What changed in this filing

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Item 1. Financial Statements

2020-08-14 compared with 2020-05-15 · 306 added, 266 removed, 1383 unchanged (29% of the section changed)

66 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Three Months Ended March 31

Three Months Ended June 30

Six Months Ended June 30

Insurance premiums and other considerations

27 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF 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

Three Months Ended June 30

Six Months Ended June 30

Other comprehensive income:

Unrealized gains on fixed maturity securities available for sale

Unrealized gains on restricted assets

Unrealized gains on cemetery perpetual care trust investments

Foreign currency translation adjustments

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)

Other comprehensive income, before income tax

Income tax expense

Other comprehensive income, net of income tax

Comprehensive income

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

Class A Common Stock

19 unchanged sentences

$ 189,712,263

Three Months Ended March 31, 2019

Other comprehensive income

Stock-based compensation expense

Exercise of stock options

Sale of treasury stock

Purchase of treasury stock

Stock dividends

Conversion Class C to Class A

June 30, 2020

$ 120,126,524

$ (1,542,276)

$ 222,614,226

Six Months Ended June 30, 2019

Class A Common Stock

6 unchanged sentences

$ 171,811,173

Other comprehensive gain

Other comprehensive income

Stock-based compensation expense

6 unchanged sentences

$ 174,049,485

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

$ 100,611,335

$ 177,568,176

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

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31

Six Months Ended June 30

Cash flows from operating activities:

Net cash provided by (used in) operating activities

Net cash used in operating activities

$(109,561,903)

$ (40,725,988)

Cash flows from investing activities:

23 unchanged sentences

Net change in warehouse line borrowings for loans held for sale

Net cash provided by (used in) financing activities

Net cash provided by financing activities

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

11 unchanged sentences

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

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

Receivable for maturities of fixed maturity securities

Mortgage loans held for investment foreclosed into receivables

4 unchanged sentences

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

Three Months Ended March 31

Six Months Ended June 30

Cash and cash equivalents

9 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

1) Basis of Presentation

3 unchanged sentences

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

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

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

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.

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

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

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

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

23 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

Accounting Standards Adopted in 2019

23 unchanged sentences

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

2) Recent Accounting Pronouncements (Continued)

“Financial Services – Insurance (Topic 944):

4 unchanged sentences

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

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

June 30, 2020 (Unaudited)

3) Investments

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

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

Amortized Cost

2 unchanged sentences

Estimated Fair Value

March 31, 2020 :

June 30, 2020 :

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

42 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

46 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

Fixed Maturity Securities

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

The unrealized losses were primarily related to interest rate fluctuations.

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

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

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

2 unchanged sentences

Total Unrealized Loss

At March 31, 2020

At June 30, 2020

Obligations of States and Political Subdivisions

10 unchanged sentences

Total unrealized losses

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

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

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

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

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

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

11 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 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.

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

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

9 unchanged sentences

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

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

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

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.

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

Investment Related Earnings

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

Three Months Ended March 31

Three Months Ended June 30

Six Months Ended June 30

Fixed maturity securities:

8 unchanged sentences

$ (1,025,893)

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

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

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 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.

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

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

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

Major categories of net investment income are as follows:

Three Months Ended March 31

Three Months Ended June 30

Six Months Ended June 30

Fixed maturity securities

8 unchanged sentences

Net investment income

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

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

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

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

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

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.

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

Real Estate Held for Investment and Held for Sale

1 unchanged sentence

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

3 unchanged sentences

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

3) Investments (Continued)

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

2 unchanged sentences

The Company currently owns and operates 13 commercial properties in 5 states.

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

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

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

The Company 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.

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

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

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

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

These impairment losses relate 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.

2 unchanged sentences

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

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:

1 unchanged sentence

Total Square Footage

March 31 2020

December 31 2019

March 31 2020

December 31 2019

1 unchanged sentence

(2) Improved commercial pad

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

3) Investments (Continued)

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

7 unchanged sentences

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

As of 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.

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

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

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

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

1 unchanged sentence

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

March 31, 2020 (Unaudited)

3) Investments (Continued)

(1) Includes subdivision land developments

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

Net Ending Balance

March 31 2020

December 31 2019

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

3) Investments (Continued)

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

2 unchanged sentences

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

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

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

Business Segment

23 unchanged sentences

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

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

At 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

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.

