What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-05-15 compared with 2019-11-14 · 883 added, 838 removed, 766 unchanged (69% of the section changed)

Financial Statements.

Fixed maturity securities, held to maturity, at amortized cost

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

$ 329,145,562

$ 355,977,820

Equity securities at estimated fair value

1 unchanged sentence

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

Real estate held for sale

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

3 unchanged sentences

Loans held for sale at estimated fair value

Receivables (net of allowances for doubtful accounts of $1,597,186 and $1,519,842 for 2019 and 2018)

Receivables (net of allowances for doubtful accounts of $1,710,087

and $1,724,156 for 2020 and 2019)

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

14 unchanged sentences

Future policy benefits and unpaid claims

$ 831,659,523

$ 825,600,918

Unearned premium reserve

5 unchanged sentences

Total liabilities

1,186,448,574

1,137,733,470

Stockholders' Equity

23 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended

Nine Months Ended

Three Months Ended March 31

Insurance premiums and other considerations

22 unchanged sentences

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

(1) Net earnings per share amounts have been adjusted retroactively

for the effect of annual stock dividends.

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

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended

Nine Months Ended

Other comprehensive income:

Three Months Ended March 31

Other comprehensive income (loss):

Unrealized losses on fixed maturity securities available for sale

$ (11,181,151)

Unrealized losses on restricted assets

Unrealized losses on cemetery perpetual care trust investments

Foreign currency translation adjustments

Other comprehensive income, before income tax

Income tax benefit

Other comprehensive income, net of income tax

Comprehensive income

Other comprehensive income (loss), before income tax

Income tax benefit (expense)

Other comprehensive income (loss), net of income tax

Comprehensive income (loss)

$ (7,427,864)

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2019

Comprehensive

Three Months Ended March 31, 2020

Class A Common Stock

Class C Common Stock

Additional Paid-in Capital

Accumulated Other Comprehensive Income

Retained Earnings

Treasury Stock

January 1, 2020

Other comprehensive gain

$ 101,256,229

$ (1,580,582)

$ 196,710,605

Other comprehensive loss

Stock-based compensation expense

5 unchanged sentences

March 31, 2020

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

June 30, 2019

Other comprehensive income

$ 102,677,084

$ (1,446,109)

$ 189,712,263

Three Months Ended March 31, 2019

Class A Common Stock

Class C Common Stock

Additional Paid-in Capital

Accumulated Other Comprehensive Income

Retained Earnings

Treasury Stock

January 1, 2019

$ 171,811,173

Other comprehensive gain

Stock-based compensation expense

2 unchanged sentences

Purchase of treasury stock

Conversion Class C to Class A

September 30, 2019

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

Nine Months Ended September 30, 2018

Comprehensive

January 1, 2018

Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)

Stock-based compensation expense

Sale of treasury stock

Exercise of stock options

Stock dividends

March 31, 2018

Other comprehensive loss

Stock-based compensation expense

Sale of treasury stock

Conversion Class C to Class A

June 30, 2018

Other comprehensive income

Stock-based compensation expense

Exercise of stock options

Sale of treasury stock

Purchase of treasury stock

September 30, 2018

March 31, 2019

$ 174,049,485

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

Three Months Ended March 31

Cash flows from operating activities:

Net cash used in operating activities

Net cash provided by (used in) operating activities

$ (63,771,244)

Cash flows from investing activities:

Purchases of fixed maturity securities

Calls and maturities of fixed maturity securities

Sales, calls and maturities of fixed maturity securities

Purchases of equity securities

2 unchanged sentences

Net changes in perpetual care trusts

Mortgage loans, other investments and policy loans made

Payments received for mortgage loans, other investments and policy loans

Purchase of property and equipment

Sale of property and equipment

Purchase of real estate

Sale of real estate

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

(153,050,405)

(137,912,509)

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

Purchases of property and equipment

Sales of property and equipment

Purchases of real estate

Sales of real estate

Cash paid for purchase of subsidiaries, net of cash acquired

4 unchanged sentences

Proceeds from stock options exercised

Purchase of treasury stock

Purchases of treasury stock

Repayment of bank and other loans

Proceeds from borrowing on bank loans

Net change in warehouse line borrowings

Net change in line of credit borrowings

Net cash provided by financing activities

Proceeds from bank borrowings

Net change in warehouse line borrowings for loans held for sale

Net cash provided by (used in) financing activities

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

1 unchanged sentence

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

$ 120,399,151

$ 139,485,682

Supplemental Disclosure of Cash Flow Information:

2 unchanged sentences

Non Cash Operating, Investing and Financing Activities:

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

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

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

Benefit plans funded with treasury stock

Accrued real estate construction costs and retainage

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

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

Benefit plans funded with treasury stock

Mortgage loans held for investment foreclosed into receivables

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

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

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

SECURITY NATIONAL FINANCIAL CORPORATION

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

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:

Nine Months Ended

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

Cash and cash equivalents

$ 103,769,066

$ 130,133,196

Restricted assets

1 unchanged sentence

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

$ 120,399,151

$ 139,485,682

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting

principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q and Articles 8 and 10 of Regulation S‑X.

Accordingly, they do not include all of the information and disclosures

required by accounting principles generally accepted in the United States of America for complete financial statements.

These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes

thereto for the year ended December 31, 2018, 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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to

make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X.

Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.

These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K (File Number 000-09341).

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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

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

In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization.

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

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

The risks and uncertainties resulting from the pandemic that may affect the Company’s future earnings, cash flows, and financial condition include the nature and duration of the curtailment or closure of the Company’s various facilities and the long-term effect on the demand for the Company’s products and services.

Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods.

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets

and liabilities;

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities;

those used in determining deferred acquisition costs and the value of business acquired;

those used in determining the value of mortgage loans foreclosed to real estate held for investment;

those used in determining the liability for

future policy benefits;

those used in determining the liability for future policy benefits;

those used in estimating other than temporary impairments on available for sale securities;

those used in determining the value of mortgage servicing rights;

1 unchanged sentence

those used in determining loan loss reserve;

and those used in

determining deferred tax assets and liabilities.

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.

1 unchanged sentence

Accounting Standards Adopted in 2020

“Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification

(“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations.

The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and

ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments.

classification will determine whether the lease expense is recognized based on an effective interest rate method or a straight-line basis over the term of the leases.

The FASB further clarified ASU 2016-02 and provided targeted improvements by

issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening

balance of retained earnings.

Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard.

Under this transition option, the Company will apply the

legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption.

The Company has made an accounting policy election not to apply the recognition requirements to short-term

leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise.

The new authoritative guidance allows

for certain practical expedients to be utilized to assist with the implementation of the new standard.

The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing

contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.

“Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures.

Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards.

The Company adopted this standard on January 1, 2020.

The adoption of this standard did not materially impact the Company’s financial statements.

See Note 8 for the Company’s fair value disclosures.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

March 31, 2020 (Unaudited)

Accounting Standards Adopted in 2019

“Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations.

The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors.

The lease classification will determine whether the lease expense is recognized based on an effective interest rate met hod or a straight-line basis over the term of the leases.

The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings.

Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard.

Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption.

The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise.

The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard.

The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets.

The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet

presentation for leased assets and obligations.

The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019.

This standard did not impact the Company’s accounting for leases where the

Company is the lessor.

This standard did not impact the Company’s accounting for leases where the Company is the lessor.

Accounting Standards Issued But Not Yet Adopted

“Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit

losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities.

For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition

threshold in current general accepted accounting principles (“GAAP”) and, instead, requires an entity to reflect its current estimate of all expected credit losses.

The allowance for credit losses is a valuation account that is deducted from the

amortized cost basis of the financial assets to present the net amount expected to be collected.

“Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities.

For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected.

For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP;

however, Topic 326 will require that credit

losses be presented as an allowance rather than as a write-down.

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

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

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

The Company is in the process of evaluating the

potential impact of this standard, especially as it relates to held to maturity debt securities and mortgage loans held for investment.

“Fair Value Measurement (Topic 820):

Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” –

Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures.

Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers

between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.

ASU 2018-13 does not change the fair value

measurements already required or permitted by existing standards.

This new authoritative guidance will be effective for the Company on January 1, 2020.

The adoption of this standard will not materially impact the Company’s financial statements.

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

“Financial Services – Insurance (Topic 944):

Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in

August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by

modifying the rate used to discount future cash flows.

The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition

costs while improving and expanding required disclosures.

Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows.

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

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

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

The Company is in the process of evaluating the potential

impact of this standard.

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.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

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

3) Investments

The Company’s investments as of September 30, 2019 are summarized as follows:

September 30, 2019

Fixed maturity securities held to maturity carried at amortized cost:

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

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

March 31, 2020 :

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

Treasury securities and obligations of U.S.

