SEC Form 10-Q filed by Security National Financial Corporation

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended March 31, 2024

 

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.)
433 Ascension Way, 6th Floor, Salt Lake City, Utah		84123
(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 each 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 ☒ 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 ☒ 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 ☒
		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 ☒

 

As of May 3, 2024, the registrant had 20,057,835 shares of Class A Common Stock, $2.00 par value, outstanding and 2,971,588 shares of Class C Common Stock, $2.00 par value, outstanding.

 

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2024

 

Table of Contents

 

		Page No.
	Part I - Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023	3-4
	Condensed Consolidated Statements of Earnings for the three month periods ended March 31, 2024 and 2023 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2024 and 2023 (unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2024 and March 31, 2023 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2024 and 2023 (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	60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65
Item 4.	Controls and Procedures	65
	Part II - Other Information
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	67
Item 6.	Exhibits	67
	Signatures	68

 

 

Part I - Financial Information

 

Item 1.

Financial Statements.

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		March 31, 2024				December 31, 2023
		(Unaudited)
Assets
Investments:
Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $386,405,977 and $390,884,441 for 2024 and 2023, respectively; net of allowance for credit losses of $410,549 and $314,549 for 2024 and 2023, respectively)		$	375,833,407			$	381,535,986
Equity securities at estimated fair value (cost of $11,160,744 and $10,571,505 for 2024 and 2023, respectively)			15,161,999				13,636,071
Mortgage loans held for investment (net of allowance for credit losses of $2,921,614 and $3,818,653 for 2024 and 2023, respectively)			268,636,784				275,616,837
Real estate held for investment (net of accumulated depreciation of $27,161,160 and $29,307,791 for 2024 and 2023, respectively)			183,562,322				183,419,292
Real estate held for sale			13,122,924				3,028,973
Other investments and policy loans (net of allowance for credit losses of $1,587,525 and $1,553,836 for 2024 and 2023, respectively)			70,510,984				69,404,617
Accrued investment income			8,961,065				10,170,790
Total investments			935,789,485				936,812,566
Cash and cash equivalents			150,930,786				126,941,658
Loans held for sale at estimated fair value			112,678,958				126,549,190
Receivables (net of allowance for credit losses of $1,755,553 and $1,897,887 for 2024 and 2023, respectively)			16,875,546				15,335,315
Restricted assets (including $10,083,226 and $9,239,063 for 2024 and 2023 respectively, at estimated fair value)			20,878,561				20,028,976
Cemetery perpetual care trust investments (including $5,217,068 and $4,969,005 for 2024 and 2023, respectively, at estimated fair value)			8,368,975				8,082,917
Receivable from reinsurers			14,726,731				14,857,059
Cemetery land and improvements			9,557,577				9,163,691
Deferred policy and pre-need contract acquisition costs			118,117,308				116,351,067
Mortgage servicing rights, net			3,318,155				3,461,146
Property and equipment, net			18,806,536				19,175,099
Value of business acquired			8,457,054				8,467,613
Goodwill			5,253,783				5,253,783
Other			22,742,841				20,072,195
Total Assets		$	1,446,502,296			$	1,430,552,275

 

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

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

 

		March 31, 2024				December 31, 2023
		(Unaudited)
Liabilities and Stockholders’ Equity
Liabilities
Future policy benefits and unpaid claims		$	923,292,031			$	916,038,616
Unearned premium reserve			2,491,281				2,543,822
Bank and other loans payable			104,335,116				105,555,137
Deferred pre-need cemetery and mortuary contract revenues			18,501,474				18,237,246
Cemetery perpetual care obligation			5,384,115				5,326,196
Accounts payable			3,560,096				2,936,968
Other liabilities and accrued expenses			53,175,654				53,266,090
Income taxes			15,658,555				13,752,981
Total liabilities			1,126,398,322				1,117,657,056
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; 40,000,000 shares authorized; 20,048,581 shares issued and outstanding as of March 31, 2024 and 20,048,002 shares issued and outstanding as of December 31, 2023			40,097,162				40,096,004
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; 6,000,000 shares authorized; 2,971,680 shares issued and outstanding as of March 31, 2024  and 2,971,854 shares issued and outstanding as of December 31, 2023			5,943,360				5,943,708
Common stock value			5,943,360				5,943,708
Additional paid-in capital			72,727,294				72,424,429
Accumulated other comprehensive loss, net of taxes			(7,780,656	)			(6,885,558	)
Retained earnings			214,452,895				206,978,373
Treasury stock at cost - 756,386 Class A shares and 35,717 Class C shares as of March 31, 2024; and 806,311 Class A shares and 35,717 Class C shares as of December 31, 2023			(5,336,081	)			(5,661,737	)
Total stockholders’ equity			320,103,974				312,895,219
Total Liabilities and Stockholders’ Equity		$	1,446,502,296			$	1,430,552,275

 

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

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

		2024				2023
		Three Months Ended March 31,
		2024				2023
Revenues:
Mortgage fee income		$	21,831,670			$	25,989,006
Insurance premiums and other considerations			29,852,093				27,967,292
Net investment income			19,946,568				17,774,883
Net mortuary and cemetery sales			6,948,491				6,471,429
Gains on investments and other assets			1,669,426				111,154
Other			939,950				1,186,970
Total revenues			81,188,198				79,500,734
Benefits and expenses:
Death benefits			15,713,753				16,678,366
Surrenders and other policy benefits			1,215,793				1,132,693
Increase in future policy benefits			9,345,887				8,054,939
Amortization of deferred policy and pre-need acquisition costs and value of business acquired			4,743,913				4,883,581
Selling, general and administrative expenses:
Commissions			7,981,217				9,673,310
Personnel			19,855,135				21,962,512
Advertising			687,655				903,411
Rent and rent related			1,401,477				1,776,780
Depreciation on property and equipment			587,449				588,416
Costs related to funding mortgage loans			1,449,095				1,842,342
Other			6,285,910				7,780,535
Interest expense			1,027,474				1,453,333
Cost of goods and services sold-mortuaries and cemeteries			1,274,129				1,185,628
Total benefits and expenses			71,568,887				77,915,846
Earnings before income taxes			9,619,311				1,584,888
Income tax expense			(2,144,789	)			(344,716	)
Net earnings		$	7,474,522			$	1,240,172
Net earnings per Class A Equivalent common share (1)		$	0.34			$	0.06
Net earnings per Class A Equivalent common share-assuming dilution (1)		$	0.33			$	0.05
Weighted-average Class A equivalent common shares outstanding (1)			22,219,490				22,129,713
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)			22,945,842				22,687,773

 

(1)

Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share.

 

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

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		2024				2023
		Three Months Ended March 31,
		2024				2023
Net earnings		$	7,474,522			$	1,240,172
Other comprehensive income:
Unrealized gains (losses) on fixed maturity securities available for sale		$	(1,131,650	)			5,218,029
Unrealized gains (losses) on restricted assets (1)			(1,890	)			4,133
Unrealized gains (losses) on cemetery perpetual care trust investments (1)			(774	)			2,926
Other comprehensive income (loss), before income tax			(1,134,314	)			5,225,088
Income tax (expense) benefit			239,216				(1,097,530	)
Other comprehensive income (loss), net of income tax			(895,098	)			4,127,558
Comprehensive income		$	6,579,424			$	5,367,730

 

(1)

Fixed maturity securities available for sale

 

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

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

		Class A Common Stock				Class C Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock				Total
		Three Months Ended March 31, 2024
		Class A Common Stock				Class C Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock				Total
January 1, 2024		$	40,096,004			$	5,943,708			$	72,424,429			$	(6,885,558	)		$	206,978,373			$	(5,661,737	)		$	312,895,219
Net earnings			-				-				-				-				7,474,522				-				7,474,522
Other comprehensive loss			-				-				-				(895,098	)			-				-				(895,098	)
Stock-based compensation expense			-				-				199,887				-				-				-				199,887
Vesting of restricted stock units			810				-				(810	)			-				-				-				-
Sale of treasury stock			-				-				103,788				-				-				366,733				470,521
Purchase of treasury stock			-				-				-				-				-				(41,077	)			(41,077	)
Conversion Class C to Class A			348				(348	)			-				-				-				-				-
March 31, 2024		$	40,097,162			$	5,943,360			$	72,727,294			$	(7,780,656	)		$	214,452,895			$	(5,336,081	)		$	320,103,974

 

		Three Months Ended March 31, 2023
		Class A Common Stock				Class C Common Stock				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Treasury Stock				Total
January 1, 2023		$	37,516,062			$	5,779,718			$	64,767,769			$	(13,070,277	)		$	202,160,306			$	(4,366,651	)		$	292,786,927
Balance, value		$	37,516,062			$	5,779,718			$	64,767,769			$	(13,070,277	)		$	202,160,306			$	(4,366,651	)		$	292,786,927
Adoption of ASU 2016-13			-				-				-				-				(671,506	)			-				(671,506	)
Net earnings			-				-				-				-				1,240,172				-				1,240,172
Other comprehensive income			-				-				-				4,127,558				-				-				4,127,558
Stock-based compensation expense			-				-				143,671				-				-				-				143,671
Exercise of stock options			96,092				-				(62,073	)			-				-				-				34,019
Sale of treasury stock			-				-				(43,493	)			-				-				620,651				577,158
Purchase of treasury stock			-				-				-				-				-				(1,204,357	)			(1,204,357	)
Conversion Class C to Class A			1,872				(1,872	)			-				-				-				-				-
March 31, 2023		$	37,614,026			$	5,777,846			$	64,805,874			$	(8,942,719	)		$	202,728,972			$	(4,950,357	)		$	297,033,642
Balance, value		$	37,614,026			$	5,777,846			$	64,805,874			$	(8,942,719	)		$	202,728,972			$	(4,950,357	)		$	297,033,642

 

 

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		2024				2023
		Three Months Ended March 31,
		2024				2023
Cash flows from operating activities:
Net cash provided by (used in) operating activities		$	25,077,244			$	(16,073,799	)
Cash flows from investing activities:
Purchases of fixed maturity securities			(6,670,277	)			(11,911,847	)
Sales, calls and maturities of fixed maturity securities			11,440,209				5,375,819
Purchases of equity securities			(2,038,459	)			(4,596,981	)
Sales of equity securities			1,412,118				4,150,683
Purchases of restricted assets			(643,531	)			(311,776	)
Sales, calls and maturities of restricted assets			178,350				24,746
Purchases of cemetery perpetual care trust investments			(46,725	)			(113,238	)
Sales, calls and maturities of perpetual care trust investments			54,601				27,199
Mortgage loans held for investment, other investments and policy loans made			(166,160,908	)			(165,651,041	)
Payments received for mortgage loans held for investment, other investments and policy loans			175,017,132				184,156,157
Purchases of property and equipment			(256,155	)			(250,642	)
Sales of property and equipment			71,469				10,974
Purchases of real estate			(17,740,755	)			(2,705,716	)
Sales of real estate			7,082,265				9,160,065
Net cash provided by investing activities			1,699,334				17,364,402
Cash flows from financing activities:
Investment contract receipts			3,237,207				3,100,207
Investment contract withdrawals			(4,105,463	)			(3,831,218	)
Proceeds from stock options exercised			-				34,019
Purchases of treasury stock			(41,077	)			(1,204,357	)
Repayment of bank loans			(470,652	)			(15,684,446	)
Proceeds from bank loans			-				46,000,000
Net change in warehouse line borrowings for loans held for sale			(769,236	)			(53,656,378	)
Net cash used in financing activities			(2,149,221	)			(25,242,173	)
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents			24,627,357				(23,951,570	)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period			139,923,399				133,483,817
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period		$	164,550,756			$	109,532,247
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest		$	1,022,460			$	1,635,867
Income taxes (net of refunds)			-				(6,878	)
Non Cash Operating, Investing and Financing Activities:
Transfer of loans held for sale to mortgage loans held for investment		$	1,867,552			$	-
Loans held for sale foreclosed into real estate held for sale			858,977				-
Right-of-use assets obtained in exchange for operating lease liabilities			479,462				139,095
Benefit plans funded with treasury stock			470,521				577,158
Transfer from mortgage loans held for investment to restricted assets			-				1,625,961
Transfer from mortgage loans held for investment to cemetery perpetual care trust investments			-				1,611,550

 

 

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,
		2024				2023
Cash and cash equivalents		$	150,930,786			$	99,554,776
Restricted assets			10,598,384				9,228,113
Cemetery perpetual care trust investments			3,021,586				749,358
Total cash, cash equivalents, restricted cash and restricted cash equivalents		$	164,550,756			$	109,532,247
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period		$	164,550,756			$	109,532,247

 

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

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (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 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, 2023, 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 month periods ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

 

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. 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 or sale; those used in determining the liability for future policy benefits and unearned revenue; those used in determining the estimated future costs for pre-need sales; those used in determining the value of mortgage servicing rights; those used in determining the value of loans held for sale; those used in determining allowances for credit losses; 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.

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

2) Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2023

 

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 held for investment and held to maturity debt securities) and available for sale debt securities. For assets held at an amortized cost basis, Topic 326 eliminates the probable initial recognition threshold 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 Topic 326 requires that credit losses be presented as an allowance rather than as a write-down. The Company adopted this standard on January 1, 2023, and after a review of the affected assets, decreased the opening balance of retained earnings in stockholders’ equity by $671,506 on January 1, 2023. The allowances for credit losses increased (decreased) by the following amounts.

