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:
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.
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.
The Company's realized gains and losses and other than temporary impairments from investments and other assets, are summarized as follows:
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.
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.
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.
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.
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.
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.
The following is a summary of the Company's investment in residential real estate for the periods presented:
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.
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:
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:
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
5)
Earnings Per Share
The basic and diluted earnings per share amounts were calculated as follows:
|
|
Three Months Ended
March 31 (As Restated) (Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,860,000
|
|
|
$
|
2,537,941
|
|
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
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share
|
|
$
|
0.12
|
|
|
$
|
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/A 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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
|
|
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
|
|
|
$
|
41,065,699
|
|
|
$
|
-
|
|
|
$
|
70,829,297
|
|
Intersegment revenues
|
|
|
2,988,651
|
|
|
|
109,351
|
|
|
|
95,770
|
|
|
|
(3,193,772
|
)
|
|
|
-
|
|
Segment profit before income taxes
|
|
|
1,483,480
|
|
|
|
758,911
|
|
|
|
655,379
|
|
|
|
-
|
|
|
|
2,897,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
833,999,127
|
|
|
|
99,554,821
|
|
|
|
164,990,647
|
|
|
|
(139,027,232
|
)
|
|
|
959,517,363
|
|
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
|
|
|
$
|
44,050,448
|
|
|
$
|
-
|
|
|
$
|
69,456,348
|
|
Intersegment revenues
|
|
|
3,103,446
|
|
|
|
286,925
|
|
|
|
79,479
|
|
|
|
(3,469,850
|
)
|
|
|
-
|
|
Segment profit before income taxes
|
|
|
1,103,727
|
|
|
|
469,055
|
|
|
|
2,498,298
|
|
|
|
-
|
|
|
|
4,071,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
724,858,698
|
|
|
|
96,827,903
|
|
|
|
157,602,831
|
|
|
|
(133,414,858
|
)
|
|
|
845,874,574
|
|
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:
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.
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.
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, as restated.
|
|
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
|
|
|
9,540,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,540,950
|
|
Total assets accounted for at fair value on a recurring basis
|
|
$
|
21,701,925
|
|
|
$
|
12,160,975
|
|
|
$
|
-
|
|
|
$
|
9,540,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, as restated
|
|
$
|
(49,421,125
|
)
|
|
$
|
(99,388,662
|
)
|
|
$
|
6,809,332
|
|
|
$
|
(3,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
265,685
|
|
|
|
673,850
|
|
|
|
2,167,593
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2017, as restated
|
|
$
|
(49,155,440
|
)
|
|
$
|
(98,714,812
|
)
|
|
$
|
8,976,925
|
|
|
$
|
(1,713
|
)
|
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, as restated.
|
|
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
|
|
|
6,911,544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,911,544
|
|
Total assets accounted for at fair value on a recurring basis
|
|
$
|
18,919,705
|
|
|
$
|
12,008,161
|
|
|
$
|
-
|
|
|
$
|
6,911,544
|
|
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
|
)
|
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, as restated
|
|
$
|
(50,694,953
|
)
|
|
$
|
(69,398,617
|
)
|
|
$
|
7,671,495
|
|
|
$
|
(13,947
|
)
|
Purchases
|
|
|
-
|
|
|
|
(30,294,480
|
)
|
|
|
-
|
|
|
|
-
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
1,273,828
|
|
|
|
304,435
|
|
|
|
(862,163
|
)
|
|
|
-
|
|
Included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,639
|
|
Balance - December 31, 2016, as restated
|
|
$
|
(49,421,125
|
)
|
|
$
|
(99,388,662
|
)
|
|
$
|
6,809,332
|
|
|
$
|
(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.