Government agencies

$ 112,607,309

$ 114,696,006

Obligations of states and political subdivisions

2 unchanged sentences

Redeemable preferred stock

Total fixed maturity securities held to maturity

Total fixed maturity securities available for sale

$ 323,056,426

$ (8,946,255)

$ 329,145,562

Equity securities at estimated fair value:

1 unchanged sentence

Industrial, miscellaneous and all other

$ (2,521,196)

Total equity securities at estimated fair value

$ (2,521,196)

Mortgage loans held for investment at amortized cost:

$ 117,696,147

Residential construction

1 unchanged sentence

Allowance for loan losses

Net discounts

Total mortgage loans held for investment

$ 250,404,519

Real estate held for investment - net of accumulated depreciation:

Total real estate held for investment

$ 102,916,419

Real estate held for sale:

Total real estate held for sale

Other investments and policy loans at amortized cost:

3 unchanged sentences

Allowance for doubtful accounts

Total other investments and policy loans

Total policy loans and other investments

Accrued investment income

Total investments

$ 766,671,555

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

3) Investments (Continued)

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

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

December 31, 2019 :

Fixed maturity securities held to maturity carried at amortized cost:

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

Treasury securities and obligations of U.S.

Government agencies

$ 142,740,641

$ 143,347,611

Obligations of states and political subdivisions

2 unchanged sentences

Redeemable preferred stock

Total fixed maturity securities held to maturity

Total fixed maturity securities available for sale

$ 338,629,810

$ 355,977,820

Equity securities at estimated fair value:

3 unchanged sentences

Mortgage loans held for investment at amortized cost:

$ 113,043,965

Residential construction

1 unchanged sentence

Allowance for loan losses

Net discounts

Total mortgage loans held for investment

$ 236,694,546

Real estate held for investment - net of accumulated depreciation:

Total real estate held for investment

$ 102,756,946

Real estate held for sale:

Total real estate held for sale

Other investments and policy loans at amortized cost:

3 unchanged sentences

Allowance for doubtful accounts

Total other investments and policy loans

Total policy loans and other investments

Accrued investment income

Total investments

$ 781,876,605

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

March 31, 2020 (Unaudited)

3) Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities held to maturity, which are carried at amortized cost, at September 30, 2019

and December 31, 2018.

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

The unrealized losses were primarily related to interest rate fluctuations.

The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

At September 30, 2019

Treasury securities and obligations of U.S.

Government Agencies

Unrealized Losses for Less than Twelve Months

Unrealized Losses for More than Twelve Months

Total Unrealized Loss

At March 31, 2020

Obligations of States and Political Subdivisions

Corporate Securities

Mortgage and other asset-backed securities

Redeemable preferred stock

Total unrealized losses

At December 31, 2019

Treasury securities and obligations of U.S.

Treasury Securities and Obligations

Government Agencies

2 unchanged sentences

Mortgage and other asset-backed securities

Redeemable preferred stock

Total unrealized losses

There were 47 securities with fair value of 97.6% of amortized cost at September 30, 2019.

There were 361 securities with fair value of 96.2% of amortized

cost at December 31, 2018.

No credit losses have been recognized for the three and nine months ended September 30, 2019 and 2018.

On a quarterly basis, the Company evaluates its fixed maturity securities held to maturity.

This evaluation includes a review

of current ratings by the National Association of Insurance Commissions (“NAIC”).

There were 253 securities with fair value of 88.8% of amortized cost at March 31, 2020.

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

No credit losses have been recognized for the three months ended March 31, 2020 and 2019.

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

This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”).

Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment.

1 unchanged sentence

Securities with a rating of 6 are automatically determined to be impaired and are written down.

The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth

rates as well as a review of the reason for a downgrade in the NAIC rating.

Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the

terms of the financial instrument.

If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is

The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating.

Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument.

Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment.

The fair values of fixed maturity securities are based on quoted market prices, when available.

For fixed maturity securities not actively traded, fair

values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and

maturity of the investments.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

The amortized cost and estimated fair value of fixed maturity securities held to maturity, at September 30, 2019, by contractual maturity, are shown below.

March 31, 2020 (Unaudited)

3) Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities available for sale, at March 31, 2020, by contractual maturity, are shown below.

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

Estimated Fair

Held to Maturity:

Due in 1 year

4 unchanged sentences

Redeemable preferred stock

Total held to maturity

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

The Company currently has deposited a total of

$60,000,000, par value, of United States Treasury fixed maturity securities with FHLB.

These securities generate interest income for the Company and are available to use as collateral on any cash borrowings from the FHLB.

As of September 30, 2019,

the Company owed $55,000,000 to the FHLB.

This amount owed was paid in October 2019.

Equity Securities

The fair values for equity securities are based on quoted market prices.

The Company recognizes the changes (unrealized gains and losses) in the fair value

of these equity securities through earnings as part of gains on investments and other assets on the condensed consolidated statements of earnings instead of other comprehensive income on the condensed consolidated balance sheets.

$ 323,056,426

$ 329,145,562

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

The Company pledged a total of $110,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at March 31, 2020.

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

As of March 31, 2020, the Company owed $20,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $88,389,000.

Investment Related Earnings

The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary

impairments are summarized as follows:

Three Months Ended

Nine Months Ended

Fixed maturity securities held to maturity:

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

Three Months Ended March 31

Fixed maturity securities:

Gross realized gains

6 unchanged sentences

Gross realized losses

(1) Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village Apartments.

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.

The carrying amount of held to maturity securities sold was $2,724,199 and $4,998,249 for the nine months ended September 30, 2019 and 2018, respectively.

The net realized loss related to these sales was $12,394 and $243,023 for the nine months ended September 30, 2019 and 2018, respectively.

Although the Company has the positive intent and ability to buy and hold a fixed maturity security to maturity,

the Company will sell a security prior to maturity if conditions and circumstances have changed within the entity that issued the security to increase the risk of default to an unacceptable level.

$ (3,212,247)

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

March 31, 2020 (Unaudited)

3) Investments (Continued)

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

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

Proceeds received from the sale of fixed maturity available for sale securities for the three months ended March 31, 2020, were $645,750, and resulted in gross realized gains and gross realized losses of $79,411 and $-0-, respectively.

The carrying amount of held to maturity securities sold was $369,263 for the three months ended March 31, 2019.

The net realized loss related to these sales was $35,388 for the three months ended March 31, 2019.

Major categories of net investment income are as follows:

Three Months Ended

Nine Months Ended

Fixed maturity securities held to maturity

Three Months Ended March 31

Fixed maturity securities

Equity securities

7 unchanged sentences

Net investment income

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $102,888 and $81,486 for the three months ended

September 30, 2019 and 2018, respectively, and $323,404 and $287,545 for the nine months ended September 30, 2019 and 2018, respectively.

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

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

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

Securities on deposit with regulatory authorities as required by law amounted to $9,070,694 at September 30, 2019 and $9,220,520 at December 31, 2018.

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) at September 30, 2019, other than investments

issued or guaranteed by the United States Government.

Real Estate Held for Investment

Securities on deposit with regulatory authorities as required by law amounted to $9,633,176 at March 31, 2020 and $9,633,818 at December 31, 2019.

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

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

Real Estate Held for Investment and Held for Sale

The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations.

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

The sources for these real estate assets come through its various business units in the form of acquisition, development and mortgage foreclosures.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

3) Investments (Continued)

Commercial Real Estate Held for Investment and Held for Sale

The Company owns and manages commercial real estate assets as a means of generating investment income.

These assets are acquired in accordance with the Company’s goals and objectives for

risk-adjusted returns.

These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns.

Due diligence is conducted on each asset using internal and third-party reports.

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

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

The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets.

The Company utilizes third party

property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods.

The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets

that provide operational efficiencies.

The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods.

The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.

The Company currently owns and operates 14 commercial properties in 5 states.

These properties include industrial warehouses, office buildings, retail

centers, a restaurant, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah.

These properties include industrial warehouses, office buildings, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah.

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

The Company uses bank debt

in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.

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

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

The associated bank loan carrying values totaled approximately $54,641,000 and $54,917,000 as of March 31, 2020 and December 31, 2019, respectively.

During the three months ended March 31, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $31,429 and $-0-, respectively.

This impairment loss relates to an office building held by the life insurance segment.

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

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

Net Ending Balance

Total Square Footage

March 31 2020

December 31 2019

March 31 2020

December 31 2019

(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, 2019 (Unaudited)

3) Investments

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $87,696,000 and $84,880,000 as of September 30, 2019 and December 31, 2018,

respectively.