 

 Schedule of Increased (Decrease) in Allowances for Credit Losses Upon ASU

		Amount
Mortgage loans held for investment:
Residential		$	(192,607	)
Residential construction			301,830
Commercial			555,807
Total			665,030
Restriced assets - mortgage loans held for investment:
Residential construction			3,463
Cemetery perpetual care trust investments - mortgage loans held for investment:
Residential construction			3,013
Grand Total			671,506

 

Accounting Standards Issued But Not Yet Adopted

 

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 standard is aimed at improving the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplifying amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that requires the standard to be adopted by the Company commencing on January 1, 2025. The Company is nearing completion of its analysis and implementation of the new standard, including the identification of cohorts, system updates, and design. The Company has engaged its team of actuaries, accountants, and systems specialists and consulted external system providers as part of the implementation. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.

 

ASU No. 2023-09: “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” — Issued in December 2023, ASU 2023-09 requires that public business entities, on an annual basis: (i) disclose specific categories in the rate reconciliation and (ii) provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments in this update require that all entities disclose on an annual basis the following information about income taxes paid: (i) the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and (ii) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). ASU 2023-09 is effective for the Company beginning on January 1, 2025. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.

 

ASU No. 2023-07: “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” — Issued in November 2023, ASU 2023-07 requires enhanced disclosures about significant segment expenses. The key amendments include: (i) disclosures on significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss on an annual and interim basis; (ii) disclosures on an amount for other segment items by reportable segment and a description of its composition on an annual and interim basis. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss; (iii) providing all annual disclosures on a reportable segment’s profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting in interim periods; and (iv) specifying the title and position of the CODM. ASU 2023-07 is effective for the Company for annual periods beginning January 1, 2024 and interim periods beginning January 1, 2025. The Company is in the process of estimating the impact of the new guidance on the consolidated financial statements.

 

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.

 

11

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3) Investments

 

The Company’s investments as of March 31, 2024 are summarized as follows:

 Schedule of Investments 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses (1)				Allowance for Credit Losses				Estimated Fair Value
March 31, 2024:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	108,273,666			$	21,718			$	(1,168,930	)		$	-			$	107,126,454
Obligations of states and political subdivisions			6,314,947				327				(312,669	)			-				6,002,605
Corporate securities including public utilities			231,778,966				2,770,637				(7,446,098	)			(398,500	)			226,705,005
Mortgage-backed securities			39,788,398				342,124				(4,379,130	)			(12,049	)			35,739,343
Redeemable preferred stock			250,000				10,000				-				-				260,000
Total fixed maturity securities available for sale		$	386,405,977			$	3,144,806			$	(13,306,827	)		$	(410,549	)		$	375,833,407
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	11,160,744			$	4,284,537			$	(283,282	)						$	15,161,999
Total equity securities at estimated fair value		$	11,160,744			$	4,284,537			$	(283,282	)						$	15,161,999
Mortgage loans held for investment at amortized cost:
Residential		$	106,764,632
Residential construction			99,748,408
Commercial			67,076,085
Less: Unamortized deferred loan fees, net			(1,711,491	)
Less: Allowance for credit losses			(2,921,614	)
Less: Net discounts			(319,236	)
Total mortgage loans held for investment		$	268,636,784
Real estate held for investment - net of accumulated depreciation:
Residential		$	54,638,976
Commercial			128,923,346
Total real estate held for investment		$	183,562,322
Real estate held for sale:
Residential		$	859,599
Commercial			12,263,325
Total real estate held for sale		$	13,122,924
Other investments and policy loans at amortized cost:
Policy loans		$	13,248,999
Insurance assignments			46,710,578
Federal Home Loan Bank stock (2)			2,325,900
Other investments			9,813,032
Less: Allowance for credit losses for insurance assignments			(1,587,525	)
Total other investments and policy loans		$	70,510,984
Accrued investment income		$	8,961,065
Total investments		$	935,789,485

 

 

(1)

Gross unrealized losses are net of allowance for credit losses

(2)

Includes $552,600 of Membership stock and $1,773,300 of Activity stock attributable to short-term borrowings and letters of credit.

 

12

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The Company’s investments as of December 31, 2023 are summarized as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses (1)				Allowance for Credit Losses				Estimated Fair Value
December 31, 2023:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	111,450,753			$	344,425			$	(1,416,448	)		$	-			$	110,378,730
Obligations of states and political subdivisions			6,524,083				500				(319,260	)			-				6,205,323
Corporate securities including public utilities			232,299,727				3,688,642				(7,145,507	)			(308,500	)			228,534,362
Mortgage-backed securities			40,359,878				506,647				(4,702,905	)			(6,049	)			36,157,571
Redeemable preferred stock			250,000				10,000				-				-				260,000
Total fixed maturity securities available for sale		$	390,884,441			$	4,550,214			$	(13,584,120	)		$	(314,549	)		$	381,535,986
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	10,571,505			$	3,504,141			$	(439,575	)						$	13,636,071
Total equity securities at estimated fair value		$	10,571,505			$	3,504,141			$	(439,575	)						$	13,636,071
Mortgage loans held for investment at amortized cost:
Residential		$	103,153,587
Residential construction			104,052,748
Commercial			74,176,538
Less: Unamortized deferred loan fees, net			(1,623,226	)
Less: Allowance for credit losses			(3,818,653	)
Less: Net discounts			(324,157	)
Total mortgage loans held for investment		$	275,616,837
Real estate held for investment - net of accumulated depreciation:
Residential		$	40,924,865
Commercial			142,494,427
Total real estate held for investment		$	183,419,292
Real estate held for sale:
Residential		$	-
Commercial			3,028,973
Total real estate held for sale		$	3,028,973
Other investments and policy loans at amortized cost:
Policy loans		$	13,264,183
Insurance assignments			45,605,322
Federal Home Loan Bank stock (2)			2,279,800
Other investments			9,809,148
Less: Allowance for credit losses for insurance assignments			(1,553,836	)
Total policy loans and other investments		$	69,404,617
Accrued investment income		$	10,170,790
Total investments		$	936,812,566

 

 

(1)

Gross unrealized losses are net of allowance for credit losses

(2)

Includes $530,900 of Membership stock and $1,748,900 of Activity stock due to short-term advances and letters of credit.

 

13

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

There were no investments, aggregated by issuer, of more than 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) as of March 31, 2024, other than investments issued or guaranteed by the United States Government.

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of March 31, 2024 and December 31, 2023. The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The table below sets forth unrealized losses by duration with the fair value of the related fixed maturity securities.

 Schedule of Fair Value of Fixed Maturity Securities 

		Unrealized Losses for Less than Twelve Months				Fair Value				Unrealized Losses for More than Twelve Months				Fair Value				Total Unrealized Loss				Combined Fair Value
March 31, 2024
U.S. Treasury securities and obligations of U.S. Government agencies		$	167,532			$	53,312,759			$	1,001,398			$	29,735,785			$	1,168,930			$	83,048,544
Obligations of states and political subdivisions			12,735				469,060				299,934				5,083,218				312,669				5,552,278
Corporate securities			613,453				35,567,960				6,832,645				110,572,963				7,446,098				146,140,923
Mortgage-backed securities			18,656				4,044,375				4,360,474				23,420,838				4,379,130				27,465,213
Totals		$	812,376			$	93,394,154			$	12,494,451			$	168,812,804			$	13,306,827			$	262,206,958
December 31, 2023
U.S. Treasury securities and obligations of U.S. Government agencies		$	29,394			$	9,436,090			$	1,387,054			$	70,885,403			$	1,416,448			$	80,321,493
Obligations of states and political subdivisions			11,105				470,325				308,155				5,284,498				319,260				5,754,823
Corporate securities			529,660				32,507,773				6,615,847				107,556,216				7,145,507				140,063,989
Mortgage-backed securities			29,799				2,260,445				4,673,106				22,184,174				4,702,905				24,444,619
Totals		$	599,958			$	44,674,633			$	12,984,162			$	205,910,291			$	13,584,120			$	250,584,924

 

Relevant holdings were comprised of 634 securities with fair values aggregating 95.2% of the aggregate amortized cost as of March 31, 2024. Relevant holdings were comprised of 606 securities with fair values aggregating 94.9% of the aggregate amortized cost as of December 31, 2023. Credit loss provision of $96,000 and $179,500 have been recognized for the three month periods ended March 31, 2024 and 2023, respectively. Credit losses are included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. Other unrealized losses for which no credit loss was recognized are primarily the result of increases in interest rates.

 

14

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Evaluation of Allowance for Credit Losses

 

See Note 2 regarding the adoption of ASU 2016-13.

 

On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”) and other industry rating agencies. Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss unless current market data or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited 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. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings.

 

Where the decline in fair value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and the Company anticipates recovery of all contractual or expected cash flows, the Company does not consider these securities to have credit loss because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before a recovery of amortized cost, which may be at maturity.

 

If the Company intends to sell a fixed maturity security or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, a credit loss has occurred and the difference between the amortized cost and the fair value that relates to the expected credit loss is recognized as a loss in earnings, included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings.

 

If the Company does not intend to sell a debt security and it is less likely than not that the Company will be required to sell the debt security but the Company also does not expect to recover the entire amortized cost basis of the security, a credit loss is recognized in earnings for the amount of the expected credit loss with a corresponding allowance for credit losses as a contra-asset account. The credit loss is included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. The recognized credit loss is limited to the total unrealized loss on the security due to a change in credit.

 

Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if the Company intends to sell a security or when it is more likely than not that the Company will be required to sell the security before the recovery of its amortized cost.

 

The Company does not measure a credit loss allowance on accrued interest receivable, included in accrued investment income on the condensed consolidated balance sheets, as the Company writes off any accrued interest receivable balance to net investment income in a timely manner (after 90 days) when the Company has concerns regarding collectability.

 

15

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Credit Quality Indicators

 

The NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered investment grade while the NAIC Class 3 through 6 designations are considered non-investment grade. Based on the NAIC designations, the Company had 98.1% and 98.2% of its fixed maturity securities rated investment grade as of March 31, 2024 and December 31, 2023, respectively. The following table summarizes the credit quality, by NAIC designation, of the Company’s fixed maturity securities available for sale, excluding redeemable preferred stock.

 Schedule of Credit Quality of Fixed Maturity Security Portfolio by NAIC Designation

		March 31, 2024								December 31, 2023
NAIC Designation		Amortized Cost				Estimated Fair Value				Amortized Cost				Estimated Fair Value
1		$	216,075,719			$	210,349,942			$	221,933,425			$	216,975,288
2			162,441,509				158,181,139				161,062,016				157,346,803
3			6,318,939				5,939,193				6,418,829				5,953,542
4			1,078,897				1,053,757				982,290				948,478
5			239,704				49,375				236,648				51,875
6			1,209				1				1,233				-
Total		$	386,155,977			$	375,573,407			$	390,634,441			$	381,275,986

 

The following tables present a roll forward of the Company’s allowance for credit losses on fixed maturity securities available for sale:

Schedule of Allowance for Credit Losses on Fixed Maturity Securities Available for Sale 

		Three Months Ended March 31, 2024
		U.S. Treasury securities and obligations of U.S. Government agencies				Obligations of states and political subdivisions				Corporate securities including public utilities				Mortgage-backed securities				Total
Beginning balance - January 1, 2024		$	-			$	-			$	308,500			$	6,049			$	314,549
Additions for credit losses not previously recorded			-				-				30,000				-				30,000
Change in allowance on securities with previous allowance			-				-				60,000				6,000				66,000
Reductions for securities sold during the period			-				-				-				-				-
Reductions for securities with credit losses due to intent to sell			-				-				-				-				-
Write-offs charged against the allowance			-				-				-				-				-
Recoveries of amounts previously written off			-				-				-				-				-
Ending Balance - March 31, 2024		$	-			$	-			$	398,500			$	12,049			$	410,549

 

16

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

		Three Months Ended March 31, 2023
		U.S. Treasury securities and obligations of U.S. Government agencies				Obligations of states and political subdivisions				Corporate securities including public utilities				Mortgage-backed securities				Total
Beginning balance - January 1, 2023		$	-			$	-			$	-			$	-			$	-
Balance		$	-			$	-			$	-			$	-			$	-
Additions for credit losses not previously recorded			-				-				179,500				-				179,500
Change in allowance on securities with previous allowance			-				-				-				-				-
Reductions for securities sold during the period			-				-				-				-				-
Reductions for securities with credit losses due to intent to sell			-				-				-				-				-
Write-offs charged against the allowance			-				-				-				-				-
Recoveries of amounts previously written off			-				-				-				-				-
Ending Balance - March 31, 2023		$	-			$	-			$	179,500			$	-			$	179,500
Balance		$	-			$	-			$	179,500			$	-			$	179,500

 

The table below presents the amortized cost and the estimated fair value of fixed maturity securities available for sale as of March 31, 2024, by contractual maturity. Actual or 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.

Schedule of Investments Classified by Contractual Maturity Date 

		Amortized Cost				Estimated Fair Value
Due in 1 year		$	72,470,984			$	72,077,712
Due in 2-5 years			123,253,754				120,601,532
Due in 5-10 years			85,540,964				84,576,263
Due in more than 10 years			65,101,877				62,578,557
Mortgage-backed securities			39,788,398				35,739,343
Redeemable preferred stock			250,000				260,000
Total		$	386,405,977			$	375,833,407

 

Information regarding sales of fixed maturity securities available for sale is presented as follows.

Schedule of Major Categories of Net Investment Income 

		Three Months Ended March 31,
		2024				2023
Proceeds from sales		$	179,989			$	1,209,844
Gross realized gains			303				15,490
Gross realized losses			(854	)			(54,104	)

 

17

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Assets on Deposit, Held in Trust, and Pledged as Collateral

 

Assets on deposit with life insurance regulatory authorities as required by law were as follows:

Schedule of Assets on Deposit With Life Insurance 

		As of March 31, 2024				As of December 31, 2023
Fixed maturity securities available for sale at estimated fair value		$	6,068,973			$	6,206,650
Other investments			400,000				400,000
Cash and cash equivalents			1,982,298				1,909,215
Total assets on deposit		$	8,451,271			$	8,515,865

 

Assets held in trust related to third-party reinsurance agreements were as follows:

 

		As of March 31, 2024				As of December 31, 2023
Fixed maturity securities available for sale at estimated fair value		$	27,718,677			$	27,903,952
Cash and cash equivalents			2,469,301				2,101,052
Total assets on deposit		$	30,187,978			$	30,005,004

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). Assets pledged as collateral with the FHLB are presented below. These pledged securities are used as collateral for any FHLB cash advances.

 

		As of March 31, 2024				As of December 31, 2023
Fixed maturity securities available for sale at estimated fair value		$	94,098,666			$	93,903,089
Total assets pledged as collateral		$	94,098,666			$	93,903,089

 

Real Estate Held for Investment and Held for Sale

 

The Company strategically deploys resources into real estate assets 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.

 

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 resources. The geographic locations and asset classes of investments are determined by senior management under the direction of the Board of Directors.

 

18

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

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 where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are in regions expected to have high growth in employment and population and that provide operational efficiencies.

 

The Company currently owns and operates seven commercial properties in two states. These properties include office buildings, flex office space, and the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company uses bank debt in strategic cases, primarily where it is anticipated to improve yields, or facilitate the acquisition of higher quality assets or asset class diversification.

 

The aggregated net book value of commercial real estate serving as collateral for bank loans was $123,079,008 and $124,381,467 as of March 31, 2024 and December 31, 2023, respectively. The associated bank loan carrying values totaled $97,359,494 and $97,807,614 as of March 31, 2024 and December 31, 2023, respectively.

 

During the three month periods ended March 31, 2024 and 2023, the Company did not record any impairment losses on commercial 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.

 

During the three month periods ended March 31, 2024 and 2023, the Company recorded depreciation expense on commercial real estate held for investment of $1,527,793 and $1,565,927, respectively. Commercial real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

The Company’s commercial real estate held for investment is summarized as follows as of the respective dates indicated:

Schedule of Commercial Real Estate Investment 

		Net Book Value								Total Square Footage
		March 31, 2024				December 31, 2023				March 31, 2024				December 31, 2023
Utah (1)		$	128,904,262			$	142,475,177				546,941				625,920
Louisiana			19,084				19,250				1,622				1,622
		$	128,923,346			$	142,494,427				548,563				627,542

 

 

(1)	Includes Center53

 

19

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The Company’s commercial real estate held for sale is summarized as follows as of the respective dates indicated:

 

		Net Book Value								Total Square Footage
		March 31, 2024				December 31, 2023				March 31, 2024				December 31, 2023
Mississippi (1)		$	151,553			$	3,028,973				-				19,694
Utah (2)			12,111,772				-				78,979				-
		$	12,263,325			$	3,028,973				78,979				19,694

 

 

(1)

Consists of approximately 93 acres of undeveloped land for $151,553 for 2024 and 2023. The remaining property for $2,877,420 was sold in February 2024 for a gain of approximately $250,000.

(2)

Sold in April 2024 for a gain of approximately $3,000

 

The property is being marketed with the assistance of commercial real estate brokers in Mississippi.

 

Residential Real Estate Held for Investment and Held for Sale

 

The Company occasionally acquires a small portfolio of residential homes primarily because of loan foreclosures. The Company has the option to sell these properties or to continue to hold them for expected cash flow and price appreciation. The Company also invests in residential subdivision development.

 

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

 

During the three month periods ended March 31, 2024 and 2023 the Company did not record any impairment losses on residential real estate held for sale or held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

 

During the three month periods ended March 31, 2024 and 2023, the Company recorded depreciation expense on residential real estate held for investment of $2,653 and $2,648, respectively. Residential real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

 

The Company’s residential real estate held for investment is summarized as follows as of the respective dates indicated:

Schedule of Residential Real Estate Investment 

		Net Book Value
		March 31, 2024				December 31, 2023
Utah (1)		$	54,638,976			$	40,924,865
		$	54,638,976			$	40,924,865

 

 

(1)

Includes multiple residential subdivision development projects

 

20

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The following table presents additional information regarding the Company’s residential subdivision development in Utah:

 

		March 31, 2024				December 31, 2023
Lots developed			64				42
Lots to be developed			1,269				1,145
Book Value		$	54,449,234			$	40,739,201

 

The Company’s residential real estate held for sale is summarized as follows as of the respective dates indicated:

 

		Net Book Value
		March 31, 2024				December 31, 2023
Utah		$	859,599			$	-
		$	859,599			$	-

 

The net book value of foreclosed residential real estate included in residential real estate held for sale was $859,599 and nil as of March 31, 2024 and December 31, 2023, respectively.

 

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, 2024, real estate owned and occupied by the Company is summarized as follows:

Schedule of Real Estate Owned and Occupied by the Company 

Location		Business Segment		Approximate Square Footage				Square Footage Occupied by the Company
433 Ascension Way, Floors 4, 5 and 6, Salt Lake City, UT - Center53 Building 2 (1)		Corporate Offices, Life Insurance, Cemetery/Mortuary Operations, and Mortgage Operations and Sales			221,000				50	%
1818 Marshall Street, Shreveport, LA (2)		Life Insurance Operations			12,274				100	%
909 Foisy Street, Alexandria, LA (2) (3)		Life Insurance Sales			8,059				100	%
812 Sheppard Street, Minden, LA (2) (4)		Life Insurance Sales			1,560				100	%

 

 

(1)

Included in real estate held for investment on the condensed consolidated balance sheets

(2)

Included in property and equipment on the condensed consolidated balance sheets

(3)

Sold in April 2024 for a loss of approximately $39,000

(4)

Listed for sale

 

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 the loans are secured by real estate.

 

21

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

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 the relevant debtors’ ability to honor obligations is dependent upon the economic stability of the geographic region in which the debtors do business or are employed. As of March 31, 2024, the Company had 43%, 11%, 8%, 8% and 7%, of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, and Arizona, respectively. As of December 31, 2023, the Company had 44%, 11%, 10%, 7% and 6% of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, and Arizona respectively.

 

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 credit 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 terms 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 requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans of more than 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required.

 

Evaluation of Allowance for Credit Losses

 

See Note 2 regarding the adoption of ASU 2016-13.

 

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the Company’s mortgage loans held for investment to present the net amount expected to be collected. The Company reports in net earnings, as a credit loss expense, the amount necessary to adjust the allowance for credit losses for the Company’s current estimate of expected credit losses on mortgage loans held for investment. This credit loss expense is included in other expenses on the condensed consolidated statements of earnings.

 

Once a mortgage loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and reverse any interest income that had been accrued. Given this policy, the Company does not measure a credit loss allowance on accrued interest receivable. Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received for mortgage loans on a non-accrual status are recognized when received. The interest income recognized from payments received for mortgage loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued on these loans totaled approximately $328,000 and $237,000 as of March 31, 2024 and December 31, 2023, respectively.

 

The Company measures expected credit losses based on the fair value of the collateral when the Company determines that foreclosure is probable. When a mortgage loan becomes delinquent, the Company proceeds to foreclose and all expenses for foreclosure are expensed as incurred. Once foreclosed, the property is classified as real estate held for investment or held for sale.

 

To determine the allowance for credit 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 secondarily on the borrower’s (or guarantor’s) ability to repay.

 

22

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Commercial loans are evaluated for credit loss by analyzing common metrics that are predictors for future credit losses such as debt service coverage ratio (“DSCR”), loan to value (“LTV”), local market conditions, borrower quality, and underlying collateral. The fair value of the underlying collateral is based on a third-party appraisal of the property at origination of the loan. The fair value is assessed if the loan becomes 90 days delinquent. The Company uses these metrics to pool similar loans. The allowance for credit losses is based on estimates, historical experience, probability of loss, value of the underlying collateral, and other factors that affect the collectability of the loan. The Company applies a future loss factor to the outstanding balance of each group to arrive at the allowance for credit losses.

 

Residential — These loans are secured by first and second mortgages on single-family dwellings. The borrower’s ability to repay is sensitive to the life events and the general economic condition of the region. Where loan to value exceeds 80%, the loan is generally guaranteed by private mortgage insurance, the FHA, or VA.

 

Residential loans are evaluated for credit loss by using relevant available information from both internal and external sources. Among other things, the Company uses its historical delinquency information and considers current and forecasted economic conditions. External sources include a monthly analysis of its residential portfolio by a third party. The third party uses the Company’s current loan data and runs it through various models to project cash flows and provide a projected life of loan loss. The models consider loan features such as loan type, loan to value, payment status, age, and current property values. Analyzing the information from the various sources allows the Company to arrive at the allowance for credit losses.

 

Residential construction (including land acquisition and development) – These loans are 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, and factor in estimates of the value of construction projects upon completion. 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 acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These loans are 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.

 

Residential construction mortgage loans are evaluated for credit loss by considering historical activity and current housing market trends to arrive at a per loan basis point allowance that is recognized at loan origination and for subsequent draws. The per loan basis point is reviewed at least annually or as loan losses or market trends require.

 

The following table presents a roll forward of the allowance for credit losses as of the dates indicated:

Schedule of Allowance for Loan Losses 

		Three Months Ended
		Commercial				Residential				Residential Construction				Total
Beginning balance - January 1, 2024		$	1,219,653			$	2,390,894			$	208,106			$	3,818,653
			-
Change in provision for credit losses			(360,031	)			(528,399	)			(8,609	)			(897,039	)
Charge-offs			-				-				-				-
Ending balance - March 31, 2024		$	859,622			$	1,862,495			$	199,497			$	2,921,614
Beginning balance - January 1, 2023		$	187,129			$	1,739,980			$	43,202			$	1,970,311
Adoption of ASU 2016-13 (1)			555,807				(192,607	)			301,830				665,030
Change in provision for credit losses (2)			15,195				137,727				(52,844	)			100,078
Charge-offs			-				-				-				-
Ending balance - March 31, 2023		$	758,131			$	1,685,100			$	292,188			$	2,735,419

 

 

(1)

See Note 2 of the notes to the condensed consolidated financial statements

(2)

Included in other expenses on the condensed consolidated statements of earnings

 

23

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The following table presents the aging of mortgage loans held for investment by loan type as of the dates indicated:

Schedule of Aging of Mortgage Loans 

		Commercial				Residential				Residential  Construction				Total
March 31, 2024
30-59 days past due		$	5,056,753			$	3,868,858			$	-			$	8,925,611
60-89 days past due			-				2,018,961				-				2,018,961
Over 90 days past due (1)			405,000				3,001,826				-				3,406,826
In process of foreclosure (1)			191,508				1,694,997				-				1,886,505
Total past due			5,653,261				10,584,642				-				16,237,903
Current			61,422,824				96,179,990				99,748,408				257,351,222
Total mortgage loans			67,076,085				106,764,632				99,748,408				273,589,125
Allowance for credit losses			(859,622	)			(1,862,495	)			(199,497	)			(2,921,614	)
Unamortized deferred loan fees, net			(144,981	)			(1,168,387	)			(398,123	)			(1,711,491	)
Unamortized discounts, net			(159,979	)			(159,257	)			-				(319,236	)
Net mortgage loans held for investment		$	65,911,503			$	103,574,493			$	99,150,788			$	268,636,784

 

December 31, 2023
30-59 days past due		$	-			$	3,387,673			$	-			$	3,387,673
60-89 days past due			-				3,472,760				-				3,472,760
Over 90 days past due (1)			405,000				3,480,931				-				3,885,931
In process of foreclosure (1)			1,241,508				1,021,790				-				2,263,298
Total past due			1,646,508				11,363,154				-				13,009,662
Current			72,530,030				91,790,433				104,052,748				268,373,211
Total mortgage loans			74,176,538				103,153,587				104,052,748				281,382,873
Allowance for credit losses			(1,219,653	)			(2,390,894	)			(208,106	)			(3,818,653	)
Unamortized deferred loan fees, net			(172,989	)			(1,135,491	)			(314,746	)			(1,623,226	)
Unamortized discounts, net			(216,705	)			(107,452	)			-				(324,157	)
Net mortgage loans held for investment		$	72,567,191			$	99,519,750			$	103,529,896			$	275,616,837

 

 

(1)

Interest income is not recognized on loans which are more than 90 days past due or in foreclosure.

 

24

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Credit Quality Indicators

 

The Company evaluates and monitors the credit quality of its commercial loans by analyzing loan to value (“LTV”) and debt service coverage ratios (“DSCR”). Monitoring a commercial mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of March 31, 2024:

Schedule of Commercial Mortgage Loans By Credit Quality Indicator 

Credit Quality Indicator LTV:		2024				2023				2022				2021				2020				Prior				Total				% of Total
Less than 65%		$	4,221,500			$	34,304,450			$	3,335,678			$	3,755,796			$	-			$	9,410,047			$	55,027,471				82.04	%
65% to 80%			432,978				1,523,926				4,773,397				-				-				-				6,730,301				10.03	%
Greater than 80%			-				-				-				405,000				4,913,313				-				5,318,313				7.93	%
Total		$	4,654,478			$	35,828,376			$	8,109,075			$	4,160,796			$	4,913,313			$	9,410,047			$	67,076,085				100.00	%
DSCR
>1.20x		$	4,221,500			$	20,990,000			$	1,000,000			$	700,000			$	4,913,313			$	5,538,915			$	37,363,728				55.70	%
1.00x - 1.20x			432,978				8,338,376				7,109,075				3,460,796				-				3,856,194				23,197,419				34.58	%
<1.00x			-				6,500,000				-				-				-				14,938				6,514,938				9.71	%
Total		$	4,654,478			$	35,828,376			$	8,109,075			$	4,160,796			$	4,913,313			$	9,410,047			$	67,076,085				100.00	%

 

The aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:

 

Credit Quality Indicator LTV:		2023				2022				2021				2020				2019				Prior				Total				% of Total
Less than 65%		$	34,304,954			$	13,555,737			$	3,778,248			$	-			$	2,964,740			$	6,565,389			$	61,169,068				82.46	%
65% to 80%			1,523,926				5,115,231				1,050,000				4,913,313				-				-				12,602,470				16.99	%
Greater than 80%			-				-				405,000				-				-				-				405,000				0.55	%
Total		$	35,828,880			$	18,670,968			$	5,233,248			$	4,913,313			$	2,964,740			$	6,565,389			$	74,176,538				100.00	%
DSCR
>1.20x		$	20,990,000			$	1,000,000			$	700,000			$	4,913,313			$	2,964,740			$	2,612,625			$	33,180,678				44.73	%
1.00x - 1.20x			8,338,880				8,496,127				3,483,248				-				-				3,952,764				24,271,019				32.72	%
<1.00x			6,500,000				9,174,841(1)	(1)			1,050,000				-				-				-				16,724,841				22.55	%
Total		$	35,828,880			$	18,670,968			$	5,233,248			$	4,913,313			$	2,964,740			$	6,565,389			$	74,176,538				100.00	%

 

 

(1)

Commercial construction loan

 

25

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The Company evaluates and monitors the credit quality of its residential mortgage loans by analyzing LTV and loan performance. The Company defines non-performing mortgage loans as loans more than 90 days past due and on a non-accrual status. Monitoring a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of March 31, 2024:

 

Credit Quality Indicator		2024				2023				2022				2021				2020				Prior				Total				% of Total
Performance Indicators:
Performing		$	3,547,990			$	16,709,844			$	52,632,220			$	7,046,188			$	7,709,605			$	14,421,963			$	102,067,810				95.60	%
Non-performing (1)			-				398,402				2,198,441				365,061				406,356				1,328,562				4,696,822				4.40	%
Total		$	3,547,990			$	17,108,246			$	54,830,661			$	7,411,249			$	8,115,961			$	15,750,525			$	106,764,632				100.00	%

 

 

(1)

Includes residential mortgage loans in the process of foreclosure of $1,694,997

 

LTV:
Less than 65%		$	750,581			$	3,288,230			$	7,025,668			$	2,629,210			$	1,577,667			$	5,951,632			$	21,222,988				19.88	%
65% to 80%			2,797,409				11,187,143				43,201,988				3,309,638				4,000,015				7,368,980				71,865,173				67.31	%
Greater than 80%			-				2,632,873				4,603,005				1,472,401				2,538,279				2,429,913				13,676,471				12.81	%
Total		$	3,547,990			$	17,108,246			$	54,830,661			$	7,411,249			$	8,115,961			$	15,750,525			$	106,764,632				100.00	%

 

The aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:

 

Credit Quality Indicator		2023				2022				2021				2020				2019				Prior				Total				% of Total
Performance Indicators:
Performing		$	15,337,828			$	53,875,389			$	7,156,934			$	7,453,796			$	2,786,562			$	12,040,357			$	98,650,866				95.63	%
Non-performing (1)			-				2,202,114				365,061				613,101				-				1,322,445				4,502,721				4.37	%
Total		$	15,337,828			$	56,077,503			$	7,521,995			$	8,066,897			$	2,786,562			$	13,362,802			$	103,153,587				100.00	%

 

 

(1)

Includes residential mortgage loans in the process of foreclosure of $1,021,790

 

LTV:
Less than 65%		$	3,280,144			$	7,049,522			$	1,843,286			$	1,746,970			$	446,675			$	5,206,095			$	19,572,692				18.97	%
65% to 80%			10,962,770				44,371,320				4,269,894				4,222,170				2,339,887				5,711,440				71,877,481				69.68	%
Greater than 80%			1,094,914				4,656,661				1,408,815				2,097,757				-				2,445,267				11,703,414				11.35	%
Total		$	15,337,828			$	56,077,503			$	7,521,995			$	8,066,897			$	2,786,562			$	13,362,802			$	103,153,587				100.00	%

 

26

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

The company evaluates and monitors the credit quality of its residential construction loans (including land acquisition and development loans) by analyzing LTV and loan performance. Monitoring a residential construction mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

 

The aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of March 31, 2024:

Schedule of Residential Construction Mortgage Loans 

Credit Quality Indicator		2024				2023				2022				2021				Total				% of Total
Performance Indicators:
Performing		$	17,493,176			$	49,632,301			$	6,844,517			$	25,778,414			$	99,748,408				100.00	%
Non-performing			-				-				-				-				-				0.00	%
Total		$	17,493,176			$	49,632,301			$	6,844,517			$	25,778,414			$	99,748,408				100.00	%
LTV:
Less than 65%		$	17,493,176			$	28,656,715			$	4,459,888			$	25,778,414			$	76,388,193				76.58	%
65% to 80%			-				20,975,586				2,384,629				-				23,360,215				23.42	%
Greater than 80%			-				-				-				-				-				0.00	%
Total		$	17,493,176			$	49,632,301			$	6,844,517			$	25,778,414			$	99,748,408				100.00	%

 

The aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of December 31, 2023:

 

Credit Quality Indicator		2023				2022				2021				Total				% of Total
Performance Indicators:
Performing		$	60,311,679			$	16,624,182			$	27,116,887			$	104,052,748				100.00	%
Non-performing			-				-				-				-				0.00	%
Total		$	60,311,679			$	16,624,182			$	27,116,887			$	104,052,748				100.00	%
LTV:
Less than 65%		$	40,215,360			$	8,732,500			$	20,442,302			$	69,390,162				66.69	%
65% to 80%			20,096,319				7,891,682				6,674,585				34,662,586				33.31	%
Greater than 80%			-				-				-				-				0.00	%
Total		$	60,311,679			$	16,624,182			$	27,116,887			$	104,052,748				100.00	%

 

27

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Insurance Assignments

 

The following table presents the aging of insurance assignments, included in other investments and policy loans on the condensed consolidated balance sheets:

Schedule of Aging of Insurance Assignments 

		As of March 31, 2024				As of December 31, 2023
30-59 days past due		$	10,589,598			$	10,829,629
60-89 days past due			4,534,618				3,709,754
Over 90 days past due			5,260,677				4,329,468
Total past due			20,384,893				18,868,851
Current			26,325,685				26,736,471
Total insurance assignments			46,710,578				45,605,322
Allowance for credit losses			(1,587,525	)			(1,553,836	)
Net insurance assignments		$	45,123,053			$	44,051,486

 

The Company records an allowance for credit losses when the insurance assignment is funded. Once an insurance assignment moves to 90 days or legal proceedings, it is monitored for write-off and collectability, and any adjustments to the allowance are recorded at that time. See Note 2 regarding the adoption of ASU 2016-13.

 

The following table presents a roll forward of the allowance for credit losses for insurance assignments as of the dates indicated:

Schedule of Allowance for Credit Losses 

		Three Months Ended
Beginning balance - January 1, 2024		$	1,553,836
Change in provision for credit losses (1)			250,567
Charge-offs			(216,878	)
Ending balance - March 31, 2024		$	1,587,525
Beginning balance - January 1, 2023		$	1,609,951
Change in provision for credit losses (1)			233,113
Charge-offs			(157,163	)
Ending balance - March 31, 2023		$	1,685,901

 

 

(1)

Included in other expenses on the condensed consolidated statements of earnings

 

28

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Investment Related Earnings

 

The following table presents the realized gains and losses from sales, calls, and maturities, and unrealized gains and losses on equity securities from investments and other assets:

Schedule of Gain (Loss) on Investments 

		Three Months Ended March 31,
		2024				2023
Fixed maturity securities:
Gross realized gains		$	303			$	15,491
Gross realized losses			(854	)			(54,891	)
Net credit loss provision			(96,000	)			(179,500	)
Equity securities:
Losses on securities sold			(61,103	)			(52,315	)
Unrealized gains on securities held at the end of the period			1,542,863				331,430
Real estate held for investment and sale:
Gross realized gains			249,960				-
Gross realized losses			-				-
Other assets:
Gross realized gains			35,486				50,939
Gross realized losses			(1,229	)			-
Total		$	1,669,426			$	111,154

 

The 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.

 

Net realized gains and losses includes gains and losses by the restricted assets and cemetery perpetual care trust investments of the cemeteries and mortuaries of $582,172 in net gains and $53,931 in net gains for the three month periods ended March 31, 2024 and 2023, respectively.

 

29

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

3)	Investments (Continued)

 

Major categories of net investment income were as follows:

 

		Three Months Ended March 31,
		2024				2023
Fixed maturity securities available for sale		$	4,403,558			$	4,012,732
Equity securities			168,148				140,507
Mortgage loans held for investment			8,814,036				8,487,656
Real estate held for investment and sale			3,515,061				3,364,924
Policy loans			301,267				200,213
Insurance assignments			5,076,549				4,768,203
Other investments			198,959				129,056
Cash and cash equivalents			1,690,957				787,762
Gross investment income			24,168,535				21,891,053
Investment expenses			(4,221,967	)			(4,116,170	)
Net investment income		$	19,946,568			$	17,774,883

 

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $933,551 and $633,527 for the three month periods ended March 31, 2024 and 2023, 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.

 

Accrued Investment Income

 

Accrued investment income consists of the following:

Schedule of Accrued Investment Income 

		As of March 31, 2024				As of December 31, 2023
Fixed maturity securities available for sale		$	4,343,991			$	3,984,695
Equity securities			25,081				20,451
Mortgage loans held for investment			1,163,282				2,661,092
Real estate held for investment			3,411,928				3,486,115
Cash and cash equivalents			16,783				18,437
Total accrued investment income		$	8,961,065			$	10,170,790

 

30

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

4) Loans Held for Sale

 

The Company’s loans held for sale portfolio is valued using the fair value option. 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 recognition of mortgage loan interest income and is included in mortgage fee income on the condensed consolidated statement of earnings. Included in loans held for sale are loans in the process of foreclosure with an aggregate unpaid principal balance of $311,117 and $1,636,090 as of March 31, 2024 and December 31, 2023, respectively. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

 

The following table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale:

Schedule of Aggregate Fair Value Loans Held for Sale 

		As of March 31, 2024				As of December 31, 2023
Aggregate fair value		$	112,678,958			$	126,549,190
Unpaid principal balance			113,616,499				127,185,867
Unrealized loss			(937,541	)			(636,677	)

 

Mortgage Fee Income

 

Mortgage fee income consists of origination fees, processing fees, interest income and 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 summarized as follows:

Schedule of Mortgage Fee Income for Loans Held for Sale 

		Three Months Ended March 31,
		2024				2023
Loan fees		$	5,520,465			$	4,388,414
Interest income			1,482,819				2,007,058
Secondary gains			14,730,974				17,961,358
Change in fair value of loan commitments			561,778				677,952
Change in fair value of loans held for sale			(300,890	)			794,614
Provision for loan loss reserve			(163,476	)			159,610
Mortgage fee income		$	21,831,670			$	25,989,006

 

Loan Loss Reserve

 

Repurchase demands from third party investors that correspond to mortgage loans previously held for sale and sold are reviewed and relevant data is captured so that an estimated future loss can be calculated. The key factors that are used in the estimated future 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 can resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.

 

The loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows:

Schedule of Loan Loss Reserve Included in Other Liabilities and Accrued Expenses

		As of March 31, 2024				As of December 31, 2023
Balance, beginning of period		$	547,233			$	1,725,667
Provision on current loan originations (1)			163,476				27,164
Charge-offs, net of recaptured amounts			(210,102	)			(1,205,598	)
Balance, end of period		$	500,607			$	547,233

 

 

(1)

Included in mortgage fee income

 

The Company maintains reserves for estimated losses on current production volumes. For the three month period ended March 31, 2024, $163,476 in reserves were added at a rate of 3.5 basis points per loan, the equivalent of $350 per $1,000,000 in loans originated. This is a decrease over the three month period ended March 31, 2023, when reserves of $239,801 were added at a rate of 4.5 basis points per loan originated, the equivalent of $450 per $1,000,000 in loans originated. The Company monitors market data and trends, economic conditions (including forecasts) and its own experience to maintain adequate loss reserves on current production.

 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

5) Stock Compensation Plans

 

The Company has equity incentive plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Plan”).