10 unchanged sentences

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

3) Investments (Continued)

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.

19 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

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

The Company establishes a valuation allowance for credit losses in its mortgage loans held for investment 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

March 31, 2020

June 30, 2020

Allowance for credit losses:

Beginning balance - January 1, 2020

Ending balance - March 31, 2020

Ending balance - June 30, 2020

Ending balance:

6 unchanged sentences

$ 106,890,366

$ 265,808,693

Ending balance:

4 unchanged sentences

$ 105,500,792

$ 256,273,709

December 31, 2019

18 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

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

Age Analysis of Mortgage Loans Held for Investment

In Process of Foreclosure (1)

3 unchanged sentences

Unamortized discounts, net

March 31, 2020

$ 229,797,674

$ 255,891,578

$ (2,089,670)

June 30, 2020

$ (1,730,243)

3 unchanged sentences

$ (2,391,567)

$ 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

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

2 unchanged sentences

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

Impaired Loans

Recorded Investment

3 unchanged sentences

Interest Income Recognized

March 31, 2020

June 30, 2020

With no related allowance recorded:

11 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

3) Investments (Continued)

4 unchanged sentences

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

Mortgage Loans Held for Investment Credit Exposure

Credit Risk Profile Based on Payment Activity

Residential Construction

13 unchanged sentences

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.

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

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

Mortgage Loans on Non-Accrual Status

As of March 31

As of June 30

As of December 31

4 unchanged sentences

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

There 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.

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

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

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

4) Loans Held for Sale (Continued)

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

As of March 31 2020

As of June 30

As of December 31 2019

7 unchanged sentences

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

Three Months Ended March 31

Three Months Ended June 30

Six Months Ended June 30

Interest income

4 unchanged sentences

Mortgage fee income

$ 113,650,094

Loan Loss Reserve

7 unchanged sentences

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

As of March 31

As of June 30

As of December 31

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 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.

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

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

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

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

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

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

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

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

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

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

5) Stock Compensation Plans

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

Compensation expense for options issued of $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.

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

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

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

2 unchanged sentences

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

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

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

Class A Shares

4 unchanged sentences

Adjustment for effect of stock dividends

Outstanding at March 31, 2020

As of March 31, 2020:

Outstanding at June 30, 2020

As of June 30, 2020:

Options exercisable

As of March 31, 2020:

As of June 30, 2020:

Available options for future grant

Weighted average contractual term of options

outstanding at March 31, 2020

outstanding at June 30, 2020

Weighted average contractual term of options

exercisable at March 31, 2020

exercisable at June 30, 2020

Aggregated intrinsic value of options

outstanding at March 31, 2020 (1)

outstanding at June 30, 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.

exercisable at June 30, 2020 (1)

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

5) Stock Compensation Plans (Continued)

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

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

Class A Shares

3 unchanged sentences

Outstanding at January 1, 2019

Outstanding at March 31, 2019

As of March 31, 2019:

Outstanding at June 30, 2019

As of June 30, 2019:

Options exercisable

As of March 31, 2019:

As of June 30, 2019:

Available options for future grant

Weighted average contractual term of options

outstanding at March 31, 2019

outstanding at June 30, 2019

Weighted average contractual term of options

exercisable at March 31, 2019

exercisable at June 30, 2019

Aggregated intrinsic value of options

outstanding at March 31, 2019 (1)

outstanding at June 30, 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.

exercisable at June 30, 2019 (1)

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

6) Earnings Per Share

1 unchanged sentence

Three Months Ended

Six 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 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.

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

7) Business Segment Information

13 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

7) Business Segment Information (Continued)

Life Insurance

Intercompany Eliminations

For the Three Months Ended

March 31, 2020

June 30, 2020

Revenues from external customers

$ 118,661,742

Intersegment revenues

Segment profit before income taxes

For the Three Months Ended

June 30, 2019

Revenues from external customers

Intersegment revenues

Segment profit before income taxes

For the Six Months Ended

June 30, 2020

Revenues from external customers

$ 117,956,335

$ 198,270,691

Intersegment revenues

Segment profit before income taxes

Identifiable Assets

5 unchanged sentences

1,521,061,742

For the Three Months Ended

March 31, 2019

For the Six Months Ended

June 30, 2019

Revenues from external customers

$ 129,939,017

Intersegment revenues

7 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments

34 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

26 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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

