SECURITY NATIONAL FINANCIAL CORP 10-Q

Item 1. Financial Statements. Assets June 30 2020 (Unaudited) December 31 2019 Investments: Fixed maturity securities, available for sale, at estimated fair value $ 348,628,792 $ 355,977,820 Equity securities at estimated fair value 11,791,511 7,271,165 Mortgage loans held for investment (net of allowances for loan losses of $2,443,557 and $1,453,037 for 2020 and 2019) 260,418,004 236,694,546 Real estate held for investment (net of accumulated depreciation of $12,801,555 and $12,788,739 for 2020 and 2019) 113,192,422 102,756,946 Real estate held for sale 10,598,341 14,097,627 Other investments and policy loans (net of allowances for doubtful accounts of $1,533,696 and $1,448,026 for 2020 and 2019) 65,700,611 60,245,269 Accrued investment income 5,008,772 4,833,232 Total investments 815,338,453 781,876,605 Cash and cash equivalents 116,961,182 127,754,719 Loans held for sale at estimated fair value 356,949,958 213,457,632 Receivables (net of allowances for doubtful accounts of $1,731,873 and $1,724,156 for 2020 and 2019) 10,208,989 9,236,330 Restricted assets (including $3,029,593 and $2,985,347 for 2020 and 2019 at estimated fair value) 16,445,277 13,935,317 Cemetery perpetual care trust investments (including $2,671,716 and $2,581,124 for 2020 and 2019 at estimated fair value) 5,230,630 4,411,864 Receivable from reinsurers 15,858,896 15,747,768 Cemetery land and improvements 9,173,403 9,519,950 Deferred policy and pre-need contract acquisition costs 97,528,343 94,701,920 Mortgage servicing rights, net 21,695,123 17,155,529 Property and equipment, net 12,952,262 14,600,394 Value of business acquired 9,570,741 9,876,647 Goodwill 3,519,588 3,519,588 Other 29,628,897 18,649,812 Total Assets $ 1,521,061,742 $ 1,334,444,075 See accompanying notes to condensed consolidated financial statements (unaudited). 3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) June 30 2020 (Unaudited) December 31 2019 Liabilities and Stockholders' Equity Liabilities Future policy benefits and unpaid claims $ 837,481,978 $ 825,600,918 Unearned premium reserve 3,476,463 3,621,697 Bank and other loans payable 347,139,008 217,572,612 Deferred pre-need cemetery and mortuary contract revenues 12,930,466 12,607,978 Cemetery perpetual care obligation 4,003,169 3,933,719 Accounts payable 4,920,178 5,056,983 Other liabilities and accrued expenses 62,689,482 50,652,591 Income taxes 25,806,772 18,686,972 Total liabilities 1,298,447,516 1,137,733,470 Stockholders' Equity Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding - - Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,557,554 shares in 2020 and 16,107,779 shares in 2019 33,115,108 32,215,558 Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding - - Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,551,445 shares in 2020 and 2,500,887 shares in 2019 5,102,890 5,001,774 Additional paid-in capital 48,917,891 46,091,112 Accumulated other comprehensive income, net of taxes 16,894,089 13,726,514 Retained earnings 120,126,524 101,256,229 Treasury stock at cost - 349,850 Class A shares in 2020 and 490,823 Class A shares in 2019 (1,542,276) (1,580,582) Total stockholders' equity 222,614,226 196,710,605 Total Liabilities and Stockholders' Equity $ 1,521,061,742 $ 1,334,444,075 See accompanying notes to condensed consolidated financial statements (unaudited). 4 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Revenues: Insurance premiums and other considerations $ 22,924,709 $ 19,645,218 $ 45,215,985 $ 38,672,220 Net investment income 12,962,745 10,540,835 26,363,244 20,582,503 Net mortuary and cemetery sales 4,700,778 4,000,730 9,158,869 7,679,358 Gains (losses) on investments and other assets 2,238,279 (1,025,893) (973,968) 780,768 Mortgage fee income 73,368,333 32,946,567 113,650,094 57,425,438 Other 2,466,898 2,337,725 4,856,467 4,798,730 Total revenues 118,661,742 68,445,182 198,270,691 129,939,017 Benefits and expenses: Death benefits 13,586,723 9,248,796 26,994,350 19,326,699 Surrenders and other policy benefits 838,191 763,978 1,908,666 1,629,909 Increase in future policy benefits 6,603,843 5,676,111 13,641,876 11,427,241 Amortization of deferred policy and pre-need acquisition costs and value of business acquired 3,026,666 3,073,478 6,541,723 6,201,752 Selling, general and administrative expenses: Commissions 27,239,088 13,853,889 43,793,831 23,528,981 Personnel 20,538,655 15,699,260 39,258,653 30,730,596 Advertising 1,229,841 1,171,903 2,235,158 2,205,078 Rent and rent related 1,662,853 1,724,179 3,277,594 3,628,467 Depreciation on property and equipment 518,070 422,926 1,034,283 872,606 Costs related to funding mortgage loans 2,378,815 1,559,289 4,335,097 2,914,214 Other 11,303,388 8,154,367 21,378,930 15,799,494 Interest expense 1,881,440 1,782,557 3,700,049 3,274,444 Cost of goods and services sold-mortuaries and cemeteries 660,413 690,606 1,502,491 1,343,534 Total benefits and expenses 91,467,986 63,821,339 169,602,701 122,883,015 Earnings before income taxes 27,193,756 4,623,843 28,667,990 7,056,002 Income tax expense (6,636,709) (1,143,789) (6,686,494) (1,645,630) Net earnings $ 20,557,047 $ 3,480,054 $ 21,981,496 $ 5,410,372 Net earnings per Class A Equivalent common share (1) $1.10 $0.19 $1.18 $0.29 Net earnings per Class A Equivalent common share-assuming dilution (1) $1.07 $0.19 $1.15 $0.29 Weighted-average Class A equivalent common share outstanding (1) 18,764,831 18,576,031 18,703,390 18,567,907 Weighted-average Class A equivalent common shares outstanding-assuming dilution (1) 19,183,491 18,810,276 19,036,249 18,807,576 (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). 5 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Net earnings $ 20,557,047 $ 3,480,054 $ 21,981,496 $ 5,410,372 Other comprehensive income: Unrealized gains on fixed maturity securities available for sale $ 15,180,782 - 3,999,631 - Unrealized gains on restricted assets 18,072 - 4,987 - Unrealized gains on cemetery perpetual care trust investments 17,815 - 5,769 - Foreign currency translation adjustments 165 954 (280) 2,046 Other comprehensive income, before income tax 15,216,834 954 4,010,107 2,046 Income tax expense (3,196,946) (238) (842,532) (510) Other comprehensive income, net of income tax 12,019,888 716 3,167,575 1,536 Comprehensive income $ 32,576,935 $ 3,480,770 $ 25,149,071 $ 5,411,908 See accompanying notes to condensed consolidated financial statements (unaudited). 6 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Six Months Ended June 30, 2020 Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Treasury Stock Total January 1, 2020 $ 32,215,558 $ 5,001,774 $ 46,091,112 $ 13,726,514 $ 101,256,229 $ (1,580,582) $ 196,710,605 Net earnings - - - - 1,424,449 - 1,424,449 Other comprehensive loss - - - (8,852,313) - - (8,852,313) Stock-based compensation expense - - 65,877 - - - 65,877 Exercise of stock options 44,822 - (33,930) - - - 10,892 Sale of treasury stock - - 218,280 - - 264,081 482,361 Purchase of treasury stock - - - - - (129,608) (129,608) Stock dividends 2,322 (1,020) 2,292 - (3,594) - - Conversion Class C to Class A 22,324 (22,324) - - - - - March 31, 2020 $ 32,285,026 $4,978,430 $ 46,343,631 $ 4,874,201 $ 102,677,084 $ (1,446,109) $ 189,712,263 Net earnings - - - - 20,557,047 - 20,557,047 Other comprehensive income - - - 12,019,888 - - 12,019,888 Stock-based compensation expense - - 101,520 - - - 101,520 Exercise of stock options 22,726 - (22,726) - - - - Sale of treasury stock - - 319,676 - - 664,546 984,222 Purchase of treasury stock - - - - - (760,713) (760,713) Stock dividends 807,356 124,460 2,175,790 - (3,107,607) - (1) Conversion Class C to Class A - - - - - - - June 30, 2020 $ 33,115,108 $ 5,102,890 $ 48,917,891 $ 16,894,089 $ 120,126,524 $ (1,542,276) $ 222,614,226 Six Months Ended June 30, 2019 Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Treasury Stock Total January 1, 2019 $ 30,609,596 $ 4,387,286 $ 41,821,778 $ (2,823) $ 95,201,732 $ (206,396) $ 171,811,173 Net earnings - - - - 1,930,318 - 1,930,318 Other comprehensive income - - - 820 - - 820 Stock-based compensation expense - - 64,704 - - - 64,704 Exercise of stock options 8,936 - 8,444 - - - 17,380 Sale of treasury stock - - 295,153 - - 42,343 337,496 Purchase of treasury stock - - - - - (112,404) (112,404) Stock dividends 282 (4) 489 - (769) - (2) Conversion Class C to Class A 6,560 (6,560) - - - - - March 31, 2019 $ 30,625,374 $ 4,380,722 $ 42,190,568 $ (2,003) $ 97,131,281 $ (276,457) $ 174,049,485 Net earnings - - - - 3,480,054 - 3,480,054 Other comprehensive loss - - - 716 - 716 Stock-based compensation expense - - 65,037 - - - 65,037 Exercise of stock options 20,274 - 9,519 - - - 29,793 Sale of treasury stock - - 92,605 - - 25,190 117,795 Purchase of treasury stock - - - - - (174,704) (174,704) Conversion Class C to Class A 12 (14) 2 - - - - June 30, 2019 $ 30,645,660 $ 4,380,708 $ 42,357,731 $ (1,287) $ 100,611,335 $ (425,971) $ 177,568,176 See accompanying notes to condensed consolidated financial statements (unaudited). 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30 2020 2019 Cash flows from operating activities: Net cash used in operating activities $(109,561,903) $ (40,725,988) Cash flows from investing activities: Purchases of fixed maturity securities (49,243,362) (4,570,527) Sales, calls and maturities of fixed maturity securities 60,438,933 13,688,850 Purchases of equity securities (13,396,648) (2,046,346) Sales of equity securities 7,841,952 763,548 Net changes in restricted assets (1,476,279) (1,380,216) Net changes in perpetual care trusts (120,904) 757,527 Mortgage loans held for investment, other investments and policy loans made (313,439,255) (273,167,834) Payments received for mortgage loans held for investment, other investments and policy loans 291,577,885 269,379,815 Purchases of property and equipment (910,429) (367,466) Sales of property and equipment - 51,102 Purchases of real estate (12,217,051) (4,316,130) Sales of real estate 6,584,359 4,945,323 Cash paid for purchase of subsidiaries, net of cash acquired - (3,261,788) Net cash provided by (used in) investing activities (24,360,799) 475,858 Cash flows from financing activities: Investment contract receipts 5,180,530 6,275,671 Investment contract withdrawals (8,606,537) (8,729,845) Proceeds from stock options exercised 10,892 47,173 Purchases of treasury stock (890,321) (287,108) Repayment of bank and other loans (48,739,820) (93,583,859) Proceeds from bank borrowings 119,172,821 92,967,146 Net change in warehouse line borrowings for loans held for sale 59,048,513 29,203,601 Net cash provided by financing activities 125,176,078 25,892,779 Net change in cash, cash equivalents, restricted cash and restricted cash equivalents (8,746,624) (14,357,351) Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 137,735,673 150,936,673 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 128,989,049 $ 136,579,322 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 3,732,031 $ 3,219,201 Income taxes (net of refunds) 409,223 960,408 Non Cash Operating, Investing and Financing Activities: Transfer of loans held for sale to mortgage loans held for investment $ 8,933,676 $ - Right-of-use assets obtained in exchange for operating lease liabilities 4,641,238 11,860,956 Benefit plans funded with treasury stock 1,466,583 455,291 Accrued real estate construction costs and retainage 687,314 823,545 Mortgage loans held for investment foreclosed into real estate held for investment 686,124 755,000 Right-of-use assets obtained in exchange for finance lease liabilities 8,494 244,855 Receivable for maturities of fixed maturity securities - 10,000,000 Mortgage loans held for investment foreclosed into receivables - 155,347 See Note 15 regarding non cash transactions included in the acquisition of Probst Family Funeral and Cremations and Heber Valley Funeral Home. 8 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below: Six Months Ended June 30 2020 2019 Cash and cash equivalents $ 116,961,182 $ 127,828,356 Restricted assets 9,992,953 7,076,341 Cemetery perpetual care trust investments 2,034,914 1,674,625 Total cash, cash equivalents, restricted cash and restricted cash equivalents $ 128,989,049 $ 136,579,322 See accompanying notes to condensed consolidated financial statements (unaudited). 9 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 1) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K (File Number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 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 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. The risks and uncertainties resulting from the pandemic that may affect the Company’s future earnings, cash flows, and financial condition include the nature and duration of the curtailment or closure of the Company’s various facilities and the long-term effect on the demand for the Company’s products and services. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits; those used in estimating other than temporary impairments on available for sale securities; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects. 2) Recent Accounting Pronouncements Accounting Standards Adopted in 2020 ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures. 10 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 2) Recent Accounting Pronouncements (Continued) Accounting Standards Adopted in 2019 ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate met hod or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20. The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases. The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor. Accounting Standards Issued But Not Yet Adopted ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. In October 2019, the FASB proposed an update to ASU No. 2016-13 that would make the ASU effective for the Company on January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment. 11 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 2) Recent Accounting Pronouncements (Continued) ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In October 2019, the FASB proposed an update to ASU No. 2018-12 that would make the ASU effective for the Company on January 1, 2024. The Company is in the process of evaluating the potential impact of this standard. 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. 12 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments The Company’s investments as of June 30, 2020 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2020 : Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 102,442,154 $ 2,147,334 $ - $ 104,589,488 Obligations of states and political subdivisions 5,878,900 269,394 (2,661) 6,145,633 Corporate securities including public utilities 182,731,042 21,371,660 (2,841,768) 201,260,934 Mortgage-backed securities 35,789,063 1,209,447 (734,173) 36,264,337 Redeemable preferred stock 364,339 21,561 (17,500) 368,400 Total fixed maturity securities available for sale $ 327,205,498 $ 25,019,396 $ (3,596,102) $ 348,628,792 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 12,380,259 $ 1,525,151 $ (2,113,899) $ 11,791,511 Total equity securities at estimated fair value $ 12,380,259 $ 1,525,151 $ (2,113,899) $ 11,791,511 Mortgage loans held for investment at amortized cost: Residential $ 109,304,960 Residential construction 106,890,366 Commercial 49,613,367 Less: Unamortized deferred loan fees, net (1,730,243) Less: Allowance for loan losses (2,443,557) Less: Net discounts (1,216,889) Total mortgage loans held for investment $ 260,418,004 Real estate held for investment - net of accumulated depreciation: Residential $ 19,973,537 Commercial 93,218,885 Total real estate held for investment $ 113,192,422 Real estate held for sale: Residential $ 4,522,020 Commercial 6,076,321 Total real estate held for sale $ 10,598,341 Other investments and policy loans at amortized cost: Policy loans $ 14,450,587 Insurance assignments 43,276,682 Federal Home Loan Bank stock (1) 4,056,600 Other investments 5,450,438 Less: Allowance for doubtful accounts (1,533,696) Total policy loans and other investments $ 65,700,611 Accrued investment income $ 5,008,772 Total investments $ 815,338,453 (1) Includes $874,400 of Membership stock and $3,182,200 of Activity stock due to short-term borrowings. 