SECURITY NATIONAL FINANCIAL CORP 10-Q

Item 1. Financial Statements September 30 2021 (Unaudited) December 31 2020 Assets Investments: Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $ 238,809,528 and $ 265,150,484 for 2021 and 2020) $ 264,844,942 $ 294,656,679 Equity securities at estimated fair value (cost of $ 8,198,282 and $ 9,698,490 for 2021 and 2020) 10,729,744 11,324,239 Mortgage loans held for investment (net of allowances for loan losses of $ 1,753,853 and $ 2,005,127 for 2021 and 2020) 307,390,481 249,343,936 Real estate held for investment (net of accumulated depreciation of $ 18,908,623 and $ 13,800,973 for 2021 and 2020) 189,610,360 131,684,453 Real estate held for sale 6,081,155 7,878,807 Other investments and policy loans (net of allowances for doubtful accounts of $ 1,795,037 and $ 1,645,475 for 2021 and 2020) 73,615,628 73,696,661 Accrued investment income 5,386,756 5,360,523 Total investments 857,659,066 773,945,298 Cash and cash equivalents 111,498,676 106,219,429 Loans held for sale at estimated fair value 312,655,843 422,772,418 Receivables (net of allowances for doubtful accounts of $ 1,664,747 and $ 1,685,382 for 2021 and 2020) 17,158,481 10,899,207 Restricted assets (including $ 4,596,169 and $ 3,989,415 for 2021 and 2020 at estimated fair value) 17,448,402 16,150,036 Cemetery perpetual care trust investments (including $ 3,173,658 and $ 2,810,070 for 2021 and 2020 at estimated fair value) 6,762,211 6,413,167 Receivable from reinsurers 15,938,343 15,569,156 Cemetery land and improvements 8,432,437 8,761,436 Deferred policy and pre-need contract acquisition costs 104,251,952 100,075,276 Mortgage servicing rights, net 50,360,805 35,210,516 Property and equipment, net 15,200,052 12,473,345 Value of business acquired 9,034,414 8,955,249 Goodwill 3,519,588 3,519,588 Other 28,405,710 27,976,357 Total Assets $ 1,558,325,980 $ 1,548,940,478 See accompanying notes to condensed consolidated financial statements (unaudited). 3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) September 30 2021 (Unaudited) December 31 2020 Liabilities and Stockholders’ Equity Liabilities Future policy benefits and unpaid claims $ 860,871,187 $ 844,790,087 Unearned premium reserve 3,126,372 3,328,623 Bank and other loans payable 263,186,923 297,824,368 Deferred pre-need cemetery and mortuary contract revenues 14,184,328 13,080,179 Cemetery perpetual care obligation 4,248,379 4,087,704 Accounts payable 13,921,187 8,932,683 Other liabilities and accrued expenses 69,236,255 87,650,981 Income taxes 32,835,181 25,258,800 Total liabilities 1,261,609,812 1,284,953,425 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 17,594,048 shares in 2021 and 16,595,783 shares in 2020 35,188,096 33,191,566 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 2,761,909 shares in 2021 and 2,679,603 shares in 2020 5,523,818 5,359,206 Common Stock, Value Additional paid-in capital 57,462,981 50,287,253 Accumulated other comprehensive income, net of taxes 20,473,292 23,243,133 Retained earnings 179,195,423 153,739,167 Treasury stock at cost – 44,145 Class A shares and 95,356 Class C shares in 2021; and 227,852 Class A shares and 10,985 Class C shares in 2020 ( 1,127,442 ) ( 1,833,272 ) Total stockholders’ equity 296,716,168 263,987,053 Total Liabilities and Stockholders’ Equity $ 1,558,325,980 $ 1,548,940,478 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 September 30 Nine Months Ended September 30 2021 2020 2021 2020 Revenues: Mortgage fee income $ 66,257,851 $ 98,559,624 $ 204,414,276 $ 212,209,718 Insurance premiums and other considerations 26,445,618 23,766,576 74,754,856 68,982,561 Net investment income 15,092,962 14,709,142 43,564,167 41,072,386 Net mortuary and cemetery sales 5,967,675 5,371,715 18,228,199 14,530,584 Gains (losses) on investments and other assets 976,900 800,507 4,414,217 ( 173,461 ) Other 4,768,125 2,997,001 13,542,337 7,853,468 Total revenues 119,509,131 146,204,565 358,918,052 344,475,256 Benefits and expenses: Death benefits 15,474,512 16,026,897 48,630,585 43,021,247 Surrenders and other policy benefits 977,190 1,056,318 2,725,791 2,964,984 Increase in future policy benefits 7,485,565 4,892,972 19,140,939 18,534,848 Amortization of deferred policy and pre- need acquisition costs and value of business acquired 4,709,979 4,239,935 11,940,905 10,781,658 Selling, general and administrative expenses: Commissions 28,769,191 37,761,992 91,392,436 81,555,823 Personnel 25,122,254 21,700,446 73,822,449 60,959,099 Advertising 1,691,236 1,607,138 5,089,301 3,842,296 Rent and rent related 1,853,960 1,797,161 5,594,206 5,074,755 Depreciation on property and equipment 412,152 516,243 1,387,275 1,550,526 Costs related to funding mortgage loans 2,379,085 3,057,276 8,055,810 7,392,373 Other 13,775,139 11,701,986 37,754,717 33,080,916 Interest expense 1,807,461 2,363,169 5,327,072 6,063,218 Cost of goods and services sold-mortuaries and cemeteries 908,014 899,101 2,880,766 2,401,592 Total benefits and expenses 105,365,738 107,620,634 313,742,252 277,223,335 Earnings before income taxes 14,143,393 38,583,931 45,175,800 67,251,921 Income tax expense ( 3,352,663 ) ( 9,279,162 ) ( 10,998,876 ) ( 15,965,656 ) Net earnings $ 10,790,730 $ 29,304,769 $ 34,176,924 $ 51,286,265 Net earnings per Class A Equivalent common share (1) $ 0.54 $ 1.48 $ 1.70 $ 2.60 Net earnings per Class A Equivalent common share-assuming dilution (1) $ 0.51 $ 1.44 $ 1.63 $ 2.55 Weighted-average Class A equivalent common shares outstanding (1) 20,160,912 19,830,879 20,117,257 19,717,877 Weighted-average Class A equivalent common shares outstanding-assuming dilution (1) 20,980,881 20,418,599 20,927,695 20,142,083 (1) Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share. See accompanying notes to condensed consolidated financial statements (unaudited). 5 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Net earnings $ 10,790,730 $ 29,304,769 $ 34,176,924 $ 51,286,265 Other comprehensive income: Unrealized gains (losses) on fixed maturity securities available for sale $ ( 1,406,615 ) 3,810,906 ( 3,477,826 ) 7,810,537 Unrealized gains (losses) on restricted assets ( 13,951 ) 23,323 ( 21,682 ) 28,309 Unrealized losses on cemetery perpetual care trust investments ( 4,669 ) ( 16,883 ) ( 10,927 ) ( 11,114 ) Foreign currency translation adjustments — 84 2,835 ( 196 ) Other comprehensive income (loss), before income tax ( 1,425,235 ) 3,817,430 ( 3,507,600 ) 7,827,536 Income tax benefit (expense) 300,029 ( 801,915 ) 737,759 ( 1,644,446 ) Other comprehensive income (loss), net of income tax ( 1,125,206 ) 3,015,515 ( 2,769,841 ) 6,183,090 Comprehensive income $ 9,665,524 $ 32,320,284 $ 31,407,083 $ 57,469,355 See accompanying notes to condensed consolidated financial statements (unaudited). 6 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Treasury Stock Total Nine Months Ended September 30, 2021 Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Treasury Stock Total January 1, 2021 $ 33,191,566 $ 5,359,206 $ 50,287,253 $ 23,243,133 $ 153,739,167 $ ( 1,833,272 ) $ 263,987,053 Net earnings — — — — 12,128,715 — 12,128,715 Other comprehensive loss — — — ( 5,388,522 ) — — ( 5,388,522 ) Stock-based compensation expense — — 39,153 — — — 39,153 Exercise of stock options 55,852 — 33,401 — — — 89,253 Sale of treasury stock — — 290,381 — — 1,632,041 1,922,422 Purchase of treasury stock — — — — — ( 910,233 ) ( 910,233 ) Stock dividends Conversion Class C to Class A 97,054 ( 97,054 ) — — — — — March 31, 2021 $ 33,344,472 $ 5,262,152 $ 50,650,188 $ 17,854,611 $ 165,867,882 $ ( 1,111,464 ) $ 271,867,841 Net earnings — — — — 11,257,479 — 11,257,479 Other comprehensive income — — — 3,743,887 — — 3,743,887 Exercise of stock options 106,044 — 7,655 — — — 113,699 Sale of treasury stock — — ( 38,048 ) — — 1,499,862 1,461,814 Purchase of treasury stock — — — — — ( 2,596,006 ) ( 2,596,006 ) Stock dividends 1,672,526 263,108 6,774,719 — ( 8,710,354 ) — ( 1 ) June 30, 2021 $ 35,123,042 $ 5,525,260 $ 57,394,514 $ 21,598,498 $ 168,415,007 $ ( 2,207,608 ) $ 285,848,713 Net earnings — — — — 10,790,730 — 10,790,730 Other comprehensive loss — — — ( 1,125,206 ) — — ( 1,125,206 ) Exercise of stock options 61,320 — 24,182 — — — 85,502 Sale of treasury stock — — ( 6,274 ) — — 1,338,621 1,332,347 Purchase of treasury stock — — 42,537 — — ( 258,455 ) ( 215,918 ) Conversion Class C to Class A 1,440 ( 1,440 ) — — — — — Stock dividends 2,294 ( 2 ) 8,022 — ( 10,314 ) — — September 30, 2021 $ 35,188,096 $ 5,523,818 $ 57,462,981 $ 20,473,292 $ 179,195,423 $ ( 1,127,442 ) $ 296,716,168 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (Continued) Nine Months Ended September 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 ) June 30, 2020 $ 33,115,108 $ 5,102,890 $ 48,917,891 $ 16,894,089 $ 120,126,524 $ ( 1,542,276 ) $ 222,614,226 Beginning balance, value $ 33,115,108 $ 5,102,890 $ 48,917,891 $ 16,894,089 $ 120,126,524 $ ( 1,542,276 ) $ 222,614,226 Net earnings — — — — 29,304,769 — 29,304,769 Other comprehensive income — — — 3,015,515 — — 3,015,515 Stock-based compensation expense — — 104,562 — — — 104,562 Sale of treasury stock — — 330,939 — — 886,452 1,217,391 Purchase of treasury stock — — — — — ( 210,506 ) ( 210,506 ) Stock dividends 742 — 1,732 — ( 2,474 ) — — Conversion Class C to Class A 4,124 ( 4,124 ) — — — — — September 30, 2020 $ 33,119,974 $ 5,098,766 $ 49,355,124 $ 19,909,604 $ 149,428,819 $ ( 866,330 ) $ 256,045,957 Ending balance, value $ 33,119,974 $ 5,098,766 $ 49,355,124 $ 19,909,604 $ 149,428,819 $ ( 866,330 ) $ 256,045,957 8 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30 2021 2020 Cash flows from operating activities: Net cash provided by (used in) operating activities $ 128,890,897 $ ( 164,589,158 ) Cash flows from investing activities: Purchases of fixed maturity securities ( 14,359,481 ) ( 56,899,073 ) Sales, calls and maturities of fixed maturity securities 40,856,383 75,523,084 Purchases of equity securities ( 1,382,227 ) ( 6,492,243 ) Sales of equity securities 3,334,697 2,011,568 Net changes in restricted assets 28,770 ( 2,650,188 ) Net changes in perpetual care trusts 1,065,459 ( 870,485 ) Mortgage loans held for investment, other investments and policy loans made ( 635,682,683 ) ( 486,189,616 ) Payments received for mortgage loans held for investment, other investments and policy loans 577,555,622 478,445,833 Purchases of property and equipment ( 4,187,580 ) ( 1,111,360 ) Sales of property and equipment 45,168 — Purchases of real estate ( 70,404,325 ) ( 27,528,643 ) Sales of real estate 22,974,490 13,052,416 Net cash used in investing activities ( 80,155,707 ) ( 12,708,707 ) Cash flows from financing activities: Investment contract receipts 8,743,867 8,656,037 Investment contract withdrawals ( 11,776,818 ) ( 12,759,734 ) Proceeds from stock options exercised 288,454 10,892 Purchases of treasury stock ( 3,722,157 ) ( 1,100,827 ) Repayment of bank loans ( 54,454,529 ) ( 251,041,466 ) Proceeds from bank loans 97,119,014 329,672,821 Net change in warehouse line borrowings for loans held for sale ( 77,374,340 ) 128,600,308 Net cash provided by (used in) financing activities ( 41,176,509 ) 201,038,031 Net change in cash, cash equivalents, restricted cash and restricted cash equivalents 7,558,681 23,740,166 Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 115,465,086 137,735,673 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 123,023,767 $ 161,475,839 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 5,464,423 $ 5,917,344 Income taxes (net of refunds) 2,684,737 4,995,073 Non Cash Operating, Investing and Financing Activities: Accrued real estate construction costs and retainage $ 8,321,415 $ 347,826 Benefit plans funded with treasury stock 4,716,583 2,683,974 Right-of-use assets obtained in exchange for operating lease liabilities 2,435,831 4,796,580 Mortgage loans held for investment foreclosed into real estate held for investment 931,079 686,124 Transfer of loans held for sale to mortgage loans held for investment 201,951 9,170,610 Right-of-use assets obtained in exchange for finance lease liabilities — 8,494 9 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued) Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below: Nine Months Ended September 30 2021 2020 Cash and cash equivalents $ 111,498,676 $ 151,686,960 Restricted assets 10,004,204 8,468,191 Cemetery perpetual care trust investments 1,520,887 1,320,688 Total cash, cash equivalents, restricted cash and restricted cash equivalents $ 123,023,767 $ 161,475,839 See accompanying notes to condensed consolidated financial statements (unaudited). 10 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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, 2020, included in the Company’s Annual Report on Form 10-K (File Number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment or sale; those used in determining the liability for future policy benefits; 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. COVID-19 . During 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19, and its variants, pose a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company is closely monitoring developments relating to the ongoing COVID-19 pandemic and assessing its impact on the Company’s business. The continued uncertainty surrounding the COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus and its variants, which include the implementation of travel bans, self-imposed quarantine periods, social distancing, and various mask and vaccine mandates. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions. Like most businesses, COVID-19 has impacted the Company. However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company. The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, including some remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business. 11 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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. 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. 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 November 2020, the FASB issued an update to ASU No. 2018-12 that made the ASU effective for the Company on January 1, 2025. The Company has engaged an industry software expert and is in the process of implementing this software and other changes to its systems. The Company anticipates that it will be ready by the effective date. 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 September 30, 2021 (Unaudited) 3) Investments The Company’s investments as of September 30, 2021 are summarized as follows: Schedule of Investments Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value September 30, 2021: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 22,284,283 $ 794,130 $ — $ 23,078,413 Obligations of states and political subdivisions 5,077,822 229,814 ( 5,226 ) 5,302,410 Corporate securities including public utilities 174,862,169 24,331,635 ( 291,388 ) 198,902,416 Mortgage-backed securities 36,316,313 1,148,676 ( 185,752 ) 37,279,237 Redeemable preferred stock 268,941 13,525 — 282,466 Total fixed maturity securities available for sale $ 238,809,528 $ 26,517,780 $ ( 482,366 ) $ 264,844,942 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 8,198,282 $ 2,885,061 $ ( 353,599 ) $ 10,729,744 Total equity securities at estimated fair value $ 8,198,282 $ 2,885,061 $ ( 353,599 ) $ 10,729,744 Mortgage loans held for investment at amortized cost: Residential $ 89,544,581 Residential construction 169,030,287 Commercial 52,087,010 Less: Unamortized deferred loan fees, net ( 1,013,925 ) Less: Allowance for loan losses ( 1,753,853 ) Less: Net discounts ( 503,619 ) Total mortgage loans held for investment $ 307,390,481 Real estate held for investment - net of accumulated depreciation: Residential $ 46,606,702 Commercial 143,003,658 Total real estate held for investment $ 189,610,360 Real estate held for sale: Residential $ 1,190,602 Commercial 4,890,553 Total real estate held for sale $ 6,081,155 Other investments and policy loans at amortized cost: Policy loans $ 13,699,414 Insurance assignments 53,417,350 Federal Home Loan Bank stock (1) 3,105,100 Other investments 5,188,801 Less: Allowance for doubtful accounts ( 1,795,037 ) Total policy loans and other investments $ 73,615,628 Accrued investment income $ 5,386,756 Total investments $ 857,659,066 (1) Includes $905,700 of Membership stock and $2,199,440 of Activity stock due to short-term borrowings. 