The associated bank loan carrying values totaled approximately $54,037,000 and $52,237,000 as of September 30, 2019 and December 31, 2018, respectively.

During the three months ended September 30, 2019 and 2018, the Company recorded impairment losses on commercial real estate held for investment of $790,827 and $-0-, respectively and during the nine

months ended September 30, 2019 and 2018, the Company recorded impairment losses on commercial real estate held for investment of $2,658,024 and $-0-, respectively.

The impairment loss of $1,867,197 recognized in the second quarter of 2019 relates to

an office building held by the life insurance segment for which the Company received an unsolicited bid in May 2019 from a potential buyer that was significantly below the building’s carrying value.

Although management did not consider the offer as

representative of fair value, the Company evaluated the unsolicited bid as a potential impairment indicator and performed an additional impairment analysis internally, concluding based on management’s best estimates that the fair value of the

building was less than its carrying value.

During the third quarter of 2019, the Company obtained an independent appraisal from an outside commercial real estate valuation firm.

This appraisal indicated an additional impairment of $790,827 which the

Company recognized in the third quarter 2019.

These impairment losses are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

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

March 31, 2020 (Unaudited)

3) Investments (Continued)

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

Net Ending Balance

Total Square Footage

March 31 2020

December 31 2019

March 31 2020

December 31 2019

(1) Undeveloped land

(2) Improved commercial pad

Residential Real Estate Held for Investment

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

The Company expects these properties to sell within the coming 12 months.

Residential Real Estate Held for Investment and Held for Sale

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.

The strategy has been to lease these homes to produce cash

flow and allow time for the economic fundamentals to return to the various markets.

The strategy has been to lease these homes to produce cash flow and allow time for the economic fundamentals to return to the various markets.

As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.

The Company also invests in residential subdivision developments.

The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio.

SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of

work performed on the portfolio of homes across the country.

As of September 30, 2019, SNRE manages 50 residential properties in 6 states across the United States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $16,073,000 and $23,532,000 as of September 30, 2019 and December 31, 2018, respectively.

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

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

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

During the three months ended March 31, 2020 and 2019 the Company did not record any impairment losses on residential real estate held for investment or held for sale.

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

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

Net Ending Balance

March 31 2020

December 31 2019

(1) Includes subdivision developments

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

During the three months ended September 30, 2019 and 2018, the Company recorded impairment losses on residential real estate held for investment of $125,980 and $-0-, respectively, and during the

nine months ended September 30, 2019 and 2018, the Company recorded impairment losses on residential real estate held for investment of $125,980 and $147,925, respectively.

These impairment losses are included in gains (losses) on investment and

other assets on the condensed consolidated statements of earnings.

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

March 31, 2020 (Unaudited)

3) Investments (Continued)

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

Net Ending Balance

South Carolina

March 31 2020

December 31 2019

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

The Company expects these properties to sell within the coming 12 months.

Real Estate Owned and Occupied by the Company

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

Currently, the Company occupies nearly 70,000 square

feet, or approximately 10% of the overall commercial real estate holdings.

As of September 30, 2019, real estate owned and occupied by the Company is summarized as follows:

As of March 31, 2020, real estate owned and occupied by the Company is summarized as follows:

Business Segment

Square Footage Occupied

5300 South 360 West, Salt Lake City, UT (1)

Corporate Offices, Life Insurance and Cemetery/Mortuary Operations

Approximate Square Footage

Square Footage Occupied by the Company

Election Rd., Draper, UT

Corporate Offices, Life Insurance and

Cemetery/Mortuary Operations

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

Mortgage Operations

Life Insurance and Mortgage Operations

1044 River Oaks Dr., Flowood, MS

Life Insurance Operations

121 West Election Road, Draper, UT

Mortgage Sales

(1) This asset is included in property and equipment on the condensed consolidated balance sheets

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

Life Insurance Operations

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

Life Insurance Sales

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

Life Insurance Sales

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

Life Insurance Sales

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

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

Mortgage Loans Held for Investment

Mortgage loans held for investment consist of first and second mortgages.

The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity

dates range from nine months to 30 years and are secured by real estate.

Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations

to be similarly affected by changes in economic conditions.

Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real

estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business.

At September 30, 2019, the

Company had 55%, 13%, 12%, 5%, 5%, 4% and 2% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, Arizona, and Tennessee, respectively.

The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate.

Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

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

At March 31, 2020, the Company had 49%, 16%, 9%, 6%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, Nevada, California, and Arizona, respectively.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs and the related allowance for loan losses.

March 31, 2020 (Unaudited)

3) Investments (Continued)

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts and the related allowance for loan losses.

Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned.

The Company defers

related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans.

The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans.

Origination fees are included in net investment income on the condensed consolidated statements of earnings.

Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding.

Generally, the Company will fund a

loan not to exceed 80% of the loan’s collateral fair market value.

Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value.

Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer.

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account).

The allowance is

comprised of two components.

The allowance is comprised of two components.

The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables.

The second component is based upon individual evaluation

of loans that are determined to be impaired.

The second component is based upon individual evaluation of loans that are determined to be impaired.

Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral.

In addition, when a mortgage loan is past

due more than 90 days, the Company does not accrue any interest income.

In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income.

When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred.

Once foreclosed, an adjustment for

the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment.

The Company will rent the properties until it is deemed desirable to sell them.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance

status of the loans, or the Company’s actual collection experience.

Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment or held for sale.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience.

The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events.

For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type.

The Company’s loan

types are commercial, residential, and residential construction.

The Company’s loan types are commercial, residential, and residential construction.

The inherent risks within the portfolio vary depending upon the loan type as follows:

1 unchanged sentence

Commercial loans are made primarily based on the underlying collateral supporting the loan.

Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or

guarantors) ability to repay.

Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay.

Residential – Secured by family dwelling units.

These loans are secured by first mortgages on the unit, which are generally the primary residence of

the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less.

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which

include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations.

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

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations.

These loans will rely on the value associated with the project upon completion.

These cost and valuation

estimates may be inaccurate.

Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to

secure long-term financing.

Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished

These cost and valuation estimates may be inaccurate.

These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or

construction financing, and interest rate sensitivity.

These cost and valuation estimates may be inaccurate.

These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

March 31, 2020 (Unaudited)

3) Investments (Continued)

The Company establishes a valuation allowance for credit losses in its portfolio.

The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

Allowance for Credit Losses and Recorded Investment in Mortgage Loans

Residential Construction

September 30, 2019

March 31, 2020

Allowance for credit losses:

Beginning balance - January 1, 2020

Ending balance - September 30, 2019

Ending balance - March 31, 2020

Ending balance:

4 unchanged sentences

Ending balance

$ 117,696,147

$ 255,891,578

Ending balance:

2 unchanged sentences

collectively evaluated for impairment

$ 113,159,307

$ 250,490,019

December 31, 2019

8 unchanged sentences

Ending balance

$ 113,043,965

$ 241,192,422

Ending balance:

2 unchanged sentences

collectively evaluated for impairment

$ 109,291,758

$ 232,296,496

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

3) Investments (Continued)

1 unchanged sentence

Age Analysis of Mortgage Loans Held for Investment

In Process of Foreclosure (1)

Mortgage Loans

Allowance for

Unamortized deferred

September 30, 2019

Residential Construction

Unamortized deferred loan fees, net

Unamortized discounts, net

March 31, 2020

$ 229,797,674

$ 255,891,578

$ (2,089,670)

$ (2,169,620)

$ (1,227,769)

$ 250,404,519

December 31, 2019

Residential Construction

$ 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

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

3) Investments (Continued)

Impaired Mortgage Loans Held for Investment

Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to

the expected collectible amount because the impairment has been considered other than temporary.

Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary.

The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:

Impaired Loans

September 30, 2019

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

March 31, 2020

With no related allowance recorded:

9 unchanged sentences

Residential construction

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

3) Investments (Continued)

Credit Risk Profile Based on Performance Status

The Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans.

Monitoring a mortgage loan increases when the

loan is delinquent or earlier if there is an indication of impairment.

Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

3) Investments

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

2 unchanged sentences

Residential Construction

September 30,

$ 113,159,306

$ 109,291,758

$ 250,490,018

$ 232,296,496

Non-performing

$ 117,696,147

$ 113,043,965

$ 255,891,578

$ 241,192,422

Non-Accrual Mortgage Loans Held for Investment

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that

had been accrued.

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued.

Payments received for loans on a non-accrual status are recognized on a cash basis.

Interest income recognized from any payments received for loans on a non-accrual status was immaterial.

Accrual of interest resumes if a loan is

brought current.

Interest not accrued on these loans totals approximately $183,000 and $151,000 as of September 30, 2019 and December 31, 2018, respectively.

Accrual of interest resumes if a loan is brought current.

Interest not accrued on these loans totals approximately $346,000 and $203,000 as of March 31, 2020 and December 31, 2019, respectively.

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

Mortgage Loans on

Non-Accrual Status

As of September 30

Mortgage Loans on Non-Accrual Status

As of March 31

As of December 31

1 unchanged sentence

4) Loans Held for Sale

Accounting Standards Codification (“ASC”) No.

825, “Financial Instruments”, allows for the option to report certain financial assets and liabilities at

fair value initially and at subsequent measurement dates with changes in fair value included in earnings.

The option may be applied instrument by instrument, but it is irrevocable.

The Company elected the fair value option for loans held for sale.

The Company believes the fair value option most closely aligns the timing of the recognition of gains and costs.

These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans.

Electing fair value also reduces certain timing differences and better matches changes in the fair value of these assets with changes in the fair value of the related derivatives used for these assets.

Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment

and is included in mortgage fee income on the condensed consolidated statement of earnings.

There are seven loans with an aggregate unpaid principal balance of $1,925,914 that are 90 or more days past due and on a nonaccrual status as of September

The Company has elected the fair value option for loans held for sale.

Changes in the fair value of the loans are included in mortgage fee income.

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

There are two loans with an aggregate unpaid principal balance of $235,909 that are 90 or more days past due and on a nonaccrual status as of March 31, 2020.

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

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

4) Loans Held for Sale (Continued)

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

As of March 31 2020

As of December 31 2019

Aggregate fair value

$ 281,052,576

$ 213,457,632

Unpaid principal balance

1 unchanged sentence

Mortgage Fee Income

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the

origination and sale of mortgage loans held for sale.

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

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

Three Months Ended

Nine Months Ended

Three Months Ended March 31

Interest income

5 unchanged sentences

Loan Loss Reserve

When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from

a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated.

When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated.

The key factors that are used in the estimated loss calculation are as follows:

(i) lien position, (ii) payment status, (iii) claim

type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand.

(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.

The Company conducts its own review upon the receipt of a repurchase demand.

In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.

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

As of September 30

As of March 31

As of December 31

4 unchanged sentences

(1) Included in mortgage fee income

The Company believes the loan loss reserve represents probable loan losses incurred as of the balance sheet date.

loan loss experience could change, in the near-term, from the established reserve based upon claims that could be asserted by third-party investors.

The Company believes there is potential to resolve any alleged claims by third-party investors on

acceptable terms.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

4) Loans Held for Sale (Continued)

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

The Company also retains loss reserves for loans that the Company originated between 2005 and 2007, in which the possibility of an investor claim or potential settlement may still exist.

For the three months ended March 31, 2020 and 2019, reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated.

Based on the Company’s best estimate for potential loan losses and considering published industry data, loss reserve basis points are established to create an adequate reserve.

The reserve is intended to cover both expected losses on recent period loan production and possible losses on earlier loans that were sold.

The strong housing market over the last several years has reduced the Company’s exposure to losses on more recent loan production, but exposure still remains on older loans.

During the period from 2006 to 2020, over $60 million has been reserved for loan losses.

A large majority of that reserve has been used to settle investor claims or potential claims on alternative documentation loans originated between 2005 to 2007.

As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim becomes more difficult.

However, because some loans remain from the original 2005 to 2007 time period that have not been settled, the Company still includes a reserve for the potential of future loan demands and potential settlements of such loans.

As of March 31, 2020, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans from this time period with a general reserve for more recent loan production.

Thus, the Company believes that the final loan loss reserve as of March 31, 2020, represents its best estimate for adequate loss reserves on loans sold.

The Company believes that actual loan loss experience could change in the near-term from the established reserve based upon claims that could be asserted by a third-party investor.

The Company believes there is potential to resolve any alleged claims by a third-party investor on acceptable terms.

If the Company is unable to resolve such claims on acceptable terms, legal action may ensue.

In the event of legal action by any third-party investor, the Company believes it has significant defenses to any such action and intends

to vigorously defend itself against such action.

In the event of legal action by any third-party investor, the Company believes it has significant defenses to any such action and intends to vigorously defend itself against such action.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

5) Stock Compensation Plans

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

Compensation expense for options issued of $65,746 and $58,691 has

been recognized for these plans for the three months ended September 30, 2019 and 2018, respectively, and $195,487 and $174,831 has been recognized for these plans for the nine months ended September 30, 2019 and 2018, respectively.

As of September

30, 2019, the total unrecognized compensation expense related to the options issued was $43,169, which is expected to be recognized over the vesting period of one year.

Compensation expense for options issued of $65,877 and $64,704 has been recognized for these plans for the three months ended March 31, 2020 and 2019, respectively.

As of March 31, 2020, the total unrecognized compensation expense related to the options issued was $248,574, which is expected to be recognized over the vesting period of one year.

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

The Company estimates the expected

life of the options using the simplified method.

Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the

The Company estimates the expected life of the options using the simplified method.

Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options.

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

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

2019, are presented below:

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

Class A Shares

2 unchanged sentences

Weighted Average Exercise Price

Outstanding at December 31, 2018

Outstanding at September 30, 2019

As of September 30, 2019:

Outstanding at January 1, 2020

Adjustment for effect of stock dividends

Outstanding at March 31, 2020

As of March 31, 2020:

Options exercisable

As of September 30, 2019:

As of March 31, 2020:

Available options for future grant

Weighted average contractual term of options outstanding at September 30, 2019

Weighted average contractual term of options exercisable at September 30, 2019

Aggregated intrinsic value of options outstanding at September 30, 2019 (1)

Aggregated intrinsic value of options 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.

Weighted average contractual term of options

outstanding at March 31, 2020

Weighted average contractual term of options

exercisable at March 31, 2020

Aggregated intrinsic value of options

outstanding at March 31, 2020 (1)

Aggregated intrinsic value of options

exercisable at March 31, 2020 (1)

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

5) Stock Compensation Plans (Continued)

A summary of the status of the Company’s stock compensation plans as of September 30, 2018, and the changes during the nine months ended September 30,

2018, are presented below:

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

Class A Shares

2 unchanged sentences

Weighted Average Exercise Price

Outstanding at December 31, 2017

Outstanding at September 30, 2018

As of September 30, 2018:

Outstanding at January 1, 2019

Outstanding at March 31, 2019

As of March 31, 2019:

Options exercisable

As of September 30, 2018:

As of March 31, 2019:

Available options for future grant

Weighted average contractual term of options outstanding at September 30, 2018

Weighted average contractual term of options exercisable at September 30, 2018

Aggregated intrinsic value of options outstanding at September 30, 2018 (1)

Aggregated intrinsic value of options exercisable at September 30, 2018 (1)

(1) The Company used a stock price of $5.20 as of September 30, 2018 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, 2019 and 2018 was $112,340 and $118,003, respectively.

Weighted average contractual term of options

outstanding at March 31, 2019

Weighted average contractual term of options

exercisable at March 31, 2019

Aggregated intrinsic value of options

outstanding at March 31, 2019 (1)

Aggregated intrinsic value of options

exercisable at March 31, 2019 (1)

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

6) Earnings Per Share

1 unchanged sentence

Three 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 nine months September 30, 2019 and 2018,

there were 864,915 and 589,822 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 three months March 31, 2020 and 2019, there were 1,316,506 and 984,415 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

7) Business Segment Information

2 unchanged sentences

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.

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, 2018.

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2019.

Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

Factors Management Used to Identify the Enterprise’s Reportable Segments

The Company’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately

to the various regulatory jurisdictions.

The Company’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.

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

7) Business Segment Information (Continued)

Life Insurance

For the Three Months Ended

September 30, 2019

Revenues from external customers

Intersegment revenues

Segment profit before income taxes

Intercompany Eliminations

For the Three Months Ended

September 30, 2018

Revenues from external customers

Intersegment revenues

Segment profit before income taxes

For the Nine Months Ended

September 30, 2019

March 31, 2020

Revenues from external customers

4 unchanged sentences

(109,493,359)

For the Nine Months Ended

September 30, 2018

1,372,641,249

1,127,009,710

(109,493,359)

1,376,160,837

For the Three Months Ended

March 31, 2019

Revenues from external customers

4 unchanged sentences

1,052,255,644

(125,548,998)

1,055,771,959

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in

the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.

GAAP 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.

inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions.

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:

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.

Financial assets and financial liabilities

whose values are based on the following:

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets;

Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

These inputs may reflect the Company’s estimates of the

assumptions that market participants would use in valuing the financial assets and financial liabilities.

The Company utilizes a combination of third-party valuation service providers,

brokers, and internal valuation models to determine fair value.

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.

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;

c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.

The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.

The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments.

The items shown under Level 1 and Level 2 are valued as follows:

Fixed Maturity Securities Available for Sale:

The fair values of fixed maturity securities are based on quoted market prices, when available.

For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

Equity Securities :

fair values for equity securities are based on quoted market prices.

The fair values for equity securities are based on quoted market prices.

Loans Held for Sale :

The Company elected the fair value option for loans held for sale.

The fair value is based on quoted market prices, when available.

When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.

Restricted Assets :

A portion of these assets include mutual funds and equity securities that have quoted market prices that are used to determine fair value.

A portion of these assets include mutual funds and equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value.

Also included are cash and cash equivalents and participations in mortgage loans.

1 unchanged sentence

Cemetery Endowment Care Trust Investments :

A portion of these assets include equity securities that have quoted market prices that are used to determine fair value.

A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value.

Also included are cash and cash equivalents.

The carrying amounts reported in the accompanying

condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Call and Put Options :

The fair values for call and put options are

based on quoted market prices.

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

The items shown under Level 3 are valued as follows:

Loans Held for Sale :

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.

The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Call and Put Option Derivatives :

The fair values for call and put options are based on quoted market prices.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The items shown under Level 3 are valued as follows:

Loan Commitments and Forward Sale Commitments :

The Company’s mortgage segment enters into loan commitments

with potential borrowers and forward sale commitments to sell loans to third-party investors.

The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to third-party investors.

The Company also uses a hedging strategy for these transactions.

A loan commitment binds the Company to lend funds to a qualified borrower at a specified

interest rate and within a specified period of time, generally up to 30 days after issuance of the loan commitment.

Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with

changes in their fair values recorded in current earnings.

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices,

estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment.

The change in fair value of the underlying mortgage loan is measured from the date the

loan commitment is issued.

A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period of time, generally up to 30 days after issuance of the loan commitment.

Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings.

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment.

The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued.

Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.

Fallout rates and other factors from the Company’s recent

historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.

Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.

Impaired Mortgage Loans Held for Investment :

The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral.

For residential and commercial properties, the

collateral value is estimated by obtaining an independent appraisal.

For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal.

The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties).

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.

For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.

Real Estate Held for Investment :

The Company believes that in an orderly market, fair value will

approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis.

The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to

hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.

It should be noted that for replacement cost, when determining the fair value of mortgage properties, the Company uses a provider of building cost

information to the real estate construction industry.

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.

also considers area comparables and property condition when determining fair value.

The Company also considers area comparables and property condition when determining fair value.

In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment.

This depreciation reduces the book value of

these properties and lessens the exposure to the Company from further deterioration in real estate values.

This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.

Mortgage Servicing Rights :

The Company initially recognizes Mortgage Servicing Rights (“MSRs”) at their

estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction.

The 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial

assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at September 30, 2019.

Quoted Prices in

Active Markets for

Identical Assets

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at March 31, 2020.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

Assets accounted for at fair value on a recurring basis

Total equity securities

Assets accounted for at fair value on a

recurring basis

Fixed maturity securities available for sale

$ 329,145,562

$ 325,870,236

Equity securities

Loans held for sale

Restricted assets (1)

Restricted assets (2)

Cemetery perpetual care trust investments (1)

Cemetery perpetual care trust investments (2)

Derivatives - loan commitments (3)

Total assets accounted for at fair value on a recurring basis

Liabilities accounted for at fair value on a recurring basis

Total assets accounted for at fair value on a

recurring basis

$ 632,959,807

$ 327,893,109

$ 293,793,350

Liabilities accounted for at fair value on a

recurring basis

Derivatives - call options (4)

1 unchanged sentence

Derivatives - loan commitments (4)

Total liabilities accounted for at fair value on a recurring basis

Total liabilities accounted for at fair value

on a recurring basis

$ (4,653,147)

$ (3,699,183)

(1) Fixed maturity securities available for sale

(2) Mutual funds and equity securities

(2) Included in other assets on the condensed consolidated balance sheets

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

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

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

For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

Range of Inputs

Fair Value at

Loans held for sale

$ 281,052,576

Market approach

Investor contract pricing as a percentage of unpaid principal balance

Derivatives - loan commitments (net)

Market approach

Fall-out factor

Initial-Value

Fixed maturity securities available for sale

Broker quotes

Pricing quotes

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

Net Loan Commitments

Loans Held for Sale

Fixed Maturity Securities Available for Sale

Balance - December 31, 2019

$ 213,457,632

Originations and purchases

Sales, maturities and paydowns

(739,130,456)

Transfer to mortgage loans held for investment

Total gains (losses):

Included in earnings

Balance - September 30, 2019

Included in other comprehensive income

Balance - March 31, 2020

$ 281,052,576

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their

classification in the condensed consolidated balance sheet at September 30, 2019.

(2) As a component of Net investment income on the condensed consolidated statements of earnings

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at March 31, 2020.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

1 unchanged sentence

Impaired mortgage loans held for investment

Impaired real estate held for investment

Total assets accounted for at fair value on a nonrecurring basis

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed

consolidated balance sheet at December 31, 2018.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

Assets accounted for at fair value on a recurring basis

Total equity securities

Assets accounted for at fair value on a

recurring basis

Fixed maturity securities available for sale

$ 355,977,820

$ 352,761,438

Equity securities

Loans held for sale

Restricted assets (1)

Restricted assets (2)

Cemetery perpetual care trust investments (1)

Cemetery perpetual care trust investments (2)

Derivatives - loan commitments (3)

Total assets accounted for at fair value on a recurring basis

Liabilities accounted for at fair value on a recurring basis

Total assets accounted for at fair value on a

recurring basis

$ 584,995,668

$ 354,745,978

$ 219,396,594

Liabilities accounted for at fair value on a

recurring basis

Derivatives - call options (4)

1 unchanged sentence

Derivatives - loan commitments (4)

Total liabilities accounted for at fair value on a recurring basis

Total liabilities accounted for at fair value

on a recurring basis

(1) Fixed maturity securities available for sale

(2) Mutual funds and equity securities

1 unchanged sentence

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

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

Range of Inputs

Fair Value at

Loans held for sale

$ 213,457,632

Market approach

Investor contract pricing as a percentage of unpaid principal balance

Derivatives - loan commitments (net)

Market approach

Fall-out factor

Initial-Value

Fixed maturity securities available for sale

Broker quotes

Pricing quotes

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

Net Loan Commitments

Net Derivatives Loan Commitments

Loans Held for Sale

Fixed Maturity Securities Available for Sale

Balance - December 31, 2018

$ 136,210,853

Originations/purchases

2,606,839,175

(2,580,875,055)

Transfer to mortgage loans held for investment

Transfer from fixed maturity securities held to maturity

Total gains (losses):

1 unchanged sentence

Balance - December 31, 2019

$ 213,457,632

(1) As a component of mortgage fee income on the condensed consolidated statements of earnings

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring

basis by their classification in the condensed consolidated balance sheet at December 31, 2018.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

Assets accounted for at fair value on a nonrecurring basis

Assets accounted for at fair value on a

nonrecurring basis

Impaired mortgage loans held for investment

Impaired real estate held for investment

Total assets accounted for at fair value on a nonrecurring basis

Total assets accounted for at fair value on

a nonrecurring basis

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Fair Value of Financial Instruments Carried at Other Than Fair Value

ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet,

for which it is practicable to estimate that value.

ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments;

however, there are inherent limitations in any

estimation technique.

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

December 31, 2018.

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, 2019:

however, there are inherent limitations in any estimation technique.

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of March 31, 2020:

Carrying Value

Fixed maturity securities held to maturity

Total Estimated Fair Value

Mortgage loans held for investment

$ 113,992,719

$ 119,728,697

Residential construction

Mortgage loans held for investment, net

$ 250,404,519

$ 255,730,838

Insurance assignments, net (1)

Restricted assets (2)

Restricted assets (3)

Cemetery perpetual care trust investments (2)

1 unchanged sentence

Bank and other loans payable

$ (253,965,181)

Policyholder account balances (3)

Future policy benefits - annuities (3)

(1) Included in other investments and policy loans on the condensed consolidated balance sheet.

(2) Fixed maturity securities held to maturity

(112,487,611)

(116,245,685)

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

(2) Mortgage loans held for investment

(4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (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, 2018:

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

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2019:

Carrying Value

Fixed maturity securities held to maturity

Total Estimated Fair Value

Mortgage loans held for investment

$ 110,253,678

$ 115,320,638

Residential construction

Mortgage loans held for investment, net

$ 236,694,546

$ 243,262,067

Insurance assignments, net (1)

Restricted assets (2)

Restricted assets (3)

Cemetery perpetual care trust investments (2)

1 unchanged sentence

Bank and other loans payable

$ (217,572,612)

Policyholder account balances (3)

Future policy benefits - annuities (3)

(1) Included in other investments and policy loans on the condensed consolidated balance sheet.