13 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) The Company’s investments as of December 31, 2019 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2019 : Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 142,740,641 $ 632,185 $ (25,215) $ 143,347,611 Obligations of states and political subdivisions 7,450,366 87,812 (9,026) 7,529,152 Corporate securities including public utilities 156,599,184 16,768,449 (463,413) 172,904,220 Mortgage-backed securities 31,475,280 597,395 (240,177) 31,832,498 Redeemable preferred stock 364,339 - - 364,339 Total fixed maturity securities available for sale $ 338,629,810 $ 18,085,841 $ (737,831) $ 355,977,820 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 6,900,537 $ 1,139,799 $ (769,171) $ 7,271,165 Total equity securities at estimated fair value $ 6,900,537 $ 1,139,799 $ (769,171) $ 7,271,165 Mortgage loans held for investment at amortized cost: Residential $ 113,043,965 Residential construction 89,430,237 Commercial 38,718,220 Less: Unamortized deferred loan fees, net (2,391,567) Less: Allowance for loan losses (1,453,037) Less: Net discounts (653,272) Total mortgage loans held for investment $ 236,694,546 Real estate held for investment - net of accumulated depreciation: Residential $ 12,530,306 Commercial 90,226,640 Total real estate held for investment $ 102,756,946 Real estate held for sale: Residential $ 8,021,306 Commercial 6,076,321 Total real estate held for sale $ 14,097,627 Other investments and policy loans at amortized cost: Policy loans $ 14,762,805 Insurance assignments 41,062,965 Federal Home Loan Bank stock (1) 894,300 Other investments 4,973,225 Less: Allowance for doubtful accounts (1,448,026) Total policy loans and other investments $ 60,245,269 Accrued investment income $ 4,833,232 Total investments $ 781,876,605 (1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings. 14 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) Fixed Maturity Securities The following tables summarize unrealized losses on fixed maturity securities available for sale, which were carried at estimated fair value, at June 30, 2020 and December 31, 2019. The 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: Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Fair Value Total Unrealized Loss Fair Value At June 30, 2020 Obligations of States and Political Subdivisions $ 2,661 $ 717,466 $ - $ - $ 2,661 $ 717,466 Corporate Securities 1,876,784 22,141,540 964,984 3,039,240 2,841,768 25,180,780 Mortgage and other asset-backed securities 710,364 10,024,319 23,809 504,583 734,173 10,528,902 Redeemable preferred stock 17,500 232,500 - - 17,500 232,500 Total unrealized losses $ 2,607,309 $ 33,115,825 $ 988,793 $ 3,543,823 $ 3,596,102 $ 36,659,648 At December 31, 2019 U.S. Treasury Securities and Obligations of U.S. Government Agencies $ 20,211 $ 30,629,288 $ 5,004 $ 10,000,400 $ 25,215 $ 40,629,688 Obligations of States and Political Subdivisions 9,026 3,062,889 - - 9,026 3,062,889 Corporate Securities 118,746 7,184,311 344,667 3,950,509 463,413 11,134,820 Mortgage and other asset-backed securities 205,470 13,266,443 34,707 502,769 240,177 13,769,212 Total unrealized losses $ 353,453 $ 54,142,931 $ 384,378 $ 14,453,678 $ 737,831 $ 68,596,609 There were 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 and six months ended June 30, 2020 and 2019. On a quarterly basis, the Company evaluates its fixed maturity securities available for sale. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment. The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. 15 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) The amortized cost and estimated fair value of fixed maturity securities available for sale, at June 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Estimated Fair Value Due in 1 year $ 61,039,649 $ 61,451,128 Due in 2-5 years 73,278,818 76,149,038 Due in 5-10 years 82,777,913 88,468,598 Due in more than 10 years 73,955,716 85,927,291 Mortgage-backed securities 35,789,063 36,264,337 Redeemable preferred stock 364,339 368,400 Total $ 327,205,498 $ 348,628,792 The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $100,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at June 30, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of June 30, 2020, the Company owed $79,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $19,572,000. Investment Related Earnings The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows: Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Fixed maturity securities: Gross realized gains $ 55,138 $ 163,038 $ 150,959 $ 248,626 Gross realized losses (12,089) (69,622) (12,089) (105,015) Equity securities: Gains (losses) on securities sold (50,029) 41,088 (107,471) 52,664 Unrealized gains and (losses) on securities held at the end of the period 1,738,059 14,016 (1,023,797) 775,224 Other assets: Gross realized gains 48,736 688,289 505,764 1,793,223 Gross realized losses 458,464 (1,862,702) (487,334) (1,983,954) Total $ 2,238,279 $ (1,025,893) $ (973,968) $ 780,768 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. 16 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) Major categories of net investment income are as follows: Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Fixed maturity securities $ 3,143,072 $ 2,528,689 $ 6,067,786 $ 5,032,554 Equity securities 111,122 74,730 203,164 152,651 Mortgage loans held for investment 5,582,152 4,525,817 11,236,042 8,629,184 Real estate held for investment 2,787,881 2,096,927 5,941,267 4,007,221 Policy loans 257,527 106,905 491,492 195,042 Insurance assignments 4,383,398 3,906,832 8,682,602 8,118,952 Other investments 398 52,130 25,421 106,678 Cash and cash equivalents 22,385 465,959 320,390 964,876 Gross investment income 16,287,935 13,757,989 32,968,164 27,207,158 Investment expenses (3,325,190) (3,217,154) (6,604,920) (6,624,655) Net investment income $ 12,962,745 $ 10,540,835 $ 26,363,244 $ 20,582,503 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 $9,632,398 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 June 30, 2020, other than investments issued or guaranteed by the United States Government. Real Estate Held for Investment and Held for Sale The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and mortgage foreclosures. Commercial Real Estate Held for Investment and Held for Sale The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors. 17 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. 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 13 commercial properties in 5 states. 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 $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. 