13 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) The Company’s investments as of December 31, 2020 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2020: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 42,381,805 $ 1,358,562 $ — $ 43,740,367 Obligations of states and political subdivisions 5,383,762 312,214 ( 1,261 ) 5,694,715 Corporate securities including public utilities 186,067,912 27,216,496 ( 681,478 ) 212,602,930 Mortgage-backed securities 31,047,791 1,565,377 ( 267,106 ) 32,346,062 Redeemable preferred stock 269,214 3,391 — 272,605 Total fixed maturity securities available for sale $ 265,150,484 $ 30,456,040 $ ( 949,845 ) $ 294,656,679 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 9,698,490 $ 2,376,156 $ ( 750,407 ) $ 11,324,239 Total equity securities at estimated fair value $ 9,698,490 $ 2,376,156 $ ( 750,407 ) $ 11,324,239 Mortgage loans held for investment at amortized cost: Residential $ 95,822,448 Residential construction 111,111,777 Commercial 46,836,866 Less: Unamortized deferred loan fees, net ( 1,161,132 ) Less: Allowance for loan losses ( 2,005,127 ) Less: Net discounts ( 1,260,896 ) Total mortgage loans held for investment $ 249,343,936 Real estate held for investment - net of accumulated depreciation: Residential $ 24,843,743 Commercial 106,840,710 Total real estate held for investment $ 131,684,453 Real estate held for sale: Residential $ 3,478,254 Commercial 4,400,553 Total real estate held for sale $ 7,878,807 Other investments and policy loans at amortized cost: Policy loans $ 14,171,589 Insurance assignments 53,231,131 Federal Home Loan Bank stock (1) 2,506,600 Other investments 5,432,816 Less: Allowance for doubtful accounts ( 1,645,475 ) Total policy loans and other investments $ 73,696,661 Accrued investment income $ 5,360,523 Total investments $ 773,945,298 (1) Includes $866,900 of Membership stock and $1,639,700 of Activity stock due to short-term borrowings. 14 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 September 30, 2021 and December 31, 2020. 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: Schedule of Unrealized Loss on Investments Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Fair Value Total Unrealized Loss Fair Value At September 30, 2021 Obligations of States and Political Subdivisions $ 5,226 $ 756,793 $ — $ — $ 5,226 $ 756,793 Corporate Securities 62,966 3,633,271 228,422 4,226,222 291,388 7,859,493 Mortgage and other asset-backed securities 67,554 7,858,646 118,198 1,759,305 185,752 9,617,951 Total unrealized losses $ 135,746 $ 12,248,710 $ 346,620 $ 5,985,527 $ 482,366 $ 18,234,237 At December 31, 2020 Obligations of States and Political Subdivisions $ 1,261 $ 206,812 $ — $ — $ 1,261 $ 206,812 Corporate Securities 242,596 9,919,298 438,882 2,593,026 681,478 12,512,324 Mortgage and other asset-backed securities 266,522 3,455,574 584 51,961 267,106 3,507,535 Total unrealized losses $ 510,379 $ 13,581,684 $ 439,466 $ 2,644,987 $ 949,845 $ 16,226,671 There were 51 securities with fair value of 97.4 % of amortized cost at September 30, 2021. There were 63 securities with fair value of 94.7 % of amortized cost at December 31, 2020. No additional credit losses have been recognized for the three and nine months ended September 30, 2021 and 2020. 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. Securities with ratings of 3 to 5 are considered non-investment grade and 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. 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 September 30, 2021 (Unaudited) 3) Investments (Continued) The following table presents a rollforward of the Company’s cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale for the nine months ended September 30: Schedule of Earnings on Fixed Maturity Securities 2021 2020 Balance of credit-related OTTI at January 1 $ 370,975 $ — Additions for credit impairments recognized on: Securities not previously impaired — — Securities previously impaired — — Reductions for credit impairments previously recognized on: Securities that matured or were sold during the period (realized) — — Securities due to an increase in expected cash flows — — Balance of credit-related OTTI at September 30 $ 370,975 $ — The amortized cost and estimated fair value of fixed maturity securities available for sale at September 30, 2021, 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. Schedule of Investments Classified by Contractual Maturity Date Amortized Cost Estimated Fair Value Due in 1 year $ 469,744 $ 474,140 Due in 2-5 years 62,693,405 66,205,403 Due in 5-10 years 71,364,711 79,246,211 Due in more than 10 years 67,696,414 81,357,485 Mortgage-backed securities 36,316,313 37,279,237 Redeemable preferred stock 268,941 282,466 Total $ 238,809,528 $ 264,844,942 The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company has pledged a total of $ 29,552,638 , par value, of United States Treasury and various Ginnie Mae fixed maturity securities with the FHLB at September 30, 2021. These securities are used as collateral on any cash borrowings from the FHLB. As of September 30, 2021, the Company owed $ 14,443,758 to the FHLB and its estimated remaining maximum borrowing capacity was $ 13,787,339 . 16 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) 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: Schedule of Gain (Loss) on Investments Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Fixed maturity securities: Gross realized gains $ 244,275 $ 50,171 $ 517,934 $ 201,130 Gross realized losses ( 16,812 ) ( 39,130 ) ( 31,698 ) ( 51,219 ) Equity securities: Gains (losses) on securities sold 119,614 95,331 372,194 ( 12,141 ) Unrealized gains and (losses) on securities held at the end of the period ( 122,505 ) 511,168 1,319,919 ( 512,629 ) Other assets: Gross realized gains 855,282 1,480,053 2,702,084 1,985,817 Gross realized losses ( 102,954 ) ( 1,297,086 ) ( 466,216 ) ( 1,784,419 ) Total $ 976,900 $ 800,507 $ 4,414,217 $ ( 173,461 ) 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. Information regarding sales of fixed maturity securities available for sale is summarized as follows: Schedule of Major Categories of Net Investment Income Three Months Ended September 30 Nine Months Ended Nine 30 2021 2020 2021 2020 Proceeds from sales $ 843,151 $ 214,200 $ 2,826,082 $ 2,967,531 Gross realized gains 13,878 16,302 223,010 149,641 Gross realized losses ( 3,249 ) ( 906 ) ( 3,249 ) ( 1,043 ) Major categories of net investment income are as follows: Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Fixed maturity securities $ 2,667,848 $ 3,191,064 $ 8,189,971 $ 9,258,850 Equity securities 111,213 126,369 345,482 329,534 Mortgage loans held for investment 7,040,773 6,918,081 20,027,656 18,154,123 Real estate 3,307,980 2,998,806 9,353,459 8,940,072 Policy loans 229,857 264,422 694,345 755,914 Insurance assignments 4,781,079 4,561,574 14,298,126 13,244,176 Other investments 35,118 — 88,124 25,421 Cash and cash equivalents 81,186 65,460 154,810 385,848 Gross investment income 18,255,054 18,125,776 53,151,973 51,093,938 Investment expenses ( 3,162,092 ) ( 3,416,634 ) ( 9,587,806 ) ( 10,021,552 ) Net investment income $ 15,092,962 $ 14,709,142 $ 43,564,167 $ 41,072,386 Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $ 778,892 and $ 129,347 for the three months ended September 30, 2021 and 2020, respectively, and $ 1,130,771 and $ 380,079 for the nine months ended September 30, 2021 and 2020, 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. 17 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) Securities on deposit with regulatory authorities as required by law amounted to $ 10,168,666 at September 30, 2021 and $ 9,684,409 at December 31, 2020. 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 September 30, 2021, other than investments issued or guaranteed by the United States Government. Real Estate Held for Investment and Held for Sale The Company strategically deploys 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. 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 12 commercial properties in 5 states. These properties include office buildings, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center 53”) 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 loans was $ 124,940,289 and $ 71,517,902 as of September 30, 2021 and December 31, 2020, respectively. The associated bank loan carrying values totaled $ 75,989,280 and $ 46,153,283 as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021 and 2020, the Company recorded impairment losses on commercial real estate held for sale of $- 0 - and $ 800,000 , respectively. During the nine months ended September 30, 2021 and 2020, the Company recorded impairment losses on commercial real estate held for sale of $ 28,378 and $ 846,980 , respectively. These impairment losses relate to an office building and a funeral home 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. 18 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) The following is a summary of the Company’s commercial real estate held for investment for the periods presented: Schedule of Commercial Real Estate Investment Net Ending Balance Total Square Footage September 30 2021 December 31 2020 September 30 2021 December 31 2020 Utah (1) $ 137,296,733 $ 100,927,528 369,899 379,066 Louisiana 2,438,053 2,998,684 31,778 84,841 Mississippi 2,879,727 2,914,498 19,694 21,521 California 389,145 — 2,872 — $ 143,003,658 $ 106,840,710 424,243 485,428 (1) Includes Center53 phase 1 completed and phase 2, which is currently 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 September 30 2021 December 31 2020 September 30 2021 December 31 2020 Kansas $ 4,000,000 $ 4,000,000 222,679 222,679 Louisiana 490,000 — 53,063 — Texas (1) 249,000 249,000 — — Mississippi 151,553 151,553 — 12,300 $ 4,890,553 $ 4,400,553 275,742 234,979 (1) Improved commercial pad 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 small portfolio of residential homes primarily as a result of loan foreclosures. The Company has the option to sell them or to continue to hold them for cash flow and acceptable returns. The Company also invests in residential subdivision land 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. The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $ 1,190,602 and $ 4,327,079 as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021 and 2020 the Company did no t record any impairment losses on residential real estate held for investment or held for sale. During the nine months ended September 30, 2021 and 2020 the Company recorded impairment losses on residential real estate held for investment of $- 0 - and $ 43,394 , respectively. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings. 19 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) The following is a summary of the Company’s residential real estate held for investment for the periods presented: Schedule of Residential Real Estate Investment Net Ending Balance September 30 2021 December 31 2020 Utah (1) $ 46,520,521 $ 24,557,562 Washington (2) 286,181 286,181 $ 46,606,702 $ 24,843,743 (1) Includes subdivision land developments (2) Improved residential lots Additional information regarding the Company’s subdivision land developments in Utah is summarized as follows: September 30 2021 December 31 2020 Lots available for sale 106 36 Lots to be developed 1,254 350 Ending Balance $ 46,111,025 $ 23,777,478 The following is a summary of the Company’s residential real estate held for sale for the periods presented: Net Ending Balance September 30 2021 December 31 2020 Nevada $ 979,640 $ 979,640 Florida — 744,322 Texas 200,962 — Ohio 10,000 10,000 Utah — 1,744,292 $ 1,190,602 $ 3,478,254 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 September 30, 2021, real estate owned and occupied by the Company is summarized as follows: Schedule of Real Estate Owned and Occupied by the Company Location Business Segment Approximate Square Footage Square Footage Occupied by the Company 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) Life Insurance Operations 12,274 100 % 909 Foisy Street, Alexandria, LA (1) Life Insurance Sales 8,059 100 % 812 Sheppard Street, Minden, LA (1) Life Insurance Sales 1,560 100 % 1550 N 3rd Street, Jena, LA (1) Life Insurance Sales 1,737 100 % (1) Included in property and equipment on the condensed consolidated balance sheets 20 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) Mortgage Loans Held for Investment Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0 % to 10.5 % , maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At September 30,2021, the Company had 62 % , 13 % , 5 % , 4 % , 2 % , 2 % and 2 % of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, Nevada, Arizona, Hawaii, and Louisiana, respectively. At December 31, 2020, the Company had 57 % , 13 % , 9 % , 4 % , 3 % and 3 % 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 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 September 30, 2021 (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: Schedule of Allowance for Loan Losses as Contra-Asset Account Commercial Residential Residential Construction Total September 30, 2021 Allowance for credit losses: Beginning balance - January 1, 2021 $ 187,129 $ 1,774,796 $ 43,202 $ 2,005,127 Charge-offs — — — — Provision — ( 251,274 ) — ( 251,273 ) Ending balance - September 30, 2021 $ 187,129 $ 1,523,522 $ 43,202 $ 1,753,853 Ending balance: individually evaluated for impairment $ — $ 131,576 $ — $ 131,576 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,391,946 $ 43,202 $ 1,622,277 Mortgage loans: Ending balance – September 30, 2021 $ 52,087,010 $ 89,544,581 $ 169,030,287 $ 310,661,878 Ending balance: individually evaluated for impairment $ 575,260 $ 3,170,462 $ — $ 3,745,722 Ending balance: collectively evaluated for impairment $ 51,511,750 $ 86,374,119 $ 169,030,287 $ 306,916,156 December 31, 2020 Allowance for credit losses: Beginning balance - January 1, 2020 $ 187,129 $ 1,222,706 $ 43,202 $ 1,453,037 Charge-offs — — — — Provision — 552,090 — 552,090 Ending balance – December 31, 2020 $ 187,129 $ 1,774,796 $ 43,202 $ 2,005,127 Ending balance: individually evaluated for impairment $ — $ 219,905 $ — $ 219,905 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,554,891 $ 43,202 $ 1,785,222 Mortgage loans: Ending balance - December 31, 2020 $ 46,836,866 $ 111,111,777 $ 95,822,448 $ 253,771,091 Ending balance: individually evaluated for impairment $ 2,148,827 $ 7,932,680 $ 200,963 $ 10,282,470 Ending balance: collectively evaluated for impairment $ 44,688,039 $ 103,179,097 $ 95,621,485 $ 243,488,621 22 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 3) Investments (Continued) The following is a summary of the aging of mortgage loans held for investment for the periods presented: Schedule of Aging of Mortgage Loans Commercial Residential Residential Construction Total September 30, 2021 30-59 Days Past Due $ 5,920,000 $ 2,675,378 $ — $ 8,595,378 60-89 Days Past Due 451,337 861,848 1,799,000 3,112,185 Greater Than 90 Days (1) 473,372 2,021,311 — 2,494,683 In Process of Foreclosure (1) 101,888 1,149,151 — 1,251,039 Total Past Due 6,946,597 6,707,686 1,799,000 15,453,285 Current 45,140,413 82,836,895 167,231,287 295,208,595 Total Mortgage Loans 52,087,010 89,544,581 169,030,287 310,661,878 Allowance for Loan Losses ( 187,129 ) ( 1,523,522 ) ( 43,202 ) ( 1,753,853 ) Unamortized deferred loan fees, net ( 27,735 ) ( 695,987 ) ( 290,203 ) ( 1,013,925 ) Unamortized discounts, net ( 269,363 ) ( 234,256 ) — ( 503,619 ) Net Mortgage Loans $ 51,602,783 $ 87,090,816 $ 168,696,882 $ 307,390,481 December 31, 2020 30-59 Days Past Due $ 233,200 $ 5,866,505 $ 127,191 $ 6,226,896 60-89 Days Past Due 812,780 2,048,148 — 2,860,928 Greater Than 90 Days (1) 2,148,827 5,669,583 — 7,818,410 In Process of Foreclosure (1) — 2,263,097 200,963 2,464,060 Total Past Due 3,194,807 15,847,333 328,154 19,370,294 Current 43,642,059 79,975,115 110,783,623 234,400,797 Total Mortgage Loans 46,836,866 95,822,448 111,111,777 253,771,091 Allowance for Loan Losses ( 187,129 ) ( 1,774,796 ) ( 43,202 ) ( 2,005,127 ) Unamortized deferred loan fees, net ( 32,557 ) ( 909,864 ) ( 218,711 ) ( 1,161,132 ) Unamortized discounts, net ( 880,721 ) ( 380,175 ) — ( 1,260,896 ) Net Mortgage Loans $ 45,736,459 $ 92,757,613 $ 110,849,864 $ 249,343,936 (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 September 30, 2021 (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: Schedule of Impaired Mortgage Loans Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized September 30, 2021 With no related allowance recorded: Commercial $ 575,260 $ 575,260 $ — $ 830,696 $ — Residential 2,268,746 2,268,746 — 2,868,607 — Residential construction — — — 133,975 — With an allowance recorded: Commercial $ — $ — $ — $ — $ — Residential 901,716 