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

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2017, or

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

Commission file number: 000-09341

SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

UTAH
87-0345941
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5300 South 360 West, Suite 250, Salt Lake City, Utah
84123
(Address of principal executive offices)
(Zip Code)
   
 (801) 264-1060
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [  ]

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

 
Large accelerated filer [  ]
Accelerated filer [  ]
 
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
 
  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No[X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class A Common Stock, $2.00 par value
13,820,079
Title of Class
Number of Shares Outstanding as of
 
May 11, 2017
   
Class C Common Stock, $2.00 par value
2,005,026
Title of Class
Number of Shares Outstanding as of
 
May 11, 2017



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED MARCH 31, 2017

Table of Contents


   
Page No.
 
Part I  - Financial Information
 
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2017 and 2016 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2017 and March 31, 2016 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
38
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
42
     
Item 4.
Controls and Procedures
42
 
Part II - Other Information
 
     
Item 1.
Legal Proceedings
43
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
     
Item 3.
Defaults Upon Senior Securities
44
     
Item 4.
Mine Safety Disclosures
44
     
Item 5.
Other Information
44
     
Item 6.
Exhibits
45
     
 
Signature Page
46

2


SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1.  Financial Statements.

Assets
 
March 31
2017
   
December 31
2016
 
Investments:
 
(Unaudited)
       
Fixed maturity securities, held to maturity, at amortized cost
 
$
186,445,498
   
$
184,979,644
 
Equity securities, available for sale, at estimated fair value
   
10,735,239
     
10,573,356
 
Mortgage loans on real estate and construction loans, held for investment net of allowances for loan losses of $1,955,443 and $1,748,783 for 2017 and 2016
   
134,123,773
     
149,181,578
 
Real estate held for investment, net of accumulated depreciation of $16,732,122 and $16,138,439 for 2017 and 2016
   
151,417,470
     
145,165,921
 
Policy loans and other investments, net of allowances for doubtful accounts of $1,050,111 and $1,119,630 for 2017 and 2016
   
41,773,152
     
40,937,146
 
Short-term investments
   
28,346,922
     
27,560,040
 
Accrued investment income
   
3,008,839
     
2,972,596
 
Total investments
   
555,850,893
     
561,370,281
 
Cash and cash equivalents
   
85,069,717
     
38,987,430
 
Mortgage loans sold to investors
   
54,401,522
     
82,491,091
 
Receivables, net
   
15,736,045
     
18,870,119
 
Restricted assets
   
10,230,360
     
10,391,394
 
Cemetery perpetual care trust investments
   
4,211,337
     
4,131,885
 
Receivable from reinsurers
   
13,227,385
     
13,079,668
 
Cemetery land and improvements
   
10,641,141
     
10,672,836
 
Deferred policy and pre-need contract acquisition costs
   
71,643,040
     
69,118,745
 
Mortgage servicing rights, net
   
19,432,993
     
18,872,362
 
Property and equipment, net
   
8,478,347
     
8,791,522
 
Value of business acquired
   
7,375,084
     
7,570,300
 
Goodwill
   
2,765,570
     
2,765,570
 
Other
   
8,141,683
     
6,891,468
 
                 
Total Assets
 
$
867,205,117
   
$
854,004,671
 

See accompanying notes to condensed consolidated financial statements (unaudited).
3


SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

   
March 31
2017
   
December 31
2016
 
Liabilities and Stockholders' Equity
 
(Unaudited)
       
Liabilities
           
Future life, annuity, and other benefits
 
$
589,405,726
   
$
585,610,063
 
Unearned premium reserve
   
4,405,472
     
4,469,771
 
Bank and other loans payable
   
61,548,686
     
53,718,548
 
Deferred pre-need cemetery and mortuary contract revenues
   
12,350,470
     
12,360,249
 
Cemetery perpetual care obligation
   
3,624,895
     
3,598,580
 
Accounts payable
   
3,113,519
     
4,213,109
 
Other liabilities and accrued expenses
   
34,128,938
     
33,950,503
 
Income taxes
   
28,717,508
     
27,904,294
 
Total liabilities
   
737,295,214
     
725,825,117
 
                 
Stockholders' Equity
               
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 13,820,078 shares in 2017 and 13,819,006 shares in 2016
   
27,640,156
     
27,638,012
 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 1,901,624 shares in 2017 and 1,902,229 shares in 2016
   
3,803,248
     
3,804,458
 
Additional paid-in capital
   
35,095,594
     
34,813,246
 
Accumulated other comprehensive income, net of taxes
   
286,114
     
264,822
 
Retained earnings
   
64,494,807
     
63,029,627
 
Treasury stock at cost - 686,549 Class A shares in 2017 and 704,122 Class A shares in 2016
   
(1,410,016
)
   
(1,370,611
)
                 
Total stockholders' equity
   
129,909,903
     
128,179,554
 
                 
Total Liabilities and Stockholders' Equity
 
$
867,205,117
   
$
854,004,671
 

See accompanying notes to condensed consolidated financial statements (unaudited).
4


SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

   
Three Months Ended
March 31
 
   
2017
   
2016
 
Revenues:
           
Insurance premiums and other considerations
 
$
17,357,124
   
$
14,451,575
 
Net investment income
   
9,563,282
     
8,992,191
 
Net mortuary and cemetery sales
   
3,358,973
     
3,245,856
 
Realized gains on investments and other assets
   
145,330
     
97,922
 
Other than temporary impairments on investments
   
(52,139
)
   
(73,630
)
Mortgage fee income
   
37,050,926
     
39,110,967
 
Other
   
2,028,873
     
1,530,426
 
Total revenues
   
69,452,369
     
67,355,307
 
                 
Benefits and expenses:
               
Death benefits
   
8,794,598
     
7,824,001
 
Surrenders and other policy benefits
   
857,531
     
518,321
 
Increase in future policy benefits
   
5,182,449
     
4,160,260
 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
   
2,264,039
     
2,212,836
 
Selling, general and administrative expenses:
               
Commissions
   
15,721,074
     
16,842,270
 
Personnel
   
18,589,687
     
17,197,372
 
Advertising
   
1,310,674
     
1,078,010
 
Rent and rent related
   
2,139,538
     
2,064,325
 
Depreciation on property and equipment
   
625,812
     
521,455
 
Provision for loan loss reserve
   
426,634
     
586,778
 
Costs related to funding mortgage loans
   
2,065,134
     
2,154,397
 
Other
   
7,430,951
     
6,480,711
 
Interest expense
   
1,254,039
     
1,064,195
 
Cost of goods and services sold-mortuaries and cemeteries
   
521,919
     
458,619
 
Total benefits and expenses
   
67,184,079
     
63,163,550
 
                 
Earnings before income taxes
   
2,268,290
     
4,191,757
 
Income tax expense
   
(799,826
)
   
(1,580,220
)
                 
Net earnings
 
$
1,468,464
   
$
2,611,537
 
                 
Net earnings per Class A Equivalent common share (1)
 
$
0.10
   
$
0.18
 
                 
Net earnings per Class A Equivalent common share-assuming dilution (1)
 
$
0.09
   
$
0.17
 
                 
Weighted-average Class A equivalent common share outstanding (1)
   
15,058,153
     
14,656,450
 
                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
   
15,527,996
     
15,112,278
 


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

See accompanying notes to condensed consolidated financial statements (unaudited).
5

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended
March 31
 
   
2017
   
2016
 
Net earnings
 
$
1,468,464
   
$
2,611,537
 
Other comprehensive income:
               
  Net unrealized gains on derivative instruments
   
973
     
1,669
 
  Net unrealized gains on available for sale securities
   
20,319
     
297,897
 
Other comprehensive income
   
21,292
     
299,566
 
Comprehensive income
 
$
1,489,756
   
$
2,911,103
 

See accompanying notes to condensed consolidated financial statements (unaudited).
6

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
 
   
Class A
Common Stock
   
Class C
Common Stock
   
Additional
Paid-in Capital
   
Accumulated
Other
 Comprehensive
Income
   
Retained
 Earnings
   
Treasury
Stock
   
Total
 
                                           
Balance at December 31, 2015
 
$
26,218,200
   
$
3,419,280
   
$
30,232,582
   
$
(499,358
)
 
$
54,054,950
   
$
(2,179,429
)
 
$
111,246,225
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
2,611,537
     
-
     
2,611,537
 
Other comprehensive income
   
-
     
-
     
-
     
299,566
     
-
     
-
     
299,566
 
Grant of stock options
   
-
     
-
     
84,452
     
-
     
-
     
-
     
84,452
 
Exercise of stock options
   
56,920
     
-
     
4,367
     
-
     
-
     
-
     
61,287
 
Sale of treasury stock
   
-
     
-
     
136,826
     
-
     
-
     
149,639
     
286,465
 
Stock Dividends
   
274
     
12,768
     
30,779
     
-
     
(43,821
)
   
-
     
-
 
Balance at March 31, 2016
 
$
26,275,394
   
$
3,432,048
   
$
30,489,006
   
$
(199,792
)
 
$
56,622,666
   
$
(2,029,790
)
 
$
114,589,532
 
                                                         
Balance at December 31, 2016
 
$
27,638,012
   
$
3,804,458
   
$
34,813,246
   
$
264,822
   
$
63,029,627
   
$
(1,370,611
)
 
$
128,179,554
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
1,468,464
     
-
     
1,468,464
 
Other comprehensive income
   
-
     
-
     
-
     
21,292
     
-
     
-
     
21,292
 
Grant of stock options
   
-
     
-
     
101,996
     
-
     
-
     
-
     
101,996
 
Sale of treasury stock
   
-
     
-
     
178,002
     
-
     
-
     
146,065
     
324,067
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(185,470
)
   
(185,470
)
Stock Dividends
   
930
     
4
     
2,350
     
-
     
(3,284
)
   
-
     
-
 
Conversion Class C to Class A
   
1,214
     
(1,214
)
   
-
     
-
     
-
     
-
     
-
 
Balance at March 31, 2017
 
$
27,640,156
   
$
3,803,248
   
$
35,095,594
   
$
286,114
   
$
64,494,807
   
$
(1,410,016
)
 
$
129,909,903
 

See accompanying notes to condensed consolidated financial statements (unaudited).
7

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

   
Three Months Ended
March 31
 
   
2017
   
2016
 
Cash flows from operating activities:
           
     Net cash provided by operating activities
 
$
24,054,637
   
$
25,863,034
 
                 
Cash flows from investing activities:
               
Securities held to maturity:
               
        Purchase-fixed maturity securities
   
(2,575,997
)
   
