UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

or

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ________

 

Commission File Number: 000-09341

 

SECURITY NATIONAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

UTAH

87-0345941

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

121 West Election Road, Suite 100, Draper, Utah

84020

(Address of principal executive offices)

(Zip Code)

 

 

(801) 264-1060

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol

Name of exchange on which registered

Class A Common Stock

SNFCA

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   

Yes [X] No [  ] 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

Yes [X] No [  ] 

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]    

Non-accelerated filer [  ] (Do not check if a smaller reporting company)Smaller reporting company [X] 

Emerging growth company [  ] 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ] 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes [  ] No[X] 

 

 

As of May 15, 2020, the registrant had 16,142,513 shares of Class A Common Stock, $2.00 par value, outstanding and 2,489,215 shares of Class C Common Stock, $2.00 par value, outstanding. 

 

===================================================================================


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2020

 

Table of Contents

 

 

 

 

Page No.

 

Part I  - Financial Information

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

3-4

 

Condensed Consolidated Statements of Earnings for the three months
ended March 31, 2020 and 2019 (unaudited)

5

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 202f0 and 2019 (unaudited)

6

 

Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2020 and March 31, 2019 (unaudited)

7

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

8-9

 

Notes to Condensed Consolidated Financial Statements (unaudited)

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

53

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

Item 4.

Controls and Procedures

58

 

Part II - Other Information

 

Item 1.

Legal Proceedings

60

Item 1A.

Risk Factors

60

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

 

Signature Page

63

 

Certifications

64


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Part I - Financial Information

 

Item 1. Financial Statements. 

 

Assets

March 31
2020
(Unaudited)

 

December 31
2019

Investments:

 

 

 

  Fixed maturity securities, available for sale, at estimated fair value

$       329,145,562

 

$   355,977,820

Equity securities at estimated fair value

             8,235,945

 

         7,271,165

Mortgage loans held for investment (net of allowances for loan losses of $2,089,670 and $1,453,037 for 2020 and 2019)

         250,404,519

 

     236,694,546

Real estate held for investment (net of accumulated depreciation of $12,858,882 and $12,788,739 for 2020 and 2019)

         102,916,419

 

     102,756,946

Real estate held for sale

           11,724,432

 

       14,097,627

Other investments and policy loans (net of allowances for doubtful accounts of $1,489,113 and $1,448,026 for 2020 and 2019)

           58,487,143

 

       60,245,269

Accrued investment income

             5,757,535

 

         4,833,232

Total investments

         766,671,555

 

     781,876,605

Cash and cash equivalents

         103,769,066

 

     127,754,719

Loans held for sale at estimated fair value

         281,052,576

 

     213,457,632

Receivables (net of allowances for doubtful accounts of $1,710,087
and $1,724,156 for 2020 and 2019)

           10,089,043

 

         9,236,330

Restricted assets (including $2,716,047 and $2,985,347 for 2020 and 2019 at estimated fair value)

           19,605,629

 

       13,935,317

Cemetery perpetual care trust investments (including $2,344,229 and $2,581,124 for 2020 and 2019 at estimated fair value)

             4,150,667

 

         4,411,864

Receivable from reinsurers

           15,517,323

 

       15,747,768

Cemetery land and improvements

             9,260,286

 

         9,519,950

Deferred policy and pre-need contract acquisition costs

           95,942,560

 

       94,701,920

Mortgage servicing rights, net

           16,777,131

 

       17,155,529

Property and equipment, net

           13,111,612

 

       14,600,394

Value of business acquired

             9,821,074

 

         9,876,647

Goodwill

             3,519,588

 

         3,519,588

Other

           26,872,727

 

       18,649,812

 

 

 

 

Total Assets

$     1,376,160,837

 

$ 1,334,444,075

 

 

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


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

 

March 31
2020
(Unaudited)

 

December 31
2019

Liabilities and Stockholders' Equity

 

 

 

Liabilities

 

 

 

Future policy benefits and unpaid claims

$   831,659,523

 

$   825,600,918

Unearned premium reserve

         3,568,325

 

         3,621,697

Bank and other loans payable

     253,965,181

 

     217,572,612

Deferred pre-need cemetery and mortuary contract revenues

       12,689,862

 

       12,607,978

Cemetery perpetual care obligation

         3,955,244

 

         3,933,719

Accounts payable

         4,345,576

 

         5,056,983

Other liabilities and accrued expenses

       59,882,522

 

       50,652,591

Income taxes

       16,382,341

 

       18,686,972

Total liabilities

   1,186,448,574

 

   1,137,733,470

 

 

 

 

Stockholders' Equity

 

 

 

Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding

                     -

 

                     -

Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,142,513 shares in 2020 and 16,107,779 shares in 2019

       32,285,026

 

       32,215,558

Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding

                     -

 

                     -

Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,489,215 shares in 2020 and 2,500,887 shares in 2019

         4,978,430

 

         5,001,774

Additional paid-in capital

       46,343,631

 

       46,091,112

Accumulated other comprehensive income, net of taxes

         4,874,201

 

       13,726,514

Retained earnings

     102,677,084

 

     101,256,229

Treasury stock at cost - 430,280 Class A shares in 2020 and 490,823 Class A shares in 2019

       (1,446,109)

 

       (1,580,582)

 

 

 

 

Total stockholders' equity

     189,712,263

 

     196,710,605

 

 

 

 

Total Liabilities and Stockholders' Equity

$ 1,376,160,837

 

$ 1,334,444,075

 

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


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

Three Months Ended March 31

 

2020

 

2019

Revenues:

 

 

 

Insurance premiums and other considerations

$      22,291,276

 

$      19,027,002

Net investment income

        13,400,499

 

        10,041,668

Net mortuary and cemetery sales

         4,458,091

 

         3,678,628

Gains (losses) on investments and other assets

        (3,212,247)

 

         1,806,661

Mortgage fee income

        40,281,761

 

        24,478,871

Other

         2,389,569

 

         2,461,005

Total revenues

79,608,949

 

61,493,835

 

 

 

 

Benefits and expenses:

 

 

 

Death benefits

        13,407,627

 

        10,077,903

Surrenders and other policy benefits

         1,070,475

 

            865,931

Increase in future policy benefits

         7,038,033

 

         5,751,130

Amortization of deferred policy and pre-need acquisition costs and value of business acquired

         3,515,057

 

         3,128,274

Selling, general and administrative expenses:

 

 

 

Commissions

        16,554,743

 

         9,675,092

Personnel

        18,719,998

 

        15,031,336

Advertising

         1,005,317

 

         1,033,175

Rent and rent related

         1,614,741

 

         1,904,288

Depreciation on property and equipment

            516,213

 

            449,680

Costs related to funding mortgage loans

         1,956,282

 

         1,354,925

Other

        10,075,542

 

         7,645,127

Interest expense

         1,818,609

 

         1,491,887

Cost of goods and services sold-mortuaries and cemeteries

            842,078

 

            652,928

Total benefits and expenses

78,134,715

 

59,061,676

 

 

 

 

Earnings before income taxes

         1,474,234

 

         2,432,159

Income tax expense

            (49,785)

 

          (501,841)

 

 

 

 

Net earnings

$        1,424,449

 

$        1,930,318

 

 

 

 

Net earnings per Class A Equivalent common share (1)

$0.08

 

$0.11

 

 

 

 

Net earnings per Class A Equivalent common share-assuming dilution (1)

$0.08

 

$0.11

 

 

 

 

Weighted-average Class A equivalent common share outstanding (1)

18,184,575

 

18,102,318

 

 

 

 

Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)

18,371,352

 

18,323,402

 

 

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

 

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


 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Three Months Ended March 31

 

2020

 

2019

Net earnings

$        1,424,449

 

$        1,930,318

Other comprehensive income (loss):

 

 

 

Unrealized losses on fixed maturity securities available for sale

$     (11,181,151)

 

                      -

Unrealized losses on restricted assets

             (13,085)

 

                      -

Unrealized losses on cemetery perpetual care trust investments

             (12,046)

 

                      -

Foreign currency translation adjustments

                 (445)

 

                1,092

Other comprehensive income (loss), before income tax

       (11,206,727)

 

                1,092

Income tax benefit (expense)

          2,354,414

 

                 (272)

Other comprehensive income (loss), net of income tax

        (8,852,313)

 

                  820

Comprehensive income (loss)

$       (7,427,864)

 

$        1,931,138

 

 

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


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

Three Months Ended March 31, 2020

 

 

Class A Common Stock

 

Class C Common Stock

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income

 

Retained Earnings

 

Treasury Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

$  32,215,558

 

$ 5,001,774

 

$      46,091,112

 

$          13,726,514

 

$  101,256,229

 

$ (1,580,582)

 

$  196,710,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                            -

 

                         -

 

                               -

 

                                    -

 

          1,424,449

 

                           -

 

          1,424,449

Other comprehensive loss

 

                            -

 

                         -

 

                               -

 

             (8,852,313)

 

                              -

 

                           -

 

        (8,852,313)

Stock-based compensation expense

 

                            -

 

                         -

 

                 65,877

 

                                    -

 

                              -

 

                           -

 

                65,877

Exercise of stock options

 

              44,822

 

                         -

 

               (33,930)

 

                                    -

 

                              -

 

                           -

 

                 10,892

Sale of treasury stock

 

                            -

 

                         -

 

               218,280

 

                                    -

 

                              -

 

           264,081

 

              482,361

Purchase of treasury stock

 

                            -

 

                         -

 

                               -

 

                                    -

 

                              -

 

         (129,608)

 

            (129,608)

Stock dividends

 

                 2,322

 

             (1,020)

 

                    2,292

 

                                    -

 

                 (3,594)

 

                           -

 

                              -

Conversion Class C to Class A

 

              22,324

 

         (22,324)

 

                               -

 

                                    -

 

                              -

 

                           -

 

                              -

March 31, 2020

 

$ 32,285,026

 

$4,978,430

 

$    46,343,631

 

$            4,874,201

 

$ 102,677,084

 

$  (1,446,109)

 

$  189,712,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

Class A Common Stock

 

Class C Common Stock

 

Additional Paid-in Capital

 

Accumulated Other Comprehensive Income

 

Retained Earnings

 

Treasury Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

$ 30,609,596

 

$  4,387,286

 

$     41,821,778

 

$                    (2,823)

 

$    95,201,732

 

$     (206,396)

 

$     171,811,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

                            -

 

                          -

 

                               -

 

                                    -

 

           1,930,318

 

                           -

 

           1,930,318

Other comprehensive gain

 

                            -

 

                          -

 

                               -

 

                             820

 

                              -

 

                           -

 

                        820

Stock-based compensation expense

 

                            -

 

                          -

 

                 64,704

 

                                    -

 

                              -

 

                           -

 

                64,704

Exercise of stock options

 

                 8,936

 

                          -

 

                    8,444

 

                                    -

 

                              -

 

                           -

 

                 17,380

Sale of treasury stock

 

                            -

 

                          -

 

               295,153

 

                                    -

 

                              -

 

             42,343

 

             337,496

Purchase of treasury stock

 

                            -

 

                          -

 

                               -

 

                                    -

 

                              -

 

          (112,404)

 

             (112,404)

Stock dividends

 

                      282

 

                        (4)

 

                        489

 

                                    -

 

                      (769)

 

                           -

 

                            (2)

Conversion Class C to Class A

 

                 6,560

 

             (6,560)

 

                               -

 

                                    -

 

                              -

 

                           -

 

                              -

March 31, 2019

 

$ 30,625,374

 

$  4,380,722

 

$    42,190,568

 

$                    (2,003)

 

$      97,131,281

 

$     (276,457)

 

$ 174,049,485

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended March 31

 

2020

 

2019

Cash flows from operating activities:

 

 

 

    Net cash provided by (used in) operating activities

$  (63,771,244)

 

$    19,519,486

 

 

 

 

Cash flows from investing activities:

 

 

 

Purchases of fixed maturity securities

    (28,691,834)

 

        (928,996)

Sales, calls and maturities of fixed maturity securities

     44,166,424

 

       1,541,770

Purchases of equity securities

    (10,650,102)

 

      (1,061,710)

Sales of equity securities

       7,576,507

 

          355,562

Net changes in restricted assets

          753,326

 

        (482,975)

Net changes in perpetual care trusts

        (107,286)

 

          484,581

Mortgage loans held for investment, other investments and policy loans made

  (153,050,405)

 

  (137,912,509)

Payments received for mortgage loans held for investment, other investments and policy loans

    149,366,124

 

    123,293,624

Purchases of property and equipment

        (534,737)

 

          (76,403)

Sales of property and equipment

                    -

 

                799

Purchases of real estate

        (750,018)

 

      (1,309,373)

Sales of real estate

       4,153,329

 

       2,349,864

Cash paid for purchase of subsidiaries, net of cash acquired

                    -

 

      (3,261,788)

     Net cash provided by (used in) investing activities

     12,231,328

 

    (17,007,554)

 

 

 

 

Cash flows from financing activities:

 

 

 

Investment contract receipts

       2,640,020

 

       2,760,871

Investment contract withdrawals

      (4,662,891)

 

      (3,959,861)

Proceeds from stock options exercised

           10,892

 

           17,380

Purchases of treasury stock

        (129,608)

 

        (112,404)

Repayment of bank and other loans

        (810,623)

 

    (46,299,191)

Proceeds from bank borrowings

     20,172,821

 

     47,273,807

Net change in warehouse line borrowings for loans held for sale

     16,982,783

 

    (13,643,525)

     Net cash provided by (used in) financing activities

     34,203,394

 

    (13,962,923)

 

 

 

 

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents

(17,336,522)

 

(11,450,991)

 

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period

137,735,673

 

150,936,673

 

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

$  120,399,151

 

$  139,485,682

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

Cash paid during the year for:

 

 

 

Interest

$     1,845,747

 

$     1,508,895

Income taxes (net of refunds)

                    -

 

          (15,975)

 

 

 

 

Non Cash Operating, Investing and Financing Activities:

 

 

 

Transfer of loans held for sale to mortgage loans held for investment

$     8,933,676

 

$                  -

Right-of-use assets obtained in exchange for operating lease liabilities

       3,271,518

 

     11,931,889

Benefit plans funded with treasury stock

          482,361

 

          337,496

Accrued real estate construction costs and retainage

          399,976

 

          786,859

Right-of-use assets obtained in exchange for finance lease liabilities

             9,394

 

          238,335

Mortgage loans held for investment foreclosed into real estate held for investment

                    -

 

          550,000

Mortgage loans held for investment foreclosed into receivables

                    -

 

          155,347

 

 

 

 

See Note 15 regarding non cash transactions included in the acquisition of Probst Family Funeral and Cremations and Heber Valley Funeral Home.


 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

 

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below:

 

 

Three Months Ended March 31

 

2020

 

2019

Cash and cash equivalents

$     103,769,066

 

$      130,133,196

Restricted assets

        15,347,648

 

            7,751,804

Cemetery perpetual care trust investments

          1,282,437

 

            1,600,682

 

 

 

 

Total cash, cash equivalents, restricted cash and restricted cash equivalents

$     120,399,151

 

$      139,485,682

 

 

 

 

 

 

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


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


1)Basis of Presentation 

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K (File Number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect the Company’s operations in March and will likely adversely affect nearly all of the Company’s operations in the second quarter, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect the Company’s future earnings, cash flows, and financial condition include the nature and duration of the curtailment or closure of the Company’s various facilities and the long-term effect on the demand for the Company’s products and services. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates.

 

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

 

2)Recent Accounting Pronouncements 

 

Accounting Standards Adopted in 2020

 

ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures.


10


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


Accounting Standards Adopted in 2019

 

ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate met hod or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20. The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.

 

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor.

 

Accounting Standards Issued But Not Yet Adopted

 

ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. In October 2019, the FASB proposed an update to ASU No. 2016-13 that would make the ASU effective for the Company on January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment.

 

ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In October 2019, the FASB proposed an update to ASU No. 2018-12 that would make the ASU effective for the Company on January 1, 2024. The Company is in the process of evaluating the potential impact of this standard.


11


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


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

 

3)Investments 

 

The Company’s investments as of March 31, 2020 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

March 31, 2020:

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value:

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. Government agencies

 

$    112,607,309

 

$       2,088,697

 

$                      -

 

$      114,696,006

    

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

6,399,567

 

194,880

 

(9,121)

 

6,585,326

 

 

 

 

 

 

 

 

 

Corporate securities including public utilities

 

171,895,973

 

12,098,857

 

(7,611,064)

 

176,383,766

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

31,789,238

 

634,576

 

(1,317,320)

 

31,106,494

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

364,339

 

              18,381

 

               (8,750)

 

373,970

 

 

 

 

 

 

 

 

 

Total fixed maturity securities available for sale

 

$    323,056,426

 

$     15,035,391

 

$      (8,946,255)

 

$      329,145,562

 

 

 

 

 

 

 

 

 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$        9,970,160

 

$          786,981

 

$      (2,521,196)

 

$          8,235,945

 

 

 

 

 

 

 

 

 

Total equity securities at estimated fair value

 

$        9,970,160

 

$          786,981

 

$      (2,521,196)

 

$          8,235,945

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$    117,696,147

 

 

 

 

 

 

Residential construction

 

        93,590,770

 

 

 

 

 

 

Commercial

 

        44,604,661

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

        (2,169,620)

 

 

 

 

 

 

Less: Allowance for loan losses

 

        (2,089,670)

 

 

 

 

 

 

Less: Net discounts

 

        (1,227,769)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$    250,404,519

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$      10,939,769

 

 

 

 

 

 

Commercial

 

        91,976,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for investment

 

$    102,916,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$        5,648,111

 

 

 

 

 

 

Commercial

 

          6,076,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for sale

 

$      11,724,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$      14,617,151

 

 

 

 

 

 

Insurance assignments

 

        38,444,267

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

          1,674,400

 

 

 

 

 

 

Other investments

 

          5,240,438

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

        (1,489,113)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total policy loans and other investments

 

$      58,487,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

$        5,757,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$    766,671,555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                         

 

 

 

 

 

 

 

 

(1) Includes $874,400 of Membership stock and $800,000 of Activity stock due to short-term borrowings.


12


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


The Company’s investments as of December 31, 2019 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

December 31, 2019:

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value:

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. Government agencies

 

$    142,740,641

 

$          632,185

 

$           (25,215)

 

$      143,347,611

    

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

7,450,366

 

87,812

 

(9,026)

 

7,529,152

 

 

 

 

 

 

 

 

 

Corporate securities including public utilities

 

156,599,184

 

16,768,449

 

(463,413)

 

172,904,220

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

31,475,280

 

597,395

 

(240,177)

 

31,832,498

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

364,339

 

                      -   

 

                      -   

 

364,339

 

 

 

 

 

 

 

 

 

Total fixed maturity securities available for sale

 

$    338,629,810

 

$     18,085,841

 

$         (737,831)

 

$      355,977,820

 

 

 

 

 

 

 

 

 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$        6,900,537

 

$       1,139,799

 

$         (769,171)

 

$          7,271,165

 

 

 

 

 

 

 

 

 

Total equity securities at estimated fair value

 

$        6,900,537

 

$       1,139,799

 

$         (769,171)

 

$          7,271,165

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$    113,043,965

 

 

 

 

 

 

Residential construction

 

        89,430,237

 

 

 

 

 

 

Commercial

 

        38,718,220

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

        (2,391,567)

 

 

 

 

 

 

Less: Allowance for loan losses

 

        (1,453,037)

 

 

 

 

 

 

Less: Net discounts

 

           (653,272)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$    236,694,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$      12,530,306

 

 

 

 

 

 

Commercial

 

        90,226,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for investment

 

$    102,756,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$        8,021,306

 

 

 

 

 

 

Commercial

 

          6,076,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for sale

 

$      14,097,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$      14,762,805

 

 

 

 

 

 

Insurance assignments

 

        41,062,965

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

             894,300

 

 

 

 

 

 

Other investments

 

          4,973,225

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

        (1,448,026)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total policy loans and other investments

 

$      60,245,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

$        4,833,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$    781,876,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                         

 

 

 

 

 

 

 

 

(1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings.