Quoted Prices in Active Markets for Identical Assets

28 unchanged sentences

(1) Fixed maturity securities available for sale

(2) Mutual funds and equity securities

(2) Equity securities

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

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

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

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

(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

Assets accounted for at fair value on a nonrecurring basis

Impaired mortgage loans held for investment

Total assets accounted for at fair value on a nonrecurring basis

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

31 unchanged sentences

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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

Range of Inputs

Fair Value at

Loans held for sale

$ 356,949,958

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

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:

14 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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

Net Loan Commitments

Loans Held for Sale

Fixed Maturity Securities Available

Balance - December 31, 2019

$ 213,457,632

Originations and purchases

2,105,048,030

Sales, maturities and paydowns

(2,017,976,791)

Transfer to mortgage loans held for investment

Total gains (losses):

Included in earnings

Included in other comprehensive income

Balance - June 30, 2020

$ 356,949,958

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

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

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

Net Derivatives Loan Commitments

13 unchanged sentences

(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

June 30, 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 nonrecurring basis

Impaired mortgage loans held for investment

Total assets accounted for at fair value on a nonrecurring basis

10 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

3 unchanged sentences

however, there are inherent limitations in any estimation technique.

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

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

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

Carrying Value

25 unchanged sentences

(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

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

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

26 unchanged sentences

(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:

12 unchanged sentences

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

June 30, 2020 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Bank and Other Loans Payable :

7 unchanged sentences

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

18 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

10) Derivative Instruments (Continued)

20 unchanged sentences

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

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

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

Fair Values and Notional Values of Derivative Instruments

March 31, 2020

June 30, 2020

December 31, 2019

13 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

10) Derivative Instruments (Continued)

1 unchanged sentence

Net Amount Gain (Loss)

Three Months Ended March 31

Net Amount Gain (Loss)

Three Months Ended June 30

Six Months Ended June 30

Classification

10 unchanged sentences

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

The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of 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.

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

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

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

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

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

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

Mortgage Loan Loss Litigation

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

30 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

12 unchanged sentences

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.

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.

7 unchanged sentences

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

6 unchanged sentences

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

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

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

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

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.

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

Certain defendants, excluding SecurityNational Mortgage, also filed a cross motion to seek an affirmative ruling on the issue of Lehman Holdings’ motion.

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

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

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

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

Debt Covenants for Mortgage Warehouse Lines of Credit

2 unchanged sentences

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.

2 unchanged sentences

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.

The Company through its subsidiary SecurityNational Mortgage, also uses a line of credit with Comerica Bank.

This agreement with the bank allows SecurityNational Mortgage to borrow up to $40,000,000 for the sole purpose of funding mortgage loans.

The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on May 27, 2021.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

11) Reinsurance, Commitments and Contingencies (Continued)

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

This agreement with the bank allows EverLEND Mortgage to borrow up to $10,000,000 for the sole purpose of funding mortgage loans.

The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on August 1, 2020.

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

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

Other Contingencies and Commitments

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

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

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

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

14 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

12) Mortgage Servicing Rights

9 unchanged sentences

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

As of March 31

As of June 30

As of December 31

16 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

12) Mortgage Servicing Rights (Continued)

3 unchanged sentences

Three Months Ended

Six 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 March 31 2020

As of June 30

As of December 31

3 unchanged sentences

The following key assumptions were used in determining MSR value:

March 31, 2020

June 30, 2020

December 31, 2019

13) Income Taxes

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

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

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

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.

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

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers

39 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers (Continued)

The amount of revenue recognized and included in the opening contract liability balance for the three months ended March 31, 2020 and 2019 was $950,772 and $741,520, respectively.

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

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

2 unchanged sentences

Three Months Ended

Ended June 30

Major goods/service lines

4 unchanged sentences

Three Months Ended

Six Months Ended

Net mortuary and cemetery sales

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

15) Acquisitions

15 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

15) Acquisitions (Continued)

25 unchanged sentences

Notes to Condensed Consolidated Financial Statements

March 31, 2020 (Unaudited)

June 30, 2020 (Unaudited)

15) Acquisitions (Continued)

27 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements