

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 October 2019, the FASB proposed an update to ASU No. 2016-13 that would make 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.

 

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.


11


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)


3)Investments 

 

The Company’s investments as of March 31, 2021 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

March 31, 2021:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

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

 

$42,427,856  

 

$1,099,519 

 

$ 

 

$43,527,375 

Obligations of states and political subdivisions

 

5,370,754  

 

209,554 

 

(24,569) 

 

5,555,739 

Corporate securities including public utilities

 

179,026,864  

 

21,203,792 

 

(501,358) 

 

199,729,298 

Mortgage-backed securities

 

29,799,733  

 

892,449 

 

(236,547) 

 

30,455,635 

Redeemable preferred stock

 

269,214  

 

13,267 

 

 

 

282,481 

Total fixed maturity securities available for sale

 

$256,894,421  

 

$23,418,581 

 

$(762,474) 

 

$279,550,528 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$8,913,275  

 

$2,586,343 

 

$(345,123) 

 

$11,154,495 

Total equity securities at estimated fair value

 

$8,913,275  

 

$2,586,343 

 

$(345,123) 

 

$11,154,495 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$88,266,355  

 

 

 

 

 

 

Residential construction

 

105,450,591  

 

 

 

 

 

 

Commercial

 

55,065,455  

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

(1,223,014) 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(1,897,155) 

 

 

 

 

 

 

Less: Net discounts

 

(710,280) 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$244,951,952  

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$39,752,530  

 

 

 

 

 

 

Commercial

 

117,288,006  

 

 

 

 

 

 

Total real estate held for investment

 

$157,040,536  

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$1,156,313  

 

 

 

 

 

 

Commercial

 

4,400,553  

 

 

 

 

 

 

Total real estate held for sale

 

$5,556,866  

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$13,946,739  

 

 

 

 

 

 

Insurance assignments

 

54,618,319  

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

2,544,700  

 

 

 

 

 

 

Other investments

 

5,242,786  

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

(1,662,394) 

 

 

 

 

 

 

Total policy loans and other investments

 

$74,690,150  

 

 

 

 

 

 

Accrued investment income

 

$6,266,403  

 

 

 

 

 

 

Total investments

 

$779,210,930  

 

 

 

 

 

 

 

(1)Includes $905,700 of Membership stock and $1,639,000 of Activity stock due to short-term borrowings. 


12


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


The Company’s investments as of December 31, 2020 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

December 31, 2020:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

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

 

$42,381,805  

 

$1,358,562 

 

$ 

 

$43,740,367 

Obligations of states and political subdivisions

 

5,383,762  

 

312,214 

 

(1,261) 

 

5,694,715 

Corporate securities including public utilities

 

186,067,912  

 

27,216,496 

 

(681,478) 

 

212,602,930 

Mortgage-backed securities

 

31,047,791  

 

1,565,377 

 

(267,106) 

 

32,346,062 

Redeemable preferred stock

 

269,214  

 

3,391 

 

 

 

272,605 

Total fixed maturity securities available for sale

 

$265,150,484  

 

$30,456,040 

 

$(949,845) 

 

$294,656,679 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$9,698,490  

 

$2,376,156 

 

$(750,407) 

 

$11,324,239 

Total equity securities at estimated fair value

 

$9,698,490  

 

$2,376,156 

 

$(750,407) 

 

$11,324,239 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$95,822,448  

 

 

 

 

 

 

Residential construction

 

111,111,777  

 

 

 

 

 

 

Commercial

 

46,836,866  

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

(1,161,132) 

 

 

 

 

 

 

Less: Allowance for loan losses

 

(2,005,127) 

 

 

 

 

 

 

Less: Net discounts

 

(1,260,896) 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$249,343,936  

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$24,843,743  

 

 

 

 

 

 

Commercial

 

106,840,710  

 

 

 

 

 

 

Total real estate held for investment

 

$131,684,453  

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$3,478,254  

 

 

 

 

 

 

Commercial

 

4,400,553  

 

 

 

 

 

 

Total real estate held for sale

 

$7,878,807  

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$14,171,589  

 

 

 

 

 

 

Insurance assignments

 

53,231,131  

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

2,506,600  

 

 

 

 

 

 

Other investments

 

5,432,816  

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

(1,645,475) 

 

 

 

 

 

 

Total policy loans and other investments

 

$73,696,661  

 

 

 

 

 

 

Accrued investment income

 

$5,360,523  

 

 

 

 

 

 

Total investments

 

$773,945,298  

 

 

 

 

 

 

 

(1)Includes $866,900 of Membership stock and $1,639,700 of Activity stock due to short-term borrowings. 


13


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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 March 31, 2021 and December 31, 2020. 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 March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$24,569 

 

$778,979 

 

$- 

 

$- 

 

$24,569 

 

$778,979 

Corporate Securities

 

137,661 

 

9,760,180 

 

363,697 

 

9,199,818 

 

501,358 

 

18,959,998 

Mortgage and other asset-backed securities

 

90,713 

 

5,235,918 

 

145,834 

 

2,026,009 

 

236,547 

 

7,261,927 

Total unrealized losses

 

$252,943 

 

$15,775,077 

 

$509,531 

 

$11,225,827 

 

$762,474 

 

$27,000,904 

At December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$1,261 

 

$206,812 

 

$- 

 

$- 

 

$1,261 

 

$206,812 

Corporate Securities

 

242,596 

 

9,919,298 

 

438,882 

 

2,593,026 

 

681,478 

 

12,512,324 

Mortgage and other asset-backed securities

 

266,522 

 

3,455,574 

 

584 

 

51,961 

 

267,106 

 

3,507,535 

Total unrealized losses

  

$510,379 

 

$13,581,684 

 

$439,466 

 

$2,644,987 

 

$949,845 

 

$16,226,671 

 

There were 79 securities with fair value of 97.3% of amortized cost at March 31, 2021. There were 63 securities with fair value of 94.7% of amortized cost at December 31, 2020. No credit losses have been recognized for the three months ended March 31, 2021 and 2020.

 

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.

 

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.


14


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


The following table presents a rollforward of the Company's cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale for the three months ended March 31:

 

 

 

2021

 

2020

Balance of credit-related OTTI at January 1

 

$370,975 

 

$- 

 

 

 

 

 

Additions for credit impairments recognized on:

 

 

 

 

Securities not previously impaired

 

- 

 

- 

Securities previously impaired

 

- 

 

- 

 

 

 

 

 

Reductions for credit impairments previously recognized on:

 

 

 

 

Securities that matured or were sold during the period (realized)

 

- 

 

- 

Securities due to an increase in expected cash flows

 

- 

 

- 

 

 

 

 

 

Balance of credit-related OTTI at March 31

  

$370,975 

 

$- 

 

The amortized cost and estimated fair value of fixed maturity securities available for sale at March 31, 2021, 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

 

$21,362,110 

 

$21,444,660 

Due in 2-5 years

 

66,817,800 

 

71,062,356 

Due in 5-10 years

 

70,609,309 

 

77,487,611 

Due in more than 10 years

 

68,036,255 

 

78,817,785 

Mortgage-backed securities

 

29,799,733 

 

30,455,635 

Redeemable preferred stock

 

269,214 

 

282,481 

Total

 

$256,894,421 

 

$279,550,528 

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $40,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at March 31, 2021. These securities are used as collateral on any cash borrowings from the FHLB. As of March 31, 2021, the Company did not have any amounts outstanding with the FHLB and its estimated remaining maximum borrowing capacity was $38,559,265.


15


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


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 March 31

 

 

2021

 

2020

Fixed maturity securities:

 

 

 

 

Gross realized gains

 

$97,622  

 

$95,821  

Gross realized losses

 

(24,997) 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

Gains (losses) on securities sold

 

106,569  

 

(57,442) 

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

 

952,030  

 

(2,761,856) 

 

 

 

 

 

Other assets:

 

 

 

 

Gross realized gains

 

1,109,358  

 

457,028  

Gross realized losses

 

(280,469) 

 

(945,798) 

Total

 

$1,960,113  

 

$(3,212,247) 

 

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.

 

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

 

 

 

Three Months Ended March 31

 

 

2021

 

2020

Proceeds from sales

 

$819,565 

 

$645,750 

Gross realized gains

 

59,794 

 

79,411 

Gross realized losses

 

- 

 

- 


16


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


Major categories of net investment income are as follows:

 

 

Three Months Ended March 31

 

2021

 

2020

Fixed maturity securities

$2,824,111  

 

$2,924,714  

Equity securities

128,229  

 

92,042  

Mortgage loans held for investment

6,084,417  

 

5,653,890  

Real estate

3,042,829  

 

3,153,385  

Policy loans

232,353  

 

233,966  

Insurance assignments

5,345,729  

 

4,299,205  

Other investments

13,707  

 

25,023  

Cash and cash equivalents

39,594  

 

298,005  

Gross investment income

17,710,969  

 

16,680,230  

Investment expenses

(3,417,082) 

 

(3,279,731) 

Net investment income

$14,293,887  

 

$13,400,499  

 

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $161,211 and $110,639 for the three months ended March 31, 2021 and 2020, 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 $9,864,903 at March 31, 2021 and $9,684,409 at December 31, 2020. 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 March 31, 2021, other than investments issued or guaranteed by the United States Government.

 

Real Estate Held for Investment and Held for Sale

 

The Company strategically deploys resources into real estate 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.


17


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


The Company currently owns and operates 11 commercial properties in 5 states. These properties include office buildings, 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 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 loans was $99,547,615 and $71,517,902 as of March 31, 2021 and December 31, 2020, respectively. The associated bank loan carrying values totaled $55,831,600 and $46,153,283 as of March 31, 2021 and December 31, 2020, respectively.

 

During the three months ended March 31, 2021 and 2020, the Company recorded impairment losses on commercial real estate held for sale of $-0- and $31,429, 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

 

 

March 31
2021

 

December 31
2020

 

March 31
2021

 

December 31
2020

Utah (1)

 

$111,008,057 

 

$100,927,528 

 

379,066 

 

379,066 

Louisiana

 

2,981,296 

 

2,998,684 

 

84,841 

 

84,841 

Mississippi

 

2,909,508 

 

2,914,498 

 

21,521 

 

21,521 

California

 

389,145 

 

- 

 

2,872 

 

- 

 

 

 

 

 

 

 

 

 

 

 

$117,288,006 

 

$106,840,710 

 

488,300 

 

485,428 

 

 

 

(1) Includes Center53 phase 1 and phase 2 which is under construction.

 

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

 

 

March 31
2021

 

December 31
2020

 

March 31
2021

 

December 31
2020

Kansas

 

4,000,000 

 

4,000,000 

 

222,679 

 

222,679 

Texas (1)

 

249,000 

 

249,000 

 

- 

 

- 

Mississippi

 

151,553 

 

151,553 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

 

$4,400,553 

 

$4,400,553 

 

222,679 

 

222,679 

 

 

 

(1) 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 small portfolio of residential homes primarily as a result of loan foreclosures.  The Company has the option to sell them or to continue to hold them for cash flow and acceptable returns. The Company also invests in residential subdivision land developments.


18


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


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, 2021, SNRE manages 5 residential properties in 4 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 $1,657,285 and $4,327,079 as of March 31, 2021 and December 31, 2020, respectively.

 

During the three months ended March 31, 2021 and 2020 the Company did not record any impairment losses on residential real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

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

 

 

 

Net Ending Balance

 

 

March 31
2021

 

December 31 2020

Utah (1)

 

39,466,349 

 

$24,557,562 

Washington (2)

 

286,181 

 

286,181 

 

 

$39,752,530 

 

$24,843,743 

 

 

 

(1) Includes subdivision land developments

(2) Improved residential lots

 

Additional information regarding the Company’s subdivision land developments in Utah is summarized as follows:

 

 

 

 

March 31
2021

 

December 31 2020

Lots available for sale

 

81 

 

36 

Lots to be developed

 

369 

 

350 

Ending Balance (1)

 

$39,251,557 

 

$23,777,478 

 

 

 

(1) The estimated remaining cost to complete the undeveloped lots is $15,613,000 and $17,354,000 as of March 31, 2021 and December 31, 2020, respectively.

 

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

 

 

 

Net Ending Balance

 

 

March 31
2021

 

December 31 2020

Nevada

 

$979,640 

 

$979,640 

Florida

 

166,673 

 

744,322 

Ohio

 

10,000 

 

10,000 

Utah

 

- 

 

1,744,292 

 

 

$1,156,313 

 

$3,478,254 

 

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.


19


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


Real Estate Owned and Occupied by the Company

 

The primary business units of the Company occupy a portion of the real estate owned by the Company.  As of March 31, 2021, 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)

 

Life Insurance Operations

 

12,274

 

100%

909 Foisy Street, Alexandria, LA (1)

 

Life Insurance Sales

 

8,059

 

100%

812 Sheppard Street, Minden, LA (1)

 

Life Insurance Sales

 

1,560

 

100%

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

 

Life Insurance Sales

 

1,737

 

100%

 

 

 

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

 

Mortgage Loans Held for Investment

 

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and 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, 2021, the Company had 54%, 14%, 9%, 3%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, and Arizona, respectively. At December 31, 2020, the Company had 57%, 13%, 9%, 4%, 3% and 3% 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


20


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


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 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.


21


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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

March 31, 2021

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance - January 1, 2021

$187,129 

 

$1,774,796  

 

$43,202 

 

$2,005,127  

Charge-offs

- 

 

 

 

- 

 

 

Provision

- 

 

(107,972) 

 

- 

 

(107,972) 

Ending balance - March 31, 2021

$187,129 

 

$1,666,824  

 

$43,202 

 

$1,897,155  

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$- 

 

$207,578  

 

$- 

 

$207,578  

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$187,129 

 

$1,459,246  

 

$43,202 

 

$1,689,577  

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$55,065,455 

 

$88,266,355  

 

$105,450,591 

 

$248,782,401  

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$1,068,365 

 

$4,436,082  

 

$200,963 

 

$5,705,410  

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$53,997,090 

 

$83,830,273  

 

$105,249,628 

 

$243,076,991  

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance

$187,129 

 

$1,222,706  

 

$43,202 

 

$1,453,037  

Charge-offs

- 

 

 

 

- 

 

 

Provision

- 

 

552,090  

 

- 

 

552,090  

Ending balance

$187,129 

 

$1,774,796  

 

$43,202 

 

$2,005,127  

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$- 

 

$219,905  

 

$- 

 

$219,905  

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$187,129 

 

$1,554,891  

 

$43,202 

 

$1,785,222  

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$46,836,866 

 

$111,111,777  

 

$95,822,448 

 

$253,771,091  

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$2,148,827 

 

$7,932,680  

 

$200,963 

 

$10,282,470  

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$44,688,039 

 

$103,179,097  

 

$95,621,485 

 

$243,488,621  


22


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

3)Investments (Continued) 


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

 

 

 

Commercial

 

Residential

 

Residential
 Construction

 

Total

March 31, 2021

 

 

 

 

 

 

 

 

30-59 Days Past Due

 

$ 

 

$4,352,659  

 

$301,071  

 

$4,653,730  

60-89 Days Past Due

 

2,027,048  

 

1,317,057  

 

 

 

3,344,105  

Greater Than 90 Days (1)

 

817,429  

 

2,522,314  

 

 

 

3,339,743  

In Process of Foreclosure (1)

 

250,936  

 

1,913,768  

 

200,963  

 

2,365,667  

Total Past Due

 

3,095,413  

 

10,105,798  

 

502,034  

 

13,703,245  

Current

 

51,970,042  

 

78,160,557  

 

104,948,557  

 

235,079,156  

Total Mortgage Loans

 

55,065,455  

 

88,266,355  

 

105,450,591  

 

248,782,401  

Allowance for Loan Losses

 

(187,129) 

 

(1,666,824) 

 

(43,202) 

 

(1,897,155) 

Unamortized deferred loan fees, net

 

(115,893) 

 

(951,108) 

 

(156,013) 

 

(1,223,014) 

Unamortized discounts, net

 

(358,587) 

 

(351,693) 

 

 

 

(710,280) 

Net Mortgage Loans

 

$54,403,846  

 

$85,296,730  

 

$105,251,376  

 

$244,951,952  

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

30-59 Days Past Due

 

$233,200  

 

$5,866,505  

 

$127,191  

 

$6,226,896  

60-89 Days Past Due

 

812,780  

 

2,048,148  

 

 

 

2,860,928  

Greater Than 90 Days (1)

 

2,148,827  

 

5,669,583  

 

 

 

7,818,410  

In Process of Foreclosure (1)

 

 

 

2,263,097  

 

200,963  

 

2,464,060  

Total Past Due

 

3,194,807  

 

15,847,333  

 

328,154  

 

19,370,294  

Current

 

43,642,059  

 

79,975,115  

 

110,783,623  

 

234,400,797  

Total Mortgage Loans

 

46,836,866  

 

95,822,448  

 

111,111,777  

 

253,771,091  

Allowance for Loan Losses

 

(187,129) 

 

(1,774,796) 

 

(43,202) 

 

(2,005,127) 

Unamortized deferred loan fees, net

 

(32,557) 

 

(909,864) 

 

(218,711) 

 

(1,161,132) 

Unamortized discounts, net

 

(880,721) 

 

(380,175) 

 

 

 

(1,260,896) 

Net Mortgage Loans

  

$45,736,459  

 

$92,757,613  

 

$110,849,864  

 

$249,343,936  

 

 

 

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


23


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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

March 31, 2021

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

$1,068,365 

 

$1,068,365 

 

$- 

 

$1,068,365 

 

$- 

Residential

3,054,262 

 

3,054,262 

 

- 

 

3,054,262 

 

- 

Residential construction

200,963 

 

200,963 

 

- 

 

200,963 

 

- 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

$- 

 

