UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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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.
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As
of June 30, 2023, the aggregate market value of the registrant’s Class A common stock held by non-affiliates of the registrant
was approximately $
As of March 26, 2024, there were outstanding shares of Class A common stock, $2.00 par value per share, and shares of Class C common stock, $2.00 par value per share.
Documents Incorporated by Reference
Security National Financial Corporation
Form 10-K
For the Fiscal Year Ended December 31, 2023
TABLE OF CONTENTS
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PART I
Item 1. Business
Security National Financial Corporation (the “Company”) operates in three reportable business segments: life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products, and accident and health insurance. These products are marketed in 40 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment consists of eight mortuaries and five cemeteries in the state of Utah, one cemetery in the state of California, and one cemetery and four mortuaries in the state of New Mexico. The Company also engages in pre-need selling of funeral, cemetery, mortuary, and cremation services through its cemetery and mortuary locations. The mortgage segment originates and underwrites or otherwise purchases residential and commercial loans for new construction, existing homes, and other real estate projects. The mortgage segment operates through 100 retail offices in 23 states and is an approved mortgage lender in several other states.
The Company’s design and structure are that each business segment is related to the other business segments and contributes to the profitability of the other segments. The Company’s cemetery and mortuary segment provides a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. The Company’s insurance segment invests its assets (including, in part, pre-need funeral products and services) in investments authorized by the respective insurance departments of their states of domicile. The Company also pursues growth through acquisitions. The Company’s mortgage segment provides mortgage loans and other real estate investment opportunities.
The Company was organized as a holding company in 1979 when Security National Life Insurance Company (“Security National Life”) became a wholly owned subsidiary of the Company, and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has acquired or purchased significant blocks of business which include Capital Investors Life Insurance Company (1994), Civil Service Employees Life Insurance Company (1995), Southern Security Life Insurance Company (1998), Menlo Life Insurance Company (1999), Acadian Life Insurance Company (2002), Paramount Security Life Insurance Company (2004), Memorial Insurance Company of America (2005 and subsequently sold in 2021 to FOXO Life Insurance Company), Capital Reserve Life Insurance Company (2007), Southern Security Life Insurance Company, Inc. (2008), North America Life Insurance Company (2011, 2015), Trans-Western Life Insurance Company (2012), Mothe Life Insurance Company (2012), DLE Life Insurance Company (2012), American Republic Insurance Company (2015), First Guaranty Insurance Company (2016), Kilpatrick Life Insurance Company (2019), and merger with FOXO Life Insurance Company (2023).
The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies. The cemetery and mortuary companies that the Company has acquired are Holladay Memorial Park, Inc. (1991), Cottonwood Mortuary, Inc. (1991), Deseret Memorial, Inc. (1991), Probst Family Funerals and Cremations L.L.C. (2019), Heber Valley Funeral Home, Inc. (2019), Rivera Funerals, Cremations and Memorial Gardens (2021), and Holbrook Mortuary (2021).
In 1993, the Company formed SecurityNational Mortgage Company (“SecurityNational Mortgage”) to originate and refinance residential mortgage loans.
See Note 15 of the Notes to Consolidated Financial Statements for additional information regarding the business segments of the Company.
Life Insurance
Products
The Company, through Security National Life, First Guaranty Insurance Company (“First Guaranty”), and Kilpatrick Life Insurance Company (“Kilpatrick”), issues and distributes selected lines of life insurance and annuities. 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. The Company’s insurance subsidiaries, Southern Security Life Insurance Company, Inc. (“Southern Security”) and Trans-Western Life Insurance Company (“Trans-Western”), do not actively write policies, but service and maintain policies that were purchased prior to their acquisition by Security National Life.
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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 has less competition 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.
Markets and Distribution
The Company is licensed to sell insurance in 40 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific niche markets. The Company’s funeral plan policies are sold primarily to people who range in age from 45 to 85 and have low to moderate income. Most of the Company’s funeral plan premiums come from the states of Arkansas, California, Florida, Georgia, Louisiana, Mississippi, Texas, and Utah.
The Company sells its life insurance products through direct agents, brokers, and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 50% to 120% of first year premiums. In those cases where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions.
In some instances, funeral plan insurance is marketed in conjunction with the Company’s cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company’s cemeteries and mortuaries. Thus, death benefits that become payable under the policy are paid to the Company’s cemetery and mortuary subsidiaries to the extent of services performed and products purchased.
In marketing funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs since these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 2023:
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Life Insurance | ||||||||||||||||||||
| Policy/Cert Count as of December 31 | 714,953 | 646,296 | 653,450 | 659,237 | 669,064 | |||||||||||||||
| Insurance in force as of December 31 (in thousands) | $ | 3,552,554 | $ | 3,446,836 | (1) | $ | 3,415,368 | (1) | $ | 3,379,921 | (1) | $ | 3,303,061 | (1) | ||||||
| Premiums Collected (in thousands) | $ | 113,584 | $ | 103,304 | $ | 99,006 | $ | 92,058 | $ | 78,253 | ||||||||||
(1) Prior years have been adjusted to include accidental death benefit insurance in force that was inadvertently excluded.
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Underwriting
The factors considered in evaluating an application for ordinary life insurance coverage can include the applicant’s age, occupation, general health condition, and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company issues insurance based upon its medical limits and requirements subject to the following general non-medical limits:
| Age Nearest Birthday |
Non-Medical Limits |
|
| 0-50 | $100,000 | |
| 51-up | Medical information | |
| required (APS or exam) |
When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks.
The Company’s funeral plan insurance is written on a simplified medical application with underwriting requirements being a completed application, a phone interview of the applicant, and an intelliscript prescription history inquiry. There are several underwriting classes in which an applicant can be placed.
Annuities
Products
The Company’s annuity business includes single premium deferred annuities, flexible premium deferred annuities, and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to annuitize or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to prematurely surrender their annuity contracts. An immediate annuity is a contract in which the individual remits a sum of money to the Company in return for the Company’s obligation to pay a series of payments on a periodic basis over a designated period, such as an individual’s life, or for such other period as may be designated.
Annuities have guaranteed interest rates that range from 1% to 6.5% per annum. Rates above the guaranteed interest rate credited are periodically modified by the Board of Directors at its discretion. For the Company to make a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. Commissions, issuance expenses, and general and administrative expenses are deducted from this interest rate spread.
Markets and Distribution
The general market for the Company’s annuities is middle to older age individuals. A major source of annuity sales come from direct agents and are sold in conjunction with other insurance sales. If an individual does not qualify for a funeral plan, the agent will often sell that individual an annuity to fund final expenses.
The following table summarizes the annuity business for the five years ended December 31, 2023:
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Annuities Policy/Cert Count as of December 31 | 24,924 | 24,225 | 24,901 | 25,476 | 26,565 | |||||||||||||||
| Deposits Collected (in thousands) | $ | 10,946 | $ | 9,972 | $ | 9,719 | $ | 9,637 | $ | 10,400 | ||||||||||
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Accident and Health
Products
Through its various acquisitions, the Company occasionally acquires small blocks of accident and health insurance policies, which it continues to service. The Company offers a low-cost comprehensive diver’s accident insurance policy that provides worldwide coverage for medical expense reimbursement in the event of a diving accident.
Markets and Distribution
The Company currently markets its diver’s accident insurance policies through the internet.
The following table summarizes the accident and health insurance business for the five years ended December 31, 2023:
| 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||
| Accident and Health Policy/Cert Count as of December 31 | 9,379 | 11,132 | 12,494 | 13,735 | 15,133 | |||||||||||||||
| Premiums Collected (in thousands) | $ | 216 | $ | 543 | $ | 353 | $ | 296 | $ | 110 | ||||||||||
Reinsurance
The primary purpose of reinsurance is to enable an insurance company to issue an insurance policy in an amount larger than the risk the insurance company is willing to assume for itself. The insurance company remains obligated for the amounts reinsured (ceded) in the event the reinsurers do not meet their obligations.
The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are generally renewed annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer.
It is the Company’s policy to retain no more than $100,000 of ordinary insurance per insured life, with the excess risk being reinsured. The total policy amount of life insurance reinsured by other companies as of December 31, 2023, was $333,211,000, which represented approximately 9.3% of the Company’s total life insurance policy amount in force on that date.
See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding reinsurance.
Investments
The investments that support the Company’s life insurance and annuity obligations are determined by the investment committees of the Company’s subsidiaries and ratified by the full boards of directors of the respective subsidiaries. A significant portion of the Company’s investments must meet statutory requirements governing the nature and quality of permitted investments by its insurance subsidiaries. The Company maintains a diversified investment portfolio consisting of common stocks, preferred stocks, municipal bonds, corporate bonds, mortgage loans, real estate, and other securities and investments.
See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding investments.
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Cemetery and Mortuary
Products
Through its cemetery and mortuary segment, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include plots, interment vaults, mausoleum crypts, markers, caskets, urns, and other death care related products. These services include professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a mortuary at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has six separate stand-alone mortuary facilities.
Markets and Distribution
The Company’s pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20-mile radius of its mortuaries and cemeteries. The Company’s at-need sales are similarly limited in geographic area.
The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In some instances, the Company’s cemetery and mortuary facilities are the named beneficiaries of the funeral plan policies.
Potential customers are located via telephone sales prospecting, responses to letters mailed by the pre-planning consultants, billboards and other outside advertising, referrals, and door-to-door canvassing. The Company trains its sales representatives and helps generate leads for them.
Mortgage Loans
Products
The Company, through SecurityNational Mortgage, is active in the residential real estate market. SecurityNational Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. The Company uses internal and external funding sources to fund mortgage loans.
Security National Life originates and funds commercial real estate loans, residential construction loans, and land development loans for internal investment.
Markets and Distribution
The Company’s residential mortgage lending services are marketed primarily to real estate brokers, builders and directly to consumers. The Company has a strong retail origination presence in the Utah, Florida, Texas, Nevada and Arizona markets and many other states across the country. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding mortgage loans.
Recent Acquisitions and Other Business Activities
Real Estate Development
The Company is capitalizing on the opportunity to develop commercial and residential assets on its existing and recently acquired properties. The cost to acquire existing for-sale assets currently exceeds the replacement costs, thus creating the opportunity for development and redevelopment of the land that the Company currently owns. The Company has developed, or is in the process of developing, assets that have an initial development cost exceeding $100,000,000, primarily relating to the Center53 Development and multiple single family residential development projects. The Company plans to continue its development endeavors as based upon its assessment of the market demand.
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Center53 Development
Center53 Development is an office development project comprising nearly 20 acres of land that is currently owned by the Company in the central valley of Salt Lake City. At final completion, the multi-year, phased development is expected to create a campus atmosphere and include nearly one million square-feet of office space in five buildings, ranging from four to eleven stories, and will be serviced by three parking structures with approximately 4,000 stalls. In 2015, the Company broke ground and commenced development on the first phase which included a six-story building of nearly 200,000 square feet and a parking garage with 748 parking stalls. The first phase of the project was completed in July 2017 and is currently 93% leased. The second phase of the project began in March 2020 and includes a second six-story building of nearly 221,000 square feet and a parking garage with approximately 870 stalls. The Company began its occupancy of a portion of the building in October 2021 and the remainder of the building is currently 100% leased. The Company plans to initiate future phases of the Center53 Development for additional Class A office space in the central valley of Salt Lake City.
Regulation
The Company’s insurance subsidiaries are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company’s insurance subsidiaries are subject to this type of regulation in any state in which they conduct relevant business. Such regulation may cause unforeseen costs and operational restrictions, and delay implementation of the Company’s business plans.
The Company’s life insurance subsidiaries are currently subject to regulation in Utah, Louisiana, Mississippi and Texas under insurance holding company legislation, and other states where applicable. Generally, intercompany transfers of assets and dividend payments from insurance subsidiaries are subject to prior notice of approval from the relevant state insurance department where they are deemed “extraordinary” under relevant state law. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies. The Company was last examined in 2021 (First Guaranty Insurance), 2022 (Security National Life, Southern Security and Trans-Western) and 2021 (Kilpatrick Life). Its most recent final examination reports have been approved by the insurance departments and are public records.
The Texas Department of Banking also audits pre-need insurance policies that are issued in the state of Texas. Pre-need policies include the life and annuity products sold as the funding mechanism for funeral plans through funeral homes by Security National agents. The Company is required to send the Texas Department of Banking an annual report that summarizes the number of policies in force and the face amount or death benefit for each policy. This annual report is also required to indicate the number of new policies issued for that year, all death claims paid that year, and all premiums received.
The Company’s cemetery and mortuary subsidiaries are subject to the Federal Trade Commission’s comprehensive funeral industry rules and to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah, California, and New Mexico. The subsidiaries are required to keep annual reports on file including financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually based on such reports. The cemeteries maintain city or county licenses where they conduct business.
The Company’s mortgage subsidiaries are subject to the rules and regulations of the U.S. Department of Housing and Urban Development (HUD), and to various state licensing acts and regulations and the Consumer Financial Protection Bureau (CFPB). These regulations, among other things, specify minimum capital requirements; procedures for loan origination and underwriting, licensing of brokers and loan officers and quality review audits and specify the fees that can be charged to borrowers. Each year, the Company is required to have an audit completed for each mortgage subsidiary by an independent registered public accounting firm to verify compliance with the relevant regulations. In addition to the government regulations, the Company must meet loan requirements, and underwriting guidelines of various investors who purchase the loans.
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Income Taxes
The Company’s insurance subsidiaries, Security National Life, First Guaranty and Kilpatrick are taxed under the Life Insurance Company Tax Act of 1984. Under the act, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions and reserves for future policyholder benefits (with modifications). Under The Tax Cuts and Jobs Act (the “Tax Act”), December 31, 2017 policyholder surplus account balances result in taxable income over a period of eight years.
Security National Life, First Guaranty and Kilpatrick calculate their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company’s premium income is characterized as deferred expenses and recognized over a five or ten-year period. The Tax Act changed this recognition period for amounts deferred after December 31, 2017 to a five or fifteen-year period.
The Company’s non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. The Company’s subsidiaries Southern Security and Trans-Western are regulated as life insurance companies but do not meet the Internal Revenue Code definition of a life insurance company, so they are taxed as insurance companies other than life insurance companies.
Competition
The life insurance industry is highly competitive. There are approximately 800 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, pricing, and customer service. The Company’s insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, longer business histories, and more diversified lines of insurance products than the Company. In addition, such companies generally have larger sales forces. Further, the Company competes with mutual insurance companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is smaller by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better-established companies. The Company believes that its policies and rates for the markets it serves are generally competitive.
The cemetery and mortuary industry is highly competitive. In the Utah, California, and New Mexico markets where the Company competes, there are several cemeteries and mortuaries which have longer business histories, more established positions in the community, and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors which do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry.
The mortgage industry is highly competitive with many mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage industry in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates.
Seasonality
The Company’s business is generally not subject to seasonal fluctuations.
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Human Capital Management
As of December 31, 2023, the Company employed 1,227 full-time and 246 part-time employees. Of the full-time employees, 729 were employed by the mortgage segment, 373 by the life insurance segment, and 125 by the cemetery and mortuary segment. The Company requires monthly acknowledgement of its anti-discrimination and anti-harassment policies and communicates to its employees how to report concerns that relate to their employment experience.
Employee Benefits
All eligible employees may elect coverage under the Company’s group health (including health savings and flexible spending), retirement, supplemental life and voluntary benefit programs. As of December 31, 2023, 756 employees had elected to participate in the Company’s group health insurance plans.
The Company has an employee safe harbor retirement plan for each business segment. The retirement plans qualify under section 401(k) of the Internal Revenue Code and, if approved by the board of directors, the Company makes a matching contribution in Company stock based on the employee’s contribution amount.
The Company provides other time off benefits such as paid sick and paid vacation time. The Company provides discounts on certain services provided by the Company to its employees. Additionally, the Company offers an employee assistance program that provides 24/7 counseling services for employees who may be facing challenges outside of the workplace.
Available Information
The Company’s internet address is www.securitynational.com. The Company’s investor relations website is www.investor.securitynational.com and the Company promptly makes available on this website, free of charge, the reports that it files or furnishes with the Securities and Exchange Commission.
Item 1A. Risk Factors
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.
Item 1B. Unresolved Staff Comments
None. As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.
Item 1C. Cybersecurity
The Company maintains a strong information security program and systems (“Cybersecurity System”) to guard against unauthorized access, malicious software, corruption of data, disruption of its networks and systems and unauthorized release of confidential information. The Company’s Cybersecurity System is comprised of multiple layers of controls to reduce the risk of cybersecurity incidents.
Risk Management and Strategy
The Company’s Cybersecurity System includes administrative, technical, and physical safeguards and is designed to provide an appropriate level of protection to maintain the confidentiality, integrity and availability of the Company’s and its customers’ information. This includes protecting against known and evolving threats to the security of the Company’s systems and information, and against unauthorized access, compromise, or loss of data. The Cybersecurity System is managed centrally, so the same security controls, policies and procedures are implemented across the organization. The Company maintains cybersecurity policies including an Acceptable Use Policy that all system users sign to acknowledge that they understand their security responsibilities. All system users receive security awareness training which includes phishing attack simulation testing.
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A key element of the Company’s Cybersecurity System is to mature the program to align with the Center for Internet Security (CIS) Critical Security Controls security framework. The CIS controls are designed based on real-world data about cyber-attacks, to ensure that the measures are effective against current threats. The framework provides a prioritized set of actions, which enables the Company to focus its efforts on the most effective defensive measures first. This prioritization helps in optimizing the use of resources for maximum impact on security. This strategy provides a structured and effective approach to cybersecurity, helping the Company to protect its assets, comply with regulations, manage risks, and improve its overall security posture.
The Company maintains cyber insurance coverage that may, subject to policy terms, conditions, and limitations, cover certain aspects of cybersecurity risks; however, such insurance coverage may be unavailable or insufficient to cover all losses or all types of claims that may arise in the continually evolving area of cyber risk.
Governance
The Company has established controls and procedures to escalate enterprise-level issues, including cybersecurity matters, to the appropriate management levels within its organization and to its Board of Directors, or members or committees thereof, as appropriate. The Company’s Board of Directors has oversight for enterprise risk management, including its approach to managing cybersecurity risk, and has delegated oversight responsibility of information security risks to its Audit Committee. Matters determined to present potential material impacts to the Company’s financial results, operations, and/or reputation are reported by management to the Company’s Board of Directors or its Audit Committee, as appropriate, in accordance with its escalation framework.
In addition, the Company has established procedures to ensure that management personnel are informed in a timely manner of known cybersecurity risks and incidents that may materially impact the Company’s operations and that timely public disclosure is made as appropriate. The Company’s Cybersecurity System is led by the Chief Information Officer (“CIO”) in collaboration with a third-party virtual Chief Information Security Officer (“vCISO”) and other third-party cybersecurity service providers which in turn assist in monitoring the Company’s exposure from significant information technology suppliers, significant software as service providers and major vendors with access to the Company’s information technology systems. The Company’s CIO has 10 years of cybersecurity industry experience. Further, team members who support the Company’s cybersecurity program have relevant educational and industry experience through various roles involving information technology, security, auditing, compliance, systems, and programming, as well as cybersecurity certifications such as a Certified Information Systems Security Professional (CISSP) and Certified Information Security Manager (CISM). During the last three years, the Company has not experienced a material security breach and, as a result, the Company has not incurred any material expenses from such a breach. Furthermore, during such time, the Company has not been penalized or paid any amount under any information security breach settlement.
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Item 2. Properties
The tables below set forth the location of the Company’s office facilities and certain other information relating to these properties.
| Street | City | State | Function | Owned / Leased | Approximate Square Footage | Lease Amount |
Expiration | ||||||||||||
| 433 Ascension Way, Floors 4, 5 and 6 | Salt Lake City | UT | Corporate Headquarters, Insurance Operations, Cemetery and Mortuary Operations, Mortgage Operations and Sales | Owned | 221,000 | N/A | N/A | ||||||||||||
| 1044 River Oaks Dr. (1) | Flowood | MS | Insurance Operations | Owned | 5,522 | N/A | N/A | ||||||||||||
| 1818 Marshall St. | Shreveport | LA | Insurance Operations | Owned | 12,274 | N/A | N/A | ||||||||||||
| 812 Sheppard St. | Minden | LA | Insurance Sales | Owned | 1,560 | N/A | N/A | ||||||||||||
| 909 Foisy Ave. (2) | Alexandria | LA | Insurance Sales | Owned | 8,059 | N/A | N/A | ||||||||||||
| 1550 N. Third St. (1) | Jena | LA | Insurance Sales | Owned | 1,737 | N/A | N/A | ||||||||||||
| 1 Sanctuary Blvd. Suite 302A | Mandeville | LA | Insurance Sales | Leased | 1,335 | $ | 2,400 | / | mo | 6/30/2024 | |||||||||
| 79 E. Main Street | Midway | UT | Funeral Service Sales | Leased | 4,476 | $ | 6,233 | / | mo | 10/31/2025 | |||||||||
| 4387 S. 500 W. | Salt Lake City | UT | Funeral Service Sales | Leased | 2,168 | $ | 1,895 | / | mo | 7/31/2025 | |||||||||
| 1627A Central Ave. | Los Alamos | NM | Funeral Service Sales | Leased | 1,400 | $ | 1,600 | / | mo | 12/30/2024 | |||||||||
| 200 Market Way | Rainbow City | AL | Fast Funding Operations | Leased | 12,850 | $ | 10,490 | / | mo | 1/31/2025 | |||||||||
| 5100 N. 99th Ave., Suite 101/103 | Phoenix | AZ | Mortgage Sales | Sub-Leased | 3,940 | $ | 3,369 | / | mo | month to month | |||||||||
| 10609 N. Hayden Rd., Suite 100 | Scottsdale | AZ | Mortgage Sales | Leased | 3,585 | $ | 8,650 | / | mo | month to month | |||||||||
| 1490 S. Price Road, Suite 318 | Chandler | AZ | Mortgage Sales | Leased | 1,600 | $ | 3,050 | / | mo | 6/30/2024 | |||||||||
| 5100 N. 99th Ave., Suite 111 | Phoenix | AZ | Mortgage Sales | Sub-Leased | 720 | $ | 2,382 | / | mo | month to month | |||||||||
| 1951 West Camelback Rd, Ste 200 | Phoenix | AZ | Mortgage Sales | Leased | 2,446 | $ | 3,771 | / | mo | month to month | |||||||||
| 2636 Hwy 95 Suite 2 | Bullhead City | AZ | Mortgage Sales | Leased | 1,000 | $ | 1,225 | / | mo | month to month | |||||||||
| 2220 S. Country Club Drive Suite 101 | Mesa | AZ | Mortgage Sales | Leased | 3,274 | $ | 5,339 | / | mo | 2/14/2028 | |||||||||
| 350 West 16th Street #209 | Yum | AZ | Mortgage Sales | Leased | 1,731 | $ | 4,284 | / | mo | 6/30/2024 | |||||||||
| 102 North Cortez St. | Prescott | AZ | Mortgage Sales | Leased | 100 | $ | 600 | / | mo | month to month | |||||||||
| 15169 North Scottsdale Road, #205 - office 3012 & 3013 | Scottsdale | AZ | Mortgage Sales | Leased | Unknown | $ | 3,400 | / | mo | month to month | |||||||||
| 10265 W. Camelback Road, #100 | Phoenix | AZ | Mortgage Sales | Leased | 1,647 | $ | 3,817 | / | mo | 2/27/2024 | |||||||||
| 40977 Oak Dr. | Forest Falls | CA | Mortgage Sales | Leased | 250 | $ | - | / | mo | month to month | |||||||||
| 2934 E. Garvey Ave. South, Suite 250 | West Covina | CA | Mortgage Sales | Leased | 500 | $ | 1,100 | / | mo | month to month | |||||||||
| 7398 Fox Trail Unit B | Yucca Valley | CA | Mortgage Sales | Leased | 900 | $ | 550 | / | mo | month to month | |||||||||
| 155 S. Highway 101 Suite 7 | Solana Beach | CA | Mortgage Sales | Leased | 2,000 | $ | 7,426 | / | mo | 7/31/2026 | |||||||||
| 44441 West 16th Street #101 | Lancaster | CA | Mortgage Sales | Leased | 2,115 | $ | 2,057 | / | mo | 1/31/2024 | |||||||||
| 1420 Magnolia Ave | Oxnard | CA | Mortgage Sales | Leased | 100 | $ | 6,392 | / | mo | 3/30/2024 | |||||||||
| 625 The City Drive, Suite 450 | Orange | CA | Mortgage Sales | Leased | 2,485 | $ | 6,655 | / | mo | 12/31/2024 | |||||||||
| 27 Main St., Suite C-104B | Edwards | CO | Mortgage Sales | Leased | 680 | $ | 1,950 | / | mo | month to month | |||||||||
| 4501 Mohawk Dr. | Larkspur | CO | Mortgage Sales | Leased | 250 | $ | 50 | / | mo | month to month | |||||||||
| 7800 E. Union Ave., Suite 550 | Denver | CO | Mortgage Sales | Sub-Leased | 4,656 | $ | 11,640 | / | mo | 2/28/2026 | |||||||||
| 5982 s Zeno Ct | Aurora | CO | Mortgage Sales | Leased | 50 | $ | - | / | mo | month to month | |||||||||
| 5475 Tech Center Drive #201-A | Colorado Springs | CO | Mortgage Sales | Leased | 790 | $ | 1,218 | / | mo | 9/30/2024 | |||||||||
| 1145 Town Park Ave., Suite 2215 | Lake Mary | FL | Mortgage Sales | Leased | 5,901 | $ | 12,294 | / | mo | 2/29/2024 | |||||||||
| 8191 College Parkway, Suite 201 | Ft Myers | FL | Mortgage Sales | Leased | 4,676 | $ | 4,505 | / | mo | 8/21/2024 | |||||||||
| 2350 Fruitville Rd Ste, Ste 101 | Sarasota | FL | Mortgage Sales | Leased | 2,455 | $ | 5,266 | / | mo | 3/14/2026 | |||||||||
| 921 Club House Blvd, New Smyrna Beach, | FL | Mortgage Sales | Leased | 50 | $ | - | / | mo | month to month | ||||||||||
| 9123 N. Military Trail, #104B | Palm Beach Gardens | FL | Mortgage Sales | Leased | 150 | $ | 800 | / | mo | month to month | |||||||||
| 970 Island Grove Drive | Deland | FL | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | |||||||||
| 10293 61st Ct N | Pinellas Park | FL | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | |||||||||
| 5666 Seminole Blvd, Suite 106 & 111 | Seminole | FL | Mortgage Sales | Leased | 210 | $ | 1,170 | / | mo | 7/31/2024 | |||||||||
| 2033 Main Street, Suite 407 | Sarasota | FL | Mortgage Sales | Leased | 2,410 | $ | 2,812 | / | mo | 10/31/2024 | |||||||||
| 265 E Marion Ave | Punta Gorda | FL | Mortgage Sales | Leased | - | $ | 99 | / | mo | month to month | |||||||||
| 900 Cricle 75 Parkway, Ste 175 | Atlanta | GA | Mortgage Sales | Leased | 3,020 | $ | 6,341 | / | mo | 6/30/2026 | |||||||||
| 6600 Peachtree Dunwoody Rd, Ste 135 | Atlanta | GA | Mortgage Sales | Leased | 2,129 | $ | 4,988 | / | mo | 3/31/2026 | |||||||||
| 4370 Kukui Grove St., Suite 201 | Lihue | HI | Mortgage Sales | Leased | 864 | $ | 1,542 | / | mo | 2/28/2025 | |||||||||
| 1001 Kamokila Blvd. | Kapolei | HI | Mortgage Sales | Leased | 737 | $ | 1,813 | / | mo | 12/31/2025 | |||||||||
| 32 Kinoole St. Suite 101, Hilo HI | Hilo | HI | Mortgage Sales | Leased | 730 | $ | 2,373 | / | mo | 5/31/2024 | |||||||||
| 1885 Main Street #108 | Wailuku | HI | Mortgage Sales | Leased | 1,092 | $ | 1,602 | / | mo | 5/14/2024 | |||||||||
| 677 Ala Moana Blvd. Suite 609 | Honolulu | HI | Mortgage Sales | Leased | 716 | $ | 2,141 | / | mo | 1/31/2024 | |||||||||
| 970 No Kalaheo Ave, Kailua, Suite A307, HI 96734 | Kailua | HI | Mortgage Sales | Leased | 510 | $ | 1,245 | / | mo | 5/31/2024 | |||||||||
| 70 Kanoa Street Suite #140 | Wailuku | HI | Mortgage Sales | Sub-Leased | Unknown | $ | 300 | / | mo | month to month | |||||||||
| 315 Cece Way | Mccall | ID | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | |||||||||
| 802 West Bartlett Road | Bartlett | IL | Mortgage Sales | Leased | 2,300 | $ | 6,000 | / | mo | 12/31/2024 | |||||||||
| 568 Greenluster Dr. | Covington | LA | Mortgage Sales | Leased | 150 | $ | 750 | / | mo | month to month | |||||||||
| 81 Boulder Drive, | Elizabethtown | KY | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | |||||||||
| 8684 Veterans Hwy, Ste 101 | Millersville | MD | Mortgage Sales | Leased | 4,018 | $ | 6,927 | / | mo | 7/31/2026 | |||||||||
| 860 Blue Gentian Road Suite 205 | Eagan | NM | Mortgage Sales | Leased | 100 | $ | 383 | / | mo | month to month | |||||||||
| 12 |
Item 2. Properties (Continued)
| Street | City | State | Function | Owned / Leased | Approximate Square Footage | Lease Amount |
Expiration | |||||||||||
| 4987 Fall Creek Rd. Suite 1 | Branson | MO | Mortgage Sales | Leased | 700 | $ | 1,000 | / | mo | month to month | ||||||||
| 4700 Homewood Ct #260 | Raleigh | NC | Mortgage Sales | Leased | 2,339 | $ | 5,353 | / | mo | 2/28/2025 | ||||||||
| 110 North Center Street, Suite 203 | Hickory | NC | Mortgage Sales | Leased | 100 | $ | 680 | / | mo | 5/14/2024 | ||||||||
| 2015 Ayrsley Town Blvd, Suite 247 | Charlotte | NC | Mortgage Sales | Leased | 100 | $ | 1,644 | / | mo | month to month | ||||||||
| 1980 Festival Plaza Dr., Suite 850 | Las Vegas | NV | Mortgage Sales | Leased | 12,866 | $ | 46,446 | / | mo | 3/31/2027 | ||||||||
| 840 Pinnacle Ct., Suite 3 | Mesquite | NV | Mortgage Sales | Leased | 900 | $ | 720 | / | mo | 3/12/2022 | ||||||||
| 2635 St. Rose Pkwy, Suites D 100, 110, 120 | Hendeson | NV | Mortgage Sales | Leased | 5,788 | $ | 12,649 | / | mo | 9/30/2025 | ||||||||
| 2250 East Postal Drive, Suite 1 | Pahrump | NV | Mortgage Sales | Sub-Leased | 1,500 | $ | 1,743 | / | mo | month to month | ||||||||
| 2546 Findlater | Henderson | NV | Mortgage Sales | Leased | 120 | $ | - | / | mo | month to month | ||||||||
| 670 Meridian Way, Suite 146 | Westerville | OH | Mortgage Sales | Leased | 100 | $ | 599 | / | mo | month to month | ||||||||
| 10365 SE Sunnyside Rd., Suite 310 | Clackamus | OR | Mortgage Sales | Leased | 1,288 | $ | 2,899 | / | mo | 11/30/2024 | ||||||||
| 11592 SW Roundup Place | Terrebonne | OR | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | ||||||||
| 709 Pacific Ave | Tillamook | OR | Mortgage Sales | Leased | 120 | $ | - | / | mo | month to month | ||||||||
| 144 Alf Taylor Rd. | Johnson City | TN | Mortgage Sales | Sub-Leased | 1,521 | $ | 800 | / | mo | month to month | ||||||||
| 4646 Poplar Avenue, #317 | Memphis | TN | Mortgage Sales | Leased | 477 | $ | 845 | / | mo | 3/31/2024 | ||||||||
| 115 W. New Street | Kingsport | TN | Mortgage Sales | Leased | 100 | $ | 650 | / | mo | month to month | ||||||||
| 11550 Fuqua, Suite 200 | Houston | TX | Mortgage Sales | Leased | 1,865 | $ | 3,341 | / | mo | 4/30/2024 | ||||||||
| 17347 Village Green Dr., Suite 102 | Houston | TX | Mortgage Sales | Sub-Leased | 3,300 | $ | 5,995 | / | mo | 12/1/2024 | ||||||||
| 9737 Great Hills Trail, Suites 150, 200, 220 | Austin | TX | Mortgage Sales | Leased | 19,891 | $ | 40,196 | / | mo | month to month | ||||||||
| 1213 East Alton Gloor Blvd., Suite H | Brownsville | TX | Mortgage Sales | Leased | 2,000 | $ | 2,310 | / | mo | 2/28/2024 | ||||||||
| 5020 Collinwood Ave., Suite 100 | Fort Worth | TX | Mortgage Sales | Leased | 2,687 | $ | 5,500 | / | mo | 1/31/2025 | ||||||||
| 722 Kiowa Dr. West | Lake Kiowa | TX | Mortgage Sales | Leased | 150 | $ | 495 | / | mo | month to month | ||||||||
| 23227 Red River Drive | Katy | TX | Mortgage Sales | Leased | 144 | $ | 750 | / | mo | month to month | ||||||||
| 5707 Cold Springs Drive | San Antonio | TX | Mortgage Sales | Leased | 100 | $ | - | / | mo | month to month | ||||||||
| 4500 1-40 West, Suite B | Amarillo | TX | Mortgage Sales | Leased | 1,238 | $ | 1,700 | / | mo | 12/31/2024 | ||||||||
| 30417 Fifth Street Suite B | Fulshear | TX | Mortgage Sales | Leased | 1,000 | $ | 1,273 | / | mo | month to month | ||||||||
| 4908 North Midkiff Road | Midland | TX | Mortgage Sales | Leased | 1,550 | $ | 2,500 | / | mo | month to month | ||||||||
| 462 Mid Cities Boulevard | Hurst | TX | Mortgage Sales | Leased | 1,640 | $ | 2,500 | / | mo | month to month | ||||||||
| 18525 West Lake Houston Parkway, Suite 222 | Humble | TX | Mortgage Sales | Leased | 1,390 | $ | 2,612 | / | mo | 9/30/2025 | ||||||||
| 2600 South Shore Boulevard, Suite 300 | League City | TX | Mortgage Sales | Leased | 94 | $ | 785 | / | mo | 4/24/2024 | ||||||||
| 106 Decker Court Suite 310 | Irving | TX | Mortgage Sales | Leased | 1,664 | $ | 4,160 | / | mo | 4/24/2024 | ||||||||
| 1600 Lee Travino, Suite A-1 | El Paso | TX | Mortgage Sales | Leased | 1,535 | $ | 2,110 | / | mo | month to month | ||||||||
| 23702 IH-10 West, Suite 105-D | San Antonio | TX | Mortgage Sales | Leased | 100 | $ | 470 | / | mo | month to month | ||||||||
| 1777 NE Loop 410, Suite 600 | San Antonio | TX | Mortgage Sales | Leased | 100 | $ | 1,070 | / | mo | month to month | ||||||||
| 299 South Columbia, | Stephenville | TX | Mortgage Sales | Leased | 3,417 | $ | 5,700 | / | mo | month to month | ||||||||
| 18756 Stone Oak Parkway Ste 200 | San Antonio | TX | Mortgage Sales | Leased | 100 | $ | 1,908 | / | mo | month to month | ||||||||
| 10000 Central Expressway Ste 428 | Dallas | TX | Mortgage Sales | Leased | 200 | $ | 1,400 | / | mo | 12/31/2024 | ||||||||
| 602 S Main St | Weatherford | TX | Mortgage Sales | Leased | 1,250 | $ | 1,282 | / | mo | 12/31/2024 | ||||||||
| 5757 Flewellen Oaks Ln #104 | Fulshear | TX | Mortgage Sales | Leased | 100 | $ | 800 | / | mo | month to month | ||||||||
| 126 W. Sego Lily Dr., Suite 126 | Sandy | UT | Mortgage Sales | Leased | 2,794 | $ | 6,933 | / | mo | 1/31/2027 | ||||||||
| 497 S. Main | Ephraim | UT | Mortgage Sales | Leased | 1,884 | $ | 1,600 | / | mo | 4/30/2025 | ||||||||
| 11240 S. River Heights Dr. | South Jordan | UT | Mortgage Sales | Leased | 3,403 | $ | 8,458 | / | mo | 11/30/2024 | ||||||||
| 500 East Village Blvd. | Stansbury Park | UT | Mortgage Sales | Leased | 1,950 | $ | 3,475 | / | mo | 10/31/2024 | ||||||||
| 1350 E. 300 S. 3rd Floor | Lehi | UT | Mortgage Sales | Leased | 15,446 | $ | 38,396 | / | mo | 12/22/2026 | ||||||||
| 2455 E. Parleys Way, Suites 120 & 150 | Salt Lake City | UT | Mortgage Sales | Leased | 5,256 | $ | 8,962 | / | mo | 7/31/2030 | ||||||||
| 859 W South Jordan Pkwy, Suite 101, | South Jordan | UT | Mortgage Sales | Leased | 3,376 | $ | 6,175 | / | mo | 5/30/2025 | ||||||||
| 768 S. 1600 W., Suite B | Mapleton | UT | Mortgage Sales | Leased | 1,500 | $ | 4,120 | / | mo | month to month | ||||||||
| UT ( ) 998 N 1200 W, Suite 104 Orem | Orem | UT | Mortgage Sales | Leased | 2,162 | $ | 5,648 | / | mo | month to month | ||||||||
| 21430 Cedar Dr., Suite 200-202 | Sterling | VA | Mortgage Sales | Leased | 6,850 | $ | 16,360 | / | mo | 3/9/2024 | ||||||||
| 15650 NE Fourth Blvd Ste 101 | Vancouver | WA | Mortgage Sales | Leased | 200 | $ | 485 | / | mo | 11/30/2024 | ||||||||
| 1508 24th Ave., Suite 23 | Kenosha | WI | Mortgage Sales | Leased | 250 | $ | 150 | / | mo | month to month | ||||||||
| 27903 99th St. | Trevor | WI | Mortgage Sales | Leased | 300 | $ | 150 | / | mo | month to month | ||||||||
(1) These two properties were sold during the first quarter of 2024.
