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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2023

or

 

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

 

For the transition period from _____ to ________

 

Commission File Number: 000-09341

 

Security National Financial Corporation

(Exact name of registrant as specified in its charter)

 

utah   87-0345941

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

 

(801) 264-1060

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

Yes ☐ No

 

As of May 5, 2023, the registrant had 18,870,913 shares of Class A Common Stock, $2.00 par value, outstanding and 2,888,923 shares of Class C Common Stock, $2.00 par value, outstanding.

 

 

 

  

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2023

 

Table of Contents

 

      Page No.
  Part I - Financial Information    
Item 1. Financial Statements    
  Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022   3-4
  Condensed Consolidated Statements of Earnings for the three months ended March 31, 2023 and 2022 (unaudited)   5
  Condensed Consolidated Statements of Comprehensive Income (loss) for the three months ended March 31, 2023 and 2022 (unaudited)   6
  Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2023 and March 31, 2022 (unaudited)   7
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (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   59
Item 3. Quantitative and Qualitative Disclosures about Market Risk   64
Item 4. Controls and Procedures   65
  Part II - Other Information    
Item 1. Legal Proceedings   65
Item 1A. Risk Factors   65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   66
Item 3. Defaults Upon Senior Securities   66
Item 4. Mine Safety Disclosures   66
Item 5. Other Information   66
Item 6. Exhibits   67
  Signatures   68

 

 2 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Part I - Financial Information

 

Item 1.Financial Statements.

 

   March 31
2023
(Unaudited)
   December 31
2022
 
Assets          
Investments:          
Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $369,382,018 and $362,750,511 for 2023 and 2022; allowance for credit losses of $179,500 and nil for 2023 and 2022)  $357,570,527   $345,858,492 
Equity securities at estimated fair value (cost of $10,356,783 and $9,942,265 for 2023 and 2022)   12,354,007    11,682,526 
Mortgage loans held for investment (net of allowance for credit losses of $2,735,419 and $1,970,311 for 2023 and 2022)   286,546,639    308,123,927 
Real estate held for investment (net of accumulated depreciation of $25,361,779 and $23,793,204 for 2023 and 2022)   187,077,012    191,328,616 
Real estate held for sale   7,390,262    11,161,582 
Other investments and policy loans (net of allowance for credit losses of $1,685,901 and $1,609,951 for 2023 and 2022)   70,218,779    70,508,156 
Accrued investment income   9,427,239    10,299,826 
Total investments   930,584,465    948,963,125 
Cash and cash equivalents   99,554,776    120,919,805 
Loans held for sale at estimated fair value   173,015,404    141,179,620 
Receivables (net of allowance for credit losses of $1,867,124 and $2,229,791 for 2023 and 2022)   16,377,391    28,573,092 
Restricted assets (including $6,877,734 and $6,565,552 for 2023 and 2022 at estimated fair value; allowance for credit losses of $5,874 and nil for 2023 and 2022)   19,036,870    18,935,055 
Cemetery perpetual care trust investments (including $3,948,380 and $3,859,893 for 2023 and 2022 at estimated fair value; allowance for credit losses of $2,196 and nil for 2023 and 2022)   7,460,412    7,276,210 
Receivable from reinsurers   14,900,756    15,033,938 
Cemetery land and improvements   9,112,647    9,101,474 
Deferred policy and pre-need contract acquisition costs   109,573,473    108,655,128 
Mortgage servicing rights, net   3,166,133    3,039,765 
Property and equipment, net   20,230,901    20,579,649 
Value of business acquired   9,556,967    9,803,736 
Goodwill   5,253,783    5,253,783 
Other   25,258,452    23,798,512 
           
Total Assets  $1,443,082,430   $1,461,112,892 

 

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

 

 3 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

   March 31
2023
(Unaudited)
   December 31
2022
 
Liabilities and Stockholders’ Equity          
Liabilities          
Future policy benefits and unpaid claims  $895,198,901   $889,327,303 
Unearned premium reserve   2,709,534    2,773,616 
Bank and other loans payable   138,391,846    161,712,804 
Deferred pre-need cemetery and mortuary contract revenues   16,583,024    16,226,836 
Cemetery perpetual care obligation   5,143,233    5,099,542 
Accounts payable   3,304,415    5,361,449 
Other liabilities and accrued expenses   52,558,185    57,113,888 
Income taxes   32,159,650    30,710,527 
Total liabilities   1,146,048,788    1,168,325,965 
           
Stockholders’ Equity          
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding   -    - 
Class A: common stock - $2.00 par value; 40,000,000 shares authorized; issued 18,807,013 shares in 2023 and 18,758,031 shares in 2022   37,614,026    37,516,062 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding   -    - 
Class C: convertible common stock - $2.00 par value; 6,000,000 shares authorized; issued 2,889,923 shares in 2023 and 2,889,859 shares in 2022   5,777,846    5,779,718 
Additional paid-in capital   64,805,874    64,767,769 
Accumulated other comprehensive loss, net of taxes   (8,942,719)   (13,070,277)
Retained earnings   202,728,972    202,160,306 
Treasury stock at cost - 612,142 Class A shares and 34,016 Class C shares in 2023; and 525,870 Class A shares and 34,016 Class C shares in 2022   (4,950,357)   (4,366,651)
           
Total stockholders’ equity   297,033,642    292,786,927 
           
Total Liabilities and Stockholders’ Equity  $1,443,082,430   $1,461,112,892 

 

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

 

 4 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Revenues:        
Mortgage fee income  $25,989,006   $48,344,445 
Insurance premiums and other considerations   27,967,292    26,341,952 
Net investment income   17,774,883    15,194,306 
Net mortuary and cemetery sales   6,471,429    7,205,721 
Gains on investments and other assets   111,154    171,975 
Other   1,186,970    5,167,508 
Total revenues   79,500,734    102,425,907 
           
Benefits and expenses:          
Death benefits   16,678,366    16,884,706 
Surrenders and other policy benefits   1,132,693    1,323,168 
Increase in future policy benefits   8,054,939    6,771,101 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired   4,883,581    4,396,413 
Selling, general and administrative expenses:          
Commissions   9,673,310    19,902,202 
Personnel   21,962,512    26,874,764 
Advertising   903,411    1,711,795 
Rent and rent related   1,776,780    1,659,270 
Depreciation on property and equipment   588,416    615,544 
Costs related to funding mortgage loans   1,842,342    2,839,463 
Other   7,780,535    12,091,636 
Interest expense   1,453,333    1,727,315 
Cost of goods and services sold-mortuaries and cemeteries   1,185,628    1,185,014 
Total benefits and expenses   77,915,846    97,982,391 
           
Earnings before income taxes   1,584,888    4,443,516 
Income tax expense   (344,716)   (1,214,798)
           
Net earnings  $1,240,172   $3,228,718 
           

Net earnings per Class A Equivalent common

share (1)

  $0.06   $0.15 
           

Net earnings per Class A Equivalent common

share-assuming dilution (1)

  $0.06   $0.15 
Weighted-average Class A equivalent common shares outstanding (1)   21,080,549    21,381,988 
           
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)   21,612,035    22,266,473 

 

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

 

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

 

 5 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Net earnings  $1,240,172   $3,228,718 
Other comprehensive income:          
Unrealized gains (losses) on fixed maturity securities available for sale  $5,218,029    (15,326,903)
Unrealized gains (losses) on restricted assets (1)   4,133    (71,946)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   2,926    (37,357)
Other comprehensive income (loss), before income tax   5,225,088    (15,436,206)
Income tax (expense) benefit   (1,097,530)   3,245,876 
Other comprehensive income (loss), net of income tax   4,127,558    (12,190,330)
Comprehensive income (loss)  $5,367,730   $(8,961,612)

 

 

(1) Fixed maturity securities available for sale

 

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

 

 6 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

                             
   Three Months Ended March 31, 2023 
   Class A Common Stock   Class C Common Stock   Additional Paid-in Capital   Accumulated Other Comprehensive Income (Loss)   Retained Earnings   Treasury Stock   Total 
January 1, 2023  $37,516,062   $5,779,718   $64,767,769   $(13,070,277)  $202,160,306   $(4,366,651)  $292,786,927 
                                    
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13)   -    -    -    -    (671,506)   -    (671,506)
Net earnings   -    -    -    -    1,240,172    -    1,240,172 
Other comprehensive gain   -    -    -    4,127,558    -    -    4,127,558 
Stock-based compensation expense   -    -    143,671    -    -    -    143,671 
Exercise of stock options   96,092    -    (62,073)   -    -    -    34,019 
Sale of treasury stock   -    -    (43,493)   -    -    620,651    577,158 
Purchase of treasury stock   -    -    -    -    -    (1,204,357)   (1,204,357)
Conversion Class C to Class A   1,872    (1,872)   -    -    -    -    - 
March 31, 2023  $37,614,026   $5,777,846   $64,805,874   $(8,942,719)  $202,728,972   $(4,950,357)  $297,033,642 

 

   Three Months Ended March 31, 2022 
   Class A Common Stock   Class C Common Stock   Additional Paid-in Capital   Accumulated Other Comprehensive Income (Loss)   Retained Earnings   Treasury Stock   Total 
January 1, 2022  $35,285,444   $5,733,130   $57,985,947   $18,070,448   $184,537,489   $(1,845,624)  $299,766,834 
                                    
Net earnings   -    -    -    -    3,228,718    -    3,228,718 
Other comprehensive loss   -    -    -    (12,190,330)   -    -    (12,190,330)
Stock-based compensation expense   -    -    271,747    -    -    -    271,747 
Exercise of stock options   100,446    -    (8,487)   -    -    -    91,959 
Sale of treasury stock   -    -    24,055    -    -    1,880,125    1,904,180 
Purchase of treasury stock   -    -    106,176    -    -    (878,417)   (772,241)
Conversion Class C to Class A   414    (414)   -    -    -    -    - 
March 31, 2022  $35,386,304   $5,732,716   $58,379,438   $5,880,118   $187,766,207   $(843,916)  $292,300,867 

 

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

 

 7 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Cash flows from operating activities:          
Net cash (used in) provided by operating activities  $(16,073,799)  $72,508,768 
           
Cash flows from investing activities:          
Purchases of fixed maturity securities   (11,911,847)   (32,508,649)
Sales, calls and maturities of fixed maturity securities   5,375,819    4,052,570 
Purchases of equity securities   (4,596,981)   (1,657,160)
Sales of equity securities   4,150,683    1,400,848 
Net changes in restricted assets   -    492,489 
Purchases of restricted assets   (311,776)   - 
Sales, calls and maturities of restricted assets   24,746    - 
Net changes in cemetery perpetual care trust investments   -    731,331 
Purchases of cemetery perpetual care trust investments   (113,238)   - 
Sales, calls and maturities of perpetual care trust investments   27,199    - 
Mortgage loans held for investment, other investments and policy loans made   (165,651,041)   (195,470,561)
Payments received for mortgage loans held for investment, other investments and policy loans   184,156,157    187,519,868 
Purchases of property and equipment   (250,642)   (356,802)
Sales of property and equipment   10,974    64,579 
Purchases of real estate   (2,705,716)   (6,367,199)
Sales of real estate   9,160,065    4,860,188 
Net cash provided by (used in) investing activities   17,364,402    (37,238,498)
           
Cash flows from financing activities:          
Investment contract receipts   3,100,207    2,875,328 
Investment contract withdrawals   (3,831,218)   (4,285,446)
Proceeds from stock options exercised   34,019    91,959 
Purchases of treasury stock   (1,204,357)   (772,241)
Repayment of bank loans   (15,684,446)   (426,027)
Proceeds from bank loans   46,000,000    7,186,083 
Net change in warehouse line borrowings for loans held for sale   (53,656,378)   (24,430,063)
Net cash used in financing activities   (25,242,173)   (19,760,407)
           
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents   (23,951,570)   15,509,863 
           
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period   133,483,817    141,414,282 
           
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period  $109,532,247   $156,924,145 
           
Supplemental Disclosure of Cash Flow Information:          
Cash paid during the year for:          
Interest  $1,635,867   $1,815,921 
Income taxes (net of refunds)   (6,878)   512 
           
Non Cash Operating, Investing and Financing Activities:          
Transfer from mortgage loans held for investment to restricted assets  $1,625,961   $- 
Transfer from mortgage loans held for investment to cemetery perpetual care trust investments   1,611,550    - 
Benefit plans funded with treasury stock   577,158    1,904,180 
Right-of-use assets obtained in exchange for operating lease liabilities   139,095    597,635 
Accrued real estate construction costs and retainage   -    2,775,240 

 

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

 

 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 
   2023   2022 
Cash and cash equivalents  $99,554,776   $145,630,099 
Restricted assets   9,228,113    9,460,057 
Cemetery perpetual care trust investments   749,358    1,833,989 
           
Total cash, cash equivalents, restricted cash and restricted cash equivalents  $109,532,247   $156,924,145 

 

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

 

 9 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

1) Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all 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, 2022, included in the Company’s Annual Report on Form 10-K (File Number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

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

 

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

 

Banking Environment. Item 7.01 Regulation FD Disclosure.

 

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

 

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

 

The information furnished in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

 

 10 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

2) Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2023

 

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

 

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

 

Accounting Standards Issued But Not Yet Adopted

 

ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” — Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will 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 has made progress in the implementation of the new standard, including the involvement of actuaries, accountants, and systems specialists. However, the Company has not yet estimated the impact the new guidance will have on the consolidated financial statements.

 

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

 

11

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments

 

The Company’s investments as of March 31, 2023 are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses (1)   Allowance for Credit Losses   Estimated Fair Value 
March 31, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
U.S. Treasury securities and obligations of U.S. Government agencies  $95,362,166   $305,924   $(2,047,395)  $-   $93,620,695 
                          
Obligations of states and political subdivisions   6,766,771    14,954    (337,946)   -    6,443,779 
                          
Corporate securities including public utilities   233,143,391    3,467,771    (9,039,301)   (179,500)   227,392,361 
                          
Mortgage-backed securities   33,859,690    203,490    (4,209,488)   -    29,853,692 
                          
Redeemable preferred stock   250,000    10,000    -    -    260,000 
                          
Total fixed maturity securities available for sale  $369,382,018   $4,002,139   $(15,634,130)  $(179,500)  $357,570,527 
                          
Equity securities at estimated fair value:                         
                          
Common stock:                         
                          
Industrial, miscellaneous and all other  $10,356,783   $2,741,720   $(744,496)       $12,354,007 
                          
Total equity securities at estimated fair value  $10,356,783   $2,741,720   $(744,496)       $12,354,007 
                          
Mortgage loans held for investment at amortized cost:                         
Residential  $94,471,213                     
Residential construction   146,093,947                     
Commercial   50,807,452                     
Less: Unamortized deferred loan fees, net   (1,752,369)                    
Less: Allowance for credit losses   (2,735,419)                    
Less: Net discounts   (338,185)                    
                          
Total mortgage loans held for investment  $286,546,639                     
                          
Real estate held for investment - net of accumulated depreciation:                         
Residential  $35,358,867                     
Commercial   151,718,145                     
                          
Total real estate held for investment  $187,077,012                     
                          
Real estate held for sale:                         
Residential  $7,238,709                     
Commercial   151,553                     
                          
Total real estate held for sale  $7,390,262                     
                          
Other investments and policy loans at amortized cost:                         
Policy loans  $13,012,347                     
Insurance assignments   45,573,831                     
Federal Home Loan Bank stock (2)   3,896,800                     
Other investments   9,421,702                     
Less: Allowance for credit losses for insurance assignments   (1,685,901)                    
                          
Total other investments and policy loans  $70,218,779                     
                          
Accrued investment income  $9,427,239                     
                          
Total investments  $930,584,465                     

 

 

(1) Gross unrealized losses are net of allowance for credit losses
(2) Includes $978,100 of Membership stock and $2,918,700 of Activity stock due to short-term borrowings and letters of credit.

 

12

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

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

 

 

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

 

13

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

Fixed Maturity Securities

 

The following table summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The table below sets forth unrealized losses by duration with the fair value of the related fixed maturity securities.

 

   Unrealized Losses for Less than Twelve Months   Fair Value   Unrealized Losses for More than Twelve Months   Fair Value   Total Unrealized Loss   Combined Fair Value 
At March 31, 2023                              
U.S. Treasury Securities And Obligations of U.S. Government Agencies  $644,240   $53,196,137   $1,403,155   $29,019,470   $2,047,395   $82,215,607 
Obligations of States and Political Subdivisions   204,976    4,644,270    132,970    1,213,482    337,946    5,857,752 
Corporate Securities   5,315,889    123,534,510    3,723,412    26,399,408    9,039,301    149,933,918 
Mortgage and other asset-backed securities   586,825    6,984,005    3,622,663    19,465,113    4,209,488    26,449,118 
Totals  $6,751,930   $188,358,922   $8,882,200   $76,097,473   $15,634,130   $264,456,395 
                               
At December 31, 2022                              
U.S. Treasury Securities And Obligations of U.S. Government Agencies  $2,685,277   $79,400,753   $-   $-   $2,685,277   $79,400,753 
Obligations of States and Political Subdivisions   378,067    5,467,910    80,070    429,020    458,137    5,896,930 
Corporate Securities   10,935,114    162,995,969    995,659    5,781,822    11,930,773    168,777,791 
Mortgage and other asset-backed securities   2,884,731    19,909,907    1,215,943    6,978,745    4,100,674    26,888,652 
Totals  $16,883,189   $267,774,539   $2,291,672   $13,189,587   $19,174,861   $280,964,126 

 

There were 656 securities with fair value of 94.4% of aggregate amortized cost at March 31, 2023. There were 713 securities with fair value of 93.6% of aggregate amortized cost at December 31, 2022. Credit losses of $179,500 and nil have been recognized for the three month periods ended March 31, 2023 and 2022 and are included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. Other unrealized losses for which no credit loss was recognized are primarily the result of the recent rise in interest rates and inflation.

 

Evaluation of Allowance for Credit Losses

 

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

 

On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss, unless current market or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited to, historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument.

 

14

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

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

 

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

 

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

 

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

 

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

 Schedule of Allowance for Credit Losses on Fixed Maturity Securities Available for Sale

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

 

15

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

   2022 
Balance of credit-related OTTI at January 1  $264,977 
      
Additions for credit impairments recognized on:     
Securities not previously impaired   - 
Securities previously impaired   - 
      
Reductions for credit impairments previously recognized on:     
Securities that matured or were sold during the period (realized)   (39,502)
Securities due to an increase in expected cash flows   - 
      
Balance of credit-related OTTI at March 31  $225,475 

 

The following table presents the amortized cost and the estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. Actual or expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized
Cost
   Estimated Fair
Value
 
Due in 1 year  $18,103,991   $18,032,556 
Due in 2-5 years   149,458,111    145,781,675 
Due in 5-10 years   81,699,121    80,082,902 
Due in more than 10 years   86,011,105    83,559,702 
Mortgage-backed securities   33,859,690    29,853,692 
Redeemable preferred stock   250,000    260,000 
Total  $369,382,018   $357,570,527 

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $93,436,027, at estimated fair value, of fixed maturity securities with the FHLB at March 31, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of March 31, 2023, the Company owed $31,000,000 to the FHLB and its estimated maximum borrowing capacity was $55,351,809.

 

Credit Quality Indicators

 

The NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered “investment grade” while the NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, the Company had 98.1% and 97.7% of its fixed maturity securities rated investment grade as of March 31, 2023 and December 31, 2022, respectively.

 

16

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

    March 31, 2023   December 31, 2022 
NAIC Designation   Amortized
Cost
   Estimated Fair
Value
   Amortized
Cost
   Estimated Fair
Value
 
1   $202,589,256   $197,298,515   $197,753,818   $189,691,540 
2    159,006,458    153,332,558    156,261,804    148,073,873 
3    6,036,229    5,540,009    7,080,305    6,635,786 
4    1,472,550    1,098,745    1,377,541    1,157,454 
5    26,236    40,316    25,736    39,155 
6    1,289    384    1,307    684 
Total   $369,132,018   $357,310,527   $362,500,511   $345,598,492 

 

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

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Proceeds from sales  $1,209,844   $455,651 
Gross realized gains   15,490    2,354 
Gross realized losses   (54,104)   (20)

 

Securities and cash on deposit with regulatory authorities as required by law amounted to $10,952,850 at March 31, 2023 and $11,032,165 at December 31, 2022. 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, 2023, other than investments issued or guaranteed by the United States Government.

 

Real Estate Held for Investment and Held for Sale

 

The Company strategically deploys resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development, and mortgage foreclosures.

 

Commercial Real Estate Held for Investment and Held for Sale

 

The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party resources. The geographic locations and asset classes of investments are determined by senior management under the direction of the Board of Directors.

 

The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are located in regions expected to have high growth in employment and population and that provide operational efficiencies.

 

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

 

17

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

The aggregated net book value of commercial real estate serving as collateral for bank loans was $128,272,775 and $129,330,119 as of March 31, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $96,652,659 and $97,112,131 as of March 31, 2023, and December 31, 2022, respectively.

 

During the three month periods ended March 31, 2023, and 2022, the Company did not record any impairment losses on commercial real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $1,565,927 and $1,323,930, respectively. Commercial real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

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

 

   Net Book Value   Total Square Footage 
   March 31
2023
   December 31 2022   March 31
2023
   December 31 2022 
Utah (1)  $146,397,779   $147,627,946    625,920    625,920 
Louisiana   2,369,405    2,380,847    31,778    31,778 
Mississippi   2,950,961    2,881,863    19,694    19,694 
                     
   $151,718,145   $152,890,656    677,392    677,392 

 

 

(1) Includes Center53 phase 1 and phase 2

 

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

 

   Net Book Value 
   March 31
2023
   December 31 2022 
Mississippi (1)  $151,553   $151,553 
           
   $151,553   $151,553 

 

 

(1) Consists of approximately 93 acres of undeveloped land

 

This property is being marketed with the assistance of commercial real estate brokers in Mississippi.

 

Residential Real Estate Held for Investment and Held for Sale

 

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

 

18

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

During the three month periods ended March 31, 2023, and 2022 the Company did not record any impairment losses on residential real estate held for sale or held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $2,648 and $2,648, respectively. Residential real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

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

 

   Net Book Value 
   March 31
2023
   December 31 2022 
Utah (1)  $35,358,867   $38,437,960 
   $35,358,867   $38,437,960 

 

 

(1) Includes subdivision land developments

 

The following table presents additional information regarding the Company’s subdivision land developments in Utah.

 

   March 31
2023
   December 31 2022 
Lots developed   67    80 
Lots to be developed   1,123    1,131 
Book Value  $34,825,972   $38,241,705 

 

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

 

   Net Book Value 
   March 31
2023
   December 31 2022 
Utah  $7,238,709   $11,010,029 
   $7,238,709   $11,010,029 

 

The net book value of foreclosed residential real estate included in residential real estate held for sale was $5,570,788 and $11,010,029 as of March 31, 2023, and December 31, 2022, respectively.

 

19

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

Real Estate Owned and Occupied by the Company

 

The primary business units of the Company occupy a portion of the real estate owned by the Company. As of March 31, 2023, real estate owned and occupied by the Company is summarized as follows:

 

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

 

 

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

 

Mortgage Loans Held for Investment

 

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and the loans are secured by real estate.

 

Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business or are employed. As of March 31, 2023, the Company had 60%, 10%, 6%, 5%, 5%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, Arizona, Hawaii, and Nevada, respectively. As of December 31, 2022, the Company had 64%, 10%, 5%, 5%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, 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 credit losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the 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 requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans in excess of 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required.

 

20

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

Evaluation of Allowance for Credit Losses

 

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

 

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

 

Once a mortgage loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Given this policy of timely writing off uncollectible accrued interest, the Company does not measure a credit loss allowance on accrued interest receivable as it writes off any uncollectible accrued interest receivable balances to net investment income in a timely manner. Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received for mortgage loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for mortgage loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued on these loans totaled approximately $110,000 and $226,000 as of March 31, 2023, and December 31, 2022, respectively.

 

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

 

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

 

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

 

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

 

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

 

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

 

21

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

Residential construction (including land acquisition and development) – These loans are underwritten in accordance with the Company’s underwriting policies, which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations, and factor in estimates of the value of construction projects upon completion. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.

 

Additionally, land acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These loans are 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.

 

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

 

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

 

   Commercial   Residential   Residential Construction   Total 
March 31, 2023                    
Allowance for credit losses:                    
Beginning balance - January 1, 2023  $187,129   $1,739,980   $43,202   $1,970,311 
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13)   555,807    (192,607)   301,830    665,030(1)
Change in provision for credit losses   15,195    137,727    (52,844)   100,078(2)
Charge-offs   -    -    -    - 
Ending balance - March 31, 2023  $758,131   $1,685,100   $292,188   $2,735,419 
                     
December 31, 2022                    
Allowance for credit losses:                    
Beginning balance - January 1, 2022  $187,129   $1,469,571   $43,202   $1,699,902 
Change in provision for credit losses   -    270,409    -    270,409(2)
Charge-offs   -    -    -    - 
Ending balance - December 31, 2022  $187,129   $1,739,980   $43,202   $1,970,311 

 

 

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

 

22

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

   Commercial   Residential   Residential
Construction
   Total 
March 31, 2023                    
30-59 days past due  $3,221,608   $5,807,400   $1,205,232   $10,234,240 
60-89 days past due   -    -    -    - 
Over 90 days past due (1)   405,000    2,224,933    -    2,629,933 
In process of foreclosure (1)   -    713,552    -    713,552 
Total past due   3,626,608    8,745,885    1,205,232    13,577,725 
Current   47,180,844    85,725,328    144,888,715    277,794,887 
Total mortgage loans   50,807,452    94,471,213    146,093,947    291,372,612 
Allowance for credit losses   (758,131)   (1,685,100)   (292,188)   (2,735,419)
Unamortized deferred loan fees, net   (224,118)   (1,258,174)   (270,077)   (1,752,369)
Unamortized discounts, net   (227,417)   (110,768)   -    (338,185)
Net mortgage loans  $49,597,786   $91,417,171   $145,531,682   $286,546,639 
                     
December 31, 2022                    
30-59 days past due  $1,000,000   $3,553,390   $-   $4,553,390 
60-89 days past due   -    814,184    -    814,184 
Over 90 days past due (1)   -    1,286,211    -    1,286,211 
In process of foreclosure (1)   405,000    876,174    -    1,281,174 
Total past due   1,405,000    6,529,959    -    7,934,959 
Current   44,906,955    86,825,664    172,516,125    304,248,744 
Total mortgage loans   46,311,955    93,355,623    172,516,125    312,183,703 
Allowance for credit losses   (187,129)   (1,739,980)   (43,202)   (1,970,311)
Unamortized deferred loan fees, net   (199,765)   (1,212,994)   (333,846)   (1,746,605)
Unamortized discounts, net   (230,987)   (111,873)   -    (342,860)
Net mortgage loans  $45,694,074   $90,290,776   $172,139,077   $308,123,927 

 

 

(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, 2023 (Unaudited)

 

3) Investments (Continued)

 

Credit Quality Indicators

 

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

 

The unpaid principal balance of commercial mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

 

    2023    2022    2021    2020    2019    Prior    Total    % of Total 
Credit Quality Indicator  2023   2022   2021   2020   2019   Prior   Total   % of Total 
LTV:                                        
Less than 65%  $8,525,000   $14,383,954   $3,842,851   $-   $3,025,549   $7,009,216   $36,786,570    72.40%
65% to 80%   -    6,073,044    2,100,000    4,913,313    -    -    13,086,357    25.76%
Greater than 80%   -    529,525    405,000    -    -    -    934,525    1.84%
                                         
Total  $8,525,000   $20,986,523   $6,347,851   $4,913,313   $3,025,549   $7,009,216   $50,807,452    100.00%
                                         
DSCR                                        
>1.20x  $5,725,000   $1,000,000   $2,800,000   $4,913,313   $3,025,549   $1,507,378   $18,971,240    37.34%
1.00x - 1.20x   2,800,000    11,425,114    3,547,851    -    -    5,501,838    23,274,803    45.81%
<1.00x   -    8,561,409(1)   -    -    -    -    8,561,409    16.85%
                                         
Total  $8,525,000   $20,986,523   $6,347,851   $4,913,313   $3,025,549   $7,009,216   $50,807,452    100.00%

 

 

(1) Commercial construction loan

 

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

 

The unpaid principal balance of residential mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

 

Credit Quality Indicator  2023   2022   2021   2020   2019   Prior   Total   % of Total 
Performance Indicators:                                        
Performing  $5,386,918   $53,760,980   $6,923,101   $8,466,520   $3,264,494   $13,730,714   $91,532,727    96.89%
Non-performing (1)   -    1,104,327    366,646    -    353,092    1,114,421    2,938,486    3.11%
                                         
Total  $5,386,918   $54,865,307   $7,289,747   $8,466,520   $3,617,586   $14,845,135   $94,471,213    100.00%

 

 

(1) Includes residential mortgage loans in the process of foreclosure of $713,552 at March 31, 2023

 

24

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

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

 

The unpaid principal balance of residential construction mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

 

 Schedule of Residential Construction Mortgage Loans

Credit Quality Indicator  2023   2022   2021   Total   % of Total 
Performance Indicators:                         
Performing  $12,541,324   $87,110,137   $46,442,486   $146,093,947    100.00%
Non-performing   -    -    -    -    0.00%
                          
Total  $12,541,324   $87,110,137   $46,442,486   $146,093,947    100.00%
                          
LTV:                         
Less than 65%  $9,072,543   $51,392,028   $8,626,153   $69,090,724    47.29%
65% to 80%   3,468,781    33,790,358    21,588,236    58,847,375    40.28%
Greater than 80%   -    1,927,751    16,228,097    18,155,848    12.43%
                          
Total  $12,541,324   $87,110,137   $46,442,486   $146,093,947    100.00%

 

Insurance Assignments

 

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

 

 Schedule of Aging of Insurance Assignments

   As of
March 31
2023
   As of
December 31 2022
 
30-59 days past due  $9,554,122   $10,621,443 
60-89 days past due   4,043,444    3,997,484 
Over 90 days past due   5,791,483    5,813,013 
Total past due   19,389,049    20,431,941 
Current   26,184,781    26,510,594 
Total insurance assignments   45,573,831    46,942,536 
Allowance for credit losses   (1,685,901)   (1,609,951)
Net insurance assignments  $43,887,930   $45,332,585 

 

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

 

25

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

The following table presents a roll forward of the allowance for credit losses as a contra-asset account for insurance assignments.

 

Schedule of Allowance for Credit Losses 

   Allowance 
Beginning balance - January 1, 2023  $1,609,951 
Change in provision for credit losses   233,113(1)
Charge-offs   (157,163)
Ending balance - March 31, 2023  $1,685,901 
      
Beginning balance - January 1, 2022  $1,686,218 
Change in provision for credit losses   889,480(1)
Charge-offs   (965,747)
Ending balance - December 31, 2022  $1,609,951 

 

 

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

 

Investment Related Earnings

 

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

 

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Fixed maturity securities:          
Gross realized gains  $15,491   $46,123 
Gross realized losses   (54,891)   (930)
Net credit loss (provision) release   (179,500)   - 
           
Equity securities:          
Gains (losses) on securities sold   (52,315)   (10,279)
Unrealized gains and (losses) on securities held at the end of the period   331,430    (607,047)
           
Real estate held for investment and sale:          
Gross realized gains   -    385,366 
Gross realized losses   -    (94,400)
           
Other assets, including call and put option derivatives:          
Gross realized gains   50,939    453,142 
Gross realized losses   -    - 
Total  $111,154   $171,975 

 

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

 

Net realized gains and losses includes gains and losses by the restricted assets and cemetery perpetual care trust investments of the cemeteries and mortuaries of $53,931 in net gains and $275,741 in net losses for the three month periods ended March 31, 2023, and 2022, respectively.

 

26

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

3) Investments (Continued)

 

Major categories of net investment income were as follows:

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
Fixed maturity securities available for sale  $4,012,732   $2,636,216 
Equity securities   140,507    123,037 
Mortgage loans held for investment   8,487,656    7,960,178 
Real estate held for investment and sale   3,364,924    3,040,033 
Policy loans   200,213    306,282 
Insurance assignments   4,768,203    5,396,987 
Other investments   129,056    70,645 
Cash and cash equivalents   787,762    75,301 
Gross investment income   21,891,053    19,608,679 
Investment expenses   (4,116,170)   (4,414,373)
Net investment income  $17,774,883   $15,194,306 

 

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $633,527 and $476,708 for the three month periods ended March 31, 2023 and 2022, respectively.

 

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

 

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

 

Accrued Investment Income

 

Accrued investment income consists of the following:

 Schedule of Accrued Investment Income

   As of
March 31
2023
   As of
December 31 2022
 
Fixed maturity securities available for sale  $3,841,931   $3,563,767 
Equity securities   18,362    14,496 
Mortgage loans held for investment   2,710,149    3,220,709 
Real estate held for investment   2,809,671    3,455,305 
Policy Loans   45,221    37,951 
Cash and cash equivalents   1,905    7,598 
Total accrued investment income  $9,427,239   $10,299,826 

 

27

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (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 table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale:

 

           
   As of
March 31
2023
   As of
December 31 2022
 
         
Aggregate fair value  $173,015,404   $141,179,620 
Unpaid principal balance   172,407,557    141,337,811 
Unrealized gain (loss)   607,847    (158,191)

 

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 summarized as follows:

 

           
   Three Months Ended March 31 
   2023   2022 
Loan fees  $4,388,414   $7,087,182 
Interest income   2,007,058    2,031,869 
Secondary gains   17,961,358    39,602,614 
Change in fair value of loan commitments   677,952    2,675,371 
Change in fair value of loans held for sale   794,614    (2,746,565)
Provision for loan loss reserve   159,610    (306,026)
Mortgage fee income  $25,989,006   $48,344,445 

 

Loan Loss Reserve

 

Repurchase demands from third party investors that correspond to mortgage loans previously held for sale and sold are reviewed and relevant data is captured so that an estimated future loss can be calculated. The key factors that are used in the estimated future loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company 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.

 

28

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

4) Loans Held for Sale (Continued)

 

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

 

   As of
March 31
2023
   As of
December 31
2022
 
Balance, beginning of period  $1,725,667   $2,447,139 
Provision on current loan originations (1)   239,801    1,078,812 
Charge-offs, net of recaptured amounts   (632,783)   (1,800,284)
Balance, end of period  $1,332,685   $1,725,667 

 

 

(1) Included in mortgage fee income

 

The Company maintains reserves for estimated losses on current production volumes. For the three month period ended March 31, 2023, $239,801 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 month period ended March 31, 2022, when reserves of $306,026 were added at a rate of 2.9 basis points per loan originated, the equivalent of $290 per $1,000,000 in loans originated. The Company 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, 2023, represents its best estimate for adequate loss reserves on loans sold.

 

29

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

5) Stock Compensation Plans

 

The Company has three fixed option plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Equity Incentive Plan”).

 

Stock Options

 

Stock based compensation expense for stock options issued of $142,929 and $271,747 has been recognized for these plans for the three month periods ended March 31, 2023, and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2023, the total unrecognized compensation expense related to the options issued was $390,702, which is expected to be recognized over the vesting period.

 

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

 

Activity of the stock option plans during the three month period ended March 31, 2023, is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Exercise Price   Number of
Class C Shares
   Weighted Average Exercise Price 
                 
Outstanding at January 1, 2023   976,605   $4.78    1,157,203   $5.59 
Granted   16,000         -      
Exercised   (90,705)        -      
Cancelled   -         -      
Outstanding at March 31, 2023   901,900   $4.92    1,157,203   $5.59 
                     
As of March 31, 2023:                    
Options exercisable   827,025   $4.76    935,953   $5.36 
                     
As of March 31, 2023:                    
Available options for future grant   155,133         795,000      
                     
Weighted average contractual term of options outstanding at March 31, 2023   4.60 years         6.66 years      
                     
Weighted average contractual term of options exercisable at March 31, 2023   4.14 years         6.20 years      
                     
Aggregated intrinsic value of options outstanding at March 31, 2023 (1)  $1,182,602        $741,380      
                     
Aggregated intrinsic value of options exercisable at March 31, 2023 (1)  $1,214,210        $812,293      

 

 

(1) The Company used a stock price of $6.23 as of March 31, 2023 to derive intrinsic value.

 

30

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

5) Stock Compensation Plans (Continued)

 

Activity of the stock option plans during the three month period ended March 31, 2022, is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Exercise Price   Number of
Class C Shares
   Weighted Average Exercise Price 
                 
Outstanding at January 1, 2022   1,024,351   $4.61    821,146   $5.48 
Granted   4,000         -      
Exercised   (50,968)        -      
Cancelled   -         -      
Outstanding at March 31, 2022   977,383   $4.77    821,146   $5.48 
                     
As of March 31, 2022:                    
Options exercisable   906,258   $4.46    648,646   $4.67 
                     
As of March 31, 2022:                    
Available options for future grant   228,376         16,689      
                     
Weighted average contractual term of options outstanding at March 31, 2022   4.44 years         7.00 years      
                     
Weighted average contractual term of options exercisable at March 31, 2022   4.03 years         6.57 years      
                     
Aggregated intrinsic value of options outstanding at March 31, 2022 (1)  $5,115,622        $3,666,085      
                     
Aggregated intrinsic value of options exercisable at March 31, 2022 (1)  $5,017,469        $3,460,285      

 

 

(1)The Company used a stock price of $10.00 as of March 31, 2022, which was the closing price of the Company’s Class A shares on Nasdaq for that day, 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 month periods ended March 31,2023 and 2022 was $176,935 and $395,831, respectively.

 

31

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

5) Stock Compensation Plans (Continued)

 

Restricted Stock Units (“RSUs”)

 

Stock based compensation expense for RSUs issued of $742 and nil has been recognized under these plans for the three month periods ended March 31, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2023, the total unrecognized compensation expense related to the RSUs issued was nil. The fair value of each RSU granted is determined based on the Company’s stock price on the date of grant. Prior to December 2022, the Company did not grant any RSUs.

 

Activity of the RSUs during the three month period ended March 31, 2023 is summarized as follows:

 

   Number of
Class A Shares
   Weighted Average Grant Date Fair Value 
Non-vested at January 1, 2023   1,620   $6.48 
Granted   -      
Vested   -      
Non-vested at March 31, 2023   1,620   $6.48 
           
Available RSUs for future grant  $18,380      
           
Aggregated intrinsic value of RSUs outstanding at March 31, 2023 (1)  $-      

 

 

(1)The Company used a stock price of $6.23 as of March 31, 2023 to derive intrinsic value.

 

32

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

6) Earnings Per Share

 

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

 

           
   Three Months Ended
March 31
 
   2023   2022 
Numerator:        
Net earnings  $1,240,172   $3,228,718 
Denominator:          
Basic weighted-average shares outstanding   21,080,549    21,381,988 
Effect of dilutive securities:          
Employee stock options   531,486    884,485 
           
Diluted weighted-average shares outstanding   21,612,035    22,266,473 
           
Basic net earnings per share  $0.06   $0.15 
           
Diluted net earnings per share  $0.06   $0.15 

 

For the three month periods ended March 31, 2023, and 2022, there were 730,270 and nil 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.

 

   Class A   Class C 
Outstanding shares at December 31, 2021   17,642,722    2,866,565 
           
Exercise of stock options   50,223    - 
Conversion of Class C to Class A   207    (207)
           
Outstanding shares at March 31, 2022   17,693,152    2,866,358 
           
Outstanding shares at December 31, 2022   18,758,031    2,889,859 
           
Exercise of stock options   48,046    - 
Conversion of Class C to Class A   936    (936)
           
Outstanding shares at March 31, 2023   18,807,013    2,888,923 

 

33

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

7) Business Segment Information

 

Description of Products and Services by Segment

 

The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale.

