SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
7)Business Segment Information (Continued)
|
|
Life Insurance
|
|
Cemetery/
Mortuary
|
|
Mortgage
|
|
Intercompany Eliminations
|
|
Consolidated
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ 39,261,044
|
|
$ 5,495,990
|
|
$ 101,447,531
|
|
$ -
|
|
$ 146,204,565
|
Intersegment revenues
|
|
2,952,836
|
|
79,096
|
|
168,890
|
|
(3,200,822)
|
|
-
|
Segment profit before income taxes
|
|
4,807,280
|
|
1,322,303
|
|
32,454,348
|
|
-
|
|
38,583,931
|
|
|
|
|
-
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ 29,824,686
|
|
$ 3,570,419
|
|
$ 41,984,554
|
|
$ -
|
|
$ 75,379,659
|
Intersegment revenues
|
|
1,465,778
|
|
106,638
|
|
120,891
|
|
(1,693,307)
|
|
-
|
Segment profit before income taxes
|
|
1,263,836
|
|
213,198
|
|
3,282,788
|
|
-
|
|
4,759,822
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ 110,255,399
|
|
$ 14,815,991
|
|
$ 219,403,866
|
|
$ -
|
|
$ 344,475,256
|
Intersegment revenues
|
|
5,677,189
|
|
272,409
|
|
559,923
|
|
(6,509,521)
|
|
-
|
Segment profit before income taxes
|
|
5,408,482
|
|
2,975,556
|
|
58,867,883
|
|
-
|
|
67,251,921
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
1,232,786,760
|
|
55,339,760
|
|
443,756,079
|
|
(88,204,200)
|
|
1,643,678,399
|
Goodwill
|
|
2,765,570
|
|
754,018
|
|
-
|
|
-
|
|
3,519,588
|
Total Assets
|
|
1,235,552,330
|
|
56,093,778
|
|
443,756,079
|
|
(88,204,200)
|
|
1,647,197,987
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$ 88,937,110
|
|
$ 12,472,711
|
|
$ 103,908,855
|
|
$ -
|
|
$ 205,318,676
|
Intersegment revenues
|
|
3,441,497
|
|
336,911
|
|
372,170
|
|
(4,150,578)
|
|
-
|
Segment profit before income taxes
|
|
4,568,178
|
|
2,421,845
|
|
4,825,801
|
|
-
|
|
11,815,824
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
941,739,161
|
|
84,250,592
|
|
243,272,631
|
|
(110,132,588)
|
|
1,159,129,796
|
Goodwill
|
|
2,765,570
|
|
754,018
|
|
-
|
|
-
|
|
3,519,588
|
Total Assets
|
|
944,504,731
|
|
85,004,610
|
|
243,272,631
|
|
(110,132,588)
|
|
1,162,649,384
|
33
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:
Level 1:Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.
Level 2: Financial assets and financial liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in non-active markets; or
c)Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level 3:Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.
The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.
The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments.
The items shown under Level 1 and Level 2 are valued as follows:
Fixed Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.
Equity Securities: The fair values for equity securities are based on quoted market prices.
Loans Held for Sale: The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.
Restricted Assets: A portion of these assets include mutual funds and equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.
Cemetery Endowment Care Trust Investments: A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.
Call and Put Option Derivatives: The fair values for call and put options are based on quoted market prices.
34
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
The items shown under Level 3 are valued as follows:
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 sheets with changes in their fair values recorded in current earnings.
The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.
Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.
Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.
It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area comparables and property condition when determining fair value.
In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.
Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights (“MSRs”) at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction.
35
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at September 30, 2020.
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets accounted for at fair value on a
recurring basis
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
$ 344,917,387
|
|
$ -
|
|
$ 342,627,234
|
|
$ 2,290,153
|
Equity securities
|
11,215,606
|
|
11,215,606
|
|
-
|
|
-
|
Loans held for sale
|
445,878,979
|
|
-
|
|
-
|
|
445,878,979
|
Restricted assets (1)
|
1,470,114
|
|
-
|
|
1,470,114
|
|
-
|
Restricted assets (2)
|
2,193,831
|
|
2,193,831
|
|
-
|
|
-
|
Cemetery perpetual care trust investments (1)
|
576,292
|
|
-
|
|
576,292
|
|
-
|
Cemetery perpetual care trust investments (2)
|
1,832,703
|
|
1,832,703
|
|
-
|
|
-
|
Derivatives - loan commitments (3)
|
17,945,259
|
|
-
|
|
-
|
|
17,945,259
|
Total assets accounted for at fair value on a
recurring basis
|
$ 826,030,171
|
|
$ 15,242,140
|
|
$ 344,673,640
|
|
$ 466,114,391
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a
recurring basis
|
|
|
|
|
|
|
|
Derivatives - call options (4)
|
$ (126,193)
|
|
$ (126,193)
|
|
$ -
|
|
$ -
|
Derivatives - loan commitments (4)
|
(2,999,809)
|
|
-
|
|
-
|
|
(2,999,809)
|
Total liabilities accounted for at fair value
on a recurring basis
|
$ (3,126,002)
|
|
$ (126,193)
|
|
$ -
|
|
$ (2,999,809)
|
|
|
|
|
|
|
|
|
(1) Fixed maturity securities available for sale
|
|
|
|
|
|
|
|
(2) Equity securities
|
|
|
|
|
|
|
|
(3) Included in other assets on the consolidated balance sheets
|
|
|
|
|
|
|
(4) Included in other liabilities and accrued expenses on the consolidated balance sheets
|
|
|
36
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2019.