(2) This property is currently listed for sale and under contract.
The Company believes the office facilities it occupies are in good operating condition and adequate for current operations. The Company plans to enter into additional leases or modify existing leases based on its assessments of market demand. Those leases are expected to be month to month where possible. As leases expire, the Company plans to either renew or find comparable leases or acquire additional office space.
| 13 |
Item 2. Properties (Continued)
The following table summarizes the location and acreage of the seven Company owned cemeteries, each of which includes one or more mausoleums. The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports, or the Company’s inspection of the cemeteries. The Company estimates that there are approximately 1,200 spaces per developed acre.
| Net Saleable Acreage | ||||||||||||||||||||||
| Name of Cemetery | Location | Date Acquired | Developed Acreage | Total Acreage | Acres Sold as Cemetery Spaces (1) | Total Available Acreage | ||||||||||||||||
| Memorial
Estates, Inc. Lakeview Cemetery | 1640
East Lakeview Drive Bountiful, Utah | 1973 | 9 | 39 | 8 | 31 | ||||||||||||||||
| Memorial
Estates, Inc. Mountain View Cemetery | 3115
East 7800 South Salt Lake City, Utah | 1973 | 26 | 54 | 20 | 34 | ||||||||||||||||
| Memorial
Estates, Inc. Redwood Cemetery | 6500
South Redwood Road West Jordan, Utah | 1973 | 40 | 71 | 35 | 36 | ||||||||||||||||
| Deseret
Memorial Inc. Lake Hills Cemetery | 10055
South State Street Sandy, Utah | 1991 | 9 | 28 | 6 | 22 | ||||||||||||||||
| Holladay
Memorial Park, Inc. Holladay Memorial Park | 4900
South Memory Lane Holladay, Utah | 1991 | 12 | 14 | 8 | 6 | ||||||||||||||||
| California
Memorial Estates, Inc. Singing Hills Memorial Park | 2800
Dehesa Road El Cajon, California | 1995 | 8 | 97 | 6 | 91 (2) | ||||||||||||||||
| SNR-SF Cemetery LLC Santa Fe Memorial Gardens | 417
Rodeo Rd Santa Fe, New Mexico | 2021 | 5 (3) | 5 | 4 | 1 | ||||||||||||||||
| (1) | Includes both reserved and occupied spaces. | |
| (2) | Includes an open easement with a total acreage of approximately 62 acres. | |
| (3) | Includes five main columbariums that can hold approximately 6,000 inurnments. |
| 14 |
Item 2. Properties (Continued)
The following table summarizes the location, square footage and the number of viewing rooms and chapels of the twelve Company owned mortuaries:
| Date | Viewing | Square | ||||||||||||||||
| Name of Mortuary | Location | Acquired | Room(s) | Chapel(s) | Footage | |||||||||||||
| Memorial Mortuary, Inc. Memorial Mortuary | 5850 South 900 East, Murray, Utah | 1973 | 3 | 1 | 20,000 | |||||||||||||
| Affordable Funerals and Cremations, St. George | 157 East Riverside Dr., No. 3A, St. George, Utah | 2016 | 1 | 1 | 2,360 | |||||||||||||
| Memorial Estates, Inc. Redwood Mortuary (1) | 6500 South Redwood Rd., West Jordan, Utah | 1973 | 2 | 1 | 10,000 | |||||||||||||
| Memorial Estates, Inc. Mountain View Mortuary (1) | 3115 East 7800 South, Salt Lake City, Utah | 1973 | 2 | 1 | 16,000 | |||||||||||||
| Memorial Estates, Inc. Lakeview Mortuary (1) | 1640 East Lakeview Dr., Bountiful, Utah | 1973 | 0 | 1 | 5,500 | |||||||||||||
| Deseret Memorial Inc. Lakehills Mortuary (1) | 10055 South State St., Sandy, Utah | 1991 | 2 | 1 | 18,000 | |||||||||||||
| Cottonwood Mortuary, Inc. Cottonwood Mortuary | 4670 South Highland Dr., Holladay, Utah | 1991 | 2 | 1 | 14,500 | |||||||||||||
| SN Probst LLC Heber Valley Funeral Home | 288 North Main St., Heber City, Utah | 2019 | 1 | 1 | 5,900 | |||||||||||||
| SN Holbrook LLC Milcreek Funeral Home | 3251 S 2300 E, Millcreek, Utah | 2021 | 2 | 1 | 6,300 | |||||||||||||
| SNR-SF Mortuary LLC Rivera Family Funeral Home Santa Fe (1) | 417 Rodeo RD, Santa Fe, New Mexico | 2021 | 2 | 1 | 7,700 | |||||||||||||
| SNR-Espanola LLC Rivera Family Funeral Home Española | 305 Calle Salazar, Española, New Mexico | 2021 | 1 | 2 | 10,400 | |||||||||||||
| SNR-Taos LLC Rivera Family Funeral Home Taos | 818 Paseo Del Pueblo Sur, Taos, New Mexico | 2021 | 0 | 1 | 9,600 | |||||||||||||
| (1) | These funeral homes also provide burial niches at their respective locations. |
| 15 |
Item 3. 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 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s Class A common stock trades on The Nasdaq Global Select Market under the symbol “SNFCA.” As of March 26, 2024, the closing stock price of the Class A common stock was $7.62 per share. As of March 26, 2024, there were 1,747 registered stockholders of record of the Company’s Class A common stock and 42 registered stockholders of record of the Company’s Class C common stock. Because many of the Company’s shares of Class A common stock are held by brokers and other institutions on behalf of the stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.
The following were the high and low market closing stock prices for the Class A common stock by quarter as reported by NASDAQ since January 1, 2022:
| Price Range (1) | ||||||||
| High | Low | |||||||
| Period (Calendar Year) | ||||||||
| 2022 | ||||||||
| First Quarter | $ | 9.39 | $ | 8.13 | ||||
| Second Quarter | $ | 9.40 | $ | 7.46 | ||||
| Third Quarter | $ | 8.20 | $ | 5.93 | ||||
| Fourth Quarter | $ | 7.21 | $ | 5.81 | ||||
| 2023 | ||||||||
| First Quarter | $ | 7.19 | $ | 5.71 | ||||
| Second Quarter | $ | 8.45 | $ | 6.03 | ||||
| Third Quarter | $ | 8.83 | $ | 7.58 | ||||
| Fourth Quarter | $ | 9.60 | $ | 6.89 | ||||
| 2024 | ||||||||
| First Quarter (through March 26, 2024) | $ | 9.04 | $ | 7.62 | ||||
(1) Stock prices have been adjusted retroactively for the effect of annual stock dividends.
The Class C common stock is not registered or traded on a national exchange. See Note 12 of the Notes to Consolidated Financial Statements.
The Company has never paid a cash dividend on its Class A or Class C common stock. The Company currently anticipates that all its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C common stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. The Company paid a 5% stock dividend on Class A and Class C common stock each year from 1990 through 2019, a 7.5% stock dividend for the year 2020, and a 5.0% stock dividend for the years 2021 through 2023.
| 16 |
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 agreement expired December 31, 2023.
The following table shows the Company’s repurchase activity of its common stock during the three-month period ended December 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 of Class A Shares that May Yet Be Purchased Under the Plan or Program (2) | ||||||||||||
| 10/1/2023-10/31/2023 | - | $ | - | - | 318,043 | |||||||||||
| 11/1/2023-11/30/2023 | - | $ | - | - | 318,043 | |||||||||||
| 12/1/2023-12/31/2023 | - | $ | - | - | 318,043 | |||||||||||
| Total | - | $ | - | - | 318,043 | |||||||||||
| (1) | Includes fees and commissions paid on stock repurchases. | |
| (2) | In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company’s Class A Common Stock in the open market. The Company amended the Stock Repurchase Plan on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. Any repurchased shares of Class A common stock are to be held as treasury shares to be used as the Company’s employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan. |
| 17 |
The graph below compares the cumulative total stockholder return of the Company’s Class A common stock with the cumulative total return on the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Insurance Index for the period from December 31, 2019 through December 31, 2023. The graph assumes that the value of the investment in the Company’s Class A common stock and in each of the indexes was $100 as of December 31, 2019 and that all dividends were reinvested.
The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Company’s Class A common stock.
| 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 | ||||||||||||||||
| SNFC | 100 | 153 | 177 | 148 | 191 | |||||||||||||||
| S & P 500 | 100 | 116 | 148 | 119 | 148 | |||||||||||||||
| S & P Insurance | 100 | 126 | 158 | 171 | 183 | |||||||||||||||
The stock performance graph set forth above is required by the Securities and Exchange Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts.
Item 6. [Reserved]
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.
| 18 |
Item 7. 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 cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans.
Insurance Operations
The following table shows the condensed financial results for the Company’s insurance operations for 2023 and 2022. See Note 15 of the Notes to Consolidated Financial Statements.
| Years
ended December 31 (in thousands of dollars) | ||||||||||||
| 2023 | 2022 | 2023 vs 2022 % Increase (Decrease) | ||||||||||
| Revenues from external customers: | ||||||||||||
| Insurance premiums | $ | 114,658 | $ | 105,002 | 9 | % | ||||||
| Net investment income | 67,812 | 62,565 | 8 | % | ||||||||
| Mortgage fee income | 77 | 143 | (46 | %) | ||||||||
| Gains (losses) on investments and other assets | 963 | (459 | ) | 310 | % | |||||||
| Other | 1,666 | 1,932 | (14 | %) | ||||||||
| Total | $ | 185,176 | $ | 169,183 | 9 | % | ||||||
| Intersegment revenue | $ | 8,203 | $ | 6,601 | 24 | % | ||||||
| Earnings before income taxes | $ | 25,272 | $ | 14,196 | 78 | % | ||||||
Profitability for 2023 increased due to (a) a $9,656,000 increase in insurance premiums and other considerations, (b) a $5,247,000 increase in net investment income, (c) a $1,602,000 increase in intersegment revenue, (d) a $1,422,000 increase in gains on investments and other assets primarily due to an increase in the fair value of equity securities, and (e) a $987,000 decrease in selling, general and administrative expenses, which were partially offset by (i) a $5,150,000 increase in future policy benefits, (ii) a $1,936,000 increase in death, surrenders and other policy benefits, (iii) a $266,000 decrease in other revenues, (iv) a $176,000 increase in intersegment interest expense and other expenses, (v) a $133,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs, (vi) a $111,000 increase in interest expense, and (vii) a $66,000 decrease in mortgage fee income.
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Cemetery and Mortuary Operations
The following table shows the condensed financial results for the Company’s cemetery and mortuary operations for 2023 and 2022. See Note 15 of the Notes to Consolidated Financial Statements.
| Years
ended December 31 (in thousands of dollars) | ||||||||||||
| 2023 | 2022 | 2023 vs 2022 % Increase (Decrease) | ||||||||||
| Revenues from external customers: | ||||||||||||
| Cemetery revenues | $ | 15,189 | $ | 13,871 | 10 | % | ||||||
| Mortuary revenues | 12,676 | 13,123 | (3 | %) | ||||||||
| Net investment income | 2,952 | 2,445 | 21 | % | ||||||||
| Gains (losses) on investments and other assets | 717 | (796 | ) | 190 | % | |||||||
| Other | 404 | 305 | 32 | % | ||||||||
| Total | $ | 31,938 | $ | 28,948 | 10 | % | ||||||
| Earnings before income taxes | $ | 8,445 | $ | 6,094 | 39 | % | ||||||
Profitability in 2023 increased due to (a) a $2,196,000 increase in cemetery pre-need sales, (b) a $1,513,000 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), (c) a $507,000 increase in net investment income, (d) a $99,000 increase in other revenues, (e) a $59,000 decrease in amortization of deferred policy acquisition costs, and (f) a $44,000 decrease in intersegment interest expense and other expenses, which were partially offset by (i) a $878,000 decrease in cemetery at-need sales, (ii) a $546,000 increase in selling, general and administrative expenses, (iii) a $447,000 decrease in mortuary at-need sales, (iv) a $111,000 decrease in intersegment revenues, and (v) a $85,000 increase in costs of goods sold.
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 originates 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 SecurityNational Mortgage are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.
SecurityNational Mortgage receives fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the MSRs on approximately 4% 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 $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 2023 and 2022, SecurityNational Mortgage originated 7,185 loans ($2,173,081,000 total volume) and 10,663 loans ($3,373,554,000 total volume), respectively.
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The following table shows the condensed financial results for the Company’s mortgage operations for 2023 and 2022. See Note 15 of the Notes to Consolidated Financial Statements.
| Years
ended December 31 (in thousands of dollars) | ||||||||||||
| 2023 | 2022 | 2023 vs 2022 % Increase (Decrease) | ||||||||||
| Revenues from external customers: | ||||||||||||
| Secondary gains from investors | $ | 68,428 | $ | 153,728 | (55 | %) | ||||||
| Income from loan originations | 31,245 | 32,772 | (5 | %) | ||||||||
| Change in fair value of loans held for sale | (478 | ) | (8,835 | ) | (95 | %) | ||||||
| Change in fair value of loan commitments | (1,124 | ) | (4,309 | ) | (74 | %) | ||||||
| Net investment income | 1,580 | 1,188 | 33 | % | ||||||||
| Gains on investments and other assets | 157 | 398 | (61 | %) | ||||||||
| Other | 1,576 | 16,580 | (90 | %) | ||||||||
| Total | $ | 101,384 | $ | 191,522 | (47 | %) | ||||||
| Earnings (loss) before income taxes | $ | (17,416 | ) | $ | 14,088 | (224 | %) | |||||
Included in other revenues is service fee income. Profitability in 2023 decreased due to (a) an $85,300,000 decrease in secondary gains from investors, (b) a $15,004,000 decrease in other revenues due to the sale of certain MSRs in October 2022, (c) a $1,535,000 increase in intersegment interest expense and other expenses, (d) a $1,527,000 decrease in income from loan originations, and (e) a $241,000 decrease in gains on investments and other assets, which were partially offset by (i) a $23,662,000 decrease in commissions, (ii) a $17,871,000 decrease in personnel expenses, (iii) a $13,180,000 decrease in other expenses, (iv) an $8,356,000 increase in the fair value of loans held for sale, (v) a $3,185,000 increase in the fair value of loan commitments, (vi) a $3,077,000 decrease in interest expense, (vii) a $1,100,000 decrease in costs related to funding mortgage loans, (viii) a $1,011,000 decrease in advertising expenses, (ix) a $392,000 increase in net investment income, (x) a $175,000 increase in intersegment revenues, (xi) a $42,000 decrease in depreciation on property and equipment, and (xii) a $52,000 decrease in rent and rent related expenses.
Critical Accounting Policies and Estimates
The following is a summary of the Company’s significant accounting policies and a review of the Company’s most critical accounting estimates. See Note 1 of the Notes to Consolidated Financial Statements.
Insurance Operations
In accordance with generally accepted accounting principles in the United States of America (“GAAP”), premiums and other considerations received for interest sensitive products are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses.
The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims more than policyholder account balances are reported as expenses in the consolidated financial statements.
Premiums and other considerations received for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.
The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized, and amortized into expenses. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality, and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.
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Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits. The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. The Company can mitigate adverse experiences through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges.
Cemetery and Mortuary Operations
Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the caskets are delivered.
Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with the retail land sales provisions of GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above.
Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is delivered, fulfilling the performance obligation.
Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including revenue and costs associated with the sales of pre-need cemetery services, are deferred until the services are performed.
Prearranged funeral and pre-need cemetery customer obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of GAAP. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or services are performed.
Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured, and there are no significant company obligations remaining.
Mortgage Operations
Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans. The Company has elected to use fair value accounting for all mortgage loans that are held for sale. Accordingly, all revenues and costs are now recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income.
The Company, through its mortgage subsidiaries, sells mortgage loans to third-party investors without recourse, unless defects are identified in the representations and warranties made at loan sale. It may be required, however, to repurchase a loan or pay a fee instead of repurchasing under certain events, which include the following:
| ● | Failure to deliver original documents specified by the investor, | |
| ● | The existence of misrepresentation or fraud in the origination of the loan, | |
| ● | The loan becomes delinquent due to nonpayment during the first several months after it is sold, | |
| ● | Early pay-off of a loan, as defined by the agreements, | |
| ● | Excessive time to settle a loan, | |
| ● | Investor declines purchase, and | |
| ● | Discontinued product and expired commitment. |
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Loan purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company.
It is the Company’s policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month period and to pursue efforts to enforce loan purchase commitments from third-party investors concerning the loans. The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives. Remedial methods include the following:
| ● | Research reasons for rejection, | |
| ● | Provide additional documents, | |
| ● | Request investor exceptions, | |
| ● | Appeal rejection decision to purchase committee, and | |
| ● | Commit to secondary investors. |
Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month period, the loans are repurchased and transferred to mortgage loans held for investment at the lower of cost or fair value and the previously recorded sales revenue that was to be received from a third-party investor is written off against the loan loss reserve. Any loan that later becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly.
Determining fair value. The cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Market value, while often difficult to determine and may contain significant unobservable inputs, is based on the following guidelines:
| ● | For loans that are committed, the Company uses the commitment price. | |
| ● | For loans that are non-committed that have an active market, the Company uses the market price. | |
| ● | For loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar product. | |
| ● | For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and loan interest rate. |
The appraised value of the real estate underlying the original mortgage loan adds significance to the Company’s determination of fair value because, if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan, thus minimizing credit risk. Most loans originated are sold to third-party investors. The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans held for sale.
Use of Significant Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements. The following is a summary of our significant accounting estimates, and critical issues that impact them:
Loan Commitments
The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed security (“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 mortgage loan commitment is issued and is shown net of related expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will be funded within the terms of the commitments.
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Deferred Acquisition Costs
Amortization of deferred policy acquisition costs (“DAC”) for interest sensitive products is dependent upon estimates of current and future gross profits or margins on this business. Key assumptions used include the following: yield on investments supporting the liabilities, amount of interest or dividends credited to the policies, amount of policy fees and charges, amount of expenses necessary to maintain the policies, amount of death and surrender benefits, and the length of time the policies will stay in force.
For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued.
Value of Business Acquired
Value of business acquired (“VOBA”) is the present value of estimated future profits of the acquired business and is amortized like deferred acquisition costs. The critical issues explained for deferred acquisition costs would also apply for value of business acquired.
Mortgage Loans Foreclosed to Real Estate Held for Investment or Sale
These properties are recorded at the lower of cost or fair value upon foreclosure. The Company believes that in an orderly market, fair value approximates 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 estimated future policy benefits. Accordingly, the fair value determination is generally weighted more heavily toward the rental analysis. The fair value is also estimated by obtaining an independent appraisal, which typically considers area comparable properties and property condition.
Future Policy Benefits
Reserves for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, expenses, investment yield, lapse rates, surrender rates, and dividend crediting rates.
These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation. For traditional life insurance, once established for a particular series of products, these assumptions are generally held constant.
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Unearned Premium Reserve
The universal life products the Company sells have significant policy initiation fees (front-end load) that are deferred and amortized into revenues over the estimated expected gross profits from surrender charges and investment, mortality, and expense margins. The same issues that impact deferred acquisition costs apply to unearned revenue.
Premium Deficiency and Loss Recognition Testing
At least annually, the Company tests the adequacy of the net benefit reserves (liability for future policy benefits, net of DAC and VOBA) recorded for life insurance and annuity products. The Company tests for recoverability by using the Company’s current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns. These tests evaluate whether the present value of future contract-related cash flows will support the capitalized DAC and VOBA assets. These cash flows consist primarily of premium income, less benefits, and expenses. If the current contract liabilities plus the present value of future premiums is greater than the sum of the present values of future policy benefits, commissions, and expenses plus the current DAC and VOBA less unearned premium reserve balances, then the capitalized assets are deemed recoverable. The present values are calculated using the best estimate of the after-tax net investment earned rate.
Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future Cost of Pre-need Sales
The revenue and cost associated with the sales of pre-need cemetery merchandise and funeral services are deferred until the merchandise is delivered or the service is performed.
The Company, through its cemetery and mortuary operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder or potential mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy.
Mortgage Servicing Rights
Mortgage Service Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents) when mortgage loans are sold. Under these contracts, the Company is obligated to retain and provide loan servicing functions on the loans sold, in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition of real estate owned and property dispositions. The Company initially accounts for MSRs at fair value and subsequently accounts for them using the amortization method. 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 accounted for using the amortization method for impairment.
Mortgage Allowance for Credit Losses and Loan Loss Reserve
The Company provides for losses on its mortgage loans held for investment through an allowance for credit losses (a contra-asset account) and through the mortgage loan loss reserve (a liability account).
The mortgage 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. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.
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The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on mortgage loans sold to third-party investors. The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities.
Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale relating to any guarantee or recourse provisions in the event of defects in the representations and warranties made at loan sale. The Company accrues a monthly allowance for indemnification losses to investors based on total production. This estimate is based on the Company’s historical experience and is included as a component of mortgage fee income. Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and administrative expenses. The estimated liability for indemnification losses is included in other liabilities and accrued expenses.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities require various estimates and judgments and may be affected favorably or unfavorably by various internal and external factors. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities that arise from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and in estimating the ultimate amount of deferred tax assets recoverable in future periods. Factors affecting the deferred tax assets and liabilities include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, and changes to overall levels of pre-tax earnings. Changes in these estimates, judgments or factors may result in an increase or decrease to the Company’s deferred tax assets and liabilities with a related increase or decrease in the Company’s provision for income taxes.
Results of Consolidated Operations
2023 Compared to 2022
Total revenues decreased by $71,155,000, or 18.3%, to $318,497,000 for 2023 from $389,652,000 for 2022. Contributing to this decrease in total revenues was primarily a $75,352,000 decrease in mortgage fee income and a $15,171,000 decrease in other revenues. This decrease in total revenues was offset by a $9,657,000 increase in insurance premiums and other considerations, a $6,145,000 increase in net investment income, a $2,695,000 increase in gains on investments and other assets, and an $871,000 increase in net cemetery and mortuary sales.
Mortgage fee income decreased by $75,352,000, or 43.4%, to $98,148,000 for 2023, from $173,500,000 for 2022. This decrease was primarily due to an $85,366,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market, and a $2,579,000 decrease in loan fees and interest income. This decrease in mortgage fee income was partially offset by a $11,541,000 increase in the fair value of loans held for sale and loan commitments and a $1,052,000 decrease in the provision for loan loss reserve.
Insurance premiums and other considerations increased by $9,657,000, or 9.2%, to $114,658,000 for 2023, from $105,002,000 for 2022. This increase was due to an increase of $9,238,000 in first year premiums because of increased preneed insurance sales and an increase of $419,000 in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying policies in force.
Net investment income increased by $6,145,000, or 9.3%, to $72,343,000 for 2023, from $66,198,000 for 2022. This increase was primarily attributable to a $4,476,000 increase in fixed maturity securities income, a $2,583,000 increase in interest on cash and cash equivalents, a $477,000 decrease in investment expenses, a $223,000 increase in rental income from real estate held for investment, a $106,000 increase in equity securities income, a $99,000 increase in income in other investments, and a $5,000 increase in insurance assignment income. This increase was partially offset by a $1,708,000 decrease in mortgage loan interest and a $116,000 decrease in policy loan income.
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Net mortuary and cemetery sales increased by $871,000, or 3.2%, to $27,865,000 for 2023, from $26,994,000 for 2022. This increase was primarily due to a $2,196,000 increase in cemetery pre-need sales. This increase was partially offset by a $878,000 decrease in cemetery at-need sales and a $447,000 decrease in mortuary at-need sales.
Gains on investments and other assets increased by $2,695,000, or 314.3%, to $1,837,000 in gains for 2023, from $858,000 in losses for 2022. This increase in gains on investments and other assets was primarily due to a $4,157,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities. This increase was partially offset by a $527,000 decrease in gains on fixed maturity securities, a $485,000 decrease in gains on other assets, and a $450,000 decrease in gains on real estate held for investment.
Other revenues decreased by $15,171,000, or 80.6%, to $3,646,000 for 2023 from $18,817,000 for 2022. This decrease was primarily attributable to a decrease in servicing fee revenue because of the sale of certain mortgage servicing rights in October 2022.
Total benefits and expenses were $302,197,000, or 94.9% of total revenues for 2023, as compared to $355,275,000, or 91.2% of total revenues for 2022.
Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $7,086,000, or 7.6%, to $100,012,000 for 2023, from $92,926,000 for 2022. This increase was primarily the result of a $5,150,000 increase in future policy benefits and a $2,012,000 increase in death benefits. This increase was partially offset by a $76,000 decrease in surrender and other policy benefits.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $74,000, or 0.4%, to $18,024,000 for 2023, from $17,950,000 for 2022. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.