13


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


Fixed Maturity Securities

 

The following tables summarize unrealized losses on fixed maturity securities available for sale, which are carried at estimated fair value, at March 31, 2020 and December 31, 2019. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

 

 

 

Unrealized Losses for Less than Twelve Months

 

Fair Value

 

Unrealized Losses for More than Twelve Months

 

Fair Value

 

Total Unrealized Loss

 

Fair Value

At March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of States and Political Subdivisions

 

$            9,121

 

$     1,517,439

 

$                    -

 

$                    -

 

$            9,121

 

$     1,517,439

Corporate Securities

 

       6,202,615

 

     45,578,852

 

       1,408,449

 

       2,597,590

 

       7,611,064

 

     48,176,442

Mortgage and other asset-backed securities

 

       1,285,828

 

     20,262,301

 

            31,492

 

          477,580

 

       1,317,320

 

     20,739,881

Redeemable preferred stock

 

              8,750

 

          241,250

 

                      -

 

                      -

 

              8,750

 

          241,250

Total unrealized losses

 

$     7,506,314

 

$   67,599,842

 

$     1,439,941

 

$     3,075,170

 

$     8,946,255

 

$   70,675,012

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities and Obligations

 

 

 

 

 

 

 

 

 

 

 

 

   of U.S. Government Agencies

 

$          20,211

 

$   30,629,288

 

$            5,004

 

$   10,000,400

 

$          25,215

 

$   40,629,688

Obligations of States and Political Subdivisions

 

              9,026

 

       3,062,889

 

                      -

 

                      -

 

              9,026

 

       3,062,889

Corporate Securities

 

          118,746

 

       7,184,311

 

          344,667

 

       3,950,509

 

          463,413

 

     11,134,820

Mortgage and other asset-backed securities

 

          205,470

 

     13,266,443

 

            34,707

 

          502,769

 

          240,177

 

     13,769,212

Total unrealized losses

 

$        353,453

 

$   54,142,931

 

$        384,378

 

$   14,453,678

 

$        737,831

 

$   68,596,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were 253 securities with fair value of 88.8% of amortized cost at March 31, 2020. There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019. No credit losses have been recognized for the three months ended March 31, 2020 and 2019.

 

On a quarterly basis, the Company evaluates its fixed maturity securities available for sale. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment. 

 

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


14


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


The amortized cost and estimated fair value of fixed maturity securities available for sale, at March 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized
Cost   

 

Estimated Fair
  Value      

Due in 1 year

 

$       73,238,213

 

$       73,502,130

Due in 2-5 years

 

         71,857,335

 

         73,583,452

Due in 5-10 years

 

         77,612,911

 

         76,748,155

Due in more than 10 years

 

         68,194,390

 

         73,831,361

Mortgage-backed securities

 

         31,789,238

 

         31,106,494

Redeemable preferred stock

 

              364,339

 

              373,970

Total

 

$     323,056,426

 

$     329,145,562

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $110,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at March 31, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of March 31, 2020, the Company owed $20,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $88,389,000.

 

Investment Related Earnings

 

The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows:

 

 

 

Three Months Ended March 31

 

 

2020

 

2019

Fixed maturity securities:

 

 

 

 

Gross realized gains

 

$        95,821

 

$        85,587

Gross realized losses

 

                  -

 

        (35,393)

 

 

 

 

 

Equity securities:

 

 

 

 

Gains (losses) on securities sold

 

        (57,442)

 

          11,576

Unrealized gains and (losses) on securities held at the end of the period

 

    (2,761,856)

 

        761,208

 

 

 

 

 

Other assets:

 

 

 

 

Gross realized gains

 

        457,028

 

      1,104,935

Gross realized losses

 

       (945,798)

 

       (121,252)

Total

 

$  (3,212,247)

 

$    1,806,661


15


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method.

 

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity available for sale securities for the three months ended March 31, 2020, were $645,750, and resulted in gross realized gains and gross realized losses of $79,411 and $-0-, respectively. The carrying amount of held to maturity securities sold was $369,263 for the three months ended March 31, 2019.  The net realized loss related to these sales was $35,388 for the three months ended March 31, 2019.

 

Major categories of net investment income are as follows:

 

 

Three Months Ended March 31

 

2020

 

2019

Fixed maturity securities

$     2,924,714

 

$     2,503,865

Equity securities

           92,042

 

           77,921

Mortgage loans held for investment

       5,653,890

 

       4,103,367

Real estate held for investment

       3,153,385

 

       1,910,294

Policy loans

         233,966

 

           88,137

Insurance assignments

       4,299,205

 

       4,212,120

Other investments

           25,023

 

           54,548

Cash and cash equivalents

         298,005

 

         498,918

Gross investment income

     16,680,230

 

     13,449,170

Investment expenses

     (3,279,731)

 

     (3,407,502)

Net investment income

$   13,400,499

 

$   10,041,668

 

 

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $110,639 and $86,288 for the three months ended March 31, 2020 and 2019, respectively.

 

Net investment income on real estate consists primarily of rental revenue.

 

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

 

Securities on deposit with regulatory authorities as required by law amounted to $9,633,176 at March 31, 2020 and $9,633,818 at December 31, 2019. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

 

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at March 31, 2020, other than investments issued or guaranteed by the United States Government.

 

Real Estate Held for Investment and Held for Sale

 

The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and mortgage foreclosures.


16


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


Commercial Real Estate Held for Investment and Held for Sale

 

The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.

 

The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.

 

The Company currently owns and operates 14 commercial properties in 5 states. These properties include industrial warehouses, office buildings, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be used for future commercial developments. The Company uses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.

 

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $86,326,000 and $87,815,000 as of March 31, 2020 and December 31, 2019, respectively. The associated bank loan carrying values totaled approximately $54,641,000 and $54,917,000 as of March 31, 2020 and December 31, 2019, respectively.

 

During the three months ended March 31, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $31,429 and $-0-, respectively. This impairment loss relates to an office building held by the life insurance segment. Impairment losses are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

The following is a summary of the Company’s commercial real estate held for investment for the periods presented:

 

 

 

Net Ending Balance

 

Total Square Footage

 

 

March 31 2020

 

December 31 2019

 

March 31 2020

 

December 31 2019

Louisiana

 

$   5,969,190

 

$  6,009,079

 

   125,114

 

       125,114

Mississippi

 

    2,933,234

 

    2,951,478

 

     21,521

 

        21,521

Utah (1)

 

   83,074,226

 

  81,266,083

 

   462,730

 

       465,230

 

 

 

 

 

 

 

 

 

 

 

$ 91,976,650

 

$ 90,226,640

 

   609,365

 

       611,865

                 

 

 

 

 

 

 

 

 

(1) Includes Center53 phase 1 completed in July 2017 and phase 2 which is under construction


17


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


 

The following is a summary of the Company’s commercial real estate held for sale for the periods presented:

 

 

 

Net Ending Balance

 

Total Square Footage

 

 

March 31 2020

 

December 31 2019

 

March 31 2020

 

December 31 2019

Arizona (1)

 

$        2,500

 

$        2,500

 

              -

 

                  -

Kansas

 

    4,800,000

 

    4,800,000

 

    222,679

 

        222,679

Mississippi

 

       318,322

 

       318,322

 

      12,300

 

          12,300

Nevada

 

       655,499

 

       655,499

 

        4,800

 

            4,800

Texas (2)

 

       300,000

 

       300,000

 

              -

 

                  -

 

 

 

 

 

 

 

 

 

 

 

$  6,076,321

 

$  6,076,321

 

    239,779

 

        239,779

                 

 

 

 

 

 

 

 

 

(1) Undeveloped land

 

 

 

 

 

 

(2) Improved commercial pad

 

 

 

 

 

 

 

These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

 

Residential Real Estate Held for Investment and Held for Sale

 

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.  The strategy has been to lease these homes to produce cash flow and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns. The Company also invests in residential subdivision developments.

 

The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.

 

As of March 31, 2020, SNRE manages 28 residential properties in 6 states across the United States.

 

The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $9,040,000 and $12,434,000 as of March 31, 2020 and December 31, 2019, respectively.

 

During the three months ended March 31, 2020 and 2019 the Company did not record any impairment losses on residential real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

The following is a summary of the Company’s residential real estate held for investment for the periods presented:

 

 

 

Net Ending Balance

 

 

March 31 2020

 

December 31 2019

Florida

 

$    2,166,615

 

$     2,487,723

Nevada

 

                  -

 

         293,516

Utah (1)

 

     8,486,973

 

       9,462,886

Washington

 

        286,181

 

         286,181

 

 

$  10,939,769

 

$   12,530,306

                 

 

 

 

 

(1) Includes subdivision developments


18


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


The following is a summary of the Company’s residential real estate held for sale for the periods presented:

 

 

 

Net Ending Balance

 

 

March 31 2020

 

December 31 2019

California

 

       421,452

 

       640,452

Florida

 

       858,221

 

    1,300,641

Nevada

 

       293,516

 

                 -

Ohio

 

         10,000

 

        10,000

Utah

 

     4,064,922

 

    5,880,213

Washington

 

                 -

 

       190,000

 

 

$   5,648,111

 

$  8,021,306

 

 

 

 

 

 

These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

 

Real Estate Owned and Occupied by the Company

 

The primary business units of the Company occupy a portion of the real estate owned by the Company.  As of March 31, 2020, real estate owned and occupied by the Company is summarized as follows:

 

Location

 

Business Segment

 

Approximate Square Footage

 

Square Footage Occupied by the Company

121 W. Election Rd., Draper, UT

 

Corporate Offices, Life Insurance and
    Cemetery/Mortuary Operations

 

78,979

 

18%

5201 Green Street, Salt Lake City, UT (1)

 

Life Insurance and Mortgage Operations

 

39,157

 

73%

1044 River Oaks Dr., Flowood, MS

 

Life Insurance Operations

 

19,694

 

28%

1818 Marshall Street, Shreveport, LA (1)(2)

 

Life Insurance Operations

 

12,274

 

100%

909 Foisy Street, Alexandria, LA (1)(2)

 

Life Insurance Sales

 

8,059

 

100%

812 Sheppard Street, Minden, LA (1)(2)

 

Life Insurance Sales

 

1,560

 

100%

1550 N 3rd Street, Jena, LA (1)(2)

 

Life Insurance Sales

 

1,737

 

100%

                      

 

 

 

 

 

 

(1) Included in property and equipment on the condensed consolidated balance sheets

 

 

 

 

 

 

 

 

 

 

 

(2) See Note 15 regarding the acquisition of Kilpatrick Life Insurance Company

 

 

 

 

 

Mortgage Loans Held for Investment

 

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At March 31, 2020, the Company had 49%, 16%, 9%, 6%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, Nevada, California, and Arizona, respectively. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.


19


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts and the related allowance for loan losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings.

 

Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding.  Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value.  Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer.  

 

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment or held for sale.

 

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

 

For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows:

 

Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay.

 

Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less.

 

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.  Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.


20


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


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

 

Allowance for Credit Losses and Recorded Investment in Mortgage Loans

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

Residential Construction

 

Total

March 31, 2020

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance - January 1, 2020

$        187,129

 

$     1,222,706

 

$          43,202

 

$     1,453,037

  Charge-offs

                      -

 

                      -

 

                      -

 

                      -

  Provision

                      -

 

          636,633

 

                      -

 

          636,633

Ending balance - March 31, 2020

$        187,129

 

$     1,859,339

 

$          43,202

 

$     2,089,670

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$                    -

 

$        345,913

 

$                    -

 

$        345,913

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$        187,129

 

$     1,513,426

 

$          43,202

 

$     1,743,757

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$   44,604,661

 

$ 117,696,147

 

$   93,590,770

 

$ 255,891,578

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$        864,719

 

$     4,536,840

 

$                    -

 

$     5,401,559

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$   43,739,942

 

$ 113,159,307

 

$   93,590,770

 

$ 250,490,019

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance - January 1, 2019

$        187,129

 

$     1,125,623

 

$          35,220

 

$     1,347,972

  Charge-offs

                      -

 

           (32,692)

 

                      -

 

           (32,692)

  Provision

                      -

 

          129,775

 

              7,982

 

          137,757

Ending balance - December 31, 2019

$        187,129

 

$     1,222,706

 

$          43,202

 

$     1,453,037

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$                    -

 

$        195,993

 

$                    -

 

$        195,993

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$        187,129

 

$     1,026,713

 

$          43,202

 

$     1,257,044

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$   38,718,220

 

$ 113,043,965

 

$   89,430,237

 

$ 241,192,422

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$     4,488,719

 

$     3,752,207

 

$        655,000

 

$     8,895,926

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$   34,229,501

 

$ 109,291,758

 

$   88,775,237

 

$ 232,296,496


21


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


The following is a summary of the aging of mortgage loans held for investment for the periods presented:

 

Age Analysis of Mortgage Loans Held for Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days
Past Due

60-89 Days
Past Due

Greater Than
90 Days (1)

In Process of Foreclosure (1)

Total
Past Due

Current

Total
Mortgage Loans

Allowance for
Loan Losses

Unamortized deferred loan fees, net

Unamortized discounts, net

Net Mortgage
Loans

March 31, 2020

 

 

 

 

 

 

 

 

 

 

Commercial

$      1,713,947

$    1,421,979

$         864,719

$                           -

$    4,000,645

$     40,604,016

$     44,604,661

$        (187,129)

$           (74,850)

$          (824,461)

$      43,518,221

Residential

        12,130,781

      3,423,153

       2,730,747

             1,806,094

     20,090,775

       97,605,372

        117,696,147

       (1,859,339)

          (1,440,781)

            (403,308)

        113,992,719

Residential
 Construction

       2,002,484

                       -

                         -

                              -

       2,002,484

        91,588,286

       93,590,770

            (43,202)

            (653,989)

                            -

       92,893,579

 

 

 

 

 

 

 

 

 

 

 

 

Total

$    15,847,212

$   4,845,132

$    3,595,466

$          1,806,094

$  26,093,904

$  229,797,674

$   255,891,578

$   (2,089,670)

$      (2,169,620)

$      (1,227,769)

$   250,404,519

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

Commercial

$     1,872,000

$                    -

$     4,488,719

$                           -

$     6,360,719

$     32,357,501

$     38,718,220

$        (187,129)

$            (88,918)

$         (653,272)

$     37,788,901

Residential

      10,609,296

     4,085,767

        2,100,742

              1,651,465

      18,447,270

       94,596,695

       113,043,965

       (1,222,706)

          (1,567,581)

                            -

       110,253,678

Residential
 Construction

                         -

                       -

           655,000

                              -

           655,000

       88,775,237

       89,430,237

            (43,202)

            (735,068)

                            -

        88,651,967

 

 

 

 

 

 

 

 

 

 

 

 

Total

$    12,481,296

$  4,085,767

$     7,244,461

$           1,651,465

$  25,462,989

$   215,729,433

$    241,192,422

$    (1,453,037)

$      (2,391,567)

$         (653,272)

$  236,694,546

                            

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Interest income is not recognized on loans past due greater than 90 days or in foreclosure.


22


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


Impaired Mortgage Loans Held for Investment

 

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

 

Impaired Loans

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

March 31, 2020

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$       864,719

 

$       864,719

 

$                  -

 

$       864,719

 

$                   -

  Residential

      2,231,530

 

      2,231,530

 

                    -

 

      2,231,530

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$                  -

 

$                   -

 

$                  -

 

$                  -

 

$                   -

  Residential

      2,305,311

 

      2,305,311

 

        345,913

 

      2,305,311

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

  Commercial

$       864,719

 

$       864,719

 

$                  -

 

$       864,719

 

$                   -

  Residential

      4,536,841

 

      4,536,841

 

        345,913

 

      4,536,841

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$    4,488,719

 

$    4,488,719

 

$                  -

 

$    1,499,043

 

$                   -

  Residential

      2,254,189

 

      2,254,189

 

                    -

 

      3,367,151

 

                     -

  Residential construction

         655,000

 

         655,000

 

                    -

 

      1,457,278

 

                     -

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

  Commercial

$                  -

 

$                   -

 

$                  -

 

$                  -

 

$                   -

  Residential

      1,498,018

 

      1,498,018

 

        195,993

 

         665,270

 

                     -

  Residential construction

                    -

 

                     -

 

                    -

 

                    -

 

                     -

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

  Commercial

$    4,488,719

 

$    4,488,719

 

$                  -

 

$    1,499,043

 

$                   -

  Residential

      3,752,207

 

      3,752,207

 

        195,993

 

      4,032,421

 

                     -

  Residential construction

         655,000

 

         655,000

 

                    -

 

      1,457,278

 

                     -


23


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

3)Investments (Continued) 


Credit Risk Profile Based on Performance Status

 

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

 

The Company’s performing and non-performing mortgage loans held for investment were as follows:

 

Mortgage Loans Held for Investment Credit Exposure

Credit Risk Profile Based on Payment Activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

Residential Construction

 

Total

 

March  
31, 2020

 

December
31, 2019

 

March  
31, 2020

 

December
31, 2019

 

March  
31, 2020

 

December
31, 2019

 

March  
31, 2020

 

December
31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

$  43,739,942

 

$   34,229,501

 

$  113,159,306

 

$  109,291,758

 

$  93,590,770

 

$  88,775,237

 

$  250,490,018

 

$     232,296,496

Non-performing

             864,719

 

         4,488,719

 

         4,536,841

 

         3,752,207

 

                             -

 

            655,000

 

           5,401,560

 

              8,895,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$   44,604,661

 

$   38,718,220

 

$  117,696,147

 

$  113,043,965

 

$  93,590,770

 

$  89,430,237

 

$  255,891,578

 

$       241,192,422

 

Non-Accrual Mortgage Loans Held for Investment

 

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $346,000 and $203,000 as of March 31, 2020 and December 31, 2019, respectively.

 

The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented.

 

 

Mortgage Loans on Non-Accrual Status

 

 

 

As of March 31
2020

 

As of December 31
2019

Commercial

$                       864,719

 

$                   4,488,719

Residential

                      4,536,841

 

                     3,752,207

Residential construction

                                    -

 

                        655,000

Total

$                    5,401,560

 

$                   8,895,926

 

4)Loans Held for Sale 

 

The Company has elected the fair value option for loans held for sale. Changes in the fair value of the loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. There are two loans with an aggregate unpaid principal balance of $235,909 that are 90 or more days past due and on a nonaccrual status as of March 31, 2020. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.


24


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

4)Loans Held for Sale (Continued) 


The following is a summary of the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for the periods presented:

 

 

As of March 31 2020

As of December 31 2019

 

 

 

Aggregate fair value

$         281,052,576

$          213,457,632

Unpaid principal balance

           272,772,415

           206,417,122

Unrealized gain

              8,280,161

               7,040,510

 

Mortgage Fee Income

 

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale.

 

Major categories of mortgage fee income for loans held for sale are as follows:

 

 

Three Months Ended March 31

 

2020

 

2019

Loan fees

$        8,916,153

 

$        5,741,262

Interest income

         1,680,459

 

         1,214,632

Secondary gains

        26,641,492

 

        16,364,771

Change in fair value of loan commitments

         3,275,032

 

            932,527

Change in fair value of loans held for sale

            381,734

 

            328,058

Provision for loan loss reserve

          (613,109)

 

          (102,379)

Mortgage fee income

$      40,281,761

 

$      24,478,871

 

Loan Loss Reserve

 

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

 

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

 

 

As of March 31
2020

 

As of December 31
2019

Balance, beginning of period

$                4,046,288

 

$               3,604,869

Provision on current loan originations (1)

                     613,109

 

                    643,284

Charge-offs, net of recaptured amounts

                (1,230,348)

 

                  (201,865)

Balance, end of period

$                3,429,049

 

$               4,046,288

                      

 

 

 

(1) Included in mortgage fee income

 

 

 


25


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

4)Loans Held for Sale (Continued) 


The Company maintains reserves for estimated losses on current production volumes. The Company also retains loss reserves for loans that the Company originated between 2005 and 2007, in which the possibility of an investor claim or potential settlement may still exist. For the three months ended March 31, 2020 and 2019, reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated.