(4,481,397
)
        Calls and maturities - fixed maturity securities
   
830,595
     
2,470,005
 
Securities available for sale:
               
       Purchase - equity securities
   
(4,190,458
)
   
(1,651,302
)
       Sales - equity securities
   
4,092,734
     
1,487,110
 
Purchase of short-term investments
   
(3,053,797
)
   
(3,258,070
)
Sales of short-term investments
   
2,266,915
     
2,364,571
 
Purchase of restricted assets
   
174,197
     
1,242,342
 
Changes in assets for perpetual care trusts
   
(104,731
)
   
(51,461
)
Amount received for perpetual care trusts
   
26,315
     
11,735
 
Mortgage loans, policy loans, and other investments made
   
(108,649,435
)
   
(112,920,364
)
Payments received for mortgage loans, policy loans and other investments
   
127,506,014
     
99,348,725
 
Purchase of property and equipment
   
(312,640
)
   
(1,084,975
)
Purchase of real estate
   
(3,103,471
)
   
(3,432,051
)
Sale of real estate
   
2,891,887
     
843,701
 
      Net cash provided by (used in) investing activities
   
15,798,128
     
(19,111,431
)
                 
Cash flows from financing activities:
               
Annuity contract receipts
   
3,051,883
     
2,516,596
 
Annuity contract withdrawals
   
(4,468,624
)
   
(3,025,833
)
Proceeds from stock options exercised
   
-
     
61,287
 
Purchase of treasury stock
   
(185,470
)
   
-
 
Repayment of bank loans on notes and contracts
   
(673,454
)
   
(390,168
)
Proceeds from borrowing on bank loans
   
7,255,187
     
737,232
 
Change in line of credit borrowings
   
1,250,000
     
-
 
      Net cash provided by (used in) financing activities
   
6,229,522
     
(100,886
)
                 
Net change in cash and cash equivalents
   
46,082,287
     
6,650,717
 
                 
Cash and cash equivalents at beginning of period
   
38,987,430
     
40,053,242
 
                 
Cash and cash equivalents at end of period
 
$
85,069,717
   
$
46,703,959
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest (net of amount capitalized)
 
$
1,234,420
   
$
1,079,891
 
Income taxes (net of refunds)
   
(3,215
)
   
12,321
 
                 
Non Cash Investing and Financing Activities:
               
Mortgage loans foreclosed into real estate
 
$
204,839
   
$
87,000
 

See accompanying notes to condensed consolidated financial statements (unaudited).
8

 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)


1) Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q and Articles 8 and 10 of Regulation S‑X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K (file number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The presentation of certain amounts in the prior year have been reclassified to conform to the 2017 presentation. See additional discussion regarding restatement of mortgage banking derivatives in the financial statements Note 21 and 22 included in the Company's Form 10-K.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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

2) Recent Accounting Pronouncements

ASU No. 2016-13: "Financial Instruments – Credit Losses (Topic 326)" – Issued in June 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current generally accepted accounting principles ("GAAP") and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is in the process of evaluating the potential impact of this standard.

ASU No. 2016-02: "Leases (Topic 842)" - Issued in February 2016, ASU 2016-02 supersedes the leases requirements in ASC Topic 840, "Leases", and was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is in the process of evaluating the potential impact of this standard.

ASU No. 2016-01: "Financial Instruments – Overall (Topic 825-10)" – Issued in January 2016, ASU 2016-01 changes the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of stockholders' equity.  Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments.  The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is in the process of evaluating the potential impact of this standard.
9

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

ASU No. 2014-09: "Revenue from Contracts with Customers (Topic 606)" - Issued in May 2014, ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition", and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Insurance contracts are excluded from the scope of this new guidance. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017. The Company is in the process of evaluating the potential impact of this standard, which is not expected to be material to the Company's results of operations or financial position.

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

3) Investments

The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of March 31, 2017 are summarized as follows:
 
   

Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
March 31, 2017
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
4,357,040
   
$
244,853
   
$
(57,240
)
 
$
4,544,653
 
Obligations of states and political subdivisions
   
5,995,384
     
146,273
     
(132,140
)
   
6,009,517
 
Corporate securities including public utilities
   
165,716,233
     
11,763,828
     
(2,443,238
)
   
175,036,823
 
Mortgage-backed securities
   
9,753,206
     
246,004
     
(233,586
)
   
9,765,624
 
Redeemable preferred stock
   
623,635
     
14,954
     
(8,627
)
   
629,962
 
Total fixed maturity securities held to maturity
 
$
186,445,498
   
$
12,415,912
   
$
(2,874,831
)
 
$
195,986,579
 
                                 
Equity securities available for sale at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
11,139,482
   
$
412,535
   
$
(816,778
)
 
$
10,735,239
 
                                 
Total equity securities available for sale at estimated fair value
 
$
11,139,482
   
$
412,535
   
$
(816,778
)
 
$
10,735,239
 
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
 
$
64,629,906
                         
Residential construction
   
33,917,309
                         
Commercial
   
37,532,001
                         
Less: Allowance for loan losses
   
(1,955,443
)
                       
Total mortgage loans on real estate and construction loans held for investment
 
$
134,123,773
                         
                                 
Real estate held for investment - net of depreciation
 
$
151,417,470
                         
                                 
Policy loans and other investments are shown at amortized cost:
                               
Policy loans
 
$
6,666,500
                         
Insurance assignments
   
33,857,966
                         
Promissory notes
   
48,797
                         
Other investments
   
2,250,000
                         
Less: Allowance for doubtful accounts
   
(1,050,111
)
                       
                                 
Total policy loans and other investments
 
$
41,773,152
                         
                                 
Short-term investments at amortized cost
 
$
28,346,922
                         


10

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)

The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2016 are summarized as follows:

   
Cost
   
Gross
Unrealized
Gains
   
Gross
 Unrealized
 Losses
   
Estimated
 Fair
Value
 
December 31, 2016:
                       
                         
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
4,475,065
   
$
249,028
   
$
(66,111
)
 
$
4,657,982
 
Obligations of states and political subdivisions
   
6,017,225
     
153,514
     
(133,249
)
   
6,037,490
 
Corporate securities including public utilities
   
164,375,636
     
10,440,989
     
(3,727,013
)
   
171,089,612
 
Mortgage-backed securities
   
9,488,083
     
221,400
     
(280,871
)
   
9,428,612
 
Redeemable preferred stock
   
623,635
     
13,418
     
-
     
637,053
 
Total fixed maturity securities held to maturity
 
$
184,979,644
   
$
11,078,349
   
$
(4,207,244
)
 
$
191,850,749
 
                                 
Equity securities available for sale at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
10,985,338
   
$
447,110
   
$
(859,092
)
 
$
10,573,356
 
                                 
Total securities available for sale carried at estimated fair value
 
$
10,985,338
   
$
447,110
   
$
(859,092
)
 
$
10,573,356
 
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
 
$
58,593,622
                         
Residential construction
   
40,800,117
                         
Commercial
   
51,536,622
                         
Less: Allowance for loan losses
   
(1,748,783
)
                       
                                 
Total mortgage loans on real estate and construction loans held for investment
 
$
149,181,578
                         
                                 
Real estate held for investment - net of depreciation
 
$
145,165,921
                         
                                 
Policy loans and other investments are shown at amortized cost:
                               
Policy loans
 
$
6,694,148
                         
Insurance assignments
   
33,548,079
                         
Promissory notes
   
48,797
                         
Other investments
   
1,765,752
                         
Less: Allowance for doubtful accounts
   
(1,119,630
)
                       
                                 
Total policy loans and other investments
 
$
40,937,146
                         
                                 
Short-term investments at amortized cost
 
$
27,560,040
                         

11

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
 
Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at March 31, 2017 and December 31, 2016. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

   
Unrealized
 Losses
for Less
 than
Twelve Months
   
Fair Value
   
Unrealized
 Losses for
 More than
Twelve
 Months
   
Fair Value
   
Total
 Unrealized
 Loss
   
Fair Value
 
At March 31, 2017
                                   
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
57,240
   
$
1,345,231
   
$
-
   
$
-
   
$
57,240
   
$
1,345,231
 
Obligations of states and political subdivisions
   
132,140
     
3,270,595
     
-
     
-
     
132,140
     
3,270,595
 
Corporate securities
   
1,094,907
     
29,075,748
     
1,348,331
     
12,362,900
     
2,443,238
     
41,438,648
 
Mortgage-backed securities
   
126,828
     
1,745,284
     
106,758
     
1,470,559
     
233,586
     
3,215,843
 
Redeemable preferred stock
   
8,627
     
98,110
     
-
     
-
     
8,627
     
98,110
 
Total unrealized losses
 
$
1,419,742
   
$
35,534,968
   
$
1,455,089
   
$
13,833,459
   
$
2,874,831
   
$
49,368,427
 
                                                 
At December 31, 2016
                                               
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
66,111
   
$
1,342,088
   
$
-
   
$
-
   
$
66,111
   
$
1,342,088
 
Obligations of states and political subdivisions
   
133,249
     
3,686,856
     
-
     
-
     
133,249
     
3,686,856
 
Corporate securities
   
1,728,312
     
41,796,016
     
1,998,701
     
12,969,135
     
3,727,013
     
54,765,151
 
Mortgage-backed securities
   
176,715
     
4,176,089
     
104,156
     
940,278
     
280,871
     
5,116,367
 
Total unrealized losses
 
$
2,104,387
   
$
51,001,049
   
$
2,102,857
   
$
13,909,413
   
$
4,207,244
   
$
64,910,462
 

There were 195 securities with unrealized losses of 94.5% of amortized cost at March 31, 2017. There were 250 securities with unrealized losses of 93.9% of amortized cost at December 31, 2016. During the three months ended March 31, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $52,139 and $30,000, respectively.