901,716 131,576 892,335 — Residential construction — — — — — Total: Commercial $ 575,260 $ 575,260 $ — $ 830,696 $ — Residential 3,170,462 3,170,462 131,576 3,760,942 — Residential construction — — — 133,975 — December 31, 2020 With no related allowance recorded: Commercial $ 2,148,827 $ 2,148,827 $ — $ 1,866,819 $ — Residential 6,415,419 6,415,419 — 5,010,078 — Residential construction 200,963 200,963 — 555,278 — With an allowance recorded: Commercial $ — $ — $ — $ — $ — Residential 1,517,261 1,517,261 219,905 1,182,368 — Residential construction — — — — — Total: Commercial $ 2,148,827 $ 2,148,827 $ — $ 1,866,819 $ — Residential 7,932,680 7,932,680 219,905 6,192,446 — Residential construction 200,963 200,963 — 555,278 — 24 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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: Schedule Of Credit Risk Of Mortgage Loans Based on Performance Status Commercial Residential Residential Construction Total September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Performing $ 51,511,750 $ 44,688,039 $ 86,374,119 $ 87,889,768 $ 169,030,287 $ 110,910,814 $ 306,916,156 $ 243,488,621 Non-performing 575,260 2,148,827 3,170,462 7,932,680 — 200,963 3,745,722 10,282,470 Total $ 52,087,011 $ 46,836,866 $ 89,544,581 $ 95,822,448 $ 169,030,287 $ 111,111,777 $ 310,661,878 $ 253,771,091 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 $ 265,000 and $ 491,000 as of September 30, 2021 and December 31, 2020, respectively. The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented. Schedule of Mortgage loans on a Nonaccrual Status As of September 30 2021 As of December 31 2020 Commercial $ 575,260 $ 2,148,827 Residential 3,170,462 7,932,680 Residential construction — 200,963 Total $ 3,745,222 $ 10,282,470 25 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale. 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: Summary of Aggregate fair value - Loans Held for Sale As of September 30 2021 As of December 31 2020 Aggregate fair value $ 312,655,843 $ 422,772,418 Unpaid principal balance 304,132,748 406,407,323 Unrealized gain 8,523,095 16,365,095 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: Schedule of Mortgage Fee Income for Loans Held for Sale Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Loan fees $ 9,552,788 $ 20,630,052 $ 28,247,365 $ 40,167,476 Interest income 2,336,573 3,348,929 6,836,754 7,630,993 Secondary gains 55,440,961 70,627,864 179,900,770 151,215,666 Change in fair value of loan commitments ( 380,696 ) 3,901,086 ( 549,093 ) 12,454,218 Change in fair value of loans held for sale ( 259,307 ) 1,404,131 ( 8,319,820 ) 4,231,347 Provision for loan loss reserve ( 432,468 ) ( 1,352,438 ) ( 1,701,700 ) ( 3,489,982 ) Mortgage fee income $ 66,257,851 $ 98,559,624 $ 204,414,276 $ 212,209,718 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: Summary of Loan Loss Reserve Included in Other Liabilities and Accrued Expenses As of September 30 2021 As of December 31 2020 Balance, beginning of period $ 20,583,618 $ 4,046,288 Provision on current loan originations (1) 1,701,700 4,938,214 Additional provision for loan loss reserve — 16,506,030 Charge-offs, net of recaptured amounts ( 19,877,085 ) ( 4,906,914 ) Balance, end of period $ 2,408,233 $ 20,583,618 (1) Included in mortgage fee income The Company maintains reserves for estimated losses on current production volumes. For the nine months ended September 30, 2021, $ 1,701,700 in reserves were added. The Company currently adds reserves a rate of 3.0 basis points per loan, the equivalent of $ 300 per $ 1,000,000 in loans originated. This is a decrease over the nine months ended September 30, 2020, when reserves were added at a rate of 8.9 basis points per loan originated, the equivalent of $ 890 per $ 1,000,000 in loans originated. The Company also increased its loan loss reserve for the year ended December 31, 2020 by an additional $ 16,506,030 to account for changes in estimates specific to settlements of loan losses. See Note 11 for additional information regarding mortgage loan loss settlements and charge-offs. The unique nature of COVID-19 creates significant difficulty for forecasting potential future losses. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production. Thus, the Company believes that the final loan loss reserve as of September 30, 2021, represents its best estimate for adequate loss reserves on loans sold. 26 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 $- 0 - and $ 104,562 has been recognized for these plans for the three months ended September 30, 2021 and 2020, respectively, and $ 39,153 and $ 271,959 has been recognized for these plans for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the total unrecognized compensation expense related to the options issued was $ 0 . 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 September 30, 2021, and the changes during the nine months ended September 30, 2021, are presented below: Schedule of stock inventive plan changes Number of Class A Shares Weighted Average Exercise Price Number of Class C Shares Weighted Average Exercise Price Outstanding at January 1, 2021 1,072,863 $ 4.22 662,666 $ 4.61 Adjustment for effect of stock dividends 47,594 33,136 Granted — — Exercised ( 134,362 ) — Cancelled — — Outstanding at September 30, 2021 986,095 $ 4.31 695,802 $ 4.61 As of September 30, 2021: Options exercisable 986,095 $ 4.31 695,802 $ 4.61 As of September 30, 2021: Available options for future grant 364,851 279,825 Weighted average contractual term of options outstanding at September 30, 2021 4.94 years 6.07 years Weighted average contractual term of options exercisable at September 30, 2021 4.94 years 6.07 years Aggregated intrinsic value of options outstanding at September 30, 2021 (1) $ 3,868,045 $ 2,515,840 Aggregated intrinsic value of options exercisable at September 30, 2021 (1) $ 3,868,045 $ 2,515,840 (1) The Company used a stock price of $ 8.23 as of September 30, 2021 to derive intrinsic value. 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 5) Stock Compensation Plans (Continued) A summary of the status of the Company’s stock compensation plans as of September 30, 2020, and the changes during the nine months ended September 30, 2020, are presented below: 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 27,968 19,354 Granted 77,000 180,000 Exercised ( 78,803 ) — Cancelled — — Outstanding at September 30, 2020 1,112,218 $ 4.28 793,486 $ 4.88 As of September 30, 2020: Options exercisable 1,053,033 $ 4.39 652,805 $ 5.14 As of September 30, 2020: Available options for future grant 325,372 266,500 Weighted average contractual term of options outstanding at September 30, 2020 5.72 years 5.94 years Weighted average contractual term of options exercisable at September 30, 2020 5.51 years 5.49 years Aggregated intrinsic value of options outstanding at September 30, 2020 (1) $ 2,242,693 $ 1,115,985 Aggregated intrinsic value of options exercisable at September 30, 2020 (1) $ 2,228,291 $ 894,505 (1) The Company used a stock price of $ 6.40 as of September 30, 2020 to derive intrinsic value. The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine months September 30, 2021 and 2020 was $ 591,603 and $ 191,309 , respectively. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 6) Earnings Per Share The basic and diluted earnings per share amounts were calculated as follows: Schedule of Earnings Per Share, Basic and Diluted Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Numerator: Net earnings $ 10,790,730 $ 29,304,769 $ 34,176,924 $ 51,286,265 Denominator: Basic weighted-average shares outstanding 20,160,912 19,830,879 20,117,257 19,717,877 Effect of dilutive securities: Employee stock options 819,969 587,720 810,438 424,206 Diluted weighted-average shares outstanding 20,980,881 20,418,599 20,927,695 20,142,083 Basic net earnings per share $ 0.54 $ 1.48 $ 1.70 $ 2.60 Diluted net earnings per share $ 0.51 $ 1.44 $ 1.63 $ 2.55 Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the nine months September 30, 2021 and 2020, there were - 0 - and - 0 - 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. Basic and diluted earnings per share amounts are the same for each class of common stock. The following table summarizes the activity in shares of capital stock for the periods presented: Schedule of Activity of Stock Option Plans Class A Class C Outstanding shares at December 31, 2019 16,107,779 2,500,887 Exercise of stock options 33,774 — Stock dividends 405,210 61,720 Conversion of Class C to Class A 13,224 ( 13,224 ) Outstanding shares at September 30, 2020 16,559,987 2,549,383 Outstanding shares at December 31, 2020 16,595,783 2,679,603 Exercise of stock options 111,608 — Stock dividends 837,410 131,553 Conversion of Class C to Class A 49,247 ( 49,247 ) Outstanding shares at September 30, 2021 17,594,048 2,761,909 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 7) Business Segment Information Description of Products and Services by Segment The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale. Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2020. 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 September 30, 2021 (Unaudited) 7) Business Segment Information (Continued) Schedule of Revenues and Expenses by Reportable Segment Life Insurance Cemetery/ Mortuary Mortgage Intercompany Eliminations Consolidated For the Three Months Ended September 30, 2021 Revenues from external customers $ 42,039,638 $ 6,705,347 $ 70,764,146 $ — $ 119,509,131 Intersegment revenues 1,756,860 79,096 153,502 ( 1,989,458 ) — Segment profit before income taxes 3,721,220 1,747,493 8,674,680 — 14,143,393 For the Three Months Ended September 30, 2020 Revenues from external customers $ 39,261,044 $ 5,495,990 $ 101,447,531 $ — $ 146,204,565 Intersegment revenues 2,952,836 79,096 168,890 ( 3,200,822 ) — Segment profit before income taxes 4,807,280 1,322,303 32,454,348 — 38,583,931 For the Nine Months Ended September 30, 2021 Revenues from external customers $ 121,640,865 $ 20,512,534 $ 216,764,653 $ — $ 358,918,052 Intersegment revenues 5,409,841 234,905 470,534 ( 6,115,280 ) — Segment profit before income taxes 11,110,425 6,717,763 27,347,612 45,175,800 Identifiable Assets 1,241,514,729 63,265,518 328,274,954 ( 78,248,809 ) 1,554,806,392 Goodwill 2,765,729 754,018 — 3,519,588 Total Assets 1,244,280,299 64,019,536 328,274,954 ( 78,248,809 ) 1,558,325,980 For the Nine Months Ended September 30, 2020 Revenues from external customers $ 110,255,399 $ 14,815,991 $ 219,403,866 — $ 344,475,256 Intersegment revenues 5,677,189 272,409 559,923 ( 6,509,521 ) — Segment profit before income taxes 5,408,482 2,975,556 58,867,883 — 67,251,921 Identifiable Assets 1,232,786,760 55,339,760 443,756,079 ( 88,204,200 ) 1,643,678,399 Goodwill 2,765,570 754,018 — — 3,519,588 Total Assets 1,235,552,330 56,093,778 443,756,079 ( 88,204,200 ) 1,647,197,987 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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. 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 Perpetual Care Trust Investments : A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. 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 September 30, 2021 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The items shown under Level 3 are valued as follows: Loans Held for Sale : The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. 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. Impaired Real Estate Held for Investment : The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims. It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area 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. See Note 12 for more information regarding MSRs. 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at September 30, 2021. Schedule of Fair Value Assets and Liabilities Measured on a Recurring Basis Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a recurring basis Fixed maturity securities available for sale $ 264,844,942 $ — $ 262,794,121 $ 2,050,821 Equity securities 10,729,744 10,729,744 — — Loans held for sale 312,655,843 — — 312,655,843 Restricted assets (1) 1,663,903 — 1,663,903 — Restricted assets (2) 2,932,266 2,932,266 — — Cemetery perpetual care trust investments (1) 786,250 — 786,250 — Cemetery perpetual care trust investments (2) 2,387,408 2,387,408 — — Derivatives - loan commitments (3) 10,396,178 — — 10,396,178 Total assets accounted for at fair value on a recurring basis $ 606,396,534 $ 16,049,418 $ 265,244,274 $ 325,102,842 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) $ ( 16,943 ) $ ( 16,943 ) $ — $ — Derivatives – put options (4) ( 23,631 ) ( 23,631 ) — — Derivatives - loan commitments (4) ( 816,661 ) — — ( 816,661 ) Total liabilities accounted for at fair value on a recurring basis $ ( 857,235 ) $ ( 40,574 ) $ — $ ( 816,661 ) (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 September 30, 2021 (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, 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 $ 294,656,679 $ — $ 292,455,504 $ 2,201,175 Equity securities 11,324,239 11,324,239 — — Loans held for sale 422,772,418 — — 422,772,418 Restricted assets (1) 1,473,637 — 1,473,637 — Restricted assets (2) 2,515,778 2,515,778 — — Cemetery perpetual care trust investments (1) 747,767 — 747,767 — Cemetery perpetual care trust investments (2) 2,062,303 2,062,303 — — Derivatives - loan commitments (3) 12,592,672 — — 12,592,672 Total assets accounted for at fair value on a recurring basis $ 748,145,493 $ 15,902,320 $ 294,676,908 $ 437,566,265 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) $ ( 43,097 ) $ ( 43,097 ) $ — $ — Derivatives - loan commitments (4) ( 2,464,062 ) — — ( 2,464,062 ) Total liabilities accounted for at fair value on a recurring basis $ ( 2,507,159 ) $ ( 43,097 ) $ — $ ( 2,464,062 ) (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 35 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 8) Fair Value of Financial Instruments (Continued) For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2021, the significant unobservable inputs used in the fair value measurements were as follows: Assets and Liabilities Measured at Fair Value on A Recurring Basis Significant Range of Inputs Fair Value at Valuation Unobservable Minimum Maximum Weighted 9/30/2021 Technique Input(s) Value Value Average Loans held for sale $ 312,655,843 Market approach Investor contract pricing as a percentage of unpaid principal balance 95.0 % 107.0 % 100.0 % Derivatives - loan commitments (net) 9,579,517 Market approach Pull-through rate 61.0 % 92.0 % 82.0 % Initial-Value N/A N/A N/A Servicing 0 bps 148 bps 62 bps Fixed maturity securities available for sale 2,050,821 Broker quotes Pricing quotes $ 90.83 $ 111.11 $ 107.56 For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 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 12/31/2020 Technique Input(s) Value Value Average Loans held for sale $ 422,772,418 Market approach Investor contract pricing as a percentage of unpaid principal balance 99.0 % 110.0 % 104.0 % Derivatives - loan commitments (net) 10,128,610 Market approach Pull-through rate 52.0 % 92.0 % 81.0 % Initial-Value N/A N/A N/A Servicing 0 bps 184 bps 58 bps Fixed maturity securities available for sale 2,201,175 Broker quotes Pricing quotes $ 90.83 $ 119.33 $ 113.47 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 for the periods presented: Schedule of Changes in the 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, 2020 $ 10,128,610 $ 422,772,418 $ 2,201,175 Originations and purchases — 4,243,072,600 — Sales, maturities and paydowns — ( 4,484,170,804 ) ( 33,950 ) Transfer to mortgage loans held for investment — ( 201,951 ) — Total gains (losses): Included in earnings ( 549,093 )(1) 131,183,580 (1) 2,729 (2) Included in other comprehensive income — — ( 119,133 ) Balance – September 30, 2021 $ 9,579,517 $ 312,655,843 $ 2,050,821 (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 for the periods presented: 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 — 3,824,329,264 - Sales, maturities and paydowns — ( 3,709,992,155 ) ( 1,031,500 ) Transfer to mortgage loans held for investment — ( 9,170,610 ) — Total gains (losses): Included in earnings 12,454,218 (1) 127,254,848 (1) 2,532 (2) Included in other comprehensive income — — 102,739 Balance - September 30, 2020 $ 14,945,451 $ 445,878,979 $ 2,290,153 (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 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 for the periods presented: Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - June 30, 2021 $ 9,960,213 $ 