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

Form 10-K

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006, or

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

Commission file number 0-9341

Security National Financial Corporation
(Exact name of registrant as specified in its charter)

     
 UTAH      87-0345941
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)
     
5300 South 360 West, Suite 250 Salt Lake City, Utah    84123
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code:   (801) 264-1060
     
Securities registered pursuant to Section 12(b) of the Act:   None
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of Each Class   Name of Each Exchange on Which Registered
Class A Common Stock, $2.00 Par Value    Nasdaq National Market
Class C Common Stock, $0.20 Par Value    None
     
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No___
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yes__  No x
 
Indicate by check mark whether the registrant is a shell company (as defined in the Exchange Act Rule 12b-2). Yes__  No x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of Registrant’s most recently completed second fiscal quarter was $17,049,000, based upon the closing price on that date on the Nasdaq National Market.
 
As of March 31, 2007, there were 6,355,622 shares of Class A Common Stock, $2.00 par value per share, and 6,972,426 shares of Class C Common Stock, $.20 par value per share, outstanding.
 
Documents Incorporated by Reference

Portions of the definitive Proxy Statement for the registrant’s 2007 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.


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Item 1. Business

Security National Financial Corporation (the “Company”) operates in three main business segments: life insurance, cemetery and mortuary, and mortgage loans. 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 38 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 of the Company consists of five cemeteries in the state of Utah and one in the state of California and eight mortuaries in the state of Utah and four in the state of Arizona. The Company also engages in pre-need selling of funeral, cemetery and cremation services through its Utah, Arizona and California operations. Many of the insurance agents also sell pre-need funeral, cemetery and cremation services. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction and existing homes and real estate projects. The mortgage loan segment operates through 28 wholesale and retail offices in thirteen states, and is an approved mortgage lender in several states.

The design and structure of the Company is that each business segment is related to the other business segments and contributes to the profitability of the other segments. Because of the Company’s cemetery and mortuary operations in Utah, California and Arizona, the Company enjoys 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 subsidiaries invest their assets (representing in part the pre-paid funerals) in investments authorized by the respective insurance departments of their states of domicile. One such investment authorized by the insurance departments is high quality mortgage loans. Thus, while each business segment is a profit center on a stand-alone basis, this horizontal integration of each segment is planned to lead to improved profitability of the Company. The Company also pursues growth through acquisitions of both life insurance companies and cemeteries and mortuaries. The Company’s acquisition business strategy is based on reducing the overhead cost of the acquired company by utilizing existing personnel, management, and technology while still providing quality service to customers and policyholders.

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 grown through the direct sale of life insurance and annuities and through the acquisition of other insurance companies, including the acquisitions of Capital Investors Life Insurance Company in 1994 and Civil Service Employees Life Insurance Company in 1995, a stock purchase transaction with Southern Security Life Insurance Company (“Southern Security Life”) in 1998 (involving the purchase of 57.4% of the outstanding common shares of Southern Security Life), an asset purchase transaction with Acadian Life Insurance Company (“Acadian”) in 2002, the acquisition of Paramount Security Life Insurance Company (“Paramount”), now Security National Life Insurance Company of Louisiana (“Security National Life of Louisiana”) in March 2004, a merger transaction involving the purchase of the remaining outstanding shares of Southern Security Life in January 2005, which resulted in Southern Security Life Insurance Company becoming a wholly-owned subsidiary of Security National Life, and the acquisition of Memorial Insurance Company of America (“Memorial Insurance Company”) in December 2005.

In December 2005, all of the remaining insurance business of Southern Security Life was transferred to Security National Life by a reinsurance agreement, except for the capital and surplus required to be maintained under Florida law. In December 2006, Southern Security Life was sold in a stock sales transaction. At the time of sale, Southern Security Life’s assets consisted of a corporate charter, licenses and the required capital and surplus. The sale of Southern Security Life is conditioned upon the subsequent approval of the transaction by the Florida Office of Insurance Regulation and, if such approval is not obtained, Southern Security Life will be liquidated.


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The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies, including the acquisitions of Paradise Chapel Funeral Home, Inc. in 1989, Holladay Memorial Park, Inc., Cottonwood Mortuary, Inc. and Deseret Memorial, Inc. in 1991, Sunset Funeral Home in 1994, Greer-Wilson Funeral Home, Inc. in 1995 and Crystal Rose Funeral Home in 1997. In 1993, the Company formed SecurityNational Mortgage Company (“SecurityNational Mortgage”) to originate and refinance mortgage loans. Since 1993, SecurityNational Mortgage has opened 28 branches in thirteen states. See Notes to Consolidated Financial Statements for additional disclosure and discussion regarding segments of the business.

Life Insurance

                Products

The Company, through its insurance subsidiaries, Security National Life, Security National Life of Louisiana and Memorial Insurance Company of America, issues and distributes selected lines of life insurance and annuities. The Company’s life insurance business includes funeral plans, interest-sensitive life insurance, as well as other traditional life and accident and health insurance products. The Company places specific marketing emphasis on funeral plans and traditional whole life products sold in association with the costs of higher education.

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $15,000. The Company believes that funeral plans represent a marketing niche that has lower competition since most insurance companies do not offer similar coverages. 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.

Through the Company’s higher education funding division, the Company markets strategies for fund accumulations for college and repayment of student loans a child may have after college. Pursuant to those strategies the Company conducts scholarship searches and originates and funds government guaranteed student loans. The traditional whole life product marketed in conjunction with funding of higher education costs is a 10-Pay Whole Life Policy with an annuity rider. Both the paid-up aspect of the whole life policy and the savings aspect of the annuity rider are marketed as a tool for parents to help accumulate money to help fund college expenses or repay loans incurred during college. The product is generally offered to parents who have children under the age of 25.

                Markets and Distribution

The Company is licensed to sell insurance in 38 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific “niche” markets. A “niche” market is an identifiable market, which the Company believes is not emphasized by most insurers. Funeral plan policies are sold primarily to persons who range in age from 45 to 75. Even though people of all ages and income levels purchase funeral plans, the Company believes that the highest percentage of funeral plan purchasers are individuals who are older than 45 and have low to moderate income.

Higher education funding is for families that desire to prepare for their children’s higher education needs. Such preparation can include searches for scholarships, grant applications, guaranteed student loan applications, and the purchase of life insurance and annuities. In 1965, the Higher Education Act created the guaranteed student loan programs participated in by the Company. Federal Family Education Loan (FFEL) Programs, which now comprise Federal Stafford Loans (formerly Guaranteed Student Loans), Federal PLUS Loans, and Federal Consolidation Loans. The FFEL Program makes these long-term loans available to students attending institutions of higher education, vocation, technical, business and trade schools and some foreign schools.


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State or private nonprofit guaranty agencies insure FFEL’s and the Federal Government reimburses these agencies for all or part of the insurance loans they pay to lenders. The federal guaranty on an FFEL replaces the security (collateral) usually required for a long-term consumer loan. These government programs have numerous rules for qualification and have limits on how much you can borrow. The Company’s whole life product has an annuity rider that can provide a way for families to save additional funds for their children’s education. The Company has a student loan resource department, which is available to policyholders to help parents and students apply for various scholarships, grants and loans.

A majority of the Company’s funeral plan premiums come from the states of Arizona, Arkansas, Colorado, Idaho, Kansas, Mississippi, Oklahoma, Texas and Utah. A majority of the Company’s non-funeral plan life insurance premiums come from the states of Alabama, California, Florida, Georgia, Louisiana, Mississippi, Missouri, New Mexico, South Carolina 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 10% to 100% 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. The incentive for such businesses to share the costs is that 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, 2006:

 
  2006   2005   2004   2003   2002  
 
 
 
 
 
 
Life Insurance
Policy/Cert. Count
    as of December 31
  401,441     413,753 (5)   357,767 (3)   353,017 (2)   341,909 (1)
Insurance in force as of
     December 31
    (omitted 000)
$ 2,620,694   $ 3,216,946 (5) $ 2,914,135 (3) $ 2,914,438 (2) $ 2,635,436 (1)
Premiums Collected
    (omitted 000)
$ 31,619 (4) $ 27,275 (5) $ 30,560 (3) $ 28,598 (1)(2) $ 14,699  
   
(1)
Includes the purchase of assets from Acadian Life Insurance Company on December 23, 2002.
 
(2)
Includes reinsurance assumed on October 1, 2003, under agreement with Guaranty Income Life Insurance Company. This agreement was cancelled on January 1, 2005.
 
(3)
Includes the purchase of Paramount Security Life Insurance Company, now known as Security National Life Insurance Company of Louisiana, on March 16, 2004.
 
(4)
Includes the purchase of Memorial Insurance Company of America on December 29, 2005.
 
(5)
Includes the termination of reinsurance assumed with Guaranty Income Life Insurance Company effective January 1, 2005.

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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 and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company writes insurance based upon its medical limits and requirements subject to the following general non-medical limits:

 
  Age Nearest
Birthday
  Non-Medical
Limits
 
 
 
 
  0-50   $75,000  
  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 also sells funeral plan insurance. This insurance is a small face amount, with a maximum policy size of $15,000. It is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on selected applicant and a Medical Information Bureau 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 surrender their annuity contracts.

Annuities have guaranteed interest rates of 3% to 6.5% per annum. Above that, the interest rate credited is periodically determined by the Board of Directors at their discretion. An immediate annuity is a contract in which the individual remits to the Company a sum of money in return for the Company’s obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual’s life, or for such other period as may be designated.

Holders of annuities generally enjoy a significant benefit under current federal income tax law in that interest accretions that are credited to the annuities do not incur current income tax expense on the part of the contract holder. Instead, the interest income is tax deferred until such time as it is paid out to the contract holder. In order for the Company to realize 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. From that spread must be deducted commissions, issuance expenses and general and administrative expenses. The Company’s annuities currently have credited interest rates ranging from 3% to 6.5%.

                Markets and Distribution

The general market for the Company’s annuities is middle to older age individuals who wish to save or invest their money in a tax-deferred environment, having relatively high yields. The major source of annuity considerations comes from direct agents. Annuities are also sold in conjunction with other insurance sales. This is true in both the


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funeral planning and higher education planning areas. If an individual does not qualify for a funeral plan due to health considerations, the agent will often sell that individual an annuity to fund those final expenses. In the higher education planning area, most life insurance sales have as part of the transaction an annuity portion that is used to accumulate funds. The commission rates on annuities are up to 10%.

The following table summarizes the annuity business for the five years ended December 31, 2006:

 
  2006   2005   2004   2003   2002  
 
 
 
 
 
 
Annuities
Policy/Cert.
                   
    Count as of December 31   8,475     8,904 (1)   7,365     7,206     7,711  
Deposits Collected (omitted 000) $ 3,977   $ 2,416   $ 1,972   $ 2,026   $ 3,215  
   
(1) Includes the purchase of Memorial Insurance Company of America on December 29, 2005.
   

Accident and Health

      Products

Prior to the acquisition of Capital Investors Life in 1994, the Company did not actively market accident and health products. With the acquisition of Capital Investors Life, the Company acquired a block of accident and health policies which pay limited benefits to policyholders. The Company is currently offering a low-cost comprehensive diver’s accident policy. The diver’s policy provides worldwide coverage for medical expense reimbursement in the event of diving or water sports accidents.

      Markets and Distribution

The Company currently markets its diver’s policy through web marketing.

The following table summarizes the accident and health business for the five years ended December 31, 2006:

 
2006   2005   2004   2003   2002  
 
 
 
 
 
 
Accident and Health
Policy/Cert.
                   
    Count as of December 31   13,153     14,934     15,778     17,391     18,921  
Premiums Collected (omitted 000) $ 274   $ 285   $ 308   $ 352   $ 365  
 

Reinsurance

When a given policy exceeds the Company’s retention limits, the Company reinsures with other companies that portion of the individual life insurance and accident and health policies it has underwritten. The primary purpose of reinsurance is to enable an insurance company to write a policy in an amount larger than the risk it is willing to assume for itself. The Company remains obligated for amounts ceded in the event the reinsurers do not meet their obligations.

The Company’s policy is to retain no more than $75,000 of ordinary insurance per insured life. Excess risk is reinsured. The total amount of life insurance in force at December 31, 2006, reinsured by other companies aggregated $122,232,000, representing approximately 6.0% of the Company’s life insurance in force on that date.


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The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are renewable 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.

Investments

The investments that support the Company’s life insurance and annuity obligations are determined by the Investment Committee of the Board of Directors of the various subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the investments must meet statutory requirements governing the nature and quality of permitted investments by insurance companies. The Company’s interest-sensitive type products, primarily annuities and interest-sensitive whole life, compete with other financial products such as bank certificates of deposit, brokerage sponsored money market funds as well as competing life insurance company products. While it is not the Company’s policy to offer the highest yield in this climate, in order to offer what the Company considers to be a competitive yield, it maintains a diversified portfolio consisting of common stocks, preferred stocks, municipal bonds, investment and non-investment grade bonds including high-yield issues, mortgage loans, real estate, short-term investments 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.

Cemetery and Mortuary

      Products

The Company has six wholly-owned cemeteries and 12 wholly owned mortuaries. The cemeteries are non-denominational. Through its cemetery and mortuary operations, 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 grave spaces, interment vaults, mausoleum crypts and niches, markers, caskets, flowers and other related products. The 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 funeral chapel at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has eight 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 also markets its mortuary and cemetery products on an at-need basis. 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 many instances, the Company’s cemetery and mortuary facilities are the named beneficiary of the funeral plan policies.


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The sales representatives of the Company’s cemetery and mortuary operations are commissioned and receive no salary. The sales commissions range from 4% to 25% for cemetery products and services and 10% to 100% of first year premiums for funeral plan insurance. Potential customers are located via telephone sales prospecting, responses to letters mailed by the sales representatives, newspaper inserts, referrals, contacts made at funeral services, and door-to-door canvassing. The Company trains its sales representatives and generates leads for them. If a customer comes to one of the Company’s cemeteries on an at-need basis, the sales representatives are compensated on a commission basis.

Mortgage Loans

      Products

Beginning in 1993, the Company, through its subsidiary, SecurityNational Mortgage Company has been active in both the residential as well as commercial real estate markets. The Company has current approvals through HUD, Fannie Mae, Freddie Mac and other substantial secondary market investors, which enable it to originate a wide variety of residential mortgage loan products that are subsequently sold to investors. The Company uses internal funding sources as well as maintaining external warehouse lines of credit with unaffiliated financial institutions. The Company also originates residential construction loans.

Security National Capital, a subsidiary of SecurityNational Mortgage Company, originates commercial real estate loans both for internal investment as well as for sale to unaffiliated investors.

      Markets and Distribution

The Company’s residential mortgage lending services are marketed primarily to mortgage originators. SecurityNational Mortgage Company maintains a retail origination presence in the Salt Lake City market in addition to 28 wholesale and retail branch offices located in Arizona, California, Colorado, Florida, Hawaii, Kansas, Nevada, North Carolina, Oklahoma, Oregon, Texas, Utah and Virginia, with sales representatives in these and other states.

Recent Acquisitions and Other Business Activities

       Southern Security Life Insurance Company

On December 31, 2005, Southern Security Life and Security National Life entered into a reinsurance agreement to reinsure the remaining in force business of Southern Security Life to Security National Life to the extent permitted by the Florida Office of Insurance Regulation. The assets and liabilities reinsured under the reinsurance agreement were deposited into a trust account, in which Zions First National Bank has agreed to act as trustee. Under the terms of the reinsurance agreement, in the event of the insolvency of Security National Life, Zions First National Bank will hold and administer the assets and liabilities of Security National Life in trust.

The Florida Office of Insurance Regulation approved the reinsurance agreement on December 28, 2005. As a result of the reinsurance agreement, all of the insurance business and operations of Southern Security Life, including its assets and liabilities, was transferred to Security National Life, as reinsurer, as of December 31, 2005, the effective date of the agreement, except for the capital and surplus which is required to be maintained under Florida law. Thus, $48,528,000 in assets and liabilities were transferred from Southern Security Life to Security National Life pursuant to the reinsurance agreement. In addition, on December 31, 2005, Southern Security Life declared a dividend to Security National Life in the amount of $7,181,000. Following the transfer of the assets and liabilities under the reinsurance agreement and the payment of the dividend, the remaining capital and surplus of Southern Security Life was $3,500,000, which was the amount required in order for Southern Security Life to remain qualified as an admitted insurer in good standing in the state of Florida.


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On December 29, 2006, the Company, through its wholly owned subsidiary, Security National Life, completed the sale of Southern Security Life to American Network Insurance Company (“American Network”), a Pennsylvania corporation and wholly owned subsidiary of Penn Treaty America Corporation, a Pennsylvania corporation. Under the terms of the transaction, Security National Life received purchase consideration consisting of $400,000 plus an amount equal to the capital and surplus of Southern Security Life as of December 31, 2006, and American Network received all of the outstanding shares of Southern Security Life . The transaction is subject to and conditioned upon the subsequent approval of the transaction by the Florida Office of Insurance Regulation, the Florida Department of Financial Services, and the Pennsylvania Department of Insurance. American Network is required to make all necessary filings, including a Form A application with the Florida Office of Insurance Regulation, and provide all information and documentation that may reasonably be required by the regulatory authorities to obtain such approval.

At the closing of the transaction on December 29, 2006, Security National Life delivered to the law firm of Mackey Price Thompson & Ostler (“Mackey Price”), an escrow agent in the transaction, to be held and disposed of by such escrow agent pursuant to the terms of an Escrow Agreement, the following: (i) certificates representing all 2,105,235 shares of Southern Security Life’s outstanding common stock; (ii) letters of resignation of the officers and directors of Southern Security Life; (iii) a copy of the Stock Purchase Agreement among American Network, Security National Life and Southern Security Life; (iv) cash in the amount of $503,302 equal to the statutory deposits of Southern Security Life pertaining to the states of Alabama, Michigan and Southern Carolina, which are statutorily required to be in the form of bonds; (v) an original executed Assignment dated December 29, 2006, in which Southern Security Life distributes, assigns and transfers to Security National Life all of Southern Security Life’s capital and surplus accounts, and any other real and personal property that it may have inadvertently failed to previously distribute to Security National Life; and (vi) original executed Articles of Dissolution dated December 29, 2006. In addition, American Network placed in escrow, pursuant to an Escrow Agreement with Preferred Insurance Capital Consultants, LLC as escrow agent, the approximate purchase price of $4,209,132, consisting of $400,000 plus an amount equal to the capital and surplus of Southern Security Life as of September 30, 2006.

Under the terms of the Escrow Agreement with Mackey Price acting as escrow agent, upon receipt by Mackey Price of (a) a written notice from Security National Life and Southern Security Life stating that all governmental approvals of the transaction have been obtained by American Network and the approximate purchase price have been distributed to Security National Life pursuant to the Stock Purchase Agreement, and (b) a written notice from Security National Life confirming receipt of payment from American Network of the difference between the approximate purchase price and the actual purchase price (consisting of the difference between the amount of the capital and surplus of Southern Security Life as of September 30, 2006 as compared to the capital and surplus as of December 31, 2006), Mackey Price has agreed to deliver to American Network the certificates representing all of the shares of Southern Security Life, together with accompanying stock powers, duly endorsed for transfer, and destroy the Assignment and Articles of Dissolution by tearing such documents in half and delivering them to Security National Life, along with the copy of the Stock Purchase Agreement. In addition, under the terms of the Escrow Agreement with Preferred Insurance Capital Consultants, LLC acting as escrow agent, the approximate purchase price being held in escrow shall be wire transferred to Security National Life, with all investment income and interest earned thereon in the escrow account being wire transferred to American Network.

Furthermore, upon obtaining governmental approvals of the transaction, American Network has agreed to immediately deposit its own bonds with the states of Alabama, Michigan and South Carolina and to take necessary action to have Security National Life’s bonds released and returned to Security National Life. Upon receipt of a written notice from American Network that it has deposited its own bonds with the states of Alabama, Michigan and South Carolina and a written notice from Security National Life that it has received the bonds that it had deposited with such states, Mackey Price, acting as escrow agent, has agreed to disburse to American Network the $503,302 in cash being held in escrow, which is an amount equal to the statutory deposits of Southern Security Life pertaining to the states of Alabama, Michigan and South Carolina.


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In the event any of the regulatory authorities disapprove or fail to approve the transaction on or before June 30, 2007, Preferred Insurance Capital Consultants acting as escrow agent under the terms of the Escrow Agreement, has agreed to wire transfer to American Network the approximate purchase price and all investment income and interest earned thereon being held in the escrow account. In addition, Mackey Price, acting as escrow agent, has agreed to return to Security National Life the certificates representing all of the shares of Southern Security Life, together with accompanying stock power, duly endorsed for transfer, the $503,302 in cash delivered into escrow by Security National Life equal to the statutory deposits of Southern Security Life pertaining to the states of Alabama, Michigan and South Carolina, and the copy of the Stock Purchase Agreement.

Moreover, in the event the condition subsequent is not satisfied by virtue of any of the regulatory authorities not approving the transaction and the sale of Southern Security Life is, as a result, rescinded, the liquidation of Southern Security Life shall be deemed to be completed as of the closing date on December 29, 2006 by virtue of Mackey Price, as escrow agent under the terms of the Escrow Agreement, delivering to Security National Life the Assignment dated December 29, 2006 and mailing the signed Articles of Dissolution to the Amendment Section, Division of Corporations with the State of Florida to complete the liquidation of Southern Security Life. The liquidation of Southern Security Life would be in accordance with the terms of the Agreement and Plan of Complete Liquidation of Southern Security Life Insurance into Security National Life Insurance Company, which the Board of Directors of both the Company and Security National Life approved on December 12, 2005. Under the terms of this agreement, Southern Security Life would be liquidated into Security National Life in essentially the same manner as the liquidation described in Private Letter Ruling 9847027 in order to achieve the same tax treatment and consequences under Section 332 of the Internal Revenue Code of 1986, as amended, and other applicable provisions described in such Letter Ruling.

      Memorial Insurance Company of America

On December 29, 2005, Security National Life and Southern Security Life completed a stock purchase transaction with Memorial Insurance Company of America, an Arkansas domiciled insurance company (“Memorial Insurance Company”), to purchase all of the outstanding shares of common stock of Memorial Insurance Company. Under the terms of the transaction, the shareholders of Memorial Insurance Company received a total purchase consideration of $13,500,000 for all of the outstanding common shares of Memorial Insurance Company, with each shareholder having received a pro rata share of the total amount of the purchase consideration based upon the number of shares such shareholder owns.

The shareholders of Memorial Insurance Company received payment for their shares by means of distributions, with Security National Life and Southern Security Life simultaneously contributing sufficient capital and surplus to Memorial Insurance Company to maintain its status as an admitted insurer in good standing in the state of Arkansas. The transaction is to be treated, for federal and state tax purposes, as a part sale, part redemption of the Memorial Insurance Company stock. At the closing of the transaction, the shareholders of Memorial Insurance Company sold all of their shares of Memorial Insurance Company stock to Southern Security Life, such shares representing all of the issued and outstanding stock of Memorial Insurance Company. As a result, Memorial Insurance Company became a wholly owned subsidiary of Southern Security Life.

As of December 31, 2005, Memorial Insurance Company had 116,116 policies in force and approximately 50 agents. For the year ended December 31, 2005, Memorial Insurance Company had revenues of $3,659,000 and net income of $837,000. As of December 31, 2005, the assets and the capital and surplus of Memorial Insurance Company were $65,909,000 and $2,505,000, respectively.

Under the terms of the transaction, as set forth in the Stock Purchase Agreement dated September 23, 2005 among Security National Life, Southern Security Life, and Memorial Insurance Company, the shareholders agree, where applicable following the closing of the transaction, to maintain any existing policies from Memorial Insurance


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Company that were previously sold through such shareholders’ funeral and mortuary businesses and to avoid replacing any of such policies with the policies of other insurance companies. The shareholders further agree to use their reasonable best efforts to support the business and operations of Memorial Insurance Company, including, where applicable, to maintain a business relationship with Memorial Insurance Company to the extent such a business relationship existed prior to such closing.

Moreover, Security National Life and Southern Security Life agree, pursuant to the terms of the Stock Purchase Agreement, to maintain the corporate offices of Memorial Insurance Company at its current location in Blytheville, Arkansas. Furthermore, Security National Life and Southern Security Life agree to use their best efforts, following the closing of the transaction, to assist Memorial Insurance Company in retaining the sales agents and brokers in its business and operations. The obligations to complete the transaction were contingent upon approval of the transaction by the Arkansas Insurance Department. A hearing was held on December 9, 2005 with the Commissioner of the Arkansas Insurance Department to consider the request to approve the transaction, and the Commissioner issued an order dated December 21, 2005 approving the transaction.

At the closing of the transaction, Security National Life and Memorial Insurance Company entered into a reinsurance agreement to reinsure the majority of the in force business of Memorial Insurance Company to Security National Life, as reinsurer, to the extent permitted by the Arkansas Insurance Department. The assets and liabilities to be reinsured under the reinsurance agreement were deposited into a trust account, in which Zions First National Bank agrees to act as trustee. Under the terms of the reinsurance agreement, in the event of the insolvency of Security National Life Insurance Company, Zions First National Bank agrees to hold the assets and liabilities in trust for purposes of the administration of the assets and liabilities with respect to such insolvency.

As a result of the execution of the reinsurance agreement, certain insurance business and operations of Memorial Insurance Company will be transferred to Security National Life, including all policies in force as of the effective date thereof, except for certain policies to be retained by Memorial Insurance Company. Any future insurance business by Memorial Insurance Company will be covered by this reinsurance agreement. All of the business and operations of Memorial Insurance Company was transferred to Security National Life under the terms of the reinsurance agreement, except for capital and surplus of approximately $1,000,000. Thus, $30,025,777 in assets and liabilities was transferred from Memorial Insurance Company to Security National Life pursuant to the reinsurance agreement.

At the closing of the stock purchase transaction, Memorial Insurance Company issued a $30,025,777 note to Security National Life payable, together with accrued interest, within 30 days from the date of issuance. The note is to be repaid in cash or in assets to be transferred to Security National Life. The note is secured by the assets owned by Memorial Insurance Company. In addition, Southern Security Life contributed $2,200,000 in cash to Memorial Insurance Company at closing in consideration for the surplus note. Memorial Insurance Company repaid the surplus note in early 2006 using the proceeds from the sale of the investments in common stock that it currently holds in its investment portfolio.

On December 31, 2005, Memorial Insurance Company entered into a reinsurance agreement with Security National Life for certain accident and health insurance policies of Security National Life. Under the terms of the reinsurance agreement, Memorial Insurance Company assumed 100% of the liabilities of these policies. In addition, pursuant to the agreement, Security National Life transferred $96,345 in statutory reserves and assets to Memorial Insurance Company as of December 31, 2005. There was no additional consideration paid for these policies under the agreement.


11



Regulation

The Company’s insurance subsidiaries, Security National Life, Security National Life of Louisiana, and Memorial Insurance Company 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 are licensed to do business. Such regulation could involve additional costs, restrict operations or delay implementation of the Company’s business plans.

The Company is currently subject to regulation in Utah, Louisiana and Arkansas under insurance holding company legislation, and other states where applicable. Generally, intercorporate transfers of assets and dividend payments from its insurance subsidiaries are subject to prior notice of approval from the State Insurance Department, if they are deemed “extraordinary” under these statutes. 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’s cemetery and mortuary subsidiaries are subject to the Federal Trade Commission’s comprehensive funeral industry rules and are subject 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, Arizona and California. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business.

The Company’s mortgage loan subsidiary, SecurityNational Mortgage, is subject to the rules and regulations of the U.S. Department of Housing and Urban Development and to various state licensing acts and regulations. These regulations, among other things, specify minimum capital requirements, the procedures for the origination, the underwriting, the licensing of wholesale brokers, quality review audits and the amounts that can be charged to borrowers for all FHA and VA loans. Each year, the Company must have an audit by an independent CPA firm to verify compliance under these regulations. In addition to the government regulations, the Company must meet loan requirements of various investors who purchase the loans.

Income Taxes

The Company’s insurance subsidiaries, Security National Life, Security National Life of Louisiana and Memorial Insurance Company 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, reserves for future policyholder benefits (with modifications), and a small life insurance company deduction (up to 60% of life insurance company taxable income). The Company may be subject to the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a result of the small life insurance company deduction. Also, under the Tax Reform Act of 1986, distributions in excess of stockholder’s surplus account or a significant decrease in life reserves will result in taxable income.


12



Security National Life, Security National Life of Louisiana and Memorial Insurance Company may continue to receive the benefit of the small life insurance company deduction. In order to qualify for the small company deduction, the combined assets of the Company must be less than $500,000,000 and the taxable income of the life insurance companies must be less than $3,000,000. To the extent that the net income limitation is exceeded, then the small life insurance company deduction is phased out over the next $12,000,000 of life insurance company taxable income.

Since 1990 Security National Life, Security National Life of Louisiana and Memorial Insurance Company have computed 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 to ten year period.

The Company’s non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. For taxable years beginning January 1, 1987, the Company may be subject to the Corporate Alternative Minimum Tax and the proportionate disallowance rules for installment sales under the Tax Reform Act of 1986.

Competition

The life insurance industry is highly competitive. There are approximately 2,000 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price and customer service. The Company’s insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and more diversified line of insurance coverage than the Company. In addition, such companies generally have a larger sales force. Further, many of the companies with which the Company competes are mutual companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is small 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 also highly competitive. In the Salt Lake City, Phoenix and San Diego areas in which the Company competes, there are a number of 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 that 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 loan industry is highly competitive with a number of mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage market in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates.

Employees

As of December 31, 2006, the Company employed 530 full-time and 73 part-time employees.


13



Item 2. Properties

The following table sets forth the location of the Company’s office facilities and certain other information relating to these properties.

 
  Location Function   Owned
Leased
  Approximate
Square
Footage
 
 

 
 
 
  5300 So. 360 West
Salt Lake City, Utah
Corporate Headquarters   Owned (1)   33,200  
               
  755 Rinehart Road
Lake Mary, Florida
Insurance Operations/
Mortgage Sales
  Owned (2)   27,000  
               
  3935 I-55 South, Frontage Road
Jackson, Mississippi
Insurance Operations   Owned (3)   12,000  
               
  2800 Youree Drive Bldg. 1, Suite 207
Shreveport, Louisiana
Insurance Operations   Leased (4)   200  
               
  634 West Main Street
Blytheville, Arkansas
Insurance Operations   Owned   3,000  
               
  410 North 44th Street, Suite 190
Phoenix, Arizona
Mortgage Sales   Leased (5)   1,800  
               
  12150 Tributary Point Dr., Suite160
Gold River, California
Mortgage Sales   Leased (6)   2,000  
               
  2101 Business Center Dr., Suite 214
Irvine, California
Mortgage Sales   Leased (7)   900  
               
  634 North Santa Cruz Ave.
Los Gatos, California
Mortgage Sales   Leased (8)   1,600  
               
  7676 Hazard Center Drive, Suite 625
San Diego, California
Mortgage Sales   Leased (9)   1,300  
               
  27433 Tourney Road, Suite 220
Valencia, California
Mortgage Sales   Leased (10)   2,500  
               
  6208 Lehman Drive, Suite 318
Colorado Springs, Colorado
Mortgage Sales   Leased (11)   600  
               
  5690 DTC Blvd., Suite 230E
Greenwood Village, Colorado
Mortgage Sales   Leased (12)   2,000  
               
  7785 Baymeadows Way, Suite 101
Jacksonville, Florida
Mortgage Sales   Leased (13)   1,800  
               
  1617 Santa Barbara Blvd.
Cape Coral, Florida
Mortgage Sales   Leased (14)   700  

14



Item 2. Properties (Continued)
 
  Location Function   Owned
Leased
  Approximate
Square
Footage
 
 

 
 
 
  5620 Tara Blvd., Suite 103
Bradenton, Florida
Mortgage Sales   Leased (15)   1,200  
               
  970 No. Kalaheo, Suite C-201
Kailua, Hawaii
Mortgage Sales   Leased (16)   4,300  
               
  6900 College Blvd., Suite 950
Overland Park, Kansas
Mortgage Sales   Leased (17)   1,900  
               
  6655 W. Sahara, Suite B-110
Las Vegas, Nevada
Mortgage Sales   Leased (18)   1,400  
               
  4045 NW 6th Street, Suite 500
Oklahoma City, Oklahoma
Mortgage Sales   Leased (19)   3,500  
               
  505 Village Road
Shallotte, North Carolina
Mortgage Sales   Leased (20)   1,000  
               
  999 Southwest Disk Drive, Suite 104
Bend, Oregon
Mortgage Sales   Leased (21)   1,800  
               
  4800 SW Griffith Drive, Suite 250
Beaverton, Oregon
Mortgage Sales   Leased (22)   2,700  
               
  12750 Merit Drive, Suite 1212
Dallas, Texas
Mortgage Sales   Leased (23)   2,600  
               
  820 Gessner, Suite 800
Houston, Texas
Mortgage Sales   Leased (24)   2,400  
               
  613 Northwest Loop 410, Suite 685
San Antonio, Texas
Mortgage Sales   Leased (25)   1,100  
               
  6975 South Union Park, Suite 150
Midvale, Utah
Mortgage Sales   Leased (26)   4,300  
               
  5247 Greenpine Drive
Murray, Utah
Insurance Operations   Owned (27)   6,600  
               
  5278 Pinemont Dr., Suite A180
Murray, Utah
Peace Mausoleum   Owned   800  
               
  5251 Green Street, Suite 350
Salt Lake City, Utah
Mortgage Sales   Owned (28)   5,000  

15



Item 2. Properties (Continued)
 
  Location Function   Owned
Leased
  Approximate
Square
Footage
 
 

 
 
 
  970 East Murray-Holladay Rd.,
Suite 4A
Salt Lake City, Utah
Mortgage Sales   Leased (29)   6,400  
               
  9149 So. Monroe, Suite A
Sandy, Utah
Mortgage Sales   Leased (30)   1,300  
               
  474 West 800 North, Suite 102
Orem, Utah
Mortgage Sales   Leased (31)   2,000  
               
  6767 Forrest Hill Avenue,
Third Floor
Richmond, Virginia
Mortgage Sales   Leased (32)   500  
   
(1)
The Company leases an additional 5,376 square feet of the facility to unrelated third parties for approximately $84,200 per year, under leases expiring at various dates after 2006.
 