On a quarterly basis, the Company reviews its available for sale and held to maturity fixed investment securities related to corporate securities and other public utilities, consisting of bonds and preferred stocks that are in a loss position. The review involves an analysis of the securities in relation to historical values, and projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.
12

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)

Equity Securities

The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at March 31, 2017 and December 31, 2016. The unrealized losses were primarily the result of decreases in fair value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available for sale in a loss position:

   
Unrealized
Losses for
 Less than
Twelve Months
   
No. of
Investment
Positions
   
Unrealized
Losses for
More than
Twelve
Months
   
No. of
Investment
Positions
   
Total
 Unrealized
 Losses
 
At March 31, 2017
                             
Industrial, miscellaneous and all other
 
$
178,006
     
149
   
$
638,772
     
105
   
$
816,778
 
Total unrealized losses
 
$
178,006
     
149
   
$
638,772
     
105
   
$
816,778
 
Fair Value
 
$
3,955,133
           
$
1,154,812
           
$
5,109,945
 
                                         
At December 31, 2016
                                       
Industrial, miscellaneous and all other
 
$
215,563
     
124
   
$
643,529
     
104
   
$
859,092
 
Total unrealized losses
 
$
215,563
     
124
   
$
643,529
     
104
   
$
859,092
 
Fair Value
 
$
2,063,144
           
$
1,685,874
           
$
3,749,018
 
 
The average market value of the equity securities available for sale was 86.2% and 81.4% of the original investment as of March 31, 2017 and December 31, 2016, respectively. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security. During the three months ended March 31, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $-0- and $43,630, respectively.

On a quarterly basis, the Company reviews its investment in industrial, miscellaneous and all other equity securities that are in a loss position. The review involves an analysis of the securities in relation to historical values, price earnings ratios, projected earnings and revenue growth rates. Based on the analysis a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.

The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices.
13

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
       
The amortized cost and estimated fair value of fixed maturity securities at March 31, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Estimated Fair
Value
 
Held to Maturity:
           
Due in 2017
 
$
5,625,049
   
$
5,677,028
 
Due in 2018 through 2021
   
42,733,718
     
44,794,103
 
Due in 2022 through 2026
   
43,263,792
     
45,020,917
 
Due after 2026
   
84,446,098
     
90,098,945
 
Mortgage-backed securities
   
9,753,206
     
9,765,624
 
Redeemable preferred stock
   
623,635
     
629,962
 
Total held to maturity
 
$
186,445,498
   
$
195,986,579
 

The cost and estimated fair value of available for sale securities at March 31, 2017, 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. Equities are valued using the specific identification method.

   

Cost
   
Estimated Fair
Value
 
Available for Sale:
           
Common stock
 
$
11,139,482
   
$
10,735,239
 
Total available for sale
 
$
11,139,482
   
$
10,735,239
 

The Company's realized gains and losses and other than temporary impairments from investments and other assets, are summarized as follows:

   
Three Months Ended
 Mar 31
 
   
2017
   
2016
 
Fixed maturity securities held to maturity:
           
Gross realized gains
 
$
2,434
   
$
-
 
Gross realized losses
   
-
     
(24,795
)
Other than temporary impairments
   
(52,139
)
   
(30,000
)
                 
Securities available for sale:
               
Gross realized gains
   
60,978
     
63,495
 
Gross realized losses
   
(4,556
)
   
(23,878
)
Other than temporary impairments
   
-
     
(43,630
)
                 
Other assets:
               
Gross realized gains
   
456,275
     
84,768
 
Gross realized losses
   
(369,801
)
   
(1,668
)
Total
 
$
93,191
   
$
24,292
 

The net carrying amount of held to maturity securities sold was $28,073 and $-0- for the three months ended March 31, 2017 and 2016, respectively.  The net realized gain related to these sales was $2,434 and $-0- for the three months ended March 31, 2017 and 2016, respectively. Although the intent is to buy and hold a bond to maturity the Company will sell a bond prior to maturity if conditions have changed within the entity that issued the bond to increase the risk of default to an unacceptable level.

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 March 31, 2017, other than investments issued or guaranteed by the United States Government.
14

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
Major categories of net investment income are as follows:
   
Three Months Ended
Mar 31
 
   
2017
   
2016
 
Fixed maturity securities
 
$
2,368,710
   
$
2,050,569
 
Equity securities
   
54,786
     
71,041
 
Mortgage loans on real estate
   
2,223,139
     
2,026,515
 
Real estate
   
2,894,331
     
2,838,484
 
Policy loans
   
193,734
     
182,206
 
Insurance assignments
   
3,364,642
     
3,104,788
 
Other investments
   
7,543
     
-
 
Short-term investments,  principally interest on sale of mortgage loans and other
   
1,804,746
     
1,863,144
 
Gross investment income
   
12,911,631
     
12,136,747
 
Investment expenses
   
(3,348,349
)
   
(3,144,556
)
Net investment income
 
$
9,563,282
   
$
8,992,191
 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $115,501 and $87,976 for the three months ended March 31, 2017 and 2016, respectively.
Net investment income on real estate consists primarily of rental revenue.
Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.
Securities on deposit for regulatory authorities as required by law amounted to $9,268,330 at March 31, 2017 and $9,269,121 at December 31, 2016. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
Real Estate
The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development mortgage foreclosures.
Commercial Real Estate Held for Investment
The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company's goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.
The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets.  The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.
The Company currently owns and operates 13 commercial properties in 7 states. These properties include industrial warehouses, office buildings, retail centers, undeveloped land and includes the redevelopment and expansion of its corporate campus in Salt Lake City Utah. The assets are primarily held without debt; however, the Company does use debt in strategic cases to leverage established yields or to acquire higher quality or different class of asset.
15

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
The following is a summary of the Company's investment in commercial real estate for the periods presented:
   
Net Ending Balance
       
Total Square Footage
 
   
March 31
       
December 31
       
March 31
   
December 31
 
   
2017
       
2016
       
2017
   
2016
 
Arizona
 
$
447,229
 
(1
)
 
$
450,538
   
(1
)
   
16,270
     
16,270
 
Arkansas
   
99,319
         
100,369
           
3,200
     
3,200
 
Kansas
   
12,512,451
         
12,450,297
           
222,679
     
222,679
 
Louisiana
   
512,324
         
518,700
           
7,063
     
7,063
 
Mississippi
   
3,795,355
         
3,818,985
           
33,821
     
33,821
 
New Mexico
   
7,000
 
(1
)
   
7,000
   
(1
)
   
-
     
-
 
Texas
   
3,760,499
         
3,734,974
           
23,470
     
23,470
 
Utah
   
57,104,854
 
(2
)
   
47,893,073
   
(2
)
   
433,244
     
433,244
 
                                           
   
$
78,239,031
       
$
68,973,936
           
739,747
     
739,747
 
_____________                                           
(1) Includes undeveloped land
                               
                                           
(2) Includes 53rd Center to be completed in July 2017
         
 
Residential Real Estate Held for Investment

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.  The strategy has been to lease these homes to produce cash flow, and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.
The Company established Security National Real Estate Services ("SNRE") to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.
As of March 31, 2017, SNRE manages 124 residential properties in 9 states across the United States which includes a newly constructed apartment complex, Dry Creek at East Village, in Sandy Utah.
The following is a summary of the Company's investment in residential real estate for the periods presented:
   
Net Ending Balance
 
   
March 31
   
December 31
 
   
2017
   
2016
 
Arizona
 
$
739,333
   
$
742,259
 
California
   
5,404,417
     
5,848,389
 
Colorado
   
204,538
     
364,489
 
Florida
   
8,273,416
     
8,327,355
 
Ohio
   
46,658
     
46,658
 
Oklahoma
   
17,500
     
-
 
Texas
   
777,843
     
1,091,188
 
Utah
   
57,428,553
     
59,485,466
 
Washington
   
286,181
     
286,181
 
   
$
73,178,439
   
$
76,191,985
 

16

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
 
Real Estate Owned and Occupied by the Company
The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 80,000 square feet, or 10% of the overall commercial real estate holdings.

As of March 31, 2017, real estate owned and occupied by the company is summarized as follows:

Location
Business Segment
 
Approximate
Square
 Footage
   
Square
 Footage
Occupied
by the
Company
 
5300 South 360 West, Salt Lake City, UT (1)
Corporate Offices, Life Insurance and Cemetery/Mortuary Operations
   
36,000
     
100
%
5201 Green Street, Salt Lake City, UT
Mortgage Operations
   
36,899
     
34
%
1044 River Oaks Dr., Flowood, MS
Life Insurance Operations
   
5,522
     
27
%
_____________                   
(1) This asset is included in property and equipment on the Condensed Consolidated Balance Sheet
         
 
Mortgage Loans

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, 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 March 31, 2017, the Company had 42%, 15%, 10%, 8%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, California, Texas, Florida, Oregon, and Nevada, respectively. The mortgage loans on real estate balances on the Condensed Consolidated Balance Sheet are reflected net of an allowance for loan losses of $1,955,443 and $1,748,783 at March 31, 2017 and December 31, 2016, respectively.
17

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
 
The Company establishes a valuation allowance for credit losses in its portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

Allowance for Credit Losses and Recorded Investment in Mortgage Loans
 
                         
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
March 31, 2017
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2017
 
$
187,129
   
$
1,461,540
   
$
100,114
   
$
1,748,783
 
   Charge-offs
   
-
     
(16,226
)
   
-
     
(16,226
)
   Provision
   
-
     
222,886
     
-
     
222,886
 
Ending balance -March 31, 2017
 
$
187,129
   
$
1,668,200
   
$
100,114
   
$
1,955,443
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
423,487
   
$
-
   
$
423,487
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,244,713
   
$
100,114
   
$
1,531,956
 
                                 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Mortgage loans:
                               
Ending balance
 
$
37,532,001
   
$
64,629,906
   
$
33,917,309
   
$
136,079,216
 
                                 
Ending balance: individually evaluated for impairment
 
$
203,264
   
$
4,842,306
   
$
484,196
   
$
5,529,766
 
                                 
Ending balance: collectively evaluated for impairment
 
$
37,328,737
   
$
59,787,600
   
$
33,433,113
   
$
130,549,450
 
                                 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
December 31, 2016
                               
Allowance for credit losses:
                               
Beginning balance - January 1, 2016
 
$
187,129
   
$
1,560,877
   
$
100,114
   
$
1,848,120
 
   Charge-offs
   
-
     
(420,135
)
   
-
     
(420,135
)
   Provision
   
-
     
320,798
     
-
     
320,798
 
Ending balance - December 31, 2016
 
$
187,129
   
$
1,461,540
   
$
100,114
   
$
1,748,783
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
374,501
   
$
-
   
$
374,501
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,087,039
   
$
100,114
   
$
1,374,282
 
                                 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Mortgage loans:
                               
Ending balance
 
$
51,536,622
   
$
58,593,622
   
$
40,800,117
   
$
150,930,361
 
                                 
Ending balance: individually evaluated for impairment
 
$
202,992
   
$
2,916,538
   
$
64,895
   
$
3,184,425
 
                                 
Ending balance: collectively evaluated for impairment
 
$
51,333,630
   
$
55,677,084
   
$
40,735,222
   
$
147,745,936
 
                                 
Ending balance: loans acquired with deteriorated credit quality
 
$
-
   
$
-
   
$
-
   
$
-
 

18

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
 
The following is a summary of the aging of mortgage loans for the periods presented:

Age Analysis of Past Due Mortgage Loans
 
                                                       
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days (1)
   
In Process of Foreclosure (1)
   
Total
Past Due
   
Current
   
Total
Mortgage
 Loans
   
Allowance
 for
Loan
Losses
   
Net
 Mortgage
Loans
 
March 31, 2017
                                                 
Commercial
 
$
1,547,419
   
$
-
   
$
-
   
$
203,264
   
$
1,750,683
   
$
35,781,318
   
$
37,532,001
   
$
(187,129
)
 
$
37,344,872
 
Residential
   
733,374
     
91,433
     
1,451,582
     
3,390,724
     
5,667,113
     
58,962,793
     
64,629,906
     
(1,668,200
)
   
62,961,706
 
Residential
  Construction
   
-
     
-
     
64,895
     
419,301
     
484,196
     
33,433,113
     
33,917,309
     
(100,114
)
   
33,817,195
 
                                                                         
Total
 
$
2,280,793
   
$
91,433
   
$
1,516,477
   
$
4,013,289
   
$
7,901,992
   
$
128,177,224
   
$
136,079,216
   
$
(1,955,443
)
 
$
134,123,773
 
                                                                         
December 31, 2016
                                                                 
Commercial
 
$
-
   
$
-
   
$
-
   
$
202,992
   
$
202,992
   
$
51,333,630
   
$
51,536,622
   
$
(187,129
)
 
$
51,349,493
 
Residential
   
964,960
     
996,779
     
1,290,355
     
1,626,183
     
4,878,277
     
53,715,345
     
58,593,622
     
(1,461,540
)
   
57,132,082
 
Residential
  Construction
   
-
     
-
     
64,895
     
-
     
64,895
     
40,735,222
     
40,800,117
     
(100,114
)
   
40,700,003
 
                                                                         
Total
 
$
964,960
   
$
996,779
   
$
1,355,250
   
$
1,829,175
   
$
5,146,164
   
$
145,784,197
   
$
150,930,361
   
$
(1,748,783
)
 
$
149,181,578
 
______________                                                                         
(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure.
 

19

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)
 
Impaired Mortgage Loans

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

Impaired Loans
 
                               
   
Recorded
 Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
 Investment
   
Interest
 Income
Recognized
 
March 31, 2017
                             
With no related allowance recorded:
                             
   Commercial
 
$
203,264
   
$
203,264
   
$
-
   
$
203,264
   
$
-
 
   Residential
   
-
     
-
     
-
     
-
     
-
 
   Residential construction
   
484,196
     
484,196
     
-
     
484,196
     
-
 
                                         
With an allowance recorded:
                                       
   Commercial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
   Residential
   
4,842,306
     
4,842,306
     
423,487
     
4,842,306
     
-
 
   Residential construction
   
-
     
-
     
-
     
-
     
-
 
                                         
Total:
                                       
   Commercial
 
$
203,264
   
$
203,264
   
$
-
   
$
203,264
   
$
-
 
   Residential
   
4,842,306
     
4,842,306
     
423,487
     
4,842,306
     
-
 
   Residential construction
   
484,196
     
484,196
     
-
     
484,196
     
-
 
                                         
December 31, 2016
                                       
With no related allowance recorded:
                                       
   Commercial
 
$
202,992
   
$
202,992
   
$
-
   
$
202,992
   
$
-
 
   Residential
   
-
     
-
     
-
     
-
     
-
 
   Residential construction
   
64,895
     
64,895
     
-
     
64,895
     
-
 
                                         
With an allowance recorded:
                                       
   Commercial
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
   Residential
   
2,916,538
     
2,916,538
     
374,501
     
2,916,538
     
-
 
   Residential construction
   
-
     
-
     
-
     
-
     
-
 
                                         
Total:
                                       
   Commercial
 
$
202,992
   
$
202,992
   
$
-
   
$
202,992
   
$
-
 
   Residential
   
2,916,538
     
2,916,538
     
374,501
     
2,916,538
     
-
 
   Residential construction
   
64,895
     
64,895
     
-
     
64,895
     
-
 
 
Credit Risk Profile Based on Performance Status

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

20

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

3) Investments (Continued)

The Company's performing and non-performing mortgage loans were as follows:

Mortgage Loan Credit Exposure
 
Credit Risk Profile Based on Payment Activity
 
                                                 
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
   
March
31, 2017
   
December
31, 2016
   
March
31, 2017
   
December
31, 2016
   
March
31, 2017
   
December
31, 2016
   
March
31, 2017
   
December
31, 2016
 
                                                 
Performing
 
$
37,328,737
   
$
51,333,630
   
$
59,787,600
   
$
55,677,084
   
$
33,433,113
   
$
40,735,222
   
$
130,549,450
   
$
147,745,936
 
Nonperforming
   
203,264
     
202,992
     
4,842,306
     
2,916,538
     
484,196
     
64,895
     
5,529,766
     
3,184,425
 
                                                                 
Total
 
$
37,532,001
   
$
51,536,622
   
$
64,629,906
   
$
58,593,622
   
$
33,917,309
   
$
40,800,117
   
$
136,079,216
   
$
150,930,361
 

Non-Accrual Mortgage Loans

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any income that had been accrued. Interest not accrued on these loans totals approximately $156,000 and $172,000 as of March 31, 2017 and December 31, 2016, respectively.

The following is a summary of mortgage loans on a nonaccrual status for the periods presented.

   
Mortgage Loans on Nonaccrual Status
 
       
   
As of
March 31
2017
   
As of
December 31
2016
 
Commercial
 
$
203,264
   
$
202,992
 
Residential
   
4,842,306
     
2,916,538
 
Residential construction
   
484,196
     
64,895
 
Total
 
$
5,529,766
   
$
3,184,425
 

Loan Loss Reserve

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

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

   
As of
March 31
2017
   
As of
December 31
2016
 
Balance, beginning of period
 
$
627,733
   
$
2,805,900
 
Provisions for losses
   
426,634
     
4,688,754
 
Charge-offs, net of recaptured amounts
   
10,708
     
(6,866,921
)
Balance, end of period
 
$
1,065,075
   
$
627,733
 

The Company believes the loan loss reserve represents probable loan losses incurred as of the balance sheet date. Actual loan loss experience could change, in the near-term, from the established reserve based upon claims that could be asserted by third party investors. SecurityNational Mortgage believes there is potential to resolve any alleged claims by third party investors on acceptable terms. If SecurityNational Mortgage is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third-party investor, SecurityNational Mortgage believes it has significant defenses to any such action and intends to vigorously defend itself against such action.
21


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)


4) Stock Compensation Plans

The Company has four fixed option plans (the "2003 Plan", the "2006 Director Plan", the "2013 Plan" and the "2014 Director Plan"). Compensation expense for options issued of $101,996 and $84,452 has been recognized for these plans for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the total unrecognized compensation expense related to the options issued in December 2016 was $273,464, which is expected to be recognized over the vesting period of one year.

The Company generally estimates the expected life of the options based upon the contractual term of the options adjusted for actual experience. Future volatility is estimated based upon the weighted 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.

A summary of the status of the Company's stock incentive plans as of March 31, 2017, and the changes during the three months ended March 31, 2017, are presented below:

   
Number of
Class A Shares
   
Weighted
 Average
Exercise Price
   
Number of
Class C Shares
   
Weighted
Average
 Exercise Price
 
                         
Outstanding at December 31, 2016
   
741,973
   
$
4.33
     
556,298
   
$
4.61
 
Granted
   
-
             
-
         
Exercised
   
-
             
-
         
Cancelled
   
-
             
-
         
Outstanding at March 31, 2017
   
741,973
   
$
4.33
     
556,298
   
$
4.61
 
                                 
As of March 31, 2017:
                               
Options exercisable
   
636,764
   
$
3.94
     
493,298
   
$
4.26
 
                                 
As of March 31, 2017:
                               
Available options for future grant
   
253,432
             
-
         
                               
Weighted average contractual term of options outstanding at March 31, 2017
 
7.12 years
           
2.42 years
         
                               
Weighted average contractual term of options exercisable at March 31, 2017
 
6.70 years
           
2.13 years
         
                               
Aggregated intrinsic value of options outstanding at March 31, 2017 (1)
 
$
1,837,828
           
$
1,264,540
         
                               
Aggregated intrinsic value of options exercisable at March 31, 2017 (1)
 
$
1,824,086
           
$
1,264,540
         
_____________                                 
(1) The Company used a stock price of $6.80 as of March 31, 2017 to derive intrinsic value.
 

22

 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

4) Stock Compensation Plans (Continued)

A summary of the status of the Company's stock incentive plans as of March 31, 2016, and the changes during the three months ended March 31, 2016, are presented below:

   
Number of
Class A Shares
   
Weighted
 Average
Exercise
Price
   
Number of
Class C Shares
   
Weighted
Average
 Exercise
Price
 
                         
Outstanding at December 31, 2015
   
618,261
   
$
3.89
     
577,436
   
$
3.54
 
Granted
   
-
             
-
         
Exercised
   
(28,460
)
   
2.15
     
-
         
Cancelled
   
-
             
-
         
Outstanding at March 31, 2016
   
589,801
   
$
3.97
     
577,436
   
$
3.54
 
                                 
As of March 31, 2016:
                               
Options exercisable
   
484,659
   
$
3.45
     
498,686
   
$
2.99
 
                                 
As of March 31, 2016:
                               
Available options for future grant
   
454,842
             
57,750
         
                                 
Weighted average contractual term of options outstanding at March 31, 2016
 
7.50 years
           
2.50 years
         
                               
Weighted average contractual term of options exercisable at March 31, 2016
 
7.03 years
           
2.16 years
         
                               
Aggregated intrinsic value of options outstanding at March 31, 2016 (1)
 
$
844,342
           
$
1,096,391
         
                                 
Aggregated intrinsic value of options exercisable at March 31, 2016 (1)
 
$
844,342
           
$
1,096,391
         
_______________                                 
(1) The Company used a stock price of $5.09 as of March 31, 2016 to derive intrinsic value.
 