 

Stock Options

 

Stock based compensation expense for stock options issued of $198,998 and $142,929 has been recognized for these plans for the three month periods ended March 31, 2024 and 2023, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2024, the total unrecognized compensation expense related to the options issued was $512,854, which is expected to be recognized over the remaining vesting period.

 

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.

 

Activity of the stock option plans during the three month period ended March 31, 2024, is summarized as follows:

 Schedule of Activity of Stock Option Plans

		Number of Class A Shares				Weighted Average Exercise Price (2)				Number of Class C Shares				Weighted Average Exercise Price (2)
Outstanding at January 1, 2024			833,570			$	5.22				1,520,062			$	5.86
Granted			16,500								-
Exercised			-								-
Cancelled			-								-
Outstanding at March 31, 2024			850,070			$	5.29				1,520,062			$	5.86
As of March 31, 2024:
Options exercisable			765,695			$	4.97				1,291,312			$	5.47
As of March 31, 2024:
Available options for future grant			76,320								529,750
Weighted average contractual term of options outstanding at March 31, 2024			5.00 years								6.25 years
Weighted average contractual term of options exercisable at March 31, 2024			4.57 years								5.83 years
Aggregated intrinsic value of options outstanding at March 31, 2024 (1)		$	2,230,953							$	3,108,691
Aggregated intrinsic value of options exercisable at March 31, 2024 (1)		$	2,246,543							$	3,146,491

 

 

(1)

The Company used a stock price of $7.91 as of March 31, 2024 to derive intrinsic value.

(2)

Adjusted for the effect of annual stock dividends.

 

32

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

5)	Stock Compensation Plans

 

Activity of the stock option plans during the three month period ended March 31, 2023, is summarized as follows:

 

		Number of Class A Shares				Weighted Average Exercise Price (2)				Number of Class C Shares				Weighted Average Exercise Price
Outstanding at January 1, 2023			976,605			$	4.78				1,157,203			$	5.59
Granted			16,000								-
Exercised			(90,705	)							-
Cancelled			-								-
Outstanding at March 31, 2023			901,900			$	4.92				1,157,203			$	5.59
As of March 31, 2023:
Options exercisable			827,025			$	4.76				935,953			$	5.36
As of March 31, 2023:
Available options for future grant			155,133								795,000
Weighted average contractual term of options outstanding at March 31, 2023			4.60 years								6.66 years
Weighted average contractual term of options exercisable at March 31, 2023			4.14 years								6.20 years
Aggregated intrinsic value of options outstanding at March 31, 2023 (1)		$	1,182,602							$	741,380
Aggregated intrinsic value of options exercisable at March 31, 2023 (1)		$	1,214,210							$	812,293

 

 

(1)

The Company used a stock price of $6.23 as of March 31, 2023 to derive intrinsic value.

(2)

Adjusted for the effect of annual stock dividends.

 

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 month periods ended March 31, 2024 and 2023 was nil and $176,935, respectively.

 

33

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

5)	Stock Compensation Plans (Continued)

 

Restricted Stock Units (“RSUs”)

 

Stock based compensation expense for RSUs issued of $889 and $742 has been recognized under these plans for each of the three month periods ended March 31, 2024 and 2023, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2024, the total unrecognized compensation expense related to the RSUs issued was $2,375, which is expected to be recognized over the remaining vesting period.

 

Activity of the RSUs during the three month period ended March 31, 2024 is summarized as follows:

 Schedule of Activity Restricted Stock Units

		Number of Class A Shares				Weighted Average Grant Date Fair Value
Non-vested at January 1, 2024			2,245			$	7.72
Granted			-
Vested			(405	)
Non-vested at March 31, 2024			1,840			$	7.99
Available RSUs for future grant			16,540

 

Activity of the RSUs during the three month period ended March 31, 2023 is summarized as follows:

 

		Number of Class A Shares				Weighted Average Grant Date Fair Value
Non-vested at January 1, 2023			1,620			$	6.48
Granted			-
Vested			-
Non-vested at March 31, 2023			1,620			$	6.48
Available RSUs for future grant			18,380

 

34

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

6) Earnings Per Share

 

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

 Schedule of Earnings Per Share, Basic and Diluted

		2024				2023
		Three Months Ended March 31,
		2024				2023
Numerator:
Net earnings		$	7,474,522			$	1,240,172
Denominator:
Basic weighted-average shares outstanding			22,219,490				22,129,713
Effect of dilutive securities:
Employee stock options			726,352				558,060
Diluted weighted-average shares outstanding			22,945,842				22,687,773
Basic net earnings per share		$	0.34			$	0.06
Diluted net earnings per share		$	0.33			$	0.05

 

For the three month periods ended March 31, 2024 and 2023, there were 467,125 and 730,270 anti-dilutive 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. Basic and diluted earnings per share amounts are the same for each class of common stock.

 

The following table summarizes the activity in shares of capital stock.

 Summary of Activities in Shares of Capital Stock

		Class A				Class C
Outstanding shares at December 31, 2022			18,758,031				2,889,859
Stock dividends			48,046				-
Exercise of stock options
Vesting of restricted stock units
Conversion of Class C to Class A			936				(936	)
Outstanding shares at March 31, 2023			18,807,013				2,888,923
Outstanding shares at December 31, 2023			20,048,002				2,971,854
Common stock, outstanding shares, beginning			20,048,002				2,971,854
Exercise of stock options			-				-
Vesting of restricted stock units			405				-
Conversion of Class C to Class A			174				(174	)
Outstanding shares at March 31, 2024			20,048,581				2,971,680
Common stock, outstanding shares, ending			20,048,581				2,971,680

 

35

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

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, 2023. 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.

 Schedule of Revenues and Expenses by Reportable Segment

		Life Insurance				Cemetery/ Mortuary				Mortgage				Intercompany Eliminations				Consolidated
For the Three Months Ended
March 31, 2024
Revenues from external customers		$	49,970,635			$	8,787,578			$	22,429,985			$	-			$	81,188,198
Intersegment revenues			1,379,575				84,768				146,606				(1,610,949	)			-
Segment profit (loss) before income taxes			8,529,509				3,053,421				(1,963,619	)			-				9,619,311
Identifiable Assets		$	1,341,500,414			$	99,346,510			$	94,563,032			$	(94,161,443	)		$	1,441,248,513
Goodwill			2,765,570				2,488,213				-				-				5,253,783
Total Assets		$	1,344,265,984			$	101,834,723			$	94,563,032			$	(94,161,443	)		$	1,446,502,296
For the Three Months Ended
March 31, 2023
Revenues from external customers		$	45,415,297			$	7,198,396			$	26,887,041			$	-			$	79,500,734
Intersegment revenues			1,510,028				83,836				123,699				(1,717,563	)			-
Segment profit (loss) before income taxes			3,683,735				1,784,592				(3,883,439	)			-				1,584,888
Identifiable Assets		$	1,308,954,075			$	87,354,333			$	152,745,312			$	(111,225,073	)		$	1,437,828,647
Goodwill			2,765,570				2,488,213				-				-				5,253,783
Total Assets		$	1,311,719,645			$	89,842,546			$	152,745,312			$	(111,225,073	)		$	1,443,082,430

 

36

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (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 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 financial assets), 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.

 

Restricted Assets: 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 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 Perpetual 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.

 

Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

 

37

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The items shown under Level 3 are valued as follows:

 

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. Fair value is often difficult to determine in volatile markets and may contain significant unobservable inputs.

 

Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters loan commitments with potential borrowers and forward sale commitments to sell loans with 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, 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 be funded 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 comparable sales in the area, property condition, and 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.

 

Impaired 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 comparable properties 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.

 

38

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (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 as of March 31, 2024:

Schedule of Fair Value Assets and Liabilities Measured on a Recurring Basis 

		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		$	375,833,407			$	-			$	374,601,220			$	1,232,187
Equity securities			15,161,999				15,161,999				-				-
Loans held for sale			112,678,958				-				-				112,678,958
Restricted assets (1)			1,804,614				-				1,804,614				-
Restricted assets (2)			8,278,612				8,278,612				-				-
Cemetery perpetual care trust investments (1)			640,779				-				640,779				-
Cemetery perpetual care trust investments (2)			4,576,289				4,576,289				-				-
Derivatives - loan commitments (3)			5,454,295				-				-				5,454,295
Total assets accounted for at fair value on a recurring basis		$	524,428,953			$	28,016,900			$	377,046,613			$	119,365,440
Liabilities accounted for at fair value on a recurring basis
Derivatives - loan commitments (4)			(3,309,255	)			-				-				(3,309,255	)
Total liabilities accounted for at fair value on a recurring basis		$	(3,309,255	)		$	-			$	-			$	(3,309,255	)

 

 

(1)	Fixed maturity securities available for sale

(2)	Equity securities

(3)	Included in other assets on the consolidated balance sheets

(4)	Included in other liabilities and accrued expenses on the consolidated balance sheets

 

39

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (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 as of December 31, 2023:

 

		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		$	381,535,986			$	-			$	380,297,330			$	1,238,656
Equity securities			13,636,071				13,636,071				-				-
Loans held for sale			126,549,190				-				-				126,549,190
Restricted assets (1)			1,853,860				-				1,853,860				-
Restricted assets (2)			7,385,203				7,385,203				-				-
Cemetery perpetual care trust investments (1)			641,704				-				641,704				-
Cemetery perpetual care trust investments (2)			4,327,301				4,327,301				-				-
Derivatives - loan commitments (3)			4,995,486				-				-				4,995,486
Total assets accounted for at fair value on a recurring basis		$	540,924,801			$	25,348,575			$	382,792,894			$	132,783,332
Liabilities accounted for at fair value on a recurring basis
Derivatives - loan commitments (4)		$	(3,412,224	)		$	-			$	-			$	(3,412,224	)
Total liabilities accounted for at fair value on a recurring basis		$	(3,412,224	)		$	-			$	-			$	(3,412,224	)

 

 

(1)	Fixed maturity securities available for sale

(2)	Equity securities

(3)	Included in other assets on the consolidated balance sheets

(4)	Included in other liabilities and accrued expenses on the consolidated balance sheets

 

40

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2024, the significant unobservable inputs used in the fair value measurements were as follows:

 Schedule of Level 3 Assets and Liabilities Measured at Fair Value on Recurring Basis 

								Significant		Range of Inputs
		Fair Value at				Valuation		Unobservable		Minimum				Maximum				Weighted
		March 31, 2024				Technique		Input(s)		Value				Value				Average
Loans held for sale		$	112,678,958			Market approach		Investor contract pricing as a percentage of unpaid principal balance			70.0	%			108.0	%			99.0	%
Derivatives - loan commitments (net)			2,145,040			Market approach		Pull-through rate			65.0	%			100.0	%			85.0	%
								Initial-Value			N/A				N/A				N/A
								Servicing			0 bps				133 bps				38 bps
Fixed maturity securities available for sale			1,232,187			Broker quotes		Pricing quotes		$	98.40			$	102.46			$	99.86

 

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2023, 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
		December 31, 2023				Technique		Input(s)		Value				Value				Average
Loans held for sale		$	126,549,190			Market approach		Investor contract pricing as a percentage of unpaid principal balance			70.0	%			121.0	%			100.0	%
Derivatives - loan commitments (net)			1,583,262			Market approach		Pull-through rate			70.0	%			99.0	%			86.0	%
								Initial-Value			N/A				N/A				N/A
								Servicing			0 bps				119 bps				49 bps
Fixed maturity securities available for sale			1,238,656			Broker quotes		Pricing quotes		$	98.40			$	102.46			$	99.86

 

41

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended March 31, 2024:

Schedule of Changes in 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, 2023		$	1,583,262			$	126,549,190			$	1,238,656
Originations and purchases			-				465,605,114				-
Sales, maturities and paydowns			-				(486,050,938	)			-
Transfer to mortgage loans held for investment			-				(1,867,552	)			-
Foreclosed into real estate held for sale			-				(858,977	)			-
Total gains (losses):
Included in earnings			561,778	(1)			9,302,121	(1)			-	(2)
Included in other comprehensive income			-				-				(6,469	)
Balance - March 31, 2024		$	2,145,040			$	112,678,958			$	1,232,187

 

 

(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 table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended March 31, 2023:

 

		Net Loan Commitments				Loans Held for Sale				Fixed Maturity Securities Available for Sale
Balance - December 31, 2022		$	2,706,877			$	141,179,620			$	1,435,519
Originations and purchases			-				531,867,796				-
Sales, maturities and paydowns			-				(511,909,942	)			-
Total gains (losses):
Included in earnings			677,952	(1)			11,877,930	(1)			-	(2)
Included in other comprehensive income			-				-				-
Balance - March 31, 2023		$	3,384,829			$	173,015,404			$	1,435,519

 

 

(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 Company did not have any financial assets and financial liabilities measured at fair value on a nonrecurring basis as of March 31, 2024 and as of December 31, 2023.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (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.

 

The Company 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 as of March 31, 2024 and December 31, 2023.

 

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, 2024:

Schedule of Financial Instruments Carried at Other Than Fair Value 

		Carrying Value				Level 1				Level 2				Level 3				Total Estimated Fair Value
Assets
Mortgage loans held for investment
Residential		$	103,574,492			$	-			$	-			$	100,743,889			$	100,743,889
Residential construction			99,150,788				-				-				99,150,788				99,150,788
Commercial			65,911,504				-				-				65,471,144				65,471,144
Mortgage loans held for investment, net		$	268,636,784			$	-			$	-			$	265,365,821			$	265,365,821
Policy loans			13,248,999				-				-				13,248,999				13,248,999
Insurance assignments, net (1)			45,123,053				-				-				45,123,053				45,123,053
Restricted assets (2)			183,574				-				-				183,574				183,574
Cemetery perpetual care trust investments (2)			123,353				-				-				123,353				123,353
Mortgage servicing rights, net			3,318,155				-				-				4,767,315				4,767,315
Liabilities
Bank and other loans payable		$	(104,335,116	)		$	-			$	-			$	(85,370,689	)		$	(85,370,689	)
Policyholder account balances (3)			(38,923,981	)			-				-				(46,252,703	)			(46,252,703	)
Future policy benefits - annuities (3)			(106,089,620	)			-				-				(100,231,984	)			(100,231,984	)

 

 

(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

 

43

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2023:

 

		Carrying Value				Level 1				Level 2				Level 3				Total Estimated Fair Value
Assets
Mortgage loans held for investment
Residential		$	99,519,750			$	-			$	-			$	96,998,106			$	96,998,106
Residential construction			103,529,896				-				-				103,529,896				103,529,896
Commercial			72,567,191				-				-				72,149,530				72,149,530
Mortgage loans held for investment, net		$	275,616,837			$	-			$	-			$	272,677,532			$	272,677,532
Policy loans			13,264,183				-				-				13,264,183				13,264,183
Insurance assignments, net (1)			44,051,486				-				-				44,051,486				44,051,486
Restricted assets (2)			675,219				-				-				675,219				675,219
Cemetery perpetual care trust investments (2)			246,865				-				-				246,865				246,865
Mortgage servicing rights, net			3,461,146				-				-				4,543,657				4,543,657
Liabilities
Bank and other loans payable		$	(105,555,137	)		$	-			$	-			$	(105,555,137	)		$	(105,555,137	)
Policyholder account balances (3)			(39,245,123	)			-				-				(48,920,691	)			(48,920,691	)
Future policy benefits - annuities (3)			(106,285,010	)			-				-				(102,177,585	)			(102,177,585	)

 

 

(1)	Included in other investments and policy loans on the consolidated balance sheets

(2)	Mortgage loans held for investment

(3)	Included in future policy benefits and unpaid claims on the consolidated balance sheets

 

The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows:

 

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

 

Residential – The estimated fair value is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single-family mortgages) and considering pricing of similar loans that were sold recently.

 

Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value.

 

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

 

Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.

 

Insurance Assignments, Net: These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.

 

44

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

8) Fair Value of Financial Instruments (Continued)

 

Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for warehouse lines of credit approximate their fair values due to their relatively short-term maturities and variable interest rates. The estimated fair value for bank loans collateralized by real estate is determined by estimating future cash flows of payments and discounting them using current market rates.

 

Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period of more than related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.

 

9) Derivative Instruments

 

Mortgage Banking Derivatives

 

Loan Commitments

 

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

 

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

 

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of related expenses. Following issuance, the value of a 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 be funded within the terms of the commitments.

 

45

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

9)	Derivative Instruments (Continued)

 

Forward Sale Commitments

 

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

 

The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets.

 

The following table shows the fair value and notional amounts of derivative instruments:

Schedule of Derivative Assets at Fair Value

				March 31, 2024												December 31, 2023
		Balance Sheet Location		Notional Amount				Asset Fair Value				Liability Fair Value				Notional Amount				Asset Fair Value				Liability Fair Value
Derivatives not designated as hedging instruments:
Loan commitments		Other assets and Other liabilities		$	229,458,247			$	5,454,295			$	3,309,255			$	161,832,250			$	4,995,486			$	3,412,224
Total				$	229,458,247			$	5,454,295			$	3,309,255			$	161,832,250			$	4,995,486			$	3,412,224

 

The table below presents the gains (losses) on derivatives. There were no gains or losses reclassified from accumulated other comprehensive income into income or gains or losses recognized in income on derivatives ineffective portion, or any amounts excluded from effective testing.

Schedule of Gains and Losses on Derivatives 

				Net Amount Gain
				Three Months Ended March 31,
Derivative		Classification		2024				2023
Loan commitments		Mortgage fee income		$	561,778			$	677,952

 

46

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

10) Reinsurance, Commitments and Contingencies

 

Reinsurance

 

The Company follows the procedure of reinsuring risks of more than a specified limit, which ranges from $25,000 to $100,000 on newly issued policies. The Company has also assumed various reinsurance agreements through acquisition of various life companies. The Company is ultimately liable for these reinsured amounts in the event such reinsurers are unable to pay their portion of the claims. The Company evaluates the financial condition of reinsurers and monitors the concentration of credit risk. The Company is also a reinsurer of insurance with other companies.

 

Mortgage Loan Loss Settlements

 

Future loan losses can be extremely difficult to estimate. However, the Company believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. See Note 4 to the condensed consolidated financial statements for additional information about the Company’s loan loss reserve.

 

Debt Covenants for Mortgage Warehouse Lines of Credit

 

The Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement allows SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans (the “Texas Capital Bank Warehouse Line of Credit”). The agreement charges interest at the 1-Month SOFR rate plus 2.0% and matures on November 30, 2024. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

 

The Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. This agreement allows SecurityNational Mortgage to borrow up to $15,000,000 for the sole purpose of funding mortgage loans (the “U.S. Bank Warehouse Line of Credit” and, together with the Texas Capital Bank Warehouse Line of Credit, the “Warehouse Lines of Credit”). The agreement charges interest at 2.10% plus the greater of (i) 0%, and (ii) the one-month forward-looking term rate based on SOFR and matures on May 26, 2024. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.

 

The agreements for the warehouse lines of credit include cross default provisions where certain events of default under other of SecurityNational Mortgage’s obligations constitute events of default under the warehouse lines of credit. As of March 31, 2024, the Company was not in compliance with the net income covenant of the warehouse lines of credit and its operating cash flow covenant for its standby letter of credit with its primary bank. SecurityNational Mortgage has received or is in the process of receiving waivers under the warehouse lines of credit from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $6,963,000 on the warehouse line of credit that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines of credit that have provided covenant waivers to fund its origination activities. The Company has performed an internal analysis of its funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders.

 

47

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

10)	Reinsurance, Commitments and Contingencies (Continued)

 

Debt Covenants for Revolving Lines of Credit and Bank Loans

 

The Company has debt covenants on its revolving lines of credit and is required to comply with minimum operating cash flow ratios and minimum net worth for each of its business segments. The Company also has debt covenants for one of its loans on real estate for a minimum consolidated operating cash flow ratio, minimum liquidity, and consolidated net worth. In addition to these financial debt covenants, the company is required to provide segment specific financial statements and building specific financial statements on all bank loans. As of March 31, 2024, the Company was in compliance with all these debt covenants.

 

Other Contingencies and Commitments

 

The Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of March 31, 2024, the Company’s commitments were approximately $146,572,000 for these loans, of which $100,056,000 had been funded. The Company advances funds in accordance with the loan agreements once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed at 5.25% to 8.50% per annum. Maturities range between six and eighteen months.

 

The Company belongs to a captive insurance group (“the captive group”) for certain casualty insurance, worker compensation and general liability programs. The captive group maintains insurance reserves relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive group considers several factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required from the Company and its members. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

 

The Company is a defendant in various other legal actions arising from the normal conduct of business. The Company believes that none of the actions, if adversely determined, will have a material effect on the Company’s financial position or results of operations. Based on the Company’s assessment and legal counsel’s analysis concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements. The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which, if adversely determined, would have a material adverse effect on its financial condition or results of operations.

 

48

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

11) Mortgage Servicing Rights

 

The Company initially records its MSRs at fair value as discussed in Note 8.

 

After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

 

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

 

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

 

The following table presents the MSR activity:

 Schedule of Mortgage Servicing Rights

		As of March 31, 2024				As of December 31, 2023
Amortized cost:
Balance before valuation allowance at beginning of year		$	3,461,146			$	3,039,765
MSR additions resulting from loan sales (1)			9,079				1,009,312
Amortization (2)			(152,070	)			(587,931	)
Sale of MSRs			-				-
Application of valuation allowance to write down MSRs with other than temporary impairment			-				-
Balance before valuation allowance at end of period		$	3,318,155			$	3,461,146
Valuation allowance for impairment of MSRs:
Balance at beginning of year		$	-			$	-
Additions			-				-
Application of valuation allowance to write down MSRs with other than temporary impairment			-				-
Balance at end of period		$	-			$	-
Mortgage servicing rights, net		$	3,318,155			$	3,461,146
Estimated fair value of MSRs at end of period		$	4,767,315			$	4,543,657

 

 

(1)

Included in mortgage fee income on the condensed consolidated statements of earnings

(2)

Included in other expenses on the condensed consolidated statements of earnings

 

49

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

11)	Mortgage Servicing Rights (Continued)

 

The table below summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the Company’s assumptions in its March 31, 2024 valuation of MSRs. The assumptions used in the following table are likely to change as market conditions, portfolio composition and borrower behavior change, causing both actual and projected amortization levels to change over time.

 Schedule of Finite-Lived Intangible Assets, Future Amortization Expense, Mortgage Servicing Rights

		Estimated MSR Amortization
2024			653,250
2025			520,903
2026			423,297
2027			338,297
2028			271,136
Thereafter			1,111,272
Total		$	3,318,155

 

The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings.

 Schedule of Other Revenues

		2024				2023
		Three Months Ended March 31,
		2024				2023
Contractual servicing fees		$	256,662			$	410,400
Late fees			23,208				49,313
Total		$	279,870			$	459,713

 

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio.

 Summary of Unpaid Principal Balances of the Servicing Portfolio 

		As of March 31, 2024				As of December 31, 2023
Servicing UPB		$	405,409,197			$	414,147,436

 

The following key assumptions were used in determining MSR value:

 Schedule of Assumptions Used in Determining MSR Value 

		Prepayment Speeds				Average Life (Years)				Discount Rate
March 31, 2024			9.00				8.12				12.07
December 31, 2023			9.70				7.79				11.85

 

50

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

12) Income Taxes

 

The Company’s overall effective tax rate for the three month periods ended March 31, 2024 and 2023 was 22.3% and 21.8%, respectively, which resulted in a provision for income taxes of $2,144,789 and $344,716, respectively. The Company’s effective tax rate is higher than the U.S. federal statutory rate of 21% due to, among other factors, state income taxes as offset by certain state income tax benefits, along with certain permanent tax adjustments such as meals and entertainment and stock-based compensation. The increase in the effective tax rate when compared to the prior year was primarily due to the Company’s state income tax provision.

 

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals.

 

13) Revenues from Contracts with Customers

 

The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.

 

Information about Performance Obligations and Contract Balances

 

The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled.

 

The Company’s three types of future obligations are as follows:

 

Pre-need Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred, and the funds are placed in trust until the need arises, the merchandise is received, or the service is performed. The trust is then relieved, and the revenue and commissions are recognized.

 

At-need Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received.

 

Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust.

 

Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such a time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. The transfer of goods and services does not fulfill an obligation and revenue remains deferred.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

13)	Revenues from Contracts with Customers (Continued)

 

The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows:

 Schedule of Opening and Closing Balances of Receivables, Contract Assets and Contract Liabilities 

		Contract Balances
		Receivables (1)				Contract Asset				Contract Liability
Opening (January 1, 2024)		$	6,321,573			$	-			$	18,237,246
Closing (March 31, 2024)			5,896,842				-				18,501,474
Increase/(decrease)			(424,731	)			-				264,228

 

		Contract Balances
		Receivables (1)				Contract Asset				Contract Liability
Opening (January 1, 2023)		$	5,392,779			$	-			$	16,226,836
Closing (December 31, 2023)			6,321,573				-				18,237,246
Increase/(decrease)			928,794				-				2,010,410

 

 

(1)

Included in Receivables, net on the condensed consolidated balance sheets

 

The amount of revenue recognized and included in the opening contract liability balance for the three month periods ended March 31, 2024 and 2023 was $1,506,114 and $1,119,898, respectively.

 

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.

 

Disaggregation of Revenue

 

The following table disaggregates revenue for the Company’s cemetery and mortuary contracts:

 Schedule of Revenues of the Cemetery and Mortuary Contracts 

		2024				2023
		Three Months Ended March 31,
		2024				2023
Major goods/service lines
At-need		$	5,410,300			$	5,154,036
Pre-need			1,538,191				1,317,393
Net mortuary and cemetery sales		$	6,948,491			$	6,471,429
Timing of Revenue Recognition
Goods transferred at a point in time		$	4,190,222			$	4,029,666
Services transferred at a point in time			2,758,269				2,441,763
Net mortuary and cemetery sales		$	6,948,491			$	6,471,429

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

13)	Revenues from Contracts with Customers (Continued)

 

The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented:

 Schedule of Reconciliation of Revenues from Cemetery and Mortuary Contracts to Business Segment Information 

		Three Months Ended March 31,
		2024				2023
Net mortuary and cemetery sales		$	6,948,491			$	6,471,429
Gains on investments and other assets			582,162				53,931
Net investment income			1,084,192				601,491
Other revenues			172,733				71,545
Revenues from external customers			8,787,578				7,198,396

 

14) Receivables

 

Receivables consist of the following:

 Schedule of Receivables 

		As of March 31, 2024				As of December 31, 2023
Contracts with customers		$	5,896,842			$	6,321,573
Receivables from sales agents			3,579,468				3,252,840
Other			9,154,789				7,658,789
Total receivables			18,631,099				17,233,202
Allowance for credit losses			(1,755,553	)			(1,897,887	)
Net receivables		$	16,875,546			$	15,335,315

 

The Company records an allowance for credit losses for its receivables in accordance with GAAP. See Note 2 regarding the adoption of ASU 2016-13.

 

The following table presents a roll forward of the allowance for credit losses:

 Schedule of Allowance Credit Losses 

		Three Months Ended
Beginning balance - January 1, 2024		$	1,897,887
Change in provision for credit losses (1)			(118,497	)
Charge-offs			(23,837	)
Ending balance - March 31, 2024		$	1,755,553

 

		Three Months Ended
Beginning balance - January 1, 2023		$	2,229,791
Change in provision for credit losses (1)			(318,664	)
Charge-offs			(44,003	)
Ending balance - March 31, 2023		$	1,867,124

 

 

(1)

Included in other expenses on the condensed consolidated statements of earnings

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets

 

Cemetery Perpetual Care Trust Investments and Obligation

 

State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as Variable Interest Entities pursuant to GAAP. The Company is the primary beneficiary of these trusts, as it absorbs both the losses and any expenses associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets.

 

The components of the cemetery perpetual care investments and obligation as of March 31, 2024, are as follows:

 Schedule of Investments 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Allowance for Credit Losses				Estimated Fair Value
March 31, 2024:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	478,900			$	458			$	(786	)		$	-			$	478,572
Obligations of states and political subdivisions			168,209				-				(6,002	)			-				162,207
Total fixed maturity securities available for sale		$	647,109			$	458			$	(6,788	)		$	-			$	640,779
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	3,657,164			$	1,066,760			$	(147,635	)						$	4,576,289
Total equity securities at estimated fair value		$	3,657,164			$	1,066,760			$	(147,635	)						$	4,576,289
Mortgage loans held for investment at amortized cost:
Residential construction		$	123,600
Less: Allowance for credit losses			(247	)
Total mortgage loans held for investment		$	123,353
Accrued investment income		$	6,968
Cash and cash equivalents		$	3,021,586
Total cemetery perpetual care trust investments		$	8,368,975
Cemetery perpetual care obligation		$	(5,384,115	)
Trust investments in excess of trust obligations		$	2,984,860

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

15)	Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

The components of the cemetery perpetual care investments and obligation as of December 31, 2023, are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
December 31, 2023:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	477,797			$	302			$	(574	)		$	477,525
Obligations of states and political subdivisions			115,792				-				(5,114	)			110,678
Corporate securities including public utilities			53,672				-				(171	)			53,501
Total fixed maturity securities available for sale		$	647,261			$	302			$	(5,859	)		$	641,704
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	3,614,392			$	859,680			$	(146,771	)		$	4,327,301
Total equity securities at estimated fair value		$	3,614,392			$	859,680			$	(146,771	)		$	4,327,301
Mortgage loans held for investment at amortized cost:
Residential construction		$	247,360
Less: Allowance for credit losses			(495	)
Total mortgage loans held for investment		$	246,865
Cash and cash equivalents		$	2,867,047
Total cemetery perpetual care trust investments		$	8,082,917
Cemetery perpetual care obligation		$	(5,326,196	)
Trust investments in excess of trust obligations		$	2,756,721

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of March 31, 2024 and December 31, 2023. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

 Schedule of Fair Value of 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
March 31, 2024
U.S. Treasury securities and obligations of U.S. Government agencies		$	786			$	143,234			$	-			$	-			$	786			$	143,234
Obligations of states and political subdivisions			-				-				6,002				162,207				6,002				162,207
Totals		$	786			$	143,234			$	6,002			$	162,207			$	6,788			$	305,441
December 31, 2023
U.S. Treasury securities and obligations of U.S. Government agencies		$	574			$	143,448			$	-			$	-			$	574			$	143,448
Obligations of states and political subdivisions			-				-				5,114				110,678				5,114				110,678
Corporate securities including public utilities			-				-				171				53,501				171				53,501
Totals		$	574			$	143,448			$	5,285			$	164,179			$	5,859			$	307,627

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

15)	Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Relevant holdings were comprised of four securities with fair values aggregating 97.8% of the aggregate amortized cost as of March 31, 2024. Relevant holdings were comprised of four securities with fair values aggregating 98.1% of aggregate amortized cost as of December 31, 2023. No credit losses have been recognized for the three month periods ended March 31, 2024 and 2023, since the increase in unrealized losses is primarily a result of increases in interest rates. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale.

 

The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of March 31, 2024, by contractual maturity. 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.

 Schedule of Investments Classified by Contractual Maturity Date  

		Amortized				Estimated Fair
		Cost				Value
Due in 1 year		$	334,878			$	335,336
Due in 2-5 years			258,559				252,489
Due in 5-10 years			-				-
Due in more than 10 years			53,672				52,954
Total		$	647,109			$	640,779

 

Restricted Assets

 

The Company has also established certain restricted assets to provide for future merchandise and service obligations incurred in connection with its pre-need sales for its cemetery and mortuary segment.

 

Restricted cash also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development projects. Additionally, the Company elected to maintain its medical benefit fund without change from the prior year and has included this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

15)	Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Restricted assets as of March 31, 2024, are summarized as follows:

Schedule of Restricted Assets in Cemetery and Mortuary Endowment Care and Pre need Merchandise Funds  

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Allowance for Credit Losses				Estimated Fair Value
March 31, 2024:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	932,737			$	5,273			$	(1,370	)		$	-			$	936,640
Obligations of states and political subdivisions			555,848				12				(8,102	)			-				547,758
Corporate securities including public utilities			324,253				18				(4,055	)			-				320,216
Total fixed maturity securities available for sale		$	1,812,838			$	5,303			$	(13,527	)		$	-			$	1,804,614
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	7,023,615			$	1,506,405			$	(251,408	)						$	8,278,612
Total equity securities at estimated fair value		$	7,023,615			$	1,506,405			$	(251,408	)						$	8,278,612
Mortgage loans held for investment at amortized cost:
Residential construction		$	183,942
Less: Allowance for credit losses			(368	)
Total mortgage loans held for investment		$	183,574
Accrued investment income		$	13,377
Cash and cash equivalents (1)		$	10,598,384
Total restricted assets		$	20,878,561

 

 

(1)

Including cash and cash equivalents of $6,925,987 for the life insurance and mortgage segments.

 

Restricted assets as of December 31, 2023, are summarized as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
December 31, 2023:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies		$	932,737			$	1,433			$	(1,000	)		$	933,170
Obligations of states and political subdivisions			652,770				305				(4,542	)			648,533
Corporate securities including public utilities			274,688				209				(2,740	)			272,157
Total fixed maturity securities available for sale		$	1,860,195			$	1,947			$	(8,282	)		$	1,853,860
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other		$	6,516,044			$	1,117,155			$	(247,996	)		$	7,385,203
Total equity securities at estimated fair value		$	6,516,044			$	1,117,155			$	(247,996	)		$	7,385,203
Mortgage loans held for investment at amortized cost:
Residential construction		$	676,572
Less: Allowance for credit losses			(1,353	)
Total mortgage loans held for investment		$	675,219
Cash and cash equivalents (1)		$	10,114,694
Total restricted assets		$	20,028,976

 

 

(1)

Including cash and cash equivalents of $6,930,930 for the life insurance and mortgage segments.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

15)	Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued)

 

Fixed Maturity Securities

 

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of March 31, 2024 and December 31, 2023. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities.

Schedule of Fair Value of 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
March 31, 2024
U.S. Treasury securities and obligations of U.S. Government agencies		$	1,370			$	249,507			$	-			$	-			$	1,370			$	249,507
Obligations of states and political subdivisions			4,206				335,100				3,896				187,645				8,102				522,745
Corporate securities including public utilities			684				75,757				3,371				219,442				4,055				295,199
Totals		$	6,260			$	660,364			$	7,267			$	407,087			$	13,527			$	1,067,451
December 31, 2023
U.S. Treasury securities and obligations of U.S. Government agencies		$	1,000			$	249,877			$	-			$	-			$	1,000			$	249,877
Obligations of states and political subdivisions			-				-				4,542				451,985				4,542				451,985
Corporate securities including public utilities			-				-				2,740				221,334				2,740				221,334
Totals		$	1,000			$	249,877			$	7,282			$	673,319			$	8,282			$	923,196

 

Relevant holdings were comprised of 15 securities with fair values aggregating 98.7% of the aggregate amortized cost as of March 31, 2024. Relevant holdings were comprised of 12 securities with fair values aggregating 99.1% of the aggregate amortized cost as of December 31, 2023. No credit losses have been recognized for the three month periods ended March 31, 2024 and 2023, since the increase in unrealized losses is primarily a result of increases in interest. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale.

 

The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of March 31, 2024, by contractual maturity. 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.

Schedule of Investments Classified by Contractual Maturity Date 

		Amortized				Estimated Fair
		Cost				Value
Due in 1 year		$	681,860			$	687,133
Due in 2-5 years			461,092				455,800
Due in 5-10 years			102,422				101,308
Due in more than 10 years			567,464				560,373
Total		$	1,812,838			$	1,804,614

 

See Notes 3 and 8 for additional information regarding restricted assets and cemetery perpetual care trust investments.

 

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SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2024 (Unaudited)

 

16) Accumulated Other Comprehensive Income (loss)

 

The following table summarizes the changes in accumulated other comprehensive income (loss):

 Schedule of Changes in Accumulated Other Comprehensive Income 

 

		2024				2023
		Three Months Ended March 31,
		2024				2023
Unrealized gains (losses) on fixed maturity securities available for sale		$	(1,035,099	)		$	5,436,929
Amounts reclassified into net earnings			(96,551	)			(218,900	)
Net unrealized gains (losses) before taxes			(1,131,650	)			5,218,029
Tax (expense) benefit			238,552				(1,095,787	)
Net			(893,098	)			4,122,242
Unrealized gains (losses) on restricted assets (1)			(1,890	)			4,133
Tax (expense) benefit			471				(1,029	)
Net			(1,419	)			3,104
Unrealized gains (losses) on cemetery perpetual care trust investments (1)			(774	)			2,926
Tax (expense) benefit			193				(714	)
Net			(581	)			2,212
Other comprehensive income (loss) changes		$	(895,098	)		$	4,127,558

 

 

(1)

Fixed maturity securities available for sale

 

The following table presents the accumulated balances of other comprehensive income (loss) as of March 31, 2024:

  Schedule of Accumulated Balances of Other Comprehensive Income 

		Beginning Balance December 31, 2023				Change for the period				Ending Balance March 31, 2024
Unrealized losses on fixed maturity securities available for sale		$	(6,876,629	)		$	(893,098	)		$	(7,769,727	)
Unrealized losses on restricted assets (1)			(4,757	)			(1,419	)			(6,176	)
Unrealized losses on cemetery perpetual care trust investments (1)			(4,172	)			(581	)			(4,753	)
Other comprehensive loss		$	(6,885,558	)		$	(895,098	)		$	(7,780,656	)

 

 

(1)

Fixed maturity securities available for sale

 

The following table presents the accumulated balances of other comprehensive income (loss) as of December 31, 2023:

 

		Beginning Balance December 31, 2022				Change for the period				Ending Balance December 31, 2023
Unrealized gains (losses) on fixed maturity securities  available for sale		$	(13,050,767	)		$	6,174,138			$	(6,876,629	)
Unrealized gains (losses) on restricted assets (1)			(13,148	)			8,391				(4,757	)
Unrealized gains (losses) on cemetery perpetual  care trust investments (1)			(6,362	)			2,190				(4,172	)
Other comprehensive income (loss)		$	(13,070,277	)		$	6,184,719			$	(6,885,558	)

 

 

(1)

Fixed maturity securities available for sale

 

 

 

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

 

Overview

 

The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on the cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans.

 

Insurance Operations

 

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

 

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $30,000. The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

 

The following table shows the condensed financial results of the insurance operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

 

		Three months ended March 31, (in thousands of dollars)
		2024				2023				% Increase (Decrease)
Revenues from external customers
Insurance premiums		$	29,852			$	27,968				7	%
Mortgage fee income			-				44				(100	)%
Net investment income			18,612				16,755				11	%
Gains on investments and other assets			1,088				57				1809	%
Other			418				591				(29	)%
Total		$	49,970			$	45,415				10	%
Intersegment revenue		$	1,380			$	1,510				(9	)%
Earnings before income taxes		$	8,530			$	3,684				132	%

 

Profitability for the three month period ended March 31, 2024 increased due to (a) a $1,884,000 increase in insurance premiums and other considerations, (b) a $1,857,000 increase in net investment income, (c) a $1,031,000 increase in gains on investments and other assets, (d) a $882,000 decrease in death, surrenders and other policy benefits, (e) a $481,000 decrease in selling, general and administrative expenses, (f) a $254,000 decrease in amortization of deferred policy acquisition costs, and (g) a $119,000 decrease in interest expense, which were partially offset by (i) a $1,291,000 increase in future policy benefits, (ii) a $173,000 decrease in other revenues, (iii) a $130,000 decrease in intersegment revenue, (iv) a $44,000 decrease in mortgage fee income, and (v) a $24,000 increase in intersegment interest expense and other expenses.

 

 

Cemetery and Mortuary Operations

 

The Company sells mortuary services and products through its nine mortuaries in Utah and three mortuaries in New Mexico. The Company also sells cemetery products and services through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.

 

The following table shows the condensed financial results of the cemetery and mortuary operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

 

		Three months ended March 31, (in thousands of dollars)
		2024				2023				% Increase (Decrease)
Revenues from external customers
Mortuary revenues		$	3,414			$	3,275				4	%
Cemetery revenues			3,534				3,196				11	%
Net investment income			1,084				601				80	%
Gains on investments and other assets			582				54				978	%
Other			173				72				140	%
Total		$	8,787			$	7,198				22	%
Earnings before income taxes		$	3,053			$	1,785				71	%

 

Profitability in the three month period ended March 31, 2024 increased due to (a) a $528,000 increase in gains on investments and other assets, (b) a $483,000 increase in net investment income, (c) a $221,000 increase in cemetery pre-need sales, (d) a $139,000 increase in mortuary at-need sales, (e) a $117,000 increase in cemetery at-need sales, and (f) a $101,000 increase in other revenues, a (g) a $5,000 decrease in intersegment interest expense and other expenses, and (h) a $1,000 increase in intersegment revenues, which were partially offset by (i) a $124,000 increase in selling, general and administrative expenses, (ii) a $114,000 increase in amortization of deferred policy acquisition costs, and (iii) an $88,000 increase in cost of goods and services sold.

 

Mortgage Operations

 

The Company’s wholly owned subsidiary, SecurityNational Mortgage, is a mortgage lender incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgages loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage originates and refinances mortgage loans on a retail basis. Mortgage loans originated or refinanced by the SecurityNational Mortgage are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.

 

SecurityNational Mortgage receives fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 0.19% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

 

Mortgage rates have followed the US Treasury yields up in response to the increase inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance.’ Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchases,’ although not as significant as those in the refinance classification.

 

For the three month periods ended March 31, 2024 and 2023, SecurityNational Mortgage originated 1,486 loans ($465,605,000 total volume) and 1,702 loans ($531,868,000 total volume), respectively.

 

 

The following table shows the condensed financial results of the mortgage operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

 

		Three months ended March 31, (in thousands of dollars)
		2024				2023				% Increase (Decrease)
Revenues from external customers
Secondary gains from investors		$	14,731			$	17,917				(18	)%
Income from loan originations			6,840				6,555				4	%
Change in fair value of loans held for sale			(301	)			795				(138	)%
Change in fair value of loan commitments			562				678				(17	)%
Net investment income			250				418				(40	)%
Losses on investments and other assets			(1	)			-				(100	)%
Other			349				524				(33	)%
Total		$	22,430			$	26,887				(17	)%
Loss before income taxes		$	(1,964	)		$	(3,883	)			(49	)%

 

Profitability for the three month period ended March 31, 2024 increased due to (a) a $2,755,000 decrease in personnel expenses, (b) a $1,303,000 decrease in other expenses, (c) a $896,000 decrease in commissions, (d) a $393,000 decrease in costs related to funding mortgage loans, (e) a $382,000 decrease in rent and rent related expenses, (f) a $307,000 decrease in interest expense, (g) a $285,000 increase in income from loan originations, (h) a $176,000 decrease in advertising expenses, (i) a $125,000 decrease in intersegment interest expense and other expenses, (j) a $23,000 increase in intersegment revenues, and (k) a $17,000 decrease in depreciation on property and equipment, which were partially offset by (i) a $3,186,000 decrease in secondary gains from investors, (ii) a $1,096,000 decrease in the fair value of loans held for sale, (iii) a $175,000 decrease in other revenues, (iv) a $168,000 decrease in net investment income, and (v) a $116,000 decrease in the fair value of loan commitments.

 

Consolidated Results of Operations

 

Three month period ended March 31, 2024, Compared to Three month period ended March 31, 2023

 

Total revenues increased by $1,687,000, or 2.1%, to $81,188,000 for the three month period ended March 31, 2024, from $79,501,000 for the comparable period in 2023. Contributing to this increase in total revenues was a $2,172,000 increase in net investment income, a $1,885,000 increase in insurance premiums and other considerations, a $1,558,000 increase in gains on investments and other assets, and a $477,000 increase in net mortuary and cemetery sales, which were partially offset by a $247,000 decrease in other revenues and a $4,157,000 decrease in mortgage fee income.

 

Mortgage fee income decreased by $4,157,000, or 16.0%, to $21,832,000, for the three month period ended March 31, 2024, from $25,989,000 for the comparable period in 2023. This decrease was primarily due to a $3,230,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market due to the decline in origination activity because of increasing interest rates, a $1,096,000 decrease in the fair value of loans held for sale, and a $116,000 decrease in the fair value of loan commitments, which was partially offset by a $285,000 increase in loan fees and interest income net of a decrease in the provision for loan loss reserve.

 

Insurance premiums and other considerations increased by $1,885,000, or 6.7%, to $29,852,000 for the three month period ended March 31, 2024, from $27,967,000 for the comparable period in 2023. This increase was primarily due to an increase of $1,645,000 in first year premiums and an increase of $240,000 in renewal premiums.

 

 

Net investment income increased by $2,172,000, or 12.2%, to $19,947,000 for the three month period ended March 31, 2024, from $17,775,000 for the comparable period in 2023. This increase was primarily attributable to a $903,000 increase in interest on cash and cash equivalents, $391,000 increase in fixed maturity securities income, a $326,000 increase in mortgage loan interest, a $308,000 increase in insurance assignment income, a $150,000 increase in real estate income, a $101,000 increase in policy loan interest, a $70,000 increase in other investment income, and a $28,000 increase in equity securities income, which were partially offset by a $105,000 increase in investment expenses.

 

Net mortuary and cemetery sales increased by $477,000, or 7.4%, to $6,948,000 for the three month period ended March 31, 2024, from $6,471,000 for the comparable period in 2023. This increase was primarily due to a $221,000 increase in cemetery pre-need sales, a $139,000 increase in mortuary at-need sales, and a $117,000 increase in cemetery at-need sales.

 

Gains on investments and other assets increased by $1,558,000, or 1401.9%, to $1,669,000 for the three month period ended March 31, 2024, from $111,000 for the comparable period in 2023. This increase in gains on investments and other assets was primarily due to a $1,203,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, a $250,000 increase in gains on real estate, and a $122,000 increase in gains on fixed maturity securities, which were partially offset by a $17,000 decrease in gains on other assets mostly attributable to the Company discontinuing its use of call and put option derivatives in the first quarter of 2023.

 

Other revenues decreased by $247,000, or 20.8%, to $940,000 for the three month period ended March 31, 2024, from $1,187,000 for the comparable period in 2023. This decrease was primarily attributable to a decrease of $180,000 in servicing fee revenue due to a decrease in the retention of mortgage servicing rights.

 

Total benefits and expenses were $71,569,000, or 88.2% of total revenues, for the three month period ended March 31, 2024, as compared to $77,916,000, or 98.0% of total revenues, for the comparable period in 2023.

 

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $409,000 or 1.6%, to $26,275,000 for the three month period ended March 31, 2024, from $25,866,000 for the comparable period in 2023. This increase was primarily the result of a $1,291,000 increase in future policy benefits and an $83,000 increase in surrender and other policy benefits, which were partially offset by a $965,000 decrease in death benefits.

 

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $140,000, or 2.9%, to $4,744,000 for the three month period ended March 31, 2024, from $4,884,000 for the comparable period in 2023. This decrease was primarily due to increased payment consistency from premium-paying products.

 

Selling, general and administrative expenses decreased by $6,279,000, or 14.1%, to $38,248,000 for the three month period ended March 31, 2024, from $44,527,000 for the comparable period in 2023. This decrease was primarily the result of a $2,107,000 decrease in personnel expenses, a $1,692,000 decrease in commissions, a $1,495,000 decrease in other expenses, a $393,000 decrease in costs related to funding mortgage loans, a $376,000 decrease in rent and rent related expenses, and a $216,000 decrease in advertising expense.

 

Interest expense decreased by $426,000, or 29.3%, to $1,027,000 for the three month period ended March 31, 2024, from $1,453,000 for the comparable period in 2023. This decrease was primarily due to a decrease of $307,000 in interest expense on mortgage warehouse lines of credit for loans held for sale and a decrease of $119,000 in interest expense on bank loans.

 

 

Liquidity and Capital Resources

 

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees from mortgage loans held for sale that are sold to investors into the secondary market. It should be noted that current conditions in the financial markets and economy may affect the realization of these expected cash flows. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses. As of March 31, 2024, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its Warehouse Lines of Credit and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event SecurityNational Mortgage is required to repay the outstanding advances of approximately $6,963,000 on the Warehouse Line of Credit that has not provided a covenant waiver, SecurityNational Mortgage has sufficient cash and borrowing capacity on the Warehouse Lines of Credit that have provided covenant waivers to fund its origination activities. The Company has done an internal analysis of the funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders.

 

During the three month periods ended March 31, 2024 and 2023, the Company’s operations provided cash of approximately $25,077,000 and used cash of approximately $16,074,000, respectively. The increase in cash provided by operations was due primarily to increased proceeds from the sale of mortgage loans held for sale.

 

The Company expects to pay out liabilities under its funeral plans over the long term given the nature of those plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs; policyholders generally keep these policies in force until, and do not surrender prior to, death. Because of the long-term nature of these liabilities, the Company can hold to maturity or for the targeted investment period its corresponding bond, real estate, and mortgage loan investments, thus reducing the risk of liquidating these long-term investments because of any sudden changes in their fair values.

 

The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing matching. The Company purchases short-term investments on a temporary basis to meet the expected short-term requirements of the Company’s insurance products. The Company’s investment philosophy is intended to provide a rate of return for the expected duration of its cemetery and mortuary policies that will exceed the accruing of liabilities under those policies regardless of future interest rate movements.

 

The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans. The warehoused mortgage loans are typically held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the Company’s life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $360,314,000 (at estimated fair value) and $362,663,000 (at estimated fair value) as of March 31, 2024 and December 31, 2023, respectively. This represented 38.5% and 38.7% of the total investments of the Company as of March 31, 2024 and December 31, 2023, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. As of March 31, 2024, 1.9% (or $7,042,000) and as of December 31, 2023, 1.8% (or $6,954,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

 

The Company’s life insurance subsidiaries are subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. As of March 31, 2024 and December 31, 2023, the life insurance subsidiaries were in compliance with the regulatory criteria.

 

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $424,439,000 as of March 31, 2024, as compared to $418,450,000 as of December 31, 2023. This increase was primarily due to an increase of $7,209,000 in stockholders’ equity as partially offset by a decrease of $1,220,000 in bank loans and other loans payable. Stockholders’ equity as a percent of total capitalization was 75.4% and 74.8% as of March 31, 2024 and December 31, 2023, respectively.

 

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2023 was 4.4% as compared to a lapse rate of 4.3% for 2022. The 2024 lapse rate to date has been approximately the same as 2023.

 

 

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $110,239,000 and $107,385,000 as of March 31, 2024, and December 31, 2023, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

As of March 31, 2024, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).

 

Changes in Internal Control over Financial Reporting

 

There have not been any significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II - Other Information

 

Item 1. Legal Proceedings.

 

The Company is not a party to any material legal proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would be expected to have a material adverse effect on its financial condition or results of operation.

 

 

Item 1A. Risk Factors.

 

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

 

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

 

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

On April 15, 2024 the Company executed a 10b5-1 agreement with a broker to repurchase shares of the Company’s Class A Common Stock. Under the terms of the agreement, the broker is permitted to repurchase up to $1,000,000 of the Company’s Class A Common Stock, with purchases to commence no sooner than May 15, 2024. The agreement is subject to the daily time, price and volume conditions of Rule 10b-18. The agreement expires on December 31, 2024.

 

The following table shows the Company’s repurchase activity during the three month period ended March 31, 2024 under the 10b5-1 agreement.

 

Period			(a) Total Number of Class A Shares Purchased				(b) Average Price Paid per Class A Share (1)				(c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program				(d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program (2)
1/1/2024-1/31/2024				-			$	-				-				318,043
2/1/2024-2/29/2024				-				-				-				318,043
3/1/2024-3/31/2024				-				-				-				318,043
Total				-			$	-				-				318,043

 

(1)

Includes fees and commissions paid on stock repurchases.

(2)

In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company’s Class A Common Stock in the open market. The Company amended the Stock Repurchase Plan on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. Any repurchased shares of Class A common stock are to be held as treasury shares to be used as the Company’s employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.

 

(a)(1)	Financial Statements
	See “Table of Contents – Part I – Financial Information” under page 2 above.
(a)(2)	Financial Statement Schedules
	None
	All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
(a)(3)	Exhibits
	The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings.

 

	3.1	Amended and Restated Articles of Incorporation (1)
	3.2	Amended and Restated Bylaws (2)
	31.1	Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101.INS	Inline XBRL Instance Document
	101.SCH	Inline XBRL Taxonomy Extension Schema Document
	101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
	101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
	104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

	(1)	Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017
	(2)	Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019

 

 

SIGNATURES

 

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

 

REGISTRANT

 

SECURITY NATIONAL FINANCIAL CORPORATION

Registrant

 

Dated: May 14, 2024		/s/ Scott M. Quist
		Scott M. Quist
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

 

Dated: May 14, 2024		/s/ Garrett S. Sill
		Garrett S. Sill
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)