296,728,086 $ 2,180,828 Originations and purchases — 1,432,842,093 — Sales, maturities and paydowns — ( 1,459,143,727 ) ( 11,550 ) Transfer to mortgage loans held for investment — — — Total gains (losses): Included in earnings ( 380,696 )(1) 42,229,391 928 (2) Included in other comprehensive income — — ( 119,385 ) Balance - September 30, 2021 $ 9,579,517 $ 312,655,843 $ 2,050,821 (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 for the periods presented: Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - June 30, 2020 $ 11,044,365 $ 356,949,958 $ 2,221,392 Originations and purchases — 1,719,281,234 — Sales, maturities and paydowns — ( 1,692,015,364 ) ( 10,700 ) Transfer to mortgage loans held for investment — ( 236,934 ) — Total gains (losses): Included in earnings 3,901,086 (1) 61,900,085 (1) 860 (2) Included in other comprehensive income — — 78,601 Balance - September 30, 2020 $ 14,945,451 $ 445,878,979 $ 2,290,153 (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 38 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet at September 30, 2021. Schedule of Fair Value Assets Measured on a Nonrecurring Basis Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets accounted for at fair value on a nonrecurring basis Impaired mortgage loans held for investment $ 770,140 $ — $ — $ 770,140 Impaired real estate held for sale 390,000 — — 390,000 Total assets accounted for at fair value on a nonrecurring basis $ 1,160,140 $ — $ — $ 1,160,140 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, 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 $ 1,297,356 $ — $ — $ 1,297,356 Impaired real estate held for sale 4,249,000 — — 4,249,000 Total assets accounted for at fair value on a nonrecurring basis $ 5,546,356 $ — $ — $ 5,546,356 39 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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 September 30, 2021 and December 31, 2020. The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2021: Schedule of Financial Instruments Carried at Other Than Fair Value Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential $ 87,090,816 $ — $ — $ 90,792,471 $ 90,792,471 Residential construction 168,696,882 — — 168,696,882 168,696,882 Commercial 51,602,783 — — 51,318,799 51,318,799 Mortgage loans held for investment, net $ 307,390,481 $ — $ — $ 310,808,152 $ 310,808,152 Policy loans 13,699,414 — — 13,699,414 13,699,414 Insurance assignments, net (1) 51,622,313 — — 51,622,313 51,622,313 Restricted assets (2) 2,848,029 — — 2,848,029 2,848,029 Cemetery perpetual care trust investments (2) 652,575 — — 652,575 652,575 Mortgage servicing rights, net 50,360,805 — — 63,885,183 63,885,183 Liabilities Bank and other loans payable $ ( 263,186,923 ) $ — $ — $ ( 263,186,923 ) $ ( 263,186,923 ) Policyholder account balances (3) ( 43,058,156 ) — — ( 42,144,499 ) ( 42,144,499 ) Future policy benefits - annuities (3) ( 108,252,697 ) — — ( 112,157,034 ) ( 112,157,034 ) (1) Included in other investments and policy loans (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims 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, 2020: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential $ 92,757,613 $ — $ — $ 100,384,283 $ 100,384,283 Residential construction 110,849,864 — — 110,849,864 110,849,864 Commercial 45,736,459 — — 45,259,425 45,259,425 Mortgage loans held for investment, net $ 249,343,936 $ — $ — $ 256,493,572 $ 256,493,572 Policy loans 14,171,589 — — 14,171,589 14,171,589 Insurance assignments, net (1) 51,585,656 — — 51,585,656 51,585,656 Restricted assets (2) 3,317,877 — — 3,317,877 3,317,877 Cemetery perpetual care trust investments (2) 1,468,600 — — 1,468,600 1,468,600 Mortgage servicing rights, net 35,210,516 — — 38,702,358 38,702,358 Liabilities Bank and other loans payable $ ( 297,824,368 ) $ — $ — $ ( 297,824,368 ) $ ( 297,824,368 ) Policyholder account balances (3) ( 44,026,809 ) — — ( 42,220,725 ) ( 42,220,725 ) Future policy benefits - annuities (3) ( 106,522,113 ) — — ( 112,354,186 ) ( 112,354,186 ) (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 40 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows: Mortgage Loans Held for Investment : The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment. Residential – The estimated fair value is determined through a combination of discounted cash flows(estimating expected future cash flows of 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. 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 41 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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. 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. 42 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 10) Derivative Instruments (Continued) The following table shows the notional amount and fair value of derivatives as of September 30, 2021 and December 31, 2020. Schedule of Derivative Assets at Fair Value Fair Values and Notional Values of Derivative Instruments September 30, 2021 December 31, 2020 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 $ 1,085,101,600 $ 10,396,178 $ 816,661 $ 659,245,038 $ 12,592,672 $ 2,464,062 Put options Other liabilities 635,000 — 23,631 Call options Other liabilities 1,062,500 — 16,943 1,873,200 — 43,097 Total $ 1,086,799,100 $ 10,396,178 $ 857,235 $ 661,118,238 $ 12,592,672 $ 2,507,159 The following table shows the gains and losses on derivatives for the periods presented. Schedule of Gains and Losses on Derivatives Net Amount Gain (Loss) Net Amount Gain (Loss) Three Months Ended September 30 Nine Months Ended September 30 Derivative Classification 2021 2020 2021 2020 Loan commitments Mortgage fee income $ ( 380,696 ) $ 3,901,086 $ ( 549,093 ) $ 12,454,218 Call and put options Gains on investments and other assets $ 12,985 $ 34,171 $ 128,270 $ 124,516 43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 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, the Company believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of September 30, 2021 and December 31, 2020, the balances were $ 2,408,233 and $ 20,583,618 , respectively. The Company believes that the final loan loss reserve as of September 30, 2021, represents its best estimate for adequate loss reserves on loans sold. Mortgage Loan Loss Litigation Settlement Agreement and Mutual Release with Lehman Brothers Holdings Inc. From 2004 to early 2008, SecurityNational Mortgage Company (“SecurityNational Mortgage”), a wholly owned subsidiary of the Company, originated “limited documentation” or “reduced documentation” loans which were sold to certain affiliates of Lehman Brothers Holdings Inc. (“Lehman Holdings”). Certain of these loans became the subject of disputes between SecurityNational Mortgage and Lehman Holdings and certain Lehman Holdings affiliates. Lehman Holdings filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code in 2008. In May of 2011, SecurityNational Mortgage filed a complaint in U.S. District Court against certain Lehman Holdings affiliates. In June of 2011, Lehman Holdings filed a complaint in Federal District Court against SecurityNational Mortgage, both of which were later resolved. In 2016, certain other pending loan disputes between SecurityNational Mortgage and Lehman Holdings became the subject of an unsuccessful, non-binding alternate dispute resolution mediation proceeding. Thereafter, in 2016, Lehman Holdings filed an adversary proceeding complaint against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York, which included seeking damages relating to the alleged obligations of the defendants under indemnification provisions of 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. The complaint was later amended with the latest amended complaint filed against SecurityNational Mortgage on December 27, 2016, seeking damages to be determined at trial, including interest, attorneys’ fees and costs. This complaint involved approximately 135 mortgage loans, there being millions of dollars allegedly in dispute. These claims against SecurityNational Mortgage were asserted as a result of Lehman Holdings’ earlier settlements with the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Corporation (“Freddie Mac”). In 2018, Lehman Holdings filed a separate adversary proceeding complaint against SecurityNational Mortgage. This adversary proceeding allegedly involved approximately 577 mortgage loans relative to private securitization trusts (“RMBS Loans”) and millions of dollars in damages. Thereafter, Lehman Holdings made a filing that effectively reduced the number of RMBS Loans to 248. This proceeding was in addition to the above-referenced proceeding involving the Fannie Mae and Freddie Mac mortgage loans. As with the above-referenced proceeding, damages were sought including interest, costs, and attorneys’ fees. SecurityNational Mortgage, as well as other defendants, have been involved in written discovery, and production of documents relative to the cases, and the filing of motions. The deposition phase of the cases was yet to begin, as well as the later expert witness phase. Those phases would require substantial expenditures of legal fees and costs. On February 1, 2021, SecurityNational Mortgage executed a settlement agreement with Lehman Holdings in relation to these two adversary proceedings wherein all mortgage loan related claims were resolved, thereby ending all liabilities asserted by Lehman Holdings and conclusively ending all proceedings between SecurityNational Mortgage and Lehman Holdings. The full amount of SecurityNational Mortgage’s settlement payment was accounted for in the Company’s loan loss reserve as of December 31, 2020 and was paid during the first quarter 2021. 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 11) Reinsurance, Commitments and Contingencies (Continued) Debt Covenants for Mortgage Warehouse Lines of Credit The Company, through its subsidiary SecurityNational Mortgage, has a $ 100,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 9, 2022 . 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, has 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 2% and matures on August 9, 2022 . The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $ 1.00 on a rolling four-quarter basis. The Company through its subsidiary SecurityNational Mortgage, has a line of credit with Comerica Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $ 70,000,000 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, 2022 . The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $ 1.00 on a rolling twelve months. The Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. 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 2.0% and matures on June 4, 2022 . The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $ 1.00 on a rolling twelve months. The Company, through its subsidiary EverLEND Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement with the bank allows EverLEND Mortgage to borrow up to $ 5,000,000 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 18, 2022 . 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 September 30, 2021, the Company was in compliance with all debt covenants. 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 11) Reinsurance, Commitments and Contingencies (Continued) Other Contingencies and Commitments The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of September 30, 2021, the Company’s commitments were approximately $ 318,081,000 for these loans, of which $ 172,636,000 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 5.25 % 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, if adversely determined, 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. 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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. Schedule of Mortgage Servicing Rights As of September 30 2021 As of December 31 2020 Amortized cost: Balance before valuation allowance at beginning of year $ 35,210,516 $ 17,155,529 MSR additions resulting from loan sales 26,048,186 29,896,465 Amortization (1) ( 10,897,897 ) ( 11,841,478 ) Application of valuation allowance to write down MSRs with other than temporary impairment — — Balance before valuation allowance at end of period $ 50,360,805 $ 35,210,516 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 $ 50,360,805 $ 35,210,516 Estimated fair value of MSRs at end of period $ 63,885,183 $ 38,702,358 (1) Included in other expenses on the condensed consolidated statements of earnings 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (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: Schedule of Finite-Lived Intangible Assets, Future Amortization Expense, Mortgage Servicing Rights Estimated MSR Amortization 2021 $ 14,530,529 2022 10,129,095 2023 8,049,699 2024 6,378,335 2025 5,081,973 Thereafter 6,191,174 Total $ 50,360,805 The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings: Schedule of Other Revenues Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Contractual servicing fees $ 4,037,142 $ 2,340,546 $ 11,179,908 $ 6,055,055 Late fees 71,724 69,314 227,211 238,826 Total $ 4,108,866 $ 2,409,860 $ 11,407,119 $ 6,293,881 The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented: Summary of Unpaid Principal Balances of the Servicing Portfolio As of September 30 2021 As of December 31 2020 Servicing UPB $ 6,709,170,790 $ 5,070,287,864 The following key assumptions were used in determining MSR value: Schedule of Assumptions Used in Determining MSR Value Prepayment Speeds Average Life (Years) Discount Rate September 30, 2021 11.80 6.62 9.50 December 31, 2020 15.60 5.30 9.50 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 13) Income Taxes The Company’s overall effective tax rate for the three months ended September 30, 2021 and 2020 was 23.7 % and 24.0 % , respectively, which resulted in a provision for income taxes of $ 3,352,663 and $ 9,279,162 , respectively. The Company’s overall effective tax rate for the nine months ended September 30, 2021 and 2020 was 24.3 % and 23.6 % , respectively, which resulted in a provision for income taxes of $ 10,998,876 and $ 15,965,656 , 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. Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. 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 delivered to the Company. 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. 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2021 (Unaudited) 14) Revenues from Contracts with Customers (Continued) The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows: Schedule of Opening and Closing Balances of Receivables, Contract Assets and Contract Liabilities Contract Balances Receivables (1) Contract Asset Contract Liability Opening (1/1/2021) $ 4,119,988 $ — $ 13,080,179 Closing (9/30/2021) 4,952,257 — 14,184,328 Increase/(decrease) 832,269 — 1,104,149 Contract Balances Receivables (1) Contract Asset Contract Liability Opening (1/1/2020) $ 2,778,879 $ — $ 12,607,978 Closing (12/31/2020) 4,119,988 — 13,080,179 Increase/(decrease) 1,341,109 — 472,201 (1) Included in Receivables, net on the condensed consolidated balance sheets The amount of revenue recognized and included in the opening contract liability balance for the three months ended September 30, 2021 and 2020 was $ 1,143,745 and $ 1,427,418 , respectively, and for the nine months ended September 30, 2021 and 2020 was $ 3,588,682 and $ 3,258,824 , 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: Schedule of Revenues of the Cemetery and Mortuary Contracts Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Major goods/service lines At-need $ 4,129,203 $ 4,272,816 $ 12,172,631 $ 10,915,712 Pre-need 1,838,472 1,098,899 6,055,568 3,614,872 Net mortuary and cemetery sales $ 5,967,675 $ 5,371,715 $ 18,228,199 $ 14,530,584 Timing of Revenue Recognition Goods transferred at a point in time $ 4,132,050 $ 3,559,431 $ 12,882,878 $ 9,641,751 Services transferred at a point in time 1,835,625 1,812,284 5,345,321 4,888,833 Net mortuary and cemetery sales $ 5,967,675 $ 5,371,715 $ 18,228,199 $ 14,530,584 The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented: Schedule of Reconciliation of Revenues from Cemetery and Mortuary Contracts to Business Segment Information Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 Net mortuary and cemetery sales $ 5,967,675 $ 5,371,715 $ 18,228,199 $ 14,530,584 Gains (losses) on investments and other assets ( 112,828 ) ( 66,673 ) 913,058 ( 244,413 ) Net investment income 826,008 168,478 1,296,899 444,971 Other revenues 24,492 22,470 74,378 84,849 Revenues from external customers 6,705,347 5,495,990 20,512,534 14,815,991 50