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the three months ended March 31, 2017 and 2016 was $-0- and $91,989, respectively.
23

 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

5) Earnings Per Share

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

    
Three Months Ended
March 31
 
   
2017
   
2016
 
Numerator:
           
Net earnings
 
$
1,468,464
   
$
2,611,537
 
Denominator:
               
Basic weighted-average shares outstanding
   
15,058,153
     
14,656,450
 
Effect of dilutive securities:
               
Employee stock options
   
469,843
     
455,828
 
                 
Diluted weighted-average shares outstanding
   
15,527,996
     
15,112,278
 
                 
Basic net earnings per share
 
$
0.10
   
$
0.18
 
                 
Diluted net earnings per share
 
$
0.09
   
$
0.17
 

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the three months ended March 31, 2017 and 2016, there were 89,250 and 250,039 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

6) Business Segment Information

Description of Products and Services by Segment

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

Measurement of Segment Profit or Loss and Segment Assets

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2016. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

Factors Management Used to Identify the Enterprise's Reportable Segments

The Company's reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.
24

 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

6) Business Segment Information (Continued)
   
Life Insurance
   
Cemetery/
Mortuary
   
Mortgage
   
Intercompany
Eliminations
   
Consolidated
 
For the Three Months Ended
                             
March 31, 2017
                             
Revenues from external customers
 
$
26,158,701
   
$
3,604,897
   
$
39,688,771
   
$
-
   
$
69,452,369
 
Intersegment revenues
   
2,988,651
     
109,351
     
95,770
     
(3,193,772
)
   
-
 
Segment profit before income taxes
   
1,869,073
     
758,911
     
(359,694
)
   
-
     
2,268,290
 
                                         
Identifiable Assets
   
833,999,127
     
99,554,821
     
72,678,401
     
(139,027,232
)
   
867,205,117
 
Goodwill
   
2,765,570
     
-
     
-
     
-
     
2,765,570
 
                                         
For the Three Months Ended
                                       
March 31, 2016
                                       
Revenues from external customers
 
$
22,075,134
   
$
3,330,766
   
$
41,949,407
   
$
-
   
$
67,355,307
 
Intersegment revenues
   
3,103,446
     
286,925
     
79,479
     
(3,469,850
)
   
-
 
Segment profit before income taxes
   
1,065,168
     
469,055
     
2,657,534
     
-
     
4,191,757
 
                                         
Identifiable Assets
   
724,858,698
     
96,827,903
     
69,077,738
     
(133,414,858
)
   
757,349,481
 
Goodwill
   
2,765,570
     
-
     
-
     
-
     
2,765,570
 
 
7) Fair Value of Financial Instruments

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

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

Level 2:   Financial assets and financial liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in non-active markets; or
   c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3:   Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company's estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

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

The following methods and assumptions were used by the Company in estimating the fair value disclosures related to other significant financial instruments:
25

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)

The items shown under Level 1 and Level 2 are valued as follows:

Securities Available for Sale and Held to Maturity: The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 3 of the Notes to Condensed Consolidated Statements.

Restricted Assets: A portion of these assets include mutual funds and equity securities that have quoted market prices. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.

Cemetery Endowment Care Trust Investments:  A portion of these assets include equity securities that have quoted market prices. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.

Call and Put Options: The Company uses quoted market prices to value its call and put options.

The items shown under Level 3 are valued as follows:

Policyholder Account Balances and Future Policy Benefits-Annuities:  Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5%. The fair values for the Company's liabilities under investment-type insurance contracts (disclosed as policyholder account balances and future policy benefits – annuities) 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.

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

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

Interest Rate Swaps: Management considers the interest rate swap instruments to be an effective cash flow hedge against the variable interest rate on bank borrowings since the interest rate swap mirrors the term of the note payable and expires on the maturity date of the bank loan it hedges. The interest rate swaps are derivative financial instruments carried at their fair value. The fair value of the interest rate swap was derived from a proprietary model of the bank from whom the interest rate swap was purchased and to whom the note is payable.

Mortgage Loans on Real Estate: 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 condensed consolidated balance sheet for these financial instruments approximate their fair values.
26

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)

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

It should be noted that for replacement cost, when determining the fair value of mortgage properties, the Company uses Marshall and Swift, a provider of building cost information to the real estate construction industry. For the investment analysis, the Company used market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company used 20% of the projected cash flow analysis and 80% of the replacement cost to approximate fair value of the collateral.

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

Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights ("MSRs") at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction. The precise fair value of MSRs cannot be readily determined because MSRs are not actively traded in stand-alone markets. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect the Company's earnings.
 
The Company's subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market. After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. MSR amortization is determined by amortizing the balance straight-line over an estimated seven and nine-year life which estimates the proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

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

Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.
27

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)
 
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at March 31, 2017.
 
   
Total
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   
Significant
 Observable Inputs
(Level 2)
   
Significant Unobservable
 Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis
                       
Common stock
 
$
10,735,239
   
$
10,735,239
   
$
-
   
$
-
 
Total securities available for sale
 
$
10,735,239
   
$
10,735,239
   
$
-
   
$
-
 
                                 
Restricted assets of cemeteries and mortuaries
 
$
752,814
   
$
752,814
   
$
-
   
$
-
 
Cemetery perpetual care trust investments
   
672,922
     
672,922
     
-
     
-
 
Derivatives - loan commitments
   
5,285,366
     
-
     
-
     
5,285,366
 
Total assets accounted for at fair value on a recurring basis
 
$
17,446,341
   
$
12,160,975
   
$
-
   
$
5,285,366
 
                                 
Liabilities accounted for at fair value on a  recurring basis
                               
Policyholder account balances
 
$
(49,155,440
)
 
$
-
   
$
-
   
$
(49,155,440
)
Future policy benefits - annuities
   
(98,714,812
)
   
-
     
-
     
(98,714,812
)
Derivatives  - bank loan interest rate swaps
   
(1,713
)
   
-
     
-
     
(1,713
)
   - call options
   
(38,628
)
   
(38,628
)
   
-
     
-
 
   - put options
   
(13,700
)
   
(13,700
)
   
-
     
-
 
   - loan commitments
   
(564,025
)
   
-
     
-
     
(564,025
)
Total liabilities accounted for at fair value on a recurring basis
 
$
(148,488,318
)
 
$
(52,328
)
 
$
-
   
$
(148,435,990
)

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

   
Policyholder
 Account
 Balances
   
Future
 Policy
Benefits - Annuities
   
Loan
Commitments
   
Bank Loan
 Interest
 Rate Swaps
 
                         
Balance - December 31, 2016
 
$
(49,421,125
)
 
$
(99,388,662
)
 
$
3,287,406
   
$
(3,308
)
                                 
Total gains (losses):
                               
                                 
Included in earnings
   
265,685
     
673,850
     
1,433,935
     
-
 
                                 
Included in other comprehensive income
   
-
     
-
     
-
     
1,595
 
                                 
Balance - March 31, 2017
 
$
(49,155,440
)
 
$
(98,714,812
)
 
$
4,721,341
   
$
(1,713
)

28

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at March 31, 2017.

         
Quoted Prices
             
         
in Active
   
Significant
   
Significant
 
         
Markets for
   
Observable
   
Unobservable
 
         
Identical Assets
   
Inputs
   
Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets accounted for at fair value on a nonrecurring basis
                       
Mortgage loans on real estate
 
$
5,106,278
   
$
-
   
$
-
   
$
5,106,278
 
Mortgage servicing rights
   
1,357,867
     
-
     
-
     
1,357,867
 
Total assets accounted for at fair value on a nonrecurring basis
 
$
6,464,145
   
$
-
   
$
-
   
$
6,464,145
 

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2016.

   
Total
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant
 Observable
 Inputs
(Level 2)
   
Significant Unobservable
Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis
                       
Common stock
 
$
10,573,356
   
$
10,573,356
   
$
-
   
$
-
 
Total securities available for sale
 
$
10,573,356
   
$
10,573,356
   
$
-
   
$
-
 
                                 
Restricted assets of cemeteries and mortuaries
 
$
736,603
   
$
736,603
   
$
-
   
$
-
 
Cemetery perpetual care trust investments
   
698,202
     
698,202
     
-
     
-
 
Derivatives - loan commitments
   
3,389,618
     
-
     
-
     
3,389,618
 
Total assets accounted for at fair value on a recurring basis
 
$
15,397,779
   
$
12,008,161
   
$
-
   
$
3,389,618
 
Liabilities accounted for at fair value on a recurring basis
                               
Policyholder account balances
 
$
(49,421,125
)
 
$
-
   
$
-
   
$
(49,421,125
)
Future policy benefits - annuities
   
(99,388,662
)
   
-
     
-
     
(99,388,662
)
Derivatives - bank loan interest rate swaps
   
(3,308
)
   
-
     
-
     
(3,308
)
                   - call options
   
(109,474
)
   
(109,474
)
   
-
     
-
 
                   - put options
   
(26,494
)
   
(26,494
)
   
-
     
-
 
                   - loan commitments
   
(102,212
)
   
-
     
-
     
(102,212
)
Total liabilities accounted for at fair value on a recurring basis
 
$
(149,051,275
)
 
$
(135,968
)
 
$
-
   
$
(148,915,307
)

29

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:
 
   
Policyholder
 Account
Balances
   
Future
Policy Benefits - Annuities
   
Loan
 Commitments
   
Bank Loan
 Interest Rate
 Swaps
 
Balance - December 31, 2015
 
$
(50,694,953
)
 
$
(69,398,617
)
 
$
3,333,091
   
$
(13,947
)
Purchases
   
-
     
(30,294,480
)
   
-
     
-
 
Total gains (losses):
                               
Included in earnings
   
1,273,828
     
304,435
     
(45,685
)
   
-
 
Included in other comprehensive income
   
-
     
-
     
-
     
10,639
 
Balance - December 31, 2016
 
$
(49,421,125
)
 
$
(99,388,662
)
 
$
3,287,406
   
$
(3,308
)
 
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2016.