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets accounted for at fair value on a
recurring basis
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
$ 355,977,820
|
|
$ -
|
|
$ 352,761,438
|
|
$ 3,216,382
|
Equity securities
|
7,271,165
|
|
7,271,165
|
|
-
|
|
-
|
Loans held for sale
|
213,457,632
|
|
-
|
|
-
|
|
213,457,632
|
Restricted assets (1)
|
1,008,867
|
|
-
|
|
1,008,867
|
|
-
|
Restricted assets (2)
|
1,976,480
|
|
1,976,480
|
|
-
|
|
-
|
Cemetery perpetual care trust investments (1)
|
975,673
|
|
-
|
|
975,673
|
|
-
|
Cemetery perpetual care trust investments (2)
|
1,605,451
|
|
1,605,451
|
|
-
|
|
-
|
Derivatives - loan commitments (3)
|
2,722,580
|
|
-
|
|
-
|
|
2,722,580
|
Total assets accounted for at fair value on a
recurring basis
|
$ 584,995,668
|
|
$ 10,853,096
|
|
$ 354,745,978
|
|
$ 219,396,594
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a
recurring basis
|
|
|
|
|
|
|
|
Derivatives - call options (4)
|
$ (62,265)
|
|
$ (62,265)
|
|
$ -
|
|
$ -
|
Derivatives - put options (4)
|
(22,282)
|
|
(22,282)
|
|
-
|
|
-
|
Derivatives - loan commitments (4)
|
(231,347)
|
|
-
|
|
-
|
|
(231,347)
|
Total liabilities accounted for at fair value
on a recurring basis
|
$ (315,894)
|
|
$ (84,547)
|
|
$ -
|
|
$ (231,347)
|
|
|
|
|
|
|
|
|
(1) Fixed maturity securities available for sale
|
|
|
|
|
|
|
|
(2) Mutual funds and equity securities
|
|
|
|
|
|
|
|
(3) Included in other assets on the condensed consolidated balance sheets
|
|
|
|
|
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets
|
|
|
37
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
Significant
|
|
Range of Inputs
|
|
|
|
|
Fair Value at
|
|
Valuation
|
|
Unobservable
|
|
Minimum
|
Maximum
|
|
Weighted
|
|
|
9/30/2020
|
|
Technique
|
|
Input(s)
|
|
Value
|
Value
|
|
Average
|
Loans held for sale
|
|
$ 445,878,979
|
|
Market approach
|
|
Investor contract pricing as a percentage of unpaid principal balance
|
|
99.0%
|
110.0%
|
|
104.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - loan commitments (net)
|
|
14,945,451
|
|
Market approach
|
|
Fall-out factor
|
|
1.0%
|
92.0%
|
|
80.0%
|
|
|
|
|
|
|
Initial-Value
|
|
N/A
|
N/A
|
|
N/A
|
|
|
|
|
|
|
Servicing
|
|
0 bps
|
133 bps
|
|
67 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
|
2,290,153
|
|
Broker quotes
|
|
Pricing quotes
|
|
$ 91.49
|
$ 123.46
|
|
$ 117.45
|
For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
|
|
|
|
|
|
Significant
|
|
Range of Inputs
|
|
|
|
|
Fair Value at
|
|
Valuation
|
|
Unobservable
|
|
Minimum
|
Maximum
|
|
Weighted
|
|
|
12/31/2019
|
|
Technique
|
|
Input(s)
|
|
Value
|
Value
|
|
Average
|
Loans held for sale
|
|
$ 213,457,632
|
|
Market approach
|
|
Investor contract pricing as a percentage of unpaid principal balance
|
|
98.0%
|
109.0%
|
|
103.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - loan commitments (net)
|
|
2,491,233
|
|
Market approach
|
|
Fall-out factor
|
|
1.0%
|
92.0%
|
|
81.0%
|
|
|
|
|
|
|
Initial-Value
|
|
N/A
|
N/A
|
|
N/A
|
|
|
|
|
|
|
Servicing
|
|
0 bps
|
318 bps
|
|
79 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
|
3,216,382
|
|
Broker quotes
|
|
Pricing quotes
|
|
$ 95.02
|
$ 115.80
|
|
$ 107.98
|
38
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)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:
|
|
Net Loan Commitments
|
|
Loans Held for Sale
|
|
Fixed Maturity Securities Available for Sale
|
|
Balance - December 31, 2019
|
|
$ 2,491,233
|
|
$ 213,457,632
|
|
$ 3,216,382
|
|
Originations and purchases
|
|
-
|
|
3,824,329,264
|
|
-
|
|
Sales, maturities and paydowns
|
|
-
|
|
(3,709,992,155)
|
|
(1,031,500)
|
|
Transfer to mortgage loans held for investment
|
|
-
|
|
(9,170,610)
|
|
-
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
Included in earnings
|
|
12,454,218
|
(1)
|
127,254,848
|
(1)
|
2,532
|
(2)
|
Included in other comprehensive income
|
|
-
|
|
-
|
|
102,739
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2020
|
|
$ 14,945,451
|
|
$ 445,878,979
|
|
$ 2,290,153
|
|
|
|
|
|
|
|
|
|
(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings
|
|
(2) As a component of Net investment income on the condensed consolidated statements of earnings
|
|
Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:
|
|
Net Derivatives Loan Commitments
|
|
Loans Held for Sale
|
|
Fixed Maturity Securities Available for Sale
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
$ 1,591,816
|
|
$ 136,210,853
|
|
$ -
|
Originations/purchases
|
|
-
|
|
2,606,839,175
|
|
-
|
Sales
|
|
-
|
|
(2,580,875,055)
|
|
-
|
Transfer to mortgage loans held for investment
|
|
-
|
|
(31,881,851)
|
|
-
|
Transfer from fixed maturity securities held to maturity
|
|
-
|
|
-
|
|
3,216,382
|
Total gains (losses):
|
|
|
|
|
|
|
Included in earnings (1)
|
|
899,417
|
|
83,164,510
|
|
-
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
$ 2,491,233
|
|
$ 213,457,632
|
|
$ 3,216,382
|
|
|
|
|
|
|
|
(1) As a component of mortgage fee income on the condensed consolidated statements of earnings
|
39
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at September 30, 2020.
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets accounted for at fair value on a nonrecurring basis
|
|
|
|
|
|
|
|
Impaired mortgage loans held for investment
|
$ 1,519,159
|
|
$ -
|
|
$ -
|
|
$ 1,519,159
|
Impaired real estate held for sale
|
4,000,000
|
|
-
|
|
-
|
|
4,000,000
|
Total assets accounted for at fair value on a nonrecurring basis
|
$ 5,519,159
|
|
$ -
|
|
$ -
|
|
$ 5,519,159
|
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, 2019.
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
Assets accounted for at fair value on a
nonrecurring basis
|
|
|
|
|
|
|
|
Impaired mortgage loans held for investment
|
$ 1,302,025
|
|
$ -
|
|
$ -
|
|
$ 1,302,025
|
Impaired real estate held for investment
|
8,375,884
|
|
-
|
|
-
|
|
8,375,884
|
Total assets accounted for at fair value on
a nonrecurring basis
|
$ 9,677,909
|
|
$ -
|
|
$ -
|
|
$ 9,677,909
|
40
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
Fair Value of Financial Instruments Carried at Other Than Fair Value
ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.
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 September 30, 2020 and December 31, 2019.
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 September 30, 2020:
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 77,373,490
|
|
$ -
|
|
$ -
|
|
$ 82,076,345
|
|
$ 82,076,345
|
Residential construction
|
119,915,615
|
|
-
|
|
-
|
|
119,915,615
|
|
119,915,615
|
Commercial
|
48,320,422
|
|
-
|
|
-
|
|
47,954,726
|
|
47,954,726
|
Mortgage loans held for investment, net
|
$ 245,609,527
|
|
$ -
|
|
$ -
|
|
$ 249,946,686
|
|
$ 249,946,686
|
Policy loans
|
14,234,935
|
|
-
|
|
-
|
|
14,234,935
|
|
14,234,935
|
Insurance assignments, net (1)
|
44,256,177
|
|
-
|
|
-
|
|
44,256,177
|
|
44,256,177
|
Restricted assets (2)
|
4,110,252
|
|
-
|
|
-
|
|
4,110,252
|
|
4,110,252
|
Mortgage servicing rights, net
|
28,387,476
|
|
-
|
|
-
|
|
30,288,406
|
|
30,288,406
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Bank and other loans payable
|
$ (424,932,007)
|
|
$ -
|
|
$ -
|
|
$ (424,932,007)
|
|
$ (424,932,007)
|
Policyholder account balances (3)
|
(44,246,123)
|
|
-
|
|
-
|
|
(41,229,265)
|
|
(41,229,265)
|
Future policy benefits - annuities (3)
|
(110,638,182)
|
|
-
|
|
-
|
|
(115,049,853)
|
|
(115,049,853)
|
|
|
|
|
|
|
|
|
|
|
(1) Included in other investments and policy loans on the condensed consolidated balance sheets
|
|
|
|
(2) Mortgage loans held for investment
|
|
|
|
|
|
|
|
|
|
(3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets
|
|
|
41
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2019:
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage loans held for investment
|
|
|
|
|
|
|
|
|
|
Residential
|
$ 110,253,678
|
|
$ -
|
|
$ -
|
|
$ 115,320,638
|
|
$ 115,320,638
|
Residential construction
|
88,651,967
|
|
-
|
|
-
|
|
88,651,967
|
|
88,651,967
|
Commercial
|
37,788,901
|
|
-
|
|
-
|
|
39,289,462
|
|
39,289,462
|
Mortgage loans held for investment, net
|
$ 236,694,546
|
|
$ -
|
|
$ -
|
|
$ 243,262,067
|
|
$ 243,262,067
|
Policy loans
|
14,762,805
|
|
-
|
|
-
|
|
14,762,805
|
|
14,762,805
|
Insurance assignments, net (1)
|
39,614,939
|
|
-
|
|
-
|
|
39,614,939
|
|
39,614,939
|
Restricted assets (2)
|
2,275,756
|
|
-
|
|
-
|
|
2,289,679
|
|
2,289,679
|
Cemetery perpetual care trust investments (2)
|
524,000
|
|
-
|
|
-
|
|
536,553
|
|
536,553
|
Mortgage servicing rights, net
|
17,155,529
|
|
-
|
|
-
|
|
22,784,571
|
|
22,784,571
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Bank and other loans payable
|
$ (217,572,612)
|
|
$ -
|
|
$ -
|
|
$ (217,572,612)
|
|
$ (217,572,612)
|
Policyholder account balances (3)
|
(45,154,180)
|
|
-
|
|
-
|
|
(41,828,469)
|
|
(41,828,469)
|
Future policy benefits - annuities (3)
|
(113,579,830)
|
|
-
|
|
-
|
|
(117,304,614)
|
|
(117,304,614)
|
|
|
|
|
|
|
|
|
|
|
(1) Included in other investments and policy loans on the condensed consolidated balance sheets
|
|
|
|
(2) Mortgage loans held for investment
|
|
|
|
|
|
|
|
|
|
(3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets
|
|
|
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows:
Mortgage Loans Held for Investment: The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment.
Residential – The estimated fair value is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently.
Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value.
Commercial – The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current interest rates for commercial mortgages.
Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.
Insurance Assignments, Net: These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.
42
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
8)Fair Value of Financial Instruments (Continued)
Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates.
Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows.
The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
9)Allowance for Doubtful Accounts
The Company records an allowance and recognizes an expense for potential losses from other investments 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
10)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.
43
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
10)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 mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.
Forward Sale Commitments
The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments.
The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets.
Call and Put Options
The Company uses a strategy of selling “out of the money” call options on its 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 a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.
The following table shows the notional amount and fair value of derivatives as of September 30, 2020 and December 31, 2019.
|
Fair Values and Notional Values of Derivative Instruments
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Balance Sheet Location
|
|
Notional Amount
|
|
Asset Fair Value
|
|
Liability Fair Value
|
|
Notional Amount
|
Asset Fair Value
|
|
Liability Fair Value
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments
|
Other assets and Other liabilities
|
|
$977,036,503
|
|
$17,945,259
|
|
$2,999,809
|
|
$224,202,514
|
$2,722,580
|
|
$231,347
|
Call options
|
Other liabilities
|
|
1,957,000
|
|
-
|
|
126,193
|
|
1,813,500
|
-
|
|
62,265
|
Put options
|
Other liabilities
|
|
-
|
|
-
|
|
-
|
|
1,573,100
|
-
|
|
22,282
|
Total
|
|
|
$978,993,503
|
|
$17,945,259
|
|
$3,126,002
|
|
$227,589,114
|
$2,722,580
|
|
$315,894
|
44
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
10)Derivative Instruments (Continued)
The following table shows the gains and losses on derivatives for the periods presented.
|
|
|
|
Net Amount Gain (Loss)
|
|
Net Amount Gain (Loss)
|
|
|
|
|
Three Months Ended September 30
|
|
Nine Months Ended September 30
|
Derivative
|
|
Classification
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Loan commitments
|
|
Mortgage fee income
|
|
$ 3,901,086
|
|
$ 378,899
|
|
$ 12,454,218
|
|
$ 1,915,223
|
|
|
|
|
|
|
|
|
|
|
|
Call and put options
|
|
Gains on investments and other assets
|
|
$ 34,171
|
|
$ 104,702
|
|
$ 124,516
|
|
$ 509,639
|
11)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 September 30, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.
During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007. No additional loss reserves are being held for loans originated between 2004 and 2007.
Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.
Mortgage Loan Loss Litigation
Lehman Brothers Holdings 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 had acquired these loans from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage Company (“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.
45
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
11)Reinsurance, Commitments and Contingencies (Continued)
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 non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to 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 mortgage 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 declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under 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. 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 memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017. A hearing on the motion was held on June 12, 2018.
On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion. On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a joint motion with the United States District Court (Case No. 18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction. Included with the motion were proposed objections to the Bankruptcy Court’s Decision. On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’ reply was filed on October 2, 2018.
On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law. Separately, certain other defendants also filed a notice of appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue. Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’ response on November 26, 2018. The motions to file appeals were consolidated before Valerie Caproni, U.S. District Court Judge, Case No. 18-cv-08986 (VEC). Case No. 18-mc-00392 (VEC) was also before Judge Caproni.
46
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
11)Reinsurance, Commitments and Contingencies (Continued)
On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue. Further, the judge denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.
On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage. In addition to the Fannie Mae and Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”). The RMBS loans had allegedly been sold by defendants to Lehman Bank that, in turn, sold them to Lehman Holdings. The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings. Lehman Holdings asserts that it made representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.
The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac related loans. Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation. Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’ motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants including SecurityNational Mortgage.
Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint") (United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint already on file. The RMBS Complaint seeks alleged damages relating to obligations under alleged contractual indemnification provisions in an amount to be determined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert witness fees incurred in litigation; and such other relief as the Court deems just and proper.
In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as a document production, taking depositions, and use of experts. At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019. SecurityNational Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case. Discovery is in process.
Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019. SecurityNational Mortgage sent its Statement of Position to Lehman Brothers Holdings dated September 3, 2019 in response to the notice. Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage. On January 9, 2020, SecurityNational Mortgage submitted further information to the mediator. Mediation was set to take place on January 23, 2020 in New York. In view of a motion of SecurityNational Mortgage dated January 15, 2020, Lehman Holdings requested that the mediation be continued.
On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing. It was not filed in the Bankruptcy Court but in the United States District Court for the Southern District of New York. The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial motions, and settlement,” as well as for “a Report and Recommendation” as to the pending motion. The final disposition of the motion will be with the District Court judge. Lehman Holdings asked the District Court to transfer the case to one of two other judges allegedly due to related matters. No action has been taken by the District Court to transfer the case.
47
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
11)Reinsurance, Commitments and Contingencies (Continued)
However, Lehman Holdings filed its response brief to the motion and SecurityNational Mortgage filed its reply. On July 10, 2020, the Magistrate Judge filed a report and recommendation with the District Court judge recommending that SecurityNational Mortgage’s motion to dismiss be denied on the procedural basis that the motion should not be in the District Court, but the Bankruptcy Court. SecurityNational Mortgage filed an objection to the report and recommendation to which Lehman Holdings responded. The District Court entered an order on August 10, 2020 adopting the Magistrate Judge’s recommendation that SecurityNational Mortgage’s motion be denied on the procedural basis that the matter should not be in the District Court at present, and that the Bankruptcy Court may recommend on an interlocutory basis whether there is subject matter jurisdiction and standing, and that later in the proceedings the District Court could then review the recommendation as to subject matter jurisdiction and standing.
On September 15, 2020, SecurityNational Mortgage filed a Petition for a Writ of Mandamus with the Second Circuit Court of Appeals asking that the District Court be ordered to presently resolve SecurityNational Mortgage’s motion as its motion is filed in the proper court. No action has yet to be taken by the Second Circuit.
Earlier, on March 17, 2020, Lehman Holdings filed a motion for partial summary judgment against dozens of defendants asserting that sufficient notice was given defendants concerning the settlement of the RMBS claims so that Lehman Holdings, as an indemnitee, would not have to prove that it (Lehman Holdings) had liability to the RMBS Trustees, but only that its settlement was reasonable and in good faith. Defendants involved filed a response brief that for various reasons Lehman Holdings cannot establish sufficient notice as required by law. Certain defendants, excluding SecurityNational Mortgage, also filed a cross motion to seek an affirmative ruling on the issue of Lehman Holdings’ motion.
Thereafter, Lehman Holdings filed a reply brief in support of its motion, and also a response brief to certain defendants’ cross motion. Defendants that filed a cross motion filed a reply brief in support of the cross motion. The motions are now under advisement with the Bankruptcy Court. Even if Lehman Holdings were to prevail on its motion, it does not absolve Lehman Holdings of its burden to prove indemnity liability to the defendants. SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.
Debt Covenants for Mortgage Warehouse Lines of Credit
The Company, through its subsidiary SecurityNational Mortgage, has a $150,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 24, 2021. SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.
The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on November 15, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.
The Company through its subsidiary SecurityNational Mortgage, also uses a line of credit with Comerica Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $90,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on May 27, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.
48
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
11)Reinsurance, Commitments and Contingencies (Continued)
The Company, through its subsidiary EverLEND Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows EverLEND Mortgage to borrow up to $5,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on August 1, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.
The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement. As of September 30, 2020, the Company believes that it was in compliance with all debt covenants.
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 September 30, 2020, the Company’s commitments were approximately $187,305,000 for these loans, of which $124,409,000 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.
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.
49
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
12)Mortgage Servicing Rights
The Company initially records these MSRs at fair value as discussed in Note 8.
After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.
The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.
Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.
The following is a summary of the MSR activity for the periods presented.
|
As of September 30
2020
|
As of December 31
2019
|
Amortized cost:
|
|
|
Balance before valuation allowance at beginning of year
|
$ 17,155,529
|
$ 20,016,822
|
MSR additions resulting from loan sales
|
19,400,262
|
4,194,502
|
Amortization (1)
|
(8,168,315)
|
(7,055,795)
|
Application of valuation allowance to write down MSRs
with other than temporary impairment
|
-
|
-
|
Balance before valuation allowance at end of period
|
$ 28,387,476
|
$ 17,155,529
|
|
|
|
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
|
$ 28,387,476
|
$ 17,155,529
|
|
|
|
Estimated fair value of MSRs at end of period
|
$ 30,288,406
|
$ 22,784,571
|
|
|
|
(1) Included in other expenses on the condensed consolidated statements of earnings
|
50
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
12)Mortgage Servicing Rights (Continued)
The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost:
|
|
Estimated MSR Amortization
|
2020
|
|
4,926,285
|
2021
|
|
3,690,972
|
2022
|
|
3,094,986
|
2023
|
|
2,609,308
|
2024
|
|
2,213,796
|
Thereafter
|
11,852,129
|
Total
|
|
$ 28,387,476
|
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
September 30
|
|
Nine Months Ended
September 30
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Contractual servicing fees
|
$ 2,340,546
|
|
$ 1,765,957
|
|
$ 6,055,055
|
|
$ 5,433,970
|
Late fees
|
69,314
|
|
82,547
|
|
238,826
|
|
261,437
|
Total
|
$ 2,409,860
|
|
$ 1,848,504
|
|
$ 6,293,881
|
|
$ 5,695,407
|
The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented:
|
As of September 30
2020
|
|
As of December 31 2019
|
Servicing UPB
|
$ 4,215,559,388
|
|
$ 2,804,139,415
|
The following key assumptions were used in determining MSR value:
|
Prepayment
Speeds
|
Average
Life (Years)
|
Discount
Rate
|
September 30, 2020
|
16.70
|
5.06
|
9.5
|
December 31, 2019
|
15.30
|
5.27
|
9.51
|
13) Income Taxes
The Company’s overall effective tax rate for the three months ended September 30, 2020 and 2019 was 24.0% and 24.0%, respectively, which resulted in a provision for income taxes of $9,279,162 and $1,142,408, respectively. The Company’s overall effective tax rate for the nine months ended September 30, 2020 and 2019 was 23.7% and 23.6%, respectively, which resulted in a provision for income taxes of $15,965,656 and $2,788,038, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes. The effective tax rate increased when compared to the prior year period partly due the Company’s provision for state income taxes.
51
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
14) Revenues from Contracts with Customers
The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.
Information about Performance Obligations and Contract Balances
The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled.
The Company’s three types of future obligations are as follows:
Pre-need Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized.
At-need Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received.
Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust.
Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred.
The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows:
|
Contract Balances
|
|
Receivables (1)
|
Contract Asset
|
Contract Liability
|
Opening (1/1/2020)
|
$ 2,778,879
|
$ -
|
$ 12,607,978
|
Closing (9/30/2020)
|
3,580,669
|
-
|
13,045,307
|
Increase/(decrease)
|
801,790
|
-
|
437,329
|
|
|
|
|
|
Contract Balances
|
|
Receivables (1)
|
Contract Asset
|
Contract Liability
|
Opening (1/1/2019)
|
$ 2,816,225
|
$ -
|
$ 12,508,625
|
Closing (12/31/2019)
|
2,778,879
|
-
|
12,607,978
|
Increase/(decrease)
|
(37,346)
|
-
|
99,353
|
|
|
|
|
(1) Included in Receivables, net on the condensed consolidated balance sheets
|
52
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
14) Revenues from Contracts with Customers (Continued)
The amount of revenue recognized and included in the opening contract liability balance for the three months ended September 30, 2020 and 2019 was $1,427,418 and $884,180, respectively, and for the nine months ended September 30, 2020 and 2019 was $3,258,824 and $2,515,278, respectively.
The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.
Disaggregation of Revenue
The following table disaggregates revenue for the Company’s cemetery and mortuary contracts for the periods presented:
|
Three Months Ended
September 30
|
|
Nine Months
Ended September 30
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Major goods/service lines
|
|
|
|
|
|
|
|
At-need
|
$ 4,272,816
|
|
$ 2,888,996
|
|
$ 10,915,712
|
|
$ 8,883,846
|
Pre-need
|
1,098,899
|
|
637,420
|
|
3,614,872
|
|
2,321,928
|
|
$ 5,371,715
|
|
$ 3,526,416
|
|
$ 14,530,584
|
|
$ 11,205,774
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$ 3,559,431
|
|
$ 2,371,041
|
|
$ 9,641,751
|
|
$ 7,515,881
|
Services transferred at a point in time
|
1,812,284
|
|
1,155,375
|
|
4,888,833
|
|
3,689,893
|
|
$ 5,371,715
|
|
$ 3,526,416
|
|
$ 14,530,584
|
|
$ 11,205,774
|
The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented:
|
Three Months Ended
September 30
|
|
Nine Months Ended
September 30
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net mortuary and cemetery sales
|
$ 5,371,715
|
|
$ 3,526,416
|
|
$ 14,530,584
|
|
$ 11,205,774
|
Gains (losses) on investments and other assets
|
(66,673)
|
|
(100,685)
|
|
(244,413)
|
|
752,412
|
Net investment income
|
168,478
|
|
112,246
|
|
444,971
|
|
387,617
|
Other revenues
|
22,470
|
|
32,442
|
|
84,849
|
|
126,908
|
Revenues from external customers
|
5,495,990
|
|
3,570,419
|
|
14,815,991
|
|
12,472,711
|
53
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
15) Acquisitions
Probst Family Funerals and Cremations and Heber Valley Funeral Home
On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City.
Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, Memorial Mortuary Inc. paid a net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback. In August 2019, this escrow account was settled and $137,550 was paid to the prior owners.
The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:
Cash
|
$ 53,859
|
Property and equipment
|
2,475,526
|
Receivables
|
13,620
|
Goodwill
|
754,018
|
Other
|
21,800
|
Total assets acquired
|
3,318,823
|
|
|
Bank and other loans payable
|
(3,176)
|
Total liabilities assumed
|
(3,176)
|
Fair value of net assets acquired/consideration paid
|
$ 3,315,647
|
54
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
15) Acquisitions (Continued)
Kilpatrick Life Insurance Company
On December 13, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”) completed a stock purchase transaction with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders, which resulted in the purchase of all the outstanding shares of common stock of Kilpatrick Life. The closing of the transaction was subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life, which was received on December 12, 2019. Under the terms of the transaction, the total Purchase Price that Security National Life paid for all the shares held by the Kilpatrick shareholders was $23,779,940 subject to a $1,400,000 holdback, as agreed with the shareholders.
Kilpatrick Life has been in operation since 1932 and provides life insurance products and services through insurance plans such as permanent and term life insurance, asset protection plans, graded whole life insurance, and annuities. Additionally, it provides insurance services for emergencies and pre‐arranged funeral services. Kilpatrick Life is based in Shreveport, Louisiana with additional offices in Jena, Alexandria, Minden, and Arcadia, Louisiana.
Kilpatrick Life employs a staff of almost 120 associates in four offices in Louisiana and is licensed to operate in Louisiana, Texas, Arkansas, Oklahoma, and Mississippi with the home office located in Shreveport, LA. It is the mission of Kilpatrick Life to continue providing the utmost service and protection for its policyholders for generations to come.
Prior to the stock purchase transaction, Security National life and Kilpatrick Life entered into a coinsurance agreement, effective October 1, 2019. After the effective date, Security National Life, as coinsurer, agreed to be responsible for and was obligated with respect to 100% of the contractual liabilities under the Kilpatrick Life’s life insurance policies in accordance with the terms and conditions of the policies and applicable law. Unless otherwise directed by Security National Life, as coinsurer, Kilpatrick Life continued to administer the policies on behalf of Security National Life, as coinsurer, for the duration of the coinsurance agreement.
As part of the coinsurance agreement, effective October 1, 2019, Security National Life acquired the following assets and assumed the following contractual liabilities.
Other investments and policy loans
|
$ 9,124,459
|
Real estate held for investment
|
2,850,000
|
Mortgage loans held for investment
|
200,000
|
Receivables
|
131,258
|
Total assets acquired
|
12,305,717
|
|
|
Future policy benefits and unpaid claims
|
(165,404,970)
|
Other liabilities and accrued expenses
|
(5,259,341)
|
Total liabilities assumed
|
(170,664,311)
|
Cash received for reinsurance assumed
|
$ 158,358,594
|
55
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2020 (Unaudited)
15) Acquisitions (Continued)
Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed to terminate the coinsurance agreement, to require the recapture of the life insurance policies by Kilpatrick Life and provided notification to the Louisiana Department of Insurance. The final settlement and transfer of the coinsurance trust assets from Security National Life back to Kilpatrick Life occurred shortly thereafter.
The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition, on December 13, 2019, are shown in the following table. At the time of acquisition some of these assets and liabilities became intercompany items, and the Company has eliminated them for consolidation.
Fixed maturity securities, available for sale
|
$ 22,766,520
|
|
Fixed maturity securities, held to maturity
|
16,436
|
|
Mortgage loans held for investment
|
8,011,660
|
|
Real estate held for investment
|
2,708,557
|
|
Other investments
|
446,655
|
|
Accrued investment income
|
183,527
|
|
Total investments
|
34,133,355
|
|
|
|
|
Cash and cash equivalents
|
6,900,654
|
|
Receivables, net
|
5,407,736
|
(1)
|
Receivables from reinsurers
|
168,105,064
|
(1)
|
Property and equipment, net
|
1,498,245
|
|
Value of business acquired
|
4,962,831
|
|
Deferred taxes
|
167,344
|
|
Other
|
712,323
|
|
Total assets acquired
|
221,887,552
|
|
|
|
|
Future policy benefits and unpaid claims
|
(189,071,407)
|
|
Accounts payable
|
(283,304)
|
|
Other liabilities and accrued expenses
|
(7,870,944)
|
|
Income taxes
|
(881,957)
|
|
Total liabilities assumed
|
(198,107,612)
|
|
Fair value of net assets acquired/consideration paid
|
$ 23,779,940
|
|
|
|
|
Fair value of net assets acquired/consideration paid, net of cash acquired
|
$ 16,879,286
|
|
|
|
|
(1) Receivable from reinsurers of $162,907,008 and receivables, net of $5,000,000 were settled with the recapture of the coinsurance agreement by Kilpatrick Life from Security National Life.
|
56
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 to focus on: (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 an improving housing market by originating mortgage loans. The Company has adjusted its strategy to respond to the changing economic circumstances resulting from the COVID-19 pandemic.
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 is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.
In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.
The following table shows the condensed financial results of the insurance operations for three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.
|
Three months ended September 30
(in thousands of dollars)
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
$ 23,767
|
|
$ 19,832
|
|
20%
|
|
$ 68,983
|
|
$ 58,505
|
|
18%
|
Net investment income
|
14,240
|
|
10,147
|
|
40%
|
|
40,074
|
|
30,020
|
|
3%
|
Gains (losses) on investments and other assets
|
860
|
|
(486)
|
|
(277%)
|
|
71
|
|
(615)
|
|
(112%)
|
Other
|
394
|
|
331
|
|
19%
|
|
1,127
|
|
1,027
|
|
10%
|
Total
|
$ 39,261
|
|
$ 29,824
|
|
32%
|
|
$ 110,255
|
|
$ 88,937
|
|
24%
|
Intersegment revenue
|
$ 2,953
|
|
$ 1,466
|
|
101%
|
|
$ 5,677
|
|
$ 3,441
|
|
65%
|
Earnings before income taxes
|
$ 4,807
|
|
$ 1,264
|
|
280%
|
|
$ 5,408
|
|
$ 4,568
|
|
18%
|
Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability for the nine months ended September 30, 2020 has increased due to a $10,478,000 increase in insurance premiums and other considerations, a $10,054,000 increase in net investment income, a $2,236,000 increase in intersegment revenue, a $686,000 increase in gains on investments and other assets primarily due to a decrease in the fair value of equity securities due to the recent downturn of the economy caused by the COVID-19 Pandemic offset by a decrease in impairment losses on commercial real estate, a $100,000 increase in other revenues, and a $238,000 decrease in interest expense. This increase was partially offset by a $14,456,000 increase in death, surrenders and other policy benefits, a $5,907,000 increase in selling, general and administrative expenses, a $1,127,000 increase in future policy benefits, and a $980,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs. The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019. See Note 15 to the condensed consolidated financial statements. This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and selling, general and administrative expenses.
57
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. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.
As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited. The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.
The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.
|
Three months ended September 30
(in thousands of dollars)
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Mortuary revenues
|
$ 2,112
|
|
$ 1,465
|
|
44%
|
|
$ 5,560
|
|
$ 4,693
|
|
18%
|
Cemetery revenues
|
3,260
|
|
2,061
|
|
58%
|
|
8,970
|
|
6,512
|
|
38%
|
Net investment income
|
168
|
|
112
|
|
50%
|
|
445
|
|
388
|
|
15%
|
Gains (losses) on investments and other assets
|
(67)
|
|
(101)
|
|
(34%)
|
|
(244)
|
|
752
|
|
(132%)
|
Other
|
23
|
|
32
|
|
(28%)
|
|
85
|
|
127
|
|
(33%)
|
Total
|
$ 5,496
|
|
$ 3,569
|
|
54%
|
|
$ 14,816
|
|
$ 12,472
|
|
19%
|
Earnings before income taxes
|
$ 1,322
|
|
$ 213
|
|
521%
|
|
$ 2,976
|
|
$ 2,422
|
|
23%
|
Profitability in the nine months ended September 30, 2020 has increased due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, an $867,000 increase in mortuary at-need sales, and an $82,000 increase in net investment income. This increase was partially offset by a $997,000 decrease in gains on investments and other assets primarily attributable to a $564,000 decrease in gains on real estate sales and a $433,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 Pandemic, an $801,000 increase in selling, general and administrative expenses, and a $357,000 increase in costs of goods sold.
Mortgage Operations
The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, 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), 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 originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life and unaffiliated financial institutions.
The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries 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 65% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.
For the nine months ended September 30, 2020 and 2019, SecurityNational Mortgage originated 14,462 loans ($3,708,810,000 total volume) and 7,817 loans ($1,792,058,000 total volume), respectively. For the nine months ended
58
September 30, 2020 and 2019, EverLEND Mortgage originated 400 loans ($115,519,000 total volume) and 185 loans ($48,494,000 total volume), respectively.
During the COVID-19 pandemic, the demand for mortgage loans has remained steady. The Company has seen most markets increase their demand for new homes and refinances on existing homes. The Company has transitioned 90% of its processes to a work from home environment. The largest hurdle that the Company faces is being able to process all applications in a timely manner.
The following table shows the condensed financial results of the mortgage operations for the three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.
|
Three months ended September 30
(in thousands of dollars)
|
|
Nine months ended September 30
(in thousands of dollars)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
|
2020
|
|
2019
|
|
% Increase (Decrease)
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Income from loan originations
|
$ 27,932
|
|
$ 12,162
|
|
130%
|
|
$ 60,994
|
|
$ 30,726
|
|
99%
|
Secondary gains from investors
|
70,628
|
|
27,574
|
|
156%
|
|
151,216
|
|
66,435
|
|
128%
|
Net investment income
|
300
|
|
219
|
|
37
|
|
553
|
|
654
|
|
(15%)
|
Gains on investments and other assets
|
7
|
|
67
|
|
(90%)
|
|
-
|
|
123
|
|
(100%)
|
Other
|
2,581
|
|
1,962
|
|
32%
|
|
6,641
|
|
5,971
|
|
11%
|
Total
|
$ 101,448
|
|
$ 41,984
|
|
142%
|
|
$ 219,404
|
|
$ 103,909
|
|
111%
|
Earnings before income taxes
|
$ 32,454
|
|
$ 3,283
|
|
889%
|
|
$ 58,868
|
|
$ 4,826
|
|
1120%
|
Included in other revenues is service fee income. The increase in earnings for the nine months ended September 30, 2020 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.
Mortgage Loan Loss Settlements
Future mortgage 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 mortgage loans sold. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of September 30, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.
Mortgage Loan Loss Litigation
For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.
Consolidation
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Total revenues increased by $70,825,000, or 94.0%, to $146,205,000 for the three months ended September 30, 2020, from $75,380,000 for the comparable period in 2019. Contributing to this increase in total revenues was a $58,824,000 increase in mortgage fee income, a $4,231,000 increase in net investment income, a $3,934,000 increase in insurance premiums and other considerations, a $1,845,000 increase in net mortuary and cemetery sales, a $1,320,000 increase in gains on investments and other assets, and a $671,000 increase in other revenues.
Insurance premiums and other considerations increased by $3,934,000, or 19.8%, to $23,766,000 for the three months ended September 30, 2020, from $19,832,000 for the comparable period in 2019. This increase was primarily due to $2,715,000 from the acquisition of Kilpatrick Life in December 2019. See Note 15 to the condensed consolidated financial statements. This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.
59
Net investment income increased by $4,231,000, or 40.4%, to $14,709,000 for the three months ended September 30, 2020, from $10,478,000 for the comparable period in 2019. This increase was primarily attributable to a $2,360,000 increase in mortgage loan interest ($545,000 due to the acquisition of Kilpatrick Life), a $740,000 increase in rental income from real estate held for investment ($52,000 due to the acquisition of Kilpatrick Life), a $628,000 increase in fixed maturity securities income ($719,000 due to the acquisition of Kilpatrick Life), a $710,000 increase in insurance assignment income, a $151,000 increase in policy loan income ($133,000 due to the acquisition of Kilpatrick Life), and a $52,000 increase in equity securities income. This increase was partially offset by a $334,000 decrease in interest on cash and cash equivalents and a $76,000 increase in investment expenses.
Net mortuary and cemetery sales increased by $1,845,000, or 52.3%, to $5,371,000 for the three months ended September 30, 2020, from $3,526,000 for the comparable period in 2019. This increase was primarily due to a $737,000 increase in cemetery at-need sales, a $647,000 increase in mortuary at-need sales, and a $461,000 increase in cemetery pre-need sales.
Gains on investments and other assets increased by $1,320,000, or 254.0%, to gains of $800,000 for the three months ended September 30, 2020, from losses of $520,000 for the comparable period in 2019. This increase in gains on investments and other assets was primarily due a $787,000 increase in gains ($338,000 due to the acquisition of Kilpatrick Life) on other assets mostly attributable to a decrease in impairment losses on commercial real estate. This increase in gains on investments and other assets was also due to a $619,000 increase in gains on equity securities ($149,000 due to the acquisition of Kilpatrick Life) mostly attributable to increases in the fair value of these equity securities. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This decrease in gains on investments and other assets was partially offset by a $86,000 decrease in gains on fixed maturity securities.
Mortgage fee income increased by $58,824,000, or 148.0%, to $98,560,000, for the three months ended September 30, 2020, from $39,736,000 for the comparable period in 2019. This increase was primarily due to a $43,054,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $13,412,000 increase in loan fees and interest income, and a $3,515,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage fee income was partially offset by a $1,157,000 increase in the provision for loan loss reserve.
Other revenues increased by $671,000, or 28.8%, to $2,997,000 for the three months ended September 30, 2020, from $2,326,000 for the comparable period in 2019. This increase was primarily attributable to an increase in servicing fee revenue.
Total benefits and expenses were $107,621,000, or 73.6% of total revenues, for the three months ended September 30, 2020, as compared to $70,620,000, or 93.7% of total revenues, for the comparable period in 2019.
Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $5,421,000 or 32.7%, to $21,976,000 for the three months ended September 30, 2020, from $16,555,000 for the comparable period in 2019. This increase was primarily the result of a $6,089,000 increase in death benefits ($2,290,000 due to the acquisition of Kilpatrick Life and $2,045,000 for COVID-19 related deaths) and a $420,000 increase in surrender and other policy benefits ($279,000 due to the acquisition of Kilpatrick Life). This increase was partially offset by a $1,088,000 decrease in future policy benefits ($166,000 due to the acquisition of Kilpatrick Life).
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $763,000, or 21.9%, to $4,240,000 for the three months ended September 30, 2020, from $3,477,000 for the comparable period in 2019.
Selling, general and administrative expenses increased by $30,334,000, or 63.5%, to $78,142,000 for the three months ended September 30, 2020, from $47,808,000 for the comparable period in 2019. This increase was primarily the result of a $21,048,000 increase in commissions, a $5,412,000 increase in personnel expenses, a $2,347,000 increase in other expenses, a $1,140,000 increase in costs related to funding mortgage loans, a $245,000 increase in advertising expenses, a $94,000 increase in depreciation on property and equipment, and a $48,000 increase in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to
60
the increase in mortgage loan originations and refinancings, most notably $38,936,000 in commissions, $3,904,000 in personnel expenses, $2,254,000 in other expenses, and $251,838 in advertising expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $490,000 in personnel expenses, $382,000 in other expenses, and $171,000 in commissions.
Interest expense increased by $284,000, or 13.7%, to $2,363,000 for the three months ended September 30, 2020, from $2,079,000 for the comparable period in 2019. This increase was primarily due to an increase of $470,000 in interest expense on mortgage warehouse lines for loans held for sale. This increase was partially offset by a $179,000 decrease in interest expense on bank loans collateralized by real estate held for investment.
Cost of goods and services sold-mortuaries and cemeteries increased by $198,000, or 28.2%, to $899,000 for the three months ended September 30, 2020, from $701,000 for the comparable period in 2019. This increase was primarily due to an $85,000 increase in mortuary at-need sales, a $61,000 increase in cemetery at-need sales, and a $51,000 increase in cemetery pre-need sales.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Total revenues increased by $139,156,000, or 67.8%, to $344,475,000 for the nine months ended September 30, 2020, from $205,319,000 for the comparable period in 2019. Contributing to this increase in total revenues was a $115,048,000 increase in mortgage fee income, a $10,478,000 increase in insurance premiums and other considerations, a $10,011,000 increase in net investment income, a $3,325,000 increase in net mortuary and cemetery sales, and a $729,000 increase in other revenues. This increase in total revenues was partially offset by a $435,000 decrease in gains on investments and other assets.
Insurance premiums and other considerations increased by $10,478,000, or 17.9%, to $68,983,000 for the nine months ended September 30, 2020, from $58,505,000 for the comparable period in 2019. This increase was primarily due to $8,560,000 from the acquisition of Kilpatrick Life in December 2019. See Note 15 to the condensed consolidated financial statements. This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.
Net investment income increased by $10,011,000, or 32.2%, to $41,072,000 for the nine months ended September 30, 2020, from $31,061,000 for the comparable period in 2019. This increase was primarily attributable to a $4,967,000 increase in mortgage loan interest ($1,611,000 due to the acquisition of Kilpatrick Life), a $2,674,000 increase in rental income from real estate held for investment ($145,000 due to the acquisition of Kilpatrick Life), a $1,663,000 increase in fixed maturity securities income ($1,799,000 due to the acquisition of Kilpatrick Life), a $1,273,000 increase in insurance assignment income, a $447,000 increase in policy loan income ($401,000 due to the acquisition of Kilpatrick Life), and a $102,000 increase in equity securities income. This increase was partially offset by a $978,000 decrease in interest on cash and cash equivalents ($120,000 increase due to the acquisition of Kilpatrick Life), a $81,000 decrease in other investment income ($25,000 increase due to the acquisition of Kilpatrick Life), and a $56,000 increase in investment expenses ($169,000 increase due to the acquisition of Kilpatrick Life)
Net mortuary and cemetery sales increased by $3,325,000, or 29.7%, to $14,531,000 for the nine months ended September 30, 2020, from $11,206,000 for the comparable period in 2019. This increase was primarily due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, and a $867,000 increase in mortuary at-need sales.
Gains on investments and other assets decreased by $435,000, or 166.4%, to losses of $174,000 for the nine months ended September 30, 2020, from gains of $261,000 for the comparable period in 2019. This decrease in gains on investments and other assets was primarily due a $1,340,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, due to the recent downturn of the economy caused by the COVID-19 Pandemic. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This decrease in gains on investments and other assets was also due to a $91,000 decrease in gains on fixed maturity securities.
61
This decrease was partially offset by a $996,000 increase in gains on other assets mostly attributable to a decrease in impairment losses on commercial real estate held for sale.
Mortgage fee income increased by $115,049,000, or118.4%, to $212,210,000, for the nine months ended September 30, 2020, from $97,161,000 for the comparable period in 2019. This increase was primarily due to a $84,781,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $20,604,000 increase in loan fees and interest income, and a $12,704,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage fee income was partially offset by a $3,040,000 increase in the provision for loan loss reserve.
Other revenues increased by $729,000, or 10.2%, to $7,854,000 for the nine months ended September 30, 2020, from $7,125,000 for the comparable period in 2019. This increase was primarily attributable to an increase in servicing fee revenue.
Total benefits and expenses were $277,223,000, or 80.5% of total revenues, for the nine months ended September 30, 2020, as compared to $193,503,000, or 94.2% of total revenues, for the comparable period in 2019.
Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $15,582,000 or 31.8%, to $64,521,000 for the nine months ended September 30, 2020, from $48,939,000 for the comparable period in 2019. This increase was primarily the result of a $13,757,000 increase in death benefits ($6,744,000 due to the acquisition of Kilpatrick Life and $3,338,000 for COVID-19 related deaths), a $1,127,000 increase in future policy benefits ($2,096,000 due to the acquisition of Kilpatrick Life) and a $699,000 increase in surrender and other policy benefits ($840,000 due to the acquisition of Kilpatrick Life).
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,103,000, or 11.4%, to $10,782,000 for the nine months ended September 30, 2020, from $9,679,000 for the comparable period in 2019. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs and $152,000 due to the acquisition of Kilpatrick Life.
Selling, general and administrative expenses increased by $65,969,000, or 51.7%, to $193,456,000 for the nine months ended September 30, 2020, from $127,487,000 for the comparable period in 2019. This increase was primarily the result of a $41,313,000 increase in commissions, a $13,941,000 increase in personnel expenses, a $7,926,000 increase in other expenses, a $2,561,000 increase in costs related to funding mortgage loans, a $256,000 increase in depreciation on property and equipment, and a $275,000 increase in advertising expenses. This increase was partially offset by a $303,000 decrease in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $40,244,000 in commissions, $9,111,000 in personnel expenses, and $6,873,000 in other expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $1,707,000 in personnel expenses, $1,341,000 in other expenses, and $1,086,000 in commissions.
Interest expense increased by $710,000, or 13.3%, to $6,063,000 for the nine months ended September 30, 2020, from $5,353,000 for the comparable period in 2019. This increase was primarily due to a $1,001,000 increase in interest expense on mortgage warehouse lines for loans held for sale offset by a $260,000 decrease in interest on bank loans collateralized by real estate held for investment.
Cost of goods and services sold-mortuaries and cemeteries increased by $357,000, or 17.4%, to $2,402,000 for the nine months ended September 30, 2020, from $2,045,000 for the comparable period in 2019. This increase was primarily due to a $182,000 increase in cemetery at-need sales, a $99,000 increase in cemetery pre-need sales, and a $76,000 increase in mortuary at-need sales.
62
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 or sale of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans, and fees earned from mortgage loans held for sale that are sold to investors into the secondary market. 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, and debt service, and to meet current operating expenses. It should be noted that current conditions in the financial markets and economy caused by the COVID-19 Pandemic may affect the cash flows of the Company.
During the nine months ended September 30, 2020 and 2019, the Company's operations used cash of $164,589,000 and $62,866,000, respectively. This decrease was due primarily to originations of mortgage loans held for sale.
The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance 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 having to liquidate these long-term investments as a result of any sudden changes in their fair values.
The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing. 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.
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 and classified as fixed maturity securities available for sale carried at estimated fair value amounted to $344,677,000 and $355,613,000 as of September 30, 2020 and December 31, 2019, respectively. This represents 42.74% and 45.5% of the total investments as of September 30, 2020 and December 31, 2019, 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 September 30, 2020, 3.6% (or $12,269,000) and at December 31, 2019, 2.2% (or $7,633,000) 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 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 September 30, 2020 and December 31, 2019, the life insurance subsidiaries were in compliance with the regulatory criteria.
The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $682,332,000 as of September 30, 2020, as compared to $414,283,000 as of December 31, 2019. Stockholders’ equity as a percent of total capitalization was 37.7% and 47.5% as of September 30, 2020 and December 31, 2019, respectively.
Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2019 was 9.8% as compared to a rate of 9.9% for 2018. The 2020 lapse rate to date has been approximately the same as 2019.
At September 30, 2020, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $74,881,000. The life insurance subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.
63
COVID-19 Pandemic
During the first and second quarters of 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company is closely monitoring developments relating to the COVID-19 pandemic and assessing its impact on the Company’s business. The COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions.
Like most businesses, COVID-19 has impacted the Company. However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risks.” These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company.
The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, such as business travel restrictions and remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.
Item 4.Controls and Procedures.
Disclosure Controls and Procedures
As of September 30, 2020, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).
Changes in Internal Control over Financial Reporting
Except for the remediation steps taken to address the material weakness discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, there have not been any significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Remediation Efforts to Address the Material Weakness
The Company acquired Kilpatrick Life in December 2019. Prior to the acquisition, the Company identified a material weakness in Kilpatrick Life’s internal control over financial reporting related to change management and segregation of duties for the policy administration system. As of September 30, 2020, the known deficiencies have been remediated to the extent that they no longer give rise to a material weakness with the following controls implemented by management.
·Execution of a formal consultant agreement with the former system developer.
·Creation of unique login credentials for system users.
·Implementation of system change control processes, including the installation of a third-party database logging software.
As of November 13, 2020, the Company had not fully assessed Kilpatrick Life’s internal controls over financial reporting and is currently testing new and revised internal controls for design and operating effectiveness. The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and the Company has elected to exclude Kilpatrick Life from its assessment. The Company has performed additional analysis and procedures to conclude that it believes the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.
Part II - Other Information
Item 1. Legal Proceedings.
For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.
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.
Item 1A. Risk Factors.
As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
None.
Issuer Purchases of Equity Securities
In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company's Class A Common Stock in the open market. The repurchased shares of Class A common stock will be held as treasury shares to be used as the Company's employer matching contribution to the Employee 401(k) Retirement Savings Plan.
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The following table shows the Company's repurchase activity during the three months ended September 30, 2020 under the Stock Repurchase Plan.
Period
|
(a) Total Number of Class A Shares Purchased
|
|
(b) Average Price Paid per Class A Share
|
|
(c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program
|
|
(d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program
|
7/1/2020-7/31/2020
|
12,809
|
|
$ 6.26
|
|
-
|
|
109,118
|
8/1/2020-8/31/2020
|
8,644
|
|
6.48
|
|
-
|
|
100,474
|
9/1/2020-9/30/2020
|
11,356
|
|
6.48
|
|
-
|
|
89,118
|
|
|
|
|
|
|
|
|
Total
|
32,809
|
|
$ 6.38
|
|
-
|
|
89,118
|
Item 3.Defaults Upon Senior Securities.
None.
Item 4.Mine Safety Disclosures.
None.
Item 5.Other Information.
None.
Item 6.Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a)(1)Financial Statements
See “Table of Contents – Part I – Financial Information” under page 2 above
(a)(2)Financial Statement Schedules
None
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3)Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings.
3.1Amended and Restated Articles of Incorporation (5)
3.2Amended and Restated Bylaws (9)
4.1Specimen Class A Stock Certificate (1)
4.2Specimen Class C Stock Certificate (1)
4.3Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1)
10.1Employee Stock Ownership Plan, as amended and restated (ESOP) and Trust Agreement (1)
10.2Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan (3)
10.3Amended and Restated 2014 Director Stock Option Plan (12)
10.4Employment Agreement with Scott M. Quist (2)
10.5Stock Purchase Agreement among Security National Financial Corporation, Beta Capital Corp., and Ronald D. Maxson, sole shareholder (6)
10.6Stock Repurchase Plan (7)
10.7Asset Purchase Agreement among SN Probst LLC, Probst Family Funerals and Cremations, L.L.C, Heber Valley Funeral Home, Inc., Joe T. Probst, Clinton Wayne Probst, Calle J. Probst, and Marsha J. Probst (8)
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10.8Coinsurance Agreement between Kilpatrick Life Insurance Company and Security National Life Insurance Company (10)
10.9 Stock Purchase Agreement among Security National Financial Corporation, Kilpatrick Life Insurance Company, and the Shareholders of Kilpatrick Life Insurance Company (10)
10.10Consolidated Statement of Assets Acquired and Liabilities Assumed at December 13, 2019 (11)
14Code of Business Conduct and Ethics (9)
21Subsidiaries of the Registrant
23.1Consent of Eide Bailly LLP (4)
23.2Consent of Mackey Price & Mecham (4)
31.1Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
31.2Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.xmlInstance Document
101.xsdTaxonomy Extension Schema Document
101.calTaxonomy Extension Calculation Linkbase Document
101.defTaxonomy Extension Definition Linkbase Document
101.labTaxonomy Extension Label Linkbase Document
101.preTaxonomy Extension Presentation Linkbase Document
(1)Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987
(2)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2015
(3)Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016
(4)Incorporated by reference from Registration Statement on Form S-8, as filed on September 7, 2016
(5)Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017
(6)Incorporated by reference from Report on Form 8-K, as filed on June 6, 2018
(7)Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2018
(8)Incorporated by reference from Report on Form 8-K, as filed on February 28, 2019
(9)Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019
(10) Incorporated by reference from Report on Form 8-K, as filed on November 12, 2019
(11) Incorporated by reference from Report on Form 8-K/A, as filed on February 26, 2020
(12) Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2020
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL CORPORATION
Registrant
Dated: November 13, 2020
|
|
/s/ Scott M. Quist
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|
|
Scott M. Quist
|
|
|
Chairman, President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
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|
|
|
Dated: November 13, 2020
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|
/s/ Garrett S. Sill
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|
|
Garrett S. Sill
|
|
|
Chief Financial Officer and Treasurer
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|
|
(Principal Financial Officer and Principal Accounting Officer)
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|
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