 

Based on the Company’s best estimate for potential loan losses and considering published industry data, loss reserve basis points are established to create an adequate reserve. The reserve is intended to cover both expected losses on recent period loan production and possible losses on earlier loans that were sold. The strong housing market over the last several years has reduced the Company’s exposure to losses on more recent loan production, but exposure still remains on older loans.

 

During the period from 2006 to 2020, over $60 million has been reserved for loan losses. A large majority of that reserve has been used to settle investor claims or potential claims on alternative documentation loans originated between 2005 to 2007. As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim becomes more difficult. However, because some loans remain from the original 2005 to 2007 time period that have not been settled, the Company still includes a reserve for the potential of future loan demands and potential settlements of such loans. As of March 31, 2020, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans from this time period with a general reserve for more recent loan production. Thus, the Company believes that the final loan loss reserve as of March 31, 2020, represents its best estimate for adequate loss reserves on loans sold.

 

The Company believes that actual loan loss experience could change in the near-term from the established reserve based upon claims that could be asserted by a third-party investor. The Company believes there is potential to resolve any alleged claims by a third-party investor on acceptable terms. If the Company is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third-party investor, the Company believes it has significant defenses to any such action and intends to vigorously defend itself against such action.


26


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


5)Stock Compensation Plans 

 

The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options issued of $65,877 and $64,704 has been recognized for these plans for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the total unrecognized compensation expense related to the options issued was $248,574, which is expected to be recognized over the vesting period of one year.

 

The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.

 

A summary of the status of the Company’s stock compensation plans as of March 31, 2020, and the changes during the three months ended March 31, 2020, are presented below:

 

 

 

Number of
Class A Shares

 

Weighted Average Exercise Price

 

Number of
Class C Shares

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2020

 

     1,086,053

 

$      4.41

 

        594,132

 

$      5.36

Adjustment for effect of stock dividends

 

               829

 

 

 

                   -

 

 

Granted

 

          37,500

 

 

 

          90,000

 

 

Exercised

 

        (42,294)

 

 

 

                   -

 

 

Cancelled

 

                   -

 

 

 

                   -

 

 

Outstanding at March 31, 2020

 

     1,082,088

 

$      4.44

 

        684,132

 

$      5.15

 

 

 

 

 

 

 

 

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

Options exercisable

 

        985,366

 

$      4.42

 

        452,381

 

$      5.39

 

 

 

 

 

 

 

 

 

As of March 31, 2020:

 

 

 

 

 

 

 

 

Available options for future grant

 

          97,218

 

 

 

                   -

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2020

 

5.57 years

 

 

 

5.96 years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2020

 

5.16 years

 

 

 

4.70 years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2020 (1)

 

$489,237

 

 

 

$41,150

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2020 (1)

 

$471,642

 

 

 

$               -   

 

 

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The Company used a stock price of $4.27 as of March 31, 2020 to derive intrinsic value.

 

 


27


 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

5)Stock Compensation Plans (Continued) 


A summary of the status of the Company’s stock compensation plans as of March 31, 2019, and the changes during the three months ended March 31, 2019, are presented below:

 

 

 

Number of
Class A Shares

 

Weighted Average Exercise Price

 

Number of
Class C Shares

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2019

 

     1,011,274

 

$      4.49

 

        577,280

 

$      5.15

Granted

 

            2,000

 

 

 

                   -

 

 

Exercised

 

             (968)

 

 

 

                   -

 

 

Cancelled

 

                   -

 

 

 

                   -

 

 

Outstanding at March 31, 2019

 

     1,012,306

 

$      4.49

 

        577,280

 

$      5.15

 

 

 

 

 

 

 

 

 

As of March 31, 2019:

 

 

 

 

 

 

 

 

Options exercisable

 

        898,472

 

$      4.36

 

        506,404

 

$      5.13

 

 

 

 

 

 

 

 

 

As of March 31, 2019:

 

 

 

 

 

 

 

 

Available options for future grant

 

        295,128

 

 

 

        146,425

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2019

 

5.89 years

 

 

 

3.71 years

 

 

 

 

 

 

 

 

 

 

 

Weighted average contractual term of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2019

 

5.71 years

 

 

 

2.87 years

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

outstanding at March 31, 2019 (1)

 

$704,498

 

 

 

$137,424

 

 

 

 

 

 

 

 

 

 

 

Aggregated intrinsic value of options

 

 

 

 

 

 

 

 

exercisable at March 31, 2019 (1)

 

$704,498

 

 

 

$137,424

 

 

                                

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The Company used a stock price of $4.72 as of March 31, 2019 to derive intrinsic value.

 

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the three months March 31, 2020 and 2019 was $73,072 and $1,539, respectively.


28


 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)


6)Earnings Per Share 

 

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

 

 

 

 

Three Months Ended
March 31

 

 

 

2020

 

2019

Numerator:

 

 

 

 

 

Net earnings

 

$   1,424,449

 

$   1,930,318

Denominator:

 

 

 

 

 

Basic weighted-average shares outstanding

 

   18,184,575

 

   18,102,318

Effect of dilutive securities:

 

 

 

 

 

Employee stock options

 

        186,777

 

        221,084

 

 

 

 

 

 

 

Diluted weighted-average shares outstanding

 

   18,371,352

 

   18,323,402

 

 

 

 

 

 

Basic net earnings per share

 

$0.08

 

$0.11

 

 

 

 

 

 

Diluted net earnings per share

 

$0.08

 

$0.11

 

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the three months March 31, 2020 and 2019, there were 1,316,506 and 984,415 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

 

7)Business Segment Information 

 

Description of Products and Services by Segment

 

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

 

Measurement of Segment Profit or Loss and Segment Assets

 

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2019. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

 

Factors Management Used to Identify the Enterprise’s Reportable Segments

 

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


29


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

 

7)Business Segment Information (Continued) 


 

 

Life Insurance

 

Cemetery/
Mortuary

 

Mortgage

 

Intercompany Eliminations

 

Consolidated

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$   33,205,762

 

$   4,013,696

 

$   42,389,491

 

$                -

 

$     79,608,949

Intersegment revenues

 