(2)
The Company leases an additional 9,903 square feet of the facility to unrelated third parties for approximately $202,200 per year, under leases expiring at various dates after 2006.
 
(3) The building is located on 104 undeveloped acres.
   
(4) The Company leases this facility for $1,900 per year. The lease expires April 2007.
 
(5) The Company leases this facility for $35,300 per year. The lease expires in October 2009.
 
(6) The Company leases this facility for $47,600 per year. The lease expires in July 2009.
 
(7) The Company leases this facility for $47,700 per year, with a month-to-month lease.
 
(8) The Company leases this facility for $39,300 per year. The lease expires in November 2008
 
(9) The Company leases this facility for $45,300 per year. The lease expires in June 2008
 
(10) The Company leases this facility for $78,000 per year. The lease expires in February 2009.
 
(11) The Company leases this facility for $9,600 per year. The lease expires in June 2007.
 
(12) The Company leases this facility for $34,200 per year. The lease expires in September 2009.
 
(13) The Company leases this facility for $28,800 per year. The lease expires in September 2009.
 
(14) The Company leases this facility for $8,400 per year, with a month-to-month lease.
 
(15) The Company leases this facility for $20,300 per year. The lease expires in July 2009.
 
(16) The Company leases this facility for $21,300 per year. The lease expires in March 2008.
 
(17)
The Company leases this facility for $38,100 per year. The lease expires in January 2010.
 
(18) The Company leases this facility for $49,100 per year, with a month-to-month lease.
 
(19) The Company leases this facility for $47,700 per year. The lease expires in March 2008.
 
(20) The Company leases this facility for $7,200 per year, with a month-to-month lease.
 
(21)
The Company leases this facility for $37,400 per year. The lease expires in December 2008.
 
(22) The Company leases this facility for $43,000 per year. The lease expires in May 2007.
 
(23) The Company leases this facility for $40,500 per year. The lease expires in January 2009.
 
(24) The Company leases this facility for $51,300 per year. The lease expires in January 2011.
 
(25) The Company leases this facility for $7,200 per year with a month-to-month lease.
 
(26)
The Company leases this facility for $98,000 per year. The lease expires in January 2010.
 
(27)
The Company leases an additional 128,300 square feet of the facility to unrelated third parties for approximately $809,200 per year, under leases expiring at various dates after 2006.
 
(28)
The Company leases an additional 25,000 square feet of the facility to unrelated third parties for approximately $368,000 per year, under leases expiring at various dates after 2006.
 
(29) The Company leases this facility for $81,900 per year. The lease expires in February 2007.
 
(30) The Company leases this facility for $15,900 per year. The lease expires in August 2007.
 
(31) The Company leases this facility for $31,000 per year. The lease expires in February 2007.
 
(32) The Company leases this facility for $19,200 per year. The lease expires in March 2007.

16



The Company believes the office facilities it occupies are in good operating condition, are adequate for current operations and has no plans to build or acquire additional office facilities. The Company believes its office facilities are adequate for handling its business in the foreseeable future. As leases expire the Company will either renew or find comparable leases or acquire additional office space.

The following table summarizes the location and acreage of the six Company owned cemeteries, each of which includes one or more mausoleums:

 
        Net Saleable Acreage    
Name of
Cemetery
Location   Date
Acquired
  Developed
Acreage(1)
  Total
Acreage(1)
  Acres
Sold as
Cemetery
Spaces(2)
  Total
Available
Acreage(1)
 


 
 
 
 
 
 
Memorial Estates, Inc.:                                
                                 
  Lakeview                        
     Cemetery(3) 1640 East Lakeview Dr.
Bountiful, Utah
  1973     7     40     6     34  
                                 
  Mountain View                                
     Cemetery(3) 3115 East 7800 South
Salt Lake City, Utah
  1973     15     54     13     41  
                                 
  Redwood                                
     Cemetery(3)(5) 6500 South Redwood Rd.
West Jordan, Utah
  1973     27     78     27     51  
                                 
Cottonwood Mortuary Inc.                                
  Deseret Memorial Inc.
  Lakehills Cemetery(4)
                               
  10055 So. State Street
Sandy, Utah
  1991     9     41     4     37  
                                 
Holladay Memorial                                
     Park(4)(5) 4900 So. Memory Lane
Holladay, Utah
  1991     5     14     3     11  
                                 
California Memorial Estates
  Singing Hills Memorial
                               
     Park(6) 2800 Dehesa Road
El Cajon, California
  1995     8     35     3     32  
   
             (1)
The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports or the Company’s inspection of the cemeteries.
 
             (2) Includes spaces sold for cash and installment contract sales.
   
             (3)
As of December 31, 2006, there were mortgages of approximately $6,000, collateralized by the property and facilities at Memorial Estates Lakeview, Mountain View and Redwood Cemeteries.
 
             (4)
As of December 31, 2006, there were mortgages of approximately $1,384,000, collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary.
 
             (5) These cemeteries include two granite mausoleums.
   
             (6)
As of December 31, 2006, there was a mortgage of approximately $209,000, collateralized by the property

17



The following table summarizes the location, square footage and the number of viewing rooms and chapels of the twelve Company owned mortuaries:
 
Name of
Mortuary
Location Date
Acquired
  Viewing
Room(s)
  Chapel(s)   Square
Footage
 


 
   
   
   
 
Memorial Mortuary 5850 South 900 East
Murray, Utah
  1973     3     1     20,000  
                           
Memorial Estates, Inc.:                          
  Redwood Mortuary(3) 6500 South Redwood Rd.
West Jordan, Utah
  1973     2     1     10,000  
                           
  Mountain View Mortuary(3) 3115 East 7800 South
Salt Lake City, Utah
  1973     2     1     16,000  
                           
  Lakeview Mortuary(3) 1640 East Lakeview Dr.
Bountiful, Utah
  1973     0     1     5,500  
                           
Paradise Chapel
  Funeral Home
3934 East Indian
School Road
Phoenix, Arizona
  1989     2     1     9,800  
                           
Deseret Memorial, Inc.:                          
  Colonial Mortuary(1) 2128 South State St.
Salt Lake City, Utah
  1991     1     1     14,500  
                           
  Deseret Mortuary(1) 36 East 700 South
Salt Lake City, Utah
  1991     2     2     36,300  
                           
  Lakehills Mortuary(3) 10055 South State St.
Sandy, Utah
  1991     2     1     18,000  
                           
  Cottonwood Mortuary(1)(3) 4670 South Highland Dr.
Holladay, Utah
  1991     2     1     14,500  
                           
Greer-Wilson                          
  Funeral Home 5921 West Thomas Road
Phoenix, Arizona
  1995     2     2     25,000  
                           
Adobe Funeral Home(4) 218 North Central
Avondale, Arizona
  1995     1     1     1,850  
                           
Crystal Rose Funeral Home(2) 9155 W. VanBuren
Tolleson, Arizona
  1997     0     1     9,000  

18



(1)
As of December 31, 2006, there were mortgages of approximately $1,384,000, collateralized by the property and facilities at Deseret Mortuary, Cottonwood Mortuary, Holladay Memorial Park, Lakehills Cemetery and Colonial Mortuary.
 
(2)
As of December 31, 2006, there was a mortgage of approximately $103,000, collateralized by the property and facilities of Crystal Rose Funeral Home.
 
(3) These funeral homes also provide burial niches at their respective locations.
   
(4)
As of December 31, 2006, there was a mortgage of approximately $125,000, collateralized by the property and facilities of Adobe Chapel Funeral Home.
 

Item 3. Legal Proceedings

On March 5, 2007, the Company received a proposed consent order from the Florida Office of Insurance Regulation concerning the New Success Life Program, the higher education product currently being marketed and sold by Southern Security Life. The proposed order states that as a result of the investigation the Florida Office has determined that Southern Security Life violated Florida law (i) by knowingly making statements, sales presentations, omissions or comparisons that misrepresented the benefits, advantages, or terms of the New Success Life Program, and (ii) by knowingly making, advertisements, announcements, or statements containing representations that were untrue or misleading.

The proposed order would require Security National Life and Southern Security Life to immediately cease and desist from making any false or misleading representations to Florida consumers suggesting that the New Success Life Program would accumulate enough value to pay for college expenses in full. The proposed order would also require Security National Life and Southern Security Life to agree to no longer market or sell the New Success Life Program in the State of Florida. In addition, Security National Life and Southern Security Life would be required to send a written notice to Florida consumers who purchased the New Success Life Program on or after January 1, 1998 stating that the higher education program is a whole life insurance product, with a term and annuity rider, and not a college trust fund, savings plan, or other program, and it may not necessarily pay college expenses in full from the accumulated value.

Moreover, the written notice is to provide an opportunity for the Florida consumers who purchased the New Success Life Program on or after January 1, 1998 to cancel their policy and be given a full refund, including all premiums paid, together with interest at the agreed upon rate in the original contract. If each of the Florida consumers who purchased the New Success Life Program after January 1, 1998 was to cancel his or her policy and receive a refund, the cost to the Company to refund all premiums paid, including interest, would be approximately $8,200,000, an amount in excess of the assets of Southern Security Life.

The proposed consent order would also require Security National Life and Southern Security Life to issue refunds including interest to the eleven policyholders whose affidavits were taken in connection with the administrative complaint that the Florida Office had previously filed against Franz Wallace, the former National Sales Director of Southern Security Life. Security National Life and Southern Security Life would additionally be required to issue refunds, including interest, to any Florida policyholder in the New Success Life Program who had filed a complaint with the Florida Department of Financial Services or whose coverage had lapsed. Furthermore, Security National Life and Southern Security Life would be required to notify the state insurance department in each state in which the New Success Life Program is marketed of the order and any complaint that Southern Security Life received relating to the New Success Life Program from policyholders in that state. Finally, Security National Life and Southern Security Life would be required to pay the Florida Office a penalty of $100,000 and administrative costs of $5,000.

The Company disputes the terms of the proposed consent order. The Company is not aware of specific concerns that the Florida Office has with the New Success Life Program because it has received no administrative complaint from the Florida Office nor is it aware of any recent market conduct examination that the Florida Office


19



has conducted relative to the program. The Company intends to vigorously oppose the proposed consent order. The Company is currently engaged in discussions with the Florida Office in an effort to settle the dispute concerning the proposed order. If the Company is unable to reach a satisfactory resolution with the Florida Office with respect to the terms of the proposed consent order and the Florida Office issues a similar order, the Company intends to take action necessary to protect its rights and interests, including requesting a hearing before an administrative law judge to oppose the order. The Company believes any potential liability would be limited to the assets of Southern Security Life, which are approximately $3,847,000.

Except for the proposed consent order from the Florida Office of Insurance Regulation, 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 have a material adverse effect on its financial condition or results of operation.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of the Company’s shareholders during the quarter ended December 31, 2006.

PART II

Item 5. Market for the Registrant’s Common Stock and Related Security Holder Matters

The Company’s Class A Common Stock trades on the Nasdaq National Market under the symbol “SNFCA.” Prior to August 13, 1987, there was no active public market for the Class A and Class C Common Stock. As of March 29, 2007, the closing sales price of the Class A Common Stock was $4.79 per share. The following are the high and low market closing sales prices for the Class A Common Stock by quarter as reported by Nasdaq since January 1, 2005:

 
    Price Range  
   
 
Period (Calendar Year) High   Low  


 
 
  
  2005        
       First Quarter $ 3.89   $ 2.71  
       Second Quarter   3.36     2.72  
        Third Quarter   3.00     2.79  
       Fourth Quarter   3.64     2.82  
               
  2006            
       First Quarter $ 4.56   $ 3.14  
       Second Quarter   4.73     3.81  
        Third Quarter   4.16     3.71  
       Fourth Quarter   5.43     3.93  
               
  2007            
       First Quarter   5.95     4.65  
 

The above sales prices have been adjusted retroactively for the effect of annual stock dividends.

The Class C Common Stock is not actively traded, although there are occasional transactions in such stock by brokerage firms. (See Note 13 to the Consolidated Financial Statements.)


20



The Company has never paid a cash dividend on its Class A or Class C Common Stock. The Company currently anticipates that all of 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. A 5% stock dividend on Class A and Class C Common Stock has been paid each year from 1990 through 2006.

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, 2001 through December 31, 2006. 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 at December 31, 2001 and that all dividends were reinvested.

The comparison 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.

 

$0

$50

$100

$150

$200

$250

$300

$350

$400

12/31/01

12/31/02

12/31/03

12/31/04

12/31/05

12/31/06

SNFC

S & P 500

S & P Insurance

12/31/01   12/31/02   12/31/03   12/31/04   12/31/05   12/31/06  
 
 
SNFC   100     268     326     145     174     265  
S & P 500   100     77     97     106     109     124  
S & P Insurance   100     78     94     99     112     122  
 

The graph set forth above is required by the Securities & 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.

As of December 31, 2006, there were 4,603 record holders of Class A Common Stock and 130 record holders of Class C Common Stock.


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Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated)

The following selected financial data for each of the five years in the period ended December 31, 2006, are derived from the audited consolidated financial statements. The data as of December 31, 2006 and 2005, and for the three years ended December 31, 2006, should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.

Consolidated Statement of Earnings Data:

 
  Year Ended December 31,  
 
 
  
2006(1)   2005   2004(2)   2003(3)   2002  
 
 
 
 
 
 
Revenue                    
Premiums $ 30,776,000   $ 27,170,000   $ 25,979,000   $ 23,295,000   $ 14,077,000  
Net investment income   23,246,000     19,387,000     15,939,000     17,303,000     12,540,000  
Net mortuary and cemetery sales   12,123,000     10,839,000     11,661,000     10,944,000     10,638,000  
Realized (losses) gains on investments   891,000     74,000     74,000     (2,000 )   1,021,000  
Mortgage fee income   85,113,000     71,859,000     62,690,000     92,955,000     57,008,000  
Other   381,000     621,000     855,000     550,000     479,000  
 
 
 
 
 
 
Total revenue   152,530,000     129,950,000     117,198,000     145,045,000     95,763,000  
 
 
 
 
 
 
  
Expenses                              
Policyholder benefits   27,319,000     24,477,000     23,362,000     21,755,000     13,756,000  
Amortization of deferred
  policy acquisition costs
  4,125,000     3,031,000     4,602,000     4,929,000     3,994,000  
Selling, general and administrative expenses   105,728,000     90,690,000     82,097,000     102,926,000     68,459,000  
Interest expense   6,141,000     4,921,000     2,174,000     3,642,000     1,970,000  
Cost of goods and services of
  the mortuaries and cemeteries
  2,322,000     2,103,000     2,304,000     2,328,000     2,045,000  
 
 
 
 
 
 
Total benefits and expenses   145,635,000     125,222,000     114,539,000     135,580,000     90,224,000  
 
 
 
 
 
 
Income before income tax expense   6,895,000     4,728,000     2,659,000     9,465,000     5,539,000  
Income tax expense   (1,771,000 )   (1,240,000 )   (652,000 )   (2,891,000 )   (1,565,000 )
Minority interest in (income)
   loss of subsidiary
          115,000     22,000     18,000  
 
 
 
 
 
 
Net earnings $ 5,124,000   $ 3,488,000   $ 2,122,000   $ 6,596,000   $ 3,992,000  
 
 
 
 
 
 
  
Net earnings per common share(4) $ 0.74   $ 0.51   $ 0.31   $ 1.02   $ 0.64  
 
 
 
 
 
 
Weighted average outstanding
   common shares(4)
  6,955,000     6,881,000     6,851,000     6,497,000     6,218,000  
Net earnings per common
   share-assuming dilution(4)
$ 0.72   $ 0.50   $ 0.30   $ 0.99   $ 0.62  
 
 
 
 
 
 
Weighted average outstanding
   common shares-assuming dilution(4)
  7,106,000     6,912,000     7,067,000     6,649,000     6,389,000  

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Item 6. Selected Financial Data - The Company and Subsidiaries (Consolidated) (Continued)

Balance Sheet Data:

 
  December 31,  
 
 
  
2006   2005(1)   2004(2)   2003   2002(3)  
 
 
 
 
 
 
Assets                    
Investments and restricted assets $ 222,683,000   $ 211,249,000   $ 182,645,000   $ 110,386,000   $ 104,263,000  
Cash   10,377,000     16,633,000     15,334,000     19,704,000     38,199,000  
Receivables   74,695,000     61,787,000     54,013,000     120,698,000     102,590,000  
Other assets   69,640,000     69,976,000     65,471,000     63,653,000     63,805,000  
 
 
 
 
 
 
Total assets $ 377,395,000   $ 359,645,000   $ 317,463,000   $ 314,441,000   $ 308,857,000  
 
 
 
 
 
 
  
Liabilities                              
Policyholder benefits $ 272,923,000   $ 263,981,000     226,785,000   $ 220,739,000   $ 217,895,000  
Notes & contracts payable   7,671,000     10,273,000     12,263,000     16,909,000     18,321,000  
Cemetery & mortuary liabilities   11,534,000     10,829,000     10,762,000     10,562,000     10,076,000  
Other liabilities   30,018,000     26,691,000     20,091,000     21,146,000     21,934,000  
 
 
 
 
 
 
Total liabilities   322,146,000     311,774,000     269,901,000     269,356,000     268,226,000  
 
 
 
 
 
 
  
Minority interest           3,813,000     3,957,000     4,298,000  
  
Non-controlling interest
    perpetual care trusts
  2,278,000     2,173,000     2,084,000     1,953,000     1,820,000  
  
Stockholders’ equity   52,971,000     45,698,000     41,665,000     39,175,000     34,513,000  
 
 
 
 
 
 
Total liabilities and
  stockholders’ equity
$ 377,395,000   $ 359,645,000   $ 317,463,000   $ 314,441,000   $ 308,857,000  
 
 
 
 
 
 
   
(1)
Includes the purchase of Memorial Insurance Company of America on December 29, 2005.
 
(2)
Includes the purchase of Paramount Security Life Insurance Company, now Security National Life Insurance Company of Louisiana, on March 16, 2004.
 
(3)
Includes the purchase of assets from Acadian Life Insurance Company on December 23, 2002.
 
(4)
Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.

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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 trends or events 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) emphasis on cemetery and mortuary business; and (iii) capitalizing on lower interest rates by originating and refinancing mortgage loans and other “niche” mortgage products.

SecurityNational Mortgage Company (“SNMC”) is a mortgage lender incorporated under the laws of the State of Utah. SNMC is approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), to originate mortgage loans that qualify for government insurance in the event of default by the borrower. SNMC obtains loans primarily from independent brokers and correspondents. SNMC funds the loans from internal cash flows and lines of credit from financial institutions, including the Company’s insurance subsidiaries. SNMC receives fees from the borrowers and other secondary fees from third party investors who purchased the loans from SNMC. SNMC pays the brokers and correspondents a commission for loans that are brokered through SNMC.

As of December 31, 2006, SNMC had 28 branches in thirteen states. SNMC opened one office in 2004 in Cape Coral, Florida. In 2005, SNMC opened offices in Kailua, Hawaii; Bend, Oregon; Midvale, Utah; and Richmond, Virginia. In 2006, SNMC opened offices in San Jose, California; Shallotte, North Carolina; Irvine, California; Oklahoma City, Oklahoma, Overland Park, Kansas and Beaverton, Oregon. SNMC originated and sold 14,427 loans ($2,461,000,000 loan amount), 12,786 loans ($2,085,000,000 loan amount), and 11,567 loans ($1,781,000,000 loan amount) in 2006, 2005 and 2004, respectively.

On December 17, 1998, the Company purchased all of the outstanding common shares of SSLIC Holding Company, formerly Consolidare Enterprises, Inc., and Insuradyne Corporation for a total cost of $12,248,194. At the time the transaction was completed, Consolidare owned 57.4% of the outstanding shares of Southern Security Life. Following the acquisition of Consolidare, Security National Life and its wholly owned subsidiary, SSLIC Holding Company, increased their ownership of the outstanding shares of Southern Security Life through the purchase of shares traded on the Nasdaq SmallCap Market and stock purchase transactions with then current stockholders of Southern Security Life. As of December 31, 2004, Security National Life and SSLIC Holding Company held 76.7% of the outstanding common shares of Southern Security Life.

On January 1, 2005, Security National Life and SSLIC Holding Company completed a merger transaction with Southern Security Life whereby SSLIC Holding Company was merged with Southern Security Life, which resulted in Southern Security Life becoming a wholly owned subsidiary of Security National Life and the unaffiliated stockholders of Southern Security Life becoming entitled to receive an aggregate of $1,884,733 for their shares.

On December 31, 2005, all of the remaining insurance business of Southern Security Life consisting of $48,528,000 in assets and liabilities was transferred to Security National Life by a reinsurance agreement, except for $3,500,000 in capital and surplus required to be maintained under Florida law. Also on December 31, 2005, Southern Security Life paid a $7,181,000 dividend to Security National Life.

On December 29, 2006, Southern Security Life was sold in a stock sales transaction. At the time of the sale, Southern Security Life’s assets consisted of a corporate charter, licenses, and the required capital and surplus. Under the terms of the transaction, Security National Life received purchase consideration consisting of $400,000 plus an amount equal to Southern Security Life’s capital and surplus as of December 31, 2006. The sale is conditioned upon the subsequent approval of the transaction by the Florida Office of Insurance Regulation and, if such approval is not obtained, Southern Security Life will be liquidated.


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On December 23, 2002, the Company completed an asset purchase transaction with Acadian Life Insurance Company, a Louisiana domiciled life insurance company, in which it acquired from Acadian $75,000,000 in assets and $75,000,000 in insurance reserves through its wholly owned subsidiary, Security National Life, a Utah domiciled life insurance company. The acquired assets consist primarily of approximately 275,000 funeral insurance policies in force in the state of Mississippi. The assets were originally acquired by Acadian from Gulf National Life Insurance Company on June 6, 2001, consisting of all the insurance policies of Gulf National Life Insurance Company in force and in effect on June 1, 2001.

On March 16, 2004, Security National Life purchased all of the outstanding common shares of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes in the number of policies in force or the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and the transaction was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana where it is permitted to appoint agents who do not have a full life insurance license.

These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed its Shreveport office.

On December 29, 2005, Security National Life and Southern Security Life purchased all of the outstanding common shares of Memorial Insurance Company of America, an Arkansas domiciled insurance company located in Blytheville, Arkansas. As of December 31, 2005, Memorial Insurance Company had 116,116 policies in force and approximately 50 agents. The purchase consideration was $13,500,000.

Significant Accounting Policies

The following is a brief summary of our significant accounting policies and a review of our most critical accounting estimates. Please also refer to Note 1 of our consolidated financial statements.

Insurance Operations

In accordance with accounting principles generally accepted in the United States of America (GAAP), premiums and considerations received for interest sensitive products such as universal life insurance and ordinary annuities 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 in excess of policyholder account balances are reported as expenses in the consolidated financial statements.

Premium revenues reported 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 expense. For nonparticipating traditional life products, these costs are amortized over the premium paying period of


25



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. 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.

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 has the ability to mitigate adverse experience through sound underwriting, asset/liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends or 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) - revenue and costs associated with the sales of pre-need cemetery interment rights are recognized in accordance with the retail land sales provisions of Statement of Financial Accounting Standards No. 66, “Accounting for the Sales of Real Estate” (SFAS No. 66). Under SFAS 66, 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 SFAS 66 described above.

Pre-need sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sales of pre-need cemetery merchandise are deferred until the merchandise is delivered.

Pre-need sales of cemetery services (primarily merchandise delivery and 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 obtaining costs - costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of Statement of Financial Accounting Standards No. 60 “Accounting and Reporting by Insurance Enterprises” (FAS No. 60). 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 obligations remaining.

Mortgage Operations

Mortgage fee income is generated through the origination and refinancing of mortgage loans and is realized in accordance with SFAS No. 140.


26



The majority of loans originated are sold to third party investors. The amounts sold to investors are shown on the balance sheet as due from sale of loans, and are shown on the basis of the amount of fees due from the investors.

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:

Fixed Maturities Available for Sale

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income which is included in stockholders’ equity after adjustment for deferred income taxes and deferred acquisition costs related to universal life products.

The Company is required to exercise judgment to determine when a decline in the value of a security is other than temporary. When the value of a security declines and the decline is determined to be other than temporary, the carrying value of the investment is reduced to its fair value and a realized loss is recorded to the extent of the decline.

Deferred Acquisition Costs

Amortization of deferred policy acquisition costs 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, and 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.

Cost of Insurance Acquired

Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred acquisition costs. The critical issues explained for deferred acquisition costs would also apply for cost of insurance acquired.

Allowance for Doubtful Accounts

The Company accrues an estimate of potential losses for the collection of receivables. The significant receivables are the result of receivables due on mortgage loans sold to investors, cemetery and mortuary operations, mortgage loan operations and other receivables. The allowance is based upon the Company’s experience. The critical issues that would impact recovery of the cemetery and mortuary receivables is the overall economy. The critical issues that would impact recovery of mortgage loan operations would be interest rate risk and loan underwriting.

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.


27



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.

Unearned Revenue

The universal life products the Company sells have significant policy initiation fees (front-end load), which 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 would apply to unearned revenue.

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 mortuary and cemetery 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/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 Loan Loss Reserve

The Company accrues an estimate of future losses 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 the first year of duration and to repurchase loans in default within the first year. The estimates are based upon historical experience and best estimate of future liabilities.

Deferred Compensation

The Company has deferred compensation agreements with several of its current and past executive officers. The deferred compensation is payable upon retirement or death of these individuals either in annual installments (ten years) or lump sum settlement, if approved by the Board of Directors. The Company has accrued the present value of these benefits based upon their future retirement dates and other factors, on its consolidated financial statements.

Depreciation

Depreciation is calculated principally on the straight-line-method over the estimated useful lives of the assets, which range from 3 to 40 years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms.

Self-Insurance

The Company is self insured for certain casualty insurance, workers compensation and health benefit programs. Self – Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverages. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which


28



include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party administrators and actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

Results of Operations

2006 Compared to 2005

Total revenues increased by $22,580,000, or 17.4%, from $129,950,000 for fiscal year 2005 to $152,530,000 for fiscal year 2006. Contributing to this increase in total revenues was a $13,254,000 increase in mortgage fee income, a $3,606,000 increase in insurance premium and other considerations, a $3,859,000 increase in net investment income, a $1,284,000 increase in mortuary and cemetery sales, and an $817,000 increase in realized gains on investments and other assets. This increase was partially offset by a $240,000 decrease in other revenues.

Insurance premiums and other considerations increased by $3,606,000, from $27,170,000 in 2005 to $30,776,000 in 2006. This increase was primarily due to the additional insurance premiums that were realized on new insurance sales and from the acquisition of Memorial Insurance Company on December 29, 2005.

Net investment income increased by $3,859,000, from $19,387,000 in 2005 to $23,246,000 in 2006. This increase was primarily attributable to additional interest income from increased long-term bond and mortgage purchases and additional investment income from the assets received as a result of the acquisition of Memorial Insurance Company.

Net mortuary and cemetery sales increased by $1,284,000, from $10,839,000 in 2005 to $12,123,000 in 2006. This was due to increased at-need sales in the cemetery and mortuary operations and increased pre-need land sales in cemetery operations.

Other revenues decreased by $240,000, from $621,000 in 2005 to $381,000 in 2006. Other revenues decreased in 2006 due to a reduction in other deposit funds and reinsurance risk charges.

Realized gains on investments and other assets increased by $817,000, from $74,000 in 2005 to $891,000 in 2006. This increase was primarily due to a gain of $760,000 from the condemnation of the Camelback Funeral Home by the City of Phoenix to construct a light rail facility.

Mortgage fee income increased by $13,254,000, from $71,859,000 in 2005 to $85,113,000 in 2006. This increase was primarily attributable to an increase in the number of loan originations during 2006 due to the opening of additional mortgage offices in Irvine and Los Gatos, California; Overland Park, Kansas; Oklahoma City, Oklahoma; Shallotte, North Carolina; and Beaverton, Oregon, and increased production in existing mortgage offices, which resulted in financing a greater number of mortgage loans.

Total benefits and expenses were $145,635,000 for 2006, which constituted 95.5% of the Company’s total revenues, as compared to $125,222,000, or 96.4% of the Company’s total revenues for 2005.

Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by $2,842,000 from $24,477,000 in 2005 to $27,319,000 in 2006. This net increase was primarily due to increased business and to the expected increase in reserves for policyholder benefits and death claims.


29



Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired increased by $1,094,000 from $3,031,000 in 2005 to $4,125,000 in 2006. This increase was primarily due to increased business on a slight increase in the lapse rate of 8.4% in 2006 from 7.9% in 2005.

General and administrative expenses increased by $15,038,000, from $90,690,000 in 2005 to $105,728,000 in 2006. Contributing to this increase was a $9,693,000 increase in commission expenses, from $53,807,000 in 2005 to $63,500,000 in 2006 due to a greater number of mortgage loan originations made by SecurityNational Mortgage Company during 2006. Salaries increased by $2,231,000 from $15,717,000 in 2005 to $17,948,000 in 2006, primarily due to merit increases in the salaries of existing employees and an increase in the number of employees necessitated as the result of the Company’s expanding business operations. Other expenses increased by $3,114,000, from $21,166,000 in 2005 to $24,280,000 in 2006. The increase in other expenses primarily resulted from loan costs at SecurityNational Mortgage Company during 2006 due to a greater number of loan originations and additional expenses from the operations of Memorial Insurance Company, which the Company purchased on December 29, 2005.

Interest expense increased by $1,220,000, from $4,921,000 in 2005 to $6,141,000 in 2006. This increase was primarily due to increased warehouse lines of credit required for a greater number of warehoused mortgage loans by SecurityNational Mortgage Company.

Cost of goods and services sold of the mortuaries and cemeteries increased by $219,000, from $2,103,000 in 2005 to $2,322,000 in 2006. This increase was primarily due to increased cemetery and mortuary sales.

2005 Compared to 2004

Total revenues increased by $12,752,000, or 10.9%, from $117,198,000 for fiscal year 2004 to $129,950,000 for fiscal year 2005. Contributing to this increase in total revenues was a $9,169,000 increase in mortgage fee income, a $1,191,000 increase in insurance premium and other considerations, and a $3,448,000 increase in net investment income. This increase was partially offset by an $822,000 decrease in mortuary and cemetery sales, and a $234,000 decrease in other revenues.

Insurance premiums and other considerations increased by $1,191,000, from $25,979,000 in 2004 to $27,170,000 in 2005. This increase was primarily due to the additional insurance premiums that were realized on new insurance sales.

Net investment income increased by $3,448,000, from $15,939,000 in 2004 to $19,387,000 in 2005. This increase was primarily attributable to additional borrower interest income from increased long-term bond purchases and mortgage loans over the comparable period in 2005.

Net mortuary and cemetery sales decreased by $822,000, from $11,661,000 in 2004 to $10,839,000 in 2005. This reduction in mortuary sales was primarily due to a reduction in pre-need property sales and the loss of sales from the Camelback Funeral Home as a result of the City of Phoenix having commenced condemnation proceedings to construct a light rail facility on the funeral home property.

Other revenues decreased by $234,000, from $855,000 in 2004 to $621,000 in 2005. Other revenue decreased in 2005 due in part to a one-time recovery of funds in 2004 from a member of management who made restitution of $111,000 by transferring to the Company shares of the Company’s common stock that the employee owned at the time he was terminated.


30



Mortgage fee income increased by $9,169,000, from $62,690,000 in 2004 to $71,859,000 in 2005. This increase was primarily attributable to an increase in the number of loan originations during 2005 due to the opening of new offices and increased production from existing offices, which resulted in financing a greater number of mortgage loans.

Total benefits and expenses were $125,222,000 for 2005, which constituted 96.4% of the Company’s total revenues, as compared to $114,539,000, or 97.7% of the Company’s total revenues for 2004.

During 2005, there was a net increase of $1,115,000 in death benefits, surrenders and other policy benefits, and increase in future policy benefits from $23,362,000 in 2004 to $24,477,000 in 2005. This net increase was primarily the result of an increase in reserves for policyholders.

Amortization of deferred policy and pre-need acquisition costs and cost of insurance acquired decreased by $1,571,000 from $4,602,000 in 2004 to $3,031,000 in 2005. This decrease was primarily due to recognition of improvements in persistency.

General and administrative expenses increased by $8,593,000, from $82,097,000 in 2004 to $90,690,000 in 2005. Contributing to this increase was a $5,117,000 increase in commission expenses, from $48,690,000 in 2004 to $53,807,000 in 2005 due to higher mortgage loan originations made by SecurityNational Mortgage Company during 2005. Salaries increased by $1,325,000 from $14,392,000 in 2004 to $15,717,000 in 2005, primarily due to merit increases in the salaries of existing employees and an increase in the number of employees. Other expenses increased by $2,151,000, from $19,015,000 in 2004 to $21,166,000 in 2005. The increase in other expenses primarily resulted from loan costs at SecurityNational Mortgage Company during 2005 due to a greater number of loan originations.

Interest expense increased by $2,747,000, from $2,174,000 in 2004 to $4,921,000 in 2005. This increase was primarily due to the increased use of warehouse lines of credit required for the funding of mortgage loans by SecurityNational Mortgage Company during 2005.

Cost of goods and services sold of the mortuaries and cemeteries decreased by $201,000, from $2,304,000 in 2004 to $2,103,000 in 2005. This reduction in the cost of goods and services sold of the mortuaries and cemeteries was due to the reduced costs of at-need merchandise at the Company’s mortuaries and cemeteries and the loss of sales from the Camelback Funeral Home as a result of the City of Phoenix having commenced condemnation proceedings for purposes of constructing a light rail facility on the funeral home property.

Risks

The following is a description of the most significant risks facing the Company and how it mitigates those risks:

Legal/Regulatory Risk  - the risk that changes in the legal or regulatory environment in which the Company operates will create additional expenses and/or risks not anticipated by the Company in developing and pricing its products. That is, 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/mortuary business. The Company mitigates 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 which identify and minimize the adverse impact of such risks.


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Credit Risk  - the risk that issuers of securities owned by the Company, mortgagors of mortgage loans on real estate and obligors on construction loans, will default or that other parties, including reinsurers and holders of cemetery/ mortuary contracts which owe the Company money, will not pay. The Company minimizes these risks by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible.

Interest Rate Risk  - the risk that interest rates will change which 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/mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or 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/Morbidity Risk  - the risk that the Company’s actuarial assumptions may differ from actual mortality/morbidity experience may cause the Company’s products to be underpriced, may cause the Company to liquidate insurance or other claims earlier than anticipated and other potentially adverse consequences to the business. The Company minimizes this risk through sound underwriting practices, asset/liability duration matching, and sound actuarial practices.

Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, those used in determining valuation allowances for mortgage loans on real estate, construction loans and other receivables, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are adequate.

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 maturity of held-to-maturity investments or sale of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. 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 on the issuance of new policies, the maintenance of existing policies, debt service, and to meet operating expenses.

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; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products.

The Company’s investment philosophy is intended to provide a rate of return which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.


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The Company’s investment policy is to invest predominantly in fixed maturity securities, mortgage loans, and the warehousing of mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $101,735,000 as of December 31, 2006 compared to $96,378,000 as of December 31, 2005. This represents 47% of the total investments in 2006 and 2005. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners (NAIC). Under this rating system, there are six categories used for rating bonds. At December 31, 2006, 2.3% (or $2,402,000) and at December 31, 2005, 3.5% (or $3,431,000) of the Company’s total bond investments were invested in bonds in rating categories three through six which are considered non-investment grade.

If market conditions were to cause interest rates to change, the market value of the fixed income portfolio (of approximately $188,002,000) could change by the following amounts based on the respective basis point swing (the change in the market values were calculated using a modeling technique):

 
-200 bps   -100 bps   +100 bps   +200 bps  
 
 
 
 
 
Change in
   Market Value
   (in thousands)
$ 21,597   $ 9,937   $ (7,902 ) $ (15,659 )
 

The Company has classified certain of its fixed income securities, including high-yield securities, in its portfolio as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short-term investment grade securities before liquidating higher-yielding longer-term securities.

The Company is subject to risk based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2006 and 2005, the life subsidiaries exceeded the regulatory criteria.

The Company’s total capitalization of stockholders’ equity and bank debt and notes payable was $60,641,000 and $55,971,000 as of December 31, 2006 and 2005, respectively. Stockholders’ equity as a percent of total capitalization was 87% and 82% as of December 31, 2006 and 2005, respectively.

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2006 was 8.4%, as compared to a rate of 7.9% in 2005.

On December 17, 1998, the Company completed the acquisition of SSLIC Holding Company formerly Consolidare Enterprises, Inc., a Florida corporation pursuant to the terms of the Acquisition Agreement, which the Company entered into on April 17, 1998, with SSLIC Holding Company and certain shareholders of SSLIC Holding Company for the purchase of all of the outstanding shares of common stock of SSLIC Holding Company. Prior to completion of the acquisition, SSLIC Holding Company owned 57.4% of the outstanding shares of common stock of Southern Security Life. The Company also acquired all of the outstanding shares of stock of Insuradyne Corp., a Florida corporation (“Insuradyne”).

As consideration for the purchase of the shares of SSLIC Holding Company, the Company paid to the stockholders of Consolidare at closing an aggregate of $12,248,194. In order to pay the purchase consideration, the Company obtained $6,250,000 from bank financing, with the balance of $5,998,194 obtained from funds then currently held by the Company. In addition to the purchase consideration, the Company caused Southern Security Life to pay, on the closing date, $1,050,000 to George Pihakis, the President and Chief Executive Officer of Southern Security Life prior to closing, as a lump sum settlement of the executive compensation agreement between Southern Security Life and Mr. Pihakis.


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In connection with the acquiring of SSLIC Holding Company, the Company entered into an Administrative Services Agreement dated December 17, 1998 with Southern Security Life. Under the terms of the agreement, the Company agreed to provide Southern Security Life with certain defined administrative and financial services, including accounting services, financial reports and statements, actuarial, policyholder services, underwriting, data processing, legal, building management, marketing advisory services and investment services. In consideration for the services to be provided by the Company, Southern Security Life will pay the Company an administrative services fee of $250,000 per month, or $3,000,000 on an annual basis, which may be increased, beginning on January 1, 2001, to reflect increases in the Consumer Price Index over the index amount as of January 1, 2000. However, such fee is to be reduced to zero for so long as the capital and surplus of Southern Security Life is less than or equal to $6,000,000, unless Southern Security Life and the Company otherwise agree in writing and such agreement is approved by the Florida Department of Insurance. The Company has not made any increases in the amount of the Administrative Services Fee to reflect increases in the Consumer Price Index.

The Administrative Services Agreement remained in effect for an initial term expiring on December 16, 2003. The term of the agreement was automatically extended for additional one-year terms expiring December 16, 2004, 2005 and 2006. The agreement is automatically extended for additional one-year terms unless either the Company or Southern Security Life delivers a written notice on or before September 30 of any year stating to the other a desire not to extend the term of the agreement.

On December 31, 2005, all of the remaining insurance business of Southern Security Life was transferred to Security National Life by a reinsurance agreement, except for the capital and surplus required to be maintained under Florida law and, as a result, Security National Life assumed full responsibility for Southern Security Life’s obligations under the Administrative Services Agreement. The obligations assumed by Security National Life include payment of the monthly administrative services fee to the Company. Neither the Company nor Security National Life, which assumed Southern Security Life’s rights and obligations under the agreement, provided written notice prior to September 30, 2006 stating a desire not to extend the term of the agreement. Consequently, the agreement has been extended for an additional one-year term ending December 31, 2007.

On January 1, 2005, Security National Life and SSLIC Holding Company, a wholly owned subsidiary of Security National Life, completed a merger transaction with Southern Security Life. Under the terms of the merger and pursuant to the Agreement and Plan of Reorganization, dated August 25, 2004, including the amendment thereto dated December 27, 2004, SSLIC Holding Company was merged with and into Southern Security Life, which resulted in (i) Southern Security Life becoming a wholly-owned subsidiary of Security National Life, and (ii) the unaffiliated stockholders of Southern Security Life, holding an aggregate of 490,816 shares of common stock, becoming entitled to receive $3.84 in cash for each issued and outstanding share of their common stock of Southern Security Life, or an aggregate of $1,884,733.

As a result of the merger, the separate existence of SSLIC Holding Company ceased as Southern Security Life became the surviving corporation of the merger. Southern Security Life continues to be governed by the laws of the State of Florida, and its separate corporate existence continues unaffected by the merger. In addition, as a result of the merger, Security National Life owns all of the issued and outstanding common shares of Southern Security Life. The Company, through its affiliates, Security National Life and SSLIC Holding Company, owned 76.7% of the Company’s outstanding common shares prior to the merger.

The purpose of the merger was to terminate the registration of the common stock of Southern Security Life under the Securities Exchange Act of 1934 (by reducing the number of its stockholders of record to fewer than 300 stockholders) and the Nasdaq listing of the common stock, reduce expenses associated with such registration and listing, and provide the stockholders an opportunity to sell their shares in an illiquid trading market without incurring brokerage commissions. As a result of becoming a non-reporting company, Southern Security Life is no longer required to file periodic reports with the SEC, including among other things, annual reports on Form 10-K and quarterly reports on Form 10-Q, and is no longer subject to the SEC’s proxy rules. In addition, its common stock is no longer eligible for trading on the Nasdaq SmallCap Market.


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On December 23, 2002, the Company completed an asset purchase transaction through its wholly owned subsidiary, Security National Life with Acadian from which it acquired $75,000,000 in assets and $75,000,000 in insurance reserves. The acquired assets consist primarily of approximately 275,000 funeral insurance policies in force in the state of Mississippi. The assets were originally acquired by Acadian from Gulf National Life Insurance Company on June 6, 2001, which, at that time, consisted of all of the insurance policies of Gulf National Life Insurance Company in force and in effect on June 1, 2001 (the “Reinsured Business”).

As a part of the transaction, Security National Life entered into a coinsurance agreement with Acadian, in which Security National Life agreed to reinsure all the liabilities related to policies held by Mississippi policyholders. The terms included the payment of all legal liabilities, obligations, claims and commissions of the acquired policies. The effective date of the coinsurance agreement was September 30, 2002, following Acadian’s recapture of the insurance in force from its reinsurer Scottish Re (U.S.) Inc. on September 30, 2002.

The coinsurance agreement further provides that Acadian is required to pay Security National Life an initial coinsurance premium in cash or assets acceptable to Security National Life in an amount equal to the full coinsurance reserves, not including the incurred but not reported (IBNR) reserve as of the effective date. The ceding commission to be paid by Security National Life to Acadian for the reinsured policies is to be the recapture amount to be paid by Acadian to Scottish Re (U.S.), Inc., which was approximately $10,000,000. After the initial coinsurance premium, the coinsurance premiums payable by Acadian to Security National Life are to be equal to all of the premiums collected by Acadian on the reinsurance policies subsequent to December 31, 2002.

On January 1, 2003, Security National Life entered into an assumption agreement effective January 1, 2003, with Acadian, in which Security National Life agreed to assume certain of the liabilities related to the reinsurance policies. Under the terms of the assumption agreement, Acadian agreed to cede to Security National Life, and Security National Life agreed to assume the stated insurance risks and contractual obligations of Acadian relating to the Reinsured Business. Security National Life agreed to pay all legal liabilities and obligations, including claims and commissions, of Acadian with respect to the Reinsured Business arising on or after January 1, 2003, in accordance with the terms and conditions of the reinsured policies.

On March 16, 2004, Security National Life purchased all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of December 31, 2003, Security National Life of Louisiana had 9,383 policies in force and 29 agents. There were no material changes in the number of policies in force of the number of agents between December 31, 2003 and March 16, 2004. The purchase consideration was $4,398,000 and the transaction was effective January 26, 2004. Security National Life of Louisiana is licensed in the State of Louisiana where it is permitted to appoint agents who do not have a full life insurance license.

These agents are limited to selling small life insurance policies in the final expense market. The Company believes that with this license it will be able to expand its operations in Louisiana. The Company is servicing Security National Life of Louisiana policyholders out of its Jackson, Mississippi office and has closed its Shreveport office.

On December 29, 2005, Security National Life and Southern Security Life purchased all of the outstanding common shares of Memorial Insurance Company of America, an Arkansas domiciled insurance company located in Blytheville, Arkansas. As of December 31, 2005, Memorial Insurance Company had 116,116 policies in force and approximately 50 agents. The purchase consideration was $13,500,000.

On December 31, 2005, all of the remaining insurance business of Southern Security Life consisting of $48,528,000 in assets and liabilities was transferred to Security National Life by a reinsurance agreement, except for $3,500,000 in required capital and surplus. Also on December 31, 2005, Southern Security Life paid a $7,181,000 dividend to Security National Life.


35



On December 29, 2006, Southern Security Life was sold in a stock sales transaction for $400,000 plus an amount equal to Southern Security Life’s assets consisting of a corporate charter, licenses and required capital and surplus. The sale is conditioned upon the subsequent approval of the transaction by the Florida Office of Insurance Regulation and, if such approval is not obtained, Southern Security Life will be liquidated.

At December 31, 2006, $22,869,000 of the Company’s consolidated stockholders’ equity represents the statutory stockholders’ equity of the Company’s insurance subsidiaries. The life insurance subsidiaries need to comply with applicable state regulations before a dividend can be paid to their parent company.

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.

Forward-Looking Statements

This Annual Report of Form 10-K contains forward-looking statements, together with related data and projections, about the Company’s projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of 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.

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 expense 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 and (xiii) adverse trends in mortality and morbidity.

Off-Balance Sheet Agreements

At December 31, 2006, the Company was contingently liable under a standby letter of credit aggregating $101,520, to be used as collateral to cover any contingency related to additional risk assessments pertaining to the Company’s self-insurance casualty program. The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid. Accordingly, the estimated fair value of these instruments is zero.


36



The Company leases office space and equipment under various non-cancelable agreements, with remaining terms up to five years. Minimum lease payments under these non-cancelable operating leases as of December 31, 2006, are approximately as follows:
 
  Years Ending December 31:  
 
 
    2007 $ 854,000  
    2008   677,000  
    2009   376,000  
    2010   126,000  
    2011   8,000  
    Thereafter    
   
 
         Total $ 2,041,000  
   
 
 

Total rent expense related to these non-cancelable operating leases for the years ended December 31, 2006, 2005 and 2004 was approximately $1,222,000, $828,000 and $734,000, respectively.

The total of the Company un-funded residential construction loan commitments as of December 31, 2006 was $17,923,325.

Variable Interest Entities

In conjunction with the Company’s casualty insurance program, limited equity interests are held in a captive insurance entity. This program permits the Company to self-insure a portion of losses, to gain access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit its risk of loss in any particular year. This entity meets the definition of a variable interest entity (“VIE’s), however, based on the criteria set forth in FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, “there is not a requirement to include this entity in the consolidated financial statements. The maximum exposure to loss related to the Company’s involvement with this entity is limited to approximately $120,000, a majority of which is collateralized under a standby letter of credit issued on the insurance entity’s behalf. See Note 11, “Reinsurance, Commitments and Contingencies”, for additional discussion of commitments associated with the insurance program and Note 1, “Significant Accounting Policies”, for further information on a standby letter of credit. As of December 31, 2006, there are no other entities that met the definition of a VIE.

Recent Accounting Pronouncements

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts, (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a 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 should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Initial application of SOP 05-1 should be as of the beginning of the entity’s fiscal year. The Company adopted SOP 05-1 effective January 1, 2007. Adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.


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In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and related interpretations. SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips are not subject to recognition as liabilities. SFAS 155 eliminates the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for the Company for all financial instruments acquired or issued beginning January 1, 2007. The impact of adoption of this statement on the Company’s consolidated financial statements will likely not be material.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 amends SFAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and related interpretations. SFAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset. It also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to use either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for the Company as of January 1, 2007. The impact of adoption of this statement on the Company’s consolidated financial statements will likely not be material.

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, which attempts to set out a consistent framework for preparers to use to determine the appropriate level of valuation allowance tax reserves to maintain for deferred tax assets relating to uncertain tax positions. This interpretation for FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more-than-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit, which is greater than fifty percent likely to be realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s tax reserves. The Company will adopt this Interpretation as of January 1, 2007. The impact from adoption has not been determined.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“SFAS 158”). Under SFAS 158, the company must recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. The effective date of the recognition and disclosure provisions for the company is as of December 15, 2006. The adoption of SAB 108 did not have a material impact on the consolidated financial statements.


38



In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for the Company for its December 31, 2006 year-end. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No 115 (“SFAS 159”) SFAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the Company elects for similar types of assets and liabilities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the application of the fair value option and its effect on its financial position and results of operations.

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

The Company has no activities in derivative financial or commodity instruments other than those recorded and disclosed in the financial statements. See note 20 of the consolidated financial statements included elsewhere in this Form 10-K. The Company’s exposure to market risks (i.e., interest rate risk, foreign currency exchange rate risk and equity price risk) through other financial instruments, including cash equivalents, accounts receivable and lines of credit, is not material.


39



Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page No.  
 
 
Financial Statements:      
       
     Report of Independent Registered Public Accounting Firm Hansen-Barnett & Maxwell, P.C.   41  
       
     Report of Independent Registered Public Accounting Firm-Tanner LC   42  
       
     Consolidated Balance Sheets, December 31, 2006 and 2005   43  
       
     Consolidated Statements of Earnings, Years Ended December 31, 2006, 2005, and 2004   45  
       
     Consolidated Statements of Stockholders’ Equity, Years Ended December 31, 2006, 2005 and 2004   46  
       
     Consolidated Statements of Cash Flows, Years Ended December 31, 2006, 2005 and 2004   47  
       
     Notes to Consolidated Financial Statements   49  
       
Financial Statement Schedules:      
       
     II    Condensed Financial Information of Registrant   117  
       
     IV   Reinsurance   123  
       
     V    Valuation and Qualifying Accounts   124  
 
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.

40



HANSEN , BARNETT & MAXWELL, P.C.

A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
AND

BUSINESS CONSULTANTS


 

Registered with the Public Company
Accounting Oversight Board

5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
   
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

To the Board of Directors and the Stockholders
Security National Financial Corporation

We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security National Financial Corporation and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedules II, IV and V, are presented for purpose of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 
HANSEN, BARNETT & MAXWELL, P.C.                       
 

Salt Lake City, Utah
March 23, 2007


41



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Security National Financial Corporation
Salt Lake City, Utah

We have audited the accompanying consolidated statements of earnings, stockholders’ equity, and cash flows of Security National Financial Corporation and subsidiaries for the year ended December 31, 2004. In connection with our audit of the consolidated financial statements, we have also audited the 2004 amounts included in the consolidated financial statement schedules as listed in the accompanying index under Item 8. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Security National Financial Corporation and subsidiaries for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedules for 2004, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/           TANNER LC

Salt Lake City, Utah
March 31, 2005


42



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
  December 31,  
 
 
Assets 2006   2005  
 
 
 
Investments:        
    Fixed maturity securities held to maturity, at amortized cost $ 98,317,519   $ 89,780,942  
    Fixed maturity securities, available for sale, at estimated fair value   3,417,531     6,597,161  
    Equity securities, available for sale, at estimated fair value   5,261,695     12,346,939  
    Mortgage loans on real estate and construction loans, net of allowances
       for losses of $1,026,576 and $562,909 for 2006 and 2005
  85,135,011     72,470,902  
    Real estate, net of accumulated depreciation of $4,024,710 and
       $3,766,259 for 2006 and 2005
  5,002,853     7,012,399  
    Policy, student and other loans net of allowance
       for doubtful accounts of $435,726 and $339,218 for 2006 and 2005
  12,846,986     12,391,569  
    Short-term investments   4,586,828     3,211,590  
    Accrued investment income   2,684,029     2,197,576  
 
 
 
Total investments   217,252,452     206,009,078  
     
Cash and cash equivalents   10,376,585     16,632,966  
Mortgage loans sold to investors   59,817,248     53,970,231  
Receivables, net   14,878,118     7,816,673  
Restricted assets of cemeteries and mortuaries   5,430,870     5,240,099  
Cemetery perpetual care trust investments   1,306,984     1,152,493  
Receivable from reinsurers   700,850     6,572,756  
Cemetery land and improvements sold to investors   8,745,424     8,498,227  
Deferred policy and pre-need contract acquisition costs   28,395,762     24,048,638  
Property and equipment, net   14,059,529     14,747,276  
Cost of insurance acquired   11,882,047     12,663,221  
Goodwill   683,191     683,191  
Other   3,866,123     1,610,624  
 
 
 
Total Assets $ 377,395,183   $ 359,645,473  
 
 
 
 

See accompanying notes to consolidated financial statements.


43



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
 
  December 31,  
 
 
Liabilities and Stockholders Equity 2006   2005  
 
 
 
Liabilities        
Future life, annuity, and other benefits $ 268,403,765   $ 260,822,803  
Unearned premium reserve   4,519,387     3,157,918  
Bank loans payable   6,923,344     8,946,321  
Notes and contracts payable   747,188     1,326,284  
Deferred pre-need cemetery and mortuary contract revenues   11,533,798     10,828,994  
Accounts payable   1,820,178     1,533,065  
Funds held under reinsurance treaties       1,129,747  
Other liabilities and accrued expenses   11,611,033     9,427,644  
Income taxes   16,587,284     14,601,029  
 
 
 
Total liabilities   322,145,977     311,773,805  
 
 
 
Commitments and Contingencies        
 
 
 
Non-Controlling Interest in Perpetual Care Trusts   2,278,510     2,173,250  
 
 
 
Stockholders’ Equity            
Class A common stock - $2.00 par value; 10,000,000 shares authorized;
    issued 7,533,230 shares in 2006 and 7,098,363 shares in 2005
  15,066,460     14,196,726  
 Class B non-voting common stock - $1.00 par value; 5,000,000
    shares authorized; none issued or outstanding
       
Class C convertible common stock - $0.20 par value; 7,500,000 shares
    authorized; issued 7,117,591 shares in 2006 and 6,781,060 shares in 2005
  1,423,518     1,356,212  
Additional paid-in capital   17,064,488     15,650,344  
Accumulated other comprehensive income and other items   1,703,155     117,647  
Retained earnings   20,495,063     17,460,024  
Treasury stock, at cost - 1,195,127 Class A shares and 145,045 Class C
    shares in 2006; 1,251,104 Class A shares and 138,138 Class C shares
    In 2005
  (2,781,988 )   (3,082,535 )
 
 
 
Total stockholders’ equity   52,970,696     45,698,418  
 
 
 
Total Liabilities and Stockholders’ Equity $ 377,395,183   $ 359,645,473  
 
 
 
 

See accompanying notes to consolidated financial statements.


44



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

 
Years Ended December 31,  
 
 
2006   2005   2004  
 
 
 
 
Revenues:            
Insurance premiums and other considerations $ 30,776,491   $ 27,170,109   $ 25,979,341  
Net investment income   23,245,631     19,386,571     15,939,176  
Net mortuary and cemetery sales   12,122,728     10,838,878     11,661,053  
Realized gains (losses) on investments and other assets   891,304     74,246     74,431  
Mortgage fee income   85,112,831     71,859,272     62,689,391  
Other   381,548     620,751     854,425  
 
 
 
 
   Total revenues   152,530,533     129,949,827     117,197,817  
 
 
 
 
  
Benefits and expenses:                  
Death benefits   15,155,711     13,250,080     13,248,960  
Surrenders and other policy benefits   1,697,857     1,484,284     1,291,621  
Increase in future policy benefits   10,465,268     9,742,218     8,821,497  
Amortization of deferred policy and pre-need acquisition
   costs and cost of insurance acquired
  4,124,747     3,030,734     4,602,072  
Selling, general and administrative expenses:                  
   Commissions   63,500,035     53,807,368     48,690,807  
   Salaries   17,947,902     15,716,813     14,391,958  
   Other   24,280,011     21,166,024     19,014,776  
Interest expense   6,141,298     4,921,238     2,173,778  
Cost of goods and services sold - mortuaries and cemeteries   2,322,066     2,103,432     2,303,821  
 
 
 
 
  
   Total benefits and expenses   145,634,895     125,222,191     114,539,290  
 
 
 
 
  
Earnings before income taxes   6,895,638     4,727,636     2,658,527  
Income tax expense   (1,771,188 )   (1,239,756 )   (651,536 )
Minority interest           115,281  
 
 
 
 
   Net earnings $ 5,124,450   $ 3,487,880   $ 2,122,272  
 
 
 
 
  
Net earnings per common share (1) $ 0.74   $ 0.51   $ 0.31  
 
 
 
 
  
Net earnings per common share - assuming dilution (1) $ 0.72   $ 0.50   $ 0.30  
 
 
 
 
  
Weighted average outstanding common shares (1)   6,955,439     6,881,036     6,851,287  
     
Weighted average outstanding common Shares
   -assuming dilution (1)
  7,106,474     6,911,587     7,067,377  
 

(1) Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share. Net earnings per Class C common share is equal to one-tenth (1/10) of such amount or $0.08, $0.06 and $0.04 per share of 2006, 2005 and 2004, respectively and $0.08, $0.06 and $0.03 per share-assuming dilution for 2006, 2005 and 2004, respectively.

See accompanying notes to consolidated financial statements.


45



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),
and Other
Items
  Retained
Earnings
  Treasury
Stock
  Total  

 
 
 
 
 
 
 
Balance as of January 1, 2004 $ 12,550,208   $ 1,293,927   $ 13,569,582   $ (437,973 ) $ 15,414,681   $ (3,214,994 ) $ 39,175,431  
Comprehensive income:                                          
   Net earnings                   2,122,272         2,122,272  
   Unrealized gains               426,621             426,621  
                                     
 
Total comprehensive income                           2,548,893  
                                     
 
Exercise of stock options   255,776         775,801         (1,031,577 )        
Purchase of Treasury stock                       (422,946 )   (422,946 )
Sale of Treasury stock           142,500             220,641     363,141  
Stock dividends   643,864     61,602     433,862         (1,139,328 )        
Conversion Class C to Class A   61,892     (61,888 )   1,106         (789 )       321  

 
 
 
 
 
 
 
Balance at December 31, 2004   13,511,740     1,293,641     14,922,851     (11,352 )   15,365,259     (3,417,299 )   41,664,840  

 
 
 
 
 
 
 
Comprehensive income:                                          
   Net earnings                   3,487,880         3,487,880  
   Unrealized gains               128,999             128,999  
                                     
 
Total comprehensive income                           3,616,879  
                                     
 
Exercise of stock options   6,892         3,926         (8,084 )       2,734  
Sale of Treasury stock           79,201             334,764     413,965  
Stock dividends   676,084     64,581     644,366         (1,385,031 )        
Conversion Class C to Class A   2,010     (2,010 )                      

 
 
 
 
 
 
 
Balance at December 31, 2005   14,196,726     1,356,212     15,650,344     117,647     17,460,024     (3,082,535 )   45,698,418  

 
 
 
 
 
 
 
  
Comprehensive income:                                          
   Net earnings                   5,124,450         5,124,450  
   Unrealized gains               1,585,508             1,585,508  
                                     
 
Total comprehensive income                           6,709,958  
                                     
 
Exercise of stock options   149,040         (43,441 )               105,599  
Purchase of Treasury stock                       (3,901 )   (3,901 )
Sale of Treasury stock           154,154             304,448     458,602  
Issuance for compensation   1,000         1,020                 2,020  
Stock dividends   719,212     67,788     1,302,411         (2,089,411 )        
Conversion Class C to Class A   482     (482 )                    

 
 
 
 
 
 
 
Balance at December 31, 2006 $ 15,066,460   $ 1,423,518     17,064,488   $ 1,703,155   $ 20,495,063     ($ 2,781,988 ) $ 52,970,696  

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.

46



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Years Ended December 31,  
 
 
  2006   2005   2004  

 
 
 
Cash flows from operating activities:            
      Net earnings $ 5,124,450   $ 3,487,880   $ 2,122,272  
      Adjustments to reconcile net earnings
        to net cash provided by (used in) operating
        activities:
                 
            Realized (gains) losses on investments
                 and other assets
  (891,304 )   (74,246 )   (74,431 )
            Depreciation   2,023,017     2,094,022     2,013,113  
            Provision for losses on real estate
                accounts and loans receivable
  558,370     87,376     (165,781 )
            Amortization of premiums and discounts   (34,144 )   36,637     (2,489 )
            Provision for deferred income taxes   1,153,985     862,024     636,430  
            Policy and pre-need acquisition costs deferred   (7,313,030 )   (6,764,492 )   (6,051,793 )
            Policy and pre-need acquisition costs amortized   3,132,647     1,933,125     3,370,763  
            Cost of insurance acquired amortized   992,100     1,097,609     1,231,308  
      Change in assets and liabilities net of
        effects from purchases and disposals of subsidiaries:
                 
            Land and improvements sold to investors   (247,197 )   49,537     (160,703 )
            Future life and other benefits   13,017,175     10,824,347     9,000,715  
            Receivables for mortgage loans sold   (5,321,587 )   (6,803,081 )   67,621,035  
            Other operating assets and liabilities   (520,347 )   1,771,798     (2,609,762 )

 
 
 
                Net cash provided by
                operating activities
  11,674,135     8,602,536     76,930,677  

 
 
 
Cash flows from investing activities:                  
      Securities held to maturity:                  
            Purchase - fixed maturity securities   (14,078,529 )   (5,984,347 )   (37,371,166 )
            Calls and maturities - fixed maturity securities   4,978,963     7,781,126     6,293,614  
      Securities available for sale:                  
            Purchase – fixed maturity securities   (173,262 )   (139,383 )   (21,993 )
            Sales - equity securities   11,973,825     4,183,108     2,675,301  
      Purchases of short-term investments   (41,342,009 )   (13,700,353 )   (29,893,323 )
      Sales of short-term investments   39,966,771     15,117,762     26,731,711  
      Purchases of restricted assets   (50,239 )   (57,453 )   (262,195 )
      Change in assets for perpetual care trusts   (154,491 )   (163,254 )   (31,959 )
      Amount received for perpetual care trusts   105,260     89,500     130,660  
      Mortgage, policy, and other loans made   (90,543,821 )   (76,034,805 )   (78,437,965 )
      Payments received for mortgage, policy, and
            other loans
  76,979,450     69,804,347     41,116,662  
      Purchases of property and equipment   (1,763,708 )   (2,236,732 )   (1,241,898 )
      Disposal of property and equipment   (37,756 )        
      Cash received from sale of property and equipment           149,040  
      Purchases of real estate   (2,262,890 )   (5,138,795 )   (1,856,931 )
      Cash (paid) received for purchase of subsidiary       1,722,238     (304,042 )
      Sale of real estate   5,359,781     3,898,980     352,054  

 
 
 
           Net cash used in investing activities   (11,042,655 )   (858,061 )   (71,972,430 )

 
 
 
 
See accompanying notes to the consolidated financial statements.

47



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

 
  Years Ended December 31,  
 
 
  2006   2005   2004  

 
 
 
Cash flows from financing activities:            
      Annuity contract receipts   5,941,594     5,547,795     5,387,393  
      Annuity contract withdrawals   (10,817,231 )   (9,655,951 )   (10,276,576 )
      Repayment of bank loans and notes and
         contracts payable
  (2,572,524 )   (2,463,116 )   (4,379,949 )
      Proceeds from borrowing on notes and contracts       672,439      
      Purchase of minority shareholder stock of subsidiary       (960,309 )    
      Stock options exercised   105,599          
      Purchase of treasury stock   (3,901 )       (422,946 )
      Sale of treasury stock   458,602     413,965     363,141  

 
 
 
      Net cash used in financing activities   (6,887,861 )   (6,445,177 )   (9,328,937 )

 
 
 
Net change in cash and cash equivalents   (6,256,381 )   1,299,298     (4,370,690 )

 
 
 
Cash and cash equivalents at beginning of year   16,632,966     15,333,668     19,704,358  

 
 
 
Cash and cash equivalents at end of year $ 10,376,585   $ 16,632,966   $ 15,333,668  

 
 
 
 

Supplemental Schedule of Cash Flow Information:

The following information shows the non-cash items in connection with the purchase of Security National Life Insurance Company of Louisiana on March 16, 2004 and Memorial Insurance Company of America on December 29, 2005:

 
    2005   2004  
 
 
 
   
  Liabilities assumed:        
         Future life, annuity and other policy benefits $ 30,326,086   $ 1,865,038  
         Policy and contract claims   171,526      
         Unearned premiums   61,901      
         Other liabilities   184,390      
         Deferred income taxes   1,928,137      
  Less non-cash items            
         Cost of insurance acquired   (251,086 )   (304,042 )
         Bonds received   (20,865,718 )   (1,537,801 )
         Common stock received   (8,130,046 )   (326,325 )
         Redeemable preferred stock   (821,077 )    
         Mortgage loans received       (471,593 )
         Real estate received       (32,668 )
         Policy loans received   (34,575 )   (28,180 )
         Short-term investments       586,601  
         Receivables   (388,374 )   (13,589 )
         Accrued investment income   (302,923 )   (24,983 )
         Property, plant and equipment   (156,003 )   (16,500 )
 
 
 
         Cash (paid) received $ 1,722,238   $ (304,042 )
 
 
 
 
See accompanying notes to the consolidated financial statements.

48



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies

General Overview of Business

Security National Financial Corporation and its wholly owned subsidiaries (the “Company”) operates in three main business segments: life insurance, cemetery and mortuary, and mortgage loans. 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 intermountain west, California and eleven southern states. The cemetery and mortuary segment of the Company consists of five cemeteries in Utah, one cemetery in California, eight mortuaries in Utah and four mortuaries in Arizona. The mortgage loan segment is an approved governmental and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in Arizona, California, Colorado, Florida, Hawaii, Kansas, Nevada, North Carolina, Oklahoma, Oregon, Texas, Utah, and Virginia.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance accounting principles generally accepted in the United States of America. The presentation of certain amounts in prior years has been reclassified to conform to the 2006 presentation.

Principles of Consolidation

These consolidated financial statements include the financial statement of Security National Financial Corporation and its majority owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.

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.

Held-to-maturity investments are carried at amortized cost, reflecting the Company’s intent and ability to hold the securities to maturity. Available-for-sale securities are stated at estimated fair value with net unrealized gains or losses reported as a component of accumulated other comprehensive income.

Investment gains and losses arise when investments are sold (as determined on a specific identification basis) or are other-than-temporarily impaired. If in management’s judgment a decline in the value of an investment below cost is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in judging whether an impairment is other than temporary include: the financial condition, business prospects and credit worthiness of the issuer, the length of time that fair value has been less than cost, the relative amount of the decline, and the Company’s ability and intent to hold the investment until the fair value recovers, which is not assured.


49



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

Fixed maturity securities held to maturity  are carried at cost, adjusted for amortization of premium or accretion of discount. Although the Company has the ability and intent to hold these investments to maturity, infrequent and unusual conditions could occur under which it would sell certain of these securities. Those conditions include unforeseen changes in asset quality, significant changes in tax laws, and changes in regulatory capital requirements or permissible investments.

Fixed maturity and equity securities available for sale  are carried at estimated fair value, which is based upon quoted trading prices. Changes in fair values net of income taxes are reported as unrealized appreciation or depreciation and recorded as an adjustment directly to stockholders’ equity and, accordingly, have no effect on net income.

Mortgage loans on real estate, construction loans and mortgage loans held for sale are carried at unpaid principal balances, adjusted for amortization of premium or accretion of discount, less allowance for possible losses.

Real estate 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 from impairment in value, if any.

Policy, student, and other loans  are carried at the aggregate unpaid balances, less allowances for possible losses.

Short-term investments  are carried at cost and consist of certificates of deposit and commercial paper with maturities of up to one year.

Restricted assets of cemeteries and mortuaries  are assets held in a trust account for future mortuary services and merchandise and consist of cash; participations in mortgage loans with Security National Life Insurance Company; mutual funds carried at cost; fixed maturity securities carried at cost adjusted for amortization of premium or accretion of discount; and equity securities carried at fair market value.

Cemetery and mortuary perpetual care trust  business segment contains six wholly owned cemeteries. Of the six cemeteries owned by the Company, four cemeteries are endowment care properties. Under endowment care arrangements a portion of the price for each lot sold is withheld and invested in a portfolio of investments similar to those described in the prior paragraph. The earnings stream from the investments is designed to fund future maintenance and upkeep of the cemetery.

Realized gains and losses on investments  and declines in value considered to be other than temporary, are recognized in operations on the specific identification basis.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.


50



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

Cemetery Land and Improvements Held for Sale

The development of a cemetery involves not only the initial acquisition of raw land but 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 criteria for recognizing a sale of that lot is met.

Property and Equipment

Property, plant 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 three to forty years. Leasehold improvements are amortized over the lesser of the useful life or remaining lease terms.

Recognition of Insurance Premiums and Other Considerations

Premiums 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. Revenues 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 policy charges for the policy administration charges, and surrender charges assessed against policyholder account balances during the period.

Deferred Policy Acquisition Costs and Cost of Insurance 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 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.

Cost of insurance acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs.

Allowance for Loan Losses and Doubtful Accounts

The Company records an estimate of the expense for potential losses from not collecting mortgage loans, other loans and receivables. Mortgage loans held for sale and significant receivables are the result of cemetery and mortuary operations, mortgage loan operations and other receivables. The allowance is based upon the Company’s experience. The critical issues that impact recovery of the cemetery and mortuary receivables is the overall economy. The critical issues that impact recovery of mortgage loan operations are interest rate risk and loan underwriting.


51



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

Future Life, Annuity and Other Policy Benefits

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. The range of assumed interest rates for all traditional life insurance policy reserves was 4.5% to 10%. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred. Increases in future policy benefits are charged to expense.

Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5%.

Participating Insurance

Participating business constituted 2%, 3%, and 2% of insurance in force for 2006, 2005 and 2004, respectively. The provision for policyholders’ dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors.

Reinsurance

The Company follows the procedure of reinsuring risks in excess of $75,000 to provide for greater diversification of business to allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations.

The Company entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company.

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.

Cemetery and Mortuary Operations

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 services are performed or the caskets are delivered.


52



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

Sales of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sale of cemetery interment rights are recognized in accordance with the retail land sales provisions of Statement of Financial Accounting Standards No. 66, Accounting for the Sales of Real Estate (FAS No. 66). Under FAS 66, 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 sale of unconstructed cemetery property is deferred until such property has been constructed and meets the criteria of FAS No. 66 described above.

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. 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 are accounted for under the guidance of the provisions of Statement of Financial Accounting Standards No. 60 Accounting and Reporting by Insurance Enterprises (FAS No. 60). Obtaining costs, 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.

Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection reasonably assured and there are no significant obligations remaining.

The Company, through its mortuary and cemetery 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.

Mortgage Operations

Mortgage fee income consists of origination fees, processing fees and certain other income related to the origination of mortgages. For mortgages sold to third party investors, mortgage fee income and related expenses are recognized at the time the loan meets the sales criteria for financial assets which are: (1) the transferred assets have been isolated from the Company and its creditors, (2) the transferee has the right to pledge or exchange the mortgage, and (3) the Company does not maintain effective control over the transferred mortgage. Certain loans funded are transferred to unrelated financial institutions under purchase commitments. All rights and title to the mortgage loans are assigned to the unrelated financial institutions, including any investor commitments for these loans prior to their purchasing these loans under the purchase commitments. As of December 31, 2006 and 2005, mortgage loans totaling $190,455,000 and $93,389,000 respectively, have been sold and were outstanding under these commitments.


53



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

The Company has commitment agreements from financial institutions whereby the financial institutions have agreed to purchase mortgage loans up to $306,854,000 as of December 31, 2006, until these loans are purchased by third party investors.

The majority of loans originated are sold to third party investors. Receivables for mortgages sold to investors are shown on the balance sheet as mortgage loans sold to investors and are shown on the basis of the amount due from the investors, which includes fees. Any impairment to these receivables are included in a separate allowance for loan losses. The estimates are based upon historical experience and best estimate of future losses.

The Company accrues an estimate of future losses 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 the first year of duration and to repurchase loans in default within the first year. The estimates are based upon historical experience and best estimate of future liabilities. At December 31, 2006 and 2005 the reserve for future loan losses was $2,712,000 and $2,183,000, respectively.

Self Insurance

The Company is self insured for certain casualty insurance, workers compensation and health benefit programs. Self–Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverages. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party administrators and actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since 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.

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. No impairment of goodwill has been recognized in the accompanying financial statements.


54



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

Long-lived Assets

Long-lived assets to be held and used 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. No impairment of long-lived assets has been recognized in the accompanying financial statements.

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.

Earnings Per Common Share

The Company computes earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per share. This Standard requires 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. Basic and diluted earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.

Stock Compensation

Effective January 1, 2006, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards 123 (revised 2004). Share-Based Payment (“SFAS123R”). SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. The fair value of all options was calculated using the Black Scholes method. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to adopting SFAS 123R, the Company accounted for stock-based compensation plans under Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”).


55



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

The Company also has one variable option plan (the “1987 Plan”). In accordance with SFAS 123R for 2006 and APB Opinion No. 25 for 2005 and 2004, compensation cost related to options granted and outstanding under this plan is estimated and recognized over the period of the award based on changes in the current market price of the Company’s stock over the vesting period. Options granted under the 1987 Plan are exercisable for a period of ten years from the date of grant. No compensation was recognized under SFAS 125R for 2006 or under APB 25 for 2005 and 2004.

The Company has four fixed option plans (the “1987 Plan”, the “1993 Plan,” the “2000 Plan”, the “2003 Plan” and the “2006 Plan”). No compensation cost has been recognized for these plans under SFAS 123R for 2006 or under APB 25 for 2005 and 2004. Had compensation cost for 2005 and 2004 for these plans been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123R, the Company’s net earning and basic and diluted earnings per share would have been reduced as follows:

 
  Years Ended December 31,  
  2005   2004  

 
 
   
Net earnings, as reported $ 3,487,880   $ 2,122,272  
Total stock-based employee compensation recognized        
Total stock-based employee compensation expense
   determined under fair value based method
   for all awards
  (676,920 )   (1,090,458 )

 
 
   
Pro forma net earnings $ 2,810,960   $ 1,031,814  

 
 
   
Basic earnings per share, as reported $ 0.51   $ 0.31  
Diluted earnings per share as reported $ 0.50   $ 0.30  
Basic earnings per share, pro forma $ 0.41   $ 0.15  
Diluted earnings per share, pro forma $ 0.41   $ 0.15  
 

The weighted-average fair value of each option granted in 2006 under the 2006 Plan, is estimated at $3.11 as of the grant date using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 5%, volatility of 42%, risk-free interest rate of 3.4%, and an expected life of ten years. For the year ended December 31, 2006, the Company calculated compensation expense of $7,680 related to stock options.

The Company generally estimates the expected life of the options based upon the contractual term of the options. Future volatility is estimated based upon the historical volatility of the Company’s Class A common stock over a period equal to the estimated life of the options. Common stock issued upon exercise of stock options are generally new share issuances rather than from treasury shares. Future compensation relating to non-vested stock options at December 31, 2006 is not material.

The weighted-average fair value of options granted in 2005 under the 2000 Plan and the 2003 Plan is estimated at $1.92 as of the grant date using the Black Scholes option-pricing model with the following assumptions: dividend yield of 5%, volatility of 39%, risk-free interest rate of 3.4%, and an expected life of five to ten years.


56



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

The weighted-average fair value of options granted in 2004 under the 2000 Plan and the 2003 Plan is estimated at $1.71 as of the grant date using the Black Scholes Option Pricing Model with the following assumptions: dividend yield of 5%, volatility of 36%, risk-free interest rate of 3.4%, and an expected life of five to ten years.

Concentration of Credit Risk

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.

Recent Accounting Pronouncements

In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs (“DAC”) in Connection with Modifications or Exchanges of Insurance Contracts, (“SOP 05-1”). SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a 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 should be accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract must be written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Initial application of SOP 05-1 should be as of the beginning of the entity’s fiscal year. The Company will adopt SOP 05-1 effective January 1, 2007. Adoption of this statement is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and related interpretations. SFAS 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips are not subject to recognition as liabilities. SFAS 155 eliminates the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for the Company for all financial instruments acquired or issued beginning January 1, 2007. The impact of adoption of this statement on the Company’s consolidated financial statements will likely not be material.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140 (SFAS 156). SFAS 156 amends SFAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and related interpretations. SFAS 156 requires an entity to


57



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

1)   Significant Accounting Policies (Continued)

recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset. It also requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS 156 permits an entity to use either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. SFAS 156 is effective for the Company as of January 1, 2007. The impact of adoption of this statement on the Company’s consolidated financial statements will likely not be material.

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, which attempts to set out a consistent framework for preparers to use to determine the appropriate level of valuation allowance tax reserves to maintain for deferred tax assets relating to uncertain tax positions. This interpretation of FASB Statement No. 109 uses a two-step approach wherein a tax benefit is recognized if a position is more-than-likely-than-not to be sustained. The amount of the benefit is then measured to be the highest tax benefit, which is greater than a fifty percent likelihood of being realized. FIN 48 also sets out disclosure requirements to enhance transparency of an entity’s valuation allowances. The Company will adopt this Interpretation as of January 1, 2007. The impact from adoption has not been determined.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 will be applied prospectively and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“SFAS 158”). Under SFAS 158, the Company must recognize a net liability or asset to report the funded status of its defined benefit pension and other postretirement benefit plans on its balance sheets. The effective date of the recognition and disclosure provisions for the company is as of December 31, 2006. Adoption of SFAS 158 did not have a material effect on the consolidated financial statements as of December 31, 2006 or for the year then ended.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for the Company for the year ended December 31, 2006. The adoption of SAB 108 did not have a material impact on the Company’s consolidated financial statements.

In February 2007 the FASB issued SFAS No 159, The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No 115 (“SFAS 159”) SFAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the Company elects for similar types of assets and liabilities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the application of the fair value option and its effect on its financial position and results of operations.


58



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

2)  Acquisitions

Southern Security Life - Minority Interest Acquisition

As of December 31, 2004, the Company’s wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”), and its wholly owned subsidiary, SSLIC Holding, owned approximately 77% of the outstanding shares of common stock of Southern Security Life.

On January 1, 2005, the Company, through Security National Life, acquired the remaining 490,816 shares of common stock or the remaining 23% of Southern Security Life for $3.84 per share in cash, or an aggregate of $1,884,733, which was primarily paid during 2005.

The Florida Office of Insurance Regulation approved a reinsurance agreement on December 28, 2005. As a result of the reinsurance agreement, all of the insurance business and operations of Southern Security Life, including its assets and liabilities, were transferred to Security National Life, as reinsurer, as of December 31, 2005, the effective date of the agreement, except for the capital and surplus which is required to be maintained under Florida law. Thus, approximately $48,528,000 in assets and liabilities were transferred from Southern Security Life to Security National Life pursuant to the reinsurance agreement.

Southern Security Life - Sale

On December 29, 2006, the Company, through its wholly owned subsidiary, Security National Life, entered into an agreement to sell Southern Security Life to American Network Insurance Company (“American Network”), a Pennsylvania corporation and wholly owned subsidiary of Penn Treaty America Corporation, a Pennsylvania corporation. Under the terms of the agreement, Security National Life is to receive $4,265,884 upon approval of the transaction by the Florida Office of Insurance Regulation, the Florida Department of Financial Services, and the Pennsylvania Department of Insurance.

Until closing, Security National Life was required to pay $503,302 into an escrow account which will be repaid to Security National Life upon receipt of a written notice from American Network that it has deposited its own bonds with the states of Alabama, Michigan and South Carolina

In the event any of the regulatory authorities disapprove or fail to approve the transaction on or before June 30, 2007, the purchase price and payment by Security National Life will be released from escrow to the original parties and the purchase agreement will be terminated and Southern Security Life will be merged into Security National Life.

On March 5, 2007, the Company received a proposed consent order from the Florida Office of Insurance Regulation concerning the New Success Life Program, the higher education product currently being marketed and sold by Southern Security Life. The proposed order states that as a result of the investigation the Florida Office has determined that Southern Security Life violated Florida law (i) by knowingly making statements, sales presentations, omissions or comparisons that misrepresented the benefits, advantages, or terms of the New Success Life Program, and (ii) by knowingly making, advertisements, announcements, or statements containing representations that were untrue or misleading.


59



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

2)  Acquisitions (Continued)

The proposed order would require Security National Life and Southern Security Life to immediately cease and desist from making any false or misleading representations to Florida consumers suggesting that the New Success Life Program would accumulate enough value to pay for college expenses in full. The proposed order would also require Security National Life and Southern Security Life to agree to no longer market or sell the New Success Life Program in the State of Florida. In addition, Security National Life and Southern Security Life would be required to send a written notice to Florida consumers who purchased the New Success Life Program on or after January 1, 1998 stating that the higher education program is a whole life insurance product, with a term and annuity rider, and not a college trust fund, savings plan, or other program, and it may not necessarily pay college expenses in full from the accumulated value.

Moreover, the written notice is to provide an opportunity for the Florida consumers who purchased the New Success Life Program on or after January 1, 1998 to cancel their policy and be given a full refund, including all premiums paid, together with interest at the agreed upon rate in the original contract. If each of the Florida consumers who purchased the New Success Life Program after January 1, 1998 was to cancel his or her policy and receive a refund, the cost to the Company to refund all premiums paid, including interest, would be approximately $8,200,000, an amount in excess of the assets of Southern Security Life.

The proposed consent order would also require Security National Life and Southern Security Life to issue refunds including interest to the eleven policyholders whose affidavits were taken in connection with the administrative complaint that the Florida Office had previously filed against Franz Wallace, the former National Sales Director of Southern Security Life. Security National Life and Southern Security Life would additionally be required to issue refunds, including interest, to any Florida policyholder in the New Success Life Program who had filed a complaint with the Florida Department of Financial Services or whose coverage had lapsed. Furthermore, Security National Life and Southern Security Life would be required to notify the state insurance department in each state in which the New Success Life Program is marketed of the order and any complaint that Southern Security Life received relating to the New Success Life Program from policyholders in that state. Finally, Security National Life and Southern Security Life would be required to pay the Florida Office a penalty of $100,000 and administrative costs of $5,000.

The Company disputes the terms of the proposed consent order. The Company is not aware of specific concerns that the Florida Office has with the New Success Life Program because it has received no administrative complaint from the Florida Office nor is it aware of any recent market conduct examination that the Florida Office has conducted relative to the program. The Company intends to vigorously oppose the proposed consent order. The Company is currently engaged in discussions with the Florida Office in an effort to settle the dispute concerning the proposed order. If the Company is unable to reach a satisfactory resolution with the Florida Office with respect to the terms of the proposed consent order and the Florida Office issues a similar order, the Company intends to take action necessary to protect its rights and interests, including requesting a hearing before an administrative law judge to oppose the order. The Company believes any potential liability would be limited to the assets of Southern Security Life, which are approximately $3,847,000.

Paramount Security Life Insurance Company

On March 16, 2004, Security National Life completed the purchase of all of the outstanding common stock of Paramount Security Life Insurance Company, now known as Security National Life of Louisiana, a Louisiana domiciled insurance company located in Shreveport, Louisiana. As of March 16, 2004, Paramount Security Life Insurance Company had approximately 9,400 policies in force and approximately 29 agents. The total purchase consideration was $4,398,000 and the transaction was effective, January 26, 2004. The operation of Security National Life of Louisiana has been included in the consolidated operations of the Company from January 26, 2004.


60



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

2)  Acquisitions (Continued)

Security National Life of Louisiana is licensed in the State of Louisiana and is permitted to appoint agents who do not have a full life insurance license. These agents are limited to selling small life insurance policies in the final expense market.

Memorial Insurance Company of America

On December 29, 2005, Security National Life and Southern Security Life completed a stock purchase transaction with Memorial Insurance Company of America, an Arkansas domiciled insurance company (“Memorial Insurance Company”), and purchased all of the outstanding shares of common stock of Memorial Insurance Company for $13,500,000.

The shareholders of Memorial Insurance Company received payment for their shares by means of distributions, with Security National Life and Southern Security Life simultaneously contributing sufficient capital and surplus to Memorial Insurance Company to maintain its status as an admitted insurer in good standing in the state of Arkansas.

The following unaudited consolidated pro forma results of operations is presented assuming consummation of the purchase of Paramount Security Life Insurance Company and Memorial Insurance Company as of January 1, 2004:

 
    Unaudited Pro Forma
Years Ended December 31,
 
    2005   2004  
   
 
 
  in thousands except earnings per share  
  Total revenue $ 133,609   $ 122,000  
  Net earnings   4,325     4,283  
  Basic earnings per share $ 0.63   $ 0.63  
  Diluted earnings per share $ 0.63   $ 0.61  

61



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

2)  Acquisitions (Continued)

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition of Paramount Security Life Insurance Company on March 16, 2004 and Memorial Insurance Company of America on December 29, 2005:

 
Memorial   Paramount  
 
 
 
Assets:        
   Cash received $ 1,722,238   $  
   Cost of insurance acquired   251,086     304,042  
   Investments   29,816,841     1,864,126  
   Mortgage loans       471,593  
   Real estate       32,668  
   Policy loans   34,575     28,180  
   Receivables   388,374     13,589  
   Accrued investment income   302,923     24,983  
   Property and equipment   156,003     16,500  
 
 
 
     Total assets acquired   32,672,040     2,755,681  
 
 
 
Liabilities:            
   Future life, annuity and other benefits   30,326,086     1,865,038  
   Other liabilities   417,817     586,601  
   Deferred income taxes   1,928,137      
 
 
 
     Total liabilities assumed   32,672,040     2,451,639  
 
 
 
  
Net assets acquired $   $ 304,042  
 
 
 

62



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004
 

3) Investments

The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2006 are summarized as follows:

 
Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
 
 
 
 
December 31, 2006:                
Fixed maturity securities held to maturity
   carried at amortized cost:
                       
   Bonds:                        
      U.S. Treasury securities
             and obligations of U.S
             Government agencies
$ 14,237,522   $ 105,720   $ (287,625 ) $ 14,055,617  
                         
      Obligations of states and
             political subdivisions
  1,189,165     51,099     (4,361 )   1,235,903  
                         
      Corporate securities including
             public utilities
  72,755,683     1,036,087     (539,122 )   73,252,648  
                         
      Mortgage-backed securities   9,511,196     59,004     (331,484 )   9,238,716  
                         
   Redeemable preferred stock   623,953     16,240     (500 )   639,693  
 
 
 
 
 
      Total fixed maturity
           securities held to maturity
$ 98,317,519   $ 1,268,150   $ (1,163,092 ) $ 98,422,577  
 
 
 
 
 
Securities available for sale carried at
   estimated fair value:
                       
   Fixed maturity securities available for sale:                        
      U.S. Treasury securities
             and obligations of U.S.
             Government agencies
$ 597,937   $ 19,365   $   $ 617,302  
                         
      Corporate securities including
             public utilities
  2,713,641     86,588         2,800,229  
 
 
 
 
 
    
      Total fixed maturity securities
           available for sale
$ 3,311,578   $ 105,953   $   $ 3,417,531  
 
 
 
 
 

63



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004
 
3)   Investments (Continued)
 
Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
 
 
 
 
December 31, 2006:                
    
Equity securities available for sale:                        
    
   Non-redeemable preferred stock $ 20,281   $   $ (2,719 ) $ 17,562  
    
   Common stock:                        
    
      Public utilities   411,999     391,020     (10,557 )   792,462  
      Banks, trusts and insurance companies   559,683     909,209     (21,265 )   1,447,627  
      Industrial, miscellaneous and all other   1,173,702     2,265,431     (435,089 )   3,004,044  
 
 
 
 
 
    
Total equity securities available for sale $ 2,165,665   $ 3,565,660   $ (469,630 ) $ 5,261,695  
 
 
 
 
 
    
       Total securities available for sale
              carried at estimated fair value
$ 5,477,243   $ 3,671,613   $ (469,630 ) $ 8,679,226  
 
 
 
 
 
    
Mortgage loans on real estate and
construction loans:
                       
   Residential $ 15,992,983                    
   Residential construction   25,465,382                    
   Commercial   44,334,305                    
   Commercial construction   368,917                    
   Allowance for loan losses   (1,026,576 )                  
 
                   
Total mortgage loans on real estate
      and construction loans
$ 85,135,011                    
 
                   
    
Real estate $ 5,002,853                    
 
                   
    
Policy, student and other loans $ 12,846,986                    
 
                   
    
Short-term investments $ 4,586,828                    
 
                   

64



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004
 

3)   Investments (Continued)

The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2005 are summarized as follows:

 
Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Estimated
Fair
Value
 
 
 
 
 
 
December 31, 2005:                        
Fixed maturity securities held to maturity
   carried at amortized cost:
                       
   Bonds:                        
     U.S. Treasury securities
           and obligations of U.S
           Government agencies
$ 15,135,496   $ 161,384   $ (185,916 ) $ 15,110,964  
   
     Obligations of states and
           political subdivisions
  1,276,511     24,143     (3,335 )   1,297,319  
   
     Corporate securities including
           public utilities
  70,022,086     1,945,973     (420,407 )   71,547,652  
   
     Mortgage-backed securities   2,497,872     24,543     (136,089 )   2,386,326  
   
   Redeemable preferred stock   848,977     22,688         871,665  
 
 
 
 
 
     Total fixed maturity
         securities held to maturity
$ 89,780,942   $ 2,178,731   $ (745,747 ) $ 91,213,926  
 
 
 
 
 
   
Securities available for sale carried at
   estimated fair value:
                       
   Fixed maturity securities available for sale:                        
     U.S. Treasury securities
           and obligations of U.S
           Government agencies
$ 597,399   $ 35,315   $   $ 632,714  
   
     Corporate securities including
           public utilities
  5,846,721     122,715     (4,989 )   5,964,447  
 
 
 
 
 
   
     Total fixed maturity securities
         available for sale
$ 6,444,120   $ 158,030   $ (4,989 ) $ 6,597,161  
 
 
 
 
 

65



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

3)  Investments (Continued)

 
  Amortized Cost   Gross Unrealized
Gains
  Gross Unrealized Losses   Estimated
Fair
Value
 
 
 
 
 
 
December 31, 2005:                
  
Equity securities available for sale:                
  
   Non-redeemable preferred stock $ 37,781   $ 21,125   $ (3,436 ) $ 55,470  
  
   Common stock:                
  
     Public utilities   1,533,349     262,451     (15,357 )   1,780,443  
     Banks, trusts and insurance companies   520,684     604,681     (12,915 )   1,112,450  
     Industrial, miscellaneous and all other   8,080,838     1,801,463     (483,725 )   9,398,576  
 
 
 
 
 
  
Total equity securities available for sale $ 10,172,652   $ 2,689,720   $ (515,433 ) $ 12,346,939  
 
 
 
 
 
  
      Total securities available for sale
            carried at estimated fair value
$ 16,616,772   $ 2,847,750   $ (520,422 ) $ 18,944,100  
 
 
 
 
 
  
Mortgage loans on real estate and
construction loans:
               
   Residential $ 11,121,810  
   Residential construction   17,278,209              
   Commercial   43,504,500  
   Commercial construction   1,129,292              
   Allowance for loan losses   (562,909 )
 
             
Total mortgage loans on real estate
     and construction loans
$ 72,470,902              
 
             
  
Real estate $ 7,012,399  
 
             
  
Policy, student and other loans $ 12,391,569              
 
             
  
Short-term investments $ 3,211,590  
 
             

66



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

3)     Investments (Continued)

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

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2006, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Held to Maturity:   Amortized
Cost
  Estimated Fair
Value
 
   
 
 
  
    Due in 2007   $ 1,686,299   $ 1,682,584  
    Due in 2008 through 2011     8,866,775     8,947,719  
    Due in 2012 through 2016     21,219,659     21,200,678  
    Due after 2016     56,409,636     56,713,187  
    Mortgage-backed securities     9,511,197     9,238,716  
    Redeemable preferred stock     623,953     639,693  
   
 
 
         Total held to maturity   $ 98,317,519   $ 98,422,577  
   
 
 
           
Available for Sale:    Amortized
Cost
   Estimated Fair
Value
 
   
 
 
  
    Due in 2007   $ 499,874   $ 502,200  
    Due in 2008 through 2011     2,713,641     2,800,229  
    Due in 2012 through 2016          
    Due after 2016     98,063     115,102  
    Non-redeemable preferred stock     20,281     17,562  
    Common stock     2,145,384     5,244,133  
   
 
 
         Total available for sale   $ 5,477,243   $ 8,679,226  
   
 
 

67



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

3)  Investments (Continued)

The Company’s realized gains and losses from investments and other assets are summarized as follows:

 
        2006   2005  

2004

   
       
 
 
   
  Fixed maturity securities held
  to maturity:
                 
      Gross realized gains     $ 1,282   $ 2,593   $ 36,933    
      Gross realized losses       (28,439 )       (26,355 )  
  
  Securities available for sale:    
      Gross realized gains       106,252     56,651     3,310    
      Gross realized losses       (12,996 )   (561 )   (6,364 )  
  
  Other assets       825,205     15,563     66,907    
       
 
 
   
          Total     $ 891,304   $ 74,246   $ 74,431    
       
 
 
   
 

Generally gains and losses from held to maturity securities are a result of early calls and related amortization of premiums or discounts.

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 6% to 22.25%, maturity dates range from three months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At December 31, 2006, the Company has 48% of its mortgage loans from borrowers located in the state of Utah. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for loan losses of $1,026,576 and $562,909 at December 31, 2006 and 2005, respectively.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on available for sale securities) at December 31, 2006, other than investments issued or guaranteed by the United States Government.


68



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

3)  Investments (Continued)

Major categories of net investment income are as follows:

 
    2006   2005  

2004

 
   
 
 
 
  Fixed maturity securities $ 5,893,909   $ 4,602,518   $ 4,438,808  
  Equity securities   132,521     84,611     67,120  
  Mortgage loans on real estate   6,884,991     5,267,027     3,403,110  
  Real estate   1,159,572     1,636,413     1,322,796  
  Policy, student and other loans   713,798     674,826     673,404  
  Short-term investments, principally
  gains on sale of mortgage loans and other
  10,409,719     8,642,669     7,276,009  
   
 
 
 
    Gross investment income   25,194,510     20,908,064     17,181,247  
  Investment expenses   (1,948,879 )   (1,521,493 )   (1,242,071 )
   
 
 
 
  Net investment income $ 23,245,631   $ 19,386,571   $ 15,939,176  
   
 
 
 
 

Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of approximately $936,000, $904,000 and $781,000 for 2006, 2005, and 2004, respectively.

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

Securities on deposit for regulatory authorities as required by law amounted to $7,248,075 at December 31, 2006 and $9,439,648 at December 31, 2005. The restricted securities are included in various assets under investments on the accompanying consolidated balance sheets.

4) Receivables

 
Receivables consist of the following:     2006   2005  
     
 
 
Trade contracts     $ 8,114,563   $ 5,733,142  
Advances receivable from sales agents       2,146,507     1,992,877  
Contract for sale of Southern Security Life       4,365,887      
Other       1,117,553     958,851  


Total receivables       15,744,510     8,684,870  
Allowance for doubtful accounts       (866,392 )   (868,197 )


Net receivables     $ 14,878,118   $ 7,816,673  



69



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

5)  Cost of Insurance Acquired

Information with regard to cost of insurance acquired is as follows:

 
      2006   2005  

2004

 
     
 
 
 
Balance at beginning of year     $ 12,663,221   $ 14,053,497   $ 14,980,763  
     
 
 
 
Cost of insurance acquired       210,926     (292,667 )   304,042  
     
 
 
 
  
Imputed interest at 7%       851,702     935,085     1,016,199  
Amortization       (1,843,802 )   (2,032,694 )   (2,247,507 )
     
 
 
 
Net amortization charged to income       (992,100 )   (1,097,609 )   (1,231,308 )
     
 
 
 
Balance at end of year     $ 11,882,047   $ 12,663,221   $ 14,053,497  
     
 
 
 
 

Presuming no additional acquisitions, net amortization charged to income is expected to approximate $936,000, $876,000, $840,000, $805,000, and $772,000 for the years 2007 through 2011. Actual amortization may vary based on changes in assumptions or experience.

6) Property and Equipment

The cost of property and equipment is summarized below:

 
      December 31,  
     
 
      2006   2005  
     
 
 
Land and buildings     $ 17,040,687   $ 15,842,601  
Furniture and equipment       12,024,948     12,142,351  
     
 
 
        29,065,635     27,984,952  
Less accumulated depreciation       (15,006,106 )   (13,916,575 )
     
 
 
     Subtotal       14,059,529     14,068,377  
Land and buildings sold to investors           678,899  
     
 
 
Total     $ 14,059,529   $ 14,747,276  
     
 
 
 

7) Bank Loans Payable

Bank loans payable are summarized as follows:

      December 31,  
     
 
      2006   2005  
     
 
 
6% note payable in monthly installments of $5,693
      including principal and interest, collateralized by real  
      property, with a book value of approximately $803,000,
      due September 2010.
    $ 564,254   $ 597,221  
                 
6.93% note payable in monthly installments of $14,175
     including principal and interest, collateralized by real
     property with a book value of approximately $812,000,
     due November 2007.
      1,379,158     1,426,515  

70



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

7)     Bank Loans Payable (Continued)

 
    December 31,  
   
 
    2006   2005  
   
 
 
Bank prime rate less 1.35% (6.90% at December 31, 2006)
    note payable in monthly installments of $2,736 including
    principal and interest, collateralized by 15,000 shares of
    Security National Life Insurance Company stock, due
    February 2007.
    4,827     38,589  
               
7.35% note payable in monthly installments of $14,975
    including principal and interest, collateralized by 15,000
    shares of Security National Life Insurance Company stock,
    paid December 2006.
        172,549  
   
5.87% note payable with interest and monthly principal
     payments of $134,000, collateralized by 15,000 shares
     of Security National Life Insurance Company Stock,
     due January 2010.
    4,569,116     5,926,478  
               
Mark to market of interest rate swaps (discussed below) adjustment     (133,080 )   (162,629 )
               
Other collateralized bank loans payable     539,069     947,598  
   
 
 
     Total bank loans     6,923,344     8,946,321  
               
Less current installments     3,118,842     2,291,439  
   
 
 
Bank loans, excluding current installments   $ 3,804,502   $ 6,654,882  
   
 
 
 

The Company has line of credit agreements with a bank for $2,500,000, of which $250,000 and $600,000 were outstanding at December 31, 2006 and 2005, respectively, and were included in other collateralized bank loans payable. The lines of credit are for general operating purposes and bear interest at the bank’s prime rate and must be repaid every 30 days.

The Company considers its interest rate swap instruments (swaps) effective cash flow hedges against the variable interest rates of certain bank loans. The swaps expire on the maturity dates of the bank loans they hedge. In the event a swap is terminated, any resulting gain or loss would be deferred and amortized to interest expense over the remaining life of the bank loan it hedged. In the event of early extinguishment of a hedged bank loan, any realized or unrealized gain or loss from the hedging swap would be recognized in income coincident with the extinguishment.

Information regarding the swaps is as follows as of December 31, 2006:

 
  Weighted average variable interest rate of
    the hedged bank loans (prime less .5%)
  7.75 %  
  Weighted average fixed interest rate of the swaps   6.11 %  
  Market value of the swaps- potential unrealized
    gain position
$ 133,080    
 

The respective market values of the swaps are derived from proprietary models of the financial institution with whom the Company purchased the swaps and from whom the Company obtained the hedged bank loans.

See Note 8 for summary of maturities in subsequent years.


71



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

8)  Notes and Contracts Payable

Notes and contracts payable are summarized as follows:

 
    December 31,  
   
 
    2006   2005  
   
 
 

Unsecured note payable due to former stockholders
   of Deseret Memorial, Inc. resulting from the
   acquisition of such entity. Amount represents
   the present value, discounted at 8%, of monthly
   annuity payments of $5,900, due September 2011.

  $ 279,853   $ 501,598  
               
9% note payable in monthly installments of
   $10,000 including principal and
   interest, collateralized by real property,
   with a book value of approximately
   $2,908,000, due July 2008.
    209,322     307,434  
   
Due to shareholder of Security National
   Financial Corporation, 4.0% note payable in
   annual installments of $160,873 including
   principal and interest, due and paid in January 2006,
   secured by Company stock held in escrow
        160,873  
               
Other notes payable     258,013     356,379  
   
 
 
Total notes and contracts payable     747,188     1,326,284  
Less current installments     202,964     449,878  
   
 
 
  
Notes and contracts, excluding
current installments
  $ 544,224   $ 876,406  
   
 
 
 
The following tabulation shows the combined maturities of bank loans payable, lines of credit and notes and contracts payable:
 
  2007 $ 3,321,806  
  2008   1,798,649  
  2009   1,769,988  
  2010   569,822  
  2011   77,114  
  Thereafter   133,153  
   
 
  Total $ 7,670,532  
   
 
 

Interest paid approximated interest expense in 2006, 2005 and 2004.


72



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

9)  Cemetery and Mortuary Endowment Care and Pre-need Merchandise Funds

The Company has, historically, presented its perpetual care trusts, associated with its pre-need funeral and cemetery activities, on a net basis in the consolidated financial statements. In accordance with its adoption of FIN 46R, the assets and liabilities of the perpetual care trusts have been presented on a gross basis. Although FIN 46R requires the consolidation of the merchandise and service trusts, it does not change the legal relationships among the trusts, the Company and its customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore, their interest in these trusts has been represented as non-controlling interest in perpetual care trusts in the accompanying consolidated financial statements.

The components of the non-controlling interests in perpetual care trusts are as follows:

 
    December 31,  
   
 
    2006   2005  
   
 
 
Trust investments, at market value   $ 1,306,984   $ 1,152,493  
Note receivables from Cottonwood Mortuary
     and Singing Hills Cemetery eliminated
      in consolidation
    1,158,863     1,051,978  
Other     (187,337 )   (31,221 )
   
 
 
Non-controlling interest   $ 2,278,510   $ 2,173,250  
   
 
 
 

The Company has established and maintains certain restricted trust investments to provide for future merchandise and service obligations incurred in connection with its pre-need sales. Such amounts are reported as pre-need funeral and cemetery trust investments of cemeteries and mortuaries in the accompanying consolidated balance sheets.

Assets in the restricted asset account are summarized as follows:

       
    December 31,  
   
 
    2006   2005  
   
 
 
Cash and cash equivalents   $ 673,262   $ 747,281  
Mutual funds     332,960     332,960  
Fixed maturity securities     8,775     8,775  
Equity securities     77,778     77,778  
Participation in mortgage loans
   with Security National Life
    4,338,095     4,039,609  
Time certificate of deposit         33,696  
   
 
 
   Total   $ 5,430,870   $ 5,240,099  
   
 
 
 
10) Income Taxes
 
The Company’s income tax liability at December 31 is summarized as follows:
    December 31,  
   
 
    2006   2005  
   
 
 
Current   $ 690,171   $ 358,357  
Deferred     15,897,113     14,242,672  
   
 
 
Total   $ 16,587,284   $ 14,601,029  
   
 
 

73



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

10)  Income Taxes (Continued)

Significant components of the Company’s deferred tax (assets) and liabilities at December 31 are approximately as follows:

 
      December 31,  
     
 
      2006   2005  
     
 
 
Assets            
Future policy benefits     $ (2,678,185 ) $ (1,424,759 )
Unearned premium       (1,672,173 )   (1,736,217 )
Other       (434,239 )   (299,209 )
     
 
 
Total deferred tax assets       (4,784,597 )   (3,460,185 )
     
 
 
Liabilities                
Deferred policy acquisition costs       7,374,960     6,694,963  
Cost of insurance acquired       4,338,358     2,150,799  
Installment sales       2,232,103     3,262,577  
Trusts       1,257,376     1,766,590  
Tax on unrealized appreciation       1,649,404     584,879  
Difference between book and tax basis of other
   assets and liabilities
      3,829,509     3,243,049  
     
 
 
Total deferred tax liabilities       20,681,710     17,702,857  
     
 
 
Net deferred tax liability     $ 15,897,113   $ 14,242,672  
     
 
 
 
The Company paid $173,389, $37,960 and $126,894 in income taxes for 2006, 2005 and 2004, respectively. The Company’s income tax expense (benefit) is summarized as follows:
 
      2006   2005  

2004

 
     
 
 
 
Current     $ 617,203   $ 377,732   $ 15,106  
Deferred       1,153,985     862,024     636,430  
     
 
 
 
Total     $ 1,771,188   $ 1,239,756   $ 651,536  
     
 
 
 
 
The reconciliation of income tax expense at the U.S. federal statutory rates is as follows:
 
      2006   2005  

2004

 
     
 
 
 
Computed expense at statutory rate     $ 2,344,517   $ 1,607,396   $ 903,899  
Special deductions allowed
   small life insurance companies
      (624,438 )   (399,820 )   (243,873 )
Dividends received deduction       (2,040 )   (5,780 )   (5,619 )
Minority interest taxes               47,376  
Other, net       53,149     37,960     (50,247 )
     
 
 
 
   Tax expense     $ 1,771,188   $ 1,239,756   $ 651,536  
     
 
 
 
 
A portion of the life insurance income earned prior to 1984 was not subject to current taxation but was accumulated for tax purposes, in a “policyholders’ surplus account.” Under provisions of the Internal Revenue Code, the policyholders’ surplus account was frozen at its December 31, 1983 balance and will be taxed generally only when distributed. Congress passed changes to the tax code, which exempts distributions from tax if such distributions are made in the years 2005 through 2007. The Company took advantage of these changes and made distributions in 2006 of its policyholders surplus account ($4,152,318).

74



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

The Company has a net operating loss carry forward of approximately $1,434,000, as of December 31, 2006. These carry forward amounts begin expiring in ten years and range up to 20 years.

11)     Reinsurance, Commitments and Contingencies

The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $30,000 to $75,000 during the years 2006 and 2005. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies having insurance in force amounting to $1,388,552,000 (unaudited) at December 31, 2006 and $1,964,847,00 (unaudited) at December 31, 2005.

As part of the acquisition of Southern Security, the Company has a co-insurance agreement with The Mega Life and Health Insurance Company (“MEGA”). On December 31, 1992 Southern Security ceded to MEGA 18% of all universal life policies in force at that date. MEGA is entitled to 18% of all future premiums, claims, policyholder loans and surrenders relating to the ceded policies. In addition, Southern Security receives certain commission and expense reimbursement. Effective January 1, 2006, Southern Security entered into a Reinsurance Recapture Agreement with MEGA wherein the policies reinsured under the Reinsurance Agreement between the Company and MEGA dated December 31, 1992, as amended was recaptured. During February 2006 MEGA transferred assets and liabilities of approximately $6,582,000 to Southern Security. Consideration paid by Southern Security to MEGA was $200,000.

The Company has commitments to fund residential construction loans. As of December 31, 2006 the Company had commitments of $43,389,000 for these loans of which $25,465,000 had been funded. These loans are for new construction. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% to 80% of appraised value. The Company receives fees from the borrowers and the interest rate is generally 1% to 2% over the bank prime rate (8.25% as of December 31, 2006). Maturities range between six and twelve months.

On December 26, 2003, the Company entered into a partially Coinsurance and a partially Modified Coinsurance Agreement (CoModco Agreement) with Guaranty Income Life Insurance Company (Guaranty) effective September 30, 2003. The Company has reinsured 100% of certain blocks of Guaranty’s traditional life, universal life and annuity businesses. The total liabilities reinsured for these blocks of businesses on October 1, 2003 were $60,527,887. The Company paid a ceding commission to Guaranty of $3,400,000 and will receive from Guaranty a risk charge of 1% of the outstanding Coinsurance per calendar quarter. Guaranty put into a bank trust investment grade bonds, which equal the outstanding liabilities assumed by the Company. The Company is named as a beneficiary of the trust and the terms of the trust are such that Guaranty will maintain investment grade bonds in the trust to equal the outstanding liabilities assumed by the Company. Under the CoModco Agreement the Coinsurance and the increase in reserves are equal. Under U. S. GAAP the Coinsurance and the reserve increases are netted since these are non-cash items, and the Company expects to recapture the Coinsurance from future profits of the reinsured business. Guaranty has the right to recapture the business at any time after December 31, 2004 upon 90 days advance notice. As of December 31, 2006 and 2005, the outstanding Coinsurance amount was $-0- and $-0-, respectively. The Company recorded as income the risk charge for the years ended December 31, 2006 and 2005, of $-0- and $10,000, respectively. In the event that the Company believes it will not recover the Coinsurance it will have to record as an expense and a future liability for the amount of such impairment. Effective January 1, 2005, Guaranty recaptured the reinsurance under this agreement and the agreement was cancelled between the Company and Guaranty. The recapture did not result in recognition of a gain or loss in the consolidated financial statements.


75



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

11)     Reinsurance, Commitments and Contingencies (Continued)

The City of Phoenix (in Arizona) began condemnation proceedings during 2004 on the property where the Camelback Funeral Home was located for purposes of constructing a light rail facility. The city placed $1,200,000 in escrow to pay the Company for the property that was condemned. The carrying amount on the Company’s financial statements for the land and building of the Camelback Funeral Home at December 31, 2005 was $678,889. The Company has had an independent appraisal and negotiated a higher sales price with the city. In July 2006, the Company settled with the City of Phoenix for a sales price of $1,440,000. As a result of the sale, the Company recognized a gain of $760,231 during the third quarter of 2006. The first payment of $1,200,000 was made by the City of Phoenix in August 2006 with the remaining amount to be received within 30 days of the city council’s approval of the sales price.

The Company leases office space and equipment under various non-cancelable agreements, with remaining terms up to five years. Minimum lease payments under these non-cancelable operating leases as of December 31, 2006, are approximately as follows:

 
  Years Ending
December 31:
       
 
       
  2007   $ 854,000  
  2008     677,000  
  2009     376,000  
  2010     126,000  
  2011     8,000  
     
 
  Total   $ 2,041,000  
     
 
 

Total rent expense related to these non-cancelable operating leases for the years ended December 31, 2006, 2005, and 2004 was approximately $1,222,000, $828,000 and $734,000, respectively.

At December 31, 2006, the Company was contingently liable under a standby letter of credit aggregating $101,520, to be used as collateral to cover any contingency related to additional risk assessments pertaining to the Company’s self-insurance casualty program. The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid. Accordingly, the estimated fair value of these instruments is zero.

The Company is self insured for certain casualty insurance and health benefit programs. Self-Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverages. When estimating the self-insurance liabilities and related reserves, management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Management reviews its assumptions with its independent third-party administrators and actuaries to evaluate whether the self-insurance reserves are adequate. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. At December 31, 2006, $100,324 of reserves was established related to such insurance programs versus $163,269 at December 31, 2005.


76



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

11)     Reinsurance, Commitments and Contingencies

The Company received a letter dated November 29, 2004 on behalf of Roger Gornichec, who the Company recognizes as having been an independent contractor. Gornichec had concluded his services as an agent selling insurance in the spring of 2003 and his license to sell cemetery plots was not renewed in the summer of 2004. Gornichec asserted that he was an employee contrary to the Company’s position.

The claims made in the letter on behalf of Gornichec included but were not limited to, wrongful termination in violation of public policy, misrepresentation, age discrimination, whistle-blower retaliation, interference with economic advantage, breach of contract, breach of the covenant of good faith and fair dealing, and infliction of emotional distress. Gornichec also claimed he was owed a certain amount from a retirement plan. The letter from Gornichec’s attorney proposed a settlement in the amount of $420,000. Based on its investigation, the Company believes Gornichec was an independent contractor rather than an employee, and there was no justification for the claims and the settlement amount sought. The Company reached a settlement with Gornichec, which resulted in the Company paying $27,000 to Gornichec during the second quarter of 2006.

The Company received a letter dated November 9, 2004 on behalf of Charles Hood, who worked at Singing Hills Memorial Park in El Cajon, California. Hood was hired in early 2003 as a groundskeeper with his work concluding on October 30, 2003. Hood claims he wrote a letter to the Company expressing his concerns regarding the operation of the cemetery, and that the next day he was terminated, even though he recognizes his relationship was as an at-will employee. Hood’s claims against the Company also include, but are not limited to, violation of labor laws, whistleblower retaliation and infliction of emotional distress. The letter proposed a settlement in the amount of $275,000.

On November 23, 2005, Hood filed a complaint in the Superior Court of the State of California for the County for San Diego (Case No. GIE 028978) against Singing Hills Memorial Park and California Memorial Estates, Inc, wholly owned subsidiaries of the Company. The claims in the complaint include wrongful termination in violation of public policy, retaliation in violation of public policy, race discrimination in violation of the California Fair Employment and Housing Act, retaliation in violation of the California Fair Employment and Housing Act, intentional infliction of emotional distress, plus punitive damages, attorney’s fees and costs of the lawsuit. There are no specific amounts requested in the complaint, but damages are in an amount to be proven at a jury trial. The Company contends that Hood voluntarily quit and was not terminated. The trial was set for November 2006. The Company reached a settlement with Hood, which resulted in the Company paying $30,000 to Hood, during the third quarter of 2006.

On March 5, 2007, the Company received a proposed consent order from the Florida Office of Insurance Regulation concerning the New Success Life Program, the higher education product currently being marketed and sold by Southern Security Life. The proposed order states that as a result of the investigation the Florida Office has determined that Southern Security Life violated Florida law (i) by knowingly making statements, sales presentations, omissions or comparisons that misrepresented the benefits, advantages, or terms of the New Success Life Program, and (ii) by knowingly making, advertisements, announcements, or statements containing representations that were untrue or misleading.

The proposed order would require Security National Life and Southern Security Life to immediately cease and desist from making any false or misleading representations to Florida consumers suggesting that the New Success Life Program would accumulate enough value to pay for college expenses in full. The proposed order would also


77



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

 
11) Reinsurance, Commitments and Contingencies (Continued)
 

require Security National Life and Southern Security Life to agree to no longer market or sell the New Success Life Program in the State of Florida. In addition, Security National Life and Southern Security Life would be required to send a written notice to Florida consumers who purchased the New Success Life Program on or after January 1, 1998 stating that the higher education program is a whole life insurance product, with a term and annuity rider, and not a college trust fund, savings plan, or other program, and it may not necessarily pay college expenses in full from the accumulated value.

Moreover, the written notice is to provide an opportunity for the Florida consumers who purchased the New Success Life Program on or after January 1, 1998 to cancel their policy and be given a full refund, including all premiums paid, together with interest at the agreed upon rate in the original contract. If each of the Florida consumers who purchased the New Success Life Program after January 1, 1998 was to cancel his or her policy and receive a refund, the cost to the Company to refund all premiums paid, including interest, would be approximately $8,200,000, an amount in excess of the assets of Southern Security Life.

The proposed consent order would also require Security National Life and Southern Security Life to issue refunds including interest to the eleven policyholders whose affidavits were taken in connection with the administrative complaint that the Florida Office had previously filed against Franz Wallace, the former National Sales Director of Southern Security Life. Security National Life and Southern Security Life would additionally be required to issue refunds, including interest, to any Florida policyholder in the New Success Life Program who had filed a complaint with the Florida Department of Financial Services or whose coverage had lapsed. Furthermore, Security National Life and Southern Security Life would be required to notify the state insurance department in each state in which the New Success Life Program is marketed of the order and any complaint that Southern Security Life received relating to the New Success Life Program from policyholders in that state. Finally, Security National Life and Southern Security Life would be required to pay the Florida Office a penalty of $100,000 and administrative costs of $5,000.

The Company disputes the terms of the proposed consent order. The Company is not aware of specific concerns that the Florida Office has with the New Success Life Program because it has received no administrative complaint from the Florida Office nor is it aware of any recent market conduct examination that the Florida Office has conducted relative to the program. The Company intends to vigorously oppose the proposed consent order. The Company is currently engaged in discussions with the Florida Office in an effort to settle the dispute concerning the proposed order. If the Company is unable to reach a satisfactory resolution with the Florida Office with respect to the terms of the proposed consent order and the Florida Office issues a similar order, the Company intends to take action necessary to protect its rights and interests, including requesting a hearing before an administrative law judge to oppose the order. The Company believes any potential liability would be limited to the assets of Southern Security Life, which are approximately $3,847,000.

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


78



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

11)     Reinsurance, Commitments and Contingencies

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.

12)     Retirement Plans

The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (ESOP) for all eligible employees. Eligible employees are primarily those with more than one year of service, who work in excess of 1,040 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors. The Company’s contributions are allocated to eligible employees based on the ratio of each eligible employee’s compensation to total compensation for all eligible employees during each year. ESOP contribution expense totaled $138,286, $131,524, and $105,196 for 2006, 2005 and 2004, respectively. At December 31, 2006 the ESOP held 625,824 shares of Class A and 1,630,693 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share.

The Company has a 401(k) savings plan covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pretax contributions up to the lesser of 15% of total annual compensation or the statutory limits.

The Company may match up to 50% of each employee’s investment in Company stock, up to 1/2 of 1% of the employee’s total annual compensation. The Company’s match will be Company stock and the amount of the match will be at the discretion of the Company’s Board of Directors. The Company’s matching 401(k) contributions for 2006, 2005, and 2004 were $8,656, $5,142, and $5,746, respectively. Also, the Company may contribute, at the discretion of the Company’s Board of Directors, an Employer Profit Sharing Contribution to the 401(k) savings plan. The Employer Profit Sharing Contribution shall be divided among three different classes of participants in the plan based upon the participant’s title in the Company. The Company contributions for 2006, 2005, and 2004 were $162,584, $135,589, and $128,949, respectively. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee.

In 2001, the Company’s Board of Directors adopted a 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’s contributions for 2006, 2005 and 2004 were $125,558, $141,710, and $123,249, respectively.

The Company has deferred compensation agreements with its Chief Executive Officer and its past Senior Vice President. The deferred compensation is payable on the retirement or death of these individuals either in annual installments over 10 years or in a lump sum settlement, if approved by the Board of Directors. The amount payable is $70,392 per year with cost of living adjustments each anniversary. The compensation agreements also provide that any remaining balance will be payable to their heirs in the event of their death. In addition, the agreements provide that the Company will pay the Group Health coverages for these individuals and/or their spouses. In 2006 and 2005, the Company increased its liability for these future obligations by $6,000 and $10,000, respectively. The current balance as of December 31, 2006 is $732,000.


79



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

12)     Retirement Plans (Continued)

On July 16, 2004, the Company entered into an employment agreement with Scott M. Quist, its President and Chief Operating Officer. The agreement is effective as of December 4, 2003 and has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Quist performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Quist is to devote his full time to the Company serving as its President, General Counsel and Chief Operating Officer at not less than his current salary and benefits. The Company also agrees to maintain a group term life insurance policy of not less than $1,000,000 on Mr. Quist’s life and a whole life insurance policy in the amount of $500,000 on Mr. Quist’s life. In the event of disability, Mr. Quist’s salary would be continued for up to five years at 75% of its current level.

In the event of a sale or merger of the Company and Mr. Quist is not retained in his current position, the Company would be obligated to continue Mr. Quist’s current compensation and benefits for seven years following the merger or sale. The agreement further provides that Mr. Quist is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to 75% of his then current rate of compensation. However, in the event that Mr. Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed $88,700 and $37,800 in fiscal 2006 and 2005, respectively, to cover the present value of anticipated retirement benefits under the employment agreement. The liability accrued is $486,000 and $397,300 as of December 31, 2006 and 2005, respectively.

On December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice President of Mortgage Operations and President of SecurityNational Mortgage Company. The agreement has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Beckstead performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full time to the Company serving as President of SecurityNational Mortgage Company at not less than his current salary and benefits, and to include $350,000 of life insurance protection. In the event of disability, Mr. Beckstead’s salary would be continued for up to five years at 50% of its current level.

In the event of a sale or merger of the Company, and Mr. Beckstead were not retained in his current position, the Company would be obligated to continue Mr. Beckstead’s current compensation and benefits for five years following the merger or sale. The agreement further provides that Mr. Beckstead is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 62½) (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to one-half of his then current annual salary. However, in the event that Mr. Beckstead dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed in 2006 and 2005 approximately $36,200 and $46,300, respectively, to cover the present value of the retirement benefit of the agreement. The liability accrued is $273,000 and $236,800, as of December 31, 2006 and 2005, respectively.


80



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

13)  Capital Stock

The following table summarizes the activity in shares of capital stock for the three-year period ended December 31, 2006:

 
  Class A Class C  
 
 
 
Balance at December 31, 2003   6,275,104     6,469,638  
             
      Exercise of stock options   127,888      
      Stock Dividends   321,932     308,007  
      Conversion of Class C to Class A   30,946     (309,446 )
 
 
 
Balance at December 31, 2004   6,755,870     6,468,199  
 
 
 
             
      New shares issued for compensation   896      
      Exercise of stock options   2,550      
      Stock Dividends   338,042     322,908  
      Conversion of Class C to Class A   1,005     (10,047 )
 
 
 
Balance at December 31, 2005   7,098,363     6,781,060  
 
 
 
             
      New shares issued for compensation   500      
      Exercise of stock options   74,520      
      Stock Dividends   359,606     338,940  
      Conversion of Class C to Class A   241     (2,409 )
 
 
 
Balance at December 31, 2006   7,533,230     7,117,591  
 
 
 
 

The Company has two classes of common stock with shares outstanding, Class A and Class C. Class C shares vote share for share with the Class A shares on all matters except election of one-third of the directors who are elected solely by the Class A shares, but generally are entitled to a lower dividend participation rate. Class C shares are convertible into Class A shares at any time on a ten to one ratio.

Stockholders of both classes of common stock have received 5% stock dividends in the years 1990 through 2006, as authorized by the Company’s Board of Directors.

The Company has Class B Common Stock of $1.00 par value, 5,000,000 shares authorized, of which none 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.


81



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

13)  Capital Stock (Continued)

Earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. In accordance with SFAS 128, the basic and diluted earnings per share amounts were calculated as follows:

 
  2006 2005 2004  
 
 
 
 
Numerator:            
   Net income $ 5,124,450   $ 3,487,880   $ 2,122,272  
 
 
 
 
                   
Denominator:                  
   Denominator for basic earnings
    per share-weighted-average shares
  6,955,439     6,881,036     6,851,287  
 
 
 
 
   Effect of dilutive securities:                  
     Employee stock options   149,733     29,980     214,462  
     Stock appreciation rights   1,302     571     1,628  
 
 
 
 
Dilutive potential common shares   151,035     30,551     216,090  
 
 
 
 
                   
   Denominator for diluted earnings per
     share-adjusted weighted-average
     shares and assumed conversions
  7,106,474     6,911,587     7,067,377  
 
 
 
 
                   
Basic earnings per share $ 0.74   $ 0.51   $ 0.31  
 
 
 
 
Diluted earnings per share $ 0.72   $ 0.50   $ 0.30  
 
 
 
 
  

14)      Stock Compensation Plans

In 1987, the Company adopted the 1987 Incentive Stock Option Plan (the 1987 Plan). The 1987 Plan provides that shares of the Class A Common Stock of the Company may be optioned to certain officers and key employees of the Company. The 1987 Plan establishes a Stock Option Plan Committee which selects the employees to whom the options will be granted and determines the price of the stock. The 1987 Plan establishes the minimum purchase price of the stock at an amount which is not less than 100% of the fair market value of the stock (110% for employees owning more than 10% of the total combined voting power of all classes of stock).

The 1987 Plan provides that if additional shares of Class A Common Stock are issued pursuant to a stock split or a stock dividend, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be increased proportionately with no increase in the total purchase price of the shares then covered, and the number of shares of Class A Common Stock reserved for the purpose of the 1987 Plan shall be increased by the same proportion.

In the event that the shares of Class A Common Stock of the Company from time to time issued and outstanding are reduced by a combination of shares, the number of shares of Class A Common Stock then covered by each outstanding option granted hereunder shall be reduced proportionately with no reduction in the total price of the shares then so covered, and the number of shares of Class A Common Stock reserved for the purposes of the 1987 Plan shall be reduced by the same proportion.


82



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

14)           Stock Compensation Plans  (Continued)

The 1987 Plan terminated in 1997 and options granted are non-transferable. Options granted and outstanding under the 1987 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option.

Activity of the 1987 Plan is summarized as follows:

 
  Number of
Class A Shares
  Option Price  
 
 
 
Outstanding at December 31, 2003   4,220     $ 3.20    
                 
   Adjustment for the effect of stock dividends   158            
   Exercised   (1,055 )          
 
           
                 
Outstanding at December 31, 2004   3,323     $ 3.05    
                 
   Adjustment for the effect of stock dividends   166            
 
           
                 
Outstanding at December 31, 2005   3,489     $ 2.90    
                 
   Adjustment for the effect of stock dividends   175            
 
           
                 
Outstanding at December 31, 2006   3,664     $ 2.76    
 
           
                 
Exercisable at end of year   3,664     $ 2.76    
 
           
                 
Available options for future grant
   1987 Stock Incentive Plan
             
 
           
                 
Weighted average contractual term of options
   outstanding at December 31, 2006
  .3 years            
                 
Aggregated intrinsic value of options outstanding
   at December 31, 2006
$ 9,072            
 
           
  

On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the “1993 Plan”), which reserved 300,000 shares of Class A Common Stock for issuance thereunder.

The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress.

The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both “incentive stock options,” as defined under Section 422A of the Internal Revenue Code of 1986 (the “Code”), and “non-qualified options” may be granted pursuant to the 1993 Plan. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the Code,


83



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

14)           Stock Compensation Plans  (Continued)

including a requirement that the option exercise price be not less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company’s Board of Directors.

The options were granted to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company.

The 1993 Plan is administered by the Board of Directors or by a committee designated by the Board. The 1993 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. No options may be exercised for a term of more than ten years from the date of grant.

On November 7, 1996, the Company amended the Plan as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock.

On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 600,000 Class A shares to 1,046,126 Class A shares. The Plan had a term of ten years and was terminated in 2003 and options granted thereunder are non-transferable.

Activity of the 1993 Plan is summarized as follows:

 
  Number of Class A Shares   Option Price
 
 
 
 
Outstanding at December 31, 2003     642,782     $2.07 – $6.18  
   Adjustment for the effect of stock dividends     16,176        
   Exercised     (310,341 )      
   Cancelled     (8,925 )      
   
       
               
Outstanding at December, 2004     339,692     $1.97 - $5.35  
   Adjustment for the effect of stock dividends     16,664        
   Exercised     (2,980 )      
   Cancelled     (3,421 )      
   
       
               
Outstanding at December 31, 2005     349,955     $1.88 - $5.10  
   Adjustment for the effect of stock dividends     13,345        
   Exercised     (53,604 )      
   Cancelled     (29,453 )      
   
       
Outstanding at December 31, 2006     280,243     $1.79 - $4.86  
   
       

84



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

14)           Stock Compensation Plans  (Continued)

 
  Number of Class A Shares   Option Price
 
 
 
 
Exercisable at end of year     280,243     $1.79 - $4.86  
   
       
               
Available options for future grant
   1993 Stock Incentive Plan
           
   
       
               
Weighted average contractual term of options
   outstanding at December 31, 2006
    4.4 years        
               
Aggregated intrinsic value of options outstanding
   at December 31, 2006
  $ 205.471        
   
       
 

On October 16, 2000, the Company adopted the Security National Financial Corporation 2000 Director Stock Option Plan (the “2000 Plan”), which reserved 50,000 shares of Class A Common Stock for issuance thereunder. Effective November 1, 2000, and on each anniversary date thereof during the term of the 2000 Plan, each outside Director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside Director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the 2000 Plan. The options granted to outside Directors shall vest in their entirety on the first anniversary date of the grant.

The primary purposes of the 2000 Plan are to enhance the Company’s ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company.

The 2000 Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivisions, combination or stock dividend.

The 2000 Plan terminated in 2006 and options granted are non-transferable. Options granted and outstanding under the 2000 Plan include Stock Appreciation Rights which permit the holder of the option to elect to receive cash, amounting to the difference between the option price and the fair market value of the stock at the time of the exercise, or a lesser amount of stock without payment, upon exercise of the option.

Activity of the 2000 Plan is summarized as follows:

 
  Number of
Class A Shares
Option Price
 
 
 
 
  
Outstanding at December 31, 2003   14,627     $1.85 - $5.72  
   Adjustment for the effect of stock dividends   931        
   Granted   4,000        
   Exercised          
 
       

85



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

14)           Stock Compensation Plans  (Continued)

 
  Number of
Class A Shares
Option Price
 
 
 
 
  
Outstanding at December 31, 2004   19,558     $1.76 - $5.45  
   Adjustment for the effect of stock dividends   986        
   Granted   4,000        
   Exercised   (3,828 )      
 
       
             
Outstanding at December 31, 2005   20,716     $2.00 - $5.19  
   Adjustment for the effect of stock dividends   845        
   Granted          
   Exercised   (3,828 )      
 
       
             
Outstanding at December 31, 2006   17,733     $1.90 - $4.94  
 
       
             
Exercisable at end of year   17,733     $1.90- $4.94  
 
       
             
Available options for future
    grant 2000 Director Plan
  -0-        
 
       
             
Weighted average contractual term of options
   outstanding at December 31, 2006
  2.3 years        
             
Aggregated intrinsic value of options outstanding
   at December 31, 2006
$ 31,917        
 
       
 

On July 11, 2003, the Company adopted the Security National Financial Corporation 2003 Stock Option Plan (the “2003 Plan”), which reserved 500,000 shares of Class A Common Stock and 1,000,000 shares of Class C Common Stock for issuance thereunder. On December 7, 2006, the Board of Directors approved, subject to shareholder authorization, 500,000 shares of Class A common stock for issuance under the 2003 Plan. The 2003 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress.

The 2003 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both “incentive stock options”, as defined under Section 422A of the Internal Revenue Code of 1986 (the “Code”) and “non-qualified options” may be granted under the 2003 Plan.

The 2003 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales affected under the 2003 Plan are to be determined by the Board of Directors or its committee. No options may be exercised for a term of more than ten years from the date of the grant. Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 2003 Plan provides that the exercise price for non-qualified options will not be less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company’s Board of Directors.


86



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

14)           Stock Compensation Plans  (Continued)

The 2003 Plan has a term of ten years. The Board of Directors may amend or terminate the 2003 Plan at any time, from time to time, subject to approval of certain modifications to the 2003 Plan by the shareholders of the Company as may be required by law or the 2003 Plan.

Activity of the 2003 Plan is summarized as follows:

 
  Number of
Class A Shares
Number of
Class C Shares(1)
Option
Price(1)
 
 
 
 
 
Outstanding at January 1, 2004                
                     
   Adjustment for the effect of stock dividends   7,675       50,000        
   Granted   153,500       1,000,000        
   Exercised                
 
   
       
Outstanding at December 31, 2004   161,175       1,050,000     $3.77 - $3.08  
                     
   Adjustment for the effect of stock dividends   25,404       52,500        
   Granted   349,000              
   Exercised                
   Cancelled   (2,100 )            
 
   
       
                     
Outstanding at December 31, 2005   533,479       1,102,500     $2.93 - $3.68  
                     
   Adjustment for the effect of stock dividends   22,823       55,125        
   Granted                
   Exercised   (63,881 )            
   Cancelled   (13,125 )            
 
     
       
                     
Outstanding at December 31, 2006   479,296       1,157,625     $2.79 - $3.50  
 
   
       
                     
Exercisable at end of year   479,296       1,157,625     $2.79 - $3.50  
 
     
       
                   
Available options for future grant
   2003 Stock Incentive Plan
  72,407       57,881        
 
   
       
                     
Weighted average contractual term of options
   outstanding at December 31, 2006
  6.3 years                
                     
Aggregated intrinsic value of options
   outstanding at December 31, 2006
$ 1,140,059                
 
               
 
(1)       Class “C” shares are converted to Class “A” shares on a 10 to 1 ratio. The Option Price is based on Class A Common shares.

87



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

On December 7, 2006, the Company adopted the 2006 Director Stock Option Plan (the “Director Plan”) effective December 7, 2006. The Director Plan provides for the grant by the Company of options to purchase up to an aggregate of 100,000 shares of Class A Common Stock for issuance thereunder and adjusted for stock dividends if any. The Director Plan provides that each member of the Company’s Board of Directors who is not an employee or paid consultant of the Company automatically is eligible to receive options to purchase the Company’s Class A Common Stock under the Director Plan.

Effective as of December 7, 2006, and on each anniversary date thereof during the term of the Director Plan, each outside director shall automatically receive an option to purchase 1,000 shares of Class A Common Stock. In addition, each new outside director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the Director Plan. The options granted to outside directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the Director Plan are to enhance the Company’s ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company.

In the event of a merger of the Company with or into another company, or a consolidation, acquisition of stock or assets or other change in control transaction involving the Company, each option becomes exercisable in full, unless such option is assumed by the successor corporation. In the event the transaction is not approved by a majority of the “Continuing Directors” (as defined in the Director Plan), each option becomes fully vested and exercisable in full immediately prior to the consummation of such transaction, whether or not assumed by the successor corporation.

Activity of the 2006 Plan is summarized as follows:

         
  Number of
Class A Shares
Option Price
 
 
 
 
Outstanding at December 31, 2005            
                 
   Granted   4,000            
   Adjustment for the effect of stock dividends   200            
 
           
Outstanding at December 31, 2006   4,200     $ 5.06    
 
           
                 
Exercisable at end of year       $ 5.06    
 
           
                 
Available options for future grant
   2006 Stock Incentive Plan
  100,800            
 
           
                 
Weighted average contractual term of options
   outstanding at December 31, 2006
  9.9 years            
                 
Aggregated intrinsic value of options
   outstanding at December 31, 2006
$ 760            
 
           

88



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

15)  Statutory Reserves

Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts that the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, which were $19,153,896 at December 31, 2006, exceed minimum statutory capital requirements; however, payments of such amounts as dividends are subject to approval by regulatory authorities.

The Utah, Louisiana and Arkansas Insurance Departments impose minimum risk-based capital requirements, that were developed by the National Association of Insurance Commissioners, (“NAIC”) on insurance enterprises. The formulas for determining the risk-based capital (“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 have a combined weighted Ratio that is greater than 418% of the first level of regulatory action.

16)  Business Segment Information

Description of Products and Services by Segment

The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage loans. 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 loan segment consists of loan originations fee income and expenses from the originations of residential and commercial mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds are received from financial institutional investors.


89



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

16)  Business Segment Information (Continued)

Measurement of Segment Profit or Loss and Segment Assets

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit.

Factors Management Used to Identify the Enterprise’s Reportable Segments

The Company’s reportable segments are business units that offer different products and are managed separately due to the different products and the need to report to the various regulatory jurisdictions.

 
  2006  
 
 
  Life
Insurance
Cemetery/
Mortuary
Mortgage Reconciling
Items
Consolidated  
 
 
 
 
 
 
Revenues:                              
From external sources:                              
   Revenue from customers $ 30,776,491   $ 12,122,728   $ 85,112,831       $ 128,012,050  
   Net investment income   13,774,225     935,487     8,535,919         23,245,631  
   Realized losses on investments
       and other assets
  131,073     760,231             891,304  
   Other revenues   34,921     108,987     237,640         381,548  
                               
Intersegment revenues:                              
   Net investment income   4,907,414     116,004     452,070     (5,475,488 )    
 
 
 
 
 
 
Total revenues   49,624,124     14,043,437     94,338,460     (5,475,488 )   152,530,533  
 
 
 
 
 
 
Expenses:                              
Death and other policy benefits   16,853,568                 16,853,568  
Increase in future policy benefits   10,465,268                 10,465,268  
Amortization of deferred policy
   acquisition costs and
   cost of insurance acquired
  3,796,062     328,685             4,124,747  
Depreciation   487,545     298,512     540,915         1,326,972  
General, administrative
      and other costs:
                             
   Intersegment   24,000     60,672     294,828     (379,500 )    
   Other   12,603,489     11,508,066     82,611,487         106,723,042  
Interest expense:                              
   Intersegment   546,075     177,359     4,372,554     (5,095,988 )    
   Other   376,289     307,728     5,457,281         6,141,298  
 
 
 
 
 
 
Total benefits and expenses   45,152,296     12,681,022     93,277,065     (5,475,488 )   145,634,895  
 
 
 
 
 
 
Earnings before
    income taxes
$ 4,471,828   $ 1,362,415   $ 1,061,395   $   $ 6,895,638  
 
 
 
 
 
 
                               
Identifiable assets $ 353,431,518   $ 54,787,639   $ 22,158,123   $ (52,982,097 ) $ 377,395,183  
 
 
 
 
 
 
                               
Expenditures for
    long-lived assets
$ 454,817   $ 670,988   $ 637,903   $   $ 1,763,708  
 
 
 
 
 
 

90



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

16)  Business Segment Information (Continued)

 
  2005  
 
 
  Life
Insurance
Cemetery/
Mortuary
Mortgage Reconciling
Items
Consolidated  
 
 
 
 
 
 
Revenues:                              
From external sources:                              
   Revenue from customers $ 27,170,109   $ 10,838,878   $ 71,859,272   $   $ 109,868,259  
   Net investment income   11,080,324     967,740     7,338,507         19,386,571  
   Realized gains on investments
      and other assets
  74,246                 74,246  
   Other revenues   293,151     162,078     165,522         620,751  
                               
Intersegment revenues:                              
   Net investment income   5,015,356     92,004     349,027     (5,456,387 )    
 
 
 
 
 
 
Total revenues   43,633,186     12,060,700     79,712,328     (5,456,387 )   129,949,827  
 
 
 
 
 
 
Expenses:                              
Death and other policy benefits   14,734,364                 14,734,364  
Increase in future policy benefits   9,742,218                 9,742,218  
Amortization of deferred policy
   acquisition costs and cost of
    insurance acquired
  2,765,422     265,312             3,030,734  
Depreciation   438,423     699,236     566,495         1,704,154  
General, administrative and
   other costs:
                             
   Intersegment       36,672     296,664     (333,336 )    
   Other   12,278,778     10,147,421     68,663,284         91,089,483  
Interest expense:                              
   Intersegment   422,199     172,557     4,528,295     (5,123,051 )    
   Other   460,708     317,292     4,143,238         4,921,238  
 
 
 
 
 
 
Total benefits and expenses   40,842,112     11,638,490     78,197,976     (5,456,387 )   125,222,191  
 
 
 
 
 
 
Earnings before
   income taxes
$ 2,791,074   $ 422,210   $ 1,514,352   $   $ 4,727,636  
 
 
 
 
 
 
                               
Identifiable assets $ 345,029,159   $ 51,281,466   $ 18,193,773   $ (54,858,925 ) $ 359,645,473  
 
 
 
 
 
 
                               
Expenditures for
   long-lived assets
$ 758,688   $ 1,155,673   $ 322,371   $   $ 2,236,732  
 
 
 
 
 
 

91



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

16)     Business Segment Information (Continued)

 
  2004  
 
 
  Life
Insurance
Cemetery/
Mortuary
Mortgage Reconciling
Items
Consolidated  
 
 
 
 
 
 
Revenues:                    
From external sources:                              
   Revenue from customers $ 25,979,341   $ 11,661,053   $ 62,689,391   $   $ 100,329,785  
   Net investment income   9,062,991     812,659     6,063,526         15,939,176  
   Realized gains on
      Investments and
      other assets
  7,523     66,908             74,431  
   Other revenues   311,316     184,712     358,397         854,425  
                               
Intersegment revenues:                              
   Net investment income   7,478,350     85,337     265,470     (7,829,157 )    
 
 
 
 
 
 
Total revenues   42,839,521     12,810,669     69,376,784     (7,829,157 )   117,197,817  
 
 
 
 
 
 
Expenses:                              
Death and other policy benefits   14,540,581                 14,540,581  
Increase in future policy benefits   8,821,497                 8,821,497  
Amortization of deferred policy
    and pre-need acquisition
    costs and cost of insurance
    acquired
  4,349,371     252,701             4,602,072  
Depreciation   426,432     768,882     469,703         1,665,017  
General, administration and
      other costs:
                             
   Intersegment       36,672     284,982     (321,654 )    
   Other   11,771,056     9,963,065     61,002,224         82,736,345  
Interest expense:                              
   Intersegment   348,797     163,297     6,995,409     (7,507,503 )    
   Other   647,823     339,182     1,186,773         2,173,778  
 
 
 
 
 
 
Total benefits and expenses   40,905,557     11,523,799     69,939,091     (7,829,157 )   114,539,290  
 
 
 
 
 
 
Earnings (losses)
   before income taxes
$ 1,933,964   $ 1,286,870   $ (562,307)   $   $ 2,658,527  
 
 
 
 
 
 
                               
Expenditures for
   long-lived assets
$ 283,655   $ 487,118   $ 471,125   $   $ 1,241,898  
 
 
 
 
 
 

92



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

17)     Related Party Transactions

 

On December 19, 2001, the Parent Company entered into an option agreement with Monument Title, LLC, a Utah limited liability company (“Monument Title”), in which the Parent Company made available a $100,000 line of credit to Monument Title at an interest rate of 8% per annum. The line of credit was secured by the assets of Monument Title. From December 28, 2001 to June 14, 2002, the Company, under direction of the Parent Company, advanced Monument Title a total of $77,953 under the line of credit. The Company had the right, under the option agreement, for a period of five years from the date thereof, to acquire 100% of the outstanding common shares of Monument Title for the sum of $10.

 
On November 2, 2004 the Company entered into an Agreement to Repay Indebtedness and Convey Option with Monument Title and its principal owner. Under the terms of the agreement, Monument Title agreed to pay the Company a total of $94,177, representing the total of $77,953 that the Company advanced to Monument Title under the line of credit, plus interest thereon, within seven days from the date of the agreement. Monument Title paid $94,177 to the Company pursuant to the agreement. In addition, the Company agreed to release an interest to acquire 100% of the outstanding common shares of Monument Title, in consideration for a payment of an additional $94,177. Under the agreement, Monument Title was to pay the additional $94,177 to the Company in minimum payments of $500 per month for the first twelve months following the date of the agreement, with additional payments of $1,000 per month for the second twelve months following the date of the agreement.
 
Pursuant to this agreement, the Company received payments totaling $7,000 in 2005 and then received payments totaling $87,177 in 2006. Upon receipt of the final payment under the agreement, the Company released all of its interest to Monument Title.
 

18)  Disclosure about Fair Value of Financial Instruments

The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 3. The following methods and assumptions were used by the Company in estimating the “fair value” disclosures related to other significant financial instruments:

Cash, Receivables, Short-term Investments, and Restricted Assets of the Cemeteries and Mortuaries:  The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.

Mortgage, Policy, Student, and Collateral Loans:  The fair values are estimated using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.

Investment Contracts:  The fair values for the Company’s liabilities under investment-type insurance contracts are estimated based on the contracts’ cash surrender values.

The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.


93



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

 
  December 31, 2006
  December 31, 2005  
 
 
 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 
 
 
 
 
 
Financial assets:                
   Investment in fixed maturity securities $ 98,317,519   $ 98,422,577   $ 89,780,942   $ 91,213,926  
   Investment in securities available for sale   8,679,226     8,679,226     18,944,100     18,944,100  
   Investment in mortgage loans and construction loans   85,135,011     85,135,011     72,470,902     72,470,902  
   Investment in policy, student and other loans   12,846,986     12,846,986     12,391,569     12,391,569  
   Short-term investments   4,586,828     4,586,828     3,211,590     3,211,590  
   Cash and cash equivalents   10,376,585     10,376,585     16,632,966     16,632,966  
   Mortgage loans sold to investors   59,091,848     59,091,848     53,403,215     53,403,215  
   Receivables   15,603,518     15,603,518     8,383,689     8,383,689  
   Restricted assets of cemeteries and mortuaries   5,430,870     5,430,870     5,240,099     5,240,099  
   Cemetery perpetual care trust investments   1,306,984     1,306,984     1,152,493     1,152,493  
  
Financial liabilities:                        
   Investment-type insurance contracts   (94,284,000 )   (94,284,000 )   (93,859,000 )   (93,859,000 )
   Bank loans payable, excluding interest rate swaps   (7,056,424 )   (7,056,424 )   (9,108,950 )   (9,108,950 )
   Notes and contracts payable   (747,188 )   (747,188 )   (1,326,284 )   (1,326,284 )
   Accounts payable   (1,820,178 )   (1,820,178 )   (1,533,065 )   (1,533,065 )
   Other liabilities and accrued expenses   (11,611,033 )   (11,611,033 )   (9,427,644 )   (9,427,644 )
  
Derivatives:                        
   Interest rate lock commitments   1,147,314     1,147,314     487,382     487,382  
   Forward contracts on mortgage-backed securities   62,227     62,227     (229,688 )   (229,688 )
   Bank loan interest rate swaps   133,080     133,080     162,629     162,629  
 

19)       Accumulated Other Comprehensive Income and Other Items

The following summarizes accumulated other comprehensive income:

 
  December 31,
 
  2006 2005 2004  
 
 
 
 
Unrealized gains (losses)
     on available for-sale securities
$ 1,070,471   $ (342,816 ) $ 237,042  
Reclassification adjustment for net realized
     gains (losses) in net income
  93,255     56,090     (3,054 )
 
 
 
 
Net unrealized gains (losses) before taxes   1,163,726     (286,726 )   233,988  
Tax (expense) benefit   (186,935 )   114,017     16,928  
 
 
 
 
     Net   976,791     (172,709 )   250,916  
 
 
 
 
Potential unrealized gains (losses) for
     derivative bank loans (interest
     rate swaps) before taxes
  (29,549 )   199,439     266,219  
Tax (expense) benefit   10,047     (67,809 )   (90,514 )
 
 
 
 
     Net   (19,502 )   131,630     175,705  
 
 
 
 
Potential unrealized gains for derivative
     mortgage loans before taxes
  951,847     257,694      
Tax (expense) benefit   (323,628 )   (87,616 )    
 
 
 
 
     Net   628,219     170,078      
 
 
 
 
Other comprehensive income $ 1,585,508   $ 128,999   $ 426,621  
 
 
 
 

94



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

19)       Accumulated Other Comprehensive Income and Other Items (Continued)

The following is the accumulated balances of other comprehensive income and other items as of December 31, 2006:

 
  Beginning
Balance
December 31, 2005
Change
for the period
Ending
Balance
December 31, 2006
 
 
 
 
 
Unrealized gains on available-
     for-sale securities
$ 1,822,854   $ 976,791   $ 2,799,645  
Unrealized gains on derivative
     mortgage loans
  170,078     628,219     798,297  
Unrealized gains on derivative bank
     loan interest rate swaps
  107,335     (19,502 )   87,833  
 
 
 
 
Other comprehensive income   2,100,267     1,585,508     3,685,775  
 
 
 
 
                   
Other items:                  
Acquisitions of company stock
     held in escrow
  (1,982,620 )       (1,982,620 )
 
 
 
 
Total other comprehensive income
     and other items
$ 117,647   $ 1,585,508   $ 1,703,155  
 
 
 
 
 

20)     Derivative Loan Commitments

During 2005, the Company’s mortgage banking activities implemented new practices relating to mortgage loan commitments, including interest rate lock commitments and forward commitments to sell loans to third-party investors. The Company also implemented a hedging strategy for these transactions. A mortgage loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period of time, generally up to 30 days after inception of the rate lock. Mortgage loan commitments are derivatives under Statement of Financial Accounting Standards No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 149 (“SFAS 149”), Amendment of Statement 133 on Derivative Instruments and Hedging Activities and must be recognized at fair value on the consolidated balance sheet with changes in their fair values recorded as part of other comprehensive income from mortgage banking operations.

The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of mortgage loan commitments from the time a derivative 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 derivative loan commitments that will be exercised (i.e., the number of loan commitments that will be funded) fluctuates. The probability that a loan will not be funded within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the inception of the interest rate lock. However, many borrowers continue to exercise derivative loan commitments even when interest rates have fallen.

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


95



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

20)     Derivative Loan Commitments (Continued)

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 observed data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the mortgage loan commitments and are updated periodically to reflect the most current data. Once a loan is closed, it is classified as a loan receivable-sold to investors.

The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan and 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 mortgage loan commitment is issued. Therefore, at the time of issuance, the estimated fair value is zero. 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 derived from the Company’s recent historical empirical data are used to estimate the quantity of mortgage loans that will fund within the terms of the commitments.

The Company utilizes various derivative instruments to economically hedge the price risk associated with its outstanding mortgage loan commitments. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the derivative loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. A forward loan sales commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments by securing the ultimate sales price and delivery date of the loans. For mortgage loan commitments not protected by a forward sales commitment, the instruments used to economically hedge the fair value of the mortgage loan commitments include other freestanding derivatives such as mortgage backed securities, options and U.S. Treasury futures. The Company takes into account various factors and strategies in determining the portion of the mortgage loan commitments it wants to hedge economically.

The significant components of other comprehensive income during the years ended December 31, 2006 and 2005 are as follows:

 
    2006 2005    
   
 
   
  Gain (loss) forward loan sale commitments $ 291,915   $ (317,304 )  
  Gain on derivative loan commitments   659,932     574,998    
   
 
   
           Total $ 951,847   $ 257,694    
   
 
   
 
21)     Quarterly Financial Data (Unaudited)
 
  2006
Three Months Ended
 
  March 31 June 30 September 30 December 31
 
 
 
 
 
 
  
Revenues $ 32,403,693   $ 34,146,449   $ 38,574,775   $ 47,405,616  
Benefits and expenses   31,101,536     33,253,582     36,441,240     44,838,537  
Earnings before income taxes   1,302,157     892,867     2,133,535     2,567,079  
Income tax expense   288,491     169,228     592,238     721,231  
Net earnings   1,013,666     723,639     1,541,297     1,845,848  
Net earnings per common share $ 0.15   $ 0.10   $ 0.22   $ 0.26  
Net earnings per common share
   assuming dilution
$ 0.14   $ 0.10   $ 0.22   $ 0.26  

96



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

21)     Quarterly Financial Data (Unaudited) (Continued)

 
  2005
Three Months Ended
 
  March 31 June 30 September 30 December 31
 
 
 
 
 
 
Revenues $ 27,822,684   $ 31,844,056   $ 35,560,593   $ 34,722,494  
Benefits and expenses   27,560,936     31,140,954     33,605,129     32,915,172  
Earnings before income taxes   261,748     703,102     1,955,464     1,807,322  
Income tax expense   (18,160 )   151,627     628,751     477,538  
Net earnings   279,908     551,475     1,326,713     1,329,784  
Net earnings per common share $ 0.04   $ 0.08   $ 0.19   $ 0.19  
Net earnings per common share
   assuming dilution
$ 0.04   $ 0.08   $ 0.19   $ 0.19  

97



SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2006, 2005, and 2004

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

        (a)       Evaluation of disclosure controls and procedures – The Company’s principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this annual report. Based on that evaluation, the principal executive officer and the principal financial officer have concluded that the Company’s disclosure controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis.

        (b)       Changes in internal controls – There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect the Company’s internal controls and procedures subsequent to the date of their most recent evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls. As a result, no corrective actions were required or undertaken.

PART III

Item 10. Directors and Executive Officers

The Company’s Board of Directors consists of seven persons, four of whom are not employees of the Company. There are no family relationships between or among any of the directors and executive officers, except that Scott M. Quist and G. Robert Quist are the sons of George R. Quist and Christie Q. Overbaugh is the daughter of George R. Quist. The following table sets forth certain information with respect to the directors and executive officers of the Company.

 
Name Age Position with the Company  

 
 
 
George R. Quist   86   Chairman of the Board and Chief Executive Officer  
           
Scott M. Quist   53   President, Chief Operating Officer and Director  
           
Stephen M. Sill   61   Vice President, Treasurer and Chief Financial Officer  
           
G. Robert Quist   55   First Vice President and Secretary  
           
J. Lynn Beckstead, Jr   53   Vice President Mortgage Operations and Director  
           
Christie Q. Overbaugh   58   Senior Vice President of Internal Operations  
           
Charles L. Crittenden   86   Director  
           
Robert G. Hunter   47   Director  
           
H. Craig Moody   55   Director  
           
Norman G. Wilbur   68   Director  

98



Item 10. Directors and Executive Officers (Continued)

Committees of the Board of Directors include an executive committee, on which Messrs. George Quist, Scott Quist, and Moody serve; an audit committee, on which Messrs. Crittenden, Moody, and Wilbur serve; and a compensation committee, on which Messrs. Crittenden, Moody, Wilbur, and George Quist serve.

The audit committee is composed of directors who are, in the opinion of the Board of Directors, free from any relationship which would interfere with the exercise of independent judgment and who possess an understanding of financial statements and generally accepted accounting principles. Thus, each member is an “independent” director as that term is defined by the regulations of the Securities Exchange Act of 1934. The Board of Directors has determined that Norman G. Wilbur, who currently serves as a director and a member of the audit committee, is an independent financial expert of the audit committee.

Directors

The following is a description of the business experience of each of the Company’s directors.

            George R. Quist has been Chairman of the Board and Chief Executive Officer of the Company since October 1979. Mr. Quist served as President of the Company from 1979 until July 2002. From 1960 to 1964, Mr. Quist was Executive Vice President and Treasurer of Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent, District Manager and Associate General Agent for various insurance companies. Mr. Quist also served from 1981 to 1982 as the President of The National Association of Life Companies, a trade association of 642 life insurance companies, and from 1982 to 1983 as its Chairman of the Board.

            Scott M. Quist  has been President of the Company since July 2002, its Chief Operating Officer since October 2001, and a director since May 1986. Mr. Quist served as First Vice President of the Company from May 1986 to July 2002. From 1980 to 1982, Mr. Quist was a tax specialist with Peat, Marwick, Mitchell, & Co., in Dallas, Texas. From 1986 to 1991, he was Treasurer and a director of The National Association of Life Companies, a trade association of 642 insurance companies until its merger with the American Council of Life Companies. Mr. Quist has been a member of the Board of Governors of the Forum 500 Section (representing small insurance companies) of the American Council of Life Insurance. He has also served as a regional director of Key Bank of Utah since November 1993. Mr. Quist is currently a director and past president of the National Alliance of Life Companies, a trade association of over 200 life companies.

           J. Lynn Beckstead Jr.  has been Vice President of Mortgage Operations and a director of the Company since March 2002. In addition, Mr. Beckstead is President of SecurityNational Mortgage Company, an affiliate of the Company, having served in this position since July 1993. From 1990 to 1993, Mr. Beckstead was Vice President and a director of Republic Mortgage Corporation. From 1983 to 1990, Mr. Beckstead was Vice President and a director of Richards Woodbury Mortgage Corporation. From 1980 to 1983, he was a principal broker for Boardwalk Properties. From 1978 to 1980, Mr. Beckstead was a residential loan officer for Medallion Mortgage Company. From 1977 to 1978, he was a residential construction loan manager of Citizens Bank.

           Charles L. Crittenden  has been a director of the Company since October 1979. Mr. Crittenden has been sole stockholder of Crittenden Paint & Glass Company since 1958. He is also an owner of Crittenden Enterprises, a real estate development company, and Chairman of the Board of Linco, Inc.

           Robert G. Hunter, M.D. has been a director of the Company since October 1998. Dr. Hunter is currently a practicing physician in private practice. Dr. Hunter created the statewide E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member of the Executive Committee. He is also Chairman of Surgery at Cottonwood Hospital, a delegate to the Utah Medical Association and a delegate representing the State of Utah to the American Medical Association, and a member of several medical advisory boards.


99



           H. Craig Moody has been a director of the Company since September 1995. Mr. Moody is owner of Moody & Associates, a political consulting and real estate company. He is a former Speaker and House Majority Leader of the House of Representatives of the State of Utah.

           Norman G. Wilbur has been a director of the Company since October 1998. Mr. Wilbur worked for J.C. Penney’s regional offices in budget and analysis. His final position was Manager of Planning and Reporting for J.C. Penney’s stores. After 36 years with J.C. Penney’s, he took an option of an early retirement in 1997. Mr. Wilbur is a past board member of Habitat for Humanity in Plano, Texas.

Executive Officers

           Stephen M. Sill has been Vice President, Treasurer and Chief Financial Officer of the Company since March 2002. From 1997 to March 2002, Mr. Sill was Vice President and Controller of the Company. From 1994 to 1997, Mr. Sill was Vice President and Controller of Security National Life Insurance Company. From 1989 to 1993, he was Controller of Flying J. Inc. From 1978 to 1989, Mr. Sill was Senior Vice President and Controller of Surety Life Insurance Company. From 1975 to 1978, he was Vice President and Controller of Sambo’s Restaurant, Inc. From 1974 to 1975, Mr. Sill was Director of Reporting for Northwest Pipeline Corporation. From 1970 to 1974, he was an auditor with Arthur Andersen & Co. Mr. Sill is a past president and former director of the Insurance Accounting and Systems Association, a national association of over 1,300 insurance companies and associate members.

           G. Robert Quist  has been First Vice President and Secretary of the Company since March 2002. Mr. Quist has served as President of Memorial Estates since June 2005 and its Vice President from 1982 to June 2005. He began working for Memorial Estates in 1978. Mr. Quist has also served as First Vice President of Singing Hills Memorial Park since 1996. In addition, since 1987 Mr. Quist has served as President and a director of Big Willow Water Company and as Secretary-Treasurer and a director of the Utah Cemetery Association. From 1987 to 1988, Mr. Quist was a director of Investors Equity Life Insurance Company of Hawaii.

           Christie Q. Overbaugh has been Senior Vice President of Internal Operations of the Company since June 2006, and a Vice President of the Company from October 1998 to June 2006. Ms. Overbaugh has also served as Vice President of Underwriting for Security National Life Insurance Company since 1998. From 1986 to 1991, she was Chief Underwriter for Investors Equity Life Insurance Company of Hawaii and Security National Life Insurance Company. From 1990 to 1991, Ms. Overbaugh was President of the Utah Home Office Underwriters Association. Ms. Overbaugh is currently a member of the Utah Home Office Underwriters Association and an Associate Member of LOMA (Life Office Management Association).

The Board of Directors of the Company 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 be in conflict with the Company’s interests.

No director, officer or 5% stockholder of the Company or its subsidiaries or any affiliate thereof has had any transactions with the Company or its subsidiaries during 2006 or 2005.

All directors of the Company hold office until the next Annual Meeting of Stockholders and until their successors have been elected and qualified.

Corporate Governance

Corporate Governance Guidelines. The board has adopted the Security National Financial Corporation Corporate Governance Guidelines. These guidelines outline the functions of the board, director qualifications and responsibilities, and various processes and procedures designed to insure effective and responsive governance. The guidelines are reviewed from time to time in response to regulatory requirements and best practices and are revised accordingly. The full text of the guidelines is published on the Company’s website at www.securitynational.com. A copy of the Corporate Governance Guidelines may also be obtained at no charge by written request to the attention of G. Robert Quist, First Vice President and Secretary, Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah 84123.


100



Code of Business Conduct. All of the Company’s officers, employees and directors are required to comply with the Company’s Code of Business Conduct and Ethics to help insure that the Company’s business is conducted in accordance with appropriate standards of ethical behavior. The Company’s Code of Business Conduct and Ethics covers all areas of professional conduct, including customer relationships, conflicts of interest, insider trading, financial disclosures, intellectual property and confidential information, as well as requiring adherence to all laws and regulations applicable to the Company’s business. Employees are required to report any violations or suspected violations of the Code. The Code includes an anti-retaliation statement. The full text of the Code of Business Conduct and Ethics is published on the Company’s website at www.securitynational.com. A copy of the Code of Business Conduct and Ethics may also be obtained at no charge by written request to the attention of G. Robert Quist, First Vice President and Secretary, Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah 84123.

Item 11. Executive Officer Compensation

The following table sets forth, for each of the last three fiscal years, the compensation received by George R. Quist, the Company’s Chairman of the Board and Chief Executive Officer, and all other executive officers (collectively, the “Named Executive Officers”) at December 31, 2006 whose salary and bonus for all services in all capacities exceed $100,000 for the fiscal year ended December 31, 2006.

SUMMARY COMPENSATION TABLE

 
Name and
Principal Position
  Year Salary($) Bonus($) Stock
Awards
Option
Awards($)
Non-Equity
Incentive
Plan
Compen- sation
Change in
Pension
Value and
Non-qualified
Deferred
Compensation
Earnings($)(3)
All Other
Compen-
sation($)(2)
Total($)










George R. Quist (1)                                    
  Chairman of the 2006   203,013   40,000         21,967   7,053   272,033  
  Board and Chief 2005   186,300   35,000         21,340   7,053   249,693  
  Executive Officer 2004   165,600   50,000         21,341   8,233   245,174  
                                   
Stephen M. Sill                                    
Vice President, 2006   120,292   3,000         13,922   7,493   144,707  
  Treasurer and Chief 2005   115,063   6,000         12,518   7,484   141,065  
  Financial Officer 2004   102,855   6,000         11,134   4,150   124,139  
                                   
Scott M. Quist (1)                                    
  President, Chief 2006   275,400   75,000         24,150   16,034   390,584  
  Operating Officer 2005   246,900   75,000         23,978   27,711   373,589  
  and Director 2004   215,900   75,000         23,001   18,972   332,873  
                                   
J. Lynn Beckstead, Jr.                                    
  Vice President of 2006   246,292   6,000         21,945   4,450   278,687  
  Mortgage Operations 2005   220,306   24,000         21,735   4,441   270,482  
  and Director 2004   195,796   85,000         21,000   4,750   306,546  
                                   
G. Robert Quist (1) 2006   126,221   10,000         12,209   7,373   155,803  
  First Vice President 2005   115,063   6,000         10,205   5,239   136,507  
  and Secretary 2004   104,814           10,161   2,950   117,925  

101



  (1)       George R. Quist is the father of Scott M. Quist and G. Robert Quist.
   
 
(2)       The amounts indicated under “ All Other Annual Compensation” consist of (a) payments related to the operation of automobiles by the Named Executive Officers. Such amounts were for George R. Quist $2,400 for each of the years 2006, 2005 and 2004; Stephen M. Sill $3,600 for each of the years 2006, 2005 and 2004; Scott M. Quist $7,200 for each of the years 2006, 2005 and 2004; G. Robert Quist $4,525 for 2006, $2,400 for each of the years 2005 and 2004. However, such payments do not include the furnishing of an automobile by the Company to George R. Quist, Scott M. Quist, J. Lynn Beckstead Jr., and G. Robert Quist, nor the payment of insurance and property taxes with respect to the automobiles operated by the Named Executive Officers (b) insurance premiums paid by the Company with respect to a group life insurance plan for the benefit of the Named Executive Officers (for the years 2006, 2005 and 2004, such amounts were for George R. Quist $9, $9 and $17, respectively; for Scott M. Quist, G. Robert Quist, Stephen M. Sill and J. Lynn Beckstead, Jr., $250, $241, and $550 each, respectively); (c) life insurance premiums paid by the Company for the benefit of the family of George R. Quist ($4,644 for each of the years 2006, 2005 and 2004); Scott M. Quist ($8,584 for the year 2006, $20,270 for the year 2005, and $11,222 for 2004); J. Lynn Beckstead, Jr. $4,200 for each of the years 2006, 2005 and 2004); G. Robert Quist, ($2,598 for each of the years 2006 and 2005), and Stephen M. Sill ($3,643, for each of the years 2006 and 2005) respectively; (d) the amounts under “All Other Compensation” includes the no-interest loan in the amount of $172,000 that the Company made to George R. Quist on April 29, 1998 to exercise stock options granted to him. As of January 1, 2004 and January 1, 2005, the outstanding balance on the loan was $37,540 and $1,540, respectively. The final payment on the loan was made on January 25, 2005.
 
 
(3)       The amounts indicated under “Change in Pension Value and Non-qualified Deferred Compensation Earnings” consist of (a) amounts contributed by the Company into a trust for the benefit of the Named Executive Officers under the Security National Financial Corporation Deferred Compensation Plan
 
  (4)         Options to purchase 1,000,000 shares of Class C common stock. The Class C common shares are convertible to Class A common shares on the basis of ten shares of Class C common stock to one share of Class A common stock.
   
SUPPLEMENTAL ALL OTHER COMPENSATION TABLE
 
Name Year Perks
and
Other
Personal
Benefits
Tax
Reimburse-
ments
Discounted Securities
Purchases
Payments/ Accruals
on Termin-
ation Plans
Registrant Contribu- tions to
Defined
Contribu- tion
Plans
Insurance
Premiums
Dividends
or
Earnings
on Stock
or Option
Awards
Other(1)  

 
 
 
 
 
 
 
 
 
 
George R. Quist   2006   $ 2,400           $ 4,653        
    2005     2,400             4,653        
    2004     2,400             4,661     $ 1,172 (1)
Stephen M. Sill   2006     3,600             3,893        
    2005     3,600             3,884        
    2004     3,600             550        
Scott M. Quist   2006     7,200             8,834        
    2005     7,200             20,511        
    2004     7,200             11,772        
J. Lynn Beckstead, Jr.   2006                 4,450        
    2005                 4,441        
    2004                 4,750        
G. Robert Quist   2006     4,525             2,848        
    2005     2,400             2,839        
    2004     2,400             550        
   
(1) Represents compensation in the form of a non-interest loan in the amount of $172,000 that the Company made to George R. Quist on April 29, 1998 to exercise stock options granted to him. As of January 1, 2004 and January 1, 2005, the outstanding balance on the loan was $37,500 and $1,540, respectively. The final payment was made on January 25, 2005.

102



GRANTS OF PLAN-BASED AWARDS

 
                    All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
  All Other
Option
Awards:
Number of
Securities
Under-
lying
Options
(#)
  Exercise
or Base
Price of
Option
Awards
($/Sh)
  Grant
Date Fair
Value of
Stock and
Options
Awards
($)
 
            Estimated Future
Payouts Under
Non-Equity
Plan Awards
Estimated Future
Payouts Under
Equity Incentive
Plan Awards
         
           
 
         
Name Grant
Date
Thres-
hold
($)
Target
($)
Maxi-
mum
($)
Thres-
hold
(#)
Target
(#)
Maxi-
mum
(#)
 

 
 
 
 
 
 
 
 
 
 
 
 
George R.
   Quist
  07/16/04                 50,000   3.96   1.71  
                       12/10/04                 50,000   3.55   1.71  
                       03/25/05                 70,000   3.86   1.92  
Stephen M.
   Sill
                       
Scott M.
   Quist
  03/21/03                 70,000   5.90   2.63  
                       07/16/04                 50,000   3.60   1.71  
                       12/10/04                 50,000   3.23   1.71  
                       03/25/05                 70,000   3.51   1.92  
J. Lynn
  Beckstead, Jr.
  03/21/03                 15,000   5.90   2.63  
                       12/10/04                 5,000   3.23   1.71  
                       03/25/05                 35,000   3.51   1.92  
G. Robert
   Quist
  03/21/03                 35,000   5.90   2.63  
                       12/10/04                 10,000   3.23   1.71  
                       03/25/05                 30,000   3.51   1.92  

103



The following table sets forth information concerning the exercise of options to acquire shares of the Company’s Common Stock by the Named Executive Officers during the fiscal year ended December 31, 2006, as well as the aggregate number and value of unexercised options held by the Named Executive Officers on December 31, 2006.

Aggregated Option/SAR Exercised in Last Fiscal Year and Fiscal Year-End Option/SAR Values:

OUTSTANDING EQUITY AWARDS AT FISCAL 2006 YEAR END

 
  Option Awards Stock Awards
 
 
 
 
Name Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options:
(#)
Unexer-
cisable
Equity
Incentive
Pan Awards
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
Option
Exercise
Price
($)
Option
Expiration
Date

Number of
Shares or
Units of
Stock
Held That
Have Not
Vested(#)

Market
Value of
Shares or
Unites or
Stock
That Have
Not
Vested
($)
Equity
Incentive
Plan
Awards
Number of
Unearned
Shares,
Unites or
Other
Rights
That Have
Not
Vested
(#)
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Unites or
Other
Rights That
Have Not
Vested
($)
 


 
 
 
 
 
 
 
 
 
George R. Quist(1) 170,000       $3.55-3.96   2009-2010          
Stephen M. Sill                  
Scott M. Quist (1) 240,000       $3.23-5.90   2014-2015          
J. Lynn Beckstead, Jr. 55,000       $3.23-5.90   2013-2015          
G. Robert Quist 75,000       $3.23-5.90   2013-2015          
 

(1) Includes options to purchase 1,102,500 shares of Class C common stock. The Class C common shares are convertible to Class A common shares on the basis of ten shares of Class C common stock to one share of Class A common stock.

OPTION EXERCISES AND STOCK VESTED FOR FISCAL 2006

 
    Option Awards Stock Awards
 
   
 
 
Name
  Number of
Shares Acquired
on Exercise
(#)
Value Realized
on Exercise
($)
Number of
Shares Acquired
on Vesting
(#)
Value Realized
on Vesting
($)
 

 
 
 
 
 
George R. Quist   51,051     $ 171,557        
Stephen M. Sill   8,379       44,744        
Scott M. Quist                
J. Lynn Beckstead, Jr.                
G. Robert Quist                

104



PENSION BENEFITS FOR FISCAL 2006
 
Name Plan Name
Number of
Years
Credited
Service
(#)

Present Value of
Accumulated
Benefit
($)
Payments During
Last Fiscal Year
($)
 


 
 
 
 
George R. Quist None        
Stephen M. Sill None        
Scott M. Quist None        
J. Lynn Beckstead, Jr. None        
G. Robert Quist None        
 

Retirement Plans

On December 8, 1988, the Company entered into a deferred compensation plan with George R. Quist, the Chairman and Chief Executive officer of the Company. The plan was later amended on three occasions with the third amendment effective February 1, 2001. Under the terms of the plan as amended, upon the retirement of Mr. Quist, the Company is required to pay him ten annual installments in the amount of $60,000. Retirement is defined in the plan as the age of 70, or a later retirement age, as specified by the Board of Directors. The $60,000 annual payments are to be adjusted for inflation in accordance with the United States Consumer Price Index for each year after January 1, 2002. If Mr. Quist’s employment is terminated by reason of disability or death before he reaches retirement age, the Company is to make the ten annual payments to Mr. Quist, in the event of disability, or to his designated beneficiary, in the event of death.

The plan also provides that the Board of Directors may, in its discretion, pay the amounts due under the plan in a single, lump-sum payment. In the event that Mr. Quist dies before the ten annual payments are made, the unpaid balance will continue to be paid to his designated beneficiary. The plan further requires the Company to furnish an automobile for Mr. Quist’s use and to pay all reasonable expenses incurred in connection with its use for a ten year period, and to provide Mr. Quist with a hospitalization policy with similar benefits to those provided to him the day before his retirement or disability. However, in the event Mr. Quist’s employment with the Company is terminated for any reason other than retirement, death, or disability, the entire amount of deferred compensation payments under the plan shall be forfeited by him. The Company accrued $37,000 and $34,000 in fiscal 2006 and 2005, respectively to cover the present value of anticipated retirement benefits under the employment agreement of $419,000 as of December 31, 2006.

Employment Agreements

On July 16, 2004, the Company entered into an employment agreement with Scott M. Quist, its President and Chief Operating Officer. The agreement is effective as of December 4, 2003 and has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Quist performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Quist is to devote his full time to the Company serving as its President, General Counsel and Chief Operating Officer at not less than his current salary and benefits. The Company also agrees to maintain a group term life insurance policy of not less than $1,000,000 on Mr. Quist’s life and a whole life insurance policy in the amount of $500,000 on Mr. Quist’s life. In the event of disability, Mr. Quist’s salary would be continued for up to five years at 75% of its current level.


105



In the event of a sale or merger of the Company and Mr. Quist is not retained in his current position, the Company would be obligated to continue Mr. Quist’s current compensation and benefits for seven years following the merger or sale. The agreement further provides that Mr. Quist is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to 75% of his then current rate of compensation. However, in the event that Mr. Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company accrued $79,900 and $37,800 in fiscal 2006 and 2005, respectively, to cover the present value of anticipated retirement benefits under the employment agreement of $486,000 as of December 31, 2006.

On December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice President of Mortgage Operations and President of SecurityNational Mortgage Company. The agreement has a five-year term, but the Company has agreed to renew the agreement on December 4, 2008 and 2013 for additional five-year terms, provided Mr. Beckstead performs his duties with usual and customary care and diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full time to the Company serving as President of SecurityNational Mortgage Company at not less than his current salary and benefits, and to include $350,000 of life insurance protection. In the event of disability, Mr. Beckstead’s salary would be continued for up to five years at 50% of its current level.

In the event of a sale or merger of the Company, and Mr. Beckstead were not retained in his current position, the Company would be obligated to continue Mr. Beckstead’s current compensation and benefits for five years following the merger or sale. The agreement further provides that Mr. Beckstead is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 62½) (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of ten years in annual installments in the amount equal to one-half of his then current annual salary. However, in the event that Mr. Beckstead dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company accrued in 2006 and 2005 approximately $44,900 and $46,300, respectively, to cover the present value of the retirement benefit of the agreement of $273,000 as of December 31, 2006.

Director Compensation

Directors of the Company (but not including directors who are employees) are currently paid a director’s fee of $13,200 per year by the Company for their services and are reimbursed for their expenses in attending board and committee meetings. An additional fee of $750 is paid to each audit committee member for each audit committee meeting attended in 2006. Each director is provided with an annual grant of stock options to purchase 1,000 shares of Class A Common Stock, which occurred under the 2000 Director Stock Option Plan for years 2000-2005 and under the 2006 Director Stock Option Plan for year 2006.

DIRECTOR COMPENSATION

 
Name Fees
Earned or
Paid In
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
All Other
Compensation
($)
Total
($)
 


 
 
 
 
 
 
 
Norman G. Wilbur $ 14,700     $ 1,920         $ 16,620  
H. Craig Moody   14,700       1,920           16,620  
Robert G. Hunter   13,200       1,920           15,120  
Charles L. Crittenden   14,700       1,920           16,620  

106



Employee 401(k) Retirement Savings Plan

In 1995, the Company’s Board of Directors adopted a 401(k) Retirement Savings Plan. Under the terms of the 401(k) plan, effective as of January 1, 1995, the Company may make discretionary employer matching contributions to its employees who choose to participate in the plan. The plan allows the board to determine the amount of the contribution at the end of each year. The Board adopted a contribution formula specifying that such discretionary employer matching contributions would equal 50% of the participating employee’s contribution to the plan to purchase Company stock up to a maximum discretionary employee contribution of 1/2 of 1% of participating employees’ compensation, as defined by the plan.

All persons who have completed at least one year’s service with the Company and satisfy other plan requirements are eligible to participate in the 401(k) plan. All Company matching contributions are invested in the Company’s Class A Common Stock. The Company’s matching contributions for 2006, 2005 and 2004 were approximately $8,656, $5,142 and $5,746, respectively. Also, the Company may contribute at the discretion of the Company’s Board of Directors an Employer Profit Sharing Contribution to the 401(k) plan. The Employer Profit Sharing Contribution shall be divided among three different classes of participants in the plan based upon the participant’s title in the Company. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. The Company’s contributions to the plan for 2006, 2005 and 2004, were $162,584, $135,589 and $128,949, respectively.

Employee Stock Ownership Plan

Effective January 1, 1980, the Company adopted an employee stock ownership plan (the “Ownership Plan”) for the benefit of career employees of the Company and its subsidiaries. The following is a description of the Ownership Plan, and is qualified in its entirety by the Ownership Plan, a copy of which is available for inspection at the Company’s offices.

Under the Ownership Plan, the Company has discretionary power to make contributions on behalf of all eligible employees into a trust created under the Ownership Plan. Employees become eligible to participate in the Ownership Plan when they have attained the age of 19 and have completed one year of service (a twelve-month period in which the Employee completes at least 1,040 hours of service). The Company’s contributions under the Ownership Plan are allocated to eligible employees on the same ratio that each eligible employee’s compensation bears to total compensation for all eligible employees during each year. To date, the Ownership Plan has approximately 335 participants and had $138,286 contributions payable to the Plan in 2006. Benefits under the Ownership Plan vest as follows: 20% after the third year of eligible service by an employee, an additional 20% in the fourth, fifth, sixth and seventh years of eligible service by an employee.

Benefits under the Ownership Plan will be paid out in one lump sum or in installments in the event the employee becomes disabled, reaches the age of 65, or is terminated by the Company and demonstrates financial hardship. The Ownership Plan Committee, however, retains discretion to determine the final method of payment. Finally, the Company reserves the right to amend or terminate the Ownership Plan at any time. The trustees of the trust fund under the Ownership Plan are George R. Quist, Scott M. Quist and Robert G. Hunter, who each serve as a director of the Company.

Deferred Compensation Plan

In 2001, the Company’s Board of Directors adopted a Deferred Compensation Plan. Under the terms of the Deferred Compensation 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


107



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’s contribution for 2006, 2005 and 2004 was $125,558, $141,710 and $123,249, respectively.

NONQUALIFIED DEFERRED COMPENSATION FOR FISCAL 2006

 
Name Executive
Contributions
In Last FY
($)
Registrant
Contributions
In Last FY
($)
Aggregate
Earnings in Last
FY
($)
Aggregate
Withdrawals/
Distributions
($)
Aggregate
Balance at Last
FYE
($)
 


 
 
 
 
 
George R. Quist   $ 21,967       $ 226,947  
Stephen M. Sill     13,922         72,754  
Scott M. Quist     24,150         252,874  
J. Lynn Beckstead, Jr.     21,945         118,223  
G. Robert Quist     12,209         111,480  
 

1993 Stock Option Plan

On June 21, 1993, the Company adopted the Security National Financial Corporation 1993 Stock Incentive Plan (the “1993 Plan”), which reserves shares of Class A Common Stock for issuance thereunder. The 1993 Plan was approved at the annual meeting of the stockholders held on June 21, 1993. The 1993 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress.

The 1993 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both “incentive stock options,” as defined under Section 422A of the Internal Revenue Code of 1986 (the “Code”), and “non-qualified options” may be granted pursuant to the 1993 Plan. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the date of grant, as determined by the Company’s Board of Directors. The options granted under the 1993 Plan, were to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company.

The 1993 Plan is to be administered by the Board of Directors or by a committee designated by the Board. The terms of options granted or stock awards or sales effected under the 1993 Plan are to be determined by the Board of Directors or its committee. The Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for purposes of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant.

Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than the fair market value of the option shares on the date of grant. The 1993 Plan provides that the exercise price for non-qualified options will be not less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company’s Board of Directors.


108



The 1993 Plan has a term of ten years. The Board of Directors may amend or terminate the 1993 Plan at any time, subject to approval of certain modifications to the 1993 Plan by the shareholders of the Company as may be required by law or the 1993 Plan. On November 7, 1996, the Company amended the 1993 Plan as follows: (i) to increase the number of shares of Class A Common Stock reserved for issuance under the 1993 Plan from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that the stock subject to options, awards and purchases may include Class C common stock. On October 14, 1999, the Company amended the 1993 Plan to increase the number of shares of Class A Common Stock reserved for issuance under the plan from 600,000 Class A shares to 1,046,126 Class A shares. The Plan terminated in 2003 and options granted thereunder are non-transferable.

2000 Director Stock Option Plan

On October 16, 2000, the Company adopted the 2000 Directors Stock Option Plan (the “Director Plan”) effective November 1, 2000. The Director Plan provides for the grant by the Company of options to purchase up to an aggregate of 50,000 shares of Class A Common Stock for issuance thereunder. The Director Plan provides that each member of the Company’s Board of Directors who is not an employee or paid consultant of the Company is automatically eligible to receive options to purchase the Company’s Class A Common Stock under the Director Plan.

Effective as of November 1, 2000, and on each anniversary date thereof during the term of the Director Plan, each outside director shall automatically receive an option to purchase 1,000 shares of Class A Common Stock. In addition, each new outside director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the Director Plan. The options granted to outside directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the Director Plan are to enhance the Company’s ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company.

In the event of a merger of the Company with or into another company, or a consolidation, acquisition of stock or assets or other change in control transaction involving the Company, each option becomes exercisable in full, unless such option is assumed by the successor corporation. In the event the transaction is not approved by a majority of the “Continuing Directors” (as defined in the Director Plan), each option becomes fully vested and exercisable in full immediately prior to the consummation of such transaction, whether or not assumed by the successor corporation. The Director Plan terminated in 2006 and a new Director Plan was adopted. See 2006 Director Stock Option Plan below.

2003 Stock Option Plan

On July 11, 2003, the Company adopted the Security National Financial Corporation 2003 Stock Incentive Plan (the “2003 Plan”), which reserved 500,000 shares of Class A common stock and 1,000,000 shares of Class C common stock for issuance thereunder. The 2003 Plan was approved by the Board of Directors on May 9, 2003, and by the stockholders at the annual meeting of the stockholders held on July 11, 2003. The 2003 Plan allows the Company to grant options and issue shares as a means of providing equity incentives to key personnel, giving them a proprietary interest in the Company and its success and progress.

The 2003 Plan provides for the grant of options and the award or sale of stock to officers, directors, and employees of the Company. Both “incentive stock options”, as defined under Section 422A of the Internal Revenue Code of 1986 (the “Code”) and “non-qualified options” may be granted under the 2003 Plan. The exercise prices for the options granted are equal to or greater than the fair market value of the stock subject to such options as of the date of grant, as determined by the Company’s Board of Directors. The options granted under the 2003 Plan are to reward certain officers and key employees who have been employed by the Company for a number of years and to help the Company retain these officers by providing them with an additional incentive to contribute to the success of the Company.


109



The 2003 Plan is to be administered by the Board of Directors or by a committee designated by the board. The terms of options granted or stock awards or sales affected under the 2003 Plan are to be determined by the Board of Directors or its committee. The Plan provides that if the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price to reflect such subdivision, combination or stock dividend. In addition, the number of shares of Common Stock reserved for purposes of the Plan shall be adjusted by the same proportion. No options may be exercised for a term of more than ten years from the date of grant.

Options intended as incentive stock options may be issued only to employees, and must meet certain conditions imposed by the code, including a requirement that the option exercise price be no less than then fair market value of the option shares on the date of grant. The 2003 Plan provides that the exercise price for non-qualified options will not be less than at least 50% of the fair market value of the stock subject to such option as of the date of grant of such options, as determined by the Company’s Board of Directors.

The 2003 Plan has a term of ten years. The Board of Directors may amend or terminate the 2003 Plan at any time, subject to approval of certain modifications to the 2003 Plan by the shareholders of the Company as may be required by law or the 2003 Plan.

2006 Director Stock Option Plan

On December 7, 2006, the Company adopted the 2006 Director Stock Option Plan (the “Director Plan”) effective December 7, 2006. The Director Plan provides for the grant by the Company of options to purchase up to an aggregate of 100,000 shares of Class A Common Stock for issuance thereunder. The Director Plan provides that each member of the Company’s Board of Directors who is not an employee or paid consultant of the Company is automatically eligible to receive options to purchase the Company’s Class A Common Stock under the Director Plan.

Effective as of December 7, 2006, and on each anniversary date thereof during the term of the Director Plan, each outside director shall automatically receive an option to purchase 1,000 shares of Class A Common Stock. In addition, each new outside director who shall first join the Board after the effective date shall be granted an option to purchase 1,000 shares upon the date which such person first becomes an outside director and an annual grant of an option to purchase 1,000 shares on each anniversary date thereof during the term of the Director Plan. The options granted to outside directors shall vest in their entirety on the first anniversary date of the grant. The primary purposes of the Director Plan are to enhance the Company’s ability to attract and retain well-qualified persons for service as directors and to provide incentives to such directors to continue their association with the Company.

In the event of a merger of the Company with or into another company, or a consolidation, acquisition of stock or assets or other change in control transaction involving the Company, each option becomes exercisable in full, unless such option is assumed by the successor corporation. In the event the transaction is not approved by a majority of the “Continuing Directors” (as defined in the Director Plan), each option becomes fully vested and exercisable in full immediately prior to the consummation of such transaction, whether or not assumed by the successor corporation.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers, directors and persons who own more than 10% of a registered class of the Company’s equity securities to file reports of ownership and periodic changes in ownership of the Company’s common stock with the Securities and Exchange Commission. Such persons are also required to furnish the Company with copies of all Section 16(a) reports they file.


110



Based solely on its review of the copies of stock reports received by it with respect to fiscal 2006, or written representations from certain reporting persons, the Company believes that its directors, executive officers and greater than 10% beneficial owners complied with all Section 16(a) filing requirements applicable to them, except George R. Quist, Chairman and Chief Executive Officer, Stephen M. Sill, Vice President, Treasurer and Chief Financial Officer and Robert G. Hunter, H. Craig Moody, and Norman G. Wilbur, directors of the Company, through an oversight, each filed one late Form 4 report reporting the exercise of stock options.

Item 12 - Security Ownership of Certain Beneficial Owners and Management

The following table sets forth security ownership information of the Company’s Class A and Class C common stock as of March 31, 2007, (i) for persons who own beneficially more than 5% of the Company’s outstanding Class A or Class C common stock, (ii) each director of the Company, and (iii) for all executive officers, and directors of the Company as a group.

 
Class A
Common Stock
Class C
Common Stock
Class A and
Class C
Common Stock
 
 
 
 
 
Name and Address (1) Amount
Beneficially
Owned
Percent
of Class
Amount
Beneficially
Owned
Percent
of Class
Amount
Beneficially
Owned
Percent
of Class
 


 
 
 
 
 
 
George R. and Shirley C. Quist                        
  Family Partnership, Ltd. (2)   522,817     7.7 %   3,702,953     44.0 %   4,225,770     27.7 %
Employee Stock                                    
  Ownership Plan (3)   657,115     9.6 %   1,712,228     20.3 %   2,369,343     15.5 %
George R. Quist (4)(5)(7)(8)   576,578     8.5 %   518,815     6.2 %   1,095,393     7.2 %
Scott M. Quist (4)(7)(9)   481,985     7.1 %   1,441,055     17.1 %   1,923,040     12.6 %
Associated Investors (10)   102,310     1.5 %   722,812     8.6 %   825,122     5.4 %
G. Robert Quist (6)(11)   141,653     2.1 %   257,607     3.1 %   399,260     2.6 %
J. Lynn Beckstead, Jr., (6)(12)   174,094     2.6 %           174,094     1.1 %
Stephen M. Sill (6)   76,973     1.1 %           76,973     *  
Christie Q. Overbaugh (13)   94,788     1.4 %   116,315     1.4 %   211,103     1.4 %
Robert G. Hunter, M.D., (4)(14)   8,996     *             8,996     *  
Norman G. Wilbur (15)   7,534     *             7,534     *  
Charles L. Crittenden (16)   8,789     *             8,789     *  
H. Craig Moody (17)   7,231     *             7,231     *  
All directors and executive officers                                    
  (10 persons) (4)(5)(6)(7)   2,101,438     30.8 %   6,036,745     71.7 %   8,138,183     53.4 %
 
________________

*   Less than 1%

 (1)      Unless otherwise indicated, the address of each listed stockholder is c/o Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City, Utah 84123.

(2)       This stock is owned by the George R. and Shirley C. Quist Family Partnership, Ltd., of which George R. Quist is the general partner.

(3)       The trustees of the Employee Stock Ownership Plan (ESOP) are George R. Quist, Scott M. Quist, and Robert G. Hunter who exercise shared voting and investment powers.

(4)       Does not include 657,115 shares of Class A common stock and 1,712,228 shares of Class C common stock owned by the Company’s Employee Stock Ownership Plan (ESOP), of which George R Quist, Scott M. Quist and Robert G. Hunter are the trustees and accordingly, exercise shared voting and investment powers with respect to such shares.


111



(5)       Does not include 102,310 shares of Class A common stock and 722,812 shares of Class C common stock owned by Associated Investors, a Utah general partnership, of which George R. Quist is the managing partner and, accordingly, exercises sole voting and investment powers with respect to such shares.

(6)       Does not include 384,834 shares of Class A common stock owned by the Company’s 401(k) Retirement Savings Plan, of which G. Robert Quist, J. Lynn Beckstead, and Stephen M. Sill are members of the Investment Committee and, accordingly, exercise shared voting and investment powers with respect to such shares.

(7)       Does not include 236,656 shares of Class A common stock owned by the Company’s Deferred Compensation Plan, of which George R. Quist and Scott M. Quist are members of the Investment Committee and, accordingly, exercise shared voting and investment powers with respect to such shares.

(8)       Includes options to purchase 192,938 shares of Class A common stock granted to George R. Quist that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(9)       Includes options to purchase 162,260 shares of Class A common stock and 1,157,625 shares of Class C Common Stock granted to Scott M. Quist that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(10)     The managing partner of Associated Investors is George R. Quist, who exercises sole voting and investment powers.

(11)     Includes options to purchase 42,543 shares of Class A common stock granted to G. Robert Quist that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(12)     Includes options to purchase 62,608 shares of Class A common stock granted to Mr. Beckstead that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

 (13)    Includes options to purchase 30,732 shares of Class A common stock granted to Ms. Overbaugh that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(14)     Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Hunter that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(15)     Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Wilbur that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(16)     Includes options to purchase 3,477 shares of Class A common stock granted to Mr. Crittenden that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

(17)     Includes options to purchase 4,753 shares of Class A common stock granted to Mr. Moody that are currently exercisable or will become exercisable within 60 days of March 31, 2007.

The Company’s executive officers and directors, as a group, own beneficially approximately % of the outstanding shares of the Company’s Class A and Class C common stock.

Item 13. Certain Relationships and Related 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 be in conflict with the interests of the Company.

Item 14. Principal Accounting Fees and Services

Fees incurred in 2006 for annual audit services pertaining to the financial statements and employee benefit plans and related quarterly reviews were approximately $340,300. There were $14,800 in other fees during 2006.


112



PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1)  Financial Statements

                See “Index to Consolidated Financial Statements” under Item 8 above.

(a)(2)  Financial Statement Schedules

 
II.  
Condensed Balance Sheets as of December 31, 2005 and 2004 and Condensed Statement of Earnings and Cash Flows for the years ended 2005, 2004 and 2003
     
IV.   Reinsurance
     
V.   Valuation and Qualifying Accounts
 

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.

      (3)  Exhibits

 
 
The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings.
 
3.1
Articles of Restatement of Articles of Incorporation (4)
 
3.2
Amended Bylaws (6)
 
4.1
Specimen Class A Stock Certificate (1)
 
4.2
Specimen Class C Stock Certificate (1)
 
4.3
Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1)
 
10.1
Restated and Amended Employee Stock Ownership Plan and Trust Agreement (1)
 
10.2
2003 Stock Option Plan (5)
 
10.3
2006 Director Stock Option Plan
 
10.4
Deferred Compensation Agreement with George R. Quist (2)
 
10.5
Deferred Compensation Plan (3)
 
10.6
Employment agreement with J. Lynn Beckstead, Jr.(7)
 
10.7
Employment agreement with Scott M. Quist (8)
 
10.8
Stock Purchase Agreement among Security National Life Insurance Company, Southern Security Life Insurance Company, Memorial Insurance Company of America, and the shareholders of Memorial Insurance Company (9)
 
10.9
Reinsurance Agreement between Security National Life Insurance Company and Memorial Insurance Company of America(10)
 
10.10
Trust Agreement between Security National Life Insurance Company and Memorial Insurance Company of America(10)
 
10.11
Promissory Note between Memorial Insurance Company as Maker and Security National Life Insurance Company as Payee(10)
 
10.12
Security Agreement between Memorial Insurance Company as Debtor and Security National Life Insurance Company as Secured Party(10)
 
10.13
Surplus Contribution Note between Memorial Insurance Company of America as Maker and Southern Security Life Insurance Company as Payee(10)
 
10.14
Guaranty Agreement by Security National Life Insurance Company and Southern Security Life Insurance Company as Guarantors(10)

113



10.15
Administrative Services Agreement between Security National Life Insurance Company and Memorial Insurance Company of America(10)
 
10.16
Reinsurance Agreement between Security National Life Insurance Company and Southern Security Life Insurance Company(11)
 
10.17
Trust Agreement among Security National Life Insurance Company, Southern Security Life Insurance Company and Zions First National Bank(11)
 
10.18
Stock Purchase Agreement among Security National Life Insurance Company, Southern Security Life Insurance Company and American Network Insurance Company(12)
 
10.19
Escrow Agreement among Security National Life Insurance Company, Southern Security Life Insurance Company, American Network Insurance Company and Mackey Price Thompson & Ostler(12)
 
10.20
Escrow Agreement among American Network Insurance Company, Security National Life Insurance Company, Southern Security Life Insurance Company, and Preferred Insurance Capital Consultants, LLC(12)
 
10.21
Agreement and Plan of Complete Liquidation of Southern Security Life Insurance Company into Security National Life Insurance Company(12)
 
10.22
Assignment between Southern Security Life Insurance Company and Security National Life Insurance Company(12)
 
10.23
Assignment between Southern Security Life Insurance Company and Security National Life Insurance Company
 
10.24
Subsidiaries of the Registrant
 
31.1
Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
(1)  
Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987
   
(2)  
Incorporated by reference from Annual Report on Form 10-K, as filed on March 31, 1989
   
(3)  
Incorporated by reference from Annual Report on Form 10-K, as filed on April 3, 2002
   
 (4)  
Incorporated by reference from Report on Form 8-K/A as filed on January 8, 2003
   
 (5)  
Incorporated by reference from Schedule 14A Definitive Proxy Statement, Filed on June 5, 2003, relating to the Company’s Annual Meeting of Shareholders
   
(6)  
Incorporated by reference from Report on Form 10-Q, as filed on November 14, 2003
   
(7)  
Incorporated by reference from Report on Form 10-K, as filed on March 30, 2004
   
(8)  
Incorporated by reference from Report on Form 10-Q, as filed on August 13, 2004
   
(9)  
Incorporated by reference from Report on Form 8-K, as filed on September 27, 2005
   
(10)  
Incorporated by reference from Report on Form 8-K, as filed on January 5, 2006
   
(11)  
Incorporated by reference from Report on Form 8-K, as filed on January 11, 2006
   
(12)  
Incorporated by reference from Report on Form 8-K, as filed on January 12, 2007
 

      (b)     Reports on Form 8-K:

 
                No reports on Form 8-K were filed by the Company during the quarter ended December 31, 2006.

114



 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 31, 2007 By: George R. Quist,
   
    Chairman of the Board and
    Chief Executive Officer
     
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
 
SIGNATURE TITLE   DATE
       
George R. Quist Chairman of the
Board and Chief Executive
Officer (Principal
Executive Officer)
  March 31, 2007
       
Scott M. Quist President, Chief Operating 
Officer and Director
  March 31, 2007
       
Stephen M. Sill Vice President,
Treasurer and Chief
Financial Officer (Principal
Financial and Accounting
Officer) 
  March 31, 2007
       
J. Lynn Beckstead, Jr. Vice President and Director    March 31, 2007
       
Charles L. Crittenden Director    March 31, 2007
       
H. Craig Moody Director   March 31, 2007
       
Norman G. Wilbur Director    March 31, 2007
       
Robert G. Hunter Director   March 31, 2007

115



  Schedule II
 

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Condensed Balance Sheets

 
  December 31,  
 
 
  2006 2005  
 
 
 
Assets        
             
Cash $ 159,639   $  
Common Stock   39,000      
Investment in subsidiaries (equity method)   68,317,685     61,626,274  
             
Receivables:            
    Receivable from affiliates   7,145,494     8,390,411  
    Allowance for doubtful accounts   (16,528 )   (16,528 )
 
 
 
       Total receivables   7,128,966     8,373,883  
 
 
 
             
Property and equipment, at cost,            
    net of accumulated depreciation            
    of $964,204 for 2006 and $1,089,580            
    for 2005   491,447     419,746  
             
Other assets       61,950  
 
 
 
             
Total Assets $ 76,136,737   $ 70,481,853  
 
 
 
 
See accompanying notes to condensed financial statements.

116



Schedule II (Continued)

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Condensed Balance Sheets (Continued)

 
  December 31,  
 
 
  2006 2005  
 
 
 
Liabilities and Stockholders’ Equity        
Liabilities            
Checks written in excess of cash in bank $   $ 143,165  
Bank loans payable:            
     Current installments   1,689,219     2,129,911  
     Long-term   2,995,252     4,389,025  
Notes and contracts payable:            
     Current installments   961     161,834  
     Long-term        
Advances from affiliated companies   9,501,370     10,394,210  
Other liabilities and accrued expenses   1,052,846     1,095,602  
Income taxes   7,926,393     6,469,688  
 
 
 
Total liabilities   23,166,041     24,783,435  
 
 
 
             
Stockholders’ Equity            
Class A common stock $2.00 par value;            
     10,000,000 shares authorized ;            
     issued 7,533,230 shares in 2006            
     and 7,098,363 shares in 2005   15,066,460     14,196,726  
Class B non-voting common stock-$1.00 par value;            
     5,000,000 shares authorized; none issued or            
     outstanding        
Class C convertible common stock, $0.20 par value;            
     7,500,000 shares authorized; issued 7,117,591            
     shares in 2006 and 6,781,060 shares in 2005   1,423,518     1,356,212  
 
 
 
             
Additional paid-in capital   17,064,488     15,650,344  
Accumulated other comprehensive income   1,703,155     117,647  
Retained earnings   20,495,063     17,460,024  
Treasury stock at cost- (1,195,127 Class A shares and            
     145,045 Class C shares in 2006; 1,251,104            
     Class A shares and 138,138 Class C shares            
     in 2005, held by affiliated companies)   (2,781,988 )   (3,082,535 )
 
 
 
Total stockholders’ equity   52,970,696     45,698,418  
 
 
 
Total Liabilities and Stockholders’ Equity $ 76,136,737   $ 70,481,853  
 
   
 
 
See accompanying notes to condensed financial statements.

117



Schedule II (Continued)

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Condensed Statements of Earnings

 
  Year Ended December 31,  
 
 
  2006 2005 2004  
 
 
 
 
                   
Revenue            
     Net investment income $ 1,478   $ 7   $ 35  
     Fees from affiliates   4,187,330     4,217,198     4,249,430  
 
 
 
 
          Total revenue   4,188,808     4,217,205     4,249,465  
 
 
 
 
Benefits and Expenses:                  
     General and administrative expenses   1,937,033     2,298,886     2,277,933  
     Interest expense   349,650     457,413     634,783  
     Expenses to affiliates   131,133     200,516     180,446  
 
 
 
 
          Total benefits and expenses   2,417,816     2,956,815     3,093,162  
 
 
 
 
Earnings before income taxes,                  
     and earnings of subsidiaries   1,770,992     1,260,390     1,156,303  
Income tax expense   (1,472,098 )   (960,153 )   (606,355 )
Equity in earnings of subsidiaries   4,825,556     3,187,643     1,572,324  
 
 
 
 
Net earnings $ 5,124,450   $ 3,487,880   $ 2,122,272  
 
 
 
 
 
See accompanying notes to condensed financial statements.

118



Schedule II (Continued)

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Condensed Statements of Cash Flow

 
    Year Ended December 31,  
   
 
    2006   2005   2004  
   
 
 
 
Cash flows from operating activities:              
    Net earnings   $ 5,124,450   $ 3,487,880   $ 2,122,272  
Adjustments to reconcile net earnings
      to net cash provided by operating activities:
                   
      Depreciation and amortization     198,241     193,520     165,830  
      Undistributed earnings
         of affiliates
    (4,825,556 )   (3,187,643 )   (1,572,324 )
      Provision for income taxes     1,472,095     960,153     606,355  
    Change in assets and liabilities:  
      Accounts receivable     (1 )   1,540     36,000  
      Other assets     61,950     4,878     12,676  
      Other liabilities     (40,678 )   127,871     (230,824 )
   
 
 
 
Net cash provided by operating activities     1,990,504     1,588,199     1,139,985  
   
 
 
 
Cash flows from investing activities:                    
    Purchase of long-term investments     (39,000 )        
    Purchase of equipment     (269,942 )   (471,096 )   (7,256 )
   
 
 
 
Net cash (used in) provided by
    investing activities
    (308,942 )   (471,096 )   (7,256 )
   
 
 
 
Cash flows from financing activities:                    
    Checks written in excess of cash in bank         (492,229 )   (156,127 )
    Advances from (to) affiliates     352,078     922,569     2,764,500  
    Payments of notes and contracts payable     (2,040,785 )   (1,897,443 )   (3,741,102 )
    Stock options exercised     105,599          
    Proceeds from borrowings on notes and
      contracts payable
        350,000      
    Purchase of treasury stock     (3,901 )        
    Sale of treasury stock     208,250          
   
 
 
 
Net cash used in financing activities     (1,378,758 )   (1,117,103 )   (1,132,729 )
   
 
 
 
Net change in cash     302,804          
Cash at beginning of year     (143,165 )        
   
 
 
 
Cash at end of year   $ 159,639   $   $  
   
 
 
 
 
See accompanying notes to condensed financial statements.