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 June 30 2020 December 31 2019 June 30 2020 December 31 2019 Louisiana $ 5,929,267 $ 6,009,079 125,114 125,114 Mississippi 2,914,989 2,951,478 21,521 21,521 Utah (1) 84,374,629 81,266,083 462,730 462,730 $93,218,885 $ 90,226,640 609,365 609,365 (1) Includes Center53 phase 1 completed in July 2017 and phase 2 which is under construction 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 June 30 2020 December 31 2019 June 30 2020 December 31 2019 Arizona (1) $ 2,500 $ 2,500 - - Kansas 4,800,000 4,800,000 222,679 222,679 Mississippi 318,322 318,322 12,300 12,300 Nevada 655,499 655,499 4,800 4,800 Texas (2) 300,000 300,000 - - $ 6,076,321 $ 6,076,321 239,779 239,779 (1) Undeveloped land (2) Improved commercial pad 18 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. The Company expects these properties to sell within the coming 12 months. Residential Real Estate Held for Investment and Held for Sale The Company owns a portfolio of residential homes primarily as a result of loan foreclosures. The strategy has been to lease these homes to produce cash flow and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns. The Company also invests in residential subdivision developments. The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country. As of 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. The following is a summary of the Company’s residential real estate held for investment for the periods presented: Net Ending Balance June 30 2020 December 31 2019 Florida $ 1,269,577 $ 2,487,723 Nevada 686,124 293,516 Utah (1) 17,731,655 9,462,886 Washington 286,181 286,181 $ 19,973,537 $ 12,530,306 (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 June 30 2020 December 31 2019 California 421,452 640,452 Florida 1,351,040 1,300,641 Nevada 293,516 - Ohio 10,000 10,000 Utah 2,446,012 5,880,213 Washington - 190,000 $ 4,522,020 $ 8,021,306 19 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. The Company expects these properties to sell within the coming 12 months. Real Estate Owned and Occupied by the Company The primary business units of the Company occupy a portion of the real estate owned by the Company. As of June 30, 2020, real estate owned and occupied by the Company is summarized as follows: Location Business Segment Approximate Square Footage Square Footage Occupied by the Company 121 W. Election Rd., Draper, UT Corporate Offices, Life Insurance and Cemetery/Mortuary Operations 78,979 18% 5201 Green Street, Salt Lake City, UT (1) Life Insurance and Mortgage Operations 39,157 73% 1044 River Oaks Dr., Flowood, MS Life Insurance Operations 19,694 28% 1818 Marshall Street, Shreveport, LA (1)(2) Life Insurance Operations 12,274 100% 909 Foisy Street, Alexandria, LA (1)(2) Life Insurance Sales 8,059 100% 812 Sheppard Street, Minden, LA (1)(2) Life Insurance Sales 1,560 100% 1550 N 3rd Street, Jena, LA (1)(2) Life Insurance Sales 1,737 100% (1) Included in property and equipment on the condensed consolidated balance sheets (2) See Note 15 regarding the acquisition of Kilpatrick Life Insurance Company Mortgage Loans Held for Investment Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At 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. Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts and the related allowance for loan losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings. Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value. Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer. The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 20 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. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment or held for sale. The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events. For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows: Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay. Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less. Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing. Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity. 21 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) 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: Commercial Residential Residential Construction Total June 30, 2020 Allowance for credit losses: Beginning balance - January 1, 2020 $ 187,129 $ 1,222,706 $ 43,202 $ 1,453,037 Charge-offs - - - - Provision - 990,520 - 990,520 Ending balance - June 30, 2020 $ 187,129 $ 2,213,226 $ 43,202 $ 2,443,557 Ending balance: individually evaluated for impairment $ - $ 427,069 $ - $ 427,069 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,786,157 $ 43,202 $ 2,016,488 Mortgage loans: Ending balance $ 49,613,367 $ 109,304,960 $ 106,890,366 $ 265,808,693 Ending balance: individually evaluated for impairment $ 1,039,013 $ 7,106,397 $ 1,389,574 $ 9,534,984 Ending balance: collectively evaluated for impairment $ 48,574,354 $ 102,198,563 $ 105,500,792 $ 256,273,709 December 31, 2019 Allowance for credit losses: Beginning balance - January 1, 2019 $ 187,129 $ 1,125,623 $ 35,220 $ 1,347,972 Charge-offs - (32,692) - (32,692) Provision - 129,775 7,982 137,757 Ending balance - December 31, 2019 $ 187,129 $ 1,222,706 $ 43,202 $ 1,453,037 Ending balance: individually evaluated for impairment $ - $ 195,993 $ - $ 195,993 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,026,713 $ 43,202 $ 1,257,044 Mortgage loans: Ending balance $ 38,718,220 $ 113,043,965 $ 89,430,237 $ 241,192,422 Ending balance: individually evaluated for impairment $ 4,488,719 $ 3,752,207 $ 655,000 $ 8,895,926 Ending balance: collectively evaluated for impairment $ 34,229,501 $ 109,291,758 $ 88,775,237 $ 232,296,496 22 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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: 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days (1) In Process of Foreclosure (1) Total Past Due Current Total Mortgage Loans Allowance for Loan Losses Unamortized deferred loan fees, net Unamortized discounts, net Net Mortgage Loans June 30, 2020 Commercial $ 2,783,200 $ 371,938 $ 1,039,013 $ - $ 4,194,151 $ 45,419,216 $ 49,613,367 $ (187,129) $ (11,545) $ (849,914) $ 48,564,779 Residential 7,624,435 3,308,995 5,423,083 1,683,314 18,039,827 91,265,133 109,304,960 (2,213,226) (1,258,346) (366,975) 105,466,413 Residential Construction - - 1,389,574 - 1,389,574 105,500,792 106,890,366 (43,202) (460,352) - 106,386,812 Total $ 10,407,635 $ 3,680,933 $ 7,851,670 $ 1,683,314 $23,623,552 $242,185,141 $ 65,808,693 $(2,443,557) $ (1,730,243) $ (1,216,889) $ 260,418,004 December 31, 2019 Commercial $ 1,872,000 $ - $ 4,488,719 $ - $ 6,360,719 $ 32,357,501 $ 38,718,220 $ (187,129) $ (88,918) $ (653,272) $ 37,788,901 Residential 10,609,296 4,085,767 2,100,742 1,651,465 18,447,270 94,596,695 113,043,965 (1,222,706) (1,567,581) - 110,253,678 Residential Construction - - 655,000 - 655,000 88,775,237 89,430,237 (43,202) (735,068) - 88,651,967 Total $ 12,481,296 $ 4,085,767 $ 7,244,461 $ 1,651,465 $25,462,989 $215,729,433 $241,192,422 $(1,453,037) $ (2,391,567) $ (653,272) $236,694,546 (1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure. 23 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) Impaired Mortgage Loans Held for Investment Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized June 30, 2020 With no related allowance recorded: Commercial $ 1,039,013 $ 1,039,013 $ - $ 951,866 $ - Residential 4,683,807 4,683,807 - 3,466,388 - Residential construction 1,389,574 1,389,574 - 694,787 - With an allowance recorded: Commercial $ - $ - $ - $ - $ - Residential 2,422,590 2,422,590 427,069 2,355,231 - Residential construction - - - - - Total: Commercial $ 1,039,013 $ 1,039,013 $ - $ 951,866 $ - Residential 7,106,397 7,106,397 427,069 5,821,619 - Residential construction 1,389,574 1,389,574 - 694,787 - December 31, 2019 With no related allowance recorded: Commercial $ 4,488,719 $ 4,488,719 $ - $ 1,499,043 $ - Residential 2,254,189 2,254,189 - 3,367,151 - Residential construction 655,000 655,000 - 1,457,278 - With an allowance recorded: Commercial $ - $ - $ - $ - $ - Residential 1,498,018 1,498,018 195,993 665,270 - Residential construction - - - - - Total: Commercial $ 4,488,719 $ 4,488,719 $ - $ 1,499,043 $ - Residential 3,752,207 3,752,207 195,993 4,032,421 - Residential construction 655,000 655,000 - 1,457,278 - 24 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 3) Investments (Continued) Credit Risk Profile Based on Performance Status The Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status. The Company’s performing and non-performing mortgage loans held for investment were as follows: Commercial Residential Residential Construction Total June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019 Performing $ 48,574,354 $ 34,229,501 $ 102,198,563 $109,291,758 $ 105,500,792 $ 88,775,237 $ 256,273,709 $ 232,296,496 Non-performing 1,039,013 4,488,719 7,106,397 3,752,207 1,389,574 655,000 9,534,984 8,895,926 Total $ 49,613,367 $ 38,718,220 $ 109,304,960 $113,043,965 $ 106,890,366 $ 89,430,237 $ 265,808,693 $ 241,192,422 Non-Accrual Mortgage Loans Held for Investment Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $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. As of June 30 2020 As of December 31 2019 Commercial $ 1,039,013 $ 4,488,719 Residential 7,106,397 3,752,207 Residential construction 1,389,574 655,000 Total $ 9,534,984 $ 8,895,926 4) Loans Held for Sale The Company has elected the fair value option for loans held for sale. Changes in the fair value of the loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. There 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. 25 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 June 30 2020 As of December 31 2019 Aggregate fair value $ 356,949,958 $ 213,457,632 Unpaid principal balance 344,480,058 206,417,122 Unrealized gain 12,469,900 7,040,510 Mortgage Fee Income Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale. Major categories of mortgage fee income for loans held for sale are as follows: Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Loan fees $ 15,226,536 $ 8,626,163 $ 22,940,750 $ 13,437,482 Interest income 2,601,605 1,690,098 4,282,063 2,904,730 Secondary gains 49,422,815 21,201,216 77,269,683 38,585,201 Change in fair value of loan commitments 5,278,099 603,797 8,553,132 1,536,324 Change in fair value of loans held for sale 2,363,713 977,799 2,742,010 1,216,586 Provision for loan loss reserve (1,524,435) (152,506) (2,137,544) (254,885) Mortgage fee income $ 73,368,333 $ 32,946,567 $ 113,650,094 $ 57,425,438 Loan Loss Reserve When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor. The following is a summary of the loan loss reserve that is included in other liabilities and accrued expenses: As of June 30 2020 As of December 31 2019 Balance, beginning of period $ 4,046,288 $ 3,604,869 Provision on current loan originations (1) 1,524,435 643,284 Charge-offs, net of recaptured amounts (784,357) (201,865) Balance, end of period $ 4,786,366 $ 4,046,288 (1) Included in mortgage fee income 26 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 4) Loans Held for Sale (Continued) The Company maintains reserves for estimated losses on current production volumes. For the six months ended June 30, 2020, $1,768,968 in reserves were added at a rate of 8.6 basis points per loan, the equivalent of $860 per $1,000,000 in loans originated. This is an increase over the six months ended June 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated. 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. 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 $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. 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 June 30, 2020, and the changes during the six months ended June 30, 2020, are presented below: Number of Class A Shares Weighted Average Exercise Price Number of Class C Shares Weighted Average Exercise Price Outstanding at January 1, 2020 1,086,053 $ 4.41 594,132 $ 5.36 Adjustment for effect of stock dividends 29,099 22,544 Granted 77,000 180,000 Exercised (78,803) - Cancelled - - Outstanding at June 30, 2020 1,113,349 $ 4.27 796,676 $ 4.87 As of June 30, 2020: Options exercisable 1,013,955 $ 4.27 561,440 $ 5.11 As of June 30, 2020: Available options for future grant 325,372 266,500 Weighted average contractual term of options outstanding at June 30, 2020 5.97 years 6.18 years Weighted average contractual term of options exercisable at June 30, 2020 5.61 years 5.32 years Aggregated intrinsic value of options outstanding at June 30, 2020 (1) $2,568,502 $1,360,855 Aggregated intrinsic value of options exercisable at June 30, 2020 (1) $2,338,090 $823,712 (1) The Company used a stock price of $6.58 as of June 30, 2020 to derive intrinsic value. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 5) Stock Compensation Plans (Continued) A summary of the status of the Company’s stock compensation plans as of June 30, 2019, and the changes during the three months ended June 30, 2019, are presented below: Number of Class A Shares Weighted Average Exercise Price Number of Class C Shares Weighted Average Exercise Price Outstanding at January 1, 2019 1,011,274 $ 4.49 577,280 $ 5.15 Granted 2,000 - Exercised (15,328) - Cancelled - - Outstanding at June 30, 2019 997,946 $ 4.50 577,280 $ 5.15 As of June 30, 2019: Options exercisable 921,895 $ 4.42 530,030 $ 5.14 As of June 30, 2019: Available options for future grant 299,351 146,425 Weighted average contractual term of options outstanding at June 30, 2019 5.65 years 3.46 years Weighted average contractual term of options exercisable at June 30, 2019 5.53 years 2.93 years Aggregated intrinsic value of options outstanding at June 30, 2019 (1) $822,875 $218,010 Aggregated intrinsic value of options exercisable at June 30, 2019 (1) $822,875 $218,010 (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. 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 6) Earnings Per Share The basic and diluted earnings per share amounts were calculated as follows: Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Numerator: Net earnings $ 20,557,047 $ 3,480,054 $ 21,981,496 $ 5,410,372 Denominator: Basic weighted-average shares outstanding 18,764,831 18,576,031 18,703,390 18,567,907 Effect of dilutive securities: Employee stock options 418,660 234,245 332,859 239,669 Diluted weighted-average shares outstanding 19,183,491 18,810,276 19,036,249 18,807,576 Basic net earnings per share $1.10 $0.19 $1.18 $0.29 Diluted net earnings per share $1.07 $0.19 $1.15 $0.29 Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the six months June 30, 2020 and 2019, there were -0- and 857,227 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive. 7) Business Segment Information Description of Products and Services by Segment The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale. Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2019. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation. Factors Management Used to Identify the Enterprise’s Reportable Segments The Company’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported. 30 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 7) Business Segment Information (Continued) Life Insurance Cemetery/ Mortuary Mortgage Intercompany Eliminations Consolidated For the Three Months Ended June 30, 2020 Revenues from external customers $ 37,788,593 $ 5,306,305 $ 75,566,844 $ - $ 118,661,742 Intersegment revenues 1,816,185 89,799 190,701 (2,096,685) - Segment profit before income taxes 3,670,369 1,548,452 21,974,935 - 27,193,756 For the Three Months Ended June 30, 2019 Revenues from external customers $ 28,607,056 $ 4,543,007 $ 35,295,119 $ - $ 68,445,182 Intersegment revenues 1,080,347 113,622 124,921 (1,318,890) - Segment profit before income taxes 1,219,001 1,023,782 2,381,060 - 4,623,843 For the Six Months Ended June 30, 2020 Revenues from external customers $ 70,994,355 $ 9,320,001 $ 117,956,335 $ - $ 198,270,691 Intersegment revenues 2,724,353 193,313 391,033 (3,308,699) - Segment profit before income taxes 601,202 1,653,253 26,413,535 - 28,667,990 Identifiable Assets 1,206,815,231 75,048,428 346,286,603 (110,608,108) 1,517,542,154 Goodwill 2,765,570 754,018 - - 3,519,588 Total Assets 1,209,580,801 75,802,446 346,286,603 (110,608,108) 1,521,061,742 For the Six Months Ended June 30, 2019 Revenues from external customers $ 59,112,424 $ 8,902,292 $ 61,924,301 $ - $ 129,939,017 Intersegment revenues 1,975,719 230,273 251,279 (2,457,271) - Segment profit before income taxes 3,304,342 2,208,647 1,543,013 - 7,056,002 Identifiable Assets 929,442,236 87,450,987 202,723,000 (116,673,063) 1,102,943,160 Goodwill 2,765,570 754,018 - - 3,519,588 Total Assets 932,207,806 88,205,005 202,723,000 (116,673,063) 1,106,462,748 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 8) Fair Value of Financial Instruments GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy: Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access. Level 2: Financial assets and financial liabilities whose values are based on the following: a) Quoted prices for similar assets or liabilities in active markets; b) Quoted prices for identical or similar assets or liabilities in non-active markets; or c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability. Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities. The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value. The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments. The items shown under Level 1 and Level 2 are valued as follows: Fixed Maturity Securities Available for Sale : The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. Equity Securities : The fair values for equity securities are based on quoted market prices. Loans Held for Sale : The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. Restricted Assets : A portion of these assets include mutual funds and equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. Cemetery Endowment Care Trust Investments : A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. Call and Put Option Derivatives : The fair values for call and put options are based on quoted market prices. 32 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The items shown under Level 3 are valued as follows: Loan Commitments and Forward Sale Commitments : The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period of time, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings. The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments. Impaired Mortgage Loans Held for Investment : The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction. Real Estate Held for Investment : The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims. It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area comparables and property condition when determining fair value. In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values. Mortgage Servicing Rights : The Company initially recognizes Mortgage Servicing Rights (“MSRs”) at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction. 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 June 30, 2020. Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a recurring basis Fixed maturity securities available for sale $ 348,628,792 $ - $ 346,407,400 $ 2,221,392 Equity securities 11,791,511 11,791,511 - - Loans held for sale 356,949,958 - - 356,949,958 Restricted assets (1) 1,041,792 - 1,041,792 - Restricted assets (2) 1,987,801 1,987,801 - - Cemetery perpetual care trust investments (1) 1,003,687 - 1,003,687 - Cemetery perpetual care trust investments (2) 1,668,029 1,668,029 - - Derivatives - loan commitments (3) 12,702,945 - - 12,702,945 Total assets accounted for at fair value on a recurring basis $ 735,774,515 $ 15,447,341 $ 348,452,879 $ 371,874,295 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) $ (73,451) $ (73,451) $ - $ - Derivatives - put options (4) (49,136) (49,136) - - Derivatives - loan commitments (4) (1,658,581) - - (1,658,581) Total liabilities accounted for at fair value on a recurring basis $ (1,781,168) $ (122,587) $ - $ (1,658,581) (1) Fixed maturity securities available for sale (2) Equity securities (3) Included in other assets on the consolidated balance sheets (4) Included in other liabilities and accrued expenses on the consolidated balance sheets 34 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 December 31, 2019. Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a recurring basis Fixed maturity securities available for sale $ 355,977,820 $ - $ 352,761,438 $ 3,216,382 Equity securities 7,271,165 7,271,165 - - Loans held for sale 213,457,632 - - 213,457,632 Restricted assets (1) 1,008,867 - 1,008,867 - Restricted assets (2) 1,976,480 1,976,480 - - Cemetery perpetual care trust investments (1) 975,673 - 975,673 - Cemetery perpetual care trust investments (2) 1,605,451 1,605,451 - - Derivatives - loan commitments (3) 2,722,580 - - 2,722,580 Total assets accounted for at fair value on a recurring basis $ 584,995,668 $ 10,853,096 $ 354,745,978 $ 219,396,594 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) $ (62,265) $ (62,265) $ - $ - Derivatives - put options (4) (22,282) (22,282) - - Derivatives - loan commitments (4) (231,347) - - (231,347) Total liabilities accounted for at fair value on a recurring basis $ (315,894) $ (84,547) $ - $ (231,347) (1) Fixed maturity securities available for sale (2) Mutual funds and equity securities (3) Included in other assets on the condensed consolidated balance sheets (4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets 35 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: Significant Range of Inputs Fair Value at Valuation Unobservable Minimum Maximum Weighted 6/30/2020 Technique Input(s) Value Value Average Loans held for sale $ 356,949,958 Market approach Investor contract pricing as a percentage of unpaid principal balance 99.0% 109.0% 104.0% Derivatives - loan commitments (net) 11,044,365 Market approach Fall-out factor 1.0% 92.0% 80.0% Initial-Value N/A N/A N/A Servicing 0 bps 190 bps 58 bps Fixed maturity securities available for sale 2,221,392 Broker quotes Pricing quotes $ 91.49 $ 119.33 $ 113.29 For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows: Significant Range of Inputs Fair Value at Valuation Unobservable Minimum Maximum Weighted 12/31/2019 Technique Input(s) Value Value Average Loans held for sale $ 213,457,632 Market approach Investor contract pricing as a percentage of unpaid principal balance 98.0% 109.0% 103.0% Derivatives - loan commitments (net) 2,491,233 Market approach Fall-out factor 1.0% 92.0% 81.0% Initial-Value N/A N/A N/A Servicing 0 bps 318 bps 79 bps Fixed maturity securities available for sale 3,216,382 Broker quotes Pricing quotes $ 95.02 $ 115.80 $ 107.98 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 for Sale Balance - December 31, 2019 $ 2,491,233 $ 213,457,632 $ 3,216,382 Originations and purchases - 2,105,048,030 - Sales, maturities and paydowns - (2,017,976,791) (1,020,800) Transfer to mortgage loans held for investment - (8,933,676) - Total gains (losses): Included in earnings 8,553,132 (1) 65,354,763 (1) 1,672 (2) Included in other comprehensive income - - 24,138 Balance - June 30, 2020 $ 11,044,365 $ 356,949,958 $ 2,221,392 (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 Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - December 31, 2018 $ 1,591,816 $ 136,210,853 $ - Originations/purchases - 2,606,839,175 - Sales - (2,580,875,055) - Transfer to mortgage loans held for investment - (31,881,851) - Transfer from fixed maturity securities held to maturity - - 3,216,382 Total gains (losses): Included in earnings (1) 899,417 83,164,510 - Balance - December 31, 2019 $ 2,491,233 $ 213,457,632 $ 3,216,382 (1) As a component of mortgage fee income on the condensed consolidated statements of earnings 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 nonrecurring basis by their classification in the condensed consolidated balance sheet at June 30, 2020. Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a nonrecurring basis Impaired mortgage loans held for investment $ 1,995,521 $ - $ - $ 1,995,521 Total assets accounted for at fair value on a nonrecurring basis $ 1,995,521 $ - $ - $ 1,995,521 The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at December 31, 2019. Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a nonrecurring basis Impaired mortgage loans held for investment $ 1,302,025 $ - $ - $ 1,302,025 Impaired real estate held for investment 8,375,884 - - 8,375,884 Total assets accounted for at fair value on a nonrecurring basis $ 9,677,909 $ - $ - $ 9,677,909 38 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 8) Fair Value of Financial Instruments (Continued) Fair Value of Financial Instruments Carried at Other Than Fair Value ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30, 2020 and December 31, 2019. The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of June 30, 2020: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential $ 105,466,412 $ - $ - $ 110,991,353 $ 110,991,353 Residential construction 106,386,812 - - 106,386,812 106,386,812 Commercial 48,564,780 - - 48,187,935 48,187,935 Mortgage loans held for investment, net $ 260,418,004 $ - $ - $ 265,566,100 $ 265,566,100 Policy loans 14,450,587 - - 14,450,587 14,450,587 Insurance assignments, net (1) 41,742,986 - - 41,742,986 41,742,986 Restricted assets (2) 3,422,731 - - 3,422,731 3,422,731 Cemetery perpetual care trust investments (2) 524,000 - - 524,000 524,000 Mortgage servicing rights, net 21,695,123 - - 22,921,824 22,921,824 Liabilities Bank and other loans payable $ (347,139,008) $ - $ - $ (347,139,008) $ (347,139,008) Policyholder account balances (3) (44,656,276) - - (41,469,707) (41,469,707) Future policy benefits - annuities (3) (111,726,731) - - (115,708,414) (115,708,414) (1) Included in other investments and policy loans on the condensed consolidated balance sheets (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets 39 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: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential $ 110,253,678 $ - $ - $ 115,320,638 $ 115,320,638 Residential construction 88,651,967 - - 88,651,967 88,651,967 Commercial 37,788,901 - - 39,289,462 39,289,462 Mortgage loans held for investment, net $ 236,694,546 $ - $ - $ 243,262,067 $ 243,262,067 Policy loans 14,762,805 - - 14,762,805 14,762,805 Insurance assignments, net (1) 39,614,939 - - 39,614,939 39,614,939 Restricted assets (2) 2,275,756 - - 2,289,679 2,289,679 Cemetery perpetual care trust investments (2) 524,000 - - 536,553 536,553 Mortgage servicing rights, net 17,155,529 - - 22,784,571 22,784,571 Liabilities Bank and other loans payable $ (217,572,612) $ - $ - $ (217,572,612) $ (217,572,612) Policyholder account balances (3) (45,154,180) - - (41,828,469) (41,828,469) Future policy benefits - annuities (3) (113,579,830) - - (117,304,614) (117,304,614) (1) Included in other investments and policy loans on the condensed consolidated balance sheets (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows: Mortgage Loans Held for Investment : The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment. Residential – The estimated fair value is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently. Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value. Commercial – The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current interest rates for commercial mortgages. Policy Loans : The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies. Insurance Assignments, Net : These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values. 40 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 : 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. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 9) 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. 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. Other allowances are based upon receivables individually evaluated for impairment. 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 10) Derivative Instruments Mortgage Banking Derivatives Loan Commitments The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded. Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by 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. 41 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 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 loans. Forward Sale Commitments The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets. Call and Put Options 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 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. 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 June 30, 2020 and December 31, 2019. Fair Values and Notional Values of Derivative Instruments June 30, 2020 December 31, 2019 Balance Sheet Location Notional Amount Asset Fair Value Liability Fair Value Notional Amount Asset Fair Value Liability Fair Value Derivatives not designated as hedging instruments: Loan commitments Other assets and Other liabilities $839,341,522 $12,702,945 $ 1,658,581 $224,202,514 $2,722,580 $231,347 Call options Other liabilities 3,126,800 - 73,451 1,813,500 - 62,265 Put options Other liabilities 2,755,200 - 49,136 1,573,100 - 22,282 Total $845,223,522 $12,702,945 $ 1,781,168 $227,589,114 $2,722,580 $315,894 42 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 10) Derivative Instruments (Continued) The following table shows the gains and losses on derivatives for the periods presented. Net Amount Gain (Loss) Net Amount Gain (Loss) Three Months Ended June 30 Six Months Ended June 30 Derivative Classification 2020 2019 2020 2019 Loan commitments Mortgage fee income $ 5,278,099 $ 603,797 $ 8,553,132 $ 1,536,324 Call and put options Gains on investments and other assets $ 828,205 $ 114,939 $ 90,346 $ 404,967 11) Reinsurance, Commitments and Contingencies Reinsurance 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 has also assumed insurance from other companies. Mortgage Loan Loss Settlements 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 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 Lehman Brothers Holdings Litigation – Delaware and New York 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”). A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014. 43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 11) Reinsurance, Commitments and Contingencies (Continued) 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. 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. 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. 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. 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. 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. 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. District Court Judge, Case No. 18-cv-08986 (VEC). Case No. 18-mc-00392 (VEC) was also before Judge Caproni. 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 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. 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 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. 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. In view of SecurityNational Mortgage’s motion dated January 15, 2020, Lehman Holdings requested that the mediation be continued. 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 11) Reinsurance, Commitments and Contingencies (Continued) On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing. 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. 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 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 The Company, through its subsidiary SecurityNational Mortgage, has a $150,000,000 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 24, 2021. 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. 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. 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 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. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months. 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 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 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 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. 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 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. 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. 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. 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 12) Mortgage Servicing Rights The Company initially records these MSRs at fair value as discussed in Note 8. After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance. Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. The following is a summary of the MSR activity for the periods presented. As of June 30 2020 As of December 31 2019 Amortized cost: Balance before valuation allowance at beginning of year $ 17,155,529 $ 20,016,822 MSR additions resulting from loan sales 9,488,179 4,194,502 Amortization (1) (4,948,585) (7,055,795) Application of valuation allowance to write down MSRs with other than temporary impairment - - Balance before valuation allowance at end of period $ 21,695,123 $ 17,155,529 Valuation allowance for impairment of MSRs: Balance at beginning of year $ - $ - Additions - - Application of valuation allowance to write down MSRs with other than temporary impairment - - Balance at end of period $ - $ - Mortgage servicing rights, net $ 21,695,123 $ 17,155,529 Estimated fair value of MSRs at end of period $ 22,921,824 $ 22,784,571 (1) Included in other expenses on the condensed consolidated statements of earnings 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 12) Mortgage Servicing Rights (Continued) The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost: Estimated MSR Amortization 2020 3,370,190 2021 2,535,104 2022 1,999,989 2023 1,608,753 2024 1,317,529 Thereafter 10,863,558 Total $ 21,695,123 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 June 30 Six Months Ended June 30 2020 2019 2020 2019 Contractual servicing fees $ 1,929,565 $ 1,858,599 $ 3,714,509 $ 3,668,013 Late fees 71,704 87,291 169,512 178,890 Total $ 2,001,269 $ 1,945,890 $ 3,884,021 $ 3,846,903 The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented: As of June 30 2020 As of December 31 2019 Servicing UPB $ 3,430,482,161 $ 2,804,139,415 The following key assumptions were used in determining MSR value: Prepayment Speeds Average Life (Years) Discount Rate June 30, 2020 18.90 4.57 9.51 December 31, 2019 15.30 5.27 9.51 13) Income Taxes The Company’s overall effective tax rate for the three months ended June 30, 2020 and 2019 was 24.4% and 24.7%, respectively, which resulted in a provision for income taxes of $6,636,709 and $1,143,789, respectively. The Company’s overall effective tax rate for the six months ended June 30, 2020 and 2019 was 23.3% and 23.3%, respectively, which resulted in a provision for income taxes of $6,686,494 and $1,645,630, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes. The effective tax rate in the current period decreased when compared to the prior year period partly due to the Company’s provision for state income taxes. 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 14) Revenues from Contracts with Customers The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers. Information about Performance Obligations and Contract Balances The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled. The Company’s three types of future obligations are as follows: Pre - need Merchandise and Service Revenue : All pre-need merchandise and service revenue is deferred and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized. At-need Specialty Merchandise Revenue : At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received. Deferred Pre-need Land Revenue : Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust. Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred. The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows: Contract Balances Receivables (1) Contract Asset Contract Liability Opening (1/1/2020) $ 2,778,879 $ - $ 12,607,978 Closing (6/30/2020) 3,575,456 - 12,930,466 Increase/(decrease) 796,577 - 322,488 Contract Balances Receivables (1) Contract Asset Contract Liability Opening (1/1/2019) $ 2,816,225 $ - $ 12,508,625 Closing (12/31/2019) 2,778,879 - 12,607,978 Increase/(decrease) (37,346) - 99,353 (1) Included in Receivables, net on the condensed consolidated balance sheets 50 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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 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. Disaggregation of Revenue The following table disaggregates revenue for the Company’s cemetery and mortuary contracts for the periods presented: Three Months Ended June 30 Six Months Ended June 30 2020 2019 2020 2019 Major goods/service lines At-need $ 3,257,705 $ 3,025,783 $ 6,642,896 $ 5,994,850 Pre-need 1,443,073 974,947 2,515,973 1,684,508 $ 4,700,778 $ 4,000,730 $ 9,158,869 $ 7,679,358 Timing of Revenue Recognition Goods transferred at a point in time $ 3,088,616 $ 2,754,230 $ 6,082,320 $ 5,144,840 Services transferred at a point in time 1,612,162 1,246,500 3,076,549 2,534,518 $ 4,700,778 $ 4,000,730 $ 9,158,869 $ 7,679,358 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 June 30 Six Months Ended June 30 2020 2019 2020 2019 Net mortuary and cemetery sales $ 4,700,778 $ 4,000,730 $ 9,158,869 $ 7,679,358 Gains (losses) on investments and other assets 482,383 354,500 (177,740) 853,097 Net investment income 71,647 162,562 276,493 275,371 Other revenues 51,497 25,215 62,379 94,466 Revenues from external customers 5,306,305 4,543,007 9,320,001 8,902,292 51 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 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. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City. 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: Cash $ 53,859 Property and equipment 2,475,526 Receivables 13,620 Goodwill 754,018 Other 21,800 Total assets acquired 3,318,823 Bank and other loans payable (3,176) Total liabilities assumed (3,176) Fair value of net assets acquired/consideration paid $ 3,315,647 52 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2020 (Unaudited) 15) Acquisitions (Continued) 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 $ 9,124,459 Real estate held for investment 2,850,000 Mortgage loans held for investment 200,000 Receivables 131,258 Total assets acquired 12,305,717 Future policy benefits and unpaid claims (165,404,970) Other liabilities and accrued expenses (5,259,341) Total liabilities assumed (170,664,311) Cash received for reinsurance assumed $ 158,358,594 53 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 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 $ 22,766,520 Fixed maturity securities, held to maturity 16,436 Mortgage loans held for investment 8,011,660 Real estate held for investment 2,708,557 Other investments 446,655 Accrued investment income 183,527 Total investments 34,133,355 Cash and cash equivalents 6,900,654 Receivables, net 5,407,736 (1) Receivables from reinsurers 168,105,064 (1) Property and equipment, net 1,498,245 Value of business acquired 4,962,831 Deferred taxes 167,344 Other 712,323 Total assets acquired 221,887,552 Future policy benefits and unpaid claims (189,071,407) Accounts payable (283,304) Other liabilities and accrued expenses (7,870,944) Income taxes (881,957) Total liabilities assumed (198,107,612) Fair value of net assets acquired/consideration paid $ 23,779,940 Fair value of net assets acquired/consideration paid, net of cash acquired $ 16,879,286 (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. 54