(2) Fixed maturity securities held to maturity

(3) Participation in mortgage loans held for investment (commercial)

(4) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet.

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

Fixed Maturity Securities Held to Maturity :

The fair values of fixed maturity securities are based on quoted market prices, when available.

For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing

services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

(113,579,830)

(117,304,614)

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

(2) Mortgage loans held for investment

The estimated fair value of

the Company’s mortgage loans held for investment is determined using various methods.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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 interest payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently.

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 interest payments and discounting them

using current interest rates for commercial mortgages.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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.

Bank and Other Loans Payable :

The carrying amounts reported in the accompanying condensed consolidated

balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates.

The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates.

Policyholder Account Balances and Future Policy Benefits-Annuities :

Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges.

Policy benefits

and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances.

Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances.

Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%.

The fair values for these

investment-type insurance contracts are estimated based on the present value of liability cash flows.

The fair values for 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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

9) Allowance for Doubtful Accounts

The Company records an allowance and recognizes an expense for potential losses from other investments and receivables in accordance with generally

accepted accounting principles.

The Company records an allowance and recognizes an expense for potential losses from other investments and receivables in accordance with generally accepted accounting principles.

Receivables are the result of cemetery and mortuary operations, mortgage loan operations and life insurance operations.

The allowance is based upon the

Company’s historical experience for collectively evaluated impairment.

The allowance is based upon the Company’s historical experience for collectively evaluated impairment.

Other allowances are based upon receivables individually evaluated for impairment.

Collectability of the cemetery and mortuary receivables is significantly influenced by current

economic conditions.

Collectability of the cemetery and mortuary receivables is significantly influenced by current economic conditions.

The critical issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the overall economy

2 unchanged sentences

Loan Commitments

The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan

commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded.

Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised

(i.e., the number of loans that will be funded) fluctuates.

The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if

any, in mortgage rates following the issuance of the loan commitment.

The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded.

Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates.

The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment.

In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall.

This is due primarily to the relative

attractiveness of current mortgage rates compared to the applicant’s committed rate.

The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker

or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application approval status.

The Company has developed fallout estimates using historical data that take into account

all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall.

These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the

loan commitments and are updated periodically to reflect the most current data.

This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant’s committed rate.

The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application approval status.

The Company has developed fallout estimates using historical data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall.

These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect the most current data.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

10) Derivative Instruments (Continued)

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted

mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment.

The change in fair value of the underlying

mortgage loan is measured from the date the loan commitment is issued and is shown net of expenses.

Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment.

The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of expenses.

Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.

Forward Sale Commitments

The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments.

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.

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.

1 unchanged sentence

The Company uses a strategy of selling “out of the money” call options on its equity securities as a source of revenue.

The options give the purchaser the

right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.

The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than

current market prices.

The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.

The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices.

The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option.

The liability for options is adjusted to fair value at each reporting date.

event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold.

If the option expires unexercised, the Company realizes a gain from the sale of the option.

In the event a

put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option.

The equity security is then traded as a normal equity security in the Company’s

The net changes in the fair value of call and put options are shown in current earnings as a component of gains (losses) on investments and other assets.

Call and put options are shown in other liabilities and accrued expenses on the

condensed consolidated balance sheets.

The following table shows the notional amount and fair value of derivatives as of September 30, 2019 and December 31, 2018.

In the event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold.

If the option expires unexercised, the Company recognizes a gain from the expired option.

In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option.

The equity security is then treated as a normal equity security in the Company’s portfolio.

The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets.

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

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

Fair Values and Notional Values of Derivative Instruments

September 30, 2019

March 31, 2020

December 31, 2019

Balance Sheet Location

Liability Fair

Notional Amount

Asset Fair Value

Liability Fair Value

Notional Amount

Asset Fair Value

Liability Fair Value

Derivatives not designated as hedging instruments:

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

10) Derivative Instruments (Continued)

1 unchanged sentence

Net Amount Gain (Loss)

Three Months Ended

Nine Months Ended

Three Months Ended March 31

Classification

5 unchanged sentences

The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranges from $25,000 to $100,000.

The Company is liable for

these amounts in the event such reinsurers are unable to pay their portion of the claims.

The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims.

The Company has also assumed insurance from other companies.

1 unchanged sentence

Future loan losses can be extremely difficult to estimate.

However, management believes that the Company’s reserve methodology and its current practice of

property preservation allow it to estimate its potential losses on loans sold.

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of September 30, 2019 and December 31, 2018, the balances

were $3,882,000 and $3,605,000, respectively.

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

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of March 31, 2020 and December 31, 2019, the balances were $3,429,000 and $4,046,000, respectively.

During the period from 2006 to 2020, over $60 million has been reserved for loan losses.

A large majority of that reserve has been used to settle investor claims or potential claims on alternative documentation loans originated between 2005 to 2007.

Thus, the Company believes that the final loan loss reserve as of March 31, 2020, represents its best estimate for adequate loss reserves on loans sold.

Mortgage Loan Loss Litigation

1 unchanged sentence

In January 2014, Lehman Brothers Holdings Inc.

(“Lehman Holdings”) entered into a settlement with the Federal National

Mortgage Association (Fannie Mae) concerning the mortgage loan claims that Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had

sold to Fannie Mae.

Lehman Holdings had acquired these loans from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage

Company (“SecurityNational Mortgage”).

(“Lehman Holdings”) entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae.

A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

Lehman Holdings filed a motion in May 2014 with the U.S.

Bankruptcy Court of the Southern District of New York to require the mortgage loan originators,

including SecurityNational Mortgage, to engage in non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings.

The mediation was not

successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.

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

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

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

Lehman Holdings filed a motion in the

Delaware court seeking to stay or dismiss the declaratory judgment action.

On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings’ motion to dismiss.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators,

including SecurityNational Mortgage, in the U.S.

Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaration judgment that SecurityNational Mortgage sought in its Delaware lawsuit, and

for damages relating to the alleged obligations of the defendants under indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in

enforcing the obligations of the defendants.

Lehman Holdings filed a motion in May 2014 with the U.S.

Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage in non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings.

The mediation was not successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.

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

In the Delaware action, SecurityNational Mortgage asserted its right

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

Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory judgment action.

On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings’ motion to dismiss.

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S.

Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants.

No response was required to be filed relative to the Complaint or the Amended Complaint dated March 7, 2016.

A Case Management Order was entered on November 1, 2016.

On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which

eliminates the declaratory judgment claim but retains a similar claim for damages as in the Complaint.

Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have

subject matter jurisdiction concerning the matter and that venue is improper.

On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but retains a similar claim for damages as in the Complaint.

Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter and that venue is improper.

Lehman Holdings’ response memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017.

A hearing on the

motion was held on June 12, 2018.

A hearing on the motion was held on June 12, 2018.

On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion.

On August 27, 2018, a number of the defendants,

including SecurityNational Mortgage, filed a joint motion with the United States District Court (Case No.

18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District

Court to review the Decision de novo as to jurisdiction.

On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a joint motion with the United States District Court (Case No.

18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction.

Included with the motion were proposed objections to the Bankruptcy Court’s Decision.

On September 18, 2018, Lehman Holdings filed its response to the

joint motion, and defendants’ reply was filed on October 2, 2018.

On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an

interlocutory appeal as to the Bankruptcy Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law.

certain other defendants also filed a notice of appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue.

Lehman Holdings filed its response on October 22, 2018, and

defendants filed a joint reply to Lehman Holdings’ response on November 26, 2018.

On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’ reply was filed on October 2, 2018.

On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law.

Separately, certain other defendants also filed a notice of appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue.

Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’ response on November 26, 2018.

The motions to file appeals were consolidated before Valerie Caproni, U.S.

1 unchanged sentence

18-cv-08986 (VEC).

18-mc-00392 (VEC) is also before

Judge Caproni.

On October 1, 2018, Lehman Holdings filed a motion for leave to file a Third Amended Complaints against numerous defendants including SecurityNational

In addition to the Fannie Mae and Freddie Mac related loans, the amendments/supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”).

The RMBS loans had allegedly been sold

by defendants to Lehman Bank that, in turn, sold them to Lehman Holdings.

18-mc-00392 (VEC) was also before Judge Caproni.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue.

Further, the judge denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.

On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage.

In addition to the Fannie Mae and Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”).

The RMBS loans had allegedly been sold by defendants to Lehman Bank that, in turn, sold them to Lehman Holdings.

The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings.

Holdings asserts that it made representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.

The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in

addition to the Fannie Mae and Freddie Mac related loans.

Lehman Holdings asserts that it made representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.

The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac related loans.

Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation.

Over objections, at a hearing on October

29, 2018, the Court granted Lehman Holdings’ motion to amend/supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants including SecurityNational Mortgage.

Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter

against SecurityNational Mortgage as a new complaint ("RMBS Complaint") (United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended

Complaint already on file.

alleged obligations, including attorneys' fees and any expert witness fees incurred in litigation;

Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’ motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants, including SecurityNational Mortgage.

Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint") (United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint already on file.

The RMBS Complaint seeks alleged damages relating to obligations under alleged contractual indemnification provisions in an amount to be determined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert witness fees incurred in litigation;

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

SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously

protect and defend its position.

SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.

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.

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

SecurityNational Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case.

Discovery is in process.

Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019.

SecurityNational Mortgage sent its Statement of Position to Lehman Brothers Holdings dated September 3, 2019 in response to the notice.

Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage.

On January 9, 2020, SecurityNational Mortgage submitted further information to the mediator.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

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.

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.

On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to

jurisdiction and venue.

Further, the judge denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left

for the future.

Certain discovery has begun in the cases, and SecurityNational Mortgage filed answers and amended answers in the cases.

Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice (“Notice”) to SecurityNational Mortgage dated August 1, 2019.

SecurityNational Mortgage sent its Statement of Position to Lehman Brothers Holdings dated September 3, 2019 in response to the Notice.

Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage.

The parties are

finalizing the selection of the mediator in anticipation of then working out details with the mediator for non-binding mediation.

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

It was not filed in the Bankruptcy Court but in the United States District Court for the Southern District of New York.

The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial motions, and settlement,” as well as for “a Report and Recommendation” as to the pending motion.

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

Lehman Holdings has 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.

No decision has been made as to whether the magistrate judge will hold oral argument.

In view of SecurityNational Mortgage’s motion to dismiss, Lehman Holdings requested that the mediation set for January 23, 2020 be adjourned “pending resolution of your [SecurityNational Mortgage] motion by the court.” On January 17, 2020, the mediator adjourned the scheduled mediation without a date.

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 will file a response brief that for various reasons Lehman Holdings cannot establish sufficient notice as required by law.

Defendants are intending to file a cross motion to seek an affirmative ruling on the issue of Lehman Holdings’ motion.

Thereafter, Lehman Holdings is entitled to file a reply brief and also a response to defendants’ cross motion.

Defendants then would have the opportunity to file a reply.

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.

Debt Covenants for Mortgage Warehouse Lines of Credit

The Company, through its subsidiary SecurityNational Mortgage, has a $100,000,000 line of credit with Wells Fargo Bank N.A.

The agreement charges interest

at the 1-Month LIBOR rate plus 2.1% and matures on June 16, 2020.

SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and

the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.

The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 16, 2020.

SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.

SecurityNational Mortgage has requested but not yet received a waiver from Wells Fargo Bank N.A.

as SecurityNational Mortgage did not meet the indebtedness to adjusted tangible net worth ratio for March or April 2020 due to high mortgage origination volume in both months that resulted in aggregate borrowings in excess of the defined limits.

SecurityNational Mortgage plans to negotiate an amendment to adjust the ratio to return to compliance when SecurityNational Mortgage renews the agreement at the end of May 2020.

The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A.

This agreement with the bank allows

SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans.

SecurityNational Mortgage is currently approved to borrow $30,000,000 of the $100,000,000 available.

The agreement charges interest at the 1-Month

LIBOR rate plus 3% and matures on September 9, 2020.

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 on a rolling four-quarter basis.

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

under the other agreement.

As of September 30, 2019, the Company had approximately $54,156,000 and $94,950,000 outstanding on the Texas Capital Bank and Wells Fargo warehouse lines, respectively, and was in compliance with all debt covenants.

This agreement with the bank allows SecurityNational Mortgage to borrow up to $100,000,000 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 Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

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

SecurityNational Mortgage has requested but not yet received a waiver from Texas Capital Bank in regard to its current violation with Wells Fargo Bank N.A.

As of March 31, 2020, the Company had approximately $74,955,000 and $98,074,000 outstanding on the Texas Capital Bank and Wells Fargo warehouse lines, respectively.

In the unlikely event SecurityNational Mortgage is required to repay both warehouse lines, SecurityNational Mortgage has sufficient cash and borrowing capacity to do so and to continue to fund its origination activities through the other internal funding sources.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

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

As of September 30, 2019, the Company’s commitments were approximately $123,113,000 for these loans, of which $94,570,000 had been funded.

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

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

As of March 31, 2020, the Company’s commitments were approximately $135,902,000 for these loans, of which $94,834,000 had been funded.

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

The maximum loan commitment ranges between 50% and 80% of appraised value.

The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum.

Maturities range between six and eighteen

Maturities range between six and eighteen months.

The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs.

Insurance reserves are

maintained relative to these programs.

Insurance reserves are maintained relative to these programs.

The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage.

When estimating the insurance liabilities and related reserves, the captive

insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries.

If actual claims or adverse development of loss

reserves occurs and exceed these estimates, additional reserves may be required.

The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported

claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries.

If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required.

The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

The Company is a defendant in various other legal actions arising from the normal conduct of business.

Management believes that none of the actions will

have a material effect on the Company’s financial position or results of operations.

Based on management’s assessment and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above

claims in the consolidated financial statements.

The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which, if

adversely determined, would have a material adverse effect on its financial condition or results of operations.

Management believes that none of the actions will have a material effect on the Company’s financial position or results of operations.

Based on management’s assessment and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

12) Mortgage Servicing Rights

2 unchanged sentences

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.

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).

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.

2 unchanged sentences

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

As of September 30

As of March 31

As of December 31

3 unchanged sentences

Amortization (1)

Application of valuation allowance to write down MSRs with other than temporary impairment

Application of valuation allowance to write down MSRs

with other than temporary impairment

Balance before valuation allowance at end of period

1 unchanged sentence

Balance at beginning of year

Application of valuation allowance to write down MSRs with other than temporary impairment

Application of valuation allowance to write down MSRs

with other than temporary impairment

Balance at end of period

4 unchanged sentences

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

12) Mortgage Servicing Rights (Continued)

1 unchanged sentence

Estimated MSR Amortization

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:

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

Three Months Ended

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 September 30 2019

As of March 31 2020

As of December 31 2019

3 unchanged sentences

The following key assumptions were used in determining MSR value:

September 30, 2019

March 31, 2020

December 31, 2019

13) Income Taxes

The Company’s overall effective tax rate for the three months ended September 30, 2019 and 2018 was 24.0% and 9.0%, respectively, which resulted in a

provision for income taxes of $1,142,000 and $198,000, respectively.

The Company’s overall effective tax rate for the nine months ended September 30, 2019 and 2018 was 23.6% and 19.5%, respectively, which resulted in a provision for income taxes of

$2,788,000 and $5,383,000, respectively.

The Company’s overall effective tax rate for the three months ended March 31, 2020 and 2019 was 3.4% and 20.6%, respectively, which resulted in a provision for income taxes of $50,000 and $502,000, respectively.

During the first quarter of 2020, the Company recorded a tax benefit of $433,000 related to the enactment of the Coronavirus Aid, Relief and Economic Security ("CARES") Act signed into law March 27, 2020.

The benefit is primarily related to the net operating loss carryback provisions enacted by the CARES Act and higher tax rates in those carryback periods.

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 increased when compared

to the prior year period largely due to the Company’s provision for state income taxes and larger discrete provision-to-return adjustments in the prior year mainly due to the Tax Cuts and

Jobs Act reduction of the federal statutory rate from 35% to 21%.

federal statutory rate of 21% partially due to the tax benefit recorded for the CARES Act and its provision for state income taxes.

The effective tax rate in the current period decreased when compared to the prior year period largely due to the benefit recorded for the CARES Act.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

14) Revenues from Contracts with Customers

2 unchanged sentences

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

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.

1 unchanged sentence

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.

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.

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.

1 unchanged sentence

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 revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments.

Deferred pre-need land revenue is not placed in trust.

Complete payment of the contract does not constitute fulfillment of the performance obligation.

Goods or services are deferred until

such time the service is performed or merchandise is received.

Goods or services are deferred until such time the service is performed or merchandise is received.

Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract.

Goods and services from pre-need contracts can be transferred when

paid in full from one owner to another.

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.