119



Schedule II (Continued)

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Notes to Condensed Financial Statements

1) Bank Loans Payable

    Bank loans payable are summarized as follows:

 
      December 31,  
     
 
      2006   2005  
     
 
 
7.35% note payable in monthly installments of $14,975
    including principal and interest, collateralized by 15,000
    shares of Security National Life Insurance
    Company stock, paid December 2006
    $   $ 172,549  
                 
5.87% note payable with interest plus monthly principal
    payment of $134,000, collateralized by 15,000 shares
    of Security National Life Insurance Company stock,
    due January 2010.
      4,569,116     5,926,478  
                 
Mark-to-market of interest rate swaps adjustment       (134,645 )   (180,091 )
                 
Other collateralized bank loans payable       250,000     600,000  
     
 
 
        Total bank loans       4,684,471     6,518,936  
                 
Less current installments       1,689,219     2,129,911  
     
 
 
Bank loans, excluding current installments     $ 2,995,252   $ 4,389,025  
     
 
 
 
2)   Notes and Contracts Payable
 

       Notes and contracts are summarized as follows:

 
      December 31,  
     
 
      2006   2005  
     
 
 
       Due to shareholders of Security National Financial
           Corporation, 4.0% note payable in annual
           installments of $160,873 including principal and interest, paid
           January 2006, secured by Company stock held in escrow.
    $   $ 160,873  

120



Schedule II (Continued)

SECURITY NATIONAL FINANCIAL CORPORATION
(Parent Company Only)
Condensed Financial Information

Notes to Condensed Financial Statements

2)   Notes and Contracts Payable (Continued)

 
      December 31,  
     
 
      2006   2005  
     
 
 
                 
   Other       961     961  
     
 
 
                 
Total notes and contracts       961     161,834  
Less current installments       961     161,834  
     
 
 
Notes and contracts, excluding current installments     $   $  
     
 
 
 

The following tabulation shows the combined maturities of bank loans payable and notes and contracts payable:

 
  2007     1,690,180  
  2008     1,526,012  
  2009     1,603,885  
  2010     (134,645 )
  Thereafter      
     
 
  Total   $ 4,685,432  
     
 
 
3)  Advances from Affiliated Companies
 
      December 31,  
     
 
      2006   2005  
     
 
 
Non-interest bearing advances
     from affiliates:
           
Cemetery and Mortuary
     subsidiary
    $ 1,459,841   $ 1,459,841  
Life insurance subsidiaries       7,997,546     8,890,386  
Mortgage subsidiary       43,983     43,983  
     
 
 
      $ 9,501,370   $ 10,394,210  
     
 
 
 

4)  Dividends and Capital Contributions

In 2006, 2005 and 2004, Security National Life Insurance Company, a wholly owned subsidiary of the Registrant, paid to the registrant cash dividends of $4,015,114, $-0-, and $-0-, respectively.


121



Schedule IV
 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES

Reinsurance

 
  Direct
Amount
  Ceded to
Other
Companies
  Assumed
from Other
Companies
  Net
Amount
  Percentage
of Amount
Assumed
to Net
 
 
 
 
 
 
 
  
2006                    
Life Insurance
    in force ($000)
$ 1,232,142   $ 122,232   $ 1,388,552   $ 2,498,462     55.6 %
 
 
 
 
 
 
                               
Premiums:                    
Life Insurance $ 29,140,230   $ 328,854   $ 1,682,855   $ 30,494,231     5.5 %
                         
 
Accident and
    Health Insurance
  281,884     148     524     282,260     .2  
 
 
 
 
 
 
         Total premiums $ 29,422,114   $ 329,002   $ 1,683,379   $ 30,776,491     5.5  
 
 
 
 
 
 
                               
2005                    
Life Insurance
    in force ($000)
$ 1,252,089   $ 185,364   $ 1,964,847   $ 3,031,572     64.8 %
 
 
 
 
 
 
                               
Premiums:                    
Life Insurance $ 26,795,343   $ 853,088   $ 942,080   $ 26,884,335     3.5 %
Accident and
    Health Insurance
  285,190         584     285,774     .2 %
 
 
 
 
 
 
         Total premiums $ 27,080,533   $ 853,088   $ 942,664   $ 27,170,109     3.5 %
 
 
 
 
 
 
                               
2004                    
Life Insurance
    in force ($000)
$ 1,250,362   $ 188,542   $ 1,663,773   $ 2,725,593     61.0 %
 
 
 
 
 
 
                               
Premiums:                    
Life Insurance $ 25,554,908   $ 916,511   $ 1,031,961   $ 25,670,358     4.0 %
Accident and
    Health Insurance
  308,049     12     946     308,983     .3 %
 
 
 
 
 
 
         Total premiums $ 25,862,957   $ 916,523   $ 1,032,907   $ 25,979,341     4.0 %
 
 
 
 
 
 

122



Schedule V
 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES

Valuation and Qualifying Accounts

 
  Balance at
Beginning
of Year
  Additions Charged
to Costs
and Expenses
  Deductions
Disposals and
Write-offs
  Balance
at End of
Year
 
 
 
 
 
 
For the Year Ended December 31, 2006                
Accumulated depreciation on real estate $ 3,766,259   $ 304,711   $ (46,260 ) $ 4,024,710  
  
Allowance for losses on mortgage loans
   on real estate and construction loans
  562,909     463,667         1,026,576  
  
Accumulated depreciation
   on property and equipment
  14,373,406     1,718,306     (2,568,997 )   13,522,715  
  
Allowance for doubtful accounts   868,197     137,379     (139,184 )   866,392  
  
Allowance for doubtful accounts
   on collateral loans
  339,218     100,000     (3,492 )   435,726  
  
For the Year Ended December 31, 2005                
Accumulated depreciation on real estate $ 3,487,638   $ 291,540   $ (12,919 ) $ 3,766,259  
  
Allowance for losses on mortgage loans
   on real estate and construction loans
  530,829     46,973     (14,893 )   562,909  
  
Accumulated depreciation
    on property and equipment
  12,776,758     1,802,482     (205,834 )   14,373,406  
  
Allowance for doubtful accounts   1,026,432     33,775     (192,010 )   868,197  
  
Allowance for doubtful accounts on
    collateral loans
  140,580     200,000     (1,362 )   339,218  
  
For the Year Ended December 31, 2004                
Accumulated depreciation on real estate $ 3,231,034   $ 256,604   $   $ 3,487,638  
  
Allowance for losses on mortgage loans
   on real estate and construction loans
  14,893     515,936         530,829  
  
Accumulated depreciation
   on property and equipment
  11,248,473     1,756,510     (228,225 )   12,776,758  
  
Allowance for doubtful accounts   1,706,678     24,000     (704,246 )   1,026,432  
  
Allowance for doubtful accounts
   on collateral loans
  142,051         (1,471 )   140,580  

123



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Year Ended December 31, 2006

SECURITY NATIONAL FINANCIAL CORPORATION
Commission   File No. 0-9341

E X H I B I T S

 

124



Exhibit Index

 
 
Exhibit No.   Document Name  

 
 
10.3   2006 Director Stock Option Plan
     
10.23  
   
10.24  
   
 
31.1  
 
31.2  
 
32.1  
 
32.2  

125


 

                                                                                                                                                Exhibit 10.3

SECURITY NATIONAL FINANCIAL CORPORATION

2006 Director Stock Option Plan

                1.         PURCHASE OF THE PLAN. The purpose of this 2006 Director Stock Option Plan is to attract and retain the best available personal to serve as Outside Directors of the Company.

                All options granted hereunder shall be “non-statutory stock options.”

                2.          DEFINITIONS. A used herein, the following definitions shall apply:

                (a)         “BOARD” means the Board of Directors of the Company.

                (b)         “CHANGE IN CONTROL” means (i) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the beneficial ownership of more than fifty percent (50%) of the outstanding securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (iii) the sale, transfer or other disposition of all or substantially all of the assets of the Company; (iv) a complete liquidation or dissolution of the Company or (v) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such a merger.

                (c)         “CODE” means the Internal Revenue Code of 1986, as amended.

                (d)         “COMMON STOCK” means the Class A Common Stock of the Company.

                (e)         “COMPANY” means Security National Financial Corporation, a Utah corporation.

                (f)         “CONTINUOUS STATUS AS A DIRECTOR” means the absence of any interruption of termination of service as a Director.

                (g)         “DIRECTOR” means a member of the Board

                (h)         “EMPLOYEE” means any person, including officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.

                (i)         “EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

                (j)         “FAIR MARKET VALUE” means, as of any date, the value of Common Stock determined as follows:




                             (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers. Inc. Automated Quotation (“Nasdaq”) Systems, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported by the Wall Street Journal or such other source as the Board deems reliable;

                             (ii) If the Common Stock is quoted on the Nasdaq System ( but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked priced for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable; or

                             (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Board.

                (k)         “OPTION” means a stock option granted pursuant to the Plan.

                (l)         “OPTIONED STOCK” means the Common Stock subject to an Option.

                (m)         “OPTIONEE” means an Outside Director who receivers an Option.

                (n)         “OUTSIDE DIRECTOR” means a Director who is not an Employee

                (o)         “PARENT” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code,

                (p)         “PLAN” means this 2006 Director Stock Option Plan.

                (q)         “SHARE” means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan.

                (r)         “SUBSIDIARY” means a “subsidiary corporation,” whether now or hereafter existing, as defined in Section 424(f) of the Code.

                3.          STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section10 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the plan is 100,000 Shares (the “Pool”) of Common Stock. The Shares may be authorized but unissued, or reacquired Common Stock.

                If an Option should expire or become unexercisable for any reason without having been exercised in full. The unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan.

                4.          ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.

                (a)         ADMINISTRATOR. Except as otherwise required herein, the Plan shall be administered




by the Board.

                (b)         PROCEDURE FOR GRANTS. The provisions set forth in this Section 4(b) shall not be amended more than once every six months, other than to comply with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. All grants of Options hereunder shall be automatic and non-discretionary and shall be made strictly in accordance with the following provisions:

                             (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors.

                             (ii) Effective as of December 7, 2006 (the “Effective Date”) and on each anniversary date thereof during the term of this Plan, each Outside Director shall automatically receive an Option to purchase 1,000 Shares (an “Annual Grant”). In addition, each new Outside Director who shall first join the Board on or after the Effective Date shall automatically be granted an Option to purchase 1,000 Shares upon the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company, appointment by the Board to fill a vacancy, or termination of employment by the Company while remaining as a Director (a “One-time Grant”) and an Annual Grant of an option to purchase 1,000 Shares on each anniversary date thereof during the term of this Plan.

                             (iii) The terms of each Option granted hereunder shall be as follows:

                                              (A) the term of the Option shall have ten (10) years:

                                              (B) the Option shall be exercisable while the Outside Director remains a Director of the Company and for a period of six months from the date Optionee’s continuous status as a Director terminates, as set forth in Section 8 hereof;

                                              (C) the exercise price per Share shall be 100% of the Fair Market Value per Share on the date of grant of the Option; and

                                              (D) each Annual Grant and One-Time Grant shall become exercisable at the rate of 250 shares each three month period, so that 100% of the Optioned Stock granted under any One-Time Grant or Annual Grant shall be exercisable one year after the date of grant of the Option, assuming Continuous Status as a Director and attendance at each board meeting.

                             (iv) In the event that any Option granted under the Plan would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of shares determined by dividing the total number of Shares remaining available for grant date. No further grants shall be made until such time, if any, as additional Shares become available for grant under the Plan through action of the shareholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options preciously granted hereunder.




                (c)         POWERS OF THE BOARD. Subject to the provisions and restrictions of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 2(i) of the Plan, the Fair Market Value of the Common Stock; (ii) to interpret the Plan; (iii) to prescribe, amend and rescind rules and regulations relating to the Plan; (iv) to authorize any person to execute on behalf of the Company and instrument required to effectuate the grant of an Option previously granted hereunder; and (v) to make all other determinations deemed necessary or advisable for the administration of the Plan.

                (d)         EFFECT OF BOARD’S DECISION. All decisions, determinations and interpretations of the Board shall be final.

                5.          ELIGIBILITY. Options may be granted only to Outside Directors. All Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such precision.

                The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time.

                6.          TERM OF PLAN. The plan shall become effective as of December 7, 2006 and shall continue in effect until the tenth anniversary of the Effective Date, unless sooner terminated under Section 12 of the plan.

                7.          CONSIDERATION. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Board and may consist entirely of (i) cash; (ii) check; (iii) promissory note; (iv) other shares which have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised and which, in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more that 12 months on the date of surrender; (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price; (vi) delivery of an irrevocable subscription agreement for the Shares not more than 12 months after the date of delivery of the subscription agreement; (vii) by a combination of the foregoing methods of payment; or (viii) such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law.

                8.          EXERCISE OF OPTION.

                (a)         PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable until stockholder approval of the Plan in accordance with Section 17 hereof has been obtained.

                An Option may not be exercised for a fraction of a Share.




                An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allocable under Section 7 of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 10 of the Plan.

                Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Options is exercised.

                (b)         TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. In the event an Optionee’s Continuous Status as a Director terminates, the Optionee may exercise his or her Option but only within six months from the date of such termination, and only to the extent that the Optionee was entitled to exercise it at the date of such termination ( but in no event later than the expiration of its ten-year term). To the extent that the Optionee was not entitled to exercise an Option at the date of such termination, and to he extent that the Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

                9.          NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will, by law of descent or distribution or pursuant to qualified domestic relations order, and may be exercised, during the lifetime of the Optionee, only by the Optionee or a permitted transferee.

                10.         ADJUSTMENTS

                (a)         CHANGES IN CAPITALIZATION. In the event that the stock of the Company is changed by reason of any stock split, reverse stock split, recapitalization, or other change in the capital structure of the Company, or converted into or exchanged for other securities as a result of any merger, consolidation or reorganization, or in the event that the outstanding number of shares of stock of the Company is increased through payment of a stock dividend, appropriate proportionate adjustments shall be made in the number and class of shares of stock subject to the Plan, the number and class of shares subject to any Option outstanding Option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Any such adjustment shall be make upon approval by the Board, whose determination shall be conclusive. If there is any other change in the number or type of he outstanding shares of stock of the Company, or of any other security into which such stock shall have been changed or for which it shall have been exchanged, and if he Board in its sole discretion determines that such change equitably requires an adjustment shall be made in accordance with the determination of the Board. No adjustments shall be required by reason of the issuance or sale by the Company for cash or other consideration of additional shares of its stock or securities convertible into or exchangeable for shares of its stock.

                (b)         CORPORATE TRANSACTIONS. New Options (substantially equivalent to the Options)




may be substituted for the Options granted under the Plan, or the Company’s duties as to Options outstanding under the plan may be assumed, by an employer corporation other that the Company or by a parent or subsidiary of such employer corporation, in connection with any merger consolidation, acquisition of assets or stock, separation, reorganization, liquidation, or like occurrence in which the Company is involved; provided, however, in the event such employer the Options granted hereunder or substituted for such Options substantially equivalent options, or if the Board determined, in its sole discretion, that Options outstanding under the Plans should not then continue to be outstanding, the Options granted hereunder shall terminate and thereupon become null and void (i) upon dissolution or liquidation of the Company, acquisition, separation, or similar occurrence, or (ii) upon any merger, consolidation or similar occurrence; provided, however, that each Optionee shall be given notice of such dissolution, liquidation, merger, consolidation or similar occurrence, and shall have the right, at any time prior to, but contingent upon the consummation of such transaction, to exercise (x) any unexpired Options granted hereunder to the extent they are then exercisable, and (y) in the case of a merger consolidation or similar occurrence Company is not the surviving corporation, those Options which are not them; provided, further, that such exercise right shall not in any event expire less than 30 days after the date notice of such transaction is sent to the Optionee.

                11.         CHANGE IN CONTROL. In the event of a Change in Control of the Company, if the Change of Control is not approved by a majority of the Directors, the Administrator shall cause written notice of the proposed transaction to be given to all Optionees not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction and, concurrent with the effective date of the proposed transaction, all Options shall be accelerated and concurrent with such date the holders of such Options shall have the right to exercise such Options in respect to any or all shares subject thereto. The Administrator in its discretion may, at any time an Option is granted, or at any time thereafter (regardless of its acceleration or non-acceleration), take on or more of the following actions: (A) provide for the purchase of each Option for an amount of cash or other property that could have been received upon the exercise of the Option, (B) adjust the terms of the Options in a manner determined by the Administrator to reflect the Change in Control, (C) cause the Options to be continued or assumed, or new rights substitute therefore, by the surviving or another entity, through the continuance of the Plan and the continuation or assumption of outstanding Options or the substitution for such Options of new options of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and Exercise Prices, in which event the Plan and such Options, or the new options substituted therefore, shall continue in the manner and under the terms so provided or (D) make such other provision as the Administrator may consider equitable. In the event of a Change in Control in which the Options are not continued, assumed or substituted therefore by the surviving or another entity, regardless of whether such Change in Control is approved by a majority of the Continuing Directors, the Options shall be accelerated and fully exercisable upon the effective date of the Change in Control and the Administrator shall cause written notice of the proposed transaction to be given to all Optionees not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. The Administrator shall have the right with respect to any specific Option granted under the Plan, to provide that such Options shall be accelerated in any event upon the effective date of the Change of Control.




                12.         AMENDMENT AND TERMINATION OF THE PLAN.

                (a)         AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or discontinue the plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with any applicable law or regulation, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as may be required.

                (b)         EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated.

                13.         TIME OF GRANTING OPTIONS. The date of grant of an Option shall. For all purposes, be the date determined in accordance with the Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant.

                14.         CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws and the requirements of any stock exchange or market system upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

                As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law.

                Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

                15.         RESERVATION OF SHARES. The Company, during the term of this plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

                16.         OPTION AGREEMENT. Options shall be evidenced by written option agreements in such form as the Board shall approve.




                17.         STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the first granting of an Option hereunder. Such stockholder approval shall be obtained in the degree and manner appropriate under applicable state and federal law.




SECURITY NATIONAL FINANCIAL CORPORATION

DIRECTOR STOCK OPTION AGREEMENT
(ANNUAL GRANT)

                Security National Financial Corporation, a Utah corporation (the “Company”), has granted to _____________________ (the “Optionee”), and option to purchase a total of ______ shares of the Company’s Common Stock (the “Optioned Stock”), at the price determined as provided herein, and in all respects subject to the terms, dedications and provisions of the 2006 Director Stock Option Plan (the “Plan”) adopted by the Company which is incorporated herein by reference. The terms defined in the Plan shall have the same defined meanings herein.

                1.  NATURE OF THE OPTION. This Option is a nonstatuatory option and is not intended to qualify for any special tax benefits to the Optionee.

                2.  EXERCISE PRICE. The exercise price is 100% of the Fair Market Value of the Common Stock as determined on the date of exercise of this Option.

                3.  EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the provisions of Section 8 of the Plan as follows:

                (a) RIGHT TO EXERCISE.

                                (i) This Option shall become exercisable as to 100% of the optional stock on the first anniversary of the date of grant; provided, however, that in no event shall this Option be exercisable until stockholder approval of the Plan has been obtained in accordance with Section 16 thereof.

                                (ii) This Option may not be exercised for a fraction of a share.

                                (iii) In the even of Optionee’s death, disability or other termination of service as a Director, the exercisability of the Option is governed by Sections 6, 7 and 8 of this Agreement.

                (b) METHOD OF EXERCISE. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised and such other representations and agreements as to the holder’s investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan, in the form attached to this Agreement as Exhibit A. Such written notice shall be signed by the Optionee and shall be delivered in person of by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price.

                4.  METHOD OF PAYMENT. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee:

                (a) cash;

                (b) check;




                (c) surrender of other Shares of Common Stock of the Company which (i) either have been owned by the Optionee for 12 months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (ii) have a Fair Market Value on the date of surrender equal to the exercise price of the Shares as to which the Option is being exercised;

                (d) delivery of a promissory note (the “Note”) of Optionee in the amount of the Exercise Price together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B. The Note shall be in the form attached hereto as Exhibit C, shall contain the terms and be payable as set forth therein, shall bear interest at a rate no less than the “applicable federal rate” prescribed under the Code and its regulations at the time or purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement; or

                (e) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price.

                5.  RESTRICTIONS ON EXERCISE. This Option may not be exercised if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of an applicable federal or state securities or other law or regulations, or if such issuance would not comply with the requirements of any stock exchange or market system upon which the Shares may then be listed. As a condition to the exercise of this Option, the Company may required Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

                6.  TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR. In the event Optionee’s Continuous Status as a Director terminates (other than upon the Optionee’s death or permanent and total disability (as defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her Option, but only within 30 days from the date of such termination, and only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no even later than the expiration of its five-year term). To the extent that the Optionee was not entitled to exercise this Option at the date of such termination, and to the extent that Optionee does not exercise this Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate.

                7.  NON-TRANSFERABILITY OF OPTION. This option may not be transferred in any manner otherwise than by will, by the laws of descent or distribution or pursuant to a qualified domestic relations order, and may be exercised during the lifetime of Optionee only by the Optionee or a permitted transferee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

                8.  TERM OF OPTION. This Option may not be exercised more than ten years from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option.




                9.  TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon exercise of this Option, the Optionee will recognize income for tax purposes in an amount equal to the excess of the then Fair Market Value of the Shares purchased over the exercise price paid for such Shares. If the Optionee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, the measurement and timing of such income may be deferred, and the Optionee is advised to contact a tax advisor concerning the desirability of filing an 83(b) election in connection with the exercise of the Option. Upon a resale of such Shares by the Optionee, any difference between the sale price and the Fair Market Value of the Shares on the date of exercise of the Option, to the extent not included in income as described above, will be treated as capital gain or loss.

DATE OF GRANT_________________________________

                                                                                SECURITY NATIONAL FINANCIAL CORPORATION,
                                                                                a Utah corporation

                                                                                By:_______________________________________
                                                                                Its:__________________________________________

                The Optionee acknowledges receipt of a copy of the Plan, a copy of which is annexed hereto, and represents that the Optionee is familiar with the terms and provision thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan.

                Date:_______________________

                                                                                                _________________________________________
                                                                                                Optionee




EXHIBIT A

SECURITY NATIONAL FINANCIAL CORPORATION
2006 DIRECTOR STOCK OPTION PLAN
EXERCISE NOTICE

Security National Financial Corporation
5300 South 360 West, Suite 250
Salt Lake City, Utah 84157-2050
Attention: Secretary

                1.         Exercise of Option. Effective as of today,__________________, 200__, the undersigned (“Purchaser”) hereby elects to purchase_______ shares (the “Shares”) if the Common Stock of Security National Financial Corporation ( the “Company”) under and pursuant to the 2006 Director Stock Option Plan (the “Plan”) and the Director Stock Option Agreement dated ______ __, 200__ ( the “Option Agreement”). The purchase price for the Shares shall be 100% of the Fair Market Value per share on the date of the purchase, as required by the Option Agreement.

                2.          Delivery of Payment. Purchaser herewith delivers to the Company the full purchase price for the Shares.

                3.          Representations of Optionee. Optionee acknowledges that Optionee has received, read and understood the Plan and the Option Agreement and agrees to abide by and be bound by their terms and conditions.

                4.          Rights and Stockholder, Subject to the terms and conditions of this agreement, Optionee shall have all of the rights of a stockholder of the Company with respect to the shares from and after the date that Optionee delivers full payment of the Exercise Price until such time as Optionee disposes of the Shares.

                5.          Tax Consultation. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee’s purchase or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and the Optionee is not relying on the Company for any tax advice.

                6.          Entire Agreement: Governing Law. The Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and such agreement is governed by Utah law except for that body of law pertaining to conflict of laws.




Submitted by: Accepted to:
   
OPTIONEE SECURITY NATIONAL FINANCIAL CORPORATION
   
__________________________ By:__________________________________________
Signature  
       Title: _______________________________



EXHIBIT B

SECURITY AGREEMENT

                This Security Agreement is made as of _____________, 200__, between Security National Financial Corporation, a Utah corporation (“Pledgee”), and _____________________________ (“Pledgor”).

RECITALS:

                Pursuant to Pledgor’s election to purchase Shares under the Option Agreement dated _________, 200__ (the “Option”), between Pledgor and Pledgee under Pledgee’s 2006 Director Stock Option Plan, and Pledgor’s election under the terms of the Option to pay for such shares with Pledgor’s promissory note (the “Note”), Pledgor has purchase _________ shares of Pledgee’s Common Stock (the “Shares”) at a price of $__________ per share, for a total purchase price of $___________. The Note and the obligations thereunder are as set forth in Exhibit C to the Option.

                NOW, THEREFORE, it is agreed as follows:

                1.           Creation and Description of Security Interest. In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code, hereby pledges all of such Shares (herein sometimes referred to as the “Collateral”) represented by certificate number ________, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee (“Pledgeholder”), who shall hold said certificate subject to the terms and conditions of this Security Agreement.

                The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement.

                2.          Pledgor’s Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows:

                              (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note.

                              (b) Encumbrances. The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee.

                              (c) Margin Regulations. In the event that Pledgee’s Common Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a “lender” within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations.




                3.          Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder.

                4.         Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and upon such substitution, references to “Shares”in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof.

                5.          Options and Rights. In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged.

                6.          Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event:

                             (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or

                             (b) Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee.

                In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the Utah Commercial Code.

                7.          Release of Collateral. Subject to any applicable contrary rules under Regulation G, there shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears the same proportion to the initial number of shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note.

                8.          Withdrawal or Substitution of Collateral. Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee.

                9.          Term. The within pledge of Shares shall continue until the payment of all indebtedness secured hereby at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above.

                10.         Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by




or against it, if a receiver is appointed for the property of Pledgor or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable and Pledgee may proceed as provided in the case of default.

                11.         Pledgeholder Liability. In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of Pledgeholder’s acts, or omissions to act as Pledgeholder.

                12.         Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid.

                13.         Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term “Pledgor” and the term “Pledgee” as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators.

                14.         Governing Law. This Security Agreement shall be interpreted and governed under the laws of the State of Utah.

                IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 
“PLEDGOR” By:_______________________________________
  ___________________________________
  Print Name
                                                                Address: __________________________________________
  __________________________________________
   
“PLEDGEE” SECURITY NATIONAL FINANCIAL CORPORATION
a Utah corporation
   
 
   By:_______________________________________
   
  Title:______________________________________
   
   
“PLEDGEHOLDER”  __________________________________________
           Secretary of Security National Financial Corporation



EXHIBIT C

INSTALLMENT NOTE

 
$____________________________  Salt Lake City, Utah
   
  _____________________, 200__
   

                FOR VALUE RECEIVED, ________________________ promises to pay to Security National Financial Corporation, a Utah corporation (the “Company”), or order, the principal sum of $_____________, together with interest on the unpaid principal hereof from the date hereof at the rate of ___% per annum, compounded semiannually.

                Principal and interest shall be due and payable on ________________, 200__. Should the undersigned fail to make full payment of any installment of principal or interest for a period of ten (10) days or more after the due date thereof, the whole unpaid balance on this Note of principal and interest shall become immediately due at the option of the holder of this Note. Payments of principal and interest shall be made in lawful money of the United States of America.

                The undersigned may at any time prepay all or any portion of the principal or interest owing hereunder.

                This Note is subject to the terms of the Option, dated as of _____________, 200__. This Note is secured by a pledge of the Company’s Common Stock under the terms of a Security Agreement of even date herewith and is subject to all the provisions thereof.

                In the event the undersigned shall cease to be a director of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest shall be immediately due and payable.

                Should any action be instituted for the collection of this Note, the reasonable costs and attorney’s fees therein of the holder shall be paid by the undersigned.

 
 
____________________________________   
 
____________________________________   


 

                                                                                                                                                Exhibit 10.23

ASSIGNMENT

                THIS ASSIGNMENT (the “Assignment”) is made and entered into effective the 28th day of December, 2006, by and between SOUTHERN SECURITY LIFE INSURANCE COMPANY, a Florida corporation (“SSLIC”), and SECURITY NATIONAL LIFE INSURANCE COMPANY, a Utah corporation (“SNLIC”) (collectively, the “Parties”).

WITNESSETH:

                WHEREAS, on December 12, 2005, SSLIC and SNLIC entered into an Agreement and Plan of Complete Liquidation of SSLIC (the “Agreement”), pursuant to which SSLIC would be liquidated into SNLIC in essentially the same manner as the liquidation described in the Internal Revenue Service Private Letter Ruling 9847027 in order to achieve the same tax treatment and consequences under Section 332 of the Internal Revenue Code of 1986, as amended, and other applicable provisions described in said Letter Ruling; and

                WHEREAS, in order to complete the liquidation of SSLIC and the transfer of its business to SNLIC under the terms of the Agreement, SNLIC and SSLIC entered into a Coinsurance Agreement dated December 31, 2005, in which SNLIC became primarily liable for the liabilities of SSLIC on insurance contracts and annuities issued by SSLIC to its policyholders, and SSLIC transferred assets to SNLIC having a fair market value equal to the assumed liabilities; and

                WHEREAS, SSLIC and SNLIC desire to enter into an Assignment to transfer and distribute to SNLIC all of SSLIC’s remaining assets, except that the assets to be transferred hereunder shall not include certain retained assets described in Exhibit “A” to this Assignment (the “Retained Assets”), a copy of which is attached hereto as Exhibit “A” and by this reference made a part hereof, such Retained Assists to consist of SSLIC’s corporate charter, insurance licenses, and capital and surplus, including cash and bonds, necessary to preserve SSLIC’s corporate existence;

                NOW, THEREFORE, in consideration of the mutual promises, agreements and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto agree as follows:

                1.             Except for the Retained Assets only, SSLIC hereby assigns, transfers and conveys to SNLIC all of SSLIC’s rights, titles and interests in and to all of its assets of every kind and nature whatsoever, including without limitation the following: (i) cash reserved for the payment of certain liabilities and obligations of SSLIC, including advanced premiums, suspense items on insurance policies, and escheate obligations; (ii) furniture and equipment, including computer hardware and software; (iii) a stock certificate in the amount of 4,681 shares of common stock of Memorial Insurance Company of America, representing all of the issued and outstanding capital stock of Memorial Insurance Company; (iv) prepaid deposits; (iv) accrued investment income; (v) reinsurance and other receivables; (vi) agent balances; (vii) business and other operational licenses (except for insurance licenses); (viii) maintenance agreements; (ix) rights to transact business in the name of Security National Life Insurance Company and Southern Security Life Insurance Company; (x) accounting and other records; (xi) leases and contract rights; (xii) insurance policies; and (xiii) any and all other real and personal property.




                2.             SNLIC hereby assumes any and all liabilities of SSLIC in an amount not to exceed the capital and surplus of SSLIC as of December 31, 2006;

                3.             SSLIC also hereby assigns, transfers and conveys to SNLIC all of its rights in and to the name of Southern Security Life Insurance Company and permits SNLIC to immediately assume and use the name of Southern Security Life Insurance Company.

                4.             This Assignment may be modified or amended only in writing duly executed by each of the Parties.

                5.             This Assignment shall be governed and construed and enforced in accordance with the laws of the State of Utah (without regard to the principles of conflicts of law) applicable to a contract executed and performable in such state.

                6.             This Assignment is binding upon and will inure to the benefit of the Parties and their respective successors and permitted assigns.

                7.             Neither this Assignment nor any right or obligation herein or part hereof may be assigned by any party hereto with the prior written consent of the other party hereto (and any attempt to do so will be void).

                8.             This Assignment may be executed simultaneously in counterparts, each of which will be deemed an original, but all of which, when taken together, will constitute one and the same instrument.

                IN WITNESS WHEREOF, each of the Parties hereto, intending to be legally bound hereby, has duly executed this Assignment as of the date first above written.

   
  SOUTHERN SECURITY LIFE INSURANCE COMPANY
   
   
  By:_________________________________________
  Its: _________________________________________
   
  SECURITY NATIONAL LIFE INSURANCE COMPANY
   
   
  By:_________________________________________
  Its: _________________________________________

2



EXHIBIT 10.24

Subsidiaries of Security National
Financial Corporation
as of March 31, 2007

 
  Security National Life Insurance Company
   
  Security National Mortgage Company
   
  Memorial Estates, Inc.
   
  Memorial Mortuary
   
  Paradise Chapel Funeral Home, Inc.
   
  California Memorial Estates, Inc.
   
  Cottonwood Mortuary, Inc.
   
  Deseret Memorial, Inc.
   
  Holladay Cottonwood Memorial Foundation
   
  Holladay Memorial Park, Inc.
   
  Sunset Funeral Home, Inc.
   
  Greer-Wilson Funeral Home, Inc.
   
  Crystal Rose Funeral Home, Inc.
   
  Insuradyne Corporation
   
  Security National Funding Company
   
 
Security National Life Insurance Company of Louisiana (Formerly Paramount Security Life Insurance Company)
   
  Security National Capital, Inc.
   
  Memorial Insurance Company of America



Exhibit 31.1
 

CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, George R. Quist, certify that:

1.  I have reviewed this annual 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to 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)
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
 
(c)
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 officers 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 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.

 
Date: March 31, 2007    
     
  By: George R. Quist
    Chairman of the Board and
    Chief Executive Officer



Exhibit 31.2

CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ENACED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Stephen M. Sill, certify that:

1.  I have reviewed this annual 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant to 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)
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
 
(c)
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 officers and I have disclosed, based on our most recent evaluation of internal financial reporting, to the registrant’s auditors and the audit committee of 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.

 
Date: March 31, 2007    
     
  By: Stephen M. Sill
    Vice President, Treasurer and
    Chief Financial Officer

126



EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
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, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George R. Quist, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §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; and
 
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
   
By: George R. Quist
  Chairman of the Board and
  Chief Executive Officer
  March 31, 2007



 

EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. § 1350,
AS ADOPTED PURSUANT TO
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, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen M. Sill, Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §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; and
 
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
   
By: Stephen M. Sill
  Vice President, Treasurer
  and Chief Financial Officer
  March 31, 2007