$- 

 

$- 

 

$- 

 

$- 

Residential

1,381,820 

 

1,381,820 

 

207,578 

 

1,381,820 

 

- 

Residential construction

- 

 

- 

 

- 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

Commercial

$1,068,365 

 

$1,068,365 

 

$- 

 

$1,068,365 

 

$- 

Residential

4,436,082 

 

4,436,082 

 

207,578 

 

4,436,082 

 

- 

Residential construction

200,963 

 

200,963 

 

- 

 

200,963 

 

- 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

$2,148,827 

 

$2,148,827 

 

$- 

 

$1,866,819 

 

$- 

Residential

6,415,419 

 

6,415,419 

 

- 

 

5,010,078 

 

- 

Residential construction

200,963 

 

200,963 

 

- 

 

555,278 

 

- 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

Commercial

$- 

 

$- 

 

$- 

 

$- 

 

$- 

Residential

1,517,261 

 

1,517,261 

 

219,905 

 

1,182,368 

 

- 

Residential construction

- 

 

- 

 

- 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

Commercial

$2,148,827 

 

$2,148,827 

 

$- 

 

$1,866,819 

 

$- 

Residential

7,932,680 

 

7,932,680 

 

219,905 

 

6,192,446 

 

- 

Residential construction

200,963 

 

200,963 

 

- 

 

555,278 

 

- 


24


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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

 

March  
31, 2021

 

December
31, 2020

 

March  
31, 2021

 

December
31, 2020

 

March  
31, 2021

 

December
31, 2020

 

March  
31, 2021

 

December
31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$53,997,090 

 

$44,688,039 

 

$83,830,273 

 

$87,889,768 

 

$105,249,628 

 

$110,910,814 

 

$243,076,991 

 

$243,488,621 

Non-performing

1,068,365 

 

2,148,827 

 

4,436,082 

 

7,932,680 

 

200,963 

 

200,963 

 

5,705,410 

 

10,282,470 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$55,065,455 

 

$46,836,866 

 

$88,266,355 

 

$95,822,448 

 

$105,450,591 

 

$111,111,777 

 

$248,782,401 

 

$253,771,091 

 

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 $321,000 and $491,000 as of March 31, 2021 and December 31, 2020, respectively.

 

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

 

 

As of March 31
2021

 

As of December 31
2020

Commercial

$1,068,365 

 

$2,148,827 

Residential

4,436,082 

 

7,932,680 

Residential construction

200,963 

 

200,963 

Total

$5,705,410 

 

$10,282,470 


25


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)


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. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

 

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

 

 

 

As of March 31
2021

 

As of December 31
2020

 

 

 

 

 

Aggregate fair value

 

$304,030,372 

 

$422,772,418 

Unpaid principal balance

 

294,207,728 

 

406,407,323 

Unrealized gain

  

9,822,644 

 

16,365,095 

 

Mortgage Fee Income

 

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

 

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

 

 

Three Months Ended March 31

 

2021

 

2020

Loan fees

$9,539,956  

 

$8,916,153  

Interest income

2,311,802  

 

1,680,459  

Secondary gains

68,438,933  

 

26,641,492  

Change in fair value of loan commitments

314,466  

 

3,275,032  

Change in fair value of loans held for sale

(6,945,882) 

 

381,734  

Provision for loan loss reserve

(660,663) 

 

(613,109) 

Mortgage fee income

$72,998,612  

 

$40,281,761  

 

Loan Loss Reserve

 

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


26


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

4)Loans Held for Sale (Continued) 


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

 

 

As of March 31
2021

 

As of December 31
2020

Balance, beginning of period

$20,583,618  

 

$4,046,288  

Provision on current loan originations (1)

660,663  

 

4,938,214  

Additional provision for loan loss reserve

 

 

16,506,030  

Charge-offs, net of recaptured amounts

(19,039,298) 

 

(4,906,914) 

Balance, end of period

$2,204,983  

 

$20,583,618  

 

 

 

(1) Included in mortgage fee income

 

The Company maintains reserves for estimated losses on current production volumes. For the three months ended March 31, 2021, $660,663 in reserves were added at a rate of 4.5 basis points per loan, the equivalent of $450 per $1,000,000 in loans originated. This is an increase over the three months ended March 31, 2020, 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 Company also increased its loan loss reserve for the year ended December 31, 2020 by an additional $16,506,030 to account for changes in estimates specific to settlements of loan losses. See Note 11 for additional information regarding mortgage loan loss settlements. 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. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production. Thus, the Company believes that the final loan loss reserve as of March 31, 2021, represents its best estimate for adequate loss reserves on loans sold.


27


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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 $39,153 and $65,877 has been recognized for these plans for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the total unrecognized compensation expense related to the options issued was $-0-.

 

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

 

A summary of the status of the Company’s stock compensation plans as of March 31, 2021, and the changes during the three months ended March 31, 2021, 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, 2021

 

1,072,863  

 

$4.33 

 

662,666 

 

$4.73 

Adjustment for effect of stock dividends

 

 

 

 

 

- 

 

 

Granted

 

 

 

 

 

- 

 

 

Exercised

 

(32,925) 

 

 

 

- 

 

 

Cancelled

 

 

 

 

 

- 

 

 

Outstanding at March 31, 2021

 

1,039,938  

 

$4.34 

 

662,666 

 

$4.73 

 

 

 

 

 

 

 

 

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

Options exercisable

 

1,039,938  

 

$4.34 

 

662,666 

 

$4.73 

 

 

 

 

 

 

 

 

 

As of March 31, 2021:

 

 

 

 

 

 

 

 

Available options for future grant

 

330,371  

 

 

 

266,500 

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2021

 

6.28years

 

 

 

6.71years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2021

 

6.28years

 

 

 

6.71years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2021 (1)

 

$5,212,677  

 

 

 

$3,059,620 

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2021 (1)

 

$5,212,677  

 

 

 

$3,059,620 

 

 

 

 

 

(1) The Company used a stock price of $9.35 as of March 31, 2021 to derive intrinsic value.


28


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

5)Stock Compensation Plans (Continued) 


A summary of the status of the Company’s stock compensation plans as of March 31, 2020, and the changes during the three months ended March 31, 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

 

829  

 

 

 

- 

 

 

Granted

 

37,500  

 

 

 

90,000 

 

 

Exercised

 

(42,294) 

 

 

 

- 

 

 

Cancelled

 

 

 

 

 

- 

 

 

Outstanding at March 31, 2020

 

1,082,088  

 

$4.44 

 

684,132 

 

$5.15 

 

 

 

 

 

 

 

 

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

Options exercisable

 

985,366  

 

$4.42 

 

452,381 

 

$5.39 

 

 

 

 

 

 

 

 

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

Available options for future grant

 

97,218  

 

 

 

- 

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2020

 

5.57years

 

 

 

5.96years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2020

 

5.16years

 

 

 

4.70years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2020 (1)

 

$489,237  

 

 

 

$41,150 

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2020 (1)

 

$471,642  

 

 

 

$- 

 

 

 

 

 

(1) The Company used a stock price of $4.27 as of March 31, 2020 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 three months March 31, 2021 and 2020 was $139,035 and $73,072, respectively.


29


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)


6)Earnings Per Share 

 

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

 

 

 

Three Months Ended
March 31

 

 

2021

 

2020

Numerator:

 

 

 

 

Net earnings

 

$12,128,715 

 

$1,424,449 

Denominator:

 

 

 

 

Basic weighted-average shares outstanding

 

19,124,001 

 

18,641,950 

Effect of dilutive securities:

 

 

 

 

Employee stock options

 

884,049 

 

191,446 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

20,008,050 

 

18,833,396 

 

 

 

 

 

Basic net earnings per share

 

$0.63 

 

$0.08 

 

 

 

 

 

Diluted net earnings per share

 

$0.61 

 

$0.08 

 

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the three months March 31, 2021 and 2020, there were -0- and 1,316,506 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. Basic and diluted earnings per share amounts are the same for each class of common stock.

 

The following table summarizes the activity in shares of capital stock for the periods presented:

 

 

 

Class A

 

Class C

Outstanding shares at December 31, 2019

 

16,107,779 

 

2,500,887  

Exercise of stock options

 

22,411 

 

 

Stock dividends

 

404,839 

 

61,720  

Conversion of Class C to Class A

 

11,162 

 

(11,162) 

Outstanding shares at March 31, 2020

 

16,546,191 

 

2,551,445  

 

 

 

 

 

Outstanding shares at December 31, 2020

 

16,595,783 

 

2,679,603  

Exercise of stock options

 

27,926 

 

 

Stock dividends

 

- 

 

 

Conversion of Class C to Class A

 

48,527 

 

(48,527) 

Outstanding shares at March 31, 2021

  

16,672,236 

 

2,631,076  

 

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.


30


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

7)Business Segment Information (Continued) 


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, 2020. 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.

 

 

 

Life Insurance

 

Cemetery/
Mortuary

 

Mortgage

 

Intercompany
Eliminations

 

Consolidated

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$38,943,834  

 

$6,999,265 

 

$76,715,507 

 

$ 

 

$122,658,606 

Intersegment revenues

 

1,902,052  

 

77,507 

 

161,016 

 

(2,140,575) 

 

- 

Segment profit before income taxes

 

2,695,028  

 

2,700,945 

 

10,959,082 

 

 

 

16,355,055 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

1,174,305,180  

 

57,269,639 

 

337,524,300 

 

(84,391,181) 

 

1,484,707,938 

Goodwill

 

2,765,570  

 

754,018 

 

- 

 

 

 

3,519,588 

Total Assets

 

1,177,070,750  

 

58,023,657 

 

337,524,300 

 

(84,391,181) 

 

1,488,227,526 

 

 

 

 

- 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$33,205,762  

 

$4,013,696 

 

$42,389,491 

 

$ 

 

$79,608,949 

Intersegment revenues

 

908,168  

 

103,514 

 

200,332 

 

(1,212,014) 

 

- 

Segment profit before income taxes

 

(3,069,167) 

 

104,801 

 

4,438,600 

 

 

 

1,474,234 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

1,124,244,140  

 

79,695,043 

 

278,195,425 

 

(109,493,359) 

 

1,372,641,249 

Goodwill

 

2,765,570  

 

754,018 

 

- 

 

 

 

3,519,588 

Total Assets

 

1,127,009,710  

 

80,449,061 

 

278,195,425 

 

(109,493,359) 

 

1,376,160,837 


31


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (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.

 

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

 

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

 

Call and Put Option Derivatives: The fair values for call and put options are based on quoted market prices.


32


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


The items shown under Level 3 are valued as follows:

 

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.

 

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.

 

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

 

It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area 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. See Note 12 for more information regarding MSRs.


33


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at March 31, 2021.

 

 

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

$279,550,528  

 

$ 

 

$277,359,435 

 

$2,191,093  

Equity securities

11,154,495  

 

11,154,495  

 

- 

 

 

Loans held for sale

304,030,372  

 

 

 

- 

 

304,030,372  

Restricted assets (1)

1,456,017  

 

 

 

1,456,017 

 

 

Restricted assets (2)

2,704,704  

 

2,704,704  

 

- 

 

 

Cemetery perpetual care trust investments (1)

738,979  

 

 

 

738,979 

 

 

Cemetery perpetual care trust investments (2)

2,208,138  

 

2,208,138  

 

- 

 

 

Derivatives - loan commitments (3)

10,671,623  

 

 

 

- 

 

10,671,623  

Total assets accounted for at fair value on a recurring basis

$612,514,856  

 

$16,067,337  

 

$279,554,431 

 

$316,893,088  

 

 

 

 

 

 

 

 

Liabilities accounted for at fair value on a recurring basis

 

 

 

 

 

 

 

Derivatives - call options (4)

$(79,567) 

 

$(79,567) 

 

$- 

 

$ 

Derivatives - loan commitments (4)

(228,547) 

 

 

 

- 

 

(228,547) 

Total liabilities accounted for at fair value on a recurring basis

$(308,114) 

 

$(79,567) 

 

$- 

 

$(228,547) 

 

 

 

(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


34


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


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

$294,656,679  

 

$ 

 

$292,455,504 

 

$2,201,175  

Equity securities

11,324,239  

 

11,324,239  

 

- 

 

 

Loans held for sale

422,772,418  

 

 

 

- 

 

422,772,418  

Restricted assets (1)

1,473,637  

 

 

 

1,473,637 

 

 

Restricted assets (2)

2,515,778  

 

2,515,778  

 

- 

 

 

Cemetery perpetual care trust investments (1)

747,767  

 

 

 

747,767 

 

 

Cemetery perpetual care trust investments (2)

2,062,303  

 

2,062,303  

 

- 

 

 

Derivatives - loan commitments (3)

12,592,672  

 

 

 

- 

 

12,592,672  

Total assets accounted for at fair value on a recurring basis

$748,145,493  

 

$15,902,320  

 

$294,676,908 

 

$437,566,265  

 

 

 

 

 

 

 

 

Liabilities accounted for at fair value on a recurring basis

 

 

 

 

 

 

 

Derivatives - call options (4)

$(43,097) 

 

$(43,097) 

 

$- 

 

$ 

Derivatives - loan commitments (4)

(2,464,062) 

 

 

 

- 

 

(2,464,062) 

Total liabilities accounted for at fair value on a recurring basis

$(2,507,159) 

 

$(43,097) 

 

$- 

 

$(2,464,062) 

 

 

 

(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


35


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2021, 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

 

 

3/31/2021

 

Technique

 

Input(s)

 

Value

Value

 

Average

Loans held for sale

 

$304,030,372 

 

Market approach

 

Investor contract pricing as a percentage of unpaid principal balance

 

95.0% 

109.0% 

 

103.0% 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives - loan commitments (net)

 

10,443,076 

 

Market approach

 

Pull-through rate

 

61.0% 

92.0% 

 

82.0% 

 

 

 

 

 

 

Initial-Value

 

N/A

N/A

 

N/A

 

 

 

 

 

 

Servicing

 

0 bps

129 bps

 

55 bps

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale

 

2,191,093 

 

Broker quotes

 

Pricing quotes

 

$90.83   

$119.33   

 

$113.57   

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 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

 

 

12/31/2020

 

Technique

 

Input(s)

 

Value

Value

 

Average

Loans held for sale

 

$422,772,418 

 

Market approach

 

Investor contract pricing as a percentage of unpaid principal balance

 

99.0% 

110.0% 

 

104.0% 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives - loan commitments (net)

 

10,128,610 

 

Market approach

 

Pull-through rate

 

52.0% 

92.0% 

 

81.0% 

 

 

 

 

 

 

Initial-Value

 

N/A

N/A

 

N/A

 

 

 

 

 

 

Servicing

 

0 bps

184 bps

 

58 bps

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale

 

2,201,175 

 

Broker quotes

 

Pricing quotes

 

$90.83   

$119.33   

 

$113.47   


36


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


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

 

 

 

Net Loan Commitments

 

Loans Held for Sale

 

Fixed Maturity Securities Available for Sale

 

Balance - December 31, 2020

 

$10,128,610 

 

$422,772,418  

 

$2,201,175  

 

Originations and purchases

 

- 

 

1,449,841,009  

 

 

 

Sales, maturities and paydowns

 

- 

 

(1,614,880,058) 

 

(11,100) 

 

Transfer to mortgage loans held for investment

 

- 

 

(201,951) 

 

 

 

Total gains (losses):

 

 

 

 

 

 

 

Included in earnings

 

314,466 

(1)

46,498,954  

(1)

893  

(2)

Included in other comprehensive income

 

- 

 

 

 

125  

 

 

 

 

 

 

 

 

 

Balance - March 31, 2021

 

$10,443,076 

 

$304,030,372  

 

$2,191,093  

 

 

 

 

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

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

 

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

 

 

 

Net Loan Commitments

 

Loans Held for Sale

 

Fixed Maturity Securities Available for Sale

 

Balance - December 31, 2019

 

$2,491,233 

 

$213,457,632  

 

$3,216,382  

 

Originations and purchases

 

- 

 

792,193,592  

 

 

 

Sales, maturities and paydowns

 

- 

 

(739,130,456) 

 

(10,300) 

 

Transfer to mortgage loans held for investment

 

- 

 

(8,933,676) 

 

 

 

Total gains (losses):

 

 

 

 

 

 

 

Included in earnings

 

3,275,032 

(1)

23,465,484  

(1)

828  

(2)

Included in other comprehensive income

 

- 

 

 

 

68,416  

 

 

 

 

 

 

 

 

 

Balance - March 31, 2020

 

$5,766,265 

 

$281,052,576  

 

$3,275,326  

 

 

 

 

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

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


37


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at March 31, 2021.

 

 

Total

 

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

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a nonrecurring basis

 

 

 

 

 

 

 

Impaired mortgage loans held for investment

$1,174,242 

 

$- 

 

$- 

 

$1,174,242 

Total assets accounted for at fair value on a nonrecurring basis

$1,174,242 

 

$- 

 

$- 

 

$1,174,242 

 

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2020.

 

 

Total

 

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

 

Significant Observable Inputs
(Level 2)

 

Significant Unobservable Inputs
(Level 3)

Assets accounted for at fair value on a nonrecurring basis

 

 

 

 

 

 

 

Impaired mortgage loans held for investment

$1,297,356 

 

$- 

 

$- 

 

$1,297,356 

Impaired real estate held for sale

4,249,000 

 

- 

 

- 

 

4,249,000 

Total assets accounted for at fair value on a nonrecurring basis

$5,546,356 

 

$- 

 

$- 

 

$5,546,356 


38


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


Fair Value of Financial Instruments Carried at Other Than Fair Value

 

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

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at March 31, 2021 and December 31, 2020.

 

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of March 31, 2021:

 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total Estimated Fair Value

Assets

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

Residential

$85,296,730  

 

$- 

 

$- 

 

$90,940,077  

 

$90,940,077  

Residential construction

105,251,376  

 

- 

 

- 

 

105,251,376  

 

105,251,376  

Commercial

54,403,846  

 

- 

 

- 

 

55,014,500  

 

55,014,500  

Mortgage loans held for investment, net

$244,951,952  

 

$- 

 

$- 

 

$251,205,953  

 

$251,205,953  

Policy loans

13,946,739  

 

- 

 

- 

 

13,946,739  

 

13,946,739  

Insurance assignments, net (1)

52,955,925  

 

- 

 

- 

 

52,955,925  

 

52,955,925  

Restricted assets (2)

3,076,760  

 

- 

 

- 

 

3,076,760  

 

3,076,760  

Cemetery perpetual care trust investments (2)

1,450,600  

 

- 

 

- 

 

1,450,600  

 

1,450,600  

Mortgage servicing rights, net

42,779,361  

 

- 

 

- 

 

55,087,150  

 

55,087,150  

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Bank and other loans payable

$(245,973,378) 

 

$- 

 

$- 

 

$(245,973,378) 

 

$(245,973,378) 

Policyholder account balances (3)

(43,728,587) 

 

- 

 

- 

 

(42,141,870) 

 

(42,141,870) 

Future policy benefits - annuities (3)

(108,202,268) 

 

- 

 

- 

 

(112,119,227) 

 

(112,119,227) 

 

 

 

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

(2) Mortgage loans held for investment

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


39


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2020:

 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total Estimated Fair Value

Assets

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

Residential

$92,757,613  

 

$- 

 

$- 

 

$100,384,283  

 

$100,384,283  

Residential construction

110,849,864  

 

- 

 

- 

 

110,849,864  

 

110,849,864  

Commercial

45,736,459  

 

- 

 

- 

 

45,259,425  

 

45,259,425  

Mortgage loans held for investment, net

$249,343,936  

 

$- 

 

$- 

 

$256,493,572  

 

$256,493,572  

Policy loans

14,171,589  

 

- 

 

- 

 

14,171,589  

 

14,171,589  

Insurance assignments, net (1)

51,585,656  

 

- 

 

- 

 

51,585,656  

 

51,585,656  

Restricted assets (2)

3,317,877  

 

- 

 

- 

 

3,317,877  

 

3,317,877  

Cemetery perpetual care trust investments (2)

1,468,600  

 

- 

 

- 

 

1,468,600  

 

1,468,600  

Mortgage servicing rights, net

35,210,516  

 

- 

 

- 

 

38,702,358  

 

38,702,358  

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Bank and other loans payable

$(297,824,368) 

 

$- 

 

$- 

 

$(297,824,368) 

 

$(297,824,368) 

Policyholder account balances (3)

(44,026,809) 

 

- 

 

- 

 

(42,220,725) 

 

(42,220,725) 

Future policy benefits - annuities (3)

(106,522,113) 

 

- 

 

- 

 

(112,354,186) 

 

(112,354,186) 

 

 

 

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

(2) Mortgage loans held for investment

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

 

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

 

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

 

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

 

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

 

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

 

Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.

 

Insurance Assignments, Net: These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.


40


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

8)Fair Value of Financial Instruments (Continued) 


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

 

Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.

 

9)Allowance for Doubtful Accounts 

 

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

 

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

 

10)Derivative Instruments 

 

Mortgage Banking Derivatives

 

Loan Commitments

 

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

 

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


41


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

10)Derivative Instruments (Continued) 


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

 

Forward Sale Commitments

 

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

 

The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets.

 

Call and Put Options

 

The Company uses a strategy of selling “out of the money” call options on its equity securities as a source of revenue.  The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.  The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices.  The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option.  The liability for options is adjusted to fair value at each reporting date. In the event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.

 

The following table shows the notional amount and fair value of derivatives as of March 31, 2021 and December 31, 2020.

 

 

Fair Values and Notional Values of Derivative Instruments

 

 

 

March 31, 2021

 

December 31, 2020

 

Balance Sheet Location

 

Notional Amount

 

Asset Fair Value

 

Liability Fair Value

 

Notional Amount

Asset Fair Value

 

Liability Fair Value

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Loan commitments

Other assets and Other liabilities

 

$817,802,853 

 

$10,671,623 

 

$228,547 

 

$659,245,038 

$12,592,672 

 

$2,464,062 

Call options

Other liabilities

 

2,042,500 

 

- 

 

79,567 

 

1,873,200 

- 

 

43,097 

Total

 

 

$819,845,353 

 

$10,671,623 

 

$308,114 

 

$661,118,238 

$12,592,672 

 

$2,507,159 


42


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

10)Derivative Instruments (Continued) 


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

 

 

 

 

 

Net Amount Gain (Loss)              

 

 

 

 

Three Months Ended March 31

Derivative

 

Classification

 

2021

 

2020

Loan commitments

 

Mortgage fee income

 

$314,466 

 

$3,275,032  

 

 

 

 

 

 

 

Call and put options

 

Gains on investments and other assets

 

$26,762 

 

$(737,860) 

 

11)Reinsurance, Commitments and Contingencies 

 

Reinsurance

 

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

 

Mortgage Loan Loss Settlements

 

Future loan losses can be extremely difficult to estimate. However, the Company believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of March 31, 2021 and December 31, 2020, the balances were $2,204,983 and $20,583,618, respectively. The Company believes that the final loan loss reserve as of March 31, 2021, represents its best estimate for adequate loss reserves on loans sold.

 

Mortgage Loan Loss Litigation

 

Settlement Agreement and Mutual Release with Lehman Brothers Holdings Inc.