8 unchanged sentences

Increase/(decrease)

Contract Balances

Receivables (1)

Contract Asset

Contract Liability

Opening (1/1/2019)

Closing (12/31/2019)

Increase/(decrease)

(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

months ended September 30, 2019 and 2018 was $884,180 and $724,097, respectively, and for the nine months ended September 30, 2019 and 2018 was $2,515,278 and $2,079,157, 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 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 March 31, 2020 and 2019 was $950,772 and $741,520, 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

1 unchanged sentence

Three Months Ended

Ended September 30

Major goods/service lines

2 unchanged sentences

Services transferred at a point in time

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:

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

Three Months Ended

Nine Months Ended

Net mortuary and cemetery sales

Gains on investments and other assets

Gains (losses) on investments and other assets

Net investment income

3 unchanged sentences

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

15) Acquisitions

Probst Family Funerals and Cremations and Heber Valley Funeral Home

On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family

Funerals and Cremations, LLC.

On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC.

(“Probst Family Funerals”) and Heber Valley Funeral Home, Inc.

1 unchanged sentence

These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City.

year ended December 31, 2018, Probst Family Funerals and Heber Valley Funeral Home had combined revenues of $1,055,634 and a combined net pre-tax income of $179,613.

As of December 31, 2018, Probst Family Funerals and Heber Valley Funeral Home had

combined assets of $1,161,029 and a combined total equity of $18,052.

Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, by and among SN Probst, a wholly owned

subsidiary of Memorial Mortuary, and Probst Family Funerals, Heber Valley Funeral Home, Joe T.

Probst, Clinton Wayne Probst, Calle J.

Probst, and Marsha L.

Probst, Memorial Mortuary, through its wholly owned subsidiary SN Probst, paid a net purchase

price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback.

At the closing, Probst Funeral Homes and Heber Valley Funeral Home paid off the $907,407 principal balance and

$4,340 in interest on a loan at Zions Bank that was secured by the Heber Valley Funeral Home.

Also, at the closing, Probst Funeral Homes and Heber Valley Funeral Home paid off the $157,148 loan with Utah Community Credit Union and the $32,987 line of

credit with Zions Bank.

Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, Memorial Mortuary Inc.

paid a net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback.

In August 2019, this escrow account was settled and $137,550 was paid to the prior owners.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:

4 unchanged sentences

Fair value of net assets acquired/consideration paid

The estimated fair values of buildings, land and warehouses included in property and equipment are based on independent appraisals

using a sales comparison approach which are considered to be Level 3 under the fair value hierarchy.

The Company determined that the estimated fair value of the remaining assets and liabilities acquired approximated their book values.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2019 (Unaudited)

March 31, 2020 (Unaudited)

15) Acquisitions (Continued)

Beta Capital Corp

On June 1, 2018, the Company completed a stock purchase transaction with Beta Capital Corp.

("Beta Capital") and Ronald D.

("Maxson"), the sole owner of all the outstanding shares of common stock of Beta Capital, to purchase all of the outstanding shares of common stock of Beta Capital.

Beta Capital is engaged in the operation of a factoring business with the principal

purpose of providing funding for funeral homes and mortuaries.

Under the terms of the transaction, as set forth in the Stock Purchase Agreement dated June 1, 2018, by and among the Company, Beta

Capital and Maxson, the Company paid Maxson the purchase consideration at the closing of the transaction equal to the sum of (i) $890,000 in cash plus (ii) the accounts receivable value of $2,515,783, representing the total amount of the Company's

outstanding receivables as of the closing date of June 1, 2018, for a total closing payment of $3,405,783.

From the $3,405,783 closing payment, a holdback amount equal to $175,000 was deposited into an interest bearing escrow account to be held for a

period of eighteen months from the closing date to pay off any uncollected accounts receivable and other liabilities of Beta Capital as of the closing date.

The estimated fair values of the assets acquired as of the date of acquisition were as follows:

Other investments - insurance assignments

Other - customer list intangible asset

Kilpatrick Life Insurance Company

On December 13, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”) completed a stock purchase transaction with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders, which resulted in the purchase of all the outstanding shares of common stock of Kilpatrick Life.

The closing of the transaction was subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life, which was received on December 12, 2019.

Under the terms of the transaction, the total Purchase Price that Security National Life paid for all the shares held by the Kilpatrick shareholders was $23,779,940 subject to a $1,400,000 holdback, as agreed with the shareholders.

Kilpatrick Life has been in operation since 1932 and provides life insurance products and services through insurance plans such as permanent and term life insurance, asset protection plans, graded whole life insurance, and annuities.

Additionally, it provides insurance services for emergencies and pre‐arranged funeral services.

Kilpatrick Life is based in Shreveport, Louisiana with additional offices in Jena, Alexandria, Minden, and Arcadia, Louisiana.

Kilpatrick Life employs a staff of almost 120 associates in four offices in Louisiana and is licensed to operate in Louisiana, Texas, Arkansas, Oklahoma, and Mississippi with the home office located in Shreveport, LA.

It is the mission of Kilpatrick Life to continue providing the utmost service and protection for its policyholders for generations to come.

Prior to the stock purchase transaction, Security National life and Kilpatrick Life entered into a coinsurance agreement, effective October 1, 2019.

After the effective date, Security National Life, as coinsurer, agreed to be responsible for and was obligated with respect to 100% of the contractual liabilities under the Kilpatrick Life’s life insurance policies in accordance with the terms and conditions of the policies and applicable law.

Unless otherwise directed by Security National Life, as coinsurer, Kilpatrick Life continued to administer the policies on behalf of Security National Life, as coinsurer, for the duration of the coinsurance agreement.

As part of the coinsurance agreement, effective October 1, 2019, Security National Life acquired the following assets and assumed the following contractual liabilities.

Other investments and policy loans

Real estate held for investment

Mortgage loans held for investment

Total assets acquired

Future policy benefits and unpaid claims

(165,404,970)

Other liabilities and accrued expenses

Total liabilities assumed

(170,664,311)

Cash received for reinsurance assumed

$ 158,358,594

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

15) Acquisitions (Continued)

Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed to terminate the coinsurance agreement, to require the recapture of the life insurance policies by Kilpatrick Life and provided notification to the Louisiana Department of Insurance.

The final settlement and transfer of the coinsurance trust assets from Security National Life back to Kilpatrick Life occurred shortly thereafter.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition, on December 13, 2019, are shown in the following table.

At the time of acquisition some of these assets and liabilities became intercompany items, and the Company has eliminated them for consolidation.

Fixed maturity securities, available for sale

Fixed maturity securities, held to maturity

Mortgage loans held for investment

Real estate held for investment

Other investments

Accrued investment income

Total investments

Cash and cash equivalents

Receivables, net

Receivables from reinsurers

Property and equipment, net

Value of business acquired

Deferred taxes

Total assets acquired

Future policy benefits and unpaid claims

(189,071,407)

Accounts payable

Other liabilities and accrued expenses

Total liabilities assumed

(198,107,612)

Fair value of net assets acquired/consideration paid

16) Subsequent Events

Kilpatrick Life Insurance Company

On October 11, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security Life”) entered into a stock purchase agreement (the “Stock

Purchase Agreement”) with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders to purchase all of the outstanding shares of common stock of Kilpatrick Life.

The closing of the

transaction is subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life.

Closing will occur after approval by the Louisiana Department of Insurance.

Under the terms of the Stock Purchase Agreement, the aggregate purchase price for all the shares held by the Kilpatrick Life shareholders is $22,000,000 plus or minus adjustments for

increases or decreases in the fair value of bonds held by Kilpatrick Life as defined in the Stock Purchase Agreement.

The Stock Purchase Agreement further provides that Security Life and Kilpatrick Life each agree to enter into a Coinsurance Agreement contemporaneous with the execution of the Stock

Purchase Agreement.

Subject to the terms and conditions of the Coinsurance Agreement, Security Life, as coinsurer, agrees to coinsure all of the insurance policies as of the coinsure effective date in exchange for receipt of the reinsurance

settlement amount from Kilpatrick Life, to the extent permitted by the Louisiana Department of Insurance, except for certain policies not included with the coinsured policies.

It is anticipated that the settlement amount compensating Security Life

for assuming the obligations associated with these policies will be approximately $166,453,000.

Unless otherwise directed by Security Life, as coinsurer, Kilpatrick Life will administer the policies on behalf of Security Life, as coinsurer, for the

duration of the Coinsurance Agreement.

For further information regarding the Stock Purchase Agreement and the Coinsurance Agreement between Security Life and Kilpatrick Life, please refer to the Company’s Form 8-K filed on

November 14, 2019.

Fair value of net assets acquired/consideration paid, net of cash acquired

(1) Receivable from reinsurers of $162,907,008 and receivables, net of $5,000,000 were settled with the recapture of the coinsurance agreement by Kilpatrick Life from Security National Life.

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