|
|
|
|
|
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
|
|
$
|
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, held to maturity
|
|
$
|
186,445,498
|
|
|
$
|
-
|
|
|
$
|
195,986,579
|
|
|
$
|
-
|
|
|
$
|
195,986,579
|
|
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
|
|
Loans held for sale
|
|
|
151,891,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156,891,384
|
|
|
|
156,891,384
|
|
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
|
|
Mortgage servicing rights
|
|
|
19,432,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,632,996
|
|
|
|
26,632,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank and other loans payable
|
|
$
|
(153,592,365
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(153,592,365
|
)
|
|
$
|
(153,592,365
|
)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, held to maturity
|
|
$
|
184,979,644
|
|
|
$
|
-
|
|
|
$
|
191,850,749
|
|
|
$
|
-
|
|
|
$
|
191,850,749
|
|
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
|
|
Loans held for sale
|
|
|
189,139,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192,289,854
|
|
|
|
192,289,854
|
|
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
|
|
Mortgage servicing rights
|
|
|
18,872,362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,496,832
|
|
|
|
25,496,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank and other loans payable
|
|
$
|
(152,137,371
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(152,137,371
|
)
|
|
$
|
(152,137,371
|
)
|
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows:
Fixed Maturity Securities, Held to Maturity
:
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.
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 2016.
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.
Loans Held for Sale
:
The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.
Policy Loans
: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values
because they are fully collateralized by the cash surrender value of the underlying insurance policies.
Insurance Assignments, Net
: These investments are short in maturity accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.
Short-Term Investments
: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values
due to their short-term nature.
Bank and Other Loans Payable
: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their short-term nature.
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.
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.
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
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
(As Restated)
|
|
|
December 31, 2016
(As Restated)
|
|
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
|
|
|
$
|
9,540,950
|
|
|
other assets
|
|
|
$
|
6,911,544
|
|
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
|
|
|
|
|
|
$
|
9,540,950
|
|
|
|
|
|
|
$
|
6,911,544
|
|
|
|
$
|
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.
|
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 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.
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
|
|
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.
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
(As Restated) (Unaudited)
|
|
|
|
2017
|
|
|
2016
|
|
Total revenues
|
|
$
|
70,829,297
|
|
|
$
|
70,614,654
|
|
Net earnings
|
|
$
|
1,860,000
|
|
|
$
|
2,302,158
|
|
Net earnings per Class A equivalent common share
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
Net earnings per Class A equivalent common share assuming dilution
|
|
$
|
0.12
|
|
|
$
|
0.15
|
|
13) Correction of Errors
The accompanying Condensed Consolidated Financial Statements include the restatement of the Company's previously filed condensed consolidated balance sheets for the quarter ended March 31, 2017 and year ended December 31, 2016 and the related condensed consolidated statements of operations, shareholders' equity and cash flows for the quarters ended March 31, 2017 and March 31, 2016. For additional information about the correction of errors see Note 21 of the Company's Annual Report on Form 10-K/A.
Subsequent to the issuance of the company's 2016 Consolidated Financial Statements, the Company identified the following errors, ("Adjustments"):
Material Error in Accounting for Repurchase Agreements
: The Company has concluded it should account for its Repurchase Agreements with unaffiliated banks as "On-Balance-Sheet" transactions, rather than as "Off-Balance-Sheet" as previously reported. Accordingly, the Company will reflect any outstanding loans as Loans Held for Sale and the corresponding debt as a Bank Loan Payable. The Company has corrected its sale accounting practice to defer revenue and costs on loans that remain as Held for Sale. The Company will recognize these deferred items at the time the loan is purchased by the ultimate investor.
Material Error in Accounting for Tax Valuation Allowance
: The Company determined that it should have reversed its valuation allowance in its entirety in 2012 when the Company no longer qualified for the small life insurance company deduction, rather than in other periods as previously reported.