 

From 2004 to early 2008, SecurityNational Mortgage Company (“SecurityNational Mortgage”), a wholly owned subsidiary of the Company, originated “limited documentation” or “reduced documentation” loans which were sold to certain affiliates of Lehman Brothers Holdings Inc. (“Lehman Holdings”). Certain of these loans became the subject of disputes between SecurityNational Mortgage and Lehman Holdings and certain Lehman Holdings affiliates. Lehman Holdings filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code in 2008. In May of 2011, SecurityNational Mortgage filed a complaint in U.S. District Court against certain Lehman Holdings affiliates.  In June of 2011, Lehman Holdings filed a complaint in Federal District Court against SecurityNational Mortgage, both of which were later resolved. In 2016, certain other pending loan disputes between SecurityNational Mortgage and Lehman Holdings became the subject of an unsuccessful, non-binding alternate dispute resolution mediation proceeding.

 

Thereafter, in 2016, Lehman Holdings filed an adversary proceeding complaint against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York, which included seeking damages relating to the alleged obligations of the defendants under indemnification provisions of alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. The complaint was later amended with the latest amended complaint filed against SecurityNational Mortgage on December 27, 2016, seeking damages to be determined at trial, including interest, attorneys’ fees and costs. This complaint involved approximately 135 mortgage loans, there being millions of dollars allegedly in dispute. These claims against SecurityNational Mortgage were asserted as a result of Lehman Holdings’ earlier settlements with the FederalNational Mortgage Association (“Fannie Mae”) and the Federal Home Loan Corporation (“Freddie Mac”).


43


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

11)Reinsurance, Commitments and Contingencies (Continued) 


In 2018, Lehman Holdings filed a separate adversary proceeding complaint against SecurityNational Mortgage. This adversary proceeding allegedly involved approximately 577 mortgage loans relative to private securitization trusts (“RMBS Loans”) and millions of dollars in damages. Thereafter, Lehman Holdings made a filing that effectively reduced the number of RMBS Loans to 248. This proceeding was in addition to the above-referenced proceeding involving the Fannie Mae and Freddie Mac mortgage loans. As with the above-referenced proceeding, damages were sought including interest, costs, and attorneys’ fees.

 

SecurityNational Mortgage, as well as other defendants, have been involved in written discovery, and production of documents relative to the cases, and the filing of motions. The deposition phase of the cases was yet to begin, as well as the later expert witness phase. Those phases would require substantial expenditures of legal fees and costs.

 

On February 1, 2021, SecurityNational Mortgage executed a settlement agreement with Lehman Holdings in relation to these two adversary proceedings wherein all mortgage loan related claims were resolved, thereby ending all liabilities asserted by Lehman Holdings and conclusively ending all proceedings between SecurityNational Mortgage and Lehman Holdings. In accordance with GAAP, the full amount of SecurityNational Mortgage’s settlement payment was accounted for in the Company’s loan loss reserve as of December 31, 2020 and was paid during the first quarter 2021.

 

Debt Covenants for Mortgage Warehouse Lines of Credit

 

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

 

The Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2% and matures on November 15, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

 

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

 

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

 

The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement.  As of March 31, 2021, the Company believes that it was in compliance with all debt covenants.


44


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)

 

11)Reinsurance, Commitments and Contingencies (Continued) 


Other Contingencies and Commitments

 

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of March 31, 2021, the Company’s commitments were approximately $194,792,000 for these loans, of which $109,977,951 had been funded. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.

 

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

 

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

 

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


45


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)  


12)Mortgage Servicing Rights 

 

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

 

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

 

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

 

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

 

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

 

 

 

As of March 31
2021

 

As of December 31
2020

Amortized cost:

 

 

 

 

Balance before valuation allowance at beginning of year

 

$35,210,516  

 

$17,155,529  

MSR additions resulting from loan sales

 

11,008,149  

 

29,896,465  

Amortization (1)

 

(3,439,304) 

 

(11,841,478) 

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

 

 

 

 

Balance before valuation allowance at end of period

 

$42,779,361  

 

$35,210,516  

 

 

 

 

 

Valuation allowance for impairment of MSRs:

 

 

 

 

Balance at beginning of year

 

$ 

 

$ 

Additions

 

 

 

 

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

 

 

 

 

Balance at end of period

 

$ 

 

$ 

 

 

 

 

 

Mortgage servicing rights, net

 

$42,779,361  

 

$35,210,516  

 

 

 

 

 

Estimated fair value of MSRs at end of period

  

$55,087,150  

 

$38,702,358  

 

 

 

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


46


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2021 (Unaudited)  

 

12)Mortgage Servicing Rights (Continued) 


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

 

 

 

Estimated MSR Amortization

2021

 

5,760,982 

2022

 

4,670,850 

2023

 

4,116,524 

2024

 

3,617,054 

2025

 

3,191,065 

Thereafter

21,422,886 

Total

 

$42,779,361 

 

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

 

 

Three Months Ended
March 31

 

2021

 

2020

Contractual servicing fees

$3,387,472 

 

$1,784,944 

Late fees

81,050 

 

97,808 

Total

$3,468,522 

 

$1,882,752 

 

 

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

 

 

As of  March 31
2021

 

As of December 31 2020

Servicing UPB

$5,824,986,566 

 

$5,070,287,864 

 

 

The following key assumptions were used in determining MSR value:

 

 

 

Prepayment
Speeds

 

Average
Life (Years)

 

Discount
Rate

March 31, 2021

 

11.90

 

6.72

 

9.50

December 31, 2020

  

15.60

  

5.30

  

9.50

 

13) Income Taxes

 

The Company’s overall effective tax rate for the three months ended March 31, 2021 and 2020 was 25.8% and 3.4%, respectively, which resulted in a provision for income taxes of $4,226,340 and $49,785, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes.  The effective tax rate in the current period increased when compared to the prior year period partly due the Coronavirus Aid Relief and Economic Security (“CARES”) Act.

 

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


47


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


14) Revenues from Contracts with Customers

 

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

 

Information about Performance Obligations and Contract Balances

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

Contract Balances

 

 

Receivables (1)

 

Contract Asset

 

Contract Liability

Opening (1/1/2021)

 

$4,119,988  

 

$- 

 

$13,080,179 

Closing (3/31/2021)

 

3,988,538  

 

- 

 

13,514,055 

Increase/(decrease)

 

(131,450) 

 

- 

 

433,876 

 

 

 

Contract Balances