   
Total
   
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   
Significant
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                       
Assets accounted for at fair value on a nonrecurring basis
                       
Mortgage loans on real estate
 
$
2,809,925
   
$
-
   
$
-
   
$
2,809,925
 
Mortgage servicing rights
   
8,603,154
     
-
     
-
     
8,603,154
 
Real estate held for investment
   
2,347,820
     
-
     
-
     
2,347,820
 
                               
Total assets accounted for at fair value on a nonrecurring basis
 
$
13,760,899
   
$
-
   
$
-
   
$
13,760,899
 

Fair Value of Financial Instruments Carried at Other Than Fair Value

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

Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at March 31, 2017 and December 31, 2016. The estimated fair value amounts for March 31, 2017 and December 31, 2016 have been measured as of period-end, and have not been reevaluated or updated for purposes of these Condensed Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at period-end.
30

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)
 
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of March 31, 2017:

   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
Total
Estimated
Fair Value
 
Assets
                             
Mortgage loans:
                             
Residential
 
$
62,961,706
   
$
-
   
$
-
   
$
67,122,262
   
$
67,122,262
 
Residential construction
   
33,817,195
     
-
     
-
     
33,817,195
     
33,817,195
 
Commercial
   
37,344,872
     
-
     
-
     
38,610,972
     
38,610,972
 
Mortgage loans, net
 
$
134,123,773
   
$
-
   
$
-
   
$
139,550,429
   
$
139,550,429
 
Policy loans
   
6,666,500
     
-
     
-
     
6,666,500
     
6,666,500
 
Insurance assignments, net
   
32,856,652
     
-
     
-
     
32,856,652
     
32,856,652
 
Short-term investments
   
28,346,922
     
-
     
-
     
28,346,922
     
28,346,922
 
                                         
Liabilities
                                       
Bank and other loans payable
 
$
(61,546,973
)
 
$
-
   
$
-
   
$
(61,546,973
)
 
$
(61,546,973
)
 
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2016:
 
   
Carrying Value
   
Level 1
   
Level 2
   
Level 3
   
Total
Estimated
 Fair Value
 
Assets
                             
Mortgage loans:
                             
Residential
 
$
57,132,082
   
$
-
   
$
-
   
$
61,357,393
   
$
61,357,393
 
Residential construction
   
40,700,003
     
-
     
-
     
40,700,003
     
40,700,003
 
Commercial
   
51,349,493
     
-
     
-
     
53,299,800
     
53,299,800
 
Mortgage loans, net
 
$
149,181,578
   
$
-
   
$
-
   
$
155,357,196
   
$
155,357,196
 
Policy loans
   
6,694,148
     
-
     
-
     
6,694,148
     
6,694,148
 
Insurance assignments, net
   
32,477,246
     
-
     
-
     
32,477,246
     
32,477,246
 
Short-term investments
   
27,560,040
     
-
     
-
     
27,560,040
     
27,560,040
 
                                         
Liabilities
                                       
Bank and other loans payable
 
$
(53,715,240
)
 
$
-
   
$
-
   
$
(53,715,240
)
 
$
(53,715,240
)
 
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:

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

Residential – The estimated fair value of mortgage loans originated prior to 2013 is determined by estimating expected future cash flows of interest payments and discounting them using current interest rates from single family mortgages. The estimated fair value of mortgage loans originated in 2013 thru 2016 is determined from pricing of similar loans that were sold in 2014 and 2015

Residential Construction – These loans are primarily short in maturity (4-6 months) accordingly, the estimated fair value is determined to be the net book value.

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

Policy Loans and Other Investments: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.
31

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

7) Fair Value of Financial Instruments (Continued)

Short-Term Investments: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.

Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.

8) Allowance for Doubtful Accounts, Allowance for Loan Losses and Impaired Loans

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

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

The Company provides allowances for losses on its mortgage loans held for investment through an allowance for loan losses. The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company's historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. See the schedules in Note 3 for additional information. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company's actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events.

9) Derivative Instruments

Mortgage Banking Derivatives

Loan Commitments

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

In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant's committed rate. The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance) product type and the application approval status. The Company has developed fallout estimates using historical data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect the most current data.
32

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

9) Derivative Instruments (Continued)

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

Forward Sale Commitments

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

The net changes in fair value of all loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income.

Call and Put Options

The Company uses a strategy of selling "out of the money" call options on its available for sale equity securities as a source of revenue.  The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.  The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices.  The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option.  The liability for options is adjusted to fair value at each reporting date. In the event an option is exercised, the Company recognizes a gain on the sale of the equity security and a gain on the sale of the option.  If the option expires unexercised, the Company recognizes a gain from the sale of the option.

The following table shows the fair value of derivatives as of March 31, 2017 and December 31, 2016.

   
Fair Value of Derivative Instruments
 
   
Asset Derivatives
 
Liability Derivatives
 
   
March 31, 2017
   
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
   
Balance Sheet
 Location
   
Fair Value
   
Balance Sheet
 Location
   
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Derivatives designated as hedging instruments:
                                       
Loan commitments
 
other assets
   
$
5,285,366
   
other assets
   
$
3,389,618
 
Other liabilities
 
$
564,025
 
Other liabilities
 
$
102,212
 
Call options
   
--
     
--
     
--
     
--
 
Other liabilities
   
38,628
 
Other liabilities
   
109,474
 
Put options
   
--
     
--
     
--
     
--
 
Other liabilities
   
13,700
 
Other liabilities
   
26,494
 
Interest rate swaps
   
--
     
--
     
--
     
--
 
Bank loans payable
   
1,713
 
Bank loans payable
   
3,308
 
Total
         
$
5,285,366
           
$
3,389,618
     
$
618,066
     
$
241,488
 

The following table shows the gains and losses on derivatives for the periods presented. There were no gains or losses reclassified from accumulated other comprehensive income (OCI) into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing.
33

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

9) Derivative Instruments (Continued)

 
Net Amount Gain (Loss) Recognized in OCI
 
 
Three Months Ended Mar 31
 
Derivative - Cash Flow Hedging Relationships:
2017
 
2016
 
Interest Rate Swaps
 
$
1,595
   
$
2,737
 
Sub Total
   
1,595
     
2,737
 
Tax Effect
   
622
     
1,068
 
Total
 
$
973
   
$
1,669
 

10) Reinsurance, Commitments and Contingencies

Reinsurance

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

Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate. However, management believes that the Company's reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The amounts expensed for loan losses for the three months ended March 31, 2017 and 2016 were $427,000 and $587,000 respectively. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of March 31, 2017 and December 31, 2016, the balances were $1,065,000 and $628,000, respectively.

Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers and Aurora Loan Services, reference is to Part II, Item 1. Legal Proceedings.

Other Contingencies and Commitments

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of March 31, 2017, the Company's commitments were approximately $45,923,000 for these loans of which $33,917,000 had been funded. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.

The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. At March 31, 2017, $471,607 of reserves was established related to such insurance programs versus $416,576 at December 31, 2016.

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.
34

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

10) Reinsurance, Commitments and Contingencies (Continued)

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.

11) Mortgage Servicing Rights

The Company reports these MSRs pursuant to the accounting policy discussed in Note 7.

The following is a summary of the MSR activity for the periods presented.
 
   
As of
March 31
2017
   
As of
December 31
2016
 
Amortized cost:
           
Balance before valuation allowance at beginning of year
 
$
18,872,362
   
$
12,679,755
 
MSRs proceeds from loan sales
   
1,357,867
     
8,603,154
 
Amortization
   
(797,236
)
   
(2,410,547
)
Application of valuation allowance to write down MSRs with other than temporary impairment
   
-
     
-
 
Balance before valuation allowance at end of period
 
$
19,432,993
   
$
18,872,362
 
                 
Valuation allowance for impairment of MSRs:
               
Balance at beginning of year
 
$
-
   
$
-
 
Additions
   
-
     
-
 
Application of valuation allowance to write down MSRs with other than temporary impairment
   
-
     
-
 
Balance at end of period
 
$
-
   
$
-
 
                 
Mortgage servicing rights, net
 
$
19,432,993
   
$
18,872,362
 
                 
Estimated fair value of MSRs at end of period
 
$
26,632,996
   
$
25,496,832
 
 
The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the Condensed Consolidated Statement of Earnings:

   
Three Months Ended
Mar 31
 
   
2017
   
2016
 
Contractual servicing fees
 
$
1,835,873
   
$
1,314,285
 
Late fees
   
86,338
     
63,055
 
Total
 
$
1,922,211
   
$
1,377,340
 
 
The following is a summary of the unpaid principal balances of the servicing portfolio for the periods presented:

   
As of
 March 31
2017
   
As of
December 31
2016
 
Servicing UPB
 
$
2,744,354,316
   
$
2,720,441,340
 
 
The following key assumptions were used in determining MSR value:

   
Prepayment
Speeds
   
Average
Life(Years)
   
Discount
Rate
 
March 31, 2017
   
3.79
%
   
6.55
     
10.01
 
December 31, 2016
   
3.77
%
   
6.52
     
10.01
 
35

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

12) Acquisitions

Acquisition of First Guaranty Insurance Company

On July 11, 2016, the Company, through its wholly owned subsidiary, Security National Life completed the stock purchase transaction with the shareholders of Reppond Holding Corporation, an Arkansas corporation ("Reppond Holding") and sole shareholder of First Guaranty Insurance Company, a Louisiana domestic stock legal reserve life insurance company ("First Guaranty"), to purchase all the outstanding shares of common stock of Reppond Holding. Under the terms of the stock purchase agreement, dated February 17, 2016, between Security National Life and Reppond Holding, which was later amended on March 4 and 17, 2016, Security National Life paid a total of $6,753,000 at the closing in consideration for the purchase of all the outstanding shares of stock of Reppond Holding from its shareholders.

The estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition were as follows:

Fixed maturity securities, held to maturity
 
$
43,878,084
 
Equity securities, available for sale
   
646,335
 
Mortgage loans on real estate
   
4,528,582
 
Real estate held for investment
   
528,947
 
Policy loans
   
145,953
 
Short-term investments
   
5,358,403
 
Accrued investment income
   
585,985
 
Cash and cash equivalents
   
2,424,480
 
Receivables
   
73,347
 
Property and equipment
   
21,083
 
Deferred tax asset
   
1,190,862
 
Receivable from reinsurers
   
34,948
 
Other
   
57,768
 
Total assets acquired
   
59,474,777
 
Future life, annuity, and other benefits
   
(52,648,838
)
Accounts payable
   
(6,953
)
Other liabilities and accrued expenses
   
(65,986
)
Total liabilities assumed
   
(52,721,777
)
Fair value of net assets acquired/consideration paid
 
$
6,753,000
 
 
The estimated fair value of the fixed maturity securities and the equity securities is based on unadjusted quoted prices for identical assets in an active market.  These types of financial assets are considered Level 1 under the fair value hierarchy. The estimated fair value of future life, annuity, and other benefits is based on assumptions of the future value of the business acquired. Based on the unobservable nature of certain of these assumptions, the valuation for these financial liabilities is considered to be Level 3 under the fair value hierarchy. The Company determined that the estimated fair value of the remaining assets and liabilities acquired approximated their book values. The fair value of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability.
36

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017 (Unaudited)

12) Acquisitions (Continued)

The following unaudited pro forma information has been prepared to present the results of operations of the Company assuming the acquisition of First Guaranty had occurred at the beginning of the three month periods ended March 31, 2017 and 2016. This pro forma information is supplemental and does not necessarily present the operations of the Company that would have occurred had the acquisition occurred on those dates and may not reflect the operations that will occur in the future:

   
For the Three Months Ended
March 31
(unaudited)
 
   
2017
   
2016
 
Total revenues
 
$
69,452,369
   
$
68,513,613
 
Net earnings
 
$
1,468,464
   
$
2,375,754
 
Net earnings per Class A equivalent common share
 
$
0.10
   
$
0.16
 
Net earnings per Class A equivalent common share assuming dilution
 
$
0.09
   
$
0.16
 


37

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company's operations over the last several years generally reflect three 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 relatively low interest rates by originating mortgage loans.