Selling, general and administrative expenses decreased by an aggregate of $57,358,000, or 24.7%, to $174,490,000 for 2023, from $231,848,000 for 2022. This decrease was primarily the result of a $23,391,000 decrease in commissions, a $16,970,000 decrease in personnel expenses, a $13,739,000 decrease in other expenses, a $1,987,000 decrease in advertising expenses, a $1,100,000 decrease in costs related to funding mortgage loans, a $145,000 decrease in depreciation on property and equipment, and a $26,000 decrease in rent and rent related expenses.
Interest expense decreased by $2,965,000, or 37.9%, to $4,865,000 for 2023, from $7,830,000 for 2022. This decrease was primarily due to a decrease of $3,077,000 in interest expense on mortgage warehouse lines of credit for loans held for sale, which was partially offset by a $112,000 increase in interest expense on bank loans.
Cost of goods and services sold of the cemeteries and mortuaries increased by $85,000, or 1.8%, to $4,806,000 for 2023, from $4,721,000 for 2022. This increase was primarily due to a $218,000 increase in cemetery at-need sales and a $40,000 increase in cemetery pre-need sales, which was partially offset by a $173,000 decrease in mortuary at-need sales.
Income tax expense decreased by $6,881,000, or 79.2%, to $1,805,000 for 2023, from $8,687,000 for 2022. This decrease was primarily due to a decrease in earnings before income taxes for 2023 compared to 2022. The Company’s overall effective tax rate decreased from 25.3% for 2022 to 11.1% in 2023, a 14.2% decrease in the effective tax rate or a 56.1% change.
Risks
The following is a description of the material risks facing the Company and how it mitigates those risks:
Legal and Regulatory Risks. Changes in the legal or regulatory environment in which the Company operates may create additional expenses and risks not anticipated by the Company in developing and pricing its products. Regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company’s mortgage sales. Also, the Company may be subject to further regulations in the cemetery and mortuary business. The Company aims to mitigate these risks by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices that identify and minimize the adverse impact of such risks.
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Mortgage Industry Risks. Developments in the mortgage industry and credit markets can adversely affect the Company’s ability to sell its mortgage loans to investors, which can impact the Company’s financial results by requiring it to assume the risk of holding and servicing any unsold loans.
The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company could realize in the future on mortgage loans sold to third-party investors. The Company’s mortgage subsidiary may be required to reimburse third-party investors for costs associated with early payoff of loans within the first six months of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities.
During 2023 and 2022 the Company decreased its loan loss reserve by $1,178,000 and increased its loan loss reserve by $1,079,000, respectively, for loan originations, and the charges have been included in mortgage fee income. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2023 and 2022, the balances were $547,000 and $1,726,000, respectively. The Company believes the loan loss reserve represents probable loan losses incurred as of December 31, 2023. There is a risk, however, that future loan losses may exceed the loan loss reserve.
As of December 31, 2023, the Company’s mortgage loans held for investment portfolio consisted of mortgage loans in an aggregate principal amount of $6,149,000 with delinquencies exceeding 90 days. Of this amount, loans with an aggregate principal amount of $2,263,000 were in foreclosure proceedings. The Company has not received or recognized any interest income on the $6,149,000 in mortgage loans with delinquencies exceeding 90 days. During 2023 and 2022, the Company increased its allowance for credit losses by $1,184,000 and by $270,000, respectively, which was charged to bad debt expense and included in selling, general and administrative expenses for the period. The Company also increased its allowance for credit losses by $665,000 at the beginning of 2023 due to the adoption of the new accounting standard (Refer to Note 1 of the Notes to the Consolidated Financial Statements). The allowances for credit losses on the Company’s mortgage loans held for investment portfolio as of December 31, 2023 and 2022 were $3,819,000 and $1,970,000, respectively.
Interest Rate Risk. Fluctuations in interest rates may cause a decrease in the value of the Company’s investments or impair the ability of the Company to market its mortgage and cemetery and mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company aims to mitigate this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a loss on the sale.
Mortality and Morbidity Risks. The Company’s actuarial assumptions differing from actual mortality and morbidity experienced may mean that the Company’s relevant products sold were underpriced, may require the Company to liquidate insurance or other claims earlier than planned, and have other potentially adverse consequences to the business. The Company aims to minimize this risk through sound underwriting practices, asset and liability duration matching, and sound actuarial practices.
Banking Environment.
On March 10, 2023, and March 12, 2023, Silicon Valley Bank and Signature Bank were placed in receivership with the Federal Deposit Insurance Corporation (FDIC). Normal banking activities resumed shortly thereafter. On May 1, 2023, First Republic Bank was placed in receivership with the FDIC and was immediately purchased by a national bank.
The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank. The Company may periodically transfer funds to these banks to pay for services rendered by third party vendors that continue to maintain banking relationships with these banks. The Company continues to monitor the banking industry and its relationships with regional and community banks.
| 28 |
Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment 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 the value of loans held for sale; 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.
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 on 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 December 31, 2023, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its warehouse lines of credit and its operating cash flow covenant for its standby letter of credit with its primary bank. SecurityNational Mortgage has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event SecurityNational Mortgage is required to repay the outstanding advances of approximately $7,732,000 on the warehouse line of credit that has not provided a covenant waiver, SecurityNational Mortgage has sufficient cash and borrowing capacity on the warehouse lines of credit that have provided covenant waivers to fund its origination activities. The Company has done an internal analysis of the funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders.
During 2023 and 2022, the Company’s operations provided cash of $54,008,000 and of $130,450,000, respectively. The decrease in cash provided by operations was due primarily to decreased proceeds from the sale of loans held for sale.
The Company expects to pay out liabilities under its funeral plans over the long term given the nature of those plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs; policyholders generally keep these policies in force until, and do not surrender prior to, death. Because of the long-term nature of these liabilities, the Company can hold to maturity or for the targeted investment period its corresponding bond, real estate, and mortgage loan investments, thus reducing the risk of liquidating these long-term investments because of any sudden changes in their fair values.
The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing matching. The Company purchases short-term investments on a temporary basis to meet the expected short-term requirements of the Company’s insurance products. The Company’s investment philosophy is intended to provide a rate of return for the expected duration of its cemetery and mortuary policies that will exceed the accruing of liabilities under those policies regardless of future interest rate movements.
| 29 |
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. The warehoused mortgage loans are typically held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the Company’s life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $362,663,000 (at estimated fair value) and $345,598,000 (at estimated fair value) as of December 31, 2023 and 2022, respectively. This represented 38.7% and 36.4% of the total investments of the Company as of December 31, 2023, and 2022, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. As of December 31, 2023, 1.8% (or $6,954,000) and as of December 31, 2022, 2.2% (or $7,833,000) of the insurance subsidiaries’ total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.
See Note 2 of the Notes to Consolidated Financial Statements for the schedule of the maturity of fixed maturity securities available for sale and for the schedule of principal payments for mortgage loans held for investment.
See Note 7 of the Notes to Consolidated Financial Statements for a description of the Company’s sources of liquidity.
If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio (of approximately $657,153,000), which includes bonds, preferred stocks and mortgage loans held for investment, could change by the following amounts based on the respective basis point swing (the change in the fair values were calculated using a modeling technique):
| -200 bps | -100 bps | +100 bps | +200 bps | |||||||||||||
| Change in Fair Value | $ | 44,352 | $ | 20,873 | $ | (19,034 | ) | $ | (39,027 | ) | ||||||
| (in thousands) | ||||||||||||||||
The Company’s life insurance subsidiaries are subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. As of December 31, 2023 and 2022, the life insurance subsidiaries were in compliance with the regulatory criteria.
The Company’s total capitalization of stockholders’ equity, and bank loans and other loans payable was $418,450,000 as of December 31, 2023, as compared to $454,499,000 as of December 31, 2022. This decrease was primarily due to a decrease of $56,158,000 in bank loans and other loans payable which was partially offset by a $20,108,000 increase in stockholders’ equity. Stockholders’ equity as a percent of total capitalization was 74.8% and 64.4% as of December 31, 2023 and 2022, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance was 4.4% for 2023 as compared to a rate of 4.3% for 2022.
The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $107,385,000 and $94,254,000 as of December 31, 2023 and 2022, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the “safe harbor” provisions of the act.
This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company’s projected financial results and its plans and strategies. However, the actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company based on management’s then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.
| 30 |
Factors that may cause the Company’s actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (iv) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative, or general expenses due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives or employees; (vii) increases in medical costs; (viii) changes in the Company’s liquidity due to changes in asset and liability matching; (ix) restrictions on insurance underwriting based on genetic testing and other criteria; (x) adverse changes in the ratings obtained by independent rating agencies; (xi) failure to maintain adequate reinsurance; (xii) possible claims relating to sales practices for insurance products and claim denials; (xiii) adverse trends in mortality and morbidity; (xiv) deterioration of real estate markets; and (xv) lawsuits in the ordinary course of business.
Off-Balance Sheet Agreements
The Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of December 31, 2023, the Company’s commitments were approximately $146,953,000 for these loans, of which $104,977,000 had been funded. The Company advances funds in accordance with the loan agreements once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed at 5.25% to 8.50% per annum. Maturities range between six and eighteen months.
Contractual Obligations
In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations. Such obligations include operating leases for office space, agreements with respect to borrowed funds and future policy benefits. See Notes 7, 22, 24 of the Notes to Consolidated Financial Statements for more information about these obligations.
Captive Insurance Participation
The Company has a limited equity interest in a captive insurance entity (the “Captive’) that provides workers compensation, general liability and automobile insurance . This program permits the Company to pool insurance risks and resources with like-minded companies in order to obtain more competitive pricing for claims administration, stop loss insurance premiums and to limit its risk of loss in any particular year. The Captive also provides access to a wide array of safety-related services and regular safety training to help the Company control claims. The maximum exposure to a loss related to the Company’s involvement in the Captive is limited to approximately $443,758, which is collateralized under a standby letter of credit issued on the insurance entity’s behalf. See Note 10, “Reinsurance, Commitments and Contingencies,” for additional discussion of commitments associated with the insurance program. The Company has been a member of the Captive since 2006 and does not expect any material losses to result from the issuance of the standby letter of credit given the Company’s past performance.
Item 7A. 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.
| 31 |
Item 8. Financial Statements and Supplementary Data
| 32 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Security National Financial Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Future Policy Benefits for Life Insurance Contracts and Amortization of Deferred Policy Acquisition Costs for Insurance Contracts and Value of Business Acquired - Refer to Notes 1 and 21 to the financial statements
Critical Audit Matter Description
The Company’s management sets assumptions in (1) estimating a liability for life insurance policy benefit payments that will be made in the future (future policy benefits for life insurance contracts), (2) determining amortization of deferred policy acquisition costs for insurance contracts and value of business acquired and (3) performing premium deficiency tests. The most significant assumptions include mortality, lapse, and projected investment yield. Assumptions are determined based upon analysis of Company specific experience, industry standards, adjusted for changes in exposure and other relevant factors. Given the inherent uncertainty of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgments regarding the mortality, lapse and projected investment yield assumptions used in the development of future policy benefits for life insurance contracts and the amortization of deferred policy acquisition costs for insurance contracts and value of business acquired, included the following, among others:
| ● | With the assistance of our actuarial specialists, we: |
| ● | evaluated these actuarial assumptions, including testing the accuracy and completeness of the supporting experience studies, | ||
| ● | evaluated management’s judgments regarding these assumptions used in the development of future policy benefits for life insurance contracts and the amortization of deferred policy acquisition costs and value of business acquired, | ||
| ● | evaluated the results of the Company’s annual premium deficiency tests. |
/s/
March 29, 2024
We have served as the Company’s auditor since 2017.
| 34 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Investments: | ||||||||
| Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $ respectively; net of allowance for credit losses of $ 2023 and 2022, respectively) | $ | $ | ||||||
| Equity securities at estimated fair value (cost of $ $ | ||||||||
| Mortgage loans held for investment (net of allowance for credit losses of $ | ||||||||
| Real estate held for investment (net of accumulated depreciation of $ | ||||||||
| Real estate held for sale | ||||||||
| Other investments and policy loans (net of allowances for credit losses of $ | ||||||||
| Accrued investment income | ||||||||
| Total investments | ||||||||
| Cash and cash equivalents | ||||||||
| Loans held for sale at estimated fair value | ||||||||
| Receivables (net of allowance for credit losses of $ $ | ||||||||
| Restricted assets (including $ 2022, respectively, at estimated fair value) | ||||||||
| Cemetery perpetual care trust investments (including $ | ||||||||
| Receivable from reinsurers | ||||||||
| Cemetery land and improvements | ||||||||
| Deferred policy and pre-need contract acquisition costs | ||||||||
| Mortgage servicing rights, net | ||||||||
| Property and equipment, net | ||||||||
| Value of business acquired | ||||||||
| Goodwill | ||||||||
| Other | ||||||||
| Total Assets | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 35 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities | ||||||||
| Future policy benefits and unpaid claims | $ | $ | ||||||
| Unearned premium reserve | ||||||||
| Bank and other loans payable | ||||||||
| Deferred pre-need cemetery and mortuary contract revenues | ||||||||
| Cemetery perpetual care obligation | ||||||||
| Accounts payable | ||||||||
| Other liabilities and accrued expenses | ||||||||
| Income taxes | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred Stock: | ||||||||
| Preferred stock - non-voting-$ par value; shares authorized; issued or outstanding | ||||||||
| Common Stock: | ||||||||
| Class A: common stock - $ par value; shares authorized; shares issued and outstanding as of December 31, 2023 and shares issued and outstanding as of December 31, 2022 | ||||||||
| Class B: non-voting common stock - $ par value; shares authorized; issued or outstanding | ||||||||
| Class C: convertible common stock - $ par value; shares authorized; shares issued and outstanding as of December 31, 2023 and shares issued and outstanding as of December 31, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss, net of taxes | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Treasury stock, at cost - Class A shares and Class C shares as of December 31, 2023; and Class A shares and Class C shares as of December 31, 2022 | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 36 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Earnings
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenues: | ||||||||
| Mortgage fee income | $ | $ | ||||||
| Insurance premiums and other considerations | ||||||||
| Net investment income | ||||||||
| Net mortuary and cemetery sales | ||||||||
| Gains (losses) on investments and other assets | ( | ) | ||||||
| Other | ||||||||
| Total revenues | ||||||||
| Benefits and expenses: | ||||||||
| Death benefits | ||||||||
| Surrenders and other policy benefits | ||||||||
| Increase in future policy benefits | ||||||||
| Amortization of deferred policy and pre-need acquisition costs and value of business acquired | ||||||||
| Selling, general and administrative expenses: | ||||||||
| Commissions | ||||||||
| Personnel | ||||||||
| Advertising | ||||||||
| Rent and rent related | ||||||||
| Depreciation on property and equipment | ||||||||
| Costs related to funding mortgage loans | ||||||||
| Other | ||||||||
| Interest expense | ||||||||
| Cost of goods and services sold – cemeteries and mortuaries | ||||||||
| Total benefits and expenses | ||||||||
| Earnings before income taxes | ||||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net earnings | $ | $ | ||||||
| Net earnings per Class A equivalent common share (1) | $ | $ | ||||||
| Net
earnings per Class A equivalent common share - assuming dilution (1) | $ | $ | ||||||
| Weighted average Class A equivalent common
shares outstanding (1) | ||||||||
| Weighted average Class A equivalent common
shares outstanding-assuming dilution (1) | ||||||||
| (1) |
See accompanying notes to consolidated financial statements.
| 37 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of comprehensive income
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Net earnings | $ | $ | ||||||
| Other comprehensive income: | ||||||||
| Unrealized gains (losses) on fixed maturity securities available for sale | ( | ) | ||||||
| Unrealized gains (losses) on restricted assets | ( | ) | ||||||
| Unrealized gains (losses) on cemetery perpetual care trust investments | ( | ) | ||||||
| Other comprehensive income (loss), before income tax | ( | ) | ||||||
| Income tax benefit (expense) | ( | ) | ||||||
| Other comprehensive income (loss), net of income tax | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
See accompanying notes to consolidated financial statements.
| 38 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
| Class A Common Stock | Class C Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||
| Exercise of stock options | ( | ) | ||||||||||||||||||||||||||
| Sale of treasury stock | ( | ) | ||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock dividends | ( | ) | ||||||||||||||||||||||||||
| Conversion Class C to Class A | ( | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Adoption
of ASU 2016-13 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Stock based compensation expense | ||||||||||||||||||||||||||||
| Exercise of stock options | ( | ) | ||||||||||||||||||||||||||
| Vesting of restricted stock units | ( | ) | ||||||||||||||||||||||||||
| Sale of treasury stock | ||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock dividends | ( | ) | ||||||||||||||||||||||||||
| Conversion Class C to Class A | ( | ) | ||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
| 39 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net earnings | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||
| Losses (gains) on investments and other assets | ( | ) | ||||||
| Depreciation | ||||||||
| Provision for credit losses | ||||||||
| Net amortization of deferred fees and costs, premiums and discounts | ( | ) | ( | ) | ||||
| Provision for deferred income taxes | ( | ) | ( | ) | ||||
| Policy and pre-need acquisition costs deferred | ( | ) | ( | ) | ||||
| Policy and pre-need acquisition costs amortized | ||||||||
| Value of business acquired amortized | ||||||||
| Mortgage servicing rights, additions | ( | ) | ( | ) | ||||
| Amortization of mortgage servicing rights | ||||||||
| Net gains on the sale of mortgage servicing rights | ( | ) | ||||||
| Stock based compensation expense | ||||||||
| Benefit plans funded with treasury stock | ||||||||
| Net change in fair value of loans held for sale | ||||||||
| Originations of loans held for sale | ( | ) | ( | ) | ||||
| Proceeds from sales of loans held for sale | ||||||||
| Net gains on sales of loans held for sale | ( | ) | ( | ) | ||||
| Change in assets and liabilities: | ||||||||
| Land and improvements held for sale | ( | ) | ( | ) | ||||
| Future policy benefits and unpaid claims | ||||||||
| Other operating assets and liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchases of fixed maturity securities | ( | ) | ( | ) | ||||
| Sales, calls and maturities of fixed maturity securities | ||||||||
| Purchase of equity securities | ( | ) | ( | ) | ||||
| Sales of equity securities | ||||||||
| Purchases of restricted assets | ( | ) | ( | ) | ||||
| Sales, calls and maturities of restricted assets | ||||||||
| Purchases of cemetery perpetual care trust investments | ( | ) | ||||||
| Sales, calls and maturities of cemetery perpetual care trust investments | ||||||||
| Mortgage loans held for investment, other investments and policy loans made | ( | ) | ( | ) | ||||
| Payments received for mortgage loans held for investment, other investments and policy loans | ||||||||
| Proceeds from the sale of mortgage servicing rights | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Sales of property and equipment | ||||||||
| Purchases of real estate | ( | ) | ( | ) | ||||
| Sales of real estate | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| 40 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from financing activities: | ||||||||
| Investment contract receipts | ||||||||
| Investment contract withdrawals | ( | ) | ( | ) | ||||
| Proceeds from stock options exercised | ||||||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||
| Repayment of bank loans | ( | ) | ( | ) | ||||
| Proceeds from bank loans | ||||||||
| Net change in warehouse line borrowings for loans held for sale | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net
change in cash, cash equivalents, restricted cash and restricted cash equivalents | ( | ) | ||||||
| Cash,
cash equivalents, restricted cash and restricted cash equivalents at beginning of year | ||||||||
| Cash,
cash equivalents, restricted cash and restricted cash equivalents at end of year | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non Cash Investing and Financing Activities: | ||||||||
| Transfer of loans held for sale to mortgage loans held for investment | $ | $ | ||||||
| Transfer from mortgage loans held for investment to restricted assets | ||||||||
| Transfer from mortgage loans held for investment to cemetery perpetual care trust investments | ||||||||
| Accrued real estate construction costs and retainage | ||||||||
| Mortgage loans held for investment foreclosed into real estate held for investment | ||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | ||||||||
| Right-of-use assets obtained in exchange for finance lease liabilities | ||||||||
Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the consolidated statements of cash flows is presented in the table below:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted assets | ||||||||
| Cemetery perpetual care trust investments | ||||||||
| Total cash, cash equivalents, restricted cash and restricted cash equivalents | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 41 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies
General Overview of Business
Security National Financial Corporation and its wholly owned subsidiaries (the “Company”) operate in three reportable business segments: life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the states located in western, mid-western and southern regions of the United States. The cemetery and mortuary segment of the Company consists of eight mortuaries and five cemeteries in Utah, one cemetery in California, and four mortuaries and one cemetery in New Mexico. The mortgage segment is an approved government and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes, and real estate projects primarily in Florida, Nevada, Texas, and Utah.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Principles of Consolidation
These consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
Management of the Company has made several estimates and assumptions related to the reported amounts of assets and liabilities, reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. 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 the value of loans held for sale; 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.
Investments
The Company’s management determines the appropriate classifications of investments in fixed maturity securities and equity securities at the acquisition date and re-evaluates the classifications at each balance sheet date.
Fixed maturity securities available for sale are carried at estimated fair value. Changes in fair values are reported as unrealized gains or losses and are recorded in accumulated other comprehensive income (loss).
Equity securities are carried at estimated fair value. Changes in fair values are reported as unrealized gains or losses and are recorded through net earnings as a component of gains (losses) on investments and other assets.
| 42 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
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 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 consolidated statements of earnings. Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans of more than 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required.
Real estate held for investment is carried at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties or is adjusted to a new basis for impairment in value, if any. Included, if any, are foreclosed properties. These properties are recorded at the lower of cost or fair value upon foreclosure. Also, included is residential subdivision land development which is carried at cost.
Real estate held for sale is carried at lower of cost or fair value, less estimated costs to sell. Depreciation is not recognized on real estate classified as held for sale.
Other investments and policy loans are carried at the aggregate unpaid balances, less allowances for credit losses.
Accrued investment income refers to earned income from investments that has not yet been received by the Company.
Gains (losses) on investments (except for equity securities carried at fair value through net earnings) arise when investments are sold and are recorded on the trade date and the cost of the securities sold is determined using the specific identification method. The provision (release) for credit losses for fixed maturity securities held for sale are also included in gains (losses) on investments. See Note 2 for more information regarding the Company’s evaluation of credit losses.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Loans Held for Sale
Accounting Standards Codification (“ASC”) No. 825, “Financial Instruments”, allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but it is irrevocable. The Company elected the fair value option for loans held for sale. The Company believes the fair value option most closely aligns the timing of the recognition of gains and costs. These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans. Electing fair value also reduces certain timing differences and better matches changes in the fair value of these assets with changes in the fair value of the related derivatives used for these assets. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding loans held for sale.
| 43 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Mortgage Fee Income
Mortgage fee income consists of origination fees, processing fees, interest income and other income related to the origination and sale of mortgage loans held for sale. All revenues and costs are recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding loans held for sale.
The Company, through its mortgage subsidiaries, sells mortgage loans to third-party investors without recourse unless defects are identified in the representations and warranties made at loan sale. It may be required, however, to repurchase a loan or pay a fee instead of repurchasing under certain events, which include the following:
| ● | Failure to deliver original documents specified by the investor, | |
| ● | The existence of misrepresentation or fraud in the origination of the loan, | |
| ● | The loan becomes delinquent due to nonpayment during the first several months after it is sold, | |
| ● | Early pay-off of a loan, as defined by the agreements, | |
| ● | Excessive time to settle a loan, | |
| ● | Investor declines purchase, and | |
| ● | Discontinued product and expired commitment. |
Loan purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company.
It is the Company’s policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month period and to pursue efforts to enforce loan purchase commitments from third-party investors concerning the loans. The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives. Remedial methods include the following:
| ● | Research reasons for rejection, | |
| ● | Provide additional documents, | |
| ● | Request investor exceptions, | |
| ● | Appeal rejection decision to purchase committee, and | |
| ● | Commit to secondary investors. |
Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month period, the loans are repurchased and transferred to the long-term investment portfolio at the lower of cost or fair value and previously recorded mortgage fee income that was to be received from a third-party investor is written off against the loan loss reserve.
Determining Fair Value
The cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Fair value is often difficult to determine and may contain significant unobservable inputs, but is based on the following:
| ● | For loans that are committed, the Company uses the commitment price. | |
| ● | For loans that are non-committed that have an active market, the Company uses the market price. | |
| ● | For loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar product. |
| 44 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
| ● | For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and the loan interest rate. |
The appraised value of the real estate underlying the original mortgage loan adds support to the Company’s determination of fair value because if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan, thus minimizing credit losses.
Most loans originated are sold to third-party investors. The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans held for sale.
Loan Loss Reserve
The loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on loans sold. The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities.
Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale relating to any guarantee or recourse provisions. The Company accrues a monthly allowance for indemnification losses to investors based on total production. This estimate is based on the Company’s historical experience and is included as a component of mortgage fee income. Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and administrative expenses as a component of provision for loan loss reserve. The estimated liability for indemnification losses is included in other liabilities and accrued expenses.
The loan loss reserve analysis involves mortgage loans that have been sold to third-party investors, which were believed to have met investor underwriting guidelines at the time of sale, where the Company has received a demand from the investor. There are generally three types of demands: make whole, repurchase, or indemnification. These types of demands are further described as follows:
Make whole demand — A make whole demand occurs when an investor forecloses on a property and then sells the property. The make whole amount is calculated as the difference between the original unpaid principal balance, payments received, accrued interest and fees, less the sale proceeds.
Repurchase demand — A repurchase demand usually occurs when there is a significant payment default, error in underwriting or detected loan fraud.
Indemnification demand — On certain loans the Company has negotiated a set fee that is to be paid in lieu of repurchase. The fee varies by investor and by loan product type.
The Company believes the allowance for loan losses and the loan loss reserve represent probable loan losses incurred as of the balance sheet date.
Additional information related to the Loan Loss Reserve is included in Note 3.
| 45 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Restricted Assets
Restricted assets are assets held in a trust account for future mortuary services and merchandise. Restricted assets also include 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 funded its medical benefit safe-harbor limit based on the qualified direct costs and has included this amount as a component of restricted cash. Additional information related to restricted assets is included in Notes 2 and 8 to Consolidated Financial Statements.
Cemetery Perpetual Care Trust Investments
Cemetery endowment care trusts have been set up for five of the seven cemeteries owned by the Company. Under endowment care arrangements a portion of the price for each lot sold is withheld and invested in a portfolio of investments like those described in the prior paragraph. The earnings stream from the investments is designed to fund future maintenance and upkeep of the cemetery. Additional information related to cemetery perpetual care trust investments is included in Notes 2 and 8 to Consolidated Financial Statements.
Cemetery Land and Improvements
The development of a cemetery involves not only the initial acquisition of raw land but also the installation of roads, water lines, landscaping, and other costs to establish a marketable cemetery lot. The costs of developing the cemetery are shown as an asset on the balance sheet. The amount on the balance sheet is reduced by the total cost assigned to the development of a particular lot when the criterion for recognizing a sale of that lot is met.
Deferred Policy Acquisition Costs and Value of Business Acquired
Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs (“DAC”) for traditional life insurance are amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality, and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered.
When accounting for DAC, the Company considers internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights, or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract are accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract are written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract are accounted for as a continuation of the replaced contract.
Value of business acquired (“VOBA”) is the present value of estimated future profits of the acquired business and is amortized like deferred policy acquisition costs.
| 46 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Premium Deficiency and Loss Recognition Testing
At least annually, the Company tests the adequacy of the net benefit reserves (liability for future policy benefits, net of DAC and VOBA) recorded for life insurance and annuity products. The Company tests for recoverability by using the Company’s current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns. These tests evaluate whether the present value of future contract-related cash flows will support the capitalized DAC and VOBA assets. These cash flows consist primarily of premium income, less benefits, and expenses. If the current contract liabilities plus the present value of future premiums is greater than the sum of the present values of future policy benefits, commissions, and expenses plus the current DAC and VOBA less unearned premium reserve balances, then the capitalized assets are deemed recoverable. The present values are calculated using the best estimate of the after-tax net investment earned rate.
Mortgage Servicing Rights
Mortgage Servicing Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents) when mortgage loans are sold. Under these contracts, the Company is obligated to retain and provide loan servicing functions on loans sold, in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition of real estate owned and property dispositions.
The
total residential mortgage loans serviced for others consist primarily of agency conforming fixed-rate mortgage loans. The value of MSRs
is derived from the net cash flows associated with the servicing contracts. The Company receives a servicing fee of generally about
The
Company’s subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed
by mortgage loans with an initial term of
Interest rate risk, prepayment risk, and default risk are inherent risks in MSR valuation. Interest rate changes largely drive prepayment rates. Refinance activity generally increases as rates decline. A significant decrease in rates beyond expectation could cause a decline in the value of the MSR. On the contrary, if rates increase borrowers are less likely to refinance or prepay their mortgage, which extends the duration of the loan and MSR values are likely to rise. Because of these risks, discount rates and prepayment speeds are used to estimate the fair value.
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.
| 47 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
The Company periodically reviews the various loan strata to determine whether the value of the MSRs in each stratum is impaired and likely to recover. 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.
Property and Equipment
Property
and equipment are recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives
of the assets which range from to
Long-lived Assets
Long-lived assets to be held and used, including property and equipment and real estate held for investment, are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset, and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.
Derivative Instruments
Mortgage Banking Derivatives
Loan Commitments
The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded. Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded, or the loan application is denied or withdrawn within the terms of the commitment is driven by several factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment.
In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant’s committed rate. The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker, or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application approval status. The Company has developed fallout estimates using historical data that consider all the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect the most current data.
The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. 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.
| 48 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (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 consolidated balance sheets.
Call and Put Option 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.
Allowances for Credit Losses
The Company records allowances for current expected credit losses from fixed maturity securities available for sale, mortgage loans held for investment, other investments, and receivables in accordance with GAAP. The allowances for credit losses are valuation accounts that are reported as a reduction of the financial asset’s cost basis and are measured on a pool basis when similar risk characteristics exist. The Company estimates allowances for credit losses using relevant available information from both internal and external sources. The Company considers its historical loss experience, analyzes current market conditions and forecasts and uses third-party assistance to arrive at current expected credit losses. Amounts are written off against the allowance for credit losses when determined to be uncollectible. See below under Recent Accounting Pronouncements regarding the adoption of ASU 2016-13. See Notes 2 and 4 to Consolidated Financial Statements regarding the Company’s evaluation of allowances for credit losses.
Future Policy Benefits and Unpaid Claims
Future
policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment
yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries’ experience, modified
as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are,
for some plans, graded to equal statutory values or cash values at or prior to maturity, which are deemed a reasonable equivalent for
GAAP. The range of assumed interest rates for all traditional life insurance policy reserves was
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 more than related policy account balances. Interest credit rates for interest-sensitive insurance products ranged from
The Company records an unpaid claims liability for claims in the course of settlement equal to the death benefit amount less any reinsurance recoverable amount for claims reported. There is also an unpaid claims liability for claims incurred but not reported. This liability is based on the historical experience of the net amount of claims that were reported in reporting periods subsequent to the reporting period when claims were incurred.
| 49 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Participating Insurance
Participating
business constituted
Recognition of Insurance Premiums and Other Considerations
Premiums and other consideration for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies) are recognized as revenues when due from policyholders. Premiums and other consideration for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) are recognized when earned and consist of amounts assessed against policyholder account balances during the period for policy administration charges and surrender charges.
Reinsurance
The
Company follows the procedure of reinsuring risks of more than $
The
Company entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed
Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly.
Pre-need Sales and Costs
Pre-need contract sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets are deferred until the performance obligations are fulfilled (services are performed or the caskets are delivered).
Sales of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sale of cemetery interment rights are deferred until 10% of the sales price has been collected.
Pre-need contract sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sale of pre-need cemetery merchandise is deferred until the merchandise is delivered to the Company.
Pre-need contract sales of cemetery services (primarily merchandise delivery, installation fees and burial opening and closing fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed.
Prearranged funeral and pre-need cemetery customer acquisition costs - costs incurred related to obtaining new pre-need contract cemetery and prearranged funeral services, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral services, are deferred until the merchandise is delivered or services are performed.
| 50 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured and there are no significant performance obligations remaining.
The Company, through its cemetery and mortuary operations, provides guaranteed funeral arrangements wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal.
Goodwill
Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values with the excess purchase price recognized as goodwill. The Company evaluates annually or when changes in circumstances warrant the recoverability of goodwill and if there is a decrease in value, the related impairment is recognized as a charge against income.
Other Intangibles
Other intangibles are recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or liability. The Company engages a third-party valuation firm to analyze the value of the intangible assets that result from significant acquisitions. The value of the intangible assets that result from these acquisitions are included in Other Assets and are determined using the income approach, relying on a relief from the royalty method.
Income Taxes
Income taxes include taxes currently payable plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the temporary differences in the financial reporting basis and tax basis of assets and liabilities and operating loss carry-forwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax penalties are included as a component of income tax expense.
| 51 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
The Company computes earnings per share, which requires a presentation of basic and diluted earnings per share. Basic earnings per equivalent Class A common share are computed by dividing net earnings by the weighted-average number of Class A common shares outstanding during each year presented, after the effect of the assumed conversion of Class C common stock to Class A common stock. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the year used to compute basic earnings per share plus dilutive potential incremental shares by application of the treasury stock method. Basic and diluted earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.
The cost of employee services received in exchange for an award of equity instruments is recognized in the financial statements and is measured based on the fair value on the grant date of the award. The fair value of stock options is calculated using the Black Scholes Option Pricing Model. Stock option compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award and is included in personnel expenses on the consolidated statements of earnings.
Concentration of Credit Risk
For a description of the concentration risk regarding available for sale debt securities, mortgage loans held for investment and real estate held for investment, refer to Note 2, and for receivables from reinsurers, refer to Note 10 of the Notes to Consolidated Financial Statements.
Advertising
The Company expenses advertising costs as incurred.
| 52 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
1) Significant Accounting Policies (Continued)
Recent Accounting Pronouncements
Accounting Standards Adopted in 2023
ASU
No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” — Issued in September 2016, ASU 2016-13
amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans held for investment and held
to maturity debt securities) and available for sale debt securities. For assets held at an amortized cost basis, Topic 326 eliminates
the probable initial recognition threshold and, instead, requires an entity to reflect its current estimate of all expected credit losses.
The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present
the net amount expected to be collected. For available for sale debt securities Topic 326 requires that credit losses be presented as
an allowance rather than as a write-down. The Company adopted this standard on January 1, 2023, and after a review of the affected assets,
decreased the opening balance of retained earnings in stockholders’ equity by $
| Amount | ||||
| Mortgage loans held for investment: | ||||
| Residential | $ | ( | ) | |
| Residential construction | ||||
| Commercial | ||||
| Total | ||||
| Restricted assets - mortgage loans held for investment: | ||||
| Residential construction | ||||
| Cemetery perpetual care trust investments - mortgage loans held for investment: | ||||
| Residential construction | ||||
| Grand Total | ||||
Accounting Standards Issued But Not Yet Adopted
ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” — Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The standard is aimed at improving the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplifying amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that requires the standard to be adopted by the Company commencing on January 1, 2025. The Company is nearing completion of its analysis and implementation of the new standard, including the identification of cohorts, system updates, and design. The Company has engaged its team of actuaries, accountants, and systems specialists and consulted external system providers as part of the implementation. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.
ASU No. 2023-09: “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” — Issued in December 2023, ASU 2023-09 requires that public business entities, on an annual basis: (i) disclose specific categories in the rate reconciliation and (ii) provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments in this update require that all entities disclose on an annual basis the following information about income taxes paid: (i) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and (ii) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). ASU 2023-09 is effective for the Company beginning on January 1, 2025. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.
ASU No. 2023-07: “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” — Issued in November 2023, ASU 2023-07 requires enhanced disclosures about significant segment expenses. The key amendments include: (i) disclosures on significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss on an annual and interim basis; (ii) disclosures on an amount for other segment items by reportable segment and a description of its composition on an annual and interim basis. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss; (iii) providing all annual disclosures on a reportable segment’s profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting in interim periods; and (iv) specifying the title and position of the CODM. ASU 2023-07 is effective for the Company for annual periods beginning January 1, 2024 and interim periods beginning January 1, 2025. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.
The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position.
| 53 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments
The Company’s investments as of December 31, 2023 are summarized as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses (1) | Allowance for Credit Losses | Estimated Fair Value | ||||||||||||||||
| December 31, 2023: | ||||||||||||||||||||
| Fixed maturity securities, available for sale, at estimated fair value: | ||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||||||
| Corporate securities including public utilities | ( | ) | ( | ) | ||||||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||
| Redeemable preferred stock | ||||||||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||||||
| Common stock: | ||||||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||||||
| Residential | $ | |||||||||||||||||||
| Residential construction | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Less: Unamortized deferred loan fees, net | ( | ) | ||||||||||||||||||
| Less: Allowance for credit losses | ( | ) | ||||||||||||||||||
| Less: Net discounts | ( | ) | ||||||||||||||||||
| Total mortgage loans held for investment | $ | |||||||||||||||||||
| Real estate held for investment - net of accumulated depreciation: | ||||||||||||||||||||
| Residential | $ | |||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Total real estate held for investment | $ | |||||||||||||||||||
| Real estate held for sale: | ||||||||||||||||||||
| Residential | $ | |||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Total real estate held for sale | $ | |||||||||||||||||||
| Other investments and policy loans at amortized cost: | ||||||||||||||||||||
| Policy loans | $ | |||||||||||||||||||
| Insurance assignments | ||||||||||||||||||||
| Federal Home Loan Bank stock (2) | ||||||||||||||||||||
| Other investments | ||||||||||||||||||||
| Less: Allowance for credit losses | ( | ) | ||||||||||||||||||
| Total policy loans and other investments | $ | |||||||||||||||||||
| Accrued investment income | $ | |||||||||||||||||||
| Total investments | $ | |||||||||||||||||||
| (1) |
| (2) |
| 54 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) 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 | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Corporate securities including public utilities | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Redeemable preferred stock | ||||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||
| Common stock: | ||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||
| Residential | $ | |||||||||||||||
| Residential construction | ||||||||||||||||
| Commercial | ||||||||||||||||
| Less: Unamortized deferred loan fees, net | ( | ) | ||||||||||||||
| Less: Allowance for loan losses | ( | ) | ||||||||||||||
| Less: Net discounts | ( | ) | ||||||||||||||
| Total mortgage loans held for investment | $ | |||||||||||||||
| Real estate held for investment - net of accumulated depreciation: | ||||||||||||||||
| Residential | $ | |||||||||||||||
| Commercial | ||||||||||||||||
| Total real estate held for investment | $ | |||||||||||||||
| Real estate held for sale: | ||||||||||||||||
| Residential | $ | |||||||||||||||
| Commercial | ||||||||||||||||
| Total real estate held for sale | $ | |||||||||||||||
| Other investments and policy loans at amortized cost: | ||||||||||||||||
| Policy loans | $ | |||||||||||||||
| Insurance assignments | ||||||||||||||||
| Federal Home Loan Bank stock (1) | ||||||||||||||||
| Other investments | ||||||||||||||||
| Less: Allowance for doubtful accounts | ( | ) | ||||||||||||||
| Total policy loans and other investments | $ | |||||||||||||||
| Accrued investment income | $ | |||||||||||||||
| Total investments | $ | |||||||||||||||
| (1) |
| 55 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
There were no investments, aggregated by issuer, of more than 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) as of December 31, 2023, other than investments issued or guaranteed by the United States Government.
Fixed Maturity Securities
The table below summarizes unrealized losses on fixed maturities securities available for sale that were carried at estimated fair value as of December 31, 2023 and 2022. 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 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 December 31, 2023 | ||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| Corporate securities including public utilities | ||||||||||||||||||||||||
| Mortgage and other asset-backed securities | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| Corporate securities including public utilities | ||||||||||||||||||||||||
| Mortgage and other asset-backed securities | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Relevant
holdings were comprised of 606 securities with fair values aggregating
| 56 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Evaluation of Allowance for Credit Losses
See Note 1 regarding the adoption of ASU 2016-13.
On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”) and other industry rating agencies. Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss unless current market data or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited to, historical values, interest payment history, projected earnings, and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings.
Where the decline in fair value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and the Company anticipates recovery of all contractual or expected cash flows, the Company does not consider these securities to have credit loss because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before a recovery of amortized cost, which may be at maturity.
If the Company intends to sell a fixed maturity security or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, a credit loss has occurred and the difference between the amortized cost and the fair value that relates to the expected credit loss is recognized as a loss in earnings, included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings.
If the Company does not intend to sell a debt security and it is less likely than not that the Company will be required to sell the debt security but the Company also does not expect to recover the entire amortized cost basis of the security, a credit loss is recognized in earnings for the amount of the expected credit loss with a corresponding allowance for credit losses as a contra-asset account. The credit loss is included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. The recognized credit loss is limited to the total unrealized loss on the security due to a change in credit.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if the Company intends to sell a security or when it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost.
The Company does not measure a credit loss allowance on accrued interest receivable, included in accrued investment income on the condensed consolidated balance sheets, as the Company writes off any accrued interest receivable balance to net investment income in a timely manner (after 90 days) when the Company has concerns regarding collectability.
| 57 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Credit Quality Indicators
The
NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality).
The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered investment
grade while the NAIC Class 3 through 6 designations are considered non-investment grade. Based on the NAIC designations, the Company
had
| December 31, 2023 | December 31, 2022 | ||||||||||||||||
| NAIC Designation | Amortized
Cost | Estimated
Fair Value | Amortized
Cost | Estimated
Fair Value | |||||||||||||
| 1 | $ | $ | $ | $ | |||||||||||||
| 2 | |||||||||||||||||
| 3 | |||||||||||||||||
| 4 | |||||||||||||||||
| 5 | |||||||||||||||||
| 6 | |||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||
The following tables presents a roll forward of the Company’s allowance for credit losses on fixed maturity securities available for sale:
| Year Ended December 31, 2023 | ||||||||||||||||||||
| U.S. Treasury Securities And Obligations of U.S. Government Agencies | Obligations of states and political subdivisions | Corporate securities including public utilities | Mortgage-backed securities | Total | ||||||||||||||||
| Beginning balance - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Additions for credit losses not previously recorded | ||||||||||||||||||||
| 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 - December 31, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| 58 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) 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 | $ | |||
| Additions for credit impairments recognized on: | ||||
| Securities not previously impaired | ||||
| Securities previously impaired | ||||
| Reductions for credit impairments previously recognized on: | ||||
| Securities that matured or were sold during the period (realized) | ( | ) | ||
| Securities due to an increase in expected cash flows | ||||
| Balance of credit-related OTTI at December 31 | $ | |||
The following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at December 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 | ||||||||
| Due in 5-10 years | ||||||||
| Due in more than 10 years | ||||||||
| Mortgage-backed securities | ||||||||
| Redeemable preferred stock | ||||||||
| Total | $ | $ | ||||||
Information regarding sales of fixed maturity securities available for sale is presented as follows.
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Proceeds from sales | $ | $ | ||||||
| Gross realized gains | ||||||||
| Gross realized losses | ( | ) | ( | ) | ||||
| 59 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Assets on Deposit, Held in Trust, and Pledged as Collateral
Assets on deposit with life insurance regulatory authorities as required by law were as follows:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities available
for sale at estimated fair value | $ | $ | ||||||
| Other investments | ||||||||
| Cash and cash equivalents | ||||||||
| Total assets on deposit | $ | $ | ||||||
Assets held in trust related to third-party reinsurance agreements were as follows:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities available
for sale at estimated fair value | $ | $ | ||||||
| Cash and cash equivalents | ||||||||
| Total assets on deposit | $ | $ | ||||||
The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). Assets pledged as collateral with the FHLB are presented below. These pledged securities are used as collateral for any FHLB cash advances. See Note 7 of the Notes to the Consolidated Financial Statements for more information about the FHLB.
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity
securities available for sale at estimated fair value | $ | $ | ||||||
| Total assets pledged as collateral | $ | $ | ||||||
Real Estate Held for Investment and Held for Sale
The Company strategically deploys resources into real estate assets to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business segments in the form of acquisition, development, and mortgage foreclosures. The Company reports real estate held for investment and held for sale pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
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.
| 60 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are in regions expected to have high growth in employment and population and that provide operational efficiencies.
The Company currently owns and operates nine commercial properties in three states. These properties include office buildings, flex office space, and the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company uses bank debt in strategic cases, primarily where it is anticipated to improve yields, or facilitate the acquisition of higher quality assets or asset class diversification.
The
aggregated net book value of commercial real estate serving as collateral for bank loans was $
During 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 investments and other assets on the consolidated statements of earnings.
During
2023 and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $
The Company’s commercial real estate held for investment is summarized as follows:
| Net Book Value | Total Square Footage | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Utah (1) | $ | $ | ||||||||||||||
| Louisiana | ||||||||||||||||
| Mississippi (2) | ||||||||||||||||
| $ | $ | |||||||||||||||
| (1) |
| (2) |
Operating
leases arise from the leasing of the Company’s commercial real estate held for investment. Initial lease terms generally range
from to
| 61 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The following is a maturity analysis of the annual undiscounted cash flows of the operating lease payments expected to be received.
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
| Net Book Value | Total Square Footage | ||||||||||||||||
| December 31, | December 31, | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Mississippi (1) | $ | $ | |||||||||||||||
| $ | $ | ||||||||||||||||
| (1) |
These properties are 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 because of loan foreclosures. The Company has the option to sell these properties or to continue to hold them for expected cash flow and price appreciation.
The Company also invests in residential subdivision development.
The Company established Security National Real Estate Services (“SNRE”) to manage its residential property portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the Company’s entire residential property portfolio.
During
2023 and 2022, the Company recorded impairment losses on residential real estate held for sale of and $
During
2023 and 2022, the Company recorded depreciation expense on residential real estate held for investment of $
| 62 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The Company’s residential real estate held for investment is summarized as follows:
| Net Book Value | |||||||||
| December 31, | |||||||||
| 2023 | 2022 | ||||||||
| Utah (1) | $ | $ | |||||||
| $ | $ | ||||||||
| (1) |
The following table presents additional information regarding the Company’s residential subdivision development in Utah.
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Lots available for sale | ||||||||
| Lots to be developed | ||||||||
| Ending Balance | $ | $ | ||||||
The Company’s residential real estate held for sale is summarized as follows:
| Net Book Value | |||||||||
| December 31, | |||||||||
| 2023 | 2022 | ||||||||
| Utah | $ | $ | (1) | ||||||
| $ | $ | ||||||||
| (1) |
The
net book value of foreclosed residential real estate included in residential real estate held for investment or sale was and $
| 63 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Real Estate Owned and Occupied by the Company
The primary business units of the Company occupy a portion of the commercial real estate owned by the Company. As of December 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 | % | ||||||||
| 1044 River Oaks Dr., Flowood, MS (1) (3) | Life Insurance Operations | % | ||||||||
| 1818 Marshall Street, Shreveport, LA (2) | Life Insurance Operations | % | ||||||||
| 909 Foisy Street, Alexandria, LA (2) (4) | Life Insurance Sales | % | ||||||||
| 812 Sheppard Street, Minden, LA (2) (5) | Life Insurance Sales | % | ||||||||
| 1550 N 3rd Street, Jena, LA (2) (3) | Life Insurance Sales | % | ||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| (5) |
Mortgage Loans Held for Investment
The Company reports mortgage loans held for investment pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
Concentrations
of credit risk arise when several mortgage loan debtors have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan
portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real
estate exposures, a substantial portion of the relevant debtors’ ability to honor obligations is dependent upon the economic stability
of the geographic region in which the debtors do business or are employed. As of December 31, 2023, the Company had
Evaluation of Allowance for Credit Losses
See Note 1 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.
| 64 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Once
a mortgage loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and reverse any
interest income that had been accrued. Given this policy, the Company does not measure a credit loss allowance on accrued interest receivable.
Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received
for mortgage loans on a non-accrual status are recognized when received. The interest income recognized from payments received for mortgage
loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued
on these loans totaled approximately $
The Company measures expected credit losses based on the fair value of the collateral when the Company determines that foreclosure is probable. When a mortgage loan becomes delinquent, the Company proceeds to foreclose and all expenses for foreclosure are expensed as incurred. Once foreclosed, the property is classified as real estate held for investment or held for sale.
To determine the allowance for credit losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows:
Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondarily on the borrower’s (or guarantor’s) ability to repay.
Commercial loans are evaluated for credit loss by analyzing common metrics that are predictors for future credit losses such as debt service coverage ratio (“DSCR”), loan to value (“LTV”), local market conditions, borrower quality, and underlying collateral. The fair value of the underlying collateral is based on a third-party appraisal of the property at origination of the loan. The fair value is assessed if the loan becomes 90 days delinquent. The Company uses these metrics to pool similar loans. The allowance for credit losses is based on estimates, historical experience, probability of loss, value of the underlying collateral, and other factors that affect the collectability of the loan. The Company applies a future loss factor to the outstanding balance of each group to arrive at the allowance for credit losses.
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.
Residential loans are evaluated for credit loss by using relevant available information from both internal and external sources. Among other things, the Company uses its historical delinquency information and considers current and forecasted economic conditions. External sources include a monthly analysis of its residential portfolio by a third party. 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. Analyzing the information from the various sources allows the Company to arrive at the allowance for credit losses.
Residential construction (including land acquisition and development) – These loans are underwritten in accordance with the Company’s underwriting policies, which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations, and factor in estimates of the value of construction projects upon completion. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.
Additionally, land acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These loans are of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.
| 65 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Residential construction mortgage loans are evaluated for credit loss by considering historical activity and current housing market trends to arrive at a per loan basis point allowance that is recognized at loan origination and for subsequent draws. The per loan basis point is reviewed at least annually or as loan losses or market trends require.
The following table presents a roll forward of the allowance for credit losses as of the dates indicated:
| Commercial | Residential | Residential Construction | Total | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||
| Beginning balance - January 1, 2023 | $ | $ | $ | $ | ||||||||||||
| Adoption of ASU 2016-13 (1) | ( | ) | ||||||||||||||
| Change in provision for credit losses (2) | ( | ) | ||||||||||||||
| Charge-offs | ||||||||||||||||
| Ending balance - December 31, 2023 | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||
| Beginning balance - January 1, 2022 | $ | $ | $ | $ | ||||||||||||
| Change in provision for credit losses (2) | ||||||||||||||||
| Charge-offs | ||||||||||||||||
| Ending balance - December 31, 2022 | $ | $ | $ | $ | ||||||||||||
| (1) |
| (2) |
| 66 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The following table presents the aging of mortgage loans held for investment by loan type.
| Commercial | Residential | Residential Construction | Total | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| 30-59 days past due | $ | $ | $ | $ | ||||||||||||
| 60-89 days past due | ||||||||||||||||
| Over 90 days past due (1) | ||||||||||||||||
| In process of foreclosure (1) | ||||||||||||||||
| Total past due | ||||||||||||||||
| Current | ||||||||||||||||
| Total mortgage loans | ||||||||||||||||
| Allowance for credit losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unamortized deferred loan fees, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unamortized discounts, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net mortgage loans held for investment | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| 30-59 days past due | $ | $ | $ | $ | ||||||||||||
| 60-89 days past due | ||||||||||||||||
| Over 90 days past due (1) | ||||||||||||||||
| In process of foreclosure (1) | ||||||||||||||||
| Total past due | ||||||||||||||||
| Current | ||||||||||||||||
| Total mortgage loans | ||||||||||||||||
| Allowance for credit losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unamortized deferred loan fees, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unamortized discounts, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net mortgage loans held for investment | $ | $ | $ | $ | ||||||||||||
| (1) |
| 67 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Credit Quality Indicators
The Company evaluates and monitors the credit quality of its commercial loans by analyzing LTV and DSCR. Monitoring a commercial mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.
The aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:
| Credit Quality Indicator | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | % of Total | ||||||||||||||||||||||||
| LTV: | ||||||||||||||||||||||||||||||||
| Less than 65% | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| 65% to 80% | % | |||||||||||||||||||||||||||||||
| Greater than 80% | % | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| DSCR | ||||||||||||||||||||||||||||||||
| >1.20x | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| 1.00x - 1.20x | % | |||||||||||||||||||||||||||||||
| <1.00x | (1) | % | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| (1) |
| 68 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The Company evaluates and monitors the credit quality of its residential mortgage loans by analyzing LTV and loan performance. The Company defines non-performing mortgage loans as loans more than 90 days past due and on a non-accrual status. Monitoring a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.
The aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:
| Credit Quality Indicator | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Total | % of Total | ||||||||||||||||||||||||
| Performance Indicators: | ||||||||||||||||||||||||||||||||
| Performing | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| Non-performing (1) | % | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| (1) |
| LTV: | ||||||||||||||||||||||||||||||||
| Less than 65% | $ | $ | $ | $ | $ | $ | $ | % | ||||||||||||||||||||||||
| 65% to 80% | % | |||||||||||||||||||||||||||||||
| Greater than 80% | % | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | % |
| 69 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
The company evaluates and monitors the credit quality of its residential construction loans (including land acquisition and development loans) by analyzing LTV and loan performance. Monitoring a residential construction mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.
The aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:
| Credit Quality Indicator | 2023 | 2022 | 2021 | Total | % of Total | |||||||||||||||
| Performance Indicators: | ||||||||||||||||||||
| Performing | $ | $ | $ | $ | % | |||||||||||||||
| Non-performing | % | |||||||||||||||||||
| Total | $ | $ | $ | $ | % | |||||||||||||||
| LTV: | ||||||||||||||||||||
| Less than 65% | $ | $ | $ | $ | % | |||||||||||||||
| 65% to 80% | % | |||||||||||||||||||
| Greater than 80% | % | |||||||||||||||||||
| Total | $ | $ | $ | $ | % | |||||||||||||||
Principal Amounts Due
The following table presents the amortized cost and contractual payments on mortgage loans held for investment by category as of December 31, 2023. Expected principal payments may differ from contractual obligations because certain borrowers may elect to pay off mortgage obligations with or without early payment penalties.
| Principal | Principal | Principal | ||||||||||||||
| Amounts | Amounts | Amounts | ||||||||||||||
| Due in | Due in | Due | ||||||||||||||
| Total | 1 Year | 2-5 Years | Thereafter | |||||||||||||
| Residential | $ | $ | $ | $ | ||||||||||||
| Residential Construction | ||||||||||||||||
| Commercial | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 70 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Insurance Assignments
The following table presents the aging of insurance assignments, included in other investments and policy loans on the condensed consolidated balance sheets:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| 30-59 days past due | $ | $ | ||||||
| 60-89 days past due | ||||||||
| Over 90 days past due | ||||||||
| Total past due | ||||||||
| Current | ||||||||
| Total insurance assignments | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Net insurance assignments | $ | $ | ||||||
The Company records an allowance for credit losses when the insurance assignment is funded. Once an insurance assignment moves to 90 days or legal proceedings, it is monitored for write-off and collectability, and any adjustments to the allowance are recorded at that time. See Note 1 regarding the adoption of ASU 2016-13.
The following table presents a roll forward of the allowance for credit losses for insurance assignments:
| Allowance | ||||
| Beginning balance - January 1, 2023 | $ | |||
| Change in provision for credit losses (1) | ||||
| Charge-offs | ( | ) | ||
| Ending balance - December 31, 2023 | $ | |||
| Beginning balance - January 1, 2022 | $ | |||
| Change in provision for credit losses (1) | ||||
| Charge-offs | ( | ) | ||
| Ending balance - December 31, 2022 | $ | |||
| (1) |
| 71 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Investment Related Earnings
The following table presents the net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities from investments and other assets.
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities available for sale: | ||||||||
| Gross realized gains | $ | $ | ||||||
| Gross realized losses | ( | ) | ( | ) | ||||
| Net credit loss (provision) release | ( | ) | ||||||
| Equity securities: | ||||||||
| Gains (losses) on securities sold | ( | ) | ||||||
| Unrealized gains (losses)
on securities held at the end of the period | ( | ) | ||||||
| Real estate held for investment and sale: | ||||||||
| Gross realized gains | ||||||||
| Gross realized losses | ( | ) | ( | ) | ||||
| Other assets, including call and put option derivatives: | ||||||||
| Gross realized gains | ||||||||
| Gross realized losses | ( | ) | ||||||
| Total | $ | $ | ( | ) | ||||
The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method.
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 $
| 72 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
2) Investments (Continued)
Major categories of net investment income were as follows:
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities available for sale | $ | $ | ||||||
| Equity securities | ||||||||
| Mortgage loans held for investment | ||||||||
| Real estate held for investment and sale | ||||||||
| Policy loans | ||||||||
| Insurance assignments | ||||||||
| Other investments | ||||||||
| Cash and cash equivalents | ||||||||
| Gross investment income | ||||||||
| Investment expenses | ( | ) | ( | ) | ||||
| Net investment income | $ | $ | ||||||
Net
investment income includes income earned by the restricted assets and cemetery perpetual care trust investments of the cemeteries and
mortuaries of $
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:
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Fixed maturity securities available for sale | $ | $ | ||||||
| Equity securities | ||||||||
| Mortgage loans held for investment | ||||||||
| Real estate held for investment | ||||||||
| Policy Loans | ||||||||
| Cash and cash equivalents | ||||||||
| Total accrued investment income | $ | $ | ||||||
3) Loans Held for Sale
The
Company’s loans held for sale portfolio is valued using the fair value option. Changes in the fair value of the loans are included
in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s
policy on recognition of mortgage loan interest income and is included in mortgage fee income on the consolidated statement of earnings.
Included in loans held for sale are loans in the process of foreclosure with an aggregate unpaid principal balance of $
| 73 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
3) Loans Held for Sale (Continued)
The following table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale.
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Aggregate fair value | $ | $ | ||||||
| Unpaid principal balance | ||||||||
| Unrealized loss | ( | ) | ( | ) | ||||
Mortgage Fee Income
Mortgage fee income consists of origination fees, processing fees, interest income and other income related to the origination and sale of mortgage loans held for sale.
Major categories of mortgage fee income for loans held for sale are summarized as follows:
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Loan fees | $ | $ | ||||||
| Interest income | ||||||||
| Secondary gains | (1) | |||||||
| Change in fair value of loan commitments | ( | ) | ( | ) | ||||
| Change in fair value of loans held for sale | ( | ) | ( | ) | ||||
| Provision for loan loss reserve | ( | ) | ( | ) | ||||
| Mortgage fee income | $ | $ | ||||||
| (1) |
| 74 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
3) Loans Held for Sale (Continued)
Loan Loss Reserve
Repurchase demands from third party investors that correspond to mortgage loans previously held for sale and sold are reviewed and relevant data is captured so that an estimated future loss can be calculated. The key factors that are used in the estimated future loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company can resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.
The loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Beginning Balance | $ | $ | ||||||
| Provision for current loan originations (1) | ||||||||
| Charge-offs, net of recaptured amounts | ( | ) | ( | ) | ||||
| Ending Balance | $ | $ | ||||||
| (1) |
The
Company maintains reserves for estimated losses on current production volumes. For 2023, $
| 75 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
4) Receivables
Receivables consist of the following:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Contracts with customers | $ | $ | ||||||
| Receivables from sales agents | ||||||||
| Other | ||||||||
| Total receivables | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Net receivables | $ | $ | ||||||
The Company records an allowance for credit losses for its receivables in accordance with GAAP. See Note 1 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 | $ | |||
| Change in provision for credit losses (1) | ( | ) | ||
| Charge-offs | ( | ) | ||
| Ending balance - December 31, 2023 | $ | |||
| Beginning balance - January 1, 2022 | $ | |||
| Change in provision for credit losses (1) | ||||
| Charge-offs | ( | ) | ||
| Ending balance - December 31, 2022 | $ | |||
| (1) |
| 76 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
5) Value of Business Acquired, Goodwill and Other Intangible Assets
Information regarding value of business acquired was as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Balance at beginning of year | $ | $ | ||||||
| Value of business acquired | ||||||||
| Imputed interest at | (1) | (1) | ||||||
| Amortization included in earnings | ( | )(1) | ( | )(1) | ||||
| Shadow
amortization included in other comprehensive income | ( | ) | ||||||
| Net amortization | ( | ) | ( | ) | ||||
| Balance at end of year | $ | $ | ||||||
| (1) |
Presuming no additional acquisitions, net amortization charged to income is expected to approximate the following:
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
Actual
amortization may vary based on changes in assumptions or experience. As of December 31, 2023, value of business acquired is being amortized
over a weighted average life of
| 77 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
5) Value of Business Acquired, Goodwill and Other Intangible Assets (Continued)
Information regarding goodwill by segment was as follows:
| Life Insurance | Cemetery/ Mortuary | Total | ||||||||||
| Balance at January 1, 2022: | ||||||||||||
| Goodwill | $ | $ | $ | |||||||||
| Accumulated impairment | ||||||||||||
| Total goodwill, net | ||||||||||||
| Acquisition | ||||||||||||
| Balance at December 31, 2022: | ||||||||||||
| Goodwill | ||||||||||||
| Accumulated impairment | ||||||||||||
| Total goodwill, net | ||||||||||||
| Acquisition | ||||||||||||
| Balance at December 31, 2023: | ||||||||||||
| Goodwill | ||||||||||||
| Accumulated impairment | ||||||||||||
| Total goodwill, net | $ | $ | $ | |||||||||
Goodwill is not amortized but is tested annually for impairment. The annual impairment tests resulted in no impairment of goodwill for 2023 and 2022.
| 78 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
5) Value of Business Acquired, Goodwill and Other Intangible Assets (Continued)
The carrying value of the Company’s other intangible assets were as follows which is included in other assets:
| December 31, | ||||||||||
| Useful Life | 2023 | 2022 | ||||||||
| Intangible asset - trade name (1) | $ | $ | ||||||||
| Intangible assets - other (1) | ||||||||||
| Intangible asset - trade name (2) | ||||||||||
| Intangible asset - customer lists (3) | ||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||||
| Balance at end of year | $ | $ | ||||||||
| (1) |
| (2) |
| (3) |
Amortization
expense for 2023 and 2022 was $
The following table summarizes the Company’s estimate of future amortization for the other intangible assets:
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
| 79 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
6) Property and Equipment
Property and equipment is summarized below:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Land and buildings | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation
expense for 2023 and 2022 was $
| 80 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
7) Bank and Other Loans Payable
Bank and other loans payable are summarized as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Prime rate note
payable in monthly installments of $ June 2023. | $ | $ | ||||||
| 1 month SOFR rate plus | ||||||||
| 1 month SOFR rate plus | ||||||||
| 1 month SOFR rate plus | ||||||||
| 1 month SOFR rate plus | ||||||||
| Finance lease liabilities | ||||||||
| Total bank and other loans | ||||||||
| Less current installments | ( | ) | ( | ) | ||||
| Bank and other loans, excluding current installments | $ | $ | ||||||
| 81 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
7) Bank and Other Loans Payable (Continued)
Sources of Liquidity
Federal Home Loan Bank Membership
The Federal Home Loan Banks (“the FHLBs”) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. The Company is a member of the FHLB based in Des Moines, Iowa and based in Dallas, Texas. As a member of the FHLB, the Company is required to maintain a minimum investment in capital stock of the FHLB and may pledge collateral to the bank for advances of funds to be used in its operations.
Federal Home Loan Bank of Des Moines
As
of December 31, 2023, the amount available for borrowings from the FHLB of Des Moines was approximately $
Federal Home Loan Bank of Dallas
As
of December 31, 2023, the amount available for borrowings from the FHLB of Dallas was approximately $
Revolving Lines of Credit
The
Company has a $
The
Company also has a $
| 82 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
7) Bank and Other Loans Payable (Continued)
Debt Covenants for Mortgage Warehouse Lines of Credit
The
Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement allows SecurityNational
Mortgage to borrow up to $
The
Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. This agreement allows SecurityNational
Mortgage to borrow up to $
The
agreements for the warehouse lines of credit include cross default provisions where certain events of default under other of SecurityNational
Mortgage’s obligations constitute events of default under the warehouse lines of credit. As of December 31, 2023, the Company was
not in compliance with the net income covenant of the warehouse lines of credit and its operating cash flow covenant for its standby
letter of credit with its primary bank. SecurityNational Mortgage has received or is in the process of receiving waivers under the warehouse
lines of credit from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately
$
Debt Covenants for Revolving Lines of Credit and Bank Loans
The Company has debt covenants on its revolving lines of credit and is required to comply with minimum operating cash flow ratios and minimum net worth for each of its business segments. The Company also has debt covenants for one of its loans on real estate for a minimum consolidated operating cash flow ratio, minimum liquidity, and consolidated net worth. In addition to these financial debt covenants, the company is required to provide segment specific financial statements and building specific financial statements on all bank loans. As of December 31, 2023, the Company was in compliance with all these debt covenants.
| 83 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
7) Bank and Other Loans Payable (Continued)
The following tabulation shows the combined maturities of bank and other loans payable:
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
Interest
expense in 2023 and 2022 was $
| 84 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets
Cemetery Perpetual Care Trust Investments and Obligation
State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as Variable Interest Entities pursuant to GAAP. The Company is the primary beneficiary of these trusts, as it absorbs both the losses and any expenses associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets.
The components of the cemetery perpetual care investments and obligation as of December 31, 2023 are as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| December 31, 2023: | ||||||||||||||||
| Fixed maturity securities, available for sale, at estimated fair value: | ||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Corporate securities including public utilities | ( | ) | ||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||
| Common stock: | ||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||
| Residential construction | $ | |||||||||||||||
| Less: Allowance for credit losses | ( | ) | ||||||||||||||
| Total mortgage loans held for investment | $ | |||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||||
| Total cemetery perpetual care trust investments | $ | |||||||||||||||
| Cemetery perpetual care obligation | $ | ( | ) | |||||||||||||
| Trust investments in excess of trust obligations | $ | |||||||||||||||
| 85 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
8) 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 | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||
| Common stock: | ||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||
Residential construction | $ | |||||||||||||||
| Real estate held for investment: Residential | $ | ( | ) | |||||||||||||
| Cash and cash equivalents | $ | |||||||||||||||
| Total cemetery perpetual care trust investments | $ | |||||||||||||||
| Cemetery perpetual care obligation | $ | ( | ) | |||||||||||||
| Trust investments in excess of trust obligations | $ | |||||||||||||||
Fixed Maturity Securities
The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of December 31, 2023 and 2022. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:
| Unrealized Losses for Less than Twelve Months | Fair Value | Unrealized Losses for More than Twelve Months | Fair Value | Total Unrealized Loss | Fair Value | |||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| Corporate securities including public utilities | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Relevant
holdings were comprised of four securities with fair values aggregating
| 86 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued)
The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of December 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 | ||||||||
| Due in 5-10 years | ||||||||
| Due in more than 10 years | ||||||||
| Total | $ | $ | ||||||
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 December 31, 2023 are summarized as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||
| December 31, 2023: | ||||||||||||||||
| Fixed maturity securities, available for sale, at estimated fair value: | ||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | ( | ) | $ | ||||||||||
| Obligations of states and political subdivisions | ( | ) | ||||||||||||||
| Corporate securities including public utilities | ( | ) | ||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||
| Common stock: | ||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||
| Residential construction | $ | |||||||||||||||
| Less: Allowance for credit losses | ( | ) | ||||||||||||||
| Total mortgage loans held for investment | $ | |||||||||||||||
| Cash and cash equivalents (1) | $ | |||||||||||||||
| Total restricted assets | $ | |||||||||||||||
| (1) |
| 87 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
8) 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 | $ | $ | $ | ( | ) | $ | ||||||||||
| Corporate securities including public utilities | ( | ) | ||||||||||||||
| Total fixed maturity securities available for sale | $ | $ | $ | ( | ) | $ | ||||||||||
| Equity securities at estimated fair value: | ||||||||||||||||
| Common stock: | ||||||||||||||||
| Industrial, miscellaneous and all other | $ | $ | $ | ( | ) | $ | ||||||||||
| Total equity securities at estimated fair value | $ | $ | $ | ( | ) | $ | ||||||||||
| Mortgage loans held for investment at amortized cost: | ||||||||||||||||
| Residential construction | $ | |||||||||||||||
| Cash and cash equivalents (1) | $ | |||||||||||||||
| Total restricted assets | $ | |||||||||||||||
| (1) |
A
surplus note receivable in the amount of $
Fixed Maturity Securities
The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of December 31, 2023 and 2022. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities.
| Unrealized Losses for Less than Twelve Months | Fair Value | Unrealized Losses for More than Twelve Months | Fair Value | Total Unrealized Loss | Fair Value | |||||||||||||||||||
| At December 31, 2023 | ||||||||||||||||||||||||
| U.S. Treasury securities and obligations of U.S. Government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Obligations of states and political subdivisions | ||||||||||||||||||||||||
| Corporate securities including public utilities | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| At December 31, 2022 | ||||||||||||||||||||||||
| Obligations of states and political subdivisions | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Corporate securities including public utilities | ||||||||||||||||||||||||
| Total unrealized losses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 88 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued)
Relevant
holdings were comprised of 12 securities with fair values aggregating
The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of December 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 | ||||||||
| Due in 5-10 years | ||||||||
| Due in more than 10 years | ||||||||
| Total | $ | $ | ||||||
See Notes 1, 2 and 17 for additional information regarding restricted assets and cemetery perpetual care trust investments.
| 89 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
9) Income Taxes
The Company’s income tax liability is summarized as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Current | $ | $ | ||||||
| Deferred | ||||||||
| Total | $ | $ | ||||||
Significant components of the Company’s deferred tax assets and liabilities are approximately as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Assets | ||||||||
| Future policy benefits | $ | $ | ||||||
| Loan loss reserve | ||||||||
| Unearned premium | ||||||||
| Net operating loss | ||||||||
| Deferred compensation | ||||||||
| Tax on unrealized appreciation | ||||||||
| Other | ||||||||
| Less: Valuation allowance | ( | ) | ||||||
| Total deferred tax assets | ||||||||
| Liabilities | ||||||||
| Deferred policy acquisition costs | ||||||||
| Basis difference in property, equipment and real estate | ||||||||
| Value of business acquired | ||||||||
| Deferred gains | ||||||||
| Trusts | ||||||||
| Total deferred tax liabilities | ||||||||
| Net deferred tax liability | $ | $ | ||||||
The valuation allowance relates to differences between recorded deferred tax assets and liabilities and ultimate anticipated realization.
| 90 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
9) Income Taxes (Continued)
The Company’s income tax expense is summarized as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Current | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Deferred | ||||||||
| Federal | ( | ) | ( | ) | ||||
| State | ( | ) | ( | ) | ||||
| ( | ) | ( | ) | |||||
| Total | $ | $ | ||||||
The reconciliation of income tax expense at the U.S. federal statutory rates is as follows:
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Computed expense at statutory rate | $ | $ | ||||||
| State tax expense (benefit), net of federal tax benefit | ( | ) | ||||||
| Change in valuation allowance | ( | ) | ||||||
| Other, net | ||||||||
| Income tax expense | $ | $ | ||||||
The
Company’s overall effective tax rate for 2023 and 2022 was
As of December 31, 2023, the Company had no significant unrecognized tax benefits. As of December 31, 2023, the Company does not expect any material changes to the estimated amount of unrecognized tax benefits in the next twelve months. Federal and state income tax returns for 2020 through 2023 are subject to examination by taxing authorities.
| Net Operating Losses and Tax Credit Carryforwards: | ||||
| Year of Expiration | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter up through 2038 | ||||
| Indefinite carryforwards | ||||
| $ | ||||
| 91 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
10) Reinsurance, Commitments and Contingencies
Reinsurance
The
Company follows the procedure of reinsuring risks of more than a specified limit, which ranges from $
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 potential losses on loans sold. See Note 3 for additional information about the Company’s loan loss reserve.
Non-Cancelable Leases
The Company leases office space and equipment under various non-cancelable agreements. See Note 23 regarding leases.
Other Contingencies and Commitments
The
Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of December
31, 2023, the Company’s commitments were approximately $
The Company belongs to a captive insurance group (“the captive group”) for certain casualty insurance, worker compensation and general liability programs. The captive group maintains insurance reserves relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive group considers several factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required from the Company and its members. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.
The Company is a defendant in various other legal actions arising from the normal conduct of business. The Company 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 the Company’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.
| 92 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
11) Retirement Plans
The
Company has three 401(k) savings plans covering all eligible employees which include employer participation in accordance with the provisions
of Section 401(k) of the Internal Revenue Code. The plans allow participants to make pretax contributions up to a maximum of $
The Company has a Non-Qualified Deferred Compensation Plan. Under the terms of the Plan, the Company will provide deferred compensation for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Board has appointed a Committee of the Company to be the Plan Administrator and to determine the employees who are eligible to participate in the plan. The employees who participate may elect to defer a portion of their compensation into the plan. The Company may contribute into the plan at the discretion of the Company’s Board of Directors. The Company did not make any contributions for 2023 and 2022.
The
Company, through its wholly owned subsidiary, SecurityNational Mortgage, also has an employment agreement with its former Vice President
of Mortgage Operations and President of SecurityNational Mortgage, who retired from the Company on December 31, 2015.
| 93 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
12) Capital Stock
The Company has one class of preferred stock of $ par value, shares authorized, of which are issued. The preferred stock is non-voting.
The
Company has two classes of common stock with shares outstanding, Class A common shares and Class C common shares.
The Company has Class B common stock of $ par value, shares authorized, of which are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B common stock.
The following table summarizes the activity in shares of capital stock.
| Class A | Class C | |||||||
| Outstanding shares at December 31, 2021 | ||||||||
| Exercise of stock options | ||||||||
| Stock dividends | ||||||||
| Conversion of Class C to Class A | ( | ) | ||||||
| Outstanding shares at December 31, 2022 | ||||||||
| Exercise of stock options | ||||||||
| Vesting of restricted stock units | ||||||||
| Stock dividends | ||||||||
| Conversion of Class C to Class A | ( | ) | ||||||
| Outstanding shares at December 31, 2023 | ||||||||
| 94 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
12) Capital Stock (Continued)
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator: | ||||||||
| Net earnings | $ | $ | ||||||
| Denominator: | ||||||||
| Denominator for basic earnings per share-weighted-average shares | ||||||||
| Effect of dilutive securities | ||||||||
| Employee stock options | ||||||||
| Unvested restricted stock units | ||||||||
| Dilutive potential common shares | ||||||||
| Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
For 2023 and 2022, there were and of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive. Basic and diluted earnings per share amounts are the same for each class of common stock.
| 95 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
The Company has equity incentive plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Plan”).
Stock Options
Stock based compensation expense for stock options issued of $and $ has been recognized under these plans for 2023 and 2022, respectively, and is included in personnel expenses on the consolidated statements of earnings. As of December 31, 2023, the total unrecognized compensation expense related to the stock options issued was $, which is expected to be recognized over the remaining vesting period.
The fair value of each stock 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.
The following table summarizes the assumptions used in estimating the fair value of each stock option granted along with the weighted-average fair value of the stock options granted.
| Assumptions | ||||||||||||||||||||||||||
| Grant Date | Plan | Weighted-Average Fair Value of Each Option | Expected Dividend Yield (1) | Underlying stock FMV | Weighted-Average Volatility | Weighted-Average Risk-Free Interest Rate | Weighted-Average Expected Life (years) | |||||||||||||||||||
| December 1, 2023 | All Plans | $ | % | $ | % | % | ||||||||||||||||||||
| January 30, 2023 | All Plans | $ | % | $ | % | % | ||||||||||||||||||||
| January 18, 2023 | All Plans | $ | % | $ | % | % | ||||||||||||||||||||
| December 2, 2022 | All Plans | $ | % | $ | % | % | ||||||||||||||||||||
| (1) |
| 96 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
13) Stock Compensation Plans (Continued)
| Number
of Class A Shares | Weighted Average Exercise Price | Number
of Class C Shares | Weighted Average Exercise Price | |||||||||||||
| Outstanding at January 1, 2022 | $ | $ | ||||||||||||||
| Adjustment for the effect of stock dividends | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Adjustment for the effect of stock dividends | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at end of year | $ | $ | ||||||||||||||
| Available options for future grant | ||||||||||||||||
| Weighted average contractual term of options outstanding at December 31, 2023 | years | years | ||||||||||||||
| Weighted average contractual term of options exercisable at December 31, 2023 | years | years | ||||||||||||||
| Aggregated intrinsic value of options outstanding at December 31, 2023 (1) | $ | $ | ||||||||||||||
| Aggregated intrinsic value of options exercisable at December 31, 2023 (1) | $ | $ | ||||||||||||||
| (1) |
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 2023 and 2022 was $ and $, respectively.
| 97 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
13) Stock Compensation Plans (Continued)
Restricted Stock Units (“RSUs”)
Stock based compensation expense for RSUs issued of $and $ has been recognized under these plans for the 2023 and 2022, respectively, and is included in personnel expenses on the consolidated statements of earnings. As of December 31, 2023, the total unrecognized compensation expense related to the RSUs issued was $, which is expected to be recognized over the remaining vesting period.
| Number
of Class A Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested at December 31, 2023 | $ | |||||||
| Available RSUs for future grant | ||||||||
| 98 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
14) Statutory Financial Information and Dividend Limitations
The Company’s insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
The states in which the Company’s life insurance subsidiaries are domiciled require the preparation of statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory net income and capital and surplus of the Company’s insurance subsidiaries, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities are as follows:
| Statutory Net Income | Statutory Capital and Surplus | |||||||||||||||
| Years Ended December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts by insurance subsidiary: | ||||||||||||||||
| Security National Life Insurance Company | $ | $ | $ | $ | ||||||||||||
| Kilpatrick Life Insurance Company | ||||||||||||||||
| First Guaranty Insurance Company | ||||||||||||||||
| Southern Security Life Insurance Company, Inc. | ( | ) | ||||||||||||||
| Trans-Western Life Insurance Company | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Utah, Louisiana, Mississippi, and Texas Insurance Departments impose minimum risk-based capital (“RBC”) requirements that were developed by the NAIC on insurance enterprises. The formulas for determining the RBC specify various factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio (the Ratio) of the enterprise’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The life insurance subsidiaries each have a ratio that is greater than the first level of regulatory action as of December 31, 2023. The Company does not have any guarantees to maintain the capital and surplus of any affiliates except for the Company’s agreement to provide additional capital to Security National Life Insurance Company in the event risk-based capital drops below 350% of the authorized control level.
Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts of the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, that exceed minimum statutory capital requirements. Additional requirements must be met depending on the state, and payments of such amounts as dividends are subject to approval by regulatory authorities.
| 99 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
14) Statutory Financial Information and Dividend Limitations (Continued)
Under
the Utah Insurance Code, Security National Life Insurance Company is permitted to pay stockholder dividends, or otherwise make distributions,
to the Company subject to certain limitations. Security National Life Insurance Company must ensure that its surplus held for policyholders
is reasonable in relation to its outstanding liabilities and adequate to its financial needs after payment of any such dividend or distribution.
Furthermore, where any dividend or distribution, together with all other dividends and distributions made within the preceding 12 months,
exceeds the lesser of (i) 10% of its surplus held for policyholders as of the next preceding December 31; or (ii) its net gain from operations,
not including realized capital gains, for the 12-month period ending the next preceding December 31, such dividend or distribution constitutes
“extraordinary” under Utah law and Security National Life Insurance Company would be required to file notice of its intention
to declare such a dividend or make such a distribution with the Utah Commissioner and the Utah Commissioner must either approve the distribution
or dividend or not disapprove the dividend or distribution within 30 days’ of the notice filing. Based on Security National Life
Insurance Company’s surplus held for policyholders and net gain from operations as of December 31, 2023, the maximum aggregate
amount of dividends and distributions that it could pay or make in 2024 and which would not constitute an “extraordinary”
dividend or distribution under Utah law and would therefore not require notice and approval or lack of disproval from the Utah Commissioner,
would be approximately $
Under
the Louisiana Insurance Code, First Guaranty Insurance Company and Kilpatrick Life Insurance Company are permitted to pay stockholder
dividends, or otherwise make distributions, to the Company subject to certain limitations. First Guaranty Insurance Company and Kilpatrick
Life Insurance Company must ensure that its surplus held for policyholders is reasonable in relation to its outstanding liabilities and
adequate to its financial needs after payment of any such dividend or distribution. Furthermore, where any dividend or distribution,
together with all other dividends and distributions made within the preceding 12 months, exceeds the lesser of (i) 10% of its surplus
held for policyholders as of the next preceding December 31; or (ii) its net gain from operations, not including realized capital gains,
for the 12-month period ending the next preceding December 31, such dividend or distribution constitutes “extraordinary”
under Louisiana law and First Guaranty Insurance Company and Kilpatrick Life Insurance Company would be required to file notice of its
intention to declare such a dividend or make such a distribution with the Louisiana Commissioner and the Louisiana Commissioner must
either approve the distribution or dividend or not disapprove the dividend or distribution within 30 days’ of the notice filing.
Based on First Guaranty Insurance Company’s and Kilpatrick Life Insurance Company’s surplus held for policyholders and net
gain from operations as of December 31, 2023, the maximum aggregate amount of dividends and distributions that it could pay or make in
2024 and which would not constitute an “extraordinary” dividend or distribution under Louisiana law and would therefore not
require notice and approval or lack of disproval from the Louisiana Commissioner, would be approximately $
| 100 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
15) 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 pre-sold loans before the funds are received from financial institutional investors.
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. 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.
| 101 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
15) Business Segment Information (Continued)
| Year Ended December 31, 2023 | ||||||||||||||||||||
| Life | Cemetery/ | Intercompany | ||||||||||||||||||
| Insurance | Mortuary | Mortgage | Eliminations | Consolidated | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| From external sources: | ||||||||||||||||||||
| Revenue from customers | $ | $ | $ | $ | ||||||||||||||||
| Net investment income | ||||||||||||||||||||
| Gains (losses) on investments and other assets | ||||||||||||||||||||
| Other revenues | ||||||||||||||||||||
| Intersegment revenues: | ||||||||||||||||||||
| Net investment income | ( | ) | ||||||||||||||||||
| Total revenues | ( | ) | ||||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Death, surrenders and other policy benefits | ||||||||||||||||||||
| Increase in future policy benefits | ||||||||||||||||||||
| Amortization of deferred policy and pre-need acquisition costs and value of business acquired | ||||||||||||||||||||
| Selling, general and administrative expenses: | ||||||||||||||||||||
| Commissions | ||||||||||||||||||||
| Personnel | ||||||||||||||||||||
| Advertising | ||||||||||||||||||||
| Rent and rent related | ||||||||||||||||||||
| Depreciation on property and equipment | ||||||||||||||||||||
| Provision for loan loss reserve | ||||||||||||||||||||
| Cost related to funding mortgage loans | ||||||||||||||||||||
| Intersegment | ( | ) | ||||||||||||||||||
| Other | ||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Intersegment | ( | ) | ||||||||||||||||||
| Other | ||||||||||||||||||||
| Costs of goods and services sold-mortuaries and cemeteries | ||||||||||||||||||||
| Total benefits and expenses | ( | ) | ||||||||||||||||||
| Earnings (loss) before income taxes | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net earnings (loss) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Identifiable assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Goodwill | $ | $ | $ | $ | $ | |||||||||||||||
| 102 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
15) Business Segment Information (Continued)
| Year Ended December 31, 2022 | ||||||||||||||||||||
| Life | Cemetery/ | Intercompany | ||||||||||||||||||
| Insurance | Mortuary | Mortgage | Eliminations | Consolidated | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| From external sources: | ||||||||||||||||||||
| Revenue from customers | $ | $ | $ | $ | ||||||||||||||||
| Net investment income | ||||||||||||||||||||
| Gains (losses) on investments and other assets | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other revenues | ||||||||||||||||||||
| Intersegment revenues: | ||||||||||||||||||||
| Net investment income | ( | ) | ||||||||||||||||||
| Total revenues | ( | ) | ||||||||||||||||||
| Expenses: | ||||||||||||||||||||
| Death, surrenders and other policy benefits | ||||||||||||||||||||
| Increase in future policy benefits | ||||||||||||||||||||
| Amortization of deferred policy and pre-need acquisition costs and value of business acquired | ||||||||||||||||||||
| Selling, general and administrative expenses: | ||||||||||||||||||||
| Commissions | ||||||||||||||||||||
| Personnel | ||||||||||||||||||||
| Advertising | ||||||||||||||||||||
| Rent and rent related | ||||||||||||||||||||
| Depreciation on property and equipment | ||||||||||||||||||||
| Provision for loan loss reserve | ||||||||||||||||||||
| Cost related to funding mortgage loans | ||||||||||||||||||||
| Intersegment | ( | ) | ||||||||||||||||||
| Other | ||||||||||||||||||||
| Interest expense: | ||||||||||||||||||||
| Intersegment | ( | ) | ||||||||||||||||||
| Other | ||||||||||||||||||||
| Costs of goods and services sold-mortuaries and cemeteries | ||||||||||||||||||||
| Total benefits and expenses | ( | ) | ||||||||||||||||||
| Earnings before income taxes | $ | $ | $ | $ | $ | |||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net earnings | $ | $ | $ | $ | $ | |||||||||||||||
| Identifiable assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Goodwill | $ | $ | $ | $ | $ | |||||||||||||||
| 103 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
16) Related Party Transactions
The Company’s Board of Directors has a written procedure, which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees that is in conflict or may conflict with the interests of the Company. The Company and its Board of Directors are unaware of any related party transactions that require disclosure as of December 31, 2023.
17) Fair Value of Financial Instruments
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:
Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Financial assets and financial liabilities whose values are based on the following:
| a) | Quoted prices for similar assets or liabilities in active markets; | |
| b) | Quoted prices for identical or similar assets or liabilities in non-active markets; or | |
| c) | Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. |
Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing financial assets and financial liabilities.
The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.
The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments:
The items shown under Level 1 and Level 2 are valued as follows:
Fixed Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 financial assets), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit, and maturity of the investments.
Equity Securities: The fair values for equity securities are based on quoted market prices.
| 104 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
Restricted Assets: A portion of these assets include equity securities and fixed maturity securities available for sale 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 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 available for sale 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 consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature
Call and Put Options: The Company uses quoted market prices to value its call and put options.
Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
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 to third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings.
The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.
Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparable properties and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.
Impaired Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.
| 105 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
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 used 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 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.
The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the consolidated balance sheet as of December 31, 2023.
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets accounted for at fair value on a recurring basis | ||||||||||||||||
| Fixed maturity securities available for sale | $ | $ | $ | $ | ||||||||||||
| Equity securities | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Restricted assets (1) | ||||||||||||||||
| Restricted assets (2) | ||||||||||||||||
| Cemetery perpetual care trust investments (1) | ||||||||||||||||
| Cemetery perpetual care trust investments (2) | ||||||||||||||||
| Derivatives - loan commitments (3) | ||||||||||||||||
| Total assets accounted for at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||||
| Liabilities accounted for at fair value on a recurring basis | ||||||||||||||||
| Derivatives - loan commitments (4) | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| Total liabilities accounted for at fair value on a recurring basis | $ | ( | ) | $ | $ | $ | ( | ) | ||||||||
| (1) |
| (2) |
| (3) |
| (4) |
| 106 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the consolidated balance sheet as of December 31, 2022.
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets accounted for at fair value on a recurring basis | ||||||||||||||||
| Fixed maturity securities available for sale | $ | $ | $ | $ | ||||||||||||
| Equity securities | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Restricted assets (1) | ||||||||||||||||
| Restricted assets (2) | ||||||||||||||||
| Cemetery perpetual care trust investments (1) | ||||||||||||||||
| Cemetery perpetual care trust investments (2) | ||||||||||||||||
| Derivatives - loan commitments (3) | ||||||||||||||||
| Total assets accounted for at fair value on a recurring basis | $ | $ | $ | $ | ||||||||||||
| Liabilities accounted for at fair value on a recurring basis | ||||||||||||||||
| Derivatives - call options (4) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Derivatives - put options (4) | ( | ) | ( | ) | ||||||||||||
| Derivatives - loan commitments (4) | ( | ) | ( | ) | ||||||||||||
| Total liabilities accounted for at fair value on a recurring basis | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| (1) |
| (2) |
| (3) |
| (4) |
For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 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 | |||||||||||||||
| 12/31/2023 | Technique | Input(s) | Value | Value | Average | |||||||||||||||
| Loans held for sale | $ | Market approach | Investor contract pricing as a percentage of unpaid principal balance | % | % | % | ||||||||||||||
| Derivatives - loan commitments (net) | Market approach | Pull-through rate | % | % | % | |||||||||||||||
| Initial-Value | N/A | N/A | N/A | |||||||||||||||||
| Servicing | 0 bps | 119 bps | 49 bps | |||||||||||||||||
| Fixed maturity securities available for sale | Broker quotes | Pricing quotes | $ | $ | $ | |||||||||||||||
| 107 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
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 | $ | Market approach | Investor contract pricing as a percentage of unpaid principal balance | % | % | % | ||||||||||||||
| Derivatives - loan commitments (net) | Market approach | Pull-through rate | % | % | % | |||||||||||||||
| Initial-Value | N/A | N/A | N/A | |||||||||||||||||
| Servicing | 0 bps | 153 bps | 73 bps | |||||||||||||||||
| Fixed maturity securities available for sale | Broker quotes | Pricing quotes | $ | $ | $ | |||||||||||||||
The following table is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
| Net Derivatives Loan Commitments | Loans Held for Sale | Fixed Maturity Securities Available for Sale | ||||||||||
| Balance - December 31, 2022 | $ | $ | $ | |||||||||
| Originations/purchases | ||||||||||||
| Sales, maturities and paydowns | ( | ) | ( | ) | ||||||||
| Transfer to mortgage loans held for investment | ( | ) | ||||||||||
| Total gains (losses): | ||||||||||||
| Included in earnings | ( | )(1) | | (1) | ( | )(2) | ||||||
| Included in other comprehensive income | ( | ) | ||||||||||
| Balance - December 31, 2023 | $ | $ | $ | |||||||||
| (1) |
| (2) |
The following table is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
| Net Derivatives Loan Commitments | Loans Held for Sale | Fixed Maturity Securities Available for Sale | ||||||||||
| Balance - December 31, 2021 | $ | $ | $ | |||||||||
| Originations/purchases | ||||||||||||
| Sales, maturities and paydowns | ( | ) | ( | ) | ||||||||
| Transfer to mortgage loans held for investment | ( | ) | ||||||||||
| Total gains (losses): | ||||||||||||
| Included in earnings | ( | )(1) | | | ||||||||
| Included in other comprehensive income | ( | ) | ||||||||||
| Balance - December 31, 2022 | $ | $ | $ | |||||||||
| (1) |
| (2) |
| 108 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
The Company did not have any financial assets and financial liabilities measured at fair value on a nonrecurring basis as of December 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 consolidated balance sheet as of December 31, 2022.
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets accounted for at fair value on a nonrecurring basis | ||||||||||||||||
| Impaired mortgage loans held for investment | $ | $ | $ | $ | ||||||||||||
| Total assets accounted for at fair value on a nonrecurring basis | $ | $ | $ | $ | ||||||||||||
| 109 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
Fair Value of Financial Instruments Carried at Other Than Fair Value
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
The Company uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction as of December 31, 2023 and 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 December 31, 2023:
| Carrying Value | Level 1 | Level 2 | Level 3 | Total Estimated Fair Value | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Mortgage loans held for investment | ||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | |||||||||||||||
| Residential construction | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Mortgage loans held for investment, net | $ | $ | $ | $ | $ | |||||||||||||||
| Policy loans | ||||||||||||||||||||
| Insurance assignments, net (1) | ||||||||||||||||||||
| Restricted assets (2) | ||||||||||||||||||||
| Cemetery perpetual care trust investments (2) | ||||||||||||||||||||
| Mortgage servicing rights, net | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Bank and other loans payable | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Policyholder account balances (3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Future policy benefits - annuities (3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (1) |
| (2) |
| (3) |
| 110 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) 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 | $ | $ | $ | $ | $ | |||||||||||||||
| Residential construction | ||||||||||||||||||||
| Commercial | ||||||||||||||||||||
| Mortgage loans held for investment, net | $ | $ | $ | $ | $ | |||||||||||||||
| Policy loans | ||||||||||||||||||||
| Insurance assignments, net (1) | ||||||||||||||||||||
| Restricted assets (2) | ||||||||||||||||||||
| Cemetery perpetual care trust investments (2) | ||||||||||||||||||||
| Mortgage servicing rights, net | ||||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Bank and other loans payable | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Policyholder account balances (3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Future policy benefits - annuities (3) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (1) |
| (2) |
| (3) |
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of 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 of mortgage loans 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 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 short in maturity. Accordingly, the carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.
| 111 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
17) Fair Value of Financial Instruments (Continued)
Bank and Other Loans Payable: The carrying amounts reported in the accompanying consolidated balance sheet for the warehouse lines of credit approximate their fair values due to their relatively short-term maturities and variable interest rates. The carrying amounts reported in the accompanying consolidated balance sheet for the bank loans collateralized by real estate approximate their fair values due to the non-assumable fixed 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 more than related policy account balances. Interest
credit rates for interest-sensitive insurance products ranged from
18) Accumulated Other Comprehensive Income (loss)
The following summarizes the changes in accumulated other comprehensive income (loss):
| December 31 | ||||||||
| 2023 | 2022 | |||||||
| Unrealized gains (losses) on fixed maturity securities available for sale | $ | $ | ( | ) | ||||
| Amounts reclassified into net earnings | ( | ) | ||||||
| Net unrealized gains (losses) before taxes | ( | ) | ||||||
| Tax benefit (expense) | ( | ) | ||||||
| Net | ( | ) | ||||||
| Unrealized gains (losses) on restricted assets (1) | ( | ) | ||||||
| Tax benefit (expense) | ( | ) | ||||||
| Net | ( | ) | ||||||
| Unrealized gains (losses) on cemetery perpetual care trust investments (1) | ( | ) | ||||||
| Tax benefit (expense) | ( | ) | ||||||
| Net | ( | ) | ||||||
| Other comprehensive income (loss) changes | $ | $ | ( | ) | ||||
| (1) |
| 112 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
18) Accumulated Other Comprehensive Income (loss) (Continued)
The following is the accumulated balances of other comprehensive income (loss) as of December 31, 2023:
| Beginning Balance December 31, 2022 | Change for the period | Ending Balance December 31, 2023 | ||||||||||
| Unrealized gains (losses) on fixed maturity securities available for sale | $ | ( | ) | $ | $ | ( | ) | |||||
| Unrealized gains (losses) on restricted assets (1) | ( | ) | ( | ) | ||||||||
| Unrealized gains (losses) on cemetery perpetual care trust investments (1) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | |||||
| (1) |
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 | $ | $ | ( | ) | $ | ( | ) | |||||
| Unrealized gains (losses) on restricted assets (1) | ( | ) | ( | ) | ||||||||
| Unrealized gains (losses) on cemetery perpetual care trust investments (1) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | |||||
| (1) |
| 113 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
19) Derivative Instruments
The Company reports derivative instruments pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
The following table shows the fair value and notional amounts of derivative instruments.
| December 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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||
| Call options | Other liabilities | |||||||||||||||||||||||||
| Put options | Other liabilities | |||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||
The following table presents the gains (losses) on derivatives. There were no gains or losses reclassified from accumulated other comprehensive income into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing.
| Years ended December 31, | ||||||||||
| Derivative | Classification | 2023 | 2022 | |||||||
| Loan commitments | Mortgage fee income | $ | ( | ) | $ | ( | ) | |||
| Call and put options | $ | $ | ||||||||
| 114 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
20) Mortgage Servicing Rights
The Company reports MSRs pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
The following table presents the MSR activity.
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Amortized cost: | ||||||||
| Balance before valuation allowance at beginning of year | $ | $ | ||||||
| MSR additions resulting from loan sales | ||||||||
| Amortization (1) | ( | ) | ( | ) | ||||
| Sale of MSRs | ( | ) | ||||||
| Application of valuation allowance to write down MSRs with other than temporary impairment | ||||||||
| Balance before valuation allowance at year end | $ | $ | ||||||
| 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 year end | $ | $ | ||||||
| Mortgage servicing rights, net | $ | $ | ||||||
| Estimated fair value of MSRs at year end | $ | $ | ||||||
| (1) |
The table below summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the Company’s assumptions in its December 31, 2023 valuation of MSRs. The assumptions used in the following table are likely to change as market conditions, portfolio composition and borrower behavior change, causing both actual and projected amortization levels to change over time.
| Estimated MSR Amortization | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 115 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
20) Mortgage Servicing Rights (Continued)
The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the consolidated statements of earnings.
| Years Ended December 31, | ||||||||
| 2023 | 2022 | |||||||
| $ | $ | |||||||
| Total | $ | $ | ||||||
The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio.
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Servicing UPB | $ | $ | ||||||
The following key assumptions were used in determining MSR value.
| Prepayment Speeds | Average Life(Years) | Discount Rate | ||||||||||
| December 31, 2023 | ||||||||||||
| December 31, 2022 | ||||||||||||
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 $
| 116 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
21) Future Policy Benefits and Unpaid Claims
The Company reports future policy benefits and unpaid claims pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
The following table provides information regarding future policy benefits and unpaid claims and the related receivable from reinsurers.
| December 31, | ||||||||
| 2023 | 2022 | |||||||
| Life | $ | $ | ||||||
| Annuities | ||||||||
| Policyholder account balances | ||||||||
| Accident and health | ||||||||
| Other policyholder funds | ||||||||
| Reported but unpaid claims | ||||||||
| Incurred but not reported claims | ||||||||
| Gross future policy benefits and unpaid claims | $ | $ | ||||||
| Receivable from reinsurers | ||||||||
| Life | ||||||||
| Annuities | ||||||||
| Accident and health | ||||||||
| Reported but unpaid claims | ||||||||
| Incurred but not reported claims | ||||||||
| Total receivable from reinsurers | ||||||||
| Net future policy benefits and unpaid claims | $ | $ | ||||||
| Net unpaid claims | $ | $ | ||||||
The following table provides a roll forward of the Company’s liability for reported but unpaid claims and incurred but not reported claims, net of the related receivable from reinsurers.
| Life | Annuities | Accident and Health | Total | |||||||||||||
| Balance at 12/31/2021 | $ | $ | $ | $ | ||||||||||||
| Incurred | (1) | (2) | (3) | |||||||||||||
| Settled | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at 12/31/2022 | ||||||||||||||||
| Incurred | (1) | (2) | (3) | |||||||||||||
| Settled | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance at 12/31/2023 | $ | $ | $ | $ | ||||||||||||
| (1) |
| (2) |
| (3) |
| 117 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
22) Revenues from Contracts with Customers
The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.
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 total contract liability
for future obligations is included in deferred pre-need cemetery and mortuary contract revenues on the consolidated balance sheets and,
as of December 31, 2023 and 2022, the balances were $
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. As of December 31, 2023 and 2022, the balances were $
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. As of December 31, 2023 and 2022, the balances were $
Deferred
Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until
Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such a time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred.
| 118 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
22) 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) | $ | $ | $ | |||||||||
| Closing (12/31/2023) | ||||||||||||
| Increase/(decrease) | ||||||||||||
| Contract Balances | ||||||||||||
| Receivables (1) | Contract Asset | Contract Liability | ||||||||||
| Opening (1/1/2022) | $ | $ | $ | |||||||||
| Closing (12/31/2022) | ||||||||||||
| Increase/(decrease) | ||||||||||||
| (1) |
| 119 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
22) Revenues from Contracts with Customers (Continued)
The following table disaggregates the opening and closing balances of the Company’s contract balances.
| Contract Balances | ||||||||
| Contract Asset | Contract Liability | |||||||
| Pre-need merchandise and services | $ | $ | ||||||
| At-need specialty merchandise | ||||||||
| Pre-need land sales | ||||||||
| Opening (1/1/2023) | $ | $ | ||||||
| Pre-need merchandise and services | $ | $ | ||||||
| At-need specialty merchandise | ||||||||
| Pre-need land sales | ||||||||
| Closing (12/31/2023) | $ | $ | ||||||
| Contract Balances | ||||||||
| Contract Asset | Contract Liability | |||||||
| Pre-need merchandise and services | $ | $ | ||||||
| At-need specialty merchandise | ||||||||
| Pre-need land sales | ||||||||
| Opening (1/1/2022) | $ | $ | ||||||
| Pre-need merchandise and services | $ | $ | ||||||
| At-need specialty merchandise | ||||||||
| Pre-need land sales | ||||||||
| Closing (12/31/2022) | $ | $ | ||||||
| 120 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
22) Revenues from Contracts with Customers (Continued)
The
amount of revenue recognized for 2023 and 2022 that was included in the opening contract liability balance was $
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.
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Major goods/service lines | ||||||||
| At-need | $ | $ | ||||||
| Pre-need | ||||||||
| $ | $ | |||||||
| Timing of Revenue Recognition | ||||||||
| Goods transferred at a point in time | $ | $ | ||||||
| Services transferred at a point in time | ||||||||
| $ | $ | |||||||
Significant Judgments and Estimates
The Company’s cemetery and mortuary segment recognizes revenue on future performance obligations when goods are delivered and when services are performed and is not determined by the terms or payments of the contract as long as any good or service is paid in full prior to delivery. Prices are determined based on the market at the time a contract is created. Goods or services are not partially completed. There are no significant judgements, estimations, or allocation methods for when revenue should be recognized.
Practical Expedients
The Company has not elected to use any of the practical expedients under ASC 606.
Contract Costs
The Company’s cemetery and mortuary segment defers certain costs associated with obtaining a contract on future obligations.
Pre-need Merchandise and Service Revenue: Pre-need merchandise and service revenues are deferred until the goods or services are delivered. Recognition can be years until the obligations are satisfied. Commissions and other costs are capitalized and deferred until the obligation is satisfied. Other costs include rent on pre-need offices and training rooms, and call center costs. Costs that are allocated based on a percentage include family service advisor compensation, bonuses, utilities, and supplies that are all used to procure a pre-need sale.
At-need Specialty Merchandise Revenue: At-need specialty merchandise is ordered from a third-party manufacturer. Generally, at-need specialty merchandise is ordered and received within 90 days of order. These orders are also short-term in nature and are deferred until the product is received from the manufacturer and the obligation is satisfied.
| 121 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
22) Revenues from Contracts with Customers (Continued)
Deferred Pre-need Land Revenue: Revenue is recognized on pre-need land sales when the customer has paid at least 10% toward the land price. In cases where customers pay less than 10% the revenue and associated commissions are deferred until such a time when 10% of the contract price is received.
The following table disaggregates contract costs that are included in the deferred policy and pre-need contract acquisition costs on the consolidated balances sheets.
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Pre-need merchandise and services | $ | $ | ||||||
| At-need specialty merchandise | ||||||||
| Pre-need land sales | ||||||||
| $ | $ | |||||||
23) Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period in exchange for consideration. The Company determines if a contract is a lease at the inception of the contract. At the commencement date of a lease, the Company measures the lease liability at the present value of the lease payments over the lease term, discounted using the discount rate for the lease. The Company uses the rate implicit in the lease, if available, otherwise the Company uses its incremental borrowing rate. Also, at the commencement date of a lease, the Company measures the cost of the related right-of-use asset which consists of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred by the Company.
Information about the Nature of Leases and Subleases
The Company leases office space and equipment from third parties under various non-cancelable agreements. The Company has operating leases for office space for its segments in areas where it conducts business. The Company subleases some of this office space. The Company also has finance leases for certain equipment, such as copy machines and postage machines. The Company does not have any lease agreements with variable lease payments. The Company has not included any options to extend or terminate leases in the recognition of the right-of-use assets or lease liabilities because of the uncertainty that they will be exercised. No residual value guarantees have been provided to the Company. The Company does not have any restrictions or covenants imposed by leases.
Leases that have not Commenced
The Company does not have any leases that have not commenced that create significant rights or obligations for the Company.
Related Party Lease Transactions
The Company does not have any related party lease transactions that require disclosure as of December 31, 2023.
| 122 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
23) Leases (Continued)
Short-term Leases
The Company made an accounting policy election not to apply the recognition requirements of ASC 842 to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise.
Significant Judgments and Assumptions
The Company does not use any significant judgments or assumptions regarding the determination of whether a contract contains a lease; the allocation of the consideration in a contract between lease and nonlease components; or the determination of the discount rates for the leases. The following table presents the Company’s total lease cost recognized in earnings, amounts capitalized as right-of-use assets and cash flows from lease transactions.
| Years Ended December 31 | ||||||||
| 2023 | 2022 | |||||||
| Lease Cost | ||||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets (1) | $ | $ | ||||||
| Interest on lease liabilities (2) | ||||||||
| Operating lease cost (3) | ||||||||
| Short-term lease cost (3)(4) | ||||||||
| Sublease income (3) | ( | ) | ( | ) | ||||
| Total lease cost | $ | $ | ||||||
| Other Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Operating cash flows from finance leases | ||||||||
| Financing cash flows from finance leases | ||||||||
| Right-of-use assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | $ | ||||||
| Finance leases | ||||||||
| Weighted-average remaining lease term (in years) | ||||||||
| Finance leases | ||||||||
| Operating leases | ||||||||
| Weighted-average discount rate | ||||||||
| Finance leases | % | % | ||||||
| Operating leases | % | % | ||||||
| (1) |
| (2) |
| (3) |
| (4) |
| 123 |
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2023 and 2022
23) Leases (Continued)
The following table presents the maturity analysis of the Company’s lease liabilities.
| Finance Leases | Operating Leases | |||||||
| Lease payments due in: | ||||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total undiscounted lease payments | ||||||||
| Less: Discount on cash flows | ( | ) | ( | ) | ||||
| Present value of lease liabilities | $ | $ | ||||||
The following table presents the Company’s right-of-use assets and lease liabilities.
| Year Ended December 31, | ||||||||||
| Balance Sheet Location | 2023 | 2022 | ||||||||
| Operating Leases | ||||||||||
| Right-of-use assets | Other assets | $ | $ | |||||||
| Lease liabilities | Other liabilities and accrued expenses | $ | $ | |||||||
| Finance Leases | ||||||||||
| Right-of-use assets | $ | $ | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Right-of-use assets, net | Property and equipment, net | $ | $ | |||||||
| Lease liabilities | Bank and other loans payable | $ | $ | |||||||
The Company is also a lessor and has operating lease agreements with various tenants that lease its commercial properties. See Note 2 for information about the Company’s real estate held for investment.
| 124 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
(a) Management’s annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process that is designed 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 (“GAAP”), and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company, |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors of the Company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023 based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether the Company’s internal control over financial reporting was effective as of December 31, 2023. Based on that assessment management believes that as of December 31, 2023, the Company’s internal control over financial reporting was effective.
This annual report on internal control over financial reporting does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(b) Changes in internal control over financial reporting.
There was no change in the Company’s internal control over financial reporting that occurred in the fourth quarter 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
A
portion of the Company’s directors’ and officers’ compensation is in the form of equity awards and, from time to time,
they may engage in open-market transactions with respect to their Company securities for diversification or other personal reasons. All
such transactions in Company securities by directors and officers must comply with the Company’s Insider Trading Policy, which
requires that transactions be in accordance with applicable U.S. federal securities laws that prohibit trading while in possession of
material nonpublic information. Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables directors and officers
to prearrange transactions in the Company’s securities in a manner that avoids concerns about initiating transactions while in
possession of material nonpublic information. During the three months ended December 31, 2023, no directors or officers
| 125 |
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable
PART III
Items 10, 11, 12, 13 and 14.
The information required by these items is incorporated by reference to the Company’s definitive proxy statement relating to its 2024 Annual Meeting of Shareholders. The Company currently anticipates that its definitive proxy statement will be filed with the SEC not later than 120 days after December 31, 2023, pursuant to Regulation 14A of the Securities and Exchange Act of 1934, as amended.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” under Item 8 above.
(a)(2) Financial Statement Schedules
IV. Reinsurance
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.
| (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 |
Item 16. Form 10-K Summary
Not applicable
| 126 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SECURITY NATIONAL FINANCIAL CORPORATION
| Dated: March 29, 2024 | By: | /s/ Scott M. Quist |
| Scott M. Quist | ||
| Chairman of the Board, President, and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| SIGNATURE | TITLE | DATE | ||
| /s/ Scott M. Quist | Chairman of the Board, President, | |||
| Scott M. Quist | and Chief Executive Officer | |||
| (Principal Executive Officer) | March 29, 2024 | |||
| /s/ Garrett S. Sill | Chief Financial Officer and | |||
| Garrett S. Sill | Treasurer (Principal Financial | |||
| and Accounting Officer) | March 29, 2024 | |||
| /s/ Jason G. Overbaugh | Vice President and Director | March 29, 2024 | ||
| Jason G. Overbaugh | ||||
| /s/ S. Andrew Quist | Vice President and Director | March 29, 2024 | ||
| S. Andrew Quist | ||||
| /s/ Adam G. Quist | Vice President and Director | March 29, 2024 | ||
| Adam G. Quist | ||||
| /s/ John L. Cook | Director | March 29, 2024 | ||
| John L. Cook | ||||
| /s/ Gilbert A. Fuller | Director | March 29, 2024 | ||
| Gilbert A. Fuller | ||||
| /s/ Robert G. Hunter | Director | March 29, 2024 | ||
| Robert G. Hunter | ||||
| /s/ Ludmya B. Love | Director | March 29, 2024 | ||
| Ludmya B. Love | ||||
| /s/ Shital A. Mehta | Director | March 29, 2024 | ||
| Shital A. Mehta | ||||
| /s/ H. Craig Moody | Director | March 29, 2024 | ||
| H. Craig Moody |
| 127 |
Schedule IV
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Reinsurance
| Percentage | ||||||||||||||||||||
| Ceded to | Assumed | of Amount | ||||||||||||||||||
| Direct | Other | from Other | Net | Assumed | ||||||||||||||||
| Amount | Companies | Companies | Amount | to Net | ||||||||||||||||
| 2023 | ||||||||||||||||||||
| Life Insurance in force ($000) | $ | 3,517,812 | $ | 333,211 | $ | 34,742 | $ | 3,219,343 | 1.1 | % | ||||||||||
| Premiums: | ||||||||||||||||||||
| Life Insurance | $ | 116,141,852 | $ | 1,938,610 | $ | 239,744 | $ | 114,442,986 | 0.2 | % | ||||||||||
| Accident and Health Insurance | 215,442 | - | 8 | 215,450 | 0.0 | % | ||||||||||||||
| Total premiums | $ | 116,357,294 | $ | 1,938,610 | $ | 239,752 | $ | 114,658,436 | 0.2 | % | ||||||||||
| 2022 | ||||||||||||||||||||
| Life Insurance in force ($000) | $ | 3,322,062 | (1) | $ | 346,749 | $ | 124,774 | $ | 3,100,087 | (1) | 4.0 | % | ||||||||
| Premiums: | ||||||||||||||||||||
| Life Insurance | $ | 105,697,658 | $ | 2,004,925 | $ | 766,529 | $ | 104,459,262 | 0.7 | % | ||||||||||
| Accident and Health Insurance | 542,370 | - | 8 | 542,378 | 0.0 | % | ||||||||||||||
| Total premiums | $ | 106,240,028 | $ | 2,004,925 | $ | 766,537 | $ | 105,001,640 | 0.7 | % | ||||||||||
| (1) | The prior year has been adjusted to include accidental death benefit insurance in force that was inadvertently excluded. |
| 128 |
Exhibit 10.6
FIRST AMENDED AND RESTATED
SECURITY NATIONAL FINANCIAL CORPORATION
2022 EQUITY INCENTIVE PLAN
Security National Financial Corporation (the “Company”), a Utah corporation, hereby establishes and adopts the First Amended and Restated Security National Financial Corporation 2022 Equity Incentive Plan (the “Plan”) effective as of the date specified in Section 13.13 below.
1. PURPOSE OF THE PLAN
The purpose of the Plan is to assist the Company and its Subsidiaries in attracting and retaining selected individuals to serve as directors, employees, consultants and/or advisors of the Company who are expected to contribute to the Company’s success and to achieve long-term objectives which will inure to the benefit of all shareholders of the Company through the additional incentives inherent in the Awards hereunder.
2. DEFINITIONS
“Administrator” shall mean (i) the Board; or (ii) to the extent (A) the Board has delegated such power and authority to the Committee (which delegation may be revoked by the Board at any time), or (B) otherwise required pursuant to Section 4 of the Plan, the Committee.
“Award” shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Other Share-Based Award or any other right, interest or option relating to Shares or other property (including cash) granted pursuant to the provisions of the Plan.
“Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing any Award granted by the Administrator hereunder, including through an electronic medium.
“Base Amount” has the meaning set forth in Section 6.2(b).
“Board” shall mean the board of directors of the Company.
“Cause” shall mean with respect to any Employee or Consultant (unless the applicable Award Agreement states otherwise), any such Employee’s or Consultant’s: (i) commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude or commission of any other act involving willful malfeasance or material fiduciary breach with respect to the Company or a Subsidiary; (ii) conduct that results in or is reasonably likely to result in material harm to the reputation or business of the Company or any Subsidiary; (iii) gross negligence or willful misconduct with respect to the Company or a Subsidiary; (iv) material violation of state or federal securities laws or any applicable written employment-related policy of the Company or Subsidiary; or (v) conduct, violation or other action that would be considered Cause pursuant to a definition of Cause in any employment or service agreement, if any, between any such Employee or Consultant and the Company or any of its Subsidiaries. With respect to any Director, unless the applicable Award Agreement states otherwise, “Cause” means the commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude, malfeasance in office, gross misconduct or neglect of duties as a Director, false or fraudulent misrepresentation inducing the Director’s appointment, or repeated failure to participate in Board meetings on a regular basis despite having received proper notice of the meetings in advance. The Administrator, in its absolute discretion, shall determine the effect of all matters and questions relating to whether a Participant has been discharged for Cause.
“Change in Control” shall have the meaning set forth in Section 11.4.
“Class A Shares” shall mean Class A Common Stock, par value $2.00 per share, of the Company
“Class C Shares” shall mean Class C Common Stock, par value $2.00 per share, of the Company.
“Clawback Policy” shall have the meaning set forth in Section 13.5(b).
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.
“Committee” shall mean the Compensation Committee of the Board consisting of no fewer than two Directors, each of whom is: (i) a “Non-Employee Director” within the meaning of Rule 16b-3 of the Exchange Act; and (ii) an “independent director” for purpose of the rules and regulations of the NASDAQ Global Market (or such other principal securities market on which the Class A Shares are traded).
“Company” shall mean Security National Financial Corporation, a Utah corporation.
“Company Voting Securities” shall have the meaning set forth in Section 11.4(b).
“Consultant” shall mean any individual or entity which performs bona fide services to the Company or a Subsidiary, other than as an Employee or Director, and who may be offered Shares under the Plan registerable pursuant to a registration statement on Form S-8 under the Securities Act; provided such services are not in connection with the offer or sale of securities in a capital-raising transaction.
“Continuous Service” shall mean that the Participant’s service with the Company or a Subsidiary, whether as an Employee, Consultant or Director, is not terminated. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or a Subsidiary as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service; provided that (i) there is no interruption or termination of the Participant’s Continuous Service; and (ii) that if any Award is subject to Section 409A of the Code, this sentence shall only be given effect to the extent consistent with Section 409A of the Code. For example, a change in status from an Employee of the Company to a Director of a Subsidiary will not constitute an interruption of Continuous Service. The Administrator or its delegate, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal or family leave of absence. The Administrator or its delegate, in its sole discretion, may also determine whether a Company transaction, such as a sale or spin-off of a division or Subsidiary that employs a Participant, shall be deemed to result in a termination of Continuous Service for purposes of affected Awards, and such decision shall be final, conclusive and binding.
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“Deferred Stock Unit” shall have the meaning set forth in Section 8.2.
“Director” shall mean a non-employee member of the Board.
“Disability” shall mean, unless the applicable Award Agreement says otherwise, that the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment; provided, that for purposes of determining the term of an Incentive Stock Option, the term Disability shall have the meaning ascribed to it under Section 22(e)(3) of the Code. The determination of whether an individual has a Disability shall be determined under procedures established by the Administrator. Except in situations where the Administrator is determining Disability for purposes of the term of an Incentive Stock Option, the Administrator may rely on any determination that a Participant is disabled for purposes of benefits under any long-term disability plan maintained by the Company or any Subsidiary in which the Participant participates.
“Dividend Equivalents” shall have the meaning set forth in Section 8.3(b).
“Employee” shall mean any employee of the Company or any Subsidiary and any prospective employee conditioned upon, and effective not earlier than, such person’s becoming an employee of the Company or any Subsidiary.
“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
“Fair Market Value” shall mean, with respect to any property other than Shares, the market value of such property determined by such methods or procedures as shall be established from time to time by the Administrator. The Fair Market Value of Shares as of any date shall be the closing trading price of the Shares as reported on the NASDAQ Global Market on that date (or if there were no reported closing prices on such date, on the last preceding date as of which the closing price per Share was reported) or, if the Company is not then listed on the NASDAQ Global Market, on such other principal securities exchange on which the Shares are traded. If the Company is not listed on the NASDAQ Global Market or any other securities exchange, the Fair Market Value of Shares shall be determined by the Administrator in good faith using such criteria as it determines in its discretion, and such determination shall be conclusive and binding on all persons.
“Freestanding Stock Appreciation Right” shall have the meaning set forth in Section 6.1.
“Grant Date” shall mean the date on which the Administrator adopts a resolution, or takes other appropriate action, expressly granting an Award to a Participant that specifies the material terms and conditions of the Award or, if a later date is set forth in such resolution, then such later date as is set forth in such resolution.
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“Incentive Stock Option” shall mean an Option that is designated by the Administrator as an incentive stock option within the meaning of Section 422 of the Code and that meets the requirements set out in the Plan.
“Incumbent Directors” shall have the meaning set forth in Section 11.4(a).
“Non-qualified Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
“Non-qualifying Transaction” shall have the meaning set forth in Section 11.4(c).
“Option” shall mean any right granted to a Participant under the Plan allowing such Participant to purchase Shares at such price or prices and during such period or periods as the Administrator shall determine.
“Option Exercise Price” shall mean the price at which a Share may be purchased upon the exercise of an Option.
“Other Plan” shall mean the Security National Financial Corporation Amended and Restated 2014 Director Stock Option Plan.
“Other Share-Based Award” shall mean an Award that (i) is not an Option, Stock Appreciation Right, Restricted Stock or Restricted Stock Unit, (ii) is granted under Section 9; and (iii) is payable by delivery of Shares and/or which is measured by reference to the value of Shares.
“Participant” shall mean an Employee, Consultant or Director who is selected by the Administrator to receive an Award under the Plan.
“Payee” shall have the meaning set forth in Section 13.1.
“Performance Award” shall mean any Award the exercisability, vesting, payment or settlement of which is subject to or conditioned upon satisfaction in whole or in part of specific Performance Goals established by the Administrator and set forth in the applicable Award Agreement. For clarity, Options and other Awards that become exercisable, vest, or otherwise are earned and become payable based solely on conditions relating to Continuous Service are not Performance Awards.
“Performance Goals” shall mean, as to a Performance Award, the specified levels of attainment of designated Performance Measures established by the Administrator and set forth in the applicable Award Agreement at which the Performance Award will vest, become exercisable, or otherwise become payable or earned.
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“Performance Measures” shall mean the measures or criteria that the Administrator shall select for purposes of establishing the performance-based conditions for a Performance Award. The Performance Measures may be based on the attainment of specific levels of performance of the Company (or any Subsidiary, division, business unit or operational unit of the Company) and may include the following: (i) net earnings or net income (before or after taxes); (ii) basic or diluted earnings per share (before or after taxes); (iii) net revenue or net revenue growth; (iv) gross revenue, gross profit or gross profit growth; (v) net operating profit (before or after taxes); (vi) return on assets, capital, invested capital, equity, or sales; (vii) cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital); (viii) earnings before or after taxes, interest, depreciation and/or amortization; (ix) gross or operating margins; (x) improvements in capital structure; (xi) budget and expense management; (xii) productivity ratios; (xiii) economic value added or other value added measurements; (xiv) Share price (including, but not limited to, growth measures and total shareholder return); (xv) expense targets; (xvi) margins; (xvii) operating efficiency; (xix) working capital targets; (xx) enterprise value; and (xxi) completion of acquisitions or business expansions.
“Performance Stock Unit” shall have the meaning set forth in Section 8.1.
“Permitted Assignee” shall have the meaning set forth in Section 12.3.
“Plan” shall mean the Security National Financial Corporation 2022 Equity Incentive Plan, as amended from time to time.
“Prior Plan” shall mean the Security National Financial Corporation Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan.
“Related Right” shall have the meaning set forth in Section 6.1.
“Restricted Stock” shall mean any Share issued with the restriction that the holder may not sell, transfer, pledge or assign such Share and with such other restrictions as the Administrator, in its sole discretion, may impose (including any restriction on the right to vote such Share and the right to receive any dividends), which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, or upon the attainment of such specified Performance Goals as the Administrator may deem appropriate.
“Restricted Stock Award” shall have the meaning set forth in Section 7.1.
“Restricted Stock Unit” shall mean an Award of a contractual right to a future payment that is valued by reference to a Share, which value may be paid to the Participant in Shares or cash as determined by the Administrator in its sole discretion upon the satisfaction of such vesting restrictions as the Administrator may establish, which restrictions may lapse separately or in combination at such time or times, in installments or otherwise, as the Administrator may deem appropriate.
“Restricted Stock Unit Award” shall have the meaning set forth in Section 8.1.
“Shares” shall mean Class A Shares and Class C Shares.
“Stock Appreciation Right” shall mean the right granted to a Participant pursuant to Section 6.
“Subcommittee” shall mean a subcommittee of the Committee designated by the Committee under Section 4.2(c) of the Plan.
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“Subsidiary” shall mean any (i) corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing more than 50% of the total combined voting power of all classes of stock in one of the other corporations in the chain; and (ii) any other entity in which the Company has a greater than 50% direct or indirect voting and economic equity interest.
“Substitute Awards” shall mean Awards granted or Shares issued by the Company in assumption of, or in substitution or exchange for, awards previously granted, or the right or obligation to make future awards, by a company acquired by the Company or any Subsidiary or with which the Company or any Subsidiary combines.
“Ten Percent Shareholder” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Subsidiaries.
“Vesting Period” shall have the meaning set forth in Section 7.1 in the case of Restricted Stock or Section 8.1 in the case of Restricted Stock Units, as applicable.
“Vested Unit” shall have the meaning set forth in Section 8.5.
3. SHARES SUBJECT TO THE PLAN
3.1 Number of Shares.
(a) Subject to adjustment as provided in Section 12.2, a total of one million (1,000,000) Shares shall be authorized for grant and issuance under the Plan. Any Shares that are subject to Awards of Options or Stock Appreciation Rights shall be counted against this limit as one (1) Share for every one (1) Share granted. Any Shares that are subject to Awards other than Options or Stock Appreciation Rights shall be counted against this limit as two (2) Shares for every one (1) Share granted.
(b) If any Shares subject to an Award under this Plan are forfeited or any Options awarded under this Plan expire unexercised, the Shares underlying such Award shall, to the extent of such forfeiture or expiration, again be available for Awards under the Plan, subject to Section 3.1(d) below. For clarity, the following Shares shall not be added to the Shares authorized for grant under Section 3.1(a): (i) Shares tendered by the Participant or withheld by the Company in payment of the purchase price of an Option, (ii) Shares tendered by the Participant or withheld by the Company to satisfy any tax withholding obligation with respect to an Award, (iii) Shares repurchased by the Company with Option proceeds, (iv) Shares subject to a Stock Appreciation Right that are not issued in connection with the settlement of the Stock Appreciation Right on exercise thereof; (v) Shares authorized for issuance or subject to awards under the Prior Plan, including Shares subject to awards under the Prior Plan which are forfeited or expire unexercised under the Prior Plan; and (vi) Shares authorized for issuance or subject to awards under the Other Plan, including Shares subject to awards under the Other Plan which are forfeited or expire unexercised under the Other Plan.
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(c) Substitute Awards shall not reduce the Shares authorized for grant under the Plan or authorized for grant to a Participant in any calendar year.
(d) Any Shares that again become available for grant pursuant to this Section 3.1 shall be added back as one (1) Share if such Shares were subject to Options or Stock Appreciation Rights granted under the Plan, or as two (2) Shares if such Shares were subject to Awards other than Options or Stock Appreciation Rights granted under the Plan.
3.2. Character of Shares. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares purchased in the open market or otherwise. The Administrator shall determine in connection with each Award whether the underlying Shares are Class A Shares or Class C Shares.
4. ELIGIBILITY AND ADMINISTRATION
4.1. Eligibility. The persons eligible to receive Awards are the Employees, Consultants and Directors of the Company and its Subsidiaries.
4.2. Administration.
(a) The Plan shall be administered by the Administrator. To the extent required, necessary or desirable to satisfy applicable laws, including to satisfy the requirements for exemption under Rule 16b-3, the Administrator shall be the Committee. Subject to the foregoing and the other provisions of the Plan, (x) the Board may delegate authority to the Committee to make recommendations to the Board on any or all aspects of administering the Plan while the Board retains all of the authority of the Administrator, and (y) different Administrators (e.g., the Board and the Committee) may administer the Plan with respect to different groups of Participants. Subject to Section 4.2(c) below, the other provisions of the Plan and such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, the Administrator shall have full power and authority to: (i) select the Employees, Consultants and Directors to whom Awards may from time to time be granted hereunder; (ii) determine the type or types of Awards, not inconsistent with the provisions of the Plan, to be granted to each Participant hereunder; (iii) determine the number and class of Shares to be covered by each Award granted hereunder; (iv) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder, including conditions on exercisability and vesting; (v) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property; (vi) determine whether, to what extent, and under what circumstances cash, Shares, other property and other amounts payable with respect to an Award made under the Plan shall be deferred either automatically or at the election of the Participant; (vii) determine whether, to what extent and under what circumstances any Award shall be canceled or suspended; (viii) interpret and administer the Plan and any instrument or agreement entered into under or in connection with the Plan, including any Award Agreement; (ix) correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent that the Administrator shall deem desirable to carry it into effect; (x) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan and authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (xi) determine whether any Award, other than an Option or Stock Appreciation Right, will have Dividend Equivalents; (xii) determine whether any Option is intended to be treated as an Incentive Stock Option or Non-qualified Stock Option; (xiii) accelerate, on a case-by-case basis, the exercisability or vesting of a Participant’s Awards, in whole or in part, upon such Participant’s death, Disability or other termination of Continuous Service occurring at least one year after the Grant Date of the Award; (xiv) extend, on a case-by-case basis, the period during which a Participant’s Options can be exercised upon such Participant’s death, Disability or other termination of Continuous Service; provided that the extension will not allow any Option to be exercised after the Option’s original expiration date; (xv) make all determinations for purposes of the Plan with respect to the occurrence, time and basis of any termination of a Participant’s Continuous Service; (xvi) determine the Performance Measures, performance periods and Performance Goals, if any, that apply to vesting, exercisability or settlement of a Performance Awards, the degree to which the applicable Performance Goals have been timely attained, and the portion of any Performance Award that has become vested, exercisable, earned or payable; (xvii) make decisions with respect to outstanding Awards that may become necessary upon a Change in Control or an event that triggers anti-dilution adjustments; and (xviii) exercise full discretion and make any other determinations and take any other action that the Administrator deems necessary or desirable for administration of the Plan.
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(b) Decisions of the Administrator shall be final, conclusive and binding on all persons, including the Company, any Participant, and any Subsidiary. A Participant or other holder of an Award may contest a decision or action of the Administrator with respect to such person or Award only on the grounds that such decision is arbitrary and capricious or unlawful, and any review of such decision or action shall be limited to determining whether the Administrator’s decision or action was arbitrary and capricious or unlawful.
(c) The Administrator, or the full Committee to the extent it has been delegated the authority by the Board or otherwise has the authority pursuant to the Plan, may also delegate to a Subcommittee the right to authorize the grant of Options to Employees who are not directors or officers of the Company and the authority to take action on behalf of the Committee pursuant to the Plan to cancel or suspend Awards to Employees who are not directors or officers of the Company. Additionally, to the extent not inconsistent with applicable law and the rules and regulations of any securities exchange on which the Company’s Shares are traded, the Administrator may delegate in writing to the Company’s Chief Executive Officer, so long as he is also a director of the Company, any of the authority of the Administrator under the Plan to grant Options to such Employees and on such Plan-compliant terms as are determined by the Chief Executive Officer, other than to Employees who are officers or other persons subject to Section 16(b) of the Exchange Act. Any such delegation of authority shall be revocable prospectively by the Administrator at any time and shall be subject to such limitations, including on the number of Options that can be granted in a specified period, and procedures as the Administrator may specify.
(d) Any action within the scope of its or his authority by a Subcommittee or the Chief Executive Officer under Section 4.2(c) shall be deemed for all purposes under the Plan to have been taken by the full Committee or Administrator and references in the Plan to the “Committee” or “Administrator” shall be deemed to include the Subcommittee or the Chief Executive Officer acting within the scope of its or his delegated authority under Section 4.2(c), as applicable, unless the context otherwise requires.
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(e) The Administrator shall act pursuant to a vote of the majority of its members or, in the case of a Committee comprised of only two members, the unanimous consent of its members, whether present or not, or by the written consent of the majority of its members and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Administrator may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable.
5. OPTIONS
5.1. Grant of Options. Options may be granted hereunder to Participants either alone or in addition to other Awards under the Plan. Any Option shall be subject to the terms and conditions of this Article 5 and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Administrator shall deem desirable.
5.2. Award Agreements. All Options granted pursuant to this Article 5 shall be evidenced by a written Award Agreement in such form and containing such terms and conditions as the Administrator shall determine which are not inconsistent with the provisions of the Plan. All Options shall be separately designated as Incentive Stock Options or as Non-qualified Stock Options at the time of grant in the Award Agreement. The terms of Options need not be the same with respect to each Participant. Granting an Option pursuant to the Plan shall impose no obligation on the recipient to exercise such Option. Any individual who is granted an Option pursuant to this Article may hold more than one Option granted pursuant to the Plan at the same time.
5.3. Option Exercise Price.
(a) The Option Exercise Price per Share purchasable under any Option shall not be less than 100% of the Fair Market Value of such Share on the Grant Date of such Option. Notwithstanding the foregoing, an Option may be granted with an Option Exercise Price lower than that set forth in the preceding sentence if such Option is a Substitute Award granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 409A of the Code, and Option Exercise Prices may be adjusted as provided in Section 12.2.
(b) Other than pursuant to Section 12.2, the Administrator shall not without the approval of the Company’s shareholders: (a) lower the Option Exercise Price per Share of an Option after it is granted; (b) cancel an Option when the Option Exercise Price per Share exceeds the Fair Market Value of the underlying Shares in exchange for another Award (other than in connection with Substitute Awards); or (c) take any other action with respect to an Option that may be treated as a repricing under the rules and regulations of the NASDAQ Global Market (or such other principal securities market on which the Shares in question are traded).
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5.4. Option Term and Vesting.
(a) The term of each Option shall be fixed by the Administrator in its sole discretion; provided that no Option shall be exercisable after the expiration of ten (10) years from the Option’s Grant Date, except in the event of death or Disability.
(b) Each Option shall be subject to such terms and conditions on the time or times when it may be exercised (which conditions may be based on Continuing Service, Performance Goals or a combination thereof) as the Administrator may deem appropriate and set forth in the applicable Award Agreement. The vesting provisions of individual Options may vary from Award to Award.
5.5. Exercise of Options. Vested Options granted under the Plan shall be exercised by the Participant or by a Permitted Assignee thereof (or by the Participant’s executors, administrators, guardian or legal representative, as may be provided in an Award Agreement) as to all or any part of the Shares covered thereby, by the giving of written notice of exercise to the Company or its designated agent, specifying the number of Shares to be purchased, accompanied by payment of the full Option Exercise Price for the Shares being purchased. Unless otherwise provided in an Award Agreement, full payment of such Option Exercise Price plus any applicable withholding taxes shall be due and payable in full at the time of exercise and shall be made (a) by certified check or bank check or wire transfer of immediately available funds; or (b) if permitted by the applicable Award Agreement or otherwise with the consent of the Administrator in its discretion, and to the extent permitted by applicable statutes and regulations: (i) by tendering previously acquired Shares (either actually or by attestation, valued at their then Fair Market Value) provided such previously acquired Shares have been held for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes), (ii) by withholding Shares otherwise issuable in connection with the exercise of the Option; (iii) through a “cashless” exercise program established with a broker, (iv) by any combination of any of the foregoing, or (v) through delivery of any other form of legal consideration that may be acceptable to the Administrator. The notice of exercise, accompanied by such payment, shall be delivered to the Company at its principal business office or such other office as the Administrator may from time to time direct, and shall be in such form, containing such further provisions consistent with the provisions of the Plan, as the Administrator may from time to time prescribe. In no event may any Option granted hereunder be exercised for a fraction of a Share. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such issuance of the underlying Shares. Notwithstanding any provision to the contrary, during any period for which the Class A Shares are publicly traded (i.e., the Class A Shares are listed on any established stock exchange or a national market system) an exercise by a Director or Officer that involves or may involve a direct or indirect extension of credit or arrangement of an extension of credit by the Company, directly or indirectly, in violation of Section 402(a) of the Sarbanes-Oxley Act of 2002 shall be prohibited with respect to any Award under this Plan.
5.6. Form of Settlement. In its sole discretion, the Administrator may provide, at the time of grant, that the Shares to be issued upon an Option’s exercise shall be in the form of Restricted Stock or other similar securities, or may reserve the right so to provide after the time of grant.
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5.7. Incentive Stock Options. The Administrator may grant Options intended to qualify as Incentive Stock Options to any employee of the Company or any Subsidiary corporation, subject to the requirements of Section 422 of the Code. Solely for the purposes of determining whether Shares are available for the grant of Incentive Stock Options under the Plan, the maximum aggregate number of Shares with respect to which Incentive Stock Options may be issued under the Plan shall be one million (1,000,000) Class A Shares, subject to adjustment under Section 12.2. Additionally, a Ten Percent Shareholder shall not be granted an Incentive Stock Option unless the Option Exercise Price is at least 110% of the Fair Market Value of the underlying Shares at the Grant Date and the Option is not exercisable after the expiration of five years from the Grant Date. To the extent that the aggregate Fair Market Value (determined at the Grant Date) of Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000, the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Non-qualified Stock Options regardless of any designation in an Award Agreement to be treated as Incentive Stock Options. Any Participant who shall make a “disposition” (as defined in Section 424 of the Code) of all or any portion of Shares acquired upon exercise of an Incentive Stock Option within two (2) years from the date of grant of such Incentive Stock Option or within one (1) year after the issuance of Shares acquired upon exercise of such Incentive Stock Option shall be required to immediately advise the Company in writing as to the occurrence of the sale and the price realized upon the sale of such Shares.
5.8. Effect of Termination of Continuous Service. Unless otherwise provided in the applicable Award Agreement or approved by the Administrator, in the event a Participant’s Continuous Service terminates (other than upon the Participant’s death or Disability), the Participant may exercise the Participant’s vested Options (to the extent that the Participant was entitled to exercise such Options as of the date of termination) but only within such period of time ending on the earlier of (a) the date three months following the termination of the Participant’s Continuous Service, or (b) the expiration of the term of the Option as set forth in the Award Agreement; provided that, if the termination of Continuous Service is for Cause, all outstanding Options (whether or not otherwise vested) shall immediately terminate and cease to be exercisable. If, after termination of Continuous Service, the Options are not timely exercised, the Options shall automatically terminate. In the event that a Participant’s Continuous Service terminates on account of his or her death or Disability, the Participant or his or her successors in interest may exercise the Participant’s vested Options (to the extent that the Participant was entitled to exercise such Options as of the date of termination) but only within such period of time ending on the earlier of (i) the date that is one year following the termination of the Participant’s Continuous Service, or (ii) the expiration of the term of the Option as set forth in the Award Agreement.
6. STOCK APPRECIATION RIGHTS
6.1. Grant and Exercise. The Administrator may award Stock Appreciation Rights to a Participant: (a) in conjunction with all or part of any Option granted under the Plan or at any subsequent time during the term of such Option (a “Related Right”); (b) in conjunction with all or part of any Award (other than an Option) granted under the Plan or at any subsequent time during the term of such Award; or (c) without regard to any Option or other Award (a “Freestanding Stock Appreciation Right”), in each case upon such terms and conditions as the Administrator may establish in its sole discretion.
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6.2. Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Administrator, including the following:
(a) Each Stock Appreciation Right shall be subject to such terms and conditions on the time or times when it may be exercised (which conditions may be based on Continuing Service, Performance Goals, or a combination thereof) as the Administrator may deem appropriate and set forth in the applicable Award Agreement. The vesting provisions of individual Stock Appreciation Rights may vary from Award to Award; provided, that, in no event shall a Stock Appreciation Right be exercisable prior to the one-year anniversary of the Stock Appreciation Right’s Grant Date, except as provided in Section 11 of the Plan.
(b) Upon the exercise of a Stock Appreciation Right, the holder shall have the right to receive the excess of: (i) the Fair Market Value of one Share on the date of exercise, over (ii) a designated base value per Share (the “Base Amount”) with respect to the right on the applicable Grant Date (or in the case of a Related Right on the Grant Date of the related Option) as specified by the Administrator in its sole discretion and set forth in the applicable Award Agreement, which Base Amount per Share, except in the case of Substitute Awards or in connection with an adjustment provided in Section 12.2, shall not be less than the Fair Market Value of one Share on the Grant Date of the right or the related Option, as the case may be.
(c) Upon the exercise of a Stock Appreciation Right, the Administrator shall determine in its sole discretion whether payment shall be made in whole Shares, in cash or other property, or any combination thereof.
(d) Any Related Right may be granted at the same time as the related Option is granted or at any time thereafter before exercise or expiration of such Option.
(e) Any Related Right may be exercised only when the related Option would be exercisable and the Fair Market Value of the Shares subject to the related Option exceeds the Option Exercise Price at which Shares can be acquired pursuant to the Option. In addition, (i) if a Related Right exists with respect to less than the full number of Shares covered by a related Option, then an exercise or termination of such Option shall not reduce the number of Shares to which the Related Right applies until the number of Shares then exercisable under such Option equals the number of Shares to which the Related Right applies, and (ii) no Related Right granted under the Plan to a person then subject to Section 16 of the Exchange Act shall be exercised during the first six (6) months of its term for cash, except as provided in Article 11.
(f) Any Option related to a Related Right shall no longer be exercisable to the extent the Related Right has been exercised.
(g) The provisions of Stock Appreciation Rights need not be the same with respect to each recipient.
(h) The Administrator may impose such other conditions or restrictions on the terms of exercise and the exercise price of any Stock Appreciation Right, as it shall deem appropriate. Notwithstanding the foregoing provisions of this Section 6.2(h), but subject to Section 12.2, a Stock Appreciation Right shall have the same terms and conditions as Options, including (i) a Base Amount per Share not less than Fair Market Value of a Share on the applicable Grant Date, and (ii) a term not greater than ten (10) years. In addition to the foregoing, but subject to Section 12.2, the Administrator shall not without approval of the Company’s shareholders (A) reduce the Base Amount per Share under any Stock Appreciation Right after it is granted, (B) cancel a Stock Appreciation Right when the Base Amount per Share exceeds the Fair Market Value of the underlying Shares in exchange for another Award (other than in connection with Substitute Awards), or (C) take any other action with respect to a Stock Appreciation Right that may be treated as a repricing under the rules and regulations of the NASDAQ Global Market (or such other principal securities market on which the Shares are traded).
(i) The Administrator may impose such terms and conditions on Stock Appreciation Rights granted in conjunction with any Award (other than an Option) as the Administrator shall determine in its sole discretion.
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7. RESTRICTED STOCK AWARDS
7.1. Grants. Shares may be awarded under the Plan to Participants as Restricted Stock either alone or in addition to other Awards granted under the Plan (a “Restricted Stock Award”). Restricted Stock Awards consist of grants of actual outstanding Shares on the applicable Grant Date. A Restricted Stock Award shall be subject to vesting restrictions imposed by the Administrator covering a period of time (“Vesting Period”) specified by the Administrator and may also be subject in whole or in part to additional performance-based vesting conditions designated by the Administrator. A Restricted Stock Award subject to Performance Goal vesting conditions may be denominated as “performance shares.” The Administrator has absolute discretion to determine whether any consideration (other than services) is to be received by the Company or any Subsidiary as a condition precedent to the issuance of shares of Restricted Stock.
7.2. Award Agreements. The terms of any Restricted Stock Award granted under the Plan shall be set forth in a written Award Agreement which shall contain provisions determined by the Administrator and not inconsistent with the Plan. The terms of Restricted Stock Awards need not be the same with respect to each Restricted Stock Award. Each Participant granted Restricted Stock shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock. If the Administrator determines that the Restricted Stock shall be held by the Company or in escrow rather than delivered to the Participant pending the release of the applicable restrictions, the Administrator may require the Participant to additionally execute and deliver to the Company (a) an escrow agreement satisfactory to the Administrator, and (b) the appropriate blank stock power with respect to the Restricted Stock covered by such agreement. If a Participant fails to execute within such time as the Administrator requires an Award Agreement evidencing an Award of Restricted Stock and, if applicable, an escrow agreement and stock power, the Award shall be null and void.
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7.3. Rights of Holders of Restricted Stock.
(a) Beginning on the Grant Date of the Restricted Stock Award and subject to execution of the Award Agreement, the Participant shall become a shareholder of the Company with respect to all Shares subject to the applicable Award Agreement and shall have all of the rights of a shareholder, including the right to vote such Shares and the right to receive distributions made with respect to such Shares; provided that, except as otherwise provided in an Award Agreement, any cash, Shares or any other property distributed as a dividend or otherwise with respect to any Restricted Stock as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Stock. Any provision herein to the contrary notwithstanding, unless otherwise provided in the applicable Award Agreement, cash dividends or with respect to any Restricted Stock Award and any other property (including additional Shares) distributed as a dividend or otherwise with respect to any Restricted Stock Award shall be: (i) accumulated subject to restrictions and risk of forfeiture to the same extent as the underlying Restricted Stock with respect to which such cash, Shares or other property has been distributed; and (ii) either (A) paid to the Participant at the time such restrictions and risk of forfeiture lapse or (B) forfeited to the extent the underlying Restricted Stock is forfeited.
(b) Shares awarded to a Participant as Restricted Stock shall be subject to the following restrictions until the expiration of the applicable Vesting Period, and to such other terms and conditions as may be set forth in the applicable Award Agreement: (i) if an escrow arrangement is used, the Participant shall not be entitled to delivery of the stock certificate representing the Restricted Stock; (ii) the Shares shall be subject to the restrictions on transferability set forth in the Award Agreement; (iii) the Shares shall be subject to forfeiture to the extent provided in the applicable Award Agreement; and (iv) to the extent such Shares are forfeited, the applicable stock certificates shall be returned to the Company, and all rights of the Participant to such Shares and as a shareholder with respect to such Shares shall immediately terminate without further obligation on the part of the Company. Any certificate representing Restricted Stock awarded under the Plan shall bear a legend in such form as the Company deems appropriate.
7.4. Vesting. Restricted Stock Awards shall be subject to such terms and conditions on the time or times when they vest (which conditions may be based on Continuing Service, Performance Goals or a combination thereof) as the Administrator may deem appropriate and set forth in the applicable Award Agreement; provided, that, in no event shall the Vesting Period for a Restricted Stock Award granted to any Participant (other than a Director) be less than a period of time equal to one year, except as provided in Section 11 of the Plan.
7.5. Delivery of Shares. Upon the expiration of the applicable Vesting Period with respect to any Restricted Stock, the restrictions set forth in this Article 7 and the applicable Award Agreement shall be of no further force or effect with respect to the Shares of Restricted Stock, except as set forth in the applicable Award Agreement. If an escrow arrangement is used, upon such expiration, the Company shall deliver to the Participant, or his or her beneficiary, without charge, the stock certificate evidencing the shares of Restricted Stock which have not then been forfeited and with respect to which the Vesting Period has expired (to the nearest full share) and any cash dividends or stock dividends credited to the Participant’s account with respect to such Restricted Stock and the interest thereon, if any.
8. RESTRICTED STOCK UNIT AWARDS
8.1. Grants. Awards of Restricted Stock Units having a value equal to a designated number of Shares (“Restricted Stock Unit Awards”) may be granted hereunder to Participants, in addition to other Awards granted under the Plan. A Restricted Stock Unit Award shall be subject to vesting restrictions imposed by the Administrator covering a period of time (“Vesting Period”) specified by the Administrator and may also be subject to additional Performance Goal vesting conditions designated by the Administrator. A Restricted Stock Unit Award subject to Performance Goal vesting conditions may be denominated as “Performance Stock Units.”
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8.2. Award Agreements. The terms of Restricted Stock Unit Awards granted under the Plan shall be set forth in a written Award Agreement which shall contain provisions determined by the Administrator and not inconsistent with the Plan. The terms of such Awards need not be the same with respect to each Restricted Stock Unit Award. Each Participant granted Restricted Stock Units shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock Units. The Administrator may also grant Restricted Stock Units with a deferral feature, consistent with applicable law, including Section 409A of the Code, whereby settlement is deferred beyond the vesting date until the occurrence of a future payment date or event set forth in an Award Agreement (“Deferred Stock Units”). To the extent applicable, any reference to Restricted Stock Units in the Plan, includes Deferred Stock Units.
8.3. Rights of Holders of Restricted Stock Units.
(a) No Shares shall be issued at the time a Restricted Stock Unit, or Deferred Stock Unit, is granted, and the Company will not be required to set aside Shares or funds for the payment of any such Award. A Participant shall have no voting rights with respect to any Shares underlying Restricted Stock Units, including Deferred Stock Units, granted hereunder.
(b) At the discretion of the Administrator, each Restricted Stock Unit (representing one Share) may be credited with cash and stock dividends paid by the Company in respect of one Share (“Dividend Equivalents”). Unless otherwise expressly provided in the applicable Award Agreement, Dividend Equivalents shall be withheld by the Company and credited to the Participant’s account, and interest may be credited on the amount of cash Dividend Equivalents credited to the Participant’s account at a rate and subject to such terms as determined by the Administrator. Dividend Equivalents credited to a Participant’s account and attributable to any particular Restricted Stock Unit (and earnings thereon, if applicable) shall be distributed in cash or, at the discretion of the Administrator, in Shares having a Fair Market Value equal to the amount of such Dividend Equivalents and earnings, if applicable, to the Participant upon settlement of such Restricted Stock Unit and, if such Restricted Stock Unit is forfeited, the Participant shall have no right to such Dividend Equivalents.
(c) Restricted Stock Units awarded to any Participant shall be subject to (i) forfeiture until the expiration of the applicable Vesting Period, and satisfaction of any applicable Performance Goals during such period, to the extent provided in the applicable Award Agreement, and to the extent such Restricted Stock Units are forfeited, all rights of the Participant to such Restricted Stock Units shall automatically terminate without further obligation on the part of the Company and (ii) such other terms and conditions as may be set forth in the applicable Award Agreement.
8.4. Vesting. Restricted Stock Unit Awards shall be subject to such terms and conditions on the time or times when they vest and become earned (which conditions may be based on Continuing Service, Performance Goals or a combination thereof) as the Administrator may deem appropriate and set forth in the applicable Award Agreement; provided, that, in no event shall the Vesting Period for a Restricted Stock Unit Award granted to any Participant (other than a Director) be less than a period of time equal to one year, except as provided in Section 11 of the Plan.
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8.5. Settlement and Payment. Except as may be provided in the applicable Award Agreement, upon the expiration of the applicable Vesting Period with respect to any outstanding Restricted Stock Units (other than Deferred Stock Units), or upon the expiration of the deferral period with respect to any outstanding Deferred Stock Units, the Company shall deliver to the Participant, or his or her beneficiary, without charge, one Share for each such outstanding vested Restricted Stock Unit, or Deferred Stock Unit, (“Vested Unit”) and cash equal to any Dividend Equivalents credited with respect to each such Vested Unit in accordance with Section 8.3(b) hereof and the interest thereon or, at the discretion of the Administrator, in Shares having a Fair Market Value equal to such Dividend Equivalents and the interest thereon, if any; provided, however, that, if explicitly provided in the applicable Award Agreement, the Administrator may, in its sole discretion, elect to pay cash or part cash and part Shares in lieu of delivering only Shares for Vested Units. If a cash payment is made in lieu of delivering Shares, the amount of such payment shall be equal to the Fair Market Value of the Shares as of the date on which the Vesting Period lapsed with respect to each Vested Unit that is not a Deferred Stock Unit, or as of the delivery date in the case of each Vested Unit that is a Deferred Stock Unit. The Company shall issue Shares or make otherwise make payment for each Vested Unit as soon as reasonably possible after expiration of the applicable Vesting Period and on a date selected by the Company; provided that in no event shall settlement of any Vested Units be made later than sixty (60) days after expiration of the applicable Vesting Period (or such shorter period as is necessary to exempt the Award from Section 409A of the Code).
9. OTHER AWARDS
The Administrator may, subject to any restrictions under applicable law or under the rules of any securities exchange on which the Shares are listed, grant Other Share-Based Awards, either alone or in tandem with other Awards, in such amounts and subject to such conditions as the Administrator shall determine in its sole discretion. Each Other Share-Based Award shall be evidenced by an Award Agreement and shall be subject to such conditions, not inconsistent with the Plan, as may be reflected in the applicable Award Agreement. In no event shall the Vesting Period for an Other Share Based Award be less than a period of time equal to one year from the applicable Grant Date, except as provided in Section 11 of the Plan. Other Share-Based Awards may be paid in cash, Shares, other property, or any combination thereof, as specified in the applicable Award Agreement. No Dividend Equivalents shall be paid or credited with respect to Other Share-Based Awards. Any cash, Shares or any other property distributed as a dividend or otherwise with respect to any issued but unvested Shares underlying an Other Share-Based Award shall be subject to the same vesting conditions and risk of forfeiture as such Other Share-Based Award.
10. SECURITIES LAW COMPLIANCE
No Shares shall be issued, purchased or sold under any Award Agreement unless and until (a) any then applicable requirements of federal, state and foreign laws and regulatory agencies have been fully complied with to the satisfaction of the Company and its counsel and (b) if required to do so by the Company, the Participant has executed and delivered to the Company a letter of investment intent in such form and containing such provisions as the Administrator may require. The Company shall use reasonable efforts to seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Awards and to issue and sell Shares upon exercise, vesting or settlement of the Awards; provided that this undertaking shall not require the Company to register under the Exchange Act or other applicable securities laws the Plan, any Award or any Shares issued or issuable pursuant to any such Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Shares under the Plan, the Company shall be relieved from any liability for failure to issue and sell Shares upon exercise, vesting or settlement of such Awards unless and until such authority is obtained.
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It is the intent of the Company that the Plan satisfy, and be interpreted in a manner that satisfies, the applicable requirements of Rule 16b-3 as promulgated under Section 16 of the Exchange Act so that Participants will be entitled to the benefit of Rule 16b-3, or any other rule promulgated under Section 16 of the Exchange Act, and will not be subject to short-swing liability under Section 16 of the Exchange Act. Accordingly, if the operation of any provision of the Plan would conflict with the intent expressed in this Section 10, such provision to the extent possible shall be interpreted and/or deemed amended so as to avoid such conflict.
11. CHANGE IN CONTROL PROVISIONS
11.1. Effect of Change in Control. Notwithstanding any provision of the Plan (other than Section 11.2) or any applicable Award Agreement to the contrary, in the event of a Change in Control, all then outstanding Awards shall automatically become 100% vested, exercisable, earned and payable, as of the effective time of the Change in Control. For clarity, to the extent the amount or timing of vesting, exercisability, payment or settlement of any Award is subject to or conditioned upon attainment of Performance Goals stated in the applicable Award Agreement (i.e., the Award is a Performance Award), for purposes of this Section 11.1, such Performance Goals shall be deemed to have been attained at 100% of the applicable target levels.
11.2. Discretionary Cancellation of Awards. In addition, and notwithstanding any contrary provision in this Plan or applicable Award Agreement, in the event of a pending Change in Control, the Administrator may in its discretion and upon at least 10 days’ advance notice to the affected Participants, elect to cancel under this Section 11.2 all or any portion of the then outstanding Awards and cause the Company to pay to the holders thereof, in cash or Shares, or any combination thereof, the then current Fair Market Value of such cancelled Awards. The Administrator shall compute the Fair Market Value of Awards canceled under this Section 11.2 based upon the price per Share received or to be received by the other shareholders of the Company in the Change in Control transaction. In determining the Fair Market Value of Awards cancelled under this Section 11.2, all such cancelled Awards shall be valued as if they are 100% vested and earned (with any Performance Goals deemed satisfied at 100% of the applicable target level). In the case of any Option or Stock Appreciation Right with an Option Exercise Price (or Base Amount in the case of a Stock Appreciation Right) that equals or exceeds the price paid or to be paid for a Share in connection with the Change in Control, the Administrator may cancel the Option or Stock Appreciation Right without the payment of any consideration therefor.
11.3. Successors. The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company and its Subsidiaries, taken as a whole.
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11.4. Definition of Change in Control. For purposes of the Plan, unless otherwise provided in an Award Agreement, Change in Control means the occurrence of any one of the following events:
(a) During any twelve (12) month period beginning after the date hereof, individuals who, as of the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the beginning of such period whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; and provided further that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;
(b) any “person” (as such term is defined in the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided that the event described in this paragraph (b) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (i) by the Company or any Subsidiary, (ii) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities, (iv) pursuant to a Non-Qualifying Transaction, as defined in paragraph (c) below, or (v) by any person of Company Voting Securities from the Company, if a majority of the Incumbent Board approves in advance the acquisition of beneficial ownership of 30% or more of Company Voting Securities by such person;
(c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s shareholders, whether for such transaction or the issuance of securities in the transaction, unless immediately following such transaction: (i) more than 70% the total voting power of (A) the surviving corporation resulting from such transaction, or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the surviving corporation, is represented by Company Voting Securities that were outstanding immediately prior to such transaction (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such transaction), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the transaction; (ii) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the surviving corporation or its parent corporation), is or becomes the beneficial owner, directly or indirectly, of more than 30% of the total voting power of the outstanding voting securities eligible to elect directors of the parent corporation (or, if there is no parent corporation, the surviving corporation); and (iii) at least a majority of the members of the board of directors of the parent corporation (or, if there is no parent Corporation, the surviving corporation) following the consummation of the transaction were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such transaction (any transaction which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a “Non-Qualifying Transaction”);
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(d) the date shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; or
(e) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Company and its Subsidiaries, taken as a whole, to any person that is not a Subsidiary.
Notwithstanding the foregoing, (x) a transaction will not be deemed to be a Change in Control for purposes of a specific Award unless the transaction qualifies as a “change in control” event within the meaning of Section 409A of the Code for purposes of such Award; and (y) a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 30% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.
12. GENERALLY APPLICABLE PROVISIONS
12.1. Amendment and Termination of the Plan. The Board may, from time to time, alter, amend, suspend or terminate the Plan as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law, including the rules and regulations of the NASDAQ Global Market (or such other principal securities market on which the Class A Shares are traded); provided, that the Board may not amend the Plan in any manner that would result in noncompliance with Rule 16b-3 of the Exchange Act; and further provided that the Board may not, without the approval of the Company’s shareholders, amend the Plan to (a) increase the number of Shares that may be the subject of Awards under the Plan (except for adjustments pursuant to Section 12.2), (b) expand the types of awards available under the Plan; (c) materially expand the class of persons eligible to participate in the Plan; (d) amend any provision of Section 5.3, (e) increase the maximum permissible term of any Option specified by Section 5.4 or the maximum permissible term of a Stock Appreciation Right specified by Section 6.2, or (f) take any action with respect to an Option or Stock Appreciation Right that may be treated as a repricing under the rules and regulations of the NASDAQ Global Market (or such other principal securities market on which the Class A Shares are traded), including reducing the Option Exercise Price or Base Amount (as applicable) or exchanging an Option or Stock Appreciation Right for cash or another Award. In addition, no amendments to, or termination of, the Plan shall in any way impair the rights of a Participant under any Award previously granted without such Participant’s consent.
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12.2. Adjustments. In the event of changes in the outstanding Shares or in the capital structure of the Company by reason of any stock or extraordinary cash dividend, stock split, reverse stock split, an extraordinary corporate transaction such as any recapitalization, reorganization, merger, consolidation, combination, exchange, or other relevant change in capitalization occurring after the Grant Date of any Award, Awards granted under the Plan and any Award Agreements, the Option Exercise Price of Options and Base Amount of Stock Appreciation Rights, the maximum number of Shares subject to all Awards stated in Section 3.1 and the maximum number of Shares with respect to which Incentive Stock Options may be granted shall be equitably adjusted or substituted, as to the number, price or kind of share of common stock or other consideration subject to such Awards to the extent necessary to preserve the economic intent of such Award. In the case of adjustments made pursuant to this Section 12.2, unless the Administrator specifically determines that such adjustment is in the best interests of the Company or its Subsidiaries, the Administrator shall, in the case of Incentive Stock Options, ensure that any adjustments under this Section 12.2 will not constitute a modification, extension or renewal of the Incentive Stock Options within the meaning of Section 424(h)(3) of the Code and in the case of all Stock Options, ensure that any adjustments under this Section 12.2 will not constitute a modification of such Stock Options within the meaning of Section 409A of the Code. Any adjustments made under this Section 12.2 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. The Company shall give each Participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes.