         908,168

 

       103,514

 

         200,332

 

    (1,212,014)

 

                     -

Segment profit before income taxes

 

     (3,069,167)

 

       104,801

 

      4,438,600

 

 

 

        1,474,234

 

 

 

 

                 -

 

 

 

 

 

 

Identifiable Assets

 

 1,124,244,140

 

   79,695,043

 

   278,195,425

 

 (109,493,359)

 

  1,372,641,249

Goodwill

 

       2,765,570

 

       754,018

 

                   -

 

                  -

 

        3,519,588

Total Assets

 

 1,127,009,710

 

   80,449,061

 

   278,195,425

 

 (109,493,359)

 

  1,376,160,837

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$   30,505,368

 

$   4,359,285

 

$   26,629,182

 

$                -

 

$     61,493,835

Intersegment revenues

 

         895,372

 

       116,651

 

         126,358

 

    (1,138,381)

 

                     -

Segment profit before income taxes

 

       2,085,341

 

    1,184,865

 

       (838,047)

 

                  -

 

        2,432,159

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets

 

   935,021,695

 

   87,087,362

 

   155,695,585

 

 (125,548,998)

 

  1,052,255,644

Goodwill

 

       2,765,570

 

       750,745

 

                   -

 

                  -

 

        3,516,315

Total Assets

 

   937,787,265

 

   87,838,107

 

   155,695,585

 

 (125,548,998)

 

  1,055,771,959


30


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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.


31


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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.


32


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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 March 31, 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

$       329,145,562

 

$                        -

 

$     325,870,236

 

$          3,275,326

Equity securities

             8,235,945

 

            8,235,945

 

                          -

 

                           -

Loans held for sale

         281,052,576

 

                          -

 

                          -

 

        281,052,576

Restricted assets (1)

             1,031,426

 

                          -

 

           1,031,426

 

                           -

Restricted assets (2)

             1,684,621

 

            1,684,621

 

                          -

 

                           -

Cemetery perpetual care trust investments (1)

                991,447

 

                          -

 

              991,447

 

                           -

Cemetery perpetual care trust investments (2)

             1,352,782

 

            1,352,782

 

                          -

 

                           -

Derivatives - loan commitments (3)

             9,465,448

 

                          -

 

                          -

 

            9,465,448

Total assets accounted for at fair value on a
  recurring basis

$       632,959,807

 

$        11,273,348

 

$     327,893,109

 

$      293,793,350

 

 

 

 

 

 

 

 

Liabilities accounted for at fair value on a
  recurring basis

 

 

 

 

 

 

 

Derivatives - call options (4)

$                (8,972)

 

$               (8,972)

 

$                        -

 

$                         -

Derivatives - put options (4)

              (944,992)

 

             (944,992)

 

                          -

 

                           -

Derivatives - loan commitments (4)

           (3,699,183)

 

                          -

 

                          -

 

          (3,699,183)

Total liabilities accounted for at fair value
  on a recurring basis

$         (4,653,147)

 

$           (953,964)

 

$                        -

 

$        (3,699,183)

                             

 

 

 

 

 

 

 

(1) Fixed maturity securities available for sale

 

 

 

 

 

 

 

(2) Mutual funds and 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

 

 

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 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

 

 

3/31/2020

 

Technique

 

Input(s)

 

Value

Value

 

Average

Loans held for sale

 

$   281,052,576

 

Market approach

 

Investor contract pricing as a percentage of unpaid principal balance

 

98.4%

108.5%

 

103.4%

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives - loan commitments (net)

 

         5,766,265

 

Market approach

 

Fall-out factor

 

1.0%

92.0%

 

80.1%

 

 

 

 

 

 

Initial-Value

 

N/A

N/A

 

N/A

 

 

 

 

 

 

Servicing

 

0 bps

255 bps

 

57 bps

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available for sale

 

         3,275,326

 

Broker quotes

 

Pricing quotes

 

$    95.02

$  119.33

 

$   110.40


33


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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

 

                          -

 

        792,193,592

 

                               -

 

Sales, maturities and paydowns

 

                          -

 

       (739,130,456)

 

                    (10,300)

 

Transfer to mortgage loans held for investment

 

                          -

 

           (8,933,676)

 

                               -

 

Total gains (losses):

 

 

 

 

 

 

 

Included in earnings

 

           3,275,032

(1)

          23,465,484

(1)

                           828

(2)

Included in other comprehensive income

 

                          -

 

                           -

 

                      68,416

 

 

 

 

 

 

 

 

 

Balance - March 31, 2020

 

$         5,766,265

 

$      281,052,576

 

$               3,275,326

 

                         

 

 

 

 

 

 

 

(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

 

 

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

$     1,959,398

 

$                      -   

 

$              -   

 

$     1,959,398

Total assets accounted for at fair value on a nonrecurring basis

$     1,959,398

 

$                        -

 

$                -

 

$     1,959,398


34


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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

 

 

 

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


35


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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 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

 

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


36


SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 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 March 31, 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 March 31, 2020:

 

 

Carrying Value

 

Level 1

 

Level 2

 

Level 3

 

Total Estimated Fair Value

Assets

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment

 

 

 

 

 

 

 

 

 

  Residential

$     113,992,719

 

$                  -

 

$                      -

 

$     119,728,697

 

$     119,728,697

  Residential construction

         92,893,579

 

                    -

 

                        -

 

         92,893,579

 

         92,893,579

  Commercial

         43,518,221

 

                    -

 

                        -

 

         43,108,562

 

         43,108,562

Mortgage loans held for investment, net

$     250,404,519

 

$                  -

 

$                      -

 

$     255,730,838

 

$     255,730,838

Policy loans

         14,617,151

 

                    -

 

                        -

 

         14,617,151

 

         14,617,151

Insurance assignments, net (1)

         36,955,154

 

                    -

 

                        -

 

         36,955,154

 

         36,955,154

Restricted assets (2)

           1,541,933

 

                    -

 

                        -

 

           1,541,933

 

           1,541,933

Cemetery perpetual care trust investments (2)

              524,000

 

                    -

 

                        -

 

              524,000

 

              524,000

Mortgage servicing rights, net

         16,777,131

 

                    -

 

                        -

 

         16,976,241

 

         16,976,241

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Bank and other loans payable

$   (253,965,181)

 

$                  -

 

$                      -

 

$   (253,965,181)

 

$   (253,965,181)

Policyholder account balances (3)

       (44,786,643)

 

                    -

 

                        -

 

       (41,477,570)

 

       (41,477,570)

Future policy benefits - annuities (3)

     (112,487,611)

 

                    -

 

                        -

 

     (116,245,685)

 

     (116,245,685)

                               

 

 

 

 

 

 

 

 

 

(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 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

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