Insurance Operations

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

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that has lower competition because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person's death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

The following table shows the condensed financial results of the insurance operations for three months ended March 31, 2017 and 2016.  See Note 6 to the Condensed Consolidated Financial Statements.

   
Three months ended March 31
(in thousands of dollars)
 
   
2017
   
2016
   
% Increase
(Decrease)
 
Revenues from external customers
                 
Insurance premiums
 
$
17,357
   
$
14,452
     
20
%
Net investment income
   
7,586
     
6,963
     
9
%
Income from loan originations
   
1,188
     
472
     
152
%
Other
   
28
     
188
     
(85
%)
Total
 
$
26,159
   
$
22,075
     
19
%
Intersegment revenue
 
$
2,989
   
$
3,103
     
(4
%)
Earnings before income taxes
 
$
1,869
   
$
1,065
     
75
%

Intersegment revenues are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company ("SecurityNational Mortgage"). Profitability in the three months ended March 31, 2017 has increased due to increases in insurance premiums, mortgage fee income and net investment income.
38


Cemetery and Mortuary Operations

The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in San Diego County, California. Cemetery land sales and at-need product sales and services are recognized as revenue at the time of sale or when the services are performed. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed.

The following table shows the condensed financial results of the Cemetery and Mortuary operations for the three months ended March 31, 2017 and 2016. See Note 6 to the Condensed Consolidated Financial Statements.

   
Three months ended March 31
(in thousands of dollars)
 
   
2017
   
2016
   
% Increase
 (Decrease)
 
Revenues from external customers
                 
Mortuary revenues
 
$
1,406
   
$
1,366
     
3
%
Cemetery revenues
   
2,131
     
2,019
     
6
%
Other
   
68
     
(54
)
   
226
%
Total
 
$
3,605
   
$
3,331
     
8
%
Earnings before income taxes
 
$
759
   
$
469
     
62
%

Included in other revenue is rental income from residential and commercial properties purchased from Security National Life. Memorial Estates purchased these properties from financing provided by Security National Life. The rental income is offset by property insurance, taxes and maintenance expenses. Memorial Estates has recorded depreciation on these properties of $170,000 and $187,000 for the three months ended March 31, 2017 and 2016, respectively.

Mortgage Operations

Overview

The Company's wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company (formerly known as Green Street Mortgage Services, Inc.), are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage obtain mortgage loans originated in retail offices and through independent brokers. Mortgage loans originated by the Company's mortgage subsidiaries are funded through loan purchase agreements from Security National Life and unaffiliated financial institutions.

The Company's mortgage subsidiaries receive fees from the borrowers and secondary fees from third party investors that purchase their loans. Loans originated by SecurityNational Mortgage are generally sold with mortgage servicing rights released to third party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 30% of its loan origination volume. These loans are serviced by an approved third party sub-servicer.

For the three months ended March 31, 2017 and 2016, SecurityNational Mortgage originated and sold 2,985 loans ($568,846,000 total volume) and 3,139 loans ($586,580,000 total volume), respectively. For the three months ended March 31, 2017 and 2016, EverLEND Mortgage originated and sold one loan ($310,000 total volume) and -0- loans ($-0- total volume), respectively.
39


The following table shows the condensed financial results of the mortgage operations for the three months ended March 31, 2017 and 2016.  See Note 6 to the Condensed Consolidated Financial Statements.

   
Three months ended March 31
(in thousands of dollars)
 
   
2017
   
2016
   
% Increase
 (Decrease)
 
Revenues from external customers
                 
Income from loan originations
 
$
31,832
   
$
33,353
     
(5
%)
Secondary gains from investors
   
7,857
     
8,596
     
(9
%)
Total
 
$
39,689
   
$
41,949
     
(5
%)
Earnings before income taxes
 
$
(360
)
 
$
2,658
     
(114
%)

The decrease in earnings for the three months ended March 31, 2017 was due to a reduction in mortgage loan originations.

Mortgage Loan Loss Settlements
Future loan losses can be extremely difficult to estimate. However, management believes that the Company's reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The amounts expensed for loan losses for the three months ended March 31, 2017 and 2016 were $427,000 and $587,000, respectively. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of March 31, 2017 and December 31, 2016, the balances were $1,065,000 and $628,000, respectively.
Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers and Aurora Loan Services, reference is to Part II, Item 1. Legal Proceedings.

Consolidation

Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Total revenues increased by $2,097,000, or 3.1%, to $69,452,000 for the three months ended March 31, 2017, from $67,355,000 for the comparable period in 2016. Contributing to this increase in total revenues was a $2,906,000 increase in insurance premiums and other considerations, a $571,000 increase in net investment income, a $499,000 increase in other revenues, a $113,000 increase in net mortuary and cemetery sales, a $47,000 increase in realized gains on investments and other assets, and a $21,000 decrease in other than temporary impairments on investments. This increase in total revenues was partially offset by a $2,060,000 decrease in mortgage fee income.

Insurance premiums and other considerations increased by $2,906,000, or 20.1%, to $17,357,000 for the three months ended March 31, 2017, from $14,451,000 for the comparable period in 2016. This increase was primarily due to an increase in renewal premiums and an increase in first year premiums as a result of increased insurance sales.

Net investment income increased by $571,000, or 6.4%, to $9,563,000 for the three months ended March 31, 2017, from $8,992,000 for the comparable period in 2016. This increase was primarily attributable to a $318,000 increase in fixed maturity securities income, a $260,000 increase in insurance assignment income, a $197,000 increase in mortgage loan interest, and a $56,000 increase in rental income from real estate owned. This increase was partially offset by a $204,000 increase in investment expenses, a $58,000 decrease in short-term investment income, and a $17,000 decrease in equity securities income.

Net mortuary and cemetery sales increased by $113,000, or 3.5%, to $3,359,000 for the three months ended March 31, 2017, from $3,246,000 for the comparable period in 2016. This increase was primarily due to an increase in at-need sales in both the cemetery and mortuary operations.

Realized gains on investments and other assets increased by $47,000, or 48.4%, to $145,000 in realized gains for the three months ended March 31, 2017, from $98,000 in realized gains for the comparable period in 2016. This increase in realized gains on investments and other assets was primarily attributable to a $27,000 increase in realized gains on fixed maturity securities, and a $17,000 increase in realized gains on securities available for sale.
40


Mortgage fee income decreased by $2,060,000, or 5.3%, to $37,051,000, for the three months ended March 31, 2017, from $39,111,000 for the comparable period in 2016.  This decrease was primarily due to a reduction in mortgage loan originations.

Other revenues increased by $499,000, or 32.6%, to $2,029,000 for the three months ended March 31, 2017, from $1,530,000 for the comparable period in 2016. This increase was due to an increase in mortgage servicing fees.

Total benefits and expenses were $67,184,000, or 96.7% of total revenues, for the three months ended March 31, 2017, as compared to $63,164,000, or 93.8% of total revenues, for the comparable period in 2016.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $2,332,000 or 18.7%, to $14,835,000 for the three months ended March 31, 2017, from $12,503,000 for the comparable period in 2016. This increase was primarily the result of a $1,022,000 increase in future policy benefits, a $971,000 increase in death benefits, and a $339,000 increase in surrender and other policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $51,000, or 2.3%, to $2,264,000 for the three months ended March 31, 2017, from $2,213,000 for the comparable period in 2016. This increase was primarily due to an increase in insurance sales expenses.

Selling, general and administrative expenses increased by $1,384,000, or 2.9%, to $48,309,000 for the three months ended March 31, 2017, from $46,925,000 for the comparable period in 2016. This increase was primarily the result of a $1,392,000 increase in personnel expenses resulting from increased salaries for existing employees and the hiring of new employees, a $950,000 increase in other expenses, a $233,000 increase in advertising, a $75,000 increase in rent and rent related expenses, and a $104,000 increase in depreciation on property and equipment. This increase was partially offset by a $1,121,000 decrease in commissions resulting from a decrease in sales, a $160,000 decrease in provision for loan loss reserve, and a $89,000 decrease in costs related to funding mortgage loans.

Interest expense increased by $190,000, or 17.8%, to $1,254,000 for the three months ended March 31, 2017, from $1,064,000 for the comparable period in 2016. This increase was primarily due to an increase in interest expense on mortgage warehouse lines, and an increase in interest expense due to the completion of the Dry Creek at East Village Apartments development in December 2015, resulting from interest from the bank loan that had been capitalized during the construction phase of each building and now being expensed.

Comprehensive income for the three months ended March 31, 2017 and 2016 amounted to gains of $1,537,000 and $2,911,000, respectively. This $1,374,000 decrease in comprehensive income was primarily the result of a $1,096,000 decrease in net income, and a $278,000 decrease in unrealized gains in securities available for sale.

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 subsidiaries realize 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 related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses.

During the three months ended March 31, 2017, the Company's operations provided cash of $24,102,000. This was due primarily to an increase in cash collected on mortgage loans sold to investors. During the three months ended March 31, 2016, the Company's provided cash of $25,863,000. This was due primarily to an increase in cash collected on mortgage loans sold to investors.

The Company's liability for future life, annuity and other benefits is expected to be paid out over the long-term due to the Company's market niche of selling funeral plans. Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person's death. A person generally will keep these policies in force and will not surrender them prior to a person's death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate and mortgage loans, thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in fair values.

The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing. 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 that will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.
41


The Company's investment policy is to invest predominantly in fixed maturity securities, real estate, mortgage loans, and 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 $185,822,000 and $184,356,000 as of March 31, 2017 and December 31, 2016, respectively. This represents 33.4% and 33.1% of the total investments as of March 31, 2017 and December 31, 2016, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At March 31, 2017, 8.8% (or $16,424,000) and at December 31, 2016, 9.0% (or $16,513,000) of the Company's total bond investments were invested in bonds in rating categories three through six, which were considered non‑investment grade.