 

Measurement of Segment Profit or Loss and Segment Assets

 

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2022. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

 

Factors Management Used to Identify the Enterprise’s Reportable Segments

 

The Company’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.

 

34

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

7) Business Segment Information (Continued)

 

   Life Insurance   Cemetery/
Mortuary
   Mortgage  

Intercompany

Eliminations

   Consolidated 
For the Three Months Ended                         
March 31, 2023                         
Revenues from external customers  $45,415,297   $7,198,396   $26,887,041   $-   $79,500,734 
Intersegment revenues   1,510,028    83,836    123,699    (1,717,563)   - 
Segment profit (loss) before income taxes   3,683,735    1,784,592    (3,883,439)   -    1,584,888 
                          
Identifiable Assets   1,308,954,075    87,354,333    152,745,312    (111,225,073)   1,437,828,647 
Goodwill   2,765,570    2,488,213    -    -    5,253,783 
Total Assets   1,311,719,645    89,842,546    152,745,312    (111,225,073)   1,443,082,430 
                          
For the Three Months Ended                         
March 31, 2022                         
Revenues from external customers  $41,501,809   $7,463,194   $53,460,904   $-   $102,425,907 
Intersegment revenues   1,695,779    182,589    74,709    (1,953,077)   - 
Segment profit before income taxes   816,485    2,020,317    1,606,714    -    4,443,516 
                          
Identifiable Assets   1,241,160,139    77,002,286    295,671,662    (99,284,078)   1,514,550,009 
Goodwill   2,765,570    2,488,213    -    -    5,253,783 
Total Assets   1,243,925,709    79,490,499    295,671,662    (99,284,078)   1,519,803,792 

 

35

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments

 

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:

 

Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

 

Level 2: Financial assets and financial liabilities whose values are based on the following:

  a) Quoted prices for similar assets or liabilities in active markets;
  b) Quoted prices for identical or similar assets or liabilities in non-active markets; or
  c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing 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 financial assets), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

 

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

 

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

 

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

 

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

 

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

 

36

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The items shown under Level 3 are valued as follows:

 

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

 

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 with third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period 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 comparable sales in the area, property condition, and potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.

 

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

 

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

 

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

 

Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights (“MSRs”) at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction.

 

37

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at March 31, 2023.

Schedule of Fair Value Assets and Liabilities Measured on a Recurring Basis  

   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  $357,570,527   $-   $356,135,008   $1,435,519 
Equity securities   12,354,007    12,354,007    -    - 
Loans held for sale   173,015,404    -    -    173,015,404 
Restricted assets (1)   1,217,307    -    1,217,307    - 
Restricted assets (2)   5,660,427    5,660,427    -    - 
Cemetery perpetual care trust investments (1)   256,422    -    256,422    - 
Cemetery perpetual care trust investments (2)   3,691,958    3,691,958    -    - 
Derivatives - loan commitments (3)   6,560,948    -    -    6,560,948 
Total assets accounted for at fair value on a recurring basis  $560,327,000   $21,706,392   $357,608,737   $181,011,871 
                     
Liabilities accounted for at fair value on a recurring basis                    
Derivatives - loan commitments (4)   (3,176,119)   -    -    (3,176,119)
Total liabilities accounted for at fair value on a recurring basis  $(3,176,119)  $-   $-   $(3,176,119)

 

 

(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

 

38

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2022.

 

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

 

 

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

 

39

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

  

          Significant  Range of Inputs     
   Fair Value at   Valuation  Unobservable  Minimum   Maximum   Weighted 
   3/31/2023   Technique  Input(s)  Value   Value   Average 
Loans held for sale  $173,015,404   Market approach  Investor contract pricing as a percentage of unpaid principal balance   70.0%   111.0%   100.0%
                           
Derivatives - loan commitments (net)   3,384,829   Market approach  Pull-through rate   65.0%   95.0%   85.0%
           Initial-Value   N/A    N/A    N/A 
           Servicing   0 bps    149 bps    45 bps 
                           
Fixed maturity securities available for sale   1,435,519   Broker quotes  Pricing quotes  $100.00   $111.11   $104.97 

 

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

 

          Significant  Range of Inputs     
   Fair Value at   Valuation  Unobservable  Minimum   Maximum   Weighted 
   12/31/2022   Technique  Input(s)  Value   Value   Average 
Loans held for sale  $141,179,620   Market approach  Investor contract pricing as a percentage of unpaid principal balance   69.9%   106.1%   99.8%
                           
Derivatives - loan commitments (net)   2,706,877   Market approach  Pull-through rate   65.0%   95.0%   82.2%
           Initial-Value   N/A    N/A    N/A 
           Servicing   0 bps    153 bps    73 bps 
                           
Fixed maturity securities available for sale   1,435,519   Broker quotes  Pricing quotes  $100.00   $111.11   $104.97 

 

40

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month periods ended March 31, 2023:

  

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - December 31, 2022  $2,706,877   $141,179,620   $1,435,519 
Originations and purchases   -    531,867,796    - 
Sales, maturities and paydowns   -    (511,909,942)   - 
Total gains (losses):               
Included in earnings   677,952(1)   11,877,930(1)   -(2)
Included in other comprehensive income   -    -    -
                
Balance - March 31, 2023  $3,384,829   $173,015,404   $1,435,519 

 

 

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

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month periods ended March 31, 2022:

 

   Net Loan Commitments   Loans Held for Sale   Fixed Maturity Securities Available for Sale 
Balance - December 31, 2021  $7,015,515   $302,776,827   $2,023,348 
Originations and purchases   -    1,039,216,582    - 
Sales, maturities and paydowns   -    (1,132,085,830)   (11,950)
Total gains (losses):               
Included in earnings   2,675,371(1)   24,105,293(1)   961(2)
Included in other comprehensive income   -    -    (587)
                
Balance - March 31, 2022  $9,690,886   $234,012,872   $2,011,772 

 

 

(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

 

41
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The Company didn’t have any financial assets and financial liabilities measured at fair value on a nonrecurring basis at March 31, 2023.

 

The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2022.

  

   Total   Quoted Prices in Active Markets for Identical Assets
(Level 1)
   Significant Observable Inputs
(Level 2)
   Significant Unobservable Inputs
(Level 3)
 
Assets accounted for at fair value on a nonrecurring basis                    
Impaired mortgage loans held for investment  $794,224   $-   $-   $794,224 
Total assets accounted for at fair value on a nonrecurring basis  $794,224   $-   $-   $794,224 

 

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, 2023 and December 31, 2022.

 

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of March 31, 2023:

 

   Carrying Value   Level 1   Level 2   Level 3   Total Estimated Fair Value 
Assets                         
Mortgage loans held for investment                         
Residential  $91,417,171   $-   $-   $89,949,922   $89,949,922 
Residential construction   145,531,682    -    -    145,531,682    145,531,682 
Commercial   49,597,786    -    -    48,049,451    48,049,451 
Mortgage loans held for investment, net  $286,546,639   $-   $-   $283,531,055   $283,531,055 
Policy loans   13,012,347    -    -    13,012,347    13,012,347 
Insurance assignments, net (1)   43,887,930    -    -    43,887,930    43,887,930 
Restricted assets (2)   2,936,896    -    -    2,936,896    2,936,896 
Cemetery perpetual care trust investments (2)   2,709,339    -    -    2,709,339    2,709,339 
Mortgage servicing rights, net   3,166,133    -    -    4,164,686    4,164,686 
                          
Liabilities                         
Bank and other loans payable  $(138,391,846)  $-   $-   $(138,391,846)  $(138,391,846)
Policyholder account balances (3)   (40,865,405)   -    -    (41,529,360)   (41,529,360)
Future policy benefits - annuities (3)   (106,474,611)   -    -    (128,238,451)   (128,238,451)

 

 

(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

 

42
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2022:

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

43
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

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

 

Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period 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) Derivative Instruments

 

Mortgage Banking Derivatives

 

Loan Commitments

 

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

 

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

 

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

 

44
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

9) Derivative Instruments (Continued)

 

Forward Sale Commitments

 

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

 

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

 

Call and Put Options Derivatives

 

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

 

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

 

      March 31, 2023   December 31, 2022 
   Balance Sheet Location  Notional Amount   Asset Fair Value   Liability Fair Value   Notional Amount   Asset Fair Value   Liability Fair Value 
Derivatives not designated as hedging instruments:                                 
Loan commitments  Other assets and Other liabilities  $441,138,434   $6,560,948   $3,176,119   $453,371,808   $4,089,859   $1,382,979 
Call options  Other liabilities   -    -    -    868,600    -    29,715 
Put options  Other liabilities   -    -    -    654,500    -    13,888 
Total     $441,138,434   $6,560,948   $3,176,119   $454,894,908   $4,089,859   $1,426,582 

 

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

 

      Net Amount Gain (Loss) 
      Three Months Ended March 31 
Derivative  Classification  2023   2022 
Loan commitments  Mortgage fee income  $677,952   $2,675,371 
              
Call and put options  Gains on investments and other assets  $49,963   $61,195 

 

45
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

10) 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 evaluates the financial condition of reinsurers and monitors the concentration of credit risk. 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. See Note 4 to the condensed consolidated financial statements for additional information about the Company’s loan loss reserve.

 

Debt Covenants for Mortgage Warehouse Lines of Credit

 

The Company, through its subsidiary SecurityNational Mortgage, has a $100,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month SOFR rate plus 2.1% and matures on June 2, 2023. 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 $100,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month SOFR rate plus 2% and matures on November 9, 2023. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling 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 $75,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month SOFR rate plus 2.50% and matures on May 26, 2023. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.

 

The Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $50,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at 2.10% plus the greater of (i) 0%, and (ii) the one-month forward-looking term rate based on SOFR and matures on June 2, 2023. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.

 

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, 2023, the Company was not in compliance with the net income covenant on its warehouse line with U.S. Bank and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $8,900,000 on the Texas Capital Bank N.A. warehouse line that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines that have provided covenant waivers to fund its origination activities.

 

46
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

10) Reinsurance, Commitments and Contingencies

 

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, 2023, the Company’s commitments were approximately $192,542,000 for these loans, of which $151,740,182 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 5.25% to 8.50% 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, if adversely determined, will have a material effect on the Company’s financial position or results of operations. Based on management’s assessment and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements.

 

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

 

47
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

11) 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 table presents the MSR activity.

 

   As of March 31
2023
   As of December 31
2022
 
Amortized cost:          
Balance before valuation allowance at beginning of year  $3,039,765   $53,060,455 
MSR additions resulting from loan sales (1)   287,710    10,243,922 
Amortization (2)   (161,342)   (9,078,706)
Sale of MSRs   -    (51,185,906)
Application of valuation allowance to write down MSRs with other than temporary impairment   -    - 
Balance before valuation allowance at end of period  $3,166,133   $3,039,765 
           
Valuation allowance for impairment of MSRs:          
Balance at beginning of year  $-   $- 
Additions   -    - 
Application of valuation allowance to write down MSRs with other than temporary impairment   -    - 
Balance at end of period  $-   $- 
           
Mortgage servicing rights, net  $3,166,133   $3,039,765 
           
Estimated fair value of MSRs at end of period  $4,164,686   $3,927,877 

 

 

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

 

48
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

11) Mortgage Servicing Rights

 

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its March 31, 2023 valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management. 

 

   Estimated MSR Amortization 
2023   345,340 
2024   309,193 
2025   277,298 
2026   246,874 
2027   221,541 
Thereafter   1,765,887 
Total  $3,166,133 

 

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.

 

   2023   2022 
   Three Months Ended
March 31
 
   2023   2022 
Contractual servicing fees  $410,400   $4,506,260 
Late fees   49,313    100,038 
Total  $459,713   $4,606,298 

 

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

 

   As of March 31
2023
   As of December 31
2022
 
Servicing UPB  $376,394,059   $360,023,384 

 

The following key assumptions were used in determining MSR value:

 

   Prepayment
Speeds
   Average
Life (Years)
   Discount
Rate
 
March 31, 2023   8.80    8.10    11.78 
December 31, 2022   8.12    8.49    11.95 

 

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

 

49
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

12) Income Taxes

 

The Company’s overall effective tax rate for the three month periods ended March 31, 2023 and 2022 was 21.8% and 27.3%, respectively, which resulted in a provision for income taxes of $344,716 and $1,214,798, 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 decrease in the effective tax rate when compared to the prior year is partially due to the Company’s provision for state income taxes.

 

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

 

13) Revenues from Contracts with Customers

 

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

 

Information about Performance Obligations and Contract Balances

 

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

 

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

 

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

 

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

 

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

 

Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such 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.

 

50
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

13) Revenues from Contracts with Customers (Continued)

 

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

 

   Contract Balances 
   Receivables (1)   Contract Asset   Contract Liability 
Opening (1/1/2023)  $5,392,779   $-   $16,226,836 
Closing (3/31/2023)   5,145,833    -    16,583,024 
Increase/(decrease)   (246,946)   -    356,188 

 

   Contract Balances 
   Receivables (1)   Contract Asset   Contract Liability 
Opening (1/1/2022)  $5,298,636   $-   $14,508,022 
Closing (12/31/2022)   5,392,779    -    16,226,836 
Increase/(decrease)   94,143    -    1,718,814 

 

 

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

 

The amount of revenue recognized and included in the opening contract liability balance for the three month periods ended March 31, 2023 and 2022 was $1,119,898 and $1,064,104, respectively.

 

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

 

Disaggregation of Revenue

 

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

 

   2023   2022 
   Three Months Ended
March 31
 
   2023   2022 
Major goods/service lines          
At-need  $5,154,036   $5,866,878 
Pre-need   1,317,393    1,338,843 
Net mortuary and cemetery sales  $6,471,429   $7,205,721 
           
Timing of Revenue Recognition          
Goods transferred at a point in time  $4,029,666   $4,180,545 
Services transferred at a point in time   2,441,763    3,025,176 
Net mortuary and cemetery sales  $6,471,429   $7,205,721 

 

51
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

13) Revenues from Contracts with Customers (Continued)

 

The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented:

 

   2023   2022 
   Three Months Ended
March 31
 
   2023   2022 
Net mortuary and cemetery sales  $6,471,429   $7,205,721 
Gains (losses) on investments and other assets   53,931    (254,525)
Net investment income   601,491    496,459 
Other revenues   71,545    15,539 
Revenues from external customers   7,198,396    7,463,194 

 

14) Receivables

 

Receivables consist of the following:

 

   As of March 31, 2023   As of December 31, 2022 
Contracts with customers  $5,145,833   $5,392,779 
Receivables from sales agents   2,254,183    2,209,185 
Other   10,844,499    23,200,919 
Total receivables   18,244,515    30,802,883 
Allowance for doubtful accounts   (1,867,124)   (2,229,791)
Net receivables  $16,377,391   $28,573,092 

 

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

 

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

 

   Allowance 
Beginning balance - January 1, 2023  $2,229,791 
Change in provision for credit losses   (318,664)(1)
Charge-offs   (44,003)
Ending balance - March 31, 2023  $1,867,124 
      
Beginning balance - January 1, 2022  $1,800,725 
Change in provision for credit losses   799,888(1)
Charge-offs   (370,822)
Ending balance - December 31, 2022  $2,229,791 

 

 

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

 

52
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

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

 

Cemetery Perpetual Care Trust Investments and Obligation

 

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

 

The components of the cemetery perpetual care investments and obligation as of March 31, 2023, are as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Allowance for Credit Losses   Estimated Fair Value 
March 31, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
U.S. Treasury securities and obligations of U.S. Government agencies  $89,004   $381   $-   $-   $89,384 
Obligations of states and political subdivisions   172,966    -    (5,928)   -    167,038 
Total fixed maturity securities available for sale  $261,969   $381   $(5,928)  $-   $256,422 
                          
Equity securities at estimated fair value:                         
Common stock:                         
Industrial, miscellaneous and all other  $3,251,768   $602,286   $(162,096)       $3,691,958 
Total equity securities at estimated fair value  $3,251,768   $602,286   $(162,096)       $3,691,958 
                          
Mortgage loans held for investment at amortized cost:                         
Residential construction  $2,709,339                     
Less: Allowance for credit losses  $(2,196)                    
Total mortgage loans held for investment  $2,707,143                     
                          
Real estate held for investment: Residential  $55,531                     
                          
Cash and cash equivalents  $749,358                     
                          
Total cemetery perpetual care trust investments  $7,460,412                     
                          
Cemetery perpetual care obligation  $(5,143,233)                    
                          
Trust investments in excess of trust obligations  $2,317,179                     

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

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

 

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

 

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

 

Fixed Maturity Securities

 

The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. 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, 2023                              
Obligations of states and political subdivisions  $435   $54,401   $5,493   $112,637   $5,928   $167,038 
Total unrealized losses  $435   $54,401   $5,493   $112,637   $5,928   $167,038 
                               
At December 31, 2022                              
U.S. Treasury securities and obligations of U.S. Government agencies  $38   $59,392   $-   $-   $38   $59,392 
Obligations of states and political subdivisions   1,845    94,612    6,633    71,112    8,478    165,724 
Total unrealized losses  $1,883   $154,004   $6,633   $71,112   $8,516   $225,116 

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

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

 

There were 3 securities with fair value of 96.6% of aggregate amortized cost at March 31, 2023. There were 5 securities with fair value of 96.4% of aggregate amortized cost at December 31, 2022. No credit losses have been recognized for the three month periods ended March 31, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent rise in interest rates and inflation.

 

The following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized   Estimated Fair 
   Cost   Value 
Due in 1 year  $89,004   $89,384 
Due in 2-5 years   76,509    71,788 
Due in 5-10 years   41,621    40,849 
Due in more than 10 years   54,835    54,401 
Total  $261,969   $256,422 

 

Restricted Assets

 

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

 

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

 

Restricted assets as of March 31, 2023, are summarized as follows:

 

   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Allowance for Credit Losses   Estimated Fair Value 
March 31, 2023:                         
Fixed maturity securities, available for sale, at estimated fair value:                         
Obligations of states and political subdivisions  $1,030,141   $679   $(12,436)  $-   $1,018,384 
Corporate securities including public utilities   200,543    -    (1,620)   -    198,923 
Total fixed maturity securities available for sale  $1,230,685   $679   $(14,056)  $-   $1,217,307 
                          
Equity securities at estimated fair value:                         
Common stock:                         
Industrial, miscellaneous and all other  $5,241,033   $692,339   $(272,945)       $5,660,427 
Total equity securities at estimated fair value  $5,241,033   $692,339   $(272,945)       $5,660,427 
                          
Mortgage loans held for investment at amortized cost:                        
Residential construction  $2,936,896                     
Less: Allowance for credit losses  $(5,874)                    
Total mortgage loans held for investment  $2,931,023                     
                          
Cash and cash equivalents (1)  $9,228,113                     
                          
Total restricted assets  $19,036,870                     

 

 

(1) Including cash and cash equivalents of $8,232,615 for the life insurance and mortgage segments.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

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

 

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

 

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

 

 

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

 

Fixed Maturity Securities

 

The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. 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, 2023                              
Obligations of states and political subdivisions  $2,670   $338,301   $9,767   $500,955   $12,436   $839,256 
Corporate securities including public utilities   1,620    198,923    -    -    1,620    198,923 
Total unrealized losses  $4,290   $537,225   $9,767   $500,955   $14,056   $1,038,179 
                               
At December 31, 2022                              
Obligations of states and political subdivisions  $11,891   $760,255   $3,469   $58,072   $15,360   $818,327 
Corporate securities including public utilities   3,016    198,755    -    -    3,016    198,755 
Total unrealized losses  $14,907   $959,010   $3,469   $58,072   $18,376   $1,017,082 

 

There were 17 securities with fair value of 98.7% of aggregate amortized cost at March 31, 2023. There were 17 securities with fair value of 98.2% of aggregate amortized cost at December 31, 2022. No credit losses have been recognized for the three month periods ended March 31, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent rise in interest rates and inflation.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

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

 

The following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized   Estimated Fair 
   Cost   Value 
Due in 1 year  $-   $- 
Due in 2-5 years   318,067    311,893 
Due in 5-10 years   153,284    151,610 
Due in more than 10 years   759,334    753,804 
Total  $1,230,685   $1,217,307 

 

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

 

16) Accumulated Other Comprehensive Income (loss)

 

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

 

   2023   2022 
   Three Months Ended March 31 
   2023   2022 
         
Unrealized gains (losses) on fixed maturity securities available for sale  $5,436,929   $(15,372,096)
Amounts reclassified into net earnings   (218,900)   45,193 
Net unrealized gains (losses) before taxes   5,218,029    (15,326,903)
Tax (expense) benefit   (1,095,787)   3,218,648 
Net   4,122,242    (12,108,255)
Unrealized gains (losses) on restricted assets (1)   4,133    (71,946)
Tax (expense) benefit   (1,029)   17,922 
Net   3,104    (54,024)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   2,926    (37,357)
Tax (expense) benefit   (714)   9,306 
Net   2,212    (28,051)
Other comprehensive income (loss) changes  $4,127,558   $(12,190,330)

 

 

(1) Fixed maturity securities available for sale

 

57
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

 

16) Accumulated Other Comprehensive Income (loss) (Continued)

 

The following is the accumulated balances of other comprehensive income (loss) as of March 31, 2023:

 

   Beginning Balance December 31, 2022   Change for the period   Ending Balance March 31,
2023
 
Unrealized gains (losses) on fixed maturity securities available for sale  $(13,050,767)  $4,122,242   $(8,928,525)
Unrealized gains (losses) on restricted assets (1)   (13,148)   3,104    (10,044)
Unrealized gains (losses) on cemetery perpetual care trust investments (1)   (6,362)   2,212    (4,150)
Other comprehensive income (loss)  $(13,070,277)  $4,127,558   $(8,942,719)

 

 

(1) Fixed maturity securities available for sale

 

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

 

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

 

 

(1) Fixed maturity securities available for sale

 

 

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Item 2.

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

 

Overview

 

The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on the cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans.

 

Insurance Operations

 

The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning.

 

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $30,000. The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

 

In response to the COVID-19 pandemic, the Company’s life insurance sales force began using virtual and tele sales processes to market products. During the third quarter 2021, the life insurance sales force returned to in person sales, however, it continues to use virtual and tele sales where needed. Currently, approximately 75% of insurance operations office staff work in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed.

 

The following table shows the condensed financial results of the insurance operations for three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended March 31
(in thousands of dollars)
 
   2023   2022   % Increase (Decrease) 
Revenues from external customers               
Insurance premiums  $27,968   $26,342    6%
Mortgage fee income   44    -    100%
Net investment income   16,755    14,580    15%
Gains on investments and other assets   57    108    (47%)
Other   591    472    25%
Total  $45,415   $41,502    9%
Intersegment revenue  $1,510   $1,696    (11%)
Earnings before income taxes  $3,684   $816    351%

 

Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability for the three month period ended March 31, 2023 increased due to (a) a $2,175,000 increase in net investment income, (b) a $1,626,000 increase in insurance premiums and other considerations, (c) a $739,000 decrease in selling, general and administrative expenses, (d) a $397,000 decrease in death, surrenders and other policy benefits, (e) a $119,000 increase in other revenues, and (f) a $44,000 increase in mortgage fee income, which were partially offset by (i) a $1,283,000 increase in future policy benefits, (ii) a $523,000 increase in amortization of deferred policy acquisition costs, (iii) a $186,000 decrease in intersegment revenue, (iv) a $128,000 increase in interest expense, (v) a $61,000 increase in intersegment interest expense and other expenses, and (vi) a $51,000 decrease in gains on investments and other assets.

 

59
 

 

Cemetery and Mortuary Operations

 

The Company sells mortuary services and products through its nine mortuaries in Utah and three mortuaries in New Mexico. The Company also sells cemetery products and services through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.

 

In response to the COVID-19 pandemic, the cemetery and mortuary’s pre-need sales force began using virtual selling processes to market its products and services including some in home sales as local regulations permitted. During the third quarter 2021, the sales force returned mostly to in home sales, however, it continues to use virtual selling where needed. Currently, the cemetery and mortuary operations office staff works in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed.

 

The following table shows the condensed financial results of the cemetery and mortuary operations for the three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended March 31
(in thousands of dollars)
 
   2023   2022   % Increase (Decrease) 
Revenues from external customers               
Mortuary revenues  $3,275   $3,766    (13%)
Cemetery revenues   3,196    3,440    (7%)
Net investment income   601    496    21%
Gains (losses) on investments and other assets   54    (255)   (121%)
Other   72    16    350%
Total  $7,198   $7,463    (4%)
Earnings before income taxes  $1,785   $2,020    (12%)

 

Profitability in the three month period ended March 31, 2023 decreased due to (a) a $491,000 decrease in mortuary at-need sales, (b) a $222,000 decrease in cemetery pre-need sales, (c) a $99,000 decrease in intersegment revenues, and (d) a $21,000 decrease in cemetery at-need sales, which were partially offset by (i) a $308,000 increase in gains on investments and other assets primarily attributable to an increase in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments, (ii) a $105,000 increase in net investment income, (iii) an $80,000 decrease in selling, general and administrative expenses, (iv) a $56,000 increase in other revenues, (v) a $36,000 decrease in amortization of deferred policy acquisition costs, and (vi) a $13,000 decrease in intersegment interest expense and other expenses.

 

Mortgage Operations

 

The Company’s wholly owned subsidiary, SecurityNational Mortgage, is a mortgage lender incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage originates and refinances mortgage loans on a retail basis. Mortgage loans originated or refinanced by the SecurityNational Mortgage are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.

 

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SecurityNational Mortgage receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 6% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased by $51,185,906.

 

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

 

For the three month periods ended March 31, 2023 and 2022, SecurityNational Mortgage originated 1,702 loans ($531,868,000 total volume) and 3,356 loans ($1,039,217,000 total volume), respectively.

 

In response to the COVID-19 pandemic, the Company’s mortgage operations integrated employee work from home accommodations into its standard operating procedures. A large percentage of fulfillment employees are in office, however, the flexibility remains to accommodate in office or work from home functionality.

 

The following table shows the condensed financial results of the mortgage operations for the three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements.

 

   Three months ended September 30
(in thousands of dollars)
 
   2022   2021   % Increase (Decrease) 
Revenues from external customers               
Secondary gains from investors  $17,917   $39,603    (55%)
Income from loan originations   6,555    8,813    (26%)
Change in fair value of loans held for sale   795    (2,747)   (129%)
Change in fair value of loan commitments   678    2,675    (75%)
Net investment income   418    118    254%
Gains on investments and other assets   -    319    (100%)
Other   524    4,680    (89%)
Total  $26,887   $53,461    (50%)
Earnings before income taxes  $(3,883)  $1,607    (342%)

 

Included in other revenues is service fee income. Profitability for the three month period ended March 31, 2023 decreased due to (a) a $21,686,000 decrease in secondary gains from investors, (b) a $4,156,000 decrease in other revenues, (c) a $2,258,000 decrease in income from loan originations, (d) a $1,997,000 decrease in the fair value of loan commitments, (e) a $319,000 decrease in gains on investments and other assets, (f) a $137,000 increase in rent and rent related expenses, and (g) a $6,000 increase in depreciation on property and equipment, which were partially offset by (i) a $10,262,000 decrease in commissions, (ii) a $4,875,000 decrease in personnel expenses, (iii) a $4,019,000 decrease in other expenses, (iv) a $3,542,000 increase in the fair value of loans held for sale, (v) a $997,000 decrease in costs related to funding mortgage loans, (v) a $401,000 decrease in interest expense, (vi) a $338,000 decrease in advertising expenses, (vii) a $300,000 increase in net investment income, (viii) a $284,000 decrease in intersegment interest expense and other expenses, and (ix) a $47,000 increase in intersegment revenues.

 

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Consolidated Results of Operations

 

Three month period ended March 31, 2023, Compared to Three month period ended March 31, 2022

 

Total revenues decreased by $22,925,000, or 22.4%, to $79,501,000 for the three month period ended March 31, 2023, from $102,426,000 for the comparable period in 2022. Contributing to this decrease in total revenues was a $22,355,000 decrease in mortgage fee income, a $3,981,000 decrease in other revenues, a $734,000 decrease in net mortuary and cemetery sales, and a $61,000 decrease in gains on investments and other assets, which were partially offset by a $2,581,000 increase in net investment income and a $1,625,000 increase in insurance premiums and other considerations.

 

Mortgage fee income decreased by $22,355,000, or 46.2%, to $25,989,000, for the three month period ended March 31, 2023, from $48,345,000 for the comparable period in 2022. This decrease was primarily due to a $21,641,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $1,997,000 decrease in the fair value of loan commitments, and a $2,258,000 decrease in loan fees and interest income net of a decrease in the provision for loan loss reserve, which were partially offset by a $3,541,000 increase in the fair value of loans held for sale.

 

Insurance premiums and other considerations increased by $1,625,000, or 6.2%, to $27,967,000 for the three month period ended March 31, 2023, from $26,342,000 for the comparable period in 2022. This increase was primarily due to an increase of $1,188,000 in first year premiums and an increase of $437,000 in renewal premiums.

 

Net investment income increased by $2,581,000, or 17.0%, to $17,775,000 for the three month period ended March 31, 2023, from $15,194,000 for the comparable period in 2022. This increase was primarily attributable to a $1,377,000 increase in fixed maturity securities income, a $713,000 increase in interest on cash and cash equivalents, a $528,000 increase in mortgage loan interest, a $325,000 increase in real estate income, and a $298,000 decrease in investment expenses, which were partially offset by a $629,000 decrease in insurance assignment income and a $106,000 decrease in policy loan income.

 

Net mortuary and cemetery sales decreased by $734,000, or 10.2%, to $6,471,000 for the three month period ended March 31, 2023, from $7,205,000 for the comparable period in 2022. This decrease was primarily due to a $491,000 decrease in mortuary at-need sales and a $222,000 decrease in cemetery at-need sales.

 

Gains on investments and other assets decreased by $61,000, or 35.4%, to $111,000 for the three month period ended March 31, 2023, from $172,000 for the comparable period in 2022. This decrease in gains on investments and other assets was primarily due to a $402,000 decrease in gains on other assets, a $291,000 decrease in gains on real estate, and a $264,000 decrease in gains on fixed maturity securities, which were partially offset by a $896,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities.

 

Other revenues decreased by $3,981,000, or 77.0%, to $1,187,000 for the three month period ended March 31, 2023, from $5,168,000 for the comparable period in 2022. This decrease was primarily attributable to a decrease in servicing fee revenue as a result of the sale of certain mortgage servicing rights in October 2022.

 

Total benefits and expenses were $77,916,000, or 98.0% of total revenues, for the three month period ended March 31, 2023, as compared to $97,982,000, or 95.7% of total revenues, for the comparable period in 2022.

 

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $887,000 or 3.6%, to $25,866,000 for the three month period ended March 31, 2023, from $24,979,000 for the comparable period in 2022. This increase was primarily the result of a $1,283,000 increase in future policy benefits, which was partially offset by a $206,000 decrease in death benefits and a $190,000 decrease in surrender and other policy benefits.

 

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $487,000, or 11.1%, to $4,883,000 for the three month period ended March 31, 2023, from $4,396,000 for the comparable period in 2022. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

 

62
 

 

Selling, general and administrative expenses decreased by $21,168,000, or 32.2%, to $44,527,000 for the three month period ended March 31, 2023, from $65,695,000 for the comparable period in 2022. This decrease was primarily the result of a $10,229,000 decrease in commissions, a $4,912,000 decrease in personnel expenses, a $4,311,000 decrease in other expenses, a $997,000 decrease in costs related to funding mortgage loans, a $809,000 decrease in advertising expense, and a $27,000 decrease in depreciation on property and equipment, which were partially offset by a $117,000 increase in rent and rent related expenses.

 

Interest expense decreased by $274,000, or 15.9%, to $1,453,000 for the three month period ended March 31, 2023, from $1,727,000 for the comparable period in 2022. This decrease was primarily due to a decrease of $401,000 in interest expense on mortgage warehouse lines for loans held for sale, which was partially offset by an increase of $127,000 in interest expense on bank loans.

 

Liquidity and Capital Resources

 

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees from mortgage loans held for sale that are sold to investors into the secondary market. It should be noted that current conditions in the financial markets and economy may affect the realization of these expected cash flows. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses. As of March 31, 2023, the Company was not in compliance with the net income covenant on its warehouse line with U.S. Bank and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $8,900,000 on the Texas Capital Bank N.A. warehouse line that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines that have provided covenant waivers to fund its origination activities.

 

During the three month periods ended March 31, 2023 and 2022, the Company’s operations used cash of $16,074,000 and provided cash of $72,509,000, respectively. The decrease in cash provided by operations was due primarily to decreased proceeds from the sale of mortgage loans held for sale.

 

The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs. Policyholders generally keep these policies in force and do not surrender them prior to death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate, and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in their fair values.

 

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

 

The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $357,311,000 (at estimated fair value) and $345,598,000 (at estimated fair value) as of March 31, 2023 and December 31, 2022, respectively. This represented 38.4% and 36.4% of the total investments as of March 31, 2023, and December 31, 2022, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At March 31, 2023, 1.9% (or $6,679,000) and at December 31, 2022, 2.2% (or $7,833,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

 

63
 

 

The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At March 31, 2023 and December 31, 2022, the life insurance subsidiaries were in compliance with the regulatory criteria.

 

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $435,425,000 as of March 31, 2023, as compared to $454,499,000 as of December 31, 2022. Stockholders’ equity as a percent of total capitalization was 68.2% and 64.4% as of March 31, 2023, and December 31, 2022, respectively. Bank loans and other loans payable decreased by $23,321,000 as of March 31, 2023, as compared to December 31, 2022, which was partially offset by an increase in stockholders’ equity of $4,247,000 as of March 31, 2023 as compared to December 31, 2022, thus causing the increase in the stockholders’ equity percentage.

 

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

 

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $94,133,000 and $94,254,000 as of March 31, 2023, and December 31, 2022, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.

 

Banking Environment

 

Item 7.01 Regulation FD Disclosure.

 

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

 

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

 

The information furnished in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

64
 

 

Item 4.Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of March 31, 2023, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).

 

Changes in Internal Control over Financial Reporting

 

There have not been any significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II - Other Information

 

Item 1. Legal Proceedings.

 

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

 

Item 1A.Risk Factors.

 

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

 

65
 

 

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

 

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

 

None.

 

Issuer Purchases of Equity Securities

 

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

 

The following table shows the Company’s repurchase activity during the three month period ended March 31, 2023 under the 10b5-1 agreement.

 

Period  (a) Total Number of Class A Shares Purchased   (b) Average Price Paid per Class A Share (1)   (c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program   (d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program (2) 
1/1/2023-1/31/2023   73,112   $7.37    -    383,207 
2/1/2023-2/28/2023   46,753    7.22    -    336,454 
3/1/2023-3/31/2023   18,411    6.74    -    318,043 
                     
Total   138,276   $7.16    -    318,043 

 

 

(1)Includes fees and commissions paid on stock repurchases.
(2)In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company’s Class A Common Stock in the open market. The Company amended the Stock Repurchase Plan on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. Any repurchased shares of Class A common stock are to be held as treasury shares to be used as the Company’s employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan.

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

None.

 

Item 5.Other Information.

 

None.

 

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

 

(a)(1) Financial Statements

 

See “Table of Contents – Part I – Financial Information” under page 2 above

 

(a)(2) Financial Statement Schedules

 

None

 

All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.

 

(a)(3) Exhibits

 

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

 

3.1Amended and Restated Articles of Incorporation (4)
3.2Amended and Restated Bylaws (6)
4.1Specimen Class A Stock Certificate (1)
4.2Specimen Class C Stock Certificate (1)
4.3Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1)
10.1Employee Stock Ownership Plan, as amended and restated (ESOP) and Trust Agreement (1)
10.2Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan (3)
10.3Amended and Restated 2014 Director Stock Option Plan (7)
10.4Employment Agreement with Scott M. Quist (2)
10.5Stock Repurchase Plan (5)
14Code of Business Conduct and Ethics (6)
21Subsidiaries of the Registrant
31.1Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  101.INS Inline XBRL Instance Document
  101.SCH Inline XBRL Taxonomy Extension Schema Document
  101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
  101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

(1)Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987
(2)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2015
(3)Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016
(4)Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017
(5)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2018
(6)Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019
(7)Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2020

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

REGISTRANT

 

SECURITY NATIONAL FINANCIAL CORPORATION

Registrant

 

Dated: May 15, 2023 /s/ Scott M. Quist
  Scott M. Quist
  Chairman, President and Chief Executive Officer
  (Principal Executive Officer)
   

 

Dated: May 15, 2023 /s/ Garrett S. Sill
  Garrett S. Sill
  Chief Financial Officer and Treasurer
  (Principal Financial Officer and Principal Accounting Officer)

 

68

 

 

 

 

EXHIBIT 21

 

SUBSIDIARIES OF THE REGISTRANT

 

Life Insurance Segment

 

Security National Life Insurance Company

Reppond Holding Company

First Guaranty Insurance Company

Kilpatrick Life Insurance Company

Kilpatrick Financial, Inc.

Southern Security Life Insurance Company, Inc.

Trans-Western Life Insurance Company

SN Farmington LLC

434 Holdings LLC

5300 Development LLC

Ascension 433 LLC

SN Diamond LLC

Security National Real Estate Services, Inc. dba Security National Commercial Capital

Marketing Source Center, Inc. dba Security National Travel Services

SNFC Subsidiary, LLC

American Funeral Financial, LLC

FFC Acquisition Co., LLC dba Funeral Funding Center

Canadian Funeral Financial, LLC

Mortician’s Choice, LLC

C & J Financial, LLC

Beta Capital Corp.

Beneficiary Advance LLC

SNA-Venture LLC

SNCH Venture LLC SNW-HAFB LLC SNH Investments LLC SNA-AM LLC, SNA-MB LLC, SNA-SE LLC, SNA-SW LLC, SNA-MV LLC, SNA-TM LLC, SNA-TR2 LLC

 

Mortgage Segment

 

SecurityNational Mortgage Company

EverLEND Mortgage Company

SN Sunset LLC SN-TLV LLC

 

Cemetery/Mortuary Segment

 

California Memorial Estates, Inc. dba Singing Hills Memorial Park

Holladay Memorial Park, Inc.

Cottonwood Mortuary, Inc.

Deseret Memorial, Inc.

Holladay Cottonwood Memorial Foundation

Memorial Estates, Inc.

SN Silver Creek LLC

Memorial Mortuary, Inc.

Affordable Funerals and Cremations of America, Inc.

SN Probst LLC

SN-Holbrook LLC SN-Rivera LLC, SNR-LA LLC, SNR-Taos LLC, SNR-SF Cemetery LLC, SNR-SF Mortuary LLC, SNR-Espanola LLC

 

 

 

 

EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER,

AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Scott M. Quist, certify that:

 

1. I have reviewed this report on Form 10-Q of Security National Financial Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period covered in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 15, 2023 /s/ Scott M. Quist
  Scott M. Quist
  Chairman, President and Chief Executive Officer
  (Principal Executive Officer)

 

 

 

 

 

EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER,

AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Garrett S. Sill, certify that:

 

1. I have reviewed this report on Form 10-Q of Security National Financial Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period covered in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Dated: May 15, 2023 /s/ Garrett S. Sill
  Garrett S. Sill
  Chief Financial Officer and Treasurer
  (Principal Financial Officer and Principal Accounting Officer)

 

 

 

EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER,

AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Security National Financial Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott M. Quist, Chairman of the Board, President and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 15, 2023 /s/ Scott M. Quist
  Scott M. Quist
  Chairman, President and Chief Executive Officer
  (Principal Executive Officer)

 

 

 

 

 

EXHIBIT 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER,

AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Security National Financial Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Garrett S. Sill, Chief Financial Officer and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

 

(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated: May 15, 2023 /s/ Garrett S. Sill
  Garrett S. Sill
  Chief Financial Officer and Treasurer
  (Principal Financial Officer and Principal Accounting Officer)