12.3. Transferability of Awards. Except as provided below, and except as otherwise authorized by the Administrator in an Award Agreement, no Award and no Shares subject to Awards described in Article 8 that have not been issued or as to which any applicable restriction or performance period has not lapsed, may be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution, and such Award may be exercised during the life of the Participant only by the Participant or the Participant’s guardian or legal representative. Notwithstanding the foregoing if provided for in an Award Agreement, a Participant may assign or transfer an Award with the consent of the Administrator (each transferee thereof, a “Permitted Assignee”): (a) to the Participant’s spouse, children, or grandchildren (including any adopted step children and grandchildren); (b) to a trust or partnership for the benefit of one or more person referred to in clause (a); or (c) for charitable donations; provided that such Permitted Assignee shall be bound by and subject to all of the terms and conditions of the Plan and the Award Agreement relating to the transferred Award and shall execute an agreement satisfactory to the Company evidencing such obligations; and provided further that such Participant shall remain bound by the terms and conditions of the Plan. The Company shall cooperate with any Permitted Assignee and the Company’s transfer agent in effectuating any transfer permitted under this Section. Any transfer of an Award or Shares in violation of this Section 12.3 shall be null and void.
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12.4. Deferral. The Administrator may establish one or more programs under the Plan to permit selected Participants the opportunity to elect to defer receipt of consideration upon exercise of an Award, vesting, satisfaction of Performance Goals, or other event that absent the election would entitle the Participant to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program. The Administrator shall be authorized to establish procedures pursuant to which the payment of any Award may be deferred.
13. MISCELLANEOUS
13.1. Tax Withholding. The Company shall have the right to make all payments or distributions pursuant to the Plan to a Participant (or a Permitted Assignee thereof) (any such person, a “Payee”) net of any applicable federal, state and local taxes required to be paid or withheld as a result of (a) the grant of any Award, (b) the exercise of an Option or Stock Appreciation Right, (c) the delivery of Shares or cash, (d) the lapse of any restrictions in connection with any Award or (e) any other event occurring pursuant to the Plan. The Company or any Subsidiary shall have the right to withhold from wages or other amounts otherwise payable to such Payee such withholding taxes as may be required by law, or to otherwise require the Payee to pay such withholding taxes. If the Payee shall fail to make such tax payments as are required, the Company or its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to such Payee or to take such other action as may be necessary to satisfy such withholding obligations. The Administrator may establish procedures for election by Participants to satisfy such obligation for the payment of such taxes by tendering previously acquired Shares (either actually or by attestation, valued at their then Fair Market Value) that have been owned for a period of at least six months (or such other period to avoid accounting charges against the Company’s earnings), or by directing the Company to retain Shares otherwise deliverable in connection with the Award.
13.2. Right of Discharge Reserved; Claims to Awards. Nothing in the Plan nor the grant of an Award hereunder shall confer upon any person the right to continue in the employment or service of the Company or any Subsidiary or affect any right that the Company or any Subsidiary may have to terminate the employment or service of (or to demote or to exclude from future Awards under the Plan) any such Employee, Consultant or Director at any time for any reason “at will.” Except as specifically provided by the Administrator, the Company shall not be liable for the loss of existing or potential profit from an Award granted in the event of termination of an employment or other relationship. No Employee, Consultant or Participant shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Employees, Consultants or Participants under the Plan.
13.3. Prospective Recipient. The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an agreement or other instrument evidencing the Award and delivered a copy thereof to the Company, and otherwise complied with the then applicable terms and conditions of the Plan and Award Agreement.
13.4. Substitute Awards. Notwithstanding any other provision of the Plan, the terms of Substitute Awards may vary from the terms set forth in the Plan to the extent the Administrator deems appropriate to conform, in whole or in part, to the provisions of the awards in substitution for which they are granted.
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13.5. Cancellation and Forfeiture of Awards; Clawback.
(a) Notwithstanding anything to the contrary contained herein or in any Award Agreement, all outstanding Awards granted to any Participant shall be automatically and immediately canceled if the Participant (a) is terminated for Cause or engages following his or her period of Continuous Service in conduct that would constitute Cause; (b) breaches any non-competition, non-solicitation, confidentiality, or other restrictive covenants that are contained in the Award Agreement or otherwise applicable to the Participant; or (c) without the consent of the Company, during or following the Participant’s period of Continuous Service for the Company or any Subsidiary, establishes a relationship with a competitor of the Company or any Subsidiary or engages in activity that is in conflict with and materially adverse to the interest of the Company or any Subsidiary, as determined by the Administrator in its discretion.
(b) Notwithstanding any other provisions in this Plan or any Award Agreement, the Company may cancel any Award, require reimbursement of any Award (or the proceeds thereof) by a Participant, and effect any other right of recoupment of equity or other compensation provided under the Plan, in accordance with any Company policies that may be adopted and/or modified from time to time by the Company in its discretion (“Clawback Policy”). A Participant may be required to repay to the Company previously paid compensation, whether provided pursuant to the Plan or an Award Agreement, in accordance with any Clawback Policy in effect at the time of the execution of the Award Agreement, as any such policy may be subsequently modified by the Company to comply with applicable law or stock exchange listing requirements. By accepting an Award, the Participant agrees to be bound by any Clawback Policy as in effect at the time of the execution of the Award Agreement, as any such policy may be subsequently modified by the Company to comply with applicable law or stock exchange listing requirements.
13.6. Delivery and Stop Transfer Orders. Upon exercise or vesting of an Award, as applicable, the Company shall issue Shares or pay any amounts due within a reasonable period of time thereafter. Subject to any statutory or regulatory obligations the Company may otherwise have, and except as otherwise contemplated by this Plan, 30 days shall be considered a reasonable period of time. All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stop-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. Any provision herein to the contrary notwithstanding, the Company shall have no obligation to issue any Shares pursuant to an Award if the Administrator determines in good faith that such issuance would violate applicable federal, state or foreign securities laws.
13.7. Nature of Payments. All Awards made pursuant to the Plan are in consideration of services performed or to be performed for the Company or any Subsidiary, division or business unit of the Company. Any income or gain realized pursuant to Awards under the Plan constitute a special incentive payment to the Participant and shall not be taken into account, to the extent permissible under applicable law, as compensation for purposes of any of the employee benefit plans of the Company or any Subsidiary except as may be determined by the Administrator.
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13.8. Other Plans. Options may continue to be granted under the Prior Plan and the Other Plan. Additionally, nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.
13.9. Severability. If any provision of the Plan shall be held unlawful or otherwise invalid or unenforceable in whole or in part by a court of competent jurisdiction, such provision shall (a) be deemed limited to the extent that such court of competent jurisdiction deems it lawful, valid and/or enforceable and as so limited shall remain in full force and effect, and (b) not affect any other provision of the Plan or part thereof, each of which shall remain in full force and effect. If the making of any payment or the provision of any other benefit required under the Plan shall be held unlawful or otherwise invalid or unenforceable by a court of competent jurisdiction, such unlawfulness, invalidity or unenforceability shall not prevent any other payment or benefit from being made or provided under the Plan, and if the making of any payment in full or the provision of any other benefit required under the Plan in full would be unlawful or otherwise invalid or unenforceable, then such unlawfulness, invalidity or unenforceability shall not prevent such payment or benefit from being made or provided in part, to the extent that it would not be unlawful, invalid or unenforceable, and the maximum payment or benefit that would not be unlawful, invalid or unenforceable shall be made or provided under the Plan.
13.10. Construction. As used in the Plan, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”
13.11. Unfunded Status of the Plan. The Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver the Shares or payments in lieu of or with respect to Awards hereunder; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan.
13.12. Governing Law. The Plan and all determinations made and actions taken thereunder, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Utah, without reference to principles of conflict of laws, and construed accordingly.
13.13. Effective Date of Plan; Termination of Plan. The Plan shall be effective on the date of the approval of the Plan by the holders of a majority of the Company Voting Securities voted at a duly constituted meeting of the shareholders of the Company. The Plan shall be null and void and of no effect if the foregoing condition is not fulfilled and no Award shall be granted until the shareholders of the Company approve the Plan. Awards may be granted under the Plan at any time and from time to time following shareholder approval of the Plan until the tenth anniversary of the effective date of the Plan, on which date the Plan will expire except as to Awards then outstanding under the Plan. Such outstanding Awards shall remain in effect until they have been exercised or terminated, or have expired.
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13.14. Foreign Employees and Sub-Plans.
(a) Awards may be granted to Participants who are foreign nationals or employed outside the United States, or both, on such terms and conditions different from those applicable to Awards to Employees employed in the United States as may, in the judgment of the Administrator, be necessary or desirable in order to recognize differences in local law or tax policy. The Administrator also may impose conditions on the exercise or vesting of Awards in order to minimize the Company’s obligation with respect to tax equalization for Employees on assignments outside their home country.
(b) The Administrator may from time to time establish sub-plans under the Plan for purposes of satisfying foreign or state blue sky, securities, tax, employment, privacy or other laws of various jurisdictions in which the Company intends to grant Awards. Any sub-plans shall contain such limitations and other terms and conditions as the Administrator determines are necessary or desirable. All sub-plans shall be deemed a part of the Plan, but each sub-plan shall apply only to the Participants in the jurisdiction for which the sub-plan was designed.
13.15. Compliance with Section 409A of the Code; Taxes.
(a) The Plan is intended to comply with Section 409A of the Code to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted and administered to be in compliance therewith. Any payments described in the Plan that are due within the “short-term deferral period” as defined in Section 409A of the Code shall not be treated as deferred compensation unless applicable laws require otherwise. In no event may any Participant, directly or indirectly, designate the calendar year of any payment to be made under this Plan or any Award Agreement hereunder which constitutes deferred compensation within the meaning of Section 409A of the Code. Notwithstanding anything to the contrary in the Plan, to the extent required to avoid accelerated taxation and taxation under Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six (6) month period immediately following the Participant’s termination of Continuous Service shall instead be paid on the first payroll date after the six-month anniversary of the Participant’s separation from service (or the Participant’s death, if earlier).
(b) Notwithstanding the foregoing or any other provision of the Plan or any other agreement, neither the Company, any Subsidiary, the Administrator, nor any of their respective directors, officers, employees or agents shall have any obligation to take any action to prevent the assessment of any tax or penalty on any Participant under Section 409A of the Code or otherwise with respect to the Plan or any Award. Neither the Company, any Subsidiary, the Administrator, nor any of their respective directors, officers, employees or agents shall have any liability to any Participant or any other Person if an Option designated as an Incentive Stock Option fails to qualify as such at any time. Neither the Company, any Subsidiary, the Administrator, nor any of their respective directors, officers, employees or agents has any liability or obligation to indemnify, reimburse, gross-up or compensate any Participant for any taxes or tax-related penalties, interest and other costs arising out of or resulting from the Plan or any Award, including any taxes under Sections 409A and 4999 of the Code.
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13.16. Captions. The captions in the Plan are for convenience of reference only, and are not intended to narrow, limit or affect the substance or interpretation of the provisions contained herein.
13.17. Beneficiary Designation. Each Participant under the Plan may from time to time name any beneficiary or beneficiaries by whom any Award under the Plan is to be exercised (or to whom any amount or Shares are to be paid or issued) in case of such Participant’s death. Each designation will revoke all prior designations by the same Participant, shall be in a form reasonably prescribed by the Administrator and shall be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime.
13.18. Plan History. The Plan was originally adopted by the Board, subject to the approval of the Company’s shareholders. The Plan was originally approved by the Company’s shareholders at the Company’s annual meeting of shareholders that was held on June 17, 2022. The Plan was amended and restated by the Board on March 17, 2023. Pursuant to the terms of the Plan and applicable law, including the Code, the shareholders of the Company were not required to approve such amendment and restatement.
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Exhibit 19
SECURITY NATIONAL FINANCIAL CORPORATION
INSIDER TRADING POLICY
AND GUIDELINES WITH RESPECT TO
CERTAIN TRANSACTIONS IN COMPANY SECURITIES
- Ratified March 22, 2024 –
This Policy provides guidelines to employees, officers, consultants, contractors and members of the Board of Directors of Security National Financial Corporation and its subsidiaries (collectively, the “Company”) with respect to transactions in the Company’s securities. The Company’s Chief Financial Officer is its Insider Trading Compliance Officer (the “Compliance Officer”).
Applicability of Policy
This Policy applies to all transactions in the Company’s securities, including common stock, options for common stock and any other securities the Company may issue from time to time, such as preferred stock, warrants and convertible debentures, as well as to derivative securities relating to the Company’s stock, whether or not issued by the Company, such as exchange-traded options. This Policy applies to all employees, officers, consultants, contractors and members of the Board of Directors of the Company who receive or. have access to material nonpublic information (“Inside Information”) regarding the Company. The basis for determining what constitutes Inside Information is discussed on page 3 of this Memorandum. This group of people, members of their immediate families, and members of their households are sometimes referred to in this Policy as “Insiders,” This Policy also applies to any person who receives Inside Information from any Insider. Any person who possesses Inside Information regarding the Company is an Insider for so long as the information is not publicly known.
Statement of Policy
A. General Policy
It is the policy of the Company to oppose the unauthorized disclosure of any nonpublic information acquired in the workplace, and the use of Inside Information in securities trading.
B. Specific Policies Applicable to All Employees and Directors
1. Trading on Material Nonpublic Information. No director, officer, consultant, contractor or employee of the Company, and no member of the immediate family or household of any such person, shall engage in any transaction involving the Company’s securities from the date that he or she possesses Inside Information until the close of business on the second Trading Day following the date of public disclosure of that information. “Trading Day” means a day on which national stock exchanges and the Nasdaq National Market are open for trading.
IF A PERSON POSSESSES INSIDE INFORMATION, HE OR SHE MUST FOREGO ANY PROPOSED TRANSACTION IN THE COMPANY’S SHARES, EVEN THOUGH HE OR SHE PLANNED TO MAKE THE TRANSACTION BEFORE HE OR SHE LEARNED OF THE INSIDE INFORMATION AND EVEN THOUGH THE FAILURE TO EXECUTE SUCH TRANSACTION MAY RESULT IN A LOSS OR THE INABILITY TO GENERATE AN ANTICIPATED PROFIT.
2. Tipping. An Insider shall not disclose (“tip”) Inside Information to any other person (including family members) where such information may be used by such person to his or her profit by trading in the securities of companies to which such information relates. An Insider or related person shall not make recommendations or express opinions on the basis of Inside Information as to trading in the Company’s securities.
3. Confidentiality of Nonpublic Information. Nonpublic information relating to the Company is the property of the Company and the unauthorized disclosure of such information is forbidden.
4. Trading Window. The Company’s directors, officers, employees, consultants and contractors shall not engage in any transaction involving the Company’s securities other than during the “Trading Window.” The Trading Window closes at the close of business on February 15, April 30, July 15 and October 15 of each fiscal year. The Trading Window opens at the close of business on the second Trading Day following the date the Company publicly discloses its financial results for the previous fiscal quarter or year. The Company recommends, assuming the absence of Inside Information, that trades occur during the first ten days of the Trading Window.
From time to time, the Company may also require that directors, officers, selected employees and others to suspend trading because of developments known to the Company and not yet disclosed to the public. In such event, such persons shall not engage in any transaction involving the Company’s securities during such period and shall not disclose to others the fact that trading has been suspended.
5. Option Exercises and Sales. The exercise of stock options under the Company’s stock option plans (but not the sale of any such shares) is exempt from this Policy since the other party to the transaction is the Company itself and the price does not vary with the market but is fixed by the terms of the option agreement or the plan.
6. Short Sales. No officer, employee, consultant, contractor or director should make a short sale of the Company’s securities.
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C. Additional Requirements Applicable to Directors, Officers and Certain Employees
(i) Any owner of more than ten percent of the Company’s stock, (ii) the Company’s directors, (iii) the Company’s chief executive officer, president, chief financial officer, treasurer and senior general counsel, (iv) any vice president of the Company in charge of any of the Company’s principal business segments, and (iv) any officer or other person who performs a policy-making function for the Company (each, a “Section 16 Person”), must comply with the reporting obligations and limitations on short-swing transactions set forth in Section 16 of the Securities Exchange Act of 1934, as amended. The practical effect of these provisions is that Section 16 Persons who purchase and sell the Company’s securities within a six-month period must return all profits to the Company whether or not they had knowledge of any Inside Information. Under these provisions, and so long as certain other criteria are met, the exercise of an option under the Company’s option plan is not deemed a purchase under Section 16; however, the sale of any such shares is a sale under Section 16. Moreover, no Section 16 Person may ever make a short sale of the Company’s stock.
Section 16 Persons must report virtually all transactions in securities related to the Company, including transactions that are not otherwise subject to this Policy (such as gifts and stock option plan option exercises). Thus, stock option exercises are reportable events under Section 16 even though they are non-events for purposes of determining the six-month limitation on short-swing profits under Section 16. The failure to report or the late report of a transaction required to be reported by Section 16 is a violation of federal law, potentially subjecting the insider to monetary penalties and requiring the Company to disclose by name the person responsible for the delinquent or missing filing in the Company’s publicly filed documents.
D. Definition of Inside Information
It is not possible to define all categories of material information. However, information should be regarded as material if there is a reasonable likelihood that it would be considered important to an investor in making an investment decision regarding the purchase or sale of stock or other securities.
While it may be difficult under this standard to determine whether particular information is material) there are various categories of information that are particularly sensitive. Examples of such information may include:
| ● | Financial results | |
| ● | Projections of future earnings or losses | |
| ● | Signing or termination of a substantial new contract | |
| ● | A pending or proposed acquisition, merger or joint venture | |
| ● | Completion of a business development or milestone | |
| ● | Unanticipated problems with products or services | |
| ● | Commencement of a new development effort | |
| ● | Stock splits | |
| ● | New equity or debt offerings | |
| ● | Actual or threatened litigation | |
| ● | Changes in senior management | |
| ● | Impending bankruptcy or financial liquidity problems |
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Both positive and negative information can be material.
Nonpublic information is information that has not been previously disclosed to the general public and is otherwise not available to the general public.
E. Individual Responsibility to Comply with Policy
Every officer, director, consultant, contractor and employee has the individual responsibility to comply with this Policy. Beyond the guidelines set forth in this Policy, appropriate judgment should be exercised in connection with any trade in the Company’s securities.
F. Potential Criminal and Civil Liability and/or Disciplinary Action
1. Liability for Insider Trading. Persons may be subject to penalties of up to $1,000,000 and up to ten years in jail for engaging in transactions in the Company’s securities at a time when they possess Inside Information regarding the Company.
2. Liability: for Tipping. Persons may also be liable for improper transactions by any person (a “tippee”) to whom they have disclosed Inside Information regarding the Company or to whom they have made recommendations or expressed opinions on the basis of such information as to trading in the Company’s securities, The Securities and Exchange Commission (the “SEC”) has imposed large penalties even when the disclosing person did not profit from the trading. The SEC, the stock exchanges and the Financial Industry Regulatory Authority (FINRA) use sophisticated electronic surveillance techniques to uncover insider trading.
3. Possible Disciplinary Actions. Employees of the Company who violate this Policy arc subject to disciplinary action by the Company as determined by its officers. Penalties may include ineligibility for future participation in the Company’s equity incentive plans or termination of employment.
G. Inquiries
Please direct your questions as to any of the matters discussed in this Policy to the Compliance Officer.
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Exhibit 20
SECURITY NATIONAL FINANCIAL CORPORATION
EXECUTIVE INCENTIVE COMPENSATION CLAWBACK POLICY
Adopted September 8, 2023
I. Introduction
The Board of Directors (the “Board”) of Security National Financial Corporation, a Utah corporation (the “Company”) believes that it is in the best interests of the Company and its shareholders to create and maintain a culture that emphasizes integrity and accountability and to require the recovery of certain executive incentive compensation in the event that the Company is required to prepare an Accounting Restatement (as defined below). The Board has therefore adopted this policy which provides for the recoupment of certain executive incentive compensation in the event of an Accounting Restatement resulting from material noncompliance with financial reporting requirements under the federal securities laws (this “Policy”). This Policy is designed to comply with Section 10D of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 10D-1 thereunder, and The Nasdaq Stock Market (“Nasdaq”) Listing Rule 5608 (“Rule 5608”) and will be interpreted and applied accordingly.
II. Administration
This Policy shall be administered by the Board or, if so designated by the Board, the Compensation Committee, in which case references herein to the Board shall be deemed references to the Compensation Committee. The Board is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. Any determinations made by the Board shall be final and binding on all affected individuals.
III. Covered Executives
This Policy applies to the Company’s current and former executive officers, as determined by the Board in accordance with Section 10D of the Exchange Act and the listing standards of Nasdaq, which includes each individual who is currently or was previously designated as an “officer” of the Company as defined in Rule 16a-1(f) under the Exchange Act, and such other senior executives who may from time to time be deemed subject to this Policy by the Board (each, a “Covered Executive” and collectively, the “Covered Executives”). Each Covered Executive shall be required to sign and return to the Company the Acknowledgement Form attached hereto as Exhibit A pursuant to which such Executive Officer will agree to be bound by the terms and comply with this Policy.
IV. Recoupment; Accounting Restatement
In the event the Company is required to prepare an Accounting Restatement, the Board will promptly require reimbursement or forfeiture of any Erroneously Awarded Compensation received by any Covered Executive, unless the Board determines in accordance with Section VI below that such recovery is impracticable. Recoupment of Erroneously Awarded Compensation pursuant to this Policy is made on a “no fault” basis, without regard to whether any misconduct occurred or whether any Covered Executive has responsibility for the noncompliance that resulted in the Accounting Statement.
For purposes of this Policy, the following terms shall have the following meanings:
| ● | “Accounting Restatement” means an accounting restatement of any of the Company’s financial statements due to the Company’s material noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or to correct an error that is not material to previously issued financial statements, but would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period, within the meaning of Rule 10D-1 and Rule 5608. For the avoidance of doubt, an Accounting Restatement will not be deemed to occur in the event of a restatement of the Company’s financial statements due to an out-of-period adjustment or due to a retrospective (i) application of a change in accounting principles; (ii) revision to reportable segment information due to a change in the structure of the Company’s internal organization; (iii) reclassification due to a discontinued operation; (iv) application of a change in reporting entity, such as from a reorganization of entities under common control; or (v) revision for stock splits, reverse stock splits, stock dividends, or other changes in capital structure. | |
| ● | “Covered Incentive Compensation” means Incentive Compensation received on or after October 2, 2023: (i) by a person after beginning service as a Covered Executive, (ii) by a person who served as a Covered Executive at any time during the performance period for that Incentive Compensation, (iii) while the Company has a class of securities listed on a national securities exchange or a national securities association, and (iv) during the three completed fiscal years immediately preceding the date that the Company is required to prepare the Accounting Restatement (or such longer period as required under Rule 5608 in the event the Company changes its fiscal year). | |
| ● | “Erroneously Awarded Compensation” means the amount of Covered Incentive Compensation that was received by each Covered Executive in excess of the Covered Incentive Compensation that would have been received by the Covered Executive had such Covered Incentive Compensation been determined based on the restated Financial Reporting Measure following an Accounting Restatement, computed without regard to taxes paid, as reasonably determined by the Board. For this purpose, if the amount of Covered Incentive Compensation that is received by a Covered Executive was based on the Company’s stock price or total shareholder return and is not subject to mathematical recalculation directly from the Accounting Restatement, the amount to be recovered as Erroneously Awarded Compensation shall be based on a reasonable estimate of the effect of the Accounting Restatement on the Financial Reporting Measure upon which the Covered Incentive Compensation was received. The Company’s Corporate Secretary shall, on behalf of the Board, obtain and maintain all documentation of the determination of any such reasonable estimate and provide such documentation to Nasdaq when required. | |
| ● | “Financial Reporting Measure” means (i) any measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements and any measure that is derived wholly or in part from any such measure, and (ii) the Company’s stock price and the total shareholder return of the Company. A measure, however, need not be presented within the financial statements or included in a filing with the U.S. Securities and Exchange Commission (“SEC”) to constitute a Financial Reporting Measure. For example, Financial Reporting Measures may include revenues, net income, EBITDA, funds from operations, liquidity measures (such as working capital or operating cash flow), and return measures (such as return on invested capital or return on assets). |
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| ● | “Incentive Compensation” means any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Financial Reporting Measure. For example, Incentive Compensation includes any of the following if so granted, earned or vested: (i) annual bonuses and other short- and long-term cash incentives, (ii) stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) restricted stock units, (vi) performance shares, and (vii) performance units. For the avoidance of doubt, Incentive Compensation shall also be deemed to include any amounts which were determined based on (or were otherwise calculated by reference to) Incentive Compensation (including, without limitation, any amounts under any long-term disability, life insurance or supplemental retirement plan or any notional account that is based on Incentive Compensation, as well as any earnings accrued thereon). |
V. Method of Recoupment
The Board will determine, in its sole discretion, the method for recouping Erroneously Awarded Compensation hereunder, which may include, without limitation, any of the following:
| ● | Requiring reimbursement of cash Incentive Compensation previously paid; | |
| ● | Seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based awards; | |
| ● | Offsetting the recouped amount from any compensation otherwise owed by the Company to the Covered Executive (including any severance otherwise payable by the Company to the Covered Executive); | |
| ● | Making a deduction from the Covered Executive’s salary; | |
| ● | Cancelling, or reducing the number of shares subject to, or the value of, outstanding vested or unvested equity awards; and/or | |
| ● | Taking any other remedial and recovery action permitted by law, as determined by the Board. |
VI. Impracticability
The Board will recover any Erroneously Awarded Compensation in accordance with this Policy unless the Board determines that such recovery would be impracticable because (i) the direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered, (ii) recovery would likely cause an otherwise tax-qualified, broad-based retirement plan of the Company to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder, or (iii) the Board otherwise makes such determination in accordance with Rule 10D-1 of the Exchange Act and the listing standards of Nasdaq. Before concluding that it would be impracticable to recover any Erroneously Awarded Compensation based on the expense of enforcement, the Company shall make a reasonable attempt to recover such Erroneously Awarded Compensation, and the Company Secretary, on behalf of the Board, shall document such reasonable attempt(s) to recover and provide that documentation to Nasdaq when required.
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VII. No Indemnification or Insurance
Neither the Company nor any of its subsidiaries or affiliates shall indemnify any Covered Executive against the loss of any Erroneously Awarded Compensation. Further, neither the Company nor any of its subsidiaries or affiliates shall pay or reimburse any Covered Executive for any insurance policy entered into by a Covered Executive that provides for full or partial coverage of any recoupment obligation under this Policy.
VIII. Interpretation
The Board is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. It is intended that this Policy be interpreted in a manner that is consistent with the requirements of Section 10D of the Exchange Act and any applicable rules or standards adopted by the SEC or any national securities exchange on which the Company’s securities are listed.
IX. Effective Date
This Policy shall be effective as of October 2, 2023 (the “Effective Date”) and shall apply to Incentive Compensation that is approved, awarded or granted to Covered Executives on or after that date.
X. Amendment; Termination
The Board may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary to comply with applicable law and regulation, including any rules or standards adopted by Nasdaq. The Board may terminate this Policy at any time.
XI. Other Recoupment Rights
The Board intends that this Policy will be applied to the fullest extent of the law. The Board may require that any employment agreement, equity award agreement, or similar agreement entered into on or after the Effective Date shall, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this Policy. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company (i) under applicable law, (ii) pursuant to the terms of any similar policy or recoupment provision in any employment agreement, severance agreement, equity award agreement, bonus plan or similar agreement or plan, and (iii) any other legal remedies available to the Company. Further, the provisions of this Policy are in addition to (and not in lieu of) any rights to repayment the Company may have under Section 304 of the Sarbanes-Oxley Act of 2002.
XII. Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives.
| 4 |
XIII. Disclosure
The circumstances of any recoupment pursuant to this Policy will be publicly disclosed where required by Rule 10D-1, Item 402 of Regulation S-K and Rule 5608 or any other applicable law, rule, or regulation. In accordance with Rule 10D-1, this Policy shall be filed with the SEC as an exhibit to the Company’s Form 10-K, as provided in Item 601(b) of Regulation S-K.
XIV. Change of Listing
In the event that the Company lists its securities on any national securities exchange or national securities association other than Nasdaq, all references to “Nasdaq” in this Policy shall mean each national securities exchange or national securities association upon which the Company has a class of securities then listed.
| 5 |
Exhibit A
Security National Financial Corporation
Executive Incentive Compensation Clawback Policy
Acknowledgment Form
By signing below, the undersigned acknowledges and confirms that the undersigned has received and reviewed a copy of the Security National Financial Corporation Executive Incentive Compensation Clawback Policy (the “Policy”). Capitalized terms used but not otherwise defined in this Acknowledgement Form (this “Acknowledgement Form”) shall have the meanings ascribed to such terms in the Policy. By signing this Acknowledgement Form, the undersigned acknowledges and agrees that the undersigned is and will continue to be subject to the Policy and that the Policy will apply both during and after the undersigned’s employment with the Company. Further, by signing below, the undersigned agrees to abide by the terms of the Policy, including, without limitation, by returning any Erroneously Awarded Compensation to the Company to the extent required by, and in a manner permitted by, the Policy.
| COVERED EXECUTIVE | |
| ______________________________________ | |
| Print Name:_____________________________ | |
| Date:__________________________________ |
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 2023
Life Insurance Segment
Security National Life Insurance Company
Reppond Holding Company
First Guaranty Insurance Company
Kilpatrick Life Insurance Company
Southern Security Life Insurance Company, Inc.
Trans-Western Life Insurance Company
Security National Funding Company
New York Land Holdings, Inc.
Dry Creek Property Development, Inc.
SN Farmington LLC
434 Holdings LLC
5300 Development LLC
Ascension 5204 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
MFF Capital LLC
SNCH Venture LLC
SNW-HAFB LLC
SNH Investments LLC
SNMA Properties LLC
SNMA-AR LLC
SNA Venture LLC
SNA-MB LLC
SNA-SE LLC
SNA-SW LLC
SNA-MV LLC
SNA-TM LLC
SNA-TR LLC
SNA-TR2 LLC
SNA-AM LLC
SNA-DM LLC
SNA-SR LLC
SNA-WL2 LLC
Mortgage Segment
SecurityNational Mortgage Company
EverLEND Mortgage Company
SN-TLV LLC
SN Sunset 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.
Paradise Sunset Chapel Funeral Home, Inc.
Greer-Wilson Funeral Home, 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
SN Mapleton 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-K of Security National Financial Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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: March 29, 2024 | /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-K of Security National Financial Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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: March 29, 2024 | /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 Annual Report of Security National Financial Corporation (the “Company”) on Form 10-K for the period ending December 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, 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 and belief:
| (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: March 29, 2024 | /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 Annual Report of Security National Financial Corporation (the “Company”) on Form 10-K for the period ending December 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, 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 and belief:
| (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: March 29, 2024 | /s/ Garrett S. Sill |
| Garrett S. Sill | |
| Chief Financial Officer and Treasurer | |
| (Principal Financial Officer and Principal Accounting Officer) |