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. In accordance with Company policy, however, any such securities purchased in the future will be classified as held to maturity. Notwithstanding, business conditions 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 March 31, 2017 and December 31, 2016, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company's total capitalization of stockholders' equity, bank loans and notes payable was $191,506,000 as of March 31, 2017, as compared to $181,898,000 as of December 31, 2016. Stockholders' equity as a percent of total capitalization was 67.9% and 70.5% as of March 31, 2017 and December 31, 2016, respectively.

Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2016 was 9.6% as compared to a rate of 7.4% for 2015. The 2017 lapse rate to date has been approximately the same as 2016.

At March 31, 2017, $44,605,000 of the Company's consolidated stockholders' equity represented the statutory stockholders' equity of the Company's life insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company, without approval of state insurance regulatory authorities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes since the Annual Report on Form 10-K filed for the year ended December 31, 2016.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As of March 31, 2017, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC's rules and forms and that such information is accumulated and communicated to management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The officers have concluded that the Company's disclosure controls and procedures were effective as of March 31, 2017, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).
42


Changes in Internal Control over Financial Reporting

The Company remediated the two material weaknesses that were disclosed in its Annual Report on Form 10-K, including implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The following remediation steps are among the measures that were implemented: (i) a thorough review of the accounting department to ensure that the areas of responsibilities are properly matched to the staff competencies and that the lines of communication and processes are as effective as possible; and (ii) a thorough review of the processes and procedures used in the Company's accounting.

Other than the items mentioned above, there have been no other changes in the Company's internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II - Other Information

Item 1.  Legal Proceedings.

Lehman Brothers Litigation – Delaware and New York

In January 2014, Lehman Brothers Holdings, Inc. ("Lehman Holdings") entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae.  Lehman Holdings acquired these loans from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from certain residential mortgage loan originators, including SecurityNational Mortgage. A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

Lehman Holdings filed a motion in May 2014 with the U.S. Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage in settlement discussions and non-binding mediations of the alleged indemnification claims against the mortgage loan originators concerning the Fannie Mae and Freddie Mac settlements with Lehman Holdings.  The mediation was not successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware.  In the Delaware action, SecurityNational Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 loans.  SecurityNational Mortgage sought a declaratory judgment as to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings' settlements with Fannie Mae and Freddie Mac.  Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory judgment action.  On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings' motion to dismiss.

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaratory judgment that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under the indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys' fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. No response was required to be filed relative to the Complaint or the Amended Complaint dated March 7, 2016. A Case Management Order was entered on November 1, 2016.

On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but retains a similar claim for damages as in the Complaint.  The case is presently in a motion period. Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter and that venue is improper. Lehman Holdings' response is due at the end of May 2017. Defendants then have 45 days in which to file a reply brief. No Answer is required to be filed by SecurityNational Mortgage pending further order of the Court.  SecurityNational Mortgage denies that it has any liability to Lehman Holdings and intends to vigorously protect and defend its position.

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 operation.
43


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

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

None

Item 5. Other Information.

Completion of Acquisition of First Guaranty Insurance Company

On July 11, 2016, the Company, through its wholly owned subsidiary, Security National Life, completed a stock purchase transaction with the shareholders of Reppond Holding Corporation, an Arkansas corporation ("Reppond Holding") and sole shareholder of First Guaranty Insurance Company, a Louisiana domestic stock legal reserve life insurance company ("First Guaranty"), to purchase all the outstanding shares of common stock of Reppond Holding. Under the terms of the Stock Purchase Agreement, dated February 17, 2016, between Security National Life and Reppond Holding, which was later amended on March 4, 2016 and March 17, 2016, Security National Life paid a total of $6,753,000 at the closing in consideration for the purchase of all the outstanding shares of stock of Reppond Holding from its shareholders.

The transaction was completed following the satisfaction or waiver of certain conditions set forth in the Stock Purchase Agreement. These conditions included obtaining all the required material orders, consents, permits, authorizations, approvals and waivers (including, without limitation, obtaining the approval of the Louisiana Department of Insurance without the material abrogation or diminishment of First Guaranty's or Reppond Holding's authority or license or the imposition of signification restrictions upon the transactions contemplated thereby). This condition was satisfied on July 8, 2016 when the Department issued an order approving the transaction, as required. The closing of the transaction took place soon thereafter on July 11, 2016.

At December 31, 2015, First Guaranty had 37,069 policies in force and 320 agents. Also, as of December 31, 2015, First Guaranty had statutory revenues of $8,102,000 and a statutory net loss of $724,000. Additionally, as of December 31, 2015, the statutory assets and the capital and surplus of First Guaranty were $55,550,000 and $3,849,000, respectively. As of December 31, 2014, First Guaranty had revenues of $8,080,000 and a net loss of $172,000. Moreover, as of December 31, 2014, the statutory assets and the capital and surplus of First Guaranty were $54,696,000 and $4,581,000, respectively.

Item 6.           Exhibits, Financial Statements Schedules and Reports on Form 8-K.
 
(a)(1)               Financial Statements

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

(a)(2)              Financial Statement Schedules

None

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

44

(a)(3) Exhibits

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

3.1
Articles of Amendment to Articles of Incorporation (11)
3.2
Amended Bylaws (3)
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
Amended Employee Stock Ownership Plan (ESOP) and Trust Agreement (1)
10.2
2003 Stock Option Plan (2)
10.3
2006 Director Stock Option Plan (4)
10.4
2013 Amended Stock Option and Other Equity Incentive Awards Plan (10)
10.5
2014 Director Stock Option Plan (6)
10.6
Employment agreement with Scott M. Quist (8)
10.7
Indemnification Agreement among SecurityNational Mortgage Company, Lehman Brothers Bank, and Aurora Loan Services (5)
10.8
Purchase Agreement among Security National Financial Corporation, SNFC Subsidiary, LLC, American Funeral Financial, LLC, and Hypershop, LLC (7)
10.9
Stock Purchase Agreement among Security National Financial Corporation, and Reppond Holding Company, to purchase First Guaranty Insurance Company (10)
21
Subsidiaries of the Registrant
23.1
Consent of Eide Bailly LLP (9)
23.2
Consent of Mackey Price & Mecham (9)
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
101.xml
Instance Document
101.xsd
Taxonomy Extension Schema Document
101.cal
Taxonomy Extension Calculation Linkbase Document
101.def
Taxonomy Extension Definition Linkbase Document
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Taxonomy Extension Label Linkbase Document
101.pre
Taxonomy Extension Presentation Linkbase Document

_________
(1)
Incorporated by reference from Registration Statement on Form S‑1, as filed on September 29, 1987
(2)
Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 5, 2003, relating to the Company's Annual Meeting of Stockholders
(3)
Incorporated by reference from Report on Form 10-Q, as filed on November 14, 2003
(4)
Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 1, 2007, relating to the Company's Annual Meeting of Stockholders
(5)
Incorporated by reference from Report on Form 10-K, as filed on March 31, 2009
(6)
Incorporated by reference from Schedule 14A Definitive Proxy Statement, as filed on June 2, 2014, related to Company's Annual Meeting of Stockholders
(7)
Incorporated by reference from Report on Form 8-K, as filed on June 13, 2014
(8)
Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2015
(9)
Incorporated by reference from Registration Statement on Form S-8, as filed on October 20, 2015
(10)
Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016
(11)
Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017

45



SIGNATURES

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


REGISTRANT

SECURITY NATIONAL FINANCIAL CORPORATION
Registrant


Dated: May 15, 2017
 
/s/ Scott M. Quist
   
Scott M. Quist
   
Chairman, President and Chief Executive Officer
   
(Principal Executive Officer)
     

Dated: May 15, 2017
 
/s/ Garrett S. Sill
   
Garrett S. Sill
   
Chief Financial Officer and Treasurer
   
(Principal Financial Officer and Principal Accounting Officer)

 
46

EXHIBIT 21

Subsidiaries of Security National
Financial Corporation
as of March 31, 2017

 
SecurityNational Mortgage Company
Security National Life Insurance Company
Southern Security Life Insurance Company, Inc.
Trans-Western Life Insurance Company
Memorial Insurance Company of America
Reppond Holding Company
First Guaranty Insurance Company
C & J Financial, LLC
SNFC Subsidiary, LLC
American Funeral Financial, LLC
FFC Acquisition Co., LLC dba Funeral Funding Center
Mortician's Choice, LLC
Canadian Funeral Financial, LLC
Insuradyne Corporation
EverLEND Mortgage Company
Marketing Source Center, Inc. dba Security National Travel Services
California Memorial Estates, Inc.
Cottonwood Mortuary, Inc.
Deseret Memorial, Inc.
Greer-Wilson Funeral Home, Inc.
Holladay Cottonwood Memorial Foundation
Holladay Memorial Park, Inc.
Memorial Estates, Inc.
SN Midway, LLC
SN Mapleton, LLC
SN Shadow Cliffs, LLC
Memorial Mortuary, Inc.
Paradise Chapel Funeral Home
Dry Creek Property Development, Inc.
New York Land Holdings, Inc.
Security National Funding Company
Select Appraisal Management, Inc.
Security National Real Estate Services, Inc.
5300 Development LLC
 
 


Exhibit 31.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ENACTED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott M. Quist, certify that:

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

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

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

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

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

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

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

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

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

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

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


Dated: May 15, 2017
 
/s/ Scott M. Quist
   
Scott M. Quist
   
Chairman, President and Chief Executive Officer
   
(Principal Executive Officer)
 
 

 
 
Exhibit 31.2

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

I, Garrett S. Sill, certify that:

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

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

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

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

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

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

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

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

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

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

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

Dated: May 15, 2017
 
 /s/ Garrett S. Sill
   
 Garrett S. Sill
   
 Chief Financial Officer and Treasurer
   
(Principal Financial Officer and Principal Accounting Officer)
 
 
 

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Security National Financial Corporation (the "Company") on Form 10-Q for the period ending March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Scott M. Quist, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

Dated: May 15, 2017
/s/ Scott M. Quist
 
Scott M. Quist
 
Chairman, President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 

EXHIBIT 32.2



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Security National Financial Corporation (the "Company") on Form 10-Q for the period ending March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Garrett S. Sill, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

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

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

Dated: May 15, 2017
 /s/ Garrett S. Sill
 
 Garrett S. Sill
 
 Chief Financial Officer and Treasurer
 
(Principal Financial Officer and Principal Accounting Officer)