Other Immaterial Corrections and Reclassifications
: In addition, the Company has recorded the following additional corrections in the accompanying Consolidated Financial Statements:
1.
|
Reclassification of Receivables to Loans Held for Sale
|
2.
|
Reclassification of the Provision for Loan Loss Reserve to net against Mortgage Fee Income
|
3.
|
Correction to Future Life, Annuity and Other Benefits to reverse a deferred profit liability
|
The tables below present the impact of the restatement of the Company's Condensed Consolidated Balance Sheets for the periods presented:
|
|
As of March 31, 2017
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Loans held for sale (formerly called Mortgage loans sold to investors)
|
|
$
|
54,401,522
|
|
|
$
|
97,489,906
|
|
|
$
|
151,891,428
|
|
Receivables, net
|
|
|
15,736,045
|
|
|
|
(9,433,244
|
)
|
|
|
6,302,801
|
|
Other assets
|
|
|
8,141,683
|
|
|
|
4,255,584
|
|
|
|
12,397,267
|
|
Total Assets
|
|
|
867,205,117
|
|
|
|
92,312,246
|
|
|
|
959,517,363
|
|
Future life, annuity, and other benefits
|
|
|
589,405,726
|
|
|
|
(1,156,778
|
)
|
|
|
588,248,948
|
|
Bank and other loans payable
|
|
|
61,548,686
|
|
|
|
92,045,392
|
|
|
|
153,594,078
|
|
Income taxes
|
|
|
28,717,508
|
|
|
|
(3,347,481
|
)
|
|
|
25,370,027
|
|
Total liabilities
|
|
|
737,292,214
|
|
|
|
87,544,133
|
|
|
|
824,836,347
|
|
Retained earnings
|
|
|
64,494,807
|
|
|
|
4,771,113
|
|
|
|
69,265,920
|
|
Total stockholders' equity
|
|
|
129,909,903
|
|
|
|
4,771,113
|
|
|
|
134,681,016
|
|
Total Liabilities and Stockholders' Equity
|
|
|
867,205,117
|
|
|
|
92,312,246
|
|
|
|
959,517,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Loans held for sale (formerly called Mortgage loans sold to investors)
|
|
$
|
82,491,091
|
|
|
$
|
106,648,741
|
|
|
$
|
189,139,832
|
|
Receivables, net
|
|
|
18,870,119
|
|
|
$
|
(12,496,755
|
)
|
|
|
6,373,364
|
|
Other assets
|
|
|
6,891,468
|
|
|
|
3,521,926
|
|
|
|
10,413,394
|
|
Total Assets
|
|
|
854,004,671
|
|
|
|
97,673,912
|
|
|
|
951,678,583
|
|
Future life, annuity, and other benefits
|
|
|
585,610,063
|
|
|
|
(1,542,371
|
)
|
|
|
584,067,692
|
|
Bank and other loans payable
|
|
|
53,718,548
|
|
|
|
98,422,131
|
|
|
|
152,140,679
|
|
Income taxes
|
|
|
27,904,294
|
|
|
|
(3,585,425
|
)
|
|
|
24,318,869
|
|
Total liabilities
|
|
|
725,825,117
|
|
|
|
93,294,335
|
|
|
|
819,119,452
|
|
Retained earnings
|
|
|
63,029,627
|
|
|
|
4,379,577
|
|
|
|
67,409,204
|
|
Total stockholders' equity
|
|
|
128,179,554
|
|
|
|
4,379,577
|
|
|
|
132,559,131
|
|
Total Liabilities and Stockholders' Equity
|
|
|
854,004,671
|
|
|
|
97,673,912
|
|
|
|
951,678,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2016
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Retained earnings
|
|
|
54,054,950
|
|
|
|
6,470,454
|
|
|
|
60,525,404
|
|
The tables below present the impact of the restatement on the Company's Condensed Consolidated Statements of Earnings for the periods presented:
|
|
Three Months Ended March 31, 2017
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Mortgage fee income
|
|
$
|
37,050,926
|
|
|
$
|
1,376,928
|
|
|
$
|
38,427,854
|
|
Total revenues
|
|
|
69,452,369
|
|
|
|
1,376,928
|
|
|
|
70,829,297
|
|
Increase in future policy benefits
|
|
|
5,182,449
|
|
|
|
385,593
|
|
|
|
5,568,042
|
|
Commissions
|
|
|
15,721,074
|
|
|
|
633,974
|
|
|
|
16,355,048
|
|
Provision for loan loss reserve
|
|
|
426,634
|
|
|
|
(426,634
|
)
|
|
|
-
|
|
Cost related to funding mortgage loans
|
|
|
2,065,134
|
|
|
|
154,515
|
|
|
|
2,219,649
|
|
Total benefits and expenses
|
|
|
67,184,079
|
|
|
|
747,448
|
|
|
|
67,931,527
|
|
Earnings before income taxes
|
|
|
2,268,290
|
|
|
|
629,480
|
|
|
|
2,897,770
|
|
Income tax expense
|
|
|
(799,826
|
)
|
|
|
(237,944
|
)
|
|
|
(1,037,770
|
)
|
Net earnings
|
|
|
1,468,464
|
|
|
|
391,536
|
|
|
|
1,860,000
|
|
Net earnings per common share (1)
|
|
$
|
0.10
|
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
Net earnings per common share assuming dilution (1)
|
|
$
|
0.09
|
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Mortgage fee income
|
|
$
|
39,110,967
|
|
|
$
|
2,101,041
|
|
|
$
|
41,212,008
|
|
Total revenues
|
|
|
67,355,307
|
|
|
|
2,101,041
|
|
|
|
69,456,348
|
|
Increase in future policy benefits
|
|
|
4,160,260
|
|
|
|
(38,559
|
)
|
|
|
4,121,701
|
|
Commissions
|
|
|
16,842,270
|
|
|
|
2,368,698
|
|
|
|
19,210,968
|
|
Provision for loan loss reserve
|
|
|
586,778
|
|
|
|
(586,778
|
)
|
|
|
-
|
|
Cost related to funding mortgage loans
|
|
|
2,154,397
|
|
|
|
478,357
|
|
|
|
2,632,754
|
|
Total benefits and expenses
|
|
|
63,163,550
|
|
|
|
2,221,718
|
|
|
|
65,385,268
|
|
Earnings before income taxes
|
|
|
4,191,757
|
|
|
|
(120,677
|
)
|
|
|
4,071,080
|
|
Income tax expense
|
|
|
(1,580,220
|
)
|
|
|
47,081
|
|
|
|
(1,533,139
|
)
|
Net earnings
|
|
|
2,611,537
|
|
|
|
(73,596
|
)
|
|
|
2,537,941
|
|
Net earnings per common share (1)
|
|
$
|
0.18
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
Net earnings per common share assuming dilution (1)
|
|
$
|
0.17
|
|
|
$
|
(0.00
|
)
|
|
$
|
0.17
|
|
|
(1)
|
Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.
|
The tables below present the impact of the restatement on the Company's Condensed Consolidated Statements of Comprehensive Income for the periods presented:
|
|
Three Months Ended March 31, 2017
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net earnings
|
|
$
|
1,468,464
|
|
|
$
|
391,536
|
|
|
$
|
1,860,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net earnings
|
|
$
|
2,611,537
|
|
|
$
|
(73,596
|
)
|
|
$
|
2,537,941
|
|
The tables below present the impact of the restatement on the Company's Condensed Consolidated Statements of Cash Flows for the periods presented:
|
|
Three Months Ended March 31, 2017
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net cash provided by operating activities
|
|
$
|
24,054,637
|
|
|
$
|
6,376,739
|
|
|
$
|
30,431,376
|
|
Net change in warehouse line borrowings
|
|
|
-
|
|
|
|
(6,376,739
|
)
|
|
|
(6,376,739
|
)
|
Net cash provided by (used in) financing activities
|
|
|
6,229,522
|
|
|
|
(6,376,739
|
)
|
|
|
(147,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Net cash provided by operating activities
|
|
$
|
25,863,034
|
|
|
$
|
1,412,370
|
|
|
$
|
27,275,404
|
|
Net change in warehouse line borrowings
|
|
|
-
|
|
|
|
(1,412,370
|
)
|
|
|
(1,412,370
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(100,886
|
)
|
|
|
(1,412,370
|
)
|
|
|
(1,513,256
|
)
|