What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-13 compared with 2020-08-14 · 224 added, 204 removed, 1485 unchanged (22% of the section changed)

66 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Insurance premiums and other considerations

27 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Other comprehensive income:

1 unchanged sentence

Unrealized gains on restricted assets

Unrealized gains on cemetery perpetual care trust investments

Unrealized losses on cemetery perpetual care trust investments

Foreign currency translation adjustments

Other comprehensive income, before income tax

Income tax expense

Income tax benefit (expense)

Other comprehensive income, net of income tax

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Class A Common Stock

30 unchanged sentences

$ 222,614,226

Six Months Ended June 30, 2019

Other comprehensive income

Stock-based compensation expense

Sale of treasury stock

Purchase of treasury stock

Stock dividends

Conversion Class C to Class A

September 30, 2020

$ 149,428,819

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited) (Continued)

Nine Months Ended September 30, 2019

Class A Common Stock

5 unchanged sentences

January 1, 2019

$ 171,811,173

Other comprehensive income

7 unchanged sentences

$ 174,049,485

Other comprehensive loss

Other comprehensive income

Stock-based compensation expense

5 unchanged sentences

$ 177,568,176

Other comprehensive loss

Stock-based compensation expense

Exercise of stock options

Sale of treasury stock

Purchase of treasury stock

Conversion Class C to Class A

September 30, 2019

$ 181,072,390

3 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30

Nine Months Ended September 30

Cash flows from operating activities:

18 unchanged sentences

Cash paid for purchase of subsidiaries, net of cash acquired

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

4 unchanged sentences

Repayment of bank and other loans

(251,041,466)

(139,046,605)

Proceeds from bank borrowings

13 unchanged sentences

Benefit plans funded with treasury stock

Accrued real estate construction costs and retainage

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

Accrued real estate construction costs and retainage

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

Receivable for maturities of fixed maturity securities

Mortgage loans held for investment foreclosed into receivables

4 unchanged sentences

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:

Six Months Ended June 30

Nine Months Ended September 30

Cash and cash equivalents

9 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

1) Basis of Presentation

3 unchanged sentences

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 six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain.

The novel coronavirus (“COVID-19”) spread rapidly across the world in the first and second quarters of 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization.

The government and private sector responses to contain its spread began to affect the Company’s operations in March, has continued to affect the Company’s operations and will likely continue to affect nearly all of the Company’s operations in the third quarter, although such effects may vary significantly.

The novel coronavirus (“COVID-19”) spread rapidly across the world in the first, second and third quarters of 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization.

The government and private sector responses to contain its spread began to affect the Company’s operations in March, have continued to affect the Company’s operations and will likely continue to affect nearly all of the Company’s operations, although such effects may vary significantly.

The duration and extent of the effects over longer terms cannot be reasonably estimated at this time.

23 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

21 unchanged sentences

however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down.

In October 2019, the FASB proposed an update to ASU No.

2016-13 that would make the ASU effective for the Company on January 1, 2023.

In November 2019, the FASB issued an update to ASU No.

2016-13 that made the ASU effective for the Company on January 1, 2023.

The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

2 unchanged sentences

The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures.

In October 2019, the FASB proposed an update to ASU No.

2018-12 that would make the ASU effective for the Company on January 1, 2024.

In November 2020, the FASB issued an update to ASU No.

2018-12 that made the ASU effective for the Company on January 1, 2025.

The Company is in the process of evaluating the potential impact of this standard.

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments

The Company’s investments as of June 30, 2020 are summarized as follows:

The Company’s investments as of September 30, 2020 are summarized as follows:

Amortized Cost

2 unchanged sentences

Estimated Fair Value

June 30, 2020 :

September 30, 2020 :

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

1 unchanged sentence

Government agencies

$ 102,442,154

$ 104,589,488

Obligations of states and political subdivisions

13 unchanged sentences

Mortgage loans held for investment at amortized cost:

$ 109,304,960

Residential construction

21 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

46 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities available for sale, which were carried at estimated fair value, at June 30, 2020 and December 31, 2019.

The following tables summarize unrealized losses on fixed maturity securities available for sale, which were carried at estimated fair value, at September 30, 2020 and December 31, 2019.

The unrealized losses were primarily related to interest rate fluctuations and uncertainties relating to COVID-19.

3 unchanged sentences

Total Unrealized Loss

At June 30, 2020

At September 30, 2020

Obligations of States and Political Subdivisions

10 unchanged sentences

Total unrealized losses

There were 134 securities with fair value of 91.1% of amortized cost at June 30, 2020.

There were 113 securities with fair value of 93.5% of amortized cost at September 30, 2020.

There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019.

No credit losses have been recognized for the three and six months ended June 30, 2020 and 2019.

No credit losses have been recognized for the three and nine months ended September 30, 2020 and 2019.

On a quarterly basis, the Company evaluates its fixed maturity securities available for sale.

11 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities available for sale, at June 30, 2020, by contractual maturity, are shown below.

The amortized cost and estimated fair value of fixed maturity securities available for sale, at September 30, 2020, by contractual maturity, are shown below.

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

9 unchanged sentences

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”).

The Company pledged a total of $100,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at June 30, 2020.

The Company pledged a total of $90,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at September 30, 2020.

These securities are used as collateral on any cash borrowings from the FHLB.

As of June 30, 2020, the Company owed $79,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $19,572,000.

As of September 30, 2020, the Company owed $88,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $384,000.

Investment Related Earnings

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

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Fixed maturity securities:

7 unchanged sentences

Gross realized losses

$ (1,025,893)

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

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio.

Proceeds received from the sale of fixed maturity available for sale securities for the six months ended June 30, 2020, were $2,753,331, and resulted in gross realized gains and gross realized losses of $133,339 and $137, respectively.

The carrying amount of held to maturity securities sold for the six months ended June 30, 2019 was $662,972 and the net realized loss related to these sales was $53,097.

Proceeds received from the sale of fixed maturity available for sale securities for the nine months ended September 30, 2020, were $2,967,531, and resulted in gross realized gains and gross realized losses of $149,641 and $1,043, respectively.

The carrying amount of held to maturity securities sold for the nine months ended September 30, 2019 was $2,724,199 and the net realized loss related to these sales was $12,394.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

Major categories of net investment income are as follows:

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Fixed maturity securities

8 unchanged sentences

Net investment income

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $140,093 and $134,229 for the three months ended June 30, 2020 and 2019, respectively, and $250,732 and $220,516 for the six months ended June 30, 2020 and 2019, respectively.

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $129,347 and $102,888 for the three months ended September 30, 2020 and 2019, respectively, and $380,079 and $323,404 for the nine months ended September 30, 2020 and 2019, respectively.

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

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

Securities on deposit with regulatory authorities as required by law amounted to $9,632,398 at June 30, 2020 and $9,633,818 at December 31, 2019.

Securities on deposit with regulatory authorities as required by law amounted to $9,735,147 at September 30, 2020 and $9,633,818 at December 31, 2019.

These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at June 30, 2020, other than investments issued or guaranteed by the United States Government.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at September 30, 2020, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment and Held for Sale

6 unchanged sentences

Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (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.

3 unchanged sentences

These properties include office buildings, an assisted living facility, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah.

The Company also holds undeveloped land that may be used for future commercial developments.

The Company also holds undeveloped land that may be

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3) Investments (Continued)

used for future commercial developments.

The Company uses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $70,578,000 and $87,815,000 as of June 30, 2020 and December 31, 2019, respectively.

The associated bank loan carrying values totaled approximately $47,068,000 and $54,917,000 as of June 30, 2020 and December 31, 2019, respectively.

During the three months ended June 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $15,551 and $-0-, respectively.

During the six months ended June 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $46,980 and $1,867,197, respectively.

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $70,054,000 and $87,815,000 as of September 30, 2020 and December 31, 2019, respectively.

The associated bank loan carrying values totaled approximately $46,681,000 and $54,917,000 as of September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $800,000 and $790,827, respectively.

During the nine months ended September 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $846,980 and $2,658,024, respectively.

These impairment losses relate to an office building held by the life insurance segment.

6 unchanged sentences

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3) Investments (Continued)

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

5 unchanged sentences

(2) Improved commercial pad

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

3) Investments (Continued)

These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located.

7 unchanged sentences

SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.

As of June 30, 2020, SNRE manages 24 residential properties in 6 states across the United States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $7,698,000 and $12,434,000 as of June 30, 2020 and December 31, 2019, respectively.

During the three and six months ended June 30, 2020 and 2019 the Company did not record any impairment losses on residential real estate held for investment or held for sale.

As of September 30, 2020, SNRE manages 19 residential properties in 5 states across the United States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $6,256,000 and $12,434,000 as of September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $-0- and $125,980, respectively, and during the nine months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $43,394 and $125,980, respectively.

Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

3) Investments (Continued)

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

7 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

3 unchanged sentences

The primary business units of the Company occupy a portion of the real estate owned by the Company.

As of June 30, 2020, real estate owned and occupied by the Company is summarized as follows:

As of September 30, 2020, real estate owned and occupied by the Company is summarized as follows:

Business Segment

23 unchanged sentences

Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business.

At June 30, 2020, the Company had 54%, 15%, 8%, 5%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, Nevada, California, and Arizona, respectively.

At September 30, 2020, the Company had 62%, 11%, 8%, 3%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, and Arizona, respectively.

At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.

14 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

21 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

2 unchanged sentences

Residential Construction

June 30, 2020

September 30, 2020

Allowance for credit losses:

Beginning balance - January 1, 2020

Ending balance - June 30, 2020

Ending balance - September 30, 2020

Ending balance:

6 unchanged sentences

$ 249,729,688

$ 265,808,693

Ending balance:

4 unchanged sentences

$ 240,490,530

$ 256,273,709

December 31, 2019

18 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

5 unchanged sentences

Unamortized discounts, net

June 30, 2020

September 30, 2020

$ 230,640,153

1 unchanged sentence

$ (2,066,481)

$ (1,148,662)

$ 245,609,527

December 31, 2019

$ 215,729,433

$ 241,192,422

$ (1,453,037)

$ (2,391,567)

$ 236,694,546

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

7 unchanged sentences

Interest Income Recognized

June 30, 2020

September 30, 2020

With no related allowance recorded:

11 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

3) Investments (Continued)

19 unchanged sentences

Accrual of interest resumes if a loan is brought current.

Interest not accrued on these loans totals approximately $384,000 and $203,000 as of June 30, 2020 and December 31, 2019, respectively.

Interest not accrued on these loans totals approximately $397,000 and $203,000 as of September 30, 2020 and December 31, 2019, respectively.

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

As of June 30

As of September 30

As of December 31

4 unchanged sentences

Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings.

There is one loan with an unpaid principal balance of $227,794 that is 90 or more days past due and on a nonaccrual status as of June 30, 2020.

There is one loan with an unpaid principal balance of $190,560 that is 90 or more days past due and on a nonaccrual status as of September 30, 2020.

See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

4) Loans Held for Sale (Continued)

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

As of June 30

As of September 30

As of December 31 2019

7 unchanged sentences

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

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Interest income

14 unchanged sentences

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

As of June 30

As of September 30

As of December 31

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

4) Loans Held for Sale (Continued)

The Company maintains reserves for estimated losses on current production volumes.

For the six months ended June 30, 2020, $1,768,968 in reserves were added at a rate of 8.6 basis points per loan, the equivalent of $860 per $1,000,000 in loans originated.

This is an increase over the six months ended June 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated.

For the nine months ended September 30, 2020, $3,489,982 in reserves were added at a rate of 8.9 basis points per loan, the equivalent of $890 per $1,000,000 in loans originated.

This is an increase over the nine months ended September 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated.

The economic impact of COVID-19 and subsequent government action has increased the potential for losses due to early payoff penalties and potential for losses due to increased delinquency.

The unique nature of these current events creates significant difficulty for forecasting potential future losses.

Based on the Company’s best estimate for potential loan losses and considering published industry data, a loss reserve of 8 basis points per loan originated will continue in the third quarter 2020.

Based on the Company’s best estimate for potential loan losses and considering published industry data, a loss reserve of 8 basis points per loan originated will be used in the fourth quarter 2020.

The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production.

As of June 30, 2020, the loan loss reserve includes approximately $3,000,000 for remaining losses still to be settled on loans originated between 2004 and 2007.

On July 30, 2020, a settlement agreement with an investor was executed which covered all remaining anticipated claims against this population of loans.

Loss reserves are sufficient to cover the settlement expense, and the reserves will be reduced by that amount during the third quarter 2020.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007.

No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of June 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

5) Stock Compensation Plans

The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”).

Compensation expense for options issued of $101,520 and $65,037 has been recognized for these plans for the three months ended June 30, 2020 and 2019, respectively, and $167,397 and $129,741 has been recognized for these plans for the six months ended June 30, 2020 and 2019, respectively.

As of June 30, 2020, the total unrecognized compensation expense related to the options issued was $227,269, which is expected to be recognized over the vesting period of one year.

Compensation expense for options issued of $104,562 and $65,746 has been recognized for these plans for the three months ended September 30, 2020 and 2019, respectively, and $271,959 and $195,487 has been recognized for these plans for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, the total unrecognized compensation expense related to the options issued was $126,071, which is expected to be recognized over the vesting period of one year.

The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model.

2 unchanged sentences

The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.

A summary of the status of the Company’s stock compensation plans as of June 30, 2020, and the changes during the six months ended June 30, 2020, are presented below:

A summary of the status of the Company’s stock compensation plans as of September 30, 2020, and the changes during the nine months ended September 30, 2020, are presented below:

Class A Shares

4 unchanged sentences

Adjustment for effect of stock dividends

Outstanding at June 30, 2020

As of June 30, 2020:

Outstanding at September 30, 2020

As of September 30, 2020:

Options exercisable

As of June 30, 2020:

As of September 30, 2020:

Available options for future grant

Weighted average contractual term of options

outstanding at June 30, 2020

outstanding at September 30, 2020

Weighted average contractual term of options

exercisable at June 30, 2020

exercisable at September 30, 2020

Aggregated intrinsic value of options

outstanding at June 30, 2020 (1)

outstanding at September 30, 2020 (1)

Aggregated intrinsic value of options

exercisable at June 30, 2020 (1)

(1) The Company used a stock price of $6.58 as of June 30, 2020 to derive intrinsic value.

exercisable at September 30, 2020 (1)

(1) The Company used a stock price of $6.40 as of September 30, 2020 to derive intrinsic value.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

5) Stock Compensation Plans (Continued)

A summary of the status of the Company’s stock compensation plans as of June 30, 2019, and the changes during the three months ended June 30, 2019, are presented below:

A summary of the status of the Company’s stock compensation plans as of September 30, 2019, and the changes during the nine months ended September 30, 2019, are presented below:

Class A Shares

3 unchanged sentences

Outstanding at January 1, 2019

Outstanding at June 30, 2019

As of June 30, 2019:

Outstanding at September 30, 2019

As of September 30, 2019:

Options exercisable

As of June 30, 2019:

As of September 30, 2019:

Available options for future grant

Weighted average contractual term of options

outstanding at June 30, 2019

outstanding at September 30, 2019

Weighted average contractual term of options

exercisable at June 30, 2019

exercisable at September 30, 2019

Aggregated intrinsic value of options

outstanding at June 30, 2019 (1)

outstanding at September 30, 2019 (1)

Aggregated intrinsic value of options

exercisable at June 30, 2019 (1)

(1) The Company used a stock price of $5.02 as of June 30, 2019 to derive intrinsic value.

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the six months June 30, 2020 and 2019 was $191,656 and $15,220, respectively.

exercisable at September 30, 2019 (1)

(1) The Company used a stock price of $4.90 as of September 30, 2019 to derive intrinsic value.

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine months September 30, 2020 and 2019 was $191,309 and $112,340, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

6) Earnings Per Share

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

Basic weighted-average shares outstanding

5 unchanged sentences

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

For the six months June 30, 2020 and 2019, there were -0- and 857,227 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

For the nine months September 30, 2020 and 2019, there were -0- and 864,915 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

7) Business Segment Information

13 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

7) Business Segment Information (Continued)

Life Insurance

Intercompany Eliminations

For the Three Months Ended

June 30, 2020

September 30, 2020

Revenues from external customers

$ 101,447,531

$ 146,204,565

Intersegment revenues

1 unchanged sentence

For the Three Months Ended

June 30, 2019

September 30, 2019

Revenues from external customers

1 unchanged sentence

Segment profit before income taxes

For the Six Months Ended

June 30, 2020

For the Nine Months Ended

September 30, 2020

Revenues from external customers

1 unchanged sentence

$ 219,403,866

$ 344,475,256

Intersegment revenues

5 unchanged sentences

1,647,197,987

(110,608,108)

1,521,061,742

For the Six Months Ended

June 30, 2019

For the Nine Months Ended

September 30, 2019

Revenues from external customers

$ 103,908,855

$ 205,318,676

Intersegment revenues

7 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments

34 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

26 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at June 30, 2020.

Quoted Prices in Active Markets for Identical Assets

21 unchanged sentences

Derivatives - call options (4)

Derivatives - put options (4)

Derivatives - loan commitments (4)

9 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

33 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

Range of Inputs

27 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

2 unchanged sentences

Loans Held for Sale

Fixed Maturity Securities Available

Fixed Maturity Securities Available for Sale

Balance - December 31, 2019

8 unchanged sentences

Included in other comprehensive income

Balance - June 30, 2020

Balance - September 30, 2020

$ 445,878,979

19 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at June 30, 2020.

Quoted Prices in Active Markets for Identical Assets

3 unchanged sentences

Impaired mortgage loans held for investment

Impaired real estate held for sale

Total assets accounted for at fair value on a nonrecurring basis

11 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

3 unchanged sentences

however, there are inherent limitations in any estimation technique.

Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2020 and December 31, 2019.

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of June 30, 2020:

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2020:

Carrying Value

1 unchanged sentence

Mortgage loans held for investment

$ 105,466,412

$ 110,991,353

Residential construction

5 unchanged sentences

Restricted assets (2)

Cemetery perpetual care trust investments (2)

Mortgage servicing rights, net

13 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

43 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

28 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

10) Derivative Instruments (Continued)

20 unchanged sentences

Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.

The following table shows the notional amount and fair value of derivatives as of June 30, 2020 and December 31, 2019.

The following table shows the notional amount and fair value of derivatives as of September 30, 2020 and December 31, 2019.

Fair Values and Notional Values of Derivative Instruments

June 30, 2020

September 30, 2020

December 31, 2019

13 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

10) Derivative Instruments (Continued)

2 unchanged sentences

Net Amount Gain (Loss)

Three Months Ended June 30

Six Months Ended June 30

Three Months Ended September 30

Nine Months Ended September 30

Classification

10 unchanged sentences

However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold.

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of June 30, 2020 and December 31, 2019, the balances were $4,786,000 and $4,046,000, respectively.

As of June 30, 2020, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans originated between 2004 and 2007.

On July 30, 2020, a settlement agreement was executed which covered all potential asserted claims against the population of loans referenced above.

Loss reserves are sufficient to cover the settlement expense and the reserves will be reduced by that amount during the third quarter 2020.

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of September 30, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007.

No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of June 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

Mortgage Loan Loss Litigation

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

3 unchanged sentences

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware.

In the Delaware action, SecurityNational Mortgage asserted its right

to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans.

In the Delaware action, SecurityNational Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans.

SecurityNational Mortgage sought a declaratory judgment as to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings’ settlements with Fannie Mae and Freddie Mac.

23 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

12 unchanged sentences

and such other relief as the Court deems just and proper.

In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as document production, taking depositions, and use of experts.

In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as a document production, taking depositions, and use of experts.

At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019.

6 unchanged sentences

Mediation was set to take place on January 23, 2020 in New York.

In view of SecurityNational Mortgage’s motion dated January 15, 2020, Lehman Holdings requested that the mediation be continued.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

In view of a motion of SecurityNational Mortgage dated January 15, 2020, Lehman Holdings requested that the mediation be continued.

On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing.

2 unchanged sentences

The final disposition of the motion will be with the District Court judge.

Lehman Holdings has asked the District Court to transfer the case to one of two other judges allegedly due to related matters.

Lehman Holdings asked the District Court to transfer the case to one of two other judges allegedly due to related matters.

No action has been taken by the District Court to transfer the case.

However, Lehman Holdings filed its response brief to the motion and SecurityNational Mortgage filed its reply so the matter is now fully briefed.

On July 10, 2020, the magistrate judge filed a report and recommendation with the District Court judge recommending that SecurityNational Mortgage’s motion to dismiss be denied on the basis that the motion should not be in the District Court, but the Bankruptcy Court.

SecurityNational Mortgage filed an objection to the report and recommendation to which Lehman Holdings is entitled to respond.

A ruling relative to the issue as to the proper court will be made by the District Court, and if the motion is retained by the District Court, the matter of dismissal for lack of subject matter jurisdiction and standing will be before the District Court.

On March 17, 2020, Lehman Holdings filed a motion for partial summary judgment against dozens of defendants asserting that sufficient notice was given defendants concerning the settlement of the RMBS claims so that Lehman Holdings, as an indemnitee, would not have to prove that it (Lehman Holdings) had liability to the RMBS Trustees, but only that its settlement was reasonable and in good faith.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

However, Lehman Holdings filed its response brief to the motion and SecurityNational Mortgage filed its reply.

On July 10, 2020, the Magistrate Judge filed a report and recommendation with the District Court judge recommending that SecurityNational Mortgage’s motion to dismiss be denied on the procedural basis that the motion should not be in the District Court, but the Bankruptcy Court.

SecurityNational Mortgage filed an objection to the report and recommendation to which Lehman Holdings responded.

The District Court entered an order on August 10, 2020 adopting the Magistrate Judge’s recommendation that SecurityNational Mortgage’s motion be denied on the procedural basis that the matter should not be in the District Court at present, and that the Bankruptcy Court may recommend on an interlocutory basis whether there is subject matter jurisdiction and standing, and that later in the proceedings the District Court could then review the recommendation as to subject matter jurisdiction and standing.

On September 15, 2020, SecurityNational Mortgage filed a Petition for a Writ of Mandamus with the Second Circuit Court of Appeals asking that the District Court be ordered to presently resolve SecurityNational Mortgage’s motion as its motion is filed in the proper court.

No action has yet to be taken by the Second Circuit.

Earlier, on March 17, 2020, Lehman Holdings filed a motion for partial summary judgment against dozens of defendants asserting that sufficient notice was given defendants concerning the settlement of the RMBS claims so that Lehman Holdings, as an indemnitee, would not have to prove that it (Lehman Holdings) had liability to the RMBS Trustees, but only that its settlement was reasonable and in good faith.

Defendants involved filed a response brief that for various reasons Lehman Holdings cannot establish sufficient notice as required by law.

1 unchanged sentence

Thereafter, Lehman Holdings filed a reply brief in support of its motion, and also a response brief to certain defendants’ cross motion.

Defendants that filed a cross motion have the opportunity to file a reply brief in support of the cross motion.

Defendants that filed a cross motion filed a reply brief in support of the cross motion.

The motions are now under advisement with the Bankruptcy Court.

Even if Lehman Holdings were to prevail on its motion, it does not absolve Lehman Holdings of its burden to prove indemnity liability to the defendants.

6 unchanged sentences

This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans.

The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on September 9, 2020.

The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on November 15, 2021.

The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

4 unchanged sentences

The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement.

As of June 30, 2020, the Company believes that it was in compliance with all debt covenants.

As of September 30, 2020, the Company believes that it was in compliance with all debt covenants.

Other Contingencies and Commitments

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development.

As of June 30, 2020, the Company’s commitments were approximately $161,213,000 for these loans, of which $108,801,000 had been funded.

As of September 30, 2020, the Company’s commitments were approximately $187,305,000 for these loans, of which $124,409,000 had been funded.

The Company will advance funds once the work has been completed and an independent inspection is made.

14 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

12) Mortgage Servicing Rights

9 unchanged sentences

The following is a summary of the MSR activity for the periods presented.

As of June 30

As of September 30

As of December 31

16 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

12) Mortgage Servicing Rights (Continued)

3 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Contractual servicing fees

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented:

As of June 30

As of September 30

As of December 31 2019

3 unchanged sentences

The following key assumptions were used in determining MSR value:

June 30, 2020

September 30, 2020

December 31, 2019

13) Income Taxes

The Company’s overall effective tax rate for the three months ended June 30, 2020 and 2019 was 24.4% and 24.7%, respectively, which resulted in a provision for income taxes of $6,636,709 and $1,143,789, respectively.

The Company’s overall effective tax rate for the six months ended June 30, 2020 and 2019 was 23.3% and 23.3%, respectively, which resulted in a provision for income taxes of $6,686,494 and $1,645,630, respectively.

The Company’s overall effective tax rate for the three months ended September 30, 2020 and 2019 was 24.0% and 24.0%, respectively, which resulted in a provision for income taxes of $9,279,162 and $1,142,408, respectively.

The Company’s overall effective tax rate for the nine months ended September 30, 2020 and 2019 was 23.7% and 23.6%, respectively, which resulted in a provision for income taxes of $15,965,656 and $2,788,038, respectively.

The Company's effective tax rates differ from the U.S.

federal statutory rate of 21% partially due to its provision for state income taxes.

The effective tax rate in the current period decreased when compared to the prior year period partly due to the Company’s provision for state income taxes.

The effective tax rate increased when compared to the prior year period partly due the Company’s provision for state income taxes.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers

39 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers (Continued)

The amount of revenue recognized and included in the opening contract liability balance for the three months ended June 30, 2020 and 2019 was $880,633 and $889,578, respectively, and for the six months ended June 30, 2020 and 2019 was $1,831,406 and $1,631,098, respectively.

The amount of revenue recognized and included in the opening contract liability balance for the three months ended September 30, 2020 and 2019 was $1,427,418 and $884,180, respectively, and for the nine months ended September 30, 2020 and 2019 was $3,258,824 and $2,515,278, respectively.

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

2 unchanged sentences

Three Months Ended

Ended June 30

Ended September 30

Major goods/service lines

4 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

Net mortuary and cemetery sales

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

15) Acquisitions

15 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)

25 unchanged sentences

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)

27 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements