SECURITY NATIONAL FINANCIAL CORP 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to ________ Commission File Number: 000-09341 Security National Financial Corporation (Exact name of registrant as specified in its charter) utah 87-0345941 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 433 Ascension Way , 6 th Floor , Salt Lake City , Utah 84123 (Address of principal executive offices) (Zip Code) (801) 264-1060 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading symbol Name of each exchange on which registered Class A Common Stock SNFCA The Nasdaq Global Select Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of May 5, 2023, the registrant had 18,870,913 shares of Class A Common Stock, $2.00 par value, outstanding and 2,888,923 shares of Class C Common Stock, $2.00 par value, outstanding. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2023 Table of Contents Page No. Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2023 (unaudited) and December 31, 2022 3-4 Condensed Consolidated Statements of Earnings for the three months ended March 31, 2023 and 2022 (unaudited) 5 Condensed Consolidated Statements of Comprehensive Income (loss) for the three months ended March 31, 2023 and 2022 (unaudited) 6 Condensed Consolidated Statements of Stockholders’ Equity as of March 31, 2023 and March 31, 2022 (unaudited) 7 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (unaudited) 8-9 Notes to Condensed Consolidated Financial Statements (unaudited) 10 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 59 Item 3. Quantitative and Qualitative Disclosures about Market Risk 64 Item 4. Controls and Procedures 65 Part II - Other Information Item 1. Legal Proceedings 65 Item 1A. Risk Factors 65 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 66 Item 3. Defaults Upon Senior Securities 66 Item 4. Mine Safety Disclosures 66 Item 5. Other Information 66 Item 6. Exhibits 6 7 Signatures 68 2 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Part I - Financial Information Item 1. Financial Statements. March 31 2023 (Unaudited) December 31 2022 Assets Investments: Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $ 369,382,018 and $ 362,750,511 for 2023 and 2022; allowance for credit losses of $ 179,500 and nil for 2023 and 2022) $ 357,570,527 $ 345,858,492 Equity securities at estimated fair value (cost of $ 10,356,783 and $ 9,942,265 for 2023 and 2022) 12,354,007 11,682,526 Mortgage loans held for investment (net of allowance for credit losses of $ 2,735,419 and $ 1,970,311 for 2023 and 2022) 286,546,639 308,123,927 Real estate held for investment (net of accumulated depreciation of $ 25,361,779 and $ 23,793,204 for 2023 and 2022) 187,077,012 191,328,616 Real estate held for sale 7,390,262 11,161,582 Other investments and policy loans (net of allowance for credit losses of $ 1,685,901 and $ 1,609,951 for 2023 and 2022) 70,218,779 70,508,156 Accrued investment income 9,427,239 10,299,826 Total investments 930,584,465 948,963,125 Cash and cash equivalents 99,554,776 120,919,805 Loans held for sale at estimated fair value 173,015,404 141,179,620 Receivables (net of allowance for credit losses of $ 1,867,124 and $ 2,229,791 for 2023 and 2022) 16,377,391 28,573,092 Restricted assets (including $ 6,877,734 and $ 6,565,552 for 2023 and 2022 at estimated fair value; allowance for credit losses of $ 5,874 and nil for 2023 and 2022) 19,036,870 18,935,055 Cemetery perpetual care trust investments (including $ 3,948,380 and $ 3,859,893 for 2023 and 2022 at estimated fair value; allowance for credit losses of $ 2,196 and nil for 2023 and 2022) 7,460,412 7,276,210 Receivable from reinsurers 14,900,756 15,033,938 Cemetery land and improvements 9,112,647 9,101,474 Deferred policy and pre-need contract acquisition costs 109,573,473 108,655,128 Mortgage servicing rights, net 3,166,133 3,039,765 Property and equipment, net 20,230,901 20,579,649 Value of business acquired 9,556,967 9,803,736 Goodwill 5,253,783 5,253,783 Other 25,258,452 23,798,512 Total Assets $ 1,443,082,430 $ 1,461,112,892 See accompanying notes to condensed consolidated financial statements (unaudited). 3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) March 31 2023 (Unaudited) December 31 2022 Liabilities and Stockholders’ Equity Liabilities Future policy benefits and unpaid claims $ 895,198,901 $ 889,327,303 Unearned premium reserve 2,709,534 2,773,616 Bank and other loans payable 138,391,846 161,712,804 Deferred pre-need cemetery and mortuary contract revenues 16,583,024 16,226,836 Cemetery perpetual care obligation 5,143,233 5,099,542 Accounts payable 3,304,415 5,361,449 Other liabilities and accrued expenses 52,558,185 57,113,888 Income taxes 32,159,650 30,710,527 Total liabilities 1,146,048,788 1,168,325,965 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; 40,000,000 shares authorized; issued 18,807,013 shares in 2023 and 18,758,031 shares in 2022 37,614,026 37,516,062 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; 6,000,000 shares authorized; issued 2,889,923 shares in 2023 and 2,889,859 shares in 2022 5,777,846 5,779,718 Common stock, value 5,777,846 5,779,718 Additional paid-in capital 64,805,874 64,767,769 Accumulated other comprehensive loss, net of taxes ( 8,942,719 ) ( 13,070,277 ) Retained earnings 202,728,972 202,160,306 Treasury stock at cost - 612,142 Class A shares and 34,016 Class C shares in 2023; and 525,870 Class A shares and 34,016 Class C shares in 2022 ( 4,950,357 ) ( 4,366,651 ) Total stockholders’ equity 297,033,642 292,786,927 Total Liabilities and Stockholders’ Equity $ 1,443,082,430 $ 1,461,112,892 See accompanying notes to condensed consolidated financial statements (unaudited). 4 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) 2023 2022 Three Months Ended March 31 2023 2022 Revenues: Mortgage fee income $ 25,989,006 $ 48,344,445 Insurance premiums and other considerations 27,967,292 26,341,952 Net investment income 17,774,883 15,194,306 Net mortuary and cemetery sales 6,471,429 7,205,721 Gains on investments and other assets 111,154 171,975 Other 1,186,970 5,167,508 Total revenues 79,500,734 102,425,907 Benefits and expenses: Death benefits 16,678,366 16,884,706 Surrenders and other policy benefits 1,132,693 1,323,168 Increase in future policy benefits 8,054,939 6,771,101 Amortization of deferred policy and pre-need acquisition costs and value of business acquired 4,883,581 4,396,413 Selling, general and administrative expenses: Commissions 9,673,310 19,902,202 Personnel 21,962,512 26,874,764 Advertising 903,411 1,711,795 Rent and rent related 1,776,780 1,659,270 Depreciation on property and equipment 588,416 615,544 Costs related to funding mortgage loans 1,842,342 2,839,463 Other 7,780,535 12,091,636 Interest expense 1,453,333 1,727,315 Cost of goods and services sold-mortuaries and cemeteries 1,185,628 1,185,014 Total benefits and expenses 77,915,846 97,982,391 Earnings before income taxes 1,584,888 4,443,516 Income tax expense ( 344,716 ) ( 1,214,798 ) Net earnings $ 1,240,172 $ 3,228,718 Net earnings per Class A Equivalent common share (1) $ 0.06 $ 0.15 Net earnings per Class A Equivalent common share-assuming dilution (1) $ 0.06 $ 0.15 Weighted-average Class A equivalent common shares outstanding (1) 21,080,549 21,381,988 Weighted-average Class A equivalent common shares outstanding-assuming dilution (1) 21,612,035 22,266,473 (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 (LOSS) (Unaudited) 2023 2022 Three Months Ended March 31 2023 2022 Net earnings $ 1,240,172 $ 3,228,718 Other comprehensive income: Unrealized gains (losses) on fixed maturity securities available for sale $ 5,218,029 ( 15,326,903 ) Unrealized gains (losses) on restricted assets (1) 4,133 ( 71,946 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) 2,926 ( 37,357 ) Other comprehensive income (loss), before income tax 5,225,088 ( 15,436,206 ) Income tax (expense) benefit ( 1,097,530 ) 3,245,876 Other comprehensive income (loss), net of income tax 4,127,558 ( 12,190,330 ) Comprehensive income (loss) $ 5,367,730 $ ( 8,961,612 ) (1) Fixed maturity securities available for sale See accompanying notes to condensed consolidated financial statements (unaudited). 6 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) Three Months Ended March 31, 2023 Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Total January 1, 2023 $ 37,516,062 $ 5,779,718 $ 64,767,769 $ ( 13,070,277 ) $ 202,160,306 $ ( 4,366,651 ) $ 292,786,927 Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13) - - - - ( 671,506 ) - ( 671,506 ) Net earnings - - - - 1,240,172 - 1,240,172 Other comprehensive gain - - - 4,127,558 - - 4,127,558 Stock-based compensation expense - - 143,671 - - - 143,671 Exercise of stock options 96,092 - ( 62,073 ) - - - 34,019 Sale of treasury stock - - ( 43,493 ) - - 620,651 577,158 Purchase of treasury stock - - - - - ( 1,204,357 ) ( 1,204,357 ) Conversion Class C to Class A 1,872 ( 1,872 ) - - - - - March 31, 2023 $ 37,614,026 $ 5,777,846 $ 64,805,874 $ ( 8,942,719 ) $ 202,728,972 $ ( 4,950,357 ) $ 297,033,642 Three Months Ended March 31, 2022 Class A Common Stock Class C Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Total January 1, 2022 $ 35,285,444 $ 5,733,130 $ 57,985,947 $ 18,070,448 $ 184,537,489 $ ( 1,845,624 ) $ 299,766,834 Net earnings - - - - 3,228,718 - 3,228,718 Other comprehensive loss - - - ( 12,190,330 ) - - ( 12,190,330 ) Other comprehensive gain (loss) - - - ( 12,190,330 ) - - ( 12,190,330 ) Stock-based compensation expense - - 271,747 - - - 271,747 Exercise of stock options 100,446 - ( 8,487 ) - - - 91,959 Sale of treasury stock - - 24,055 - - 1,880,125 1,904,180 Purchase of treasury stock - - 106,176 - - ( 878,417 ) ( 772,241 ) Conversion Class C to Class A 414 ( 414 ) - - - - - March 31, 2022 $ 35,386,304 $ 5,732,716 $ 58,379,438 $ 5,880,118 $ 187,766,207 $ ( 843,916 ) $ 292,300,867 See accompanying notes to condensed consolidated financial statements (unaudited). 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2023 2022 Three Months Ended March 31 2023 2022 Cash flows from operating activities: Net cash (used in) provided by operating activities $ ( 16,073,799 ) $ 72,508,768 Cash flows from investing activities: Purchases of fixed maturity securities ( 11,911,847 ) ( 32,508,649 ) Sales, calls and maturities of fixed maturity securities 5,375,819 4,052,570 Purchases of equity securities ( 4,596,981 ) ( 1,657,160 ) Sales of equity securities 4,150,683 1,400,848 Net changes in restricted assets - 492,489 Purchases of restricted assets ( 311,776 ) - Sales, calls and maturities of restricted assets 24,746 - Net changes in cemetery perpetual care trust investments - 731,331 Purchases of cemetery perpetual care trust investments ( 113,238 ) - Sales, calls and maturities of perpetual care trust investments 27,199 - Mortgage loans held for investment, other investments and policy loans made ( 165,651,041 ) ( 195,470,561 ) Payments received for mortgage loans held for investment, other investments and policy loans 184,156,157 187,519,868 Purchases of property and equipment ( 250,642 ) ( 356,802 ) Sales of property and equipment 10,974 64,579 Purchases of real estate ( 2,705,716 ) ( 6,367,199 ) Sales of real estate 9,160,065 4,860,188 Net cash provided by (used in) investing activities 17,364,402 ( 37,238,498 ) Cash flows from financing activities: Investment contract receipts 3,100,207 2,875,328 Investment contract withdrawals ( 3,831,218 ) ( 4,285,446 ) Proceeds from stock options exercised 34,019 91,959 Purchases of treasury stock ( 1,204,357 ) ( 772,241 ) Repayment of bank loans ( 15,684,446 ) ( 426,027 ) Proceeds from bank loans 46,000,000 7,186,083 Net change in warehouse line borrowings for loans held for sale ( 53,656,378 ) ( 24,430,063 ) Net cash used in financing activities ( 25,242,173 ) ( 19,760,407 ) Net change in cash, cash equivalents, restricted cash and restricted cash equivalents ( 23,951,570 ) 15,509,863 Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period 133,483,817 141,414,282 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 109,532,247 $ 156,924,145 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 1,635,867 $ 1,815,921 Income taxes (net of refunds) ( 6,878 ) 512 Non Cash Operating, Investing and Financing Activities: Transfer from mortgage loans held for investment to restricted assets $ 1,625,961 $ - Transfer from mortgage loans held for investment to cemetery perpetual care trust investments 1,611,550 - Benefit plans funded with treasury stock 577,158 1,904,180 Right-of-use assets obtained in exchange for operating lease liabilities 139,095 597,635 Accrued real estate construction costs and retainage - 2,775,240 See accompanying notes to condensed consolidated financial statements (unaudited). 8 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below: Three Months Ended March 31 2023 2022 Cash and cash equivalents $ 99,554,776 $ 145,630,099 Restricted assets 9,228,113 9,460,057 Cemetery perpetual care trust investments 749,358 1,833,989 Total cash, cash equivalents, restricted cash and restricted cash equivalents $ 109,532,247 $ 156,924,145 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period 109,532,247 156,924,145 See accompanying notes to condensed consolidated financial statements (unaudited). 9 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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, 2022, 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 month period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. 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 and unearned revenue; those used in determining the estimated future costs for pre-need sales; those used in determining the value of mortgage servicing rights; those used in determining allowances for credit losses; 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. Banking Environment . Item 7.01 Regulation FD Disclosure. On March 10, 2023 and March 12, 2023, Silicon Valley Bank and Signature Bank were placed in receivership with the Federal Deposit Insurance Corporation (“FDIC”). Normal banking activities resumed shortly thereafter. On May 1, 2023, First Republic bank was placed in receivership with the FDIC and was immediately purchased by a national bank. The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank. The Company may periodically transfer funds to these banks to pay for services rendered by third party vendors that continue to maintain banking relationships with these banks. The Company continues to monitor the banking industry and its relationships with regional and community banks. The information furnished in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. 10 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 2) Recent Accounting Pronouncements Accounting Standards Adopted in 2023 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 held for investment 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 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 Topic 326 requires that credit losses be presented as an allowance rather than as a write-down. The Company adopted this standard on January 1, 2023, and after a review of the affected assets, decreased the opening balance of retained earnings in stockholders’ equity by $ 671,506 on January 1, 2023. The allowances for credit losses increased (decreased) by the following amounts. Schedule of Increased (Decrease) in Allowances for Credit Losses Upon ASU Amount Mortgage loans held for investment: Residential $ ( 192,607 ) Residential construction 301,830 Commercial 555,807 Total 665,030 Restriced assets - mortgage loans held for investment: Residential construction 3,463 Cemetery perpetual care trust investments - mortgage loans held for investment: Residential construction 3,013 Grand Total 671,506 Accounting Standards Issued But Not Yet Adopted 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 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 made progress in the implementation of the new standard, including the involvement of actuaries, accountants, and systems specialists. However, the Company has not yet estimated the impact the new guidance will have on the consolidated financial statements. 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. 11 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments The Company’s investments as of March 31, 2023 are summarized as follows: Schedule of Investments Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (1) Allowance for Credit Losses Estimated Fair Value March 31, 2023: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 95,362,166 $ 305,924 $ ( 2,047,395 ) $ - $ 93,620,695 Obligations of states and political subdivisions 6,766,771 14,954 ( 337,946 ) - 6,443,779 Corporate securities including public utilities 233,143,391 3,467,771 ( 9,039,301 ) ( 179,500 ) 227,392,361 Mortgage-backed securities 33,859,690 203,490 ( 4,209,488 ) - 29,853,692 Redeemable preferred stock 250,000 10,000 - - 260,000 Total fixed maturity securities available for sale $ 369,382,018 $ 4,002,139 $ ( 15,634,130 ) $ ( 179,500 ) $ 357,570,527 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 10,356,783 $ 2,741,720 $ ( 744,496 ) $ 12,354,007 Total equity securities at estimated fair value $ 10,356,783 $ 2,741,720 $ ( 744,496 ) $ 12,354,007 Mortgage loans held for investment at amortized cost: Residential $ 94,471,213 Residential construction 146,093,947 Commercial 50,807,452 Less: Unamortized deferred loan fees, net ( 1,752,369 ) Less: Allowance for credit losses ( 2,735,419 ) Less: Net discounts ( 338,185 ) Total mortgage loans held for investment $ 286,546,639 Real estate held for investment - net of accumulated depreciation: Residential $ 35,358,867 Commercial 151,718,145 Total real estate held for investment $ 187,077,012 Real estate held for sale: Residential $ 7,238,709 Commercial 151,553 Total real estate held for sale $ 7,390,262 Other investments and policy loans at amortized cost: Policy loans $ 13,012,347 Insurance assignments 45,573,831 Federal Home Loan Bank stock (2) 3,896,800 Other investments 9,421,702 Less: Allowance for credit losses for insurance assignments ( 1,685,901 ) Total other investments and policy loans $ 70,218,779 Accrued investment income $ 9,427,239 Total investments $ 930,584,465 (1) Gross unrealized losses are net of allowance for credit losses (2) Includes $ 978,100 of Membership stock and $ 2,918,700 of Activity stock due to short-term borrowings and letters of credit. 12 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The Company’s investments as of December 31, 2022 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2022: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 93,182,210 $ 180,643 $ ( 2,685,277 ) $ 90,677,576 Obligations of states and political subdivisions 6,675,071 13,869 ( 458,137 ) 6,230,803 Corporate securities including public utilities 229,141,544 1,909,630 ( 11,930,773 ) 219,120,401 Mortgage-backed securities 33,501,686 168,700 ( 4,100,674 ) 29,569,712 Redeemable preferred stock 250,000 10,000 - 260,000 Total fixed maturity securities available for sale $ 362,750,511 $ 2,282,842 $ ( 19,174,861 ) $ 345,858,492 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 9,942,265 $ 2,688,375 $ ( 948,114 ) $ 11,682,526 Total equity securities at estimated fair value $ 9,942,265 $ 2,688,375 $ ( 948,114 ) $ 11,682,526 Mortgage loans held for investment at amortized cost: Residential $ 93,355,623 Residential construction 172,516,125 Commercial 46,311,955 Less: Unamortized deferred loan fees, net ( 1,746,605 ) Less: Allowance for credit losses ( 1,970,311 ) Less: Net discounts ( 342,860 ) Total mortgage loans held for investment $ 308,123,927 Real estate held for investment - net of accumulated depreciation: Residential $ 38,437,960 Commercial 152,890,656 Total real estate held for investment $ 191,328,616 Real estate held for sale: Residential $ 11,010,029 Commercial 151,553 Total real estate held for sale $ 11,161,582 Other investments and policy loans at amortized cost: Policy loans $ 13,095,473 Insurance assignments 46,942,536 Federal Home Loan Bank stock (1) 2,600,300 Other investments 9,479,798 Less: Allowance for credit losses for insurance assignments ( 1,609,951 ) Total other investments and policy loans $ 70,508,156 Accrued investment income $ 10,299,826 Total investments $ 948,963,125 (1) Includes $ 938,500 of Membership stock and $ 1,661,800 of Activity stock due to short-term advances and letters of credit. 13 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Fixed Maturity Securities The following table summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. 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. The table below sets forth unrealized losses by duration with the fair value of the related fixed maturity securities. Schedule of Fair Value of Fixed Maturity Securities Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Fair Value Total Unrealized Loss Combined Fair Value At March 31, 2023 U.S. Treasury Securities And Obligations of U.S. Government Agencies $ 644,240 $ 53,196,137 $ 1,403,155 $ 29,019,470 $ 2,047,395 $ 82,215,607 Obligations of States and Political Subdivisions 204,976 4,644,270 132,970 1,213,482 337,946 5,857,752 Corporate Securities 5,315,889 123,534,510 3,723,412 26,399,408 9,039,301 149,933,918 Mortgage and other asset-backed securities 586,825 6,984,005 3,622,663 19,465,113 4,209,488 26,449,118 Totals $ 6,751,930 $ 188,358,922 $ 8,882,200 $ 76,097,473 $ 15,634,130 $ 264,456,395 At December 31, 2022 U.S. Treasury Securities And Obligations of U.S. Government Agencies $ 2,685,277 $ 79,400,753 $ - $ - $ 2,685,277 $ 79,400,753 Obligations of States and Political Subdivisions 378,067 5,467,910 80,070 429,020 458,137 5,896,930 Corporate Securities 10,935,114 162,995,969 995,659 5,781,822 11,930,773 168,777,791 Mortgage and other asset-backed securities 2,884,731 19,909,907 1,215,943 6,978,745 4,100,674 26,888,652 Totals $ 16,883,189 $ 267,774,539 $ 2,291,672 $ 13,189,587 $ 19,174,861 $ 280,964,126 There were 656 securities with fair value of 94.4 % of aggregate amortized cost at March 31, 2023. There were 713 securities with fair value of 93.6 % of aggregate amortized cost at December 31, 2022. Credit losses of $ 179,500 and nil have been recognized for the three month periods ended March 31, 2023 and 2022 and are included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. Other unrealized losses for which no credit loss was recognized are primarily the result of the recent rise in interest rates and inflation. Evaluation of Allowance for Credit Losses See Note 2 regarding the adoption of ASU 2016-13. On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss, unless current market or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited 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. 14 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Where the decline in fair value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and the Company anticipates recovery of all contractual or expected cash flows, the Company does not consider these securities to have credit loss because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before a recovery of amortized cost, which may be maturity. If the Company intends to sell a fixed maturity security or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, a credit loss has occurred and the difference between the amortized cost and the fair value that relates to the expected credit loss is recognized as a loss in earnings, included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. If the Company does not intend to sell and it is not more likely than not the Company will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, a credit loss would be recognized in earnings for the amount of the expected credit loss with a corresponding allowance for credit losses as a contra-asset account. The credit loss is included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. The recognized credit loss is limited to the total unrealized loss on the security due to a change in credit. Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if the Company intends to sell a security or when it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost. The Company does not measure a credit loss allowance on accrued interest receivable, included in accrued investment income on the condensed consolidated balance sheets, as the Company writes off any accrued interest receivable balance to net investment income in a timely manner (after 90 days) when the Company has concerns regarding collectability. The following table presents a roll forward of the Company’s allowance for credit losses on fixed maturity securities available for sale: Schedule of Allowance for Credit Losses on Fixed Maturity Securities Available for Sale Three Months Ended March 31, 2023 U.S. Treasury Securities And Obligations of U.S. Government Agencies Obligations of states and political subdivisions Corporate securities Mortgage-backed securities Total Beginning balance $ - $ - $ - $ - $ - Additions for credit losses not previously recorded - - 179,500 - 179,500 Change in allowance on securities with previous allowance - - - - - Reductions for securities sold during the period - - - - - Reductions for securities with credit losses due to intent to sell - - - - - Write-offs charged against the allowance - - - - - Recoveries of amounts previously written off - - - - - Ending Balance $ - $ - $ 179,500 $ - $ 179,500 15 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The following table presents a roll forward of the Company’s cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale which was required to be presented prior to the adoption of ASU 2016-13. Schedule of Earnings on Fixed Maturity Securities 2022 Balance of credit-related OTTI at January 1 $ 264,977 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) ( 39,502 ) Securities due to an increase in expected cash flows - Balance of credit-related OTTI at March 31 $ 225,475 The following table presents the amortized cost and the estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. Actual or 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 $ 18,103,991 $ 18,032,556 Due in 2-5 years 149,458,111 145,781,675 Due in 5-10 years 81,699,121 80,082,902 Due in more than 10 years 86,011,105 83,559,702 Mortgage-backed securities 33,859,690 29,853,692 Redeemable preferred stock 250,000 260,000 Total $ 369,382,018 $ 357,570,527 The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $ 93,436,027 , at estimated fair value, of fixed maturity securities with the FHLB at March 31, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of March 31, 2023, the Company owed $ 31,000,000 to the FHLB and its estimated maximum borrowing capacity was $ 55,351,809 . Credit Quality Indicators The NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered “investment grade” while the NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, the Company had 98.1 % and 97.7 % of its fixed maturity securities rated investment grade as of March 31, 2023 and December 31, 2022, respectively. 16 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The following table summarizes the credit quality, as determined by NAIC designation, of the Company’s fixed maturity securities available for sale, excluding redeemable preferred stock. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Schedule of Credit Quality of Fixed Maturity Security Portfolio by NAIC Designation March 31, 2023 December 31, 2022 NAIC Designation Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value 1 $ 202,589,256 $ 197,298,515 $ 197,753,818 $ 189,691,540 2 159,006,458 153,332,558 156,261,804 148,073,873 3 6,036,229 5,540,009 7,080,305 6,635,786 4 1,472,550 1,098,745 1,377,541 1,157,454 5 26,236 40,316 25,736 39,155 6 1,289 384 1,307 684 Total $ 369,132,018 $ 357,310,527 $ 362,500,511 $ 345,598,492 Information regarding sales of fixed maturity securities available for sale is presented as follows. Schedule of Major Categories of Net Investment Income 2023 2022 Three Months Ended March 31 2023 2022 Proceeds from sales $ 1,209,844 $ 455,651 Gross realized gains 15,490 2,354 Gross realized losses ( 54,104 ) ( 20 ) Securities and cash on deposit with regulatory authorities as required by law amounted to $ 10,952,850 at March 31, 2023 and $ 11,032,165 at December 31, 2022. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets. There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at March 31, 2023, 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 resources. The geographic locations and asset classes of investments are 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 where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are located in regions expected to have high growth in employment and population and that provide operational efficiencies. The Company currently owns and operates nine commercial properties in three states. These properties include office buildings, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company uses bank debt in strategic cases, primarily where it is anticipated to improve yields, or facilitate the acquisition of higher quality assets or asset class diversification. 17 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The aggregated net book value of commercial real estate serving as collateral for bank loans was $ 128,272,775 and $ 129,330,119 as of March 31, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $ 96,652,659 and $ 97,112,131 as of March 31, 2023, and December 31, 2022, respectively. During the three month periods ended March 31, 2023, and 2022, the Company did not record any impairment losses on commercial real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings. During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $ 1,565,927 and $ 1,323,930 , respectively. Commercial real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings. The Company’s commercial real estate held for investment is summarized as follows as of the respective dates indicated: Schedule of Commercial Real Estate Investment Net Book Value Total Square Footage March 31 2023 December 31 2022 March 31 2023 December 31 2022 Utah (1) $ 146,397,779 $ 147,627,946 625,920 625,920 Louisiana 2,369,405 2,380,847 31,778 31,778 Mississippi 2,950,961 2,881,863 19,694 19,694 $ 151,718,145 $ 152,890,656 677,392 677,392 (1) Includes Center53 phase 1 and phase 2 The Company’s commercial real estate held for sale is summarized as follows as of the respective dates indicated: Net Book Value March 31 2023 December 31 2022 Mississippi (1) $ 151,553 $ 151,553 $ 151,553 $ 151,553 (1) Consists of approximately 93 acres of undeveloped land This property is being marketed with the assistance of commercial real estate brokers in Mississippi. Residential Real Estate Held for Investment and Held for Sale The Company occasionally acquires a small portfolio of residential homes primarily as a result of loan foreclosures. The Company has the option to sell these properties or to continue to hold them for expected cash flow and price appreciation. The Company also invests in residential subdivision land developments. 18 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The Company established Security National Real Estate Services (“SNRE”) to manage its residential property portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the Company’s entire residential property portfolio. During the three month periods ended March 31, 2023, and 2022 the Company did not record any impairment losses on residential real estate held for sale or held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings. During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $ 2,648 and $ 2,648 , respectively. Residential real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings. The Company’s residential real estate held for investment is summarized as follows as of the respective dates indicated: Schedule of Residential Real Estate Investment Net Book Value March 31 2023 December 31 2022 Utah (1) $ 35,358,867 $ 38,437,960 $ 35,358,867 $ 38,437,960 (1) Includes subdivision land developments The following table presents additional information regarding the Company’s subdivision land developments in Utah. March 31 2023 December 31 2022 Lots developed 67 80 Lots to be developed 1,123 1,131 Book Value $ 34,825,972 $ 38,241,705 The Company’s residential real estate held for sale is summarized as follows as of the respective dates indicated: Net Book Value March 31 2023 December 31 2022 Utah $ 7,238,709 $ 11,010,029 $ 7,238,709 $ 11,010,029 The net book value of foreclosed residential real estate included in residential real estate held for sale was $ 5,570,788 and $ 11,010,029 as of March 31, 2023, and December 31, 2022, respectively. 19 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) 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 March 31, 2023, 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 433 Ascension Way, Floors 4, 5 and 6, Salt Lake City, UT - Center53 Building 2 (1) Corporate Offices, Life Insurance, Cemetery/Mortuary Operations, and Mortgage Operations and Sales 221,000 50 % 1044 River Oaks Dr., Flowood, MS (1) Life Insurance Operations 19,694 28 % 1818 Marshall Street, Shreveport, LA (2) Life Insurance Operations 12,274 100 % 909 Foisy Street, Alexandria, LA (2) Life Insurance Sales 8,059 100 % 812 Sheppard Street, Minden, LA (2) Life Insurance Sales 1,560 100 % 1550 N 3rd Street, Jena, LA (2) Life Insurance Sales 1,737 100 % (1) Included in real estate held for investment on the condensed consolidated balance sheets (2) Included in property and equipment on the condensed consolidated balance sheets 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 the loans 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 or are employed. As of March 31, 2023, the Company had 60 %, 10 %, 6 %, 5 %, 5 %, 3 % and 3 % of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, Arizona, Hawaii, and Nevada, respectively. As of December 31, 2022, the Company had 64 %, 10 %, 5 %, 5 %, 3 % and 3 % of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, 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 credit 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 requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans in excess of 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required. 20 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Evaluation of Allowance for Credit Losses See Note 2 regarding the adoption of ASU 2016-13. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the Company’s mortgage loans held for investment to present the net amount expected to be collected. The Company reports in net earnings, as a credit loss expense, the amount necessary to adjust the allowance for credit losses for the Company’s current estimate of expected credit losses on mortgage loans held for investment. This credit loss expense is included in other expenses on the condensed consolidated statements of earnings. Once a mortgage 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. Given this policy of timely writing off uncollectible accrued interest, the Company does not measure a credit loss allowance on accrued interest receivable as it writes off any uncollectible accrued interest receivable balances to net investment income in a timely manner. Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received for mortgage loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for mortgage loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued on these loans totaled approximately $ 110,000 and $ 226,000 as of March 31, 2023, and December 31, 2022, respectively. The Company measures expected credit losses based on the fair value of the collateral when the Company determines that foreclosure is probable. When a mortgage loan becomes delinquent, the Company proceeds to foreclose and all expenses for foreclosure are expensed as incurred. Once foreclosed, the property is classified as real estate held for investment or held for sale. For purposes of determining the allowance for credit 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 secondarily on the borrower’s (or guarantors) ability to repay. Commercial loans are evaluated for credit loss by analyzing loan attributes that are predictors for future credit losses. The Company uses a combination of the debt service coverage ratio (“DSCR”) and loan to value (“LTV”) to group similar commercial loans. The Company applies a future loss factor to the outstanding balance of each group to arrive at the allowance for credit loss. Residential — These loans are secured by first and second mortgages on single family dwellings. The borrower’s ability to repay is sensitive to the life events and the general economic condition of the region. Where loan to value exceeds 80%, the loan is generally guaranteed by private mortgage insurance, the FHA, or VA. The Company uses a third-party to provide a monthly analysis of its residential portfolio for credit losses. The third-party uses the Company’s current loan data and runs it through various models to project cash flows and provide a projected life of loan loss. The models consider loan features such as loan type, loan to value, payment status, age, and current property values. The Company also considers historical delinquency rates and current unemployment trends. 21 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Residential construction (including land acquisition and development) – These loans are 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, and factor in estimates of the value of construction projects upon completion. 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 acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. 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. To determine the allowance for credit losses on residential construction mortgage loans, the Company considers historical activity and housing market trends. Given the continued volatility in the housing market, the Company has adjusted its credit loss analysis. The following table presents a roll forward of the allowance for credit losses as of the dates indicated. Schedule of Allowance for Loan Losses Commercial Residential Residential Construction Total March 31, 2023 Allowance for credit losses: Beginning balance - January 1, 2023 $ 187,129 $ 1,739,980 $ 43,202 $ 1,970,311 Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13) 555,807 ( 192,607 ) 301,830 665,030 (1) Change in provision for credit losses 15,195 137,727 ( 52,844 ) 100,078 (2) Charge-offs - - - - Ending balance - March 31, 2023 $ 758,131 $ 1,685,100 $ 292,188 $ 2,735,419 December 31, 2022 Allowance for credit losses: Beginning balance - January 1, 2022 $ 187,129 $ 1,469,571 $ 43,202 $ 1,699,902 Change in provision for credit losses - 270,409 - 270,409 (2) Charge-offs - - - - Ending balance - December 31, 2022 $ 187,129 $ 1,739,980 $ 43,202 $ 1,970,311 (1) See Note 2 of the notes to the condensed consolidated financial statements (2) Included in other expenses on the condensed consolidated statements of earnings 22 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The following table presents the aging of mortgage loans held for investment by loan type as of the dates indicated. Schedule of Aging of Mortgage Loans Commercial Residential Residential Construction Total March 31, 2023 30-59 days past due $ 3,221,608 $ 5,807,400 $ 1,205,232 $ 10,234,240 60-89 days past due - - - - Over 90 days past due (1) 405,000 2,224,933 - 2,629,933 In process of foreclosure (1) - 713,552 - 713,552 Total past due 3,626,608 8,745,885 1,205,232 13,577,725 Current 47,180,844 85,725,328 144,888,715 277,794,887 Total mortgage loans 50,807,452 94,471,213 146,093,947 291,372,612 Allowance for credit losses ( 758,131 ) ( 1,685,100 ) ( 292,188 ) ( 2,735,419 ) Unamortized deferred loan fees, net ( 224,118 ) ( 1,258,174 ) ( 270,077 ) ( 1,752,369 ) Unamortized discounts, net ( 227,417 ) ( 110,768 ) - ( 338,185 ) Net mortgage loans $ 49,597,786 $ 91,417,171 $ 145,531,682 $ 286,546,639 December 31, 2022 30-59 days past due $ 1,000,000 $ 3,553,390 $ - $ 4,553,390 60-89 days past due - 814,184 - 814,184 Over 90 days past due (1) - 1,286,211 - 1,286,211 In process of foreclosure (1) 405,000 876,174 - 1,281,174 Total past due 1,405,000 6,529,959 - 7,934,959 Current 44,906,955 86,825,664 172,516,125 304,248,744 Total mortgage loans 46,311,955 93,355,623 172,516,125 312,183,703 Allowance for credit losses ( 187,129 ) ( 1,739,980 ) ( 43,202 ) ( 1,970,311 ) Unamortized deferred loan fees, net ( 199,765 ) ( 1,212,994 ) ( 333,846 ) ( 1,746,605 ) Unamortized discounts, net ( 230,987 ) ( 111,873 ) - ( 342,860 ) Net mortgage loans $ 45,694,074 $ 90,290,776 $ 172,139,077 $ 308,123,927 (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 March 31, 2023 (Unaudited) 3) Investments (Continued) Credit Quality Indicators The Company evaluates and monitors the credit quality of its commercial loans by analyzing loan to value (“LTV”) and debt service coverage ratios (“DSCR”). Monitoring a commercial mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The unpaid principal balance of commercial mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023: Schedule of Commercial Mortgage Loans By Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total % of Total Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total % of Total LTV: Less than 65% $ 8,525,000 $ 14,383,954 $ 3,842,851 $ - $ 3,025,549 $ 7,009,216 $ 36,786,570 72.40 % 65% to 80% - 6,073,044 2,100,000 4,913,313 - - 13,086,357 25.76 % Greater than 80% - 529,525 405,000 - - - 934,525 1.84 % Total $ 8,525,000 $ 20,986,523 $ 6,347,851 $ 4,913,313 $ 3,025,549 $ 7,009,216 $ 50,807,452 100.00 % DSCR >1.20x $ 5,725,000 $ 1,000,000 $ 2,800,000 $ 4,913,313 $ 3,025,549 $ 1,507,378 $ 18,971,240 37.34 % 1.00x - 1.20x 2,800,000 11,425,114 3,547,851 - - 5,501,838 23,274,803 45.81 % <1.00x - 8,561,409 (1) - - - - 8,561,409 16.85 % Total $ 8,525,000 $ 20,986,523 $ 6,347,851 $ 4,913,313 $ 3,025,549 $ 7,009,216 $ 50,807,452 100.00 % (1) Commercial construction loan The Company evaluates and monitors the credit quality of its residential mortgage loans by analyzing loan performance. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent and on a non-accrual status. Monitoring a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The unpaid principal balance of residential mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023: Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total % of Total Performance Indicators: Performing $ 5,386,918 $ 53,760,980 $ 6,923,101 $ 8,466,520 $ 3,264,494 $ 13,730,714 $ 91,532,727 96.89 % Non-performing (1) - 1,104,327 366,646 - 353,092 1,114,421 2,938,486 3.11 % Total $ 5,386,918 $ 54,865,307 $ 7,289,747 $ 8,466,520 $ 3,617,586 $ 14,845,135 $ 94,471,213 100.00 % (1) Includes residential mortgage loans in the process of foreclosure of $ 713,552 at March 31, 2023 24 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The company evaluates and monitors the credit quality of its residential construction loans (including land acquisition and development loans) by analyzing LTV and loan performance. Monitoring a residential construction mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The unpaid principal balance of residential construction mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023: Schedule of Residential Construction Mortgage Loans Credit Quality Indicator 2023 2022 2021 Total % of Total Performance Indicators: Performing $ 12,541,324 $ 87,110,137 $ 46,442,486 $ 146,093,947 100.00 % Non-performing - - - - 0.00 % Total $ 12,541,324 $ 87,110,137 $ 46,442,486 $ 146,093,947 100.00 % LTV: Less than 65% $ 9,072,543 $ 51,392,028 $ 8,626,153 $ 69,090,724 47.29 % 65% to 80% 3,468,781 33,790,358 21,588,236 58,847,375 40.28 % Greater than 80% - 1,927,751 16,228,097 18,155,848 12.43 % Total $ 12,541,324 $ 87,110,137 $ 46,442,486 $ 146,093,947 100.00 % Insurance Assignments The following table presents the aging of insurance assignments, included in other investments and policy loans on the condensed consolidated balance sheets. Schedule of Aging of Insurance Assignments As of March 31 2023 As of December 31 2022 30-59 days past due $ 9,554,122 $ 10,621,443 60-89 days past due 4,043,444 3,997,484 Over 90 days past due 5,791,483 5,813,013 Total past due 19,389,049 20,431,941 Current 26,184,781 26,510,594 Total insurance assignments 45,573,831 46,942,536 Allowance for credit losses ( 1,685,901 ) ( 1,609,951 ) Net insurance assignments $ 43,887,930 $ 45,332,585 The Company records an allowance for credit losses when the insurance assignment is funded. Once an insurance assignment moves to 90 days or legal proceedings, it is monitored for write-off and collectability, and any adjustments to the allowance are done at that time. See Note 2 regarding the adoption of ASU 2016-13. 25 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) The following table presents a roll forward of the allowance for credit losses as a contra-asset account for insurance assignments. Schedule of Allowance for Credit Losses Allowance Beginning balance - January 1, 2023 $ 1,609,951 Change in provision for credit losses 233,113 (1) Charge-offs ( 157,163 ) Ending balance - March 31, 2023 $ 1,685,901 Beginning balance - January 1, 2022 $ 1,686,218 Change in provision for credit losses 889,480 (1) Charge-offs ( 965,747 ) Ending balance - December 31, 2022 $ 1,609,951 (1) Included in other expenses on the condensed consolidated statements of earnings Investment Related Earnings The following table presents the realized gains and losses from sales, calls, and maturities, and unrealized gains and losses on equity securities from investments and other assets. Schedule of Gain (Loss) on Investments 2023 2022 Three Months Ended March 31 2023 2022 Fixed maturity securities: Gross realized gains $ 15,491 $ 46,123 Gross realized losses ( 54,891 ) ( 930 ) Net credit loss (provision) release ( 179,500 ) - Equity securities: Gains (losses) on securities sold ( 52,315 ) ( 10,279 ) Unrealized gains and (losses) on securities held at the end of the period 331,430 ( 607,047 ) Real estate held for investment and sale: Gross realized gains - 385,366 Gross realized losses - ( 94,400 ) Other assets, including call and put option derivatives: Gross realized gains 50,939 453,142 Gross realized losses - - Total $ 111,154 $ 171,975 The 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. Net realized gains and losses includes gains and losses by the restricted assets and cemetery perpetual care trust investments of the cemeteries and mortuaries of $ 53,931 in net gains and $ 275,741 in net losses for the three month periods ended March 31, 2023, and 2022, respectively. 26 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 3) Investments (Continued) Major categories of net investment income were as follows: 2023 2022 Three Months Ended March 31 2023 2022 Fixed maturity securities available for sale $ 4,012,732 $ 2,636,216 Equity securities 140,507 123,037 Mortgage loans held for investment 8,487,656 7,960,178 Real estate held for investment and sale 3,364,924 3,040,033 Policy loans 200,213 306,282 Insurance assignments 4,768,203 5,396,987 Other investments 129,056 70,645 Cash and cash equivalents 787,762 75,301 Gross investment income 21,891,053 19,608,679 Investment expenses ( 4,116,170 ) ( 4,414,373 ) Net investment income $ 17,774,883 $ 15,194,306 Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $ 633,527 and $ 476,708 for the three month periods ended March 31, 2023 and 2022, 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. Accrued Investment Income Accrued investment income consists of the following: Schedule of Accrued Investment Income As of March 31 2023 As of December 31 2022 Fixed maturity securities available for sale $ 3,841,931 $ 3,563,767 Equity securities 18,362 14,496 Mortgage loans held for investment 2,710,149 3,220,709 Real estate held for investment 2,809,671 3,455,305 Policy Loans 45,221 37,951 Cash and cash equivalents 1,905 7,598 Total accrued investment income $ 9,427,239 $ 10,299,826 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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 table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale: Schedule of Aggregate Fair Value Loans Held for Sale As of March 31 2023 As of December 31 2022 Aggregate fair value $ 173,015,404 $ 141,179,620 Unpaid principal balance 172,407,557 141,337,811 Unrealized gain (loss) 607,847 ( 158,191 ) 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 summarized as follows: Schedule of Mortgage Fee Income for Loans Held for Sale Three Months Ended March 31 2023 2022 Loan fees $ 4,388,414 $ 7,087,182 Interest income 2,007,058 2,031,869 Secondary gains 17,961,358 39,602,614 Change in fair value of loan commitments 677,952 2,675,371 Change in fair value of loans held for sale 794,614 ( 2,746,565 ) Provision for loan loss reserve 159,610 ( 306,026 ) Mortgage fee income $ 25,989,006 $ 48,344,445 Loan Loss Reserve Repurchase demands from third party investors that correspond to mortgage loans previously held for sale and sold are reviewed and relevant data is captured so that an estimated future loss can be calculated. The key factors that are used in the estimated future 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. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 4) Loans Held for Sale (Continued) The loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows: Summary of Loan Loss Reserve Included in Other Liabilities and Accrued Expenses As of March 31 2023 As of December 31 2022 Balance, beginning of period $ 1,725,667 $ 2,447,139 Provision on current loan originations (1) 239,801 1,078,812 Charge-offs, net of recaptured amounts ( 632,783 ) ( 1,800,284 ) Balance, end of period $ 1,332,685 $ 1,725,667 (1) Included in mortgage fee income The Company maintains reserves for estimated losses on current production volumes. For the three month period ended March 31, 2023, $ 239,801 in reserves were added at a rate of 4.5 basis points per loan, the equivalent of $ 450 per $ 1,000,000 in loans originated. This is an increase over the three month period ended March 31, 2022, when reserves of $ 306,026 were added at a rate of 2.9 basis points per loan originated, the equivalent of $ 290 per $ 1,000,000 in loans originated. 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 March 31, 2023, represents its best estimate for adequate loss reserves on loans sold. 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 5) Stock Compensation Plans The Company has three fixed option plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Equity Incentive Plan”). Stock Options Stock based compensation expense for stock options issued of $ 142,929 and $ 271,747 has been recognized for these plans for the three month periods ended March 31, 2023, and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2023, the total unrecognized compensation expense related to the options issued was $ 390,702 , which is expected to be recognized over the vesting period. 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. Activity of the stock option plans during the three month period ended March 31, 2023, is summarized as follows: Schedule of Activity of Stock Option Plans Number of Class A Shares Weighted Average Exercise Price Number of Class C Shares Weighted Average Exercise Price Outstanding at January 1, 2023 976,605 $ 4.78 1,157,203 $ 5.59 Granted 16,000 - Exercised ( 90,705 ) - Cancelled - - Outstanding at March 31, 2023 901,900 $ 4.92 1,157,203 $ 5.59 As of March 31, 2023: Options exercisable 827,025 $ 4.76 935,953 $ 5.36 As of March 31, 2023: Available options for future grant 155,133 795,000 Weighted average contractual term of options outstanding at March 31, 2023 4.60 years 6.66 years Weighted average contractual term of options exercisable at March 31, 2023 4.14 years 6.20 years Aggregated intrinsic value of options outstanding at March 31, 2023 (1) $ 1,182,602 $ 741,380 Aggregated intrinsic value of options exercisable at March 31, 2023 (1) $ 1,214,210 $ 812,293 (1) The Company used a stock price of $ 6.23 as of March 31, 2023 to derive intrinsic value. 30 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 5) Stock Compensation Plans (Continued) Activity of the stock option plans during the three month period ended March 31, 2022, is summarized as follows: Number of Class A Shares Weighted Average Exercise Price Number of Class C Shares Weighted Average Exercise Price Outstanding at January 1, 2022 1,024,351 $ 4.61 821,146 $ 5.48 Granted 4,000 - Exercised ( 50,968 ) - Cancelled - - Outstanding at March 31, 2022 977,383 $ 4.77 821,146 $ 5.48 As of March 31, 2022: Options exercisable 906,258 $ 4.46 648,646 $ 4.67 As of March 31, 2022: Available options for future grant 228,376 16,689 Weighted average contractual term of options outstanding at March 31, 2022 4.44 years 7.00 years Weighted average contractual term of options exercisable at March 31, 2022 4.03 years 6.57 years Aggregated intrinsic value of options outstanding at March 31, 2022 (1) $ 5,115,622 $ 3,666,085 Aggregated intrinsic value of options exercisable at March 31, 2022 (1) $ 5,017,469 $ 3,460,285 (1) The Company used a stock price of $ 10.00 as of March 31, 2022, which was the closing price of the Company’s Class A shares on Nasdaq for that day, to derive intrinsic value. The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the three month periods ended March 31,2023 and 2022 was $ 176,935 and $ 395,831 , respectively. 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 5) Stock Compensation Plans (Continued) Restricted Stock Units (“RSUs”) Stock based compensation expense for RSUs issued of $ 742 and nil has been recognized under these plans for the three month periods ended March 31, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of March 31, 2023, the total unrecognized compensation expense related to the RSUs issued was nil . The fair value of each RSU granted is determined based on the Company’s stock price on the date of grant. Prior to December 2022, the Company did not grant any RSUs. Activity of the RSUs during the three month period ended March 31, 2023 is summarized as follows: Schedule of Activity Restricted Stock Units Number of Class A Shares Weighted Average Grant Date Fair Value Non-vested at January 1, 2023 1,620 $ 6.48 Granted - Vested - Non-vested at March 31, 2023 1,620 $ 6.48 Available RSUs for future grant $ 18,380 Aggregated intrinsic value of RSUs outstanding at March 31, 2023 (1) $ - (1) The Company used a stock price of $ 6.23 as of March 31, 2023 to derive intrinsic value. 32 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 6) Earnings Per Share Earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. In accordance with GAAP, the basic and diluted earnings per share amounts were calculated as follows: Schedule of Earnings Per Share, Basic and Diluted Three Months Ended March 31 2023 2022 Numerator: Net earnings $ 1,240,172 $ 3,228,718 Denominator: Basic weighted-average shares outstanding 21,080,549 21,381,988 Effect of dilutive securities: Employee stock options 531,486 884,485 Diluted weighted-average shares outstanding 21,612,035 22,266,473 Basic net earnings per share $ 0.06 $ 0.15 Diluted net earnings per share $ 0.06 $ 0.15 For the three month periods ended March 31, 2023, and 2022, there were 730,270 and nil 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. Summary of Activities in Shares of Capital Stock Class A Class C Outstanding shares at December 31, 2021 17,642,722 2,866,565 Exercise of stock options 50,223 - Conversion of Class C to Class A 207 ( 207 ) Outstanding shares at March 31, 2022 17,693,152 2,866,358 Outstanding shares at December 31, 2022 18,758,031 2,889,859 Common stock, shares, outstanding, beginning 18,758,031 2,889,859 Exercise of stock options 48,046 - Conversion of Class C to Class A 936 ( 936 ) Outstanding shares at March 31, 2023 18,807,013 2,888,923 Common stock, shares, outstanding, ending 18,807,013 2,888,923 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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, 2022. 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. 34 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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 March 31, 2023 Revenues from external customers $ 45,415,297 $ 7,198,396 $ 26,887,041 $ - $ 79,500,734 Intersegment revenues 1,510,028 83,836 123,699 ( 1,717,563 ) - Segment profit (loss) before income taxes 3,683,735 1,784,592 ( 3,883,439 ) - 1,584,888 Identifiable Assets 1,308,954,075 87,354,333 152,745,312 ( 111,225,073 ) 1,437,828,647 Goodwill 2,765,570 2,488,213 - - 5,253,783 Total Assets 1,311,719,645 89,842,546 152,745,312 ( 111,225,073 ) 1,443,082,430 For the Three Months Ended March 31, 2022 Revenues from external customers $ 41,501,809 $ 7,463,194 $ 53,460,904 $ - $ 102,425,907 Intersegment revenues 1,695,779 182,589 74,709 ( 1,953,077 ) - Segment profit before income taxes 816,485 2,020,317 1,606,714 - 4,443,516 Identifiable Assets 1,241,160,139 77,002,286 295,671,662 ( 99,284,078 ) 1,514,550,009 Goodwill 2,765,570 2,488,213 - - 5,253,783 Total Assets 1,243,925,709 79,490,499 295,671,662 ( 99,284,078 ) 1,519,803,792 35 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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 financial assets), 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. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy. 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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. Fair value is often difficult to determine and may contain significant unobservable inputs. 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 with 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 comparable sales in the area, property condition, and 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 comparable properties 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. 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at March 31, 2023. 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 $ 357,570,527 $ - $ 356,135,008 $ 1,435,519 Equity securities 12,354,007 12,354,007 - - Loans held for sale 173,015,404 - - 173,015,404 Restricted assets (1) 1,217,307 - 1,217,307 - Restricted assets (2) 5,660,427 5,660,427 - - Cemetery perpetual care trust investments (1) 256,422 - 256,422 - Cemetery perpetual care trust investments (2) 3,691,958 3,691,958 - - Derivatives - loan commitments (3) 6,560,948 - - 6,560,948 Total assets accounted for at fair value on a recurring basis $ 560,327,000 $ 21,706,392 $ 357,608,737 $ 181,011,871 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) Derivatives - put options (4) Derivatives - loan commitments (4) ( 3,176,119 ) - - ( 3,176,119 ) Total liabilities accounted for at fair value on a recurring basis $ ( 3,176,119 ) $ - $ - $ ( 3,176,119 ) (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 38 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (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, 2022. 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 $ 345,858,492 $ - $ 344,422,973 $ 1,435,519 Equity securities 11,682,526 11,682,526 - - Loans held for sale 141,179,620 - - 141,179,620 Restricted assets (1) 1,217,308 - 1,217,308 - Restricted assets (1) 1,217,308 - 1,217,308 - Restricted assets (2) 5,348,244 5,348,244 - - Restricted assets (2) 5,348,244 5,348,244 - - Cemetery perpetual care trust investments (1) 254,731 - 254,731 - Cemetery perpetual care trust investments (1) 254,731 - 254,731 - Cemetery perpetual care trust investments (2) 3,605,162 3,605,162 - - Cemetery perpetual care trust investments (2) 3,605,162 3,605,162 - - Derivatives - loan commitments (3) 4,089,856 - - 4,089,856 Derivatives - loan commitments (3) 4,089,856 - - 4,089,856 Total assets accounted for at fair value on a recurring basis $ 513,235,939 $ 20,635,932 $ 345,895,012 $ 146,704,995 Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) $ ( 29,715 ) $ ( 29,715 ) $ - $ - Derivatives - put options (4) ( 13,888 ) ( 13,888 ) - - Derivatives - loan commitments (4) ( 1,382,979 ) - - ( 1,382,979 ) Derivatives - call options (4) $ ( 29,715 ) $ ( 29,715 ) $ - $ - Derivatives - put options (4) ( 13,888 ) ( 13,888 ) - - Derivatives - loan commitments (4) ( 1,382,979 ) - - ( 1,382,979 ) Total liabilities accounted for at fair value on a recurring basis $ ( 1,426,582 ) $ ( 43,603 ) $ - $ ( 1,382,979 ) (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 39 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) For Level 3 assets and liabilities measured at fair value on a recurring basis as of March 31, 2023, 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 3/31/2023 Technique Input(s) Value Value Average Loans held for sale $ 173,015,404 Market approach Investor contract pricing as a percentage of unpaid principal balance 70.0 % 111.0 % 100.0 % Derivatives - loan commitments (net) 3,384,829 Market approach Pull-through rate 65.0 % 95.0 % 85.0 % Initial-Value N/A N/A N/A Servicing 0 bps 149 bps 45 bps Fixed maturity securities available for sale 1,435,519 Broker quotes Pricing quotes $ 100.00 $ 111.11 $ 104.97 For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2022, 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 12/31/2022 Technique Input(s) Value Value Average Loans held for sale $ 141,179,620 Market approach Investor contract pricing as a percentage of unpaid principal balance 69.9 % 106.1 % 99.8 % Derivatives - loan commitments (net) 2,706,877 Market approach Pull-through rate 65.0 % 95.0 % 82.2 % Initial-Value N/A N/A N/A Servicing 0 bps 153 bps 73 bps Fixed maturity securities available for sale 1,435,519 Broker quotes Pricing quotes $ 100.00 $ 111.11 $ 104.97 40 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month periods ended March 31, 2023: Schedule of Changes in the Condensed Consolidated Balance Sheet Line Items Measured Using Level 3 Inputs Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - December 31, 2022 $ 2,706,877 $ 141,179,620 $ 1,435,519 Originations and purchases - 531,867,796 - Sales, maturities and paydowns - ( 511,909,942 ) - Total gains (losses): Included in earnings 677,952 (1) 11,877,930 (1) - (2) Included in other comprehensive income - - - Balance - March 31, 2023 $ 3,384,829 $ 173,015,404 $ 1,435,519 (1) As a component of Mortgage fee income on the condensed consolidated statements of earnings (2) As a component of Net investment income on the condensed consolidated statements of earnings The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month periods ended March 31, 2022: Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - December 31, 2021 $ 7,015,515 $ 302,776,827 $ 2,023,348 Originations and purchases - 1,039,216,582 - Sales, maturities and paydowns - ( 1,132,085,830 ) ( 11,950 ) Total gains (losses): Included in earnings 2,675,371 (1) 24,105,293 (1) 961 (2) Included in other comprehensive income - - ( 587 ) Balance - March 31, 2022 $ 9,690,886 $ 234,012,872 $ 2,011,772 (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 41 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The Company didn’t have any financial assets and financial liabilities measured at fair value on a nonrecurring basis at March 31, 2023. The following table summarizes 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, 2022. 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 $ 794,224 $ - $ - $ 794,224 Total assets accounted for at fair value on a nonrecurring basis $ 794,224 $ - $ - $ 794,224 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 March 31, 2023 and December 31, 2022. The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of March 31, 2023: 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 $ 91,417,171 $ - $ - $ 89,949,922 $ 89,949,922 Residential construction 145,531,682 - - 145,531,682 145,531,682 Commercial 49,597,786 - - 48,049,451 48,049,451 Mortgage loans held for investment, net $ 286,546,639 $ - $ - $ 283,531,055 $ 283,531,055 Policy loans 13,012,347 - - 13,012,347 13,012,347 Insurance assignments, net (1) 43,887,930 - - 43,887,930 43,887,930 Restricted assets (2) 2,936,896 - - 2,936,896 2,936,896 Cemetery perpetual care trust investments (2) 2,709,339 - - 2,709,339 2,709,339 Mortgage servicing rights, net 3,166,133 - - 4,164,686 4,164,686 Liabilities Bank and other loans payable $ ( 138,391,846 ) $ - $ - $ ( 138,391,846 ) $ ( 138,391,846 ) Policyholder account balances (3) ( 40,865,405 ) - - ( 41,529,360 ) ( 41,529,360 ) Future policy benefits - annuities (3) ( 106,474,611 ) - - ( 128,238,451 ) ( 128,238,451 ) (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 42 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2022: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential $ 90,290,776 $ - $ - $ 88,575,293 $ 88,575,293 Residential construction 172,139,077 - - 172,139,077 172,139,077 Commercial 45,694,074 - - 44,079,537 44,079,537 Mortgage loans held for investment, net $ 308,123,927 $ - $ - $ 304,793,907 $ 304,793,907 Policy loans 13,095,473 - - 13,095,473 13,095,473 Insurance assignments, net (1) 45,332,585 - - 45,332,585 45,332,585 Restricted assets (2) 1,731,469 - - 1,731,469 1,731,469 Cemetery perpetual care trust investments (2) 1,506,517 - - 1,506,517 1,506,517 Mortgage servicing rights, net 3,039,765 - - 3,927,877 3,927,877 Liabilities Bank and other loans payable $ ( 161,712,804 ) $ - $ - $ ( 161,712,804 ) $ ( 161,712,804 ) Policyholder account balances (3) ( 41,146,171 ) - - ( 42,181,089 ) ( 42,181,089 ) Future policy benefits - annuities (3) ( 106,637,094 ) - - ( 126,078,031 ) ( 126,078,031 ) (1) Included in other investments and policy loans on the consolidated balance sheets (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims on the consolidated balance sheets The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows: Mortgage Loans Held for Investment : The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment. Residential – The estimated fair value is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently. Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value. Commercial – The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current interest rates for commercial mortgages. Policy Loans : The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies. Insurance Assignments, Net : These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values. 43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) Bank and Other Loans Payable : The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates. Policyholder Account Balances and Future Policy Benefits-Annuities : Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5 % to 6.5 %. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 9) 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 net of estimated commission expense. 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 related 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. 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. 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 9 ) Derivative Instruments (Continued) 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 Derivatives The Company discontinued its use of selling “out of the money” call options on its equity securities and the use of selling put options as a source of revenue in the first quarter of 2023. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets. The following table shows the fair value and notional amounts of derivative instruments. Schedule of Derivative Assets at Fair Value March 31, 2023 December 31, 2022 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 $ 441,138,434 $ 6,560,948 $ 3,176,119 $ 453,371,808 $ 4,089,859 $ 1,382,979 Call options Other liabilities - - - 868,600 - 29,715 Put options Other liabilities - - - 654,500 - 13,888 Total $ 441,138,434 $ 6,560,948 $ 3,176,119 $ 454,894,908 $ 4,089,859 $ 1,426,582 The following table presents the gains on derivatives. There were no gains or losses reclassified from accumulated other comprehensive income into income or gains or losses recognized in income on derivatives ineffective portion, or any amounts excluded from effective testing. Schedule of Gains and Losses on Derivatives Net Amount Gain (Loss) Three Months Ended March 31 Derivative Classification 2023 2022 Loan commitments Mortgage fee income $ 677,952 $ 2,675,371 Call and put options Gains on investments and other assets $ 49,963 $ 61,195 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 10) 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 evaluates the financial condition of reinsurers and monitors the concentration of credit risk. 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. See Note 4 to the condensed consolidated financial statements for additional information about the Company’s loan loss reserve. 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 SOFR rate plus 2.1% and matures on June 2, 2023 . 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 SOFR rate plus 2% and matures on November 9, 2023 . 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 $ 75,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month SOFR rate plus 2.50% and matures on May 26, 2023 . 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 $ 50,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at 2.10% plus the greater of (i) 0% , and (ii) the one-month forward-looking term rate based on SOFR and matures on June 2, 2023 . 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 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 March 31, 2023, the Company was not in compliance with the net income covenant on its warehouse line with U.S. Bank and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $ 8,900,000 on the Texas Capital Bank N.A. warehouse line that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines that have provided covenant waivers to fund its origination activities. 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 10) Reinsurance, Commitments and Contingencies Other Contingencies and Commitments The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of March 31, 2023, the Company’s commitments were approximately $ 192,542,000 for these loans, of which $ 151,740,182 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 8.50 % 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. 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 11) 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 table presents the MSR activity. Schedule of Mortgage Servicing Rights As of March 31 2023 As of December 31 2022 Amortized cost: Balance before valuation allowance at beginning of year $ 3,039,765 $ 53,060,455 MSR additions resulting from loan sales (1) 287,710 10,243,922 Amortization (2) ( 161,342 ) ( 9,078,706 ) Sale of MSRs - ( 51,185,906 ) Application of valuation allowance to write down MSRs with other than temporary impairment - - Balance before valuation allowance at end of period $ 3,166,133 $ 3,039,765 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 $ 3,166,133 $ 3,039,765 Estimated fair value of MSRs at end of period $ 4,164,686 $ 3,927,877 (1) Included in mortgage fee income on the condensed consolidated statements of earnings (2) Included in other expenses on the condensed consolidated statements of earnings 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 11) Mortgage Servicing Rights The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its March 31, 2023 valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management. Schedule of Finite-Lived Intangible Assets, Future Amortization Expense, Mortgage Servicing Rights Estimated MSR Amortization 2023 345,340 2024 309,193 2025 277,298 2026 246,874 2027 221,541 Thereafter 1,765,887 Total $ 3,166,133 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 2023 2022 Three Months Ended March 31 2023 2022 Contractual servicing fees $ 410,400 $ 4,506,260 Late fees 49,313 100,038 Total $ 459,713 $ 4,606,298 The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio. Summary of Unpaid Principal Balances of the Servicing Portfolio As of March 31 2023 As of December 31 2022 Servicing UPB $ 376,394,059 $ 360,023,384 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 March 31, 2023 8.80 8.10 11.78 December 31, 2022 8.12 8.49 11.95 On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $ 7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased $ 51,185,906 and generated a gain of $ 34,051,938 included in mortgage fee income on the consolidated statements of earnings. Substantially all of the consideration was received by the Company with the remainder subject to certain holdbacks during transfer of the MSRs. The Company completed the physical transfer of files prior to its deadline. The Company received half of the holdbacks in the first quarter of 2023 and anticipates the release of the remaining holdbacks in the second quarter of 2023. 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 12) Income Taxes The Company’s overall effective tax rate for the three month periods ended March 31, 2023 and 2022 was 21.8 % and 27.3 %, respectively, which resulted in a provision for income taxes of $ 344,716 and $ 1,214,798 , 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 decrease in the effective tax rate when compared to the prior year is partially 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. 13) Revenues from Contracts with Customers The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers . Information about Performance Obligations and Contract Balances The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled. The Company’s three types of future obligations are as follows: Pre-need Merchandise and Service Revenue : All pre-need merchandise and service revenue is deferred, and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized. At-need Specialty Merchandise Revenue : At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received. Deferred Pre-need Land Revenue : Deferred pre-need revenue and corresponding commissions are deferred until 10 % of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust. Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred. 50 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 13) 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 (1/1/2023) $ 5,392,779 $ - $ 16,226,836 Closing (3/31/2023) 5,145,833 - 16,583,024 Increase/(decrease) ( 246,946 ) - 356,188 Contract Balances Receivables (1) Contract Asset Contract Liability Opening (1/1/2022) $ 5,298,636 $ - $ 14,508,022 Closing (12/31/2022) 5,392,779 - 16,226,836 Increase/(decrease) 94,143 - 1,718,814 (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 month periods ended March 31, 2023 and 2022 was $ 1,119,898 and $ 1,064,104 , 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. Schedule of Revenues of the Cemetery and Mortuary Contracts 2023 2022 Three Months Ended March 31 2023 2022 Major goods/service lines At-need $ 5,154,036 $ 5,866,878 Pre-need 1,317,393 1,338,843 Net mortuary and cemetery sales $ 6,471,429 $ 7,205,721 Timing of Revenue Recognition Goods transferred at a point in time $ 4,029,666 $ 4,180,545 Services transferred at a point in time 2,441,763 3,025,176 Net mortuary and cemetery sales $ 6,471,429 $ 7,205,721 51 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 13) Revenues from Contracts with Customers (Continued) 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 2023 2022 Three Months Ended March 31 2023 2022 Net mortuary and cemetery sales $ 6,471,429 $ 7,205,721 Gains (losses) on investments and other assets 53,931 ( 254,525 ) Net investment income 601,491 496,459 Other revenues 71,545 15,539 Revenues from external customers 7,198,396 7,463,194 14) Receivables Receivables consist of the following: Schedule of Receivables As of March 31, 2023 As of December 31, 2022 Contracts with customers $ 5,145,833 $ 5,392,779 Receivables from sales agents 2,254,183 2,209,185 Other 10,844,499 23,200,919 Total receivables 18,244,515 30,802,883 Allowance for doubtful accounts ( 1,867,124 ) ( 2,229,791 ) Net receivables $ 16,377,391 $ 28,573,092 The Company records an allowance for credit losses for its receivables in accordance with GAAP. See Note 2 regarding the adoption of ASU 2016-13. The following table presents a roll forward of the allowance for credit losses. Schedule of Allowance Credit Losses Allowance Beginning balance - January 1, 2023 $ 2,229,791 Change in provision for credit losses ( 318,664 )(1) Charge-offs ( 44,003 ) Ending balance - March 31, 2023 $ 1,867,124 Beginning balance - January 1, 2022 $ 1,800,725 Change in provision for credit losses 799,888 (1) Charge-offs ( 370,822 ) Ending balance - December 31, 2022 $ 2,229,791 (1) Included in other expenses on the condensed consolidated statements of earnings 52 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) Cemetery Perpetual Care Trust Investments and Obligation State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as variable interest entities pursuant to GAAP. Also, management has determined that the Company is the primary beneficiary of these trusts, as it absorbs both a majority of the losses and returns associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets . The components of the cemetery perpetual care investments and obligation as of March 31, 2023, are as follows: Schedule of Investments Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value March 31, 2023: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 89,004 $ 381 $ - $ - $ 89,384 Obligations of states and political subdivisions 172,966 - ( 5,928 ) - 167,038 Total fixed maturity securities available for sale $ 261,969 $ 381 $ ( 5,928 ) $ - $ 256,422 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 3,251,768 $ 602,286 $ ( 162,096 ) $ 3,691,958 Total equity securities at estimated fair value $ 3,251,768 $ 602,286 $ ( 162,096 ) $ 3,691,958 Mortgage loans held for investment at amortized cost: Residential construction $ 2,709,339 Less: Allowance for credit losses $ ( 2,196 ) Total mortgage loans held for investment $ 2,707,143 Real estate held for investment: Residential $ 55,531 Cash and cash equivalents $ 749,358 Total cemetery perpetual care trust investments $ 7,460,412 Cemetery perpetual care obligation $ ( 5,143,233 ) Trust investments in excess of trust obligations $ 2,317,179 53 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) The components of the cemetery perpetual care investments and obligation as of December 31, 2022, are as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2022: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 89,004 $ 42 $ ( 38 ) $ 89,008 Obligations of states and political subdivisions 174,201 - ( 8,478 ) 165,723 Total fixed maturity securities available for sale $ 263,205 $ 42 $ ( 8,516 ) $ 254,731 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 3,195,942 $ 584,383 $ ( 175,163 ) $ 3,605,162 Total equity securities at estimated fair value $ 3,195,942 $ 584,383 $ ( 175,163 ) $ 3,605,162 Mortgage loans held for investment at amortized cost: Residential construction $ 1,506,517 Real estate held for investment: Residential $ ( 16,178 ) Cash and cash equivalents $ 1,925,978 Total cemetery perpetual care trust investments $ 7,276,210 Cemetery perpetual care obligation $ ( 5,099,542 ) Trust investments in excess of trust obligations $ 2,176,668 Fixed Maturity Securities The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities: Schedule of Fair Value of Fixed Maturity Securities Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Fair Value Total Unrealized Loss Fair Value At March 31, 2023 Obligations of states and political subdivisions $ 435 $ 54,401 $ 5,493 $ 112,637 $ 5,928 $ 167,038 Total unrealized losses $ 435 $ 54,401 $ 5,493 $ 112,637 $ 5,928 $ 167,038 At December 31, 2022 U.S. Treasury securities and obligations of U.S. Government agencies $ 38 $ 59,392 $ - $ - $ 38 $ 59,392 Obligations of states and political subdivisions 1,845 94,612 6,633 71,112 8,478 165,724 Total unrealized losses $ 1,883 $ 154,004 $ 6,633 $ 71,112 $ 8,516 $ 225,116 54 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) There were 3 securities with fair value of 96.6 % of aggregate amortized cost at March 31, 2023. There were 5 securities with fair value of 96.4 % of aggregate amortized cost at December 31, 2022. No credit losses have been recognized for the three month periods ended March 31, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent rise in interest rates and inflation. The following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. 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 Estimated Fair Cost Value Due in 1 year $ 89,004 $ 89,384 Due in 2-5 years 76,509 71,788 Due in 5-10 years 41,621 40,849 Due in more than 10 years 54,835 54,401 Total $ 261,969 $ 256,422 Restricted Assets The Company has also established certain restricted assets to provide for future merchandise and service obligations incurred in connection with its pre-need sales for its cemetery and mortuary segment. Restricted cash also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development projects. Additionally, the Company elected to maintain its medical benefit fund without change from the prior year and has included this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments. Restricted assets as of March 31, 2023, are summarized as follows: Schedule of Restricted Assets in Cemetery and Mortuary Endowment Care and Pre need Merchandise Funds Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value March 31, 2023: Fixed maturity securities, available for sale, at estimated fair value: Obligations of states and political subdivisions $ 1,030,141 $ 679 $ ( 12,436 ) $ - $ 1,018,384 Corporate securities including public utilities 200,543 - ( 1,620 ) - 198,923 Total fixed maturity securities available for sale $ 1,230,685 $ 679 $ ( 14,056 ) $ - $ 1,217,307 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 5,241,033 $ 692,339 $ ( 272,945 ) $ 5,660,427 Total equity securities at estimated fair value $ 5,241,033 $ 692,339 $ ( 272,945 ) $ 5,660,427 Mortgage loans held for investment at amortized cost: Residential construction $ 2,936,896 Less: Allowance for credit losses $ ( 5,874 ) Total mortgage loans held for investment $ 2,931,023 Cash and cash equivalents (1) $ 9,228,113 Total restricted assets $ 19,036,870 (1) Including cash and cash equivalents of $ 8,232,615 for the life insurance and mortgage segments. 55 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) Restricted assets as of December 31, 2022, are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2022: Fixed maturity securities, available for sale, at estimated fair value: Obligations of states and political subdivisions $ 1,033,047 $ 866 $ ( 15,360 ) $ 1,018,553 Corporate securities including public utilities 201,771 - ( 3,016 ) 198,755 Total fixed maturity securities available for sale $ 1,234,818 $ 866 $ ( 18,376 ) $ 1,217,308 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 4,955,360 $ 703,049 $ ( 310,165 ) $ 5,348,244 Total equity securities at estimated fair value $ 4,955,360 $ 703,049 $ ( 310,165 ) $ 5,348,244 Mortgage loans held for investment at amortized cost: Residential construction $ 1,731,469 Cash and cash equivalents (1) $ 10,638,034 Total restricted assets $ 18,935,055 (1) Including cash and cash equivalents of $ 8,527,620 for the life insurance and mortgage segments. Fixed Maturity Securities The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities: Schedule of Fair Value of Fixed Maturity Securities Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Fair Value Total Unrealized Loss Fair Value At March 31, 2023 Obligations of states and political subdivisions $ 2,670 $ 338,301 $ 9,767 $ 500,955 $ 12,436 $ 839,256 Corporate securities including public utilities 1,620 198,923 - - 1,620 198,923 Total unrealized losses $ 4,290 $ 537,225 $ 9,767 $ 500,955 $ 14,056 $ 1,038,179 At December 31, 2022 Obligations of states and political subdivisions $ 11,891 $ 760,255 $ 3,469 $ 58,072 $ 15,360 $ 818,327 Corporate securities including public utilities 3,016 198,755 - - 3,016 198,755 Total unrealized losses $ 14,907 $ 959,010 $ 3,469 $ 58,072 $ 18,376 $ 1,017,082 There were 17 securities with fair value of 98.7 % of aggregate amortized cost at March 31, 2023. There were 17 securities with fair value of 98.2 % of aggregate amortized cost at December 31, 2022. No credit losses have been recognized for the three month periods ended March 31, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent rise in interest rates and inflation. 56 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) The following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. 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 Estimated Fair Cost Value Due in 1 year $ - $ - Due in 2-5 years 318,067 311,893 Due in 5-10 years 153,284 151,610 Due in more than 10 years 759,334 753,804 Total $ 1,230,685 $ 1,217,307 See Notes 3 and 8 for additional information regarding restricted assets and cemetery perpetual care trust investments. 16) Accumulated Other Comprehensive Income (loss) The following summarizes the changes in accumulated other comprehensive income (loss): Schedule of Changes in Accumulated Other Comprehensive Income 2023 2022 Three Months Ended March 31 2023 2022 Unrealized gains (losses) on fixed maturity securities available for sale $ 5,436,929 $ ( 15,372,096 ) Amounts reclassified into net earnings ( 218,900 ) 45,193 Net unrealized gains (losses) before taxes 5,218,029 ( 15,326,903 ) Tax (expense) benefit ( 1,095,787 ) 3,218,648 Net 4,122,242 ( 12,108,255 ) Unrealized gains (losses) on restricted assets (1) 4,133 ( 71,946 ) Tax (expense) benefit ( 1,029 ) 17,922 Net 3,104 ( 54,024 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) 2,926 ( 37,357 ) Tax (expense) benefit ( 714 ) 9,306 Net 2,212 ( 28,051 ) Other comprehensive income (loss) changes $ 4,127,558 $ ( 12,190,330 ) (1) Fixed maturity securities available for sale 57 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2023 (Unaudited) 16) Accumulated Other Comprehensive Income (loss) (Continued) The following is the accumulated balances of other comprehensive income (loss) as of March 31, 2023: Schedule of Accumulated Balances of Other Comprehensive Income Beginning Balance December 31, 2022 Change for the period Ending Balance March 31, 2023 Unrealized gains (losses) on fixed maturity securities available for sale $ ( 13,050,767 ) $ 4,122,242 $ ( 8,928,525 ) Unrealized gains (losses) on restricted assets (1) ( 13,148 ) 3,104 ( 10,044 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) ( 6,362 ) 2,212 ( 4,150 ) Other comprehensive income (loss) $ ( 13,070,277 ) $ 4,127,558 $ ( 8,942,719 ) (1) Fixed maturity securities available for sale The following is the accumulated balances of other comprehensive income (loss) as of December 31, 2022: Beginning Balance December 31, 2021 Change for the period Ending Balance December 31, 2022 Unrealized gains (losses) on fixed maturity securities available for sale $ 18,021,265 $ ( 31,072,032 ) $ ( 13,050,767 ) Unrealized gains (losses) on restricted assets (1) 40,192 ( 53,340 ) ( 13,148 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) 8,991 ( 15,353 ) ( 6,362 ) Other comprehensive income (loss) $ 18,070,448 $ ( 31,140,725 ) $ ( 13,070,277 ) (1) Fixed maturity securities available for sale 58 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on the cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. Insurance Operations The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning. A funeral plan is a small face value life insurance policy that generally has face coverage of up to $30,000. The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs. In response to the COVID-19 pandemic, the Company’s life insurance sales force began using virtual and tele sales processes to market products. During the third quarter 2021, the life insurance sales force returned to in person sales, however, it continues to use virtual and tele sales where needed. Currently, approximately 75% of insurance operations office staff work in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed. The following table shows the condensed financial results of the insurance operations for three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements. Three months ended March 31 (in thousands of dollars) 2023 2022 % Increase (Decrease) Revenues from external customers Insurance premiums $ 27,968 $ 26,342 6 % Mortgage fee income 44 - 100 % Net investment income 16,755 14,580 15 % Gains on investments and other assets 57 108 (47 %) Other 591 472 25 % Total $ 45,415 $ 41,502 9 % Intersegment revenue $ 1,510 $ 1,696 (11 %) Earnings before income taxes $ 3,684 $ 816 351 % Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability for the three month period ended March 31, 2023 increased due to (a) a $2,175,000 increase in net investment income, (b) a $1,626,000 increase in insurance premiums and other considerations, (c) a $739,000 decrease in selling, general and administrative expenses, (d) a $397,000 decrease in death, surrenders and other policy benefits, (e) a $119,000 increase in other revenues, and (f) a $44,000 increase in mortgage fee income, which were partially offset by (i) a $1,283,000 increase in future policy benefits, (ii) a $523,000 increase in amortization of deferred policy acquisition costs, (iii) a $186,000 decrease in intersegment revenue, (iv) a $128,000 increase in interest expense, (v) a $61,000 increase in intersegment interest expense and other expenses, and (vi) a $51,000 decrease in gains on investments and other assets. 59 Cemetery and Mortuary Operations The Company sells mortuary services and products through its nine mortuaries in Utah and three mortuaries in New Mexico. The Company also sells cemetery products and services through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received. In response to the COVID-19 pandemic, the cemetery and mortuary’s pre-need sales force began using virtual selling processes to market its products and services including some in home sales as local regulations permitted. During the third quarter 2021, the sales force returned mostly to in home sales, however, it continues to use virtual selling where needed. Currently, the cemetery and mortuary operations office staff works in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed. The following table shows the condensed financial results of the cemetery and mortuary operations for the three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements. Three months ended March 31 (in thousands of dollars) 2023 2022 % Increase (Decrease) Revenues from external customers Mortuary revenues $ 3,275 $ 3,766 (13 %) Cemetery revenues 3,196 3,440 (7 %) Net investment income 601 496 21 % Gains (losses) on investments and other assets 54 (255 ) (121 %) Other 72 16 350 % Total $ 7,198 $ 7,463 (4 %) Earnings before income taxes $ 1,785 $ 2,020 (12 %) Profitability in the three month period ended March 31, 2023 decreased due to (a) a $491,000 decrease in mortuary at-need sales, (b) a $222,000 decrease in cemetery pre-need sales, (c) a $99,000 decrease in intersegment revenues, and (d) a $21,000 decrease in cemetery at-need sales, which were partially offset by (i) a $308,000 increase in gains on investments and other assets primarily attributable to an increase in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments, (ii) a $105,000 increase in net investment income, (iii) an $80,000 decrease in selling, general and administrative expenses, (iv) a $56,000 increase in other revenues, (v) a $36,000 decrease in amortization of deferred policy acquisition costs, and (vi) a $13,000 decrease in intersegment interest expense and other expenses. Mortgage Operations The Company’s wholly owned subsidiary, SecurityNational Mortgage, is a mortgage lender incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage originates and refinances mortgage loans on a retail basis. Mortgage loans originated or refinanced by the SecurityNational Mortgage are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions. 60 SecurityNational Mortgage receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 6% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased by $51,185,906. Mortgage rates have followed the US Treasury yields up in response to the higher than expected inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance’. Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchases’, although not as significant as those in the refinance classification. For the three month periods ended March 31, 2023 and 2022, SecurityNational Mortgage originated 1,702 loans ($531,868,000 total volume) and 3,356 loans ($1,039,217,000 total volume), respectively. In response to the COVID-19 pandemic, the Company’s mortgage operations integrated employee work from home accommodations into its standard operating procedures. A large percentage of fulfillment employees are in office, however, the flexibility remains to accommodate in office or work from home functionality. The following table shows the condensed financial results of the mortgage operations for the three month periods ended March 31, 2023, and 2022. See Note 7 to the condensed consolidated financial statements. Three months ended September 30 (in thousands of dollars) 2022 2021 % Increase (Decrease) Revenues from external customers Secondary gains from investors $ 17,917 $ 39,603 (55 %) Income from loan originations 6,555 8,813 (26 %) Change in fair value of loans held for sale 795 (2,747 ) (129 %) Change in fair value of loan commitments 678 2,675 (75 %) Net investment income 418 118 254 % Gains on investments and other assets - 319 (100 %) Other 524 4,680 (89 %) Total $ 26,887 $ 53,461 (50 %) Earnings before income taxes $ (3,883 ) $ 1,607 (342 %) Included in other revenues is service fee income. Profitability for the three month period ended March 31, 2023 decreased due to (a) a $21,686,000 decrease in secondary gains from investors, (b) a $4,156,000 decrease in other revenues, (c) a $2,258,000 decrease in income from loan originations, (d) a $1,997,000 decrease in the fair value of loan commitments, (e) a $319,000 decrease in gains on investments and other assets, (f) a $137,000 increase in rent and rent related expenses, and (g) a $6,000 increase in depreciation on property and equipment, which were partially offset by (i) a $10,262,000 decrease in commissions, (ii) a $4,875,000 decrease in personnel expenses, (iii) a $4,019,000 decrease in other expenses, (iv) a $3,542,000 increase in the fair value of loans held for sale, (v) a $997,000 decrease in costs related to funding mortgage loans, (v) a $401,000 decrease in interest expense, (vi) a $338,000 decrease in advertising expenses, (vii) a $300,000 increase in net investment income, (viii) a $284,000 decrease in intersegment interest expense and other expenses, and (ix) a $47,000 increase in intersegment revenues. 61 Consolidated Results of Operations Three month period ended March 31, 2023, Compared to Three month period ended March 31, 2022 Total revenues decreased by $22,925,000, or 22.4%, to $79,501,000 for the three month period ended March 31, 2023, from $102,426,000 for the comparable period in 2022. Contributing to this decrease in total revenues was a $22,355,000 decrease in mortgage fee income, a $3,981,000 decrease in other revenues, a $734,000 decrease in net mortuary and cemetery sales, and a $61,000 decrease in gains on investments and other assets, which were partially offset by a $2,581,000 increase in net investment income and a $1,625,000 increase in insurance premiums and other considerations. Mortgage fee income decreased by $22,355,000, or 46.2%, to $25,989,000, for the three month period ended March 31, 2023, from $48,345,000 for the comparable period in 2022. This decrease was primarily due to a $21,641,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $1,997,000 decrease in the fair value of loan commitments, and a $2,258,000 decrease in loan fees and interest income net of a decrease in the provision for loan loss reserve, which were partially offset by a $3,541,000 increase in the fair value of loans held for sale. Insurance premiums and other considerations increased by $1,625,000, or 6.2%, to $27,967,000 for the three month period ended March 31, 2023, from $26,342,000 for the comparable period in 2022. This increase was primarily due to an increase of $1,188,000 in first year premiums and an increase of $437,000 in renewal premiums. Net investment income increased by $2,581,000, or 17.0%, to $17,775,000 for the three month period ended March 31, 2023, from $15,194,000 for the comparable period in 2022. This increase was primarily attributable to a $1,377,000 increase in fixed maturity securities income, a $713,000 increase in interest on cash and cash equivalents, a $528,000 increase in mortgage loan interest, a $325,000 increase in real estate income, and a $298,000 decrease in investment expenses, which were partially offset by a $629,000 decrease in insurance assignment income and a $106,000 decrease in policy loan income. Net mortuary and cemetery sales decreased by $734,000, or 10.2%, to $6,471,000 for the three month period ended March 31, 2023, from $7,205,000 for the comparable period in 2022. This decrease was primarily due to a $491,000 decrease in mortuary at-need sales and a $222,000 decrease in cemetery at-need sales. Gains on investments and other assets decreased by $61,000, or 35.4%, to $111,000 for the three month period ended March 31, 2023, from $172,000 for the comparable period in 2022. This decrease in gains on investments and other assets was primarily due to a $402,000 decrease in gains on other assets, a $291,000 decrease in gains on real estate, and a $264,000 decrease in gains on fixed maturity securities, which were partially offset by a $896,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities. Other revenues decreased by $3,981,000, or 77.0%, to $1,187,000 for the three month period ended March 31, 2023, from $5,168,000 for the comparable period in 2022. This decrease was primarily attributable to a decrease in servicing fee revenue as a result of the sale of certain mortgage servicing rights in October 2022. Total benefits and expenses were $77,916,000, or 98.0% of total revenues, for the three month period ended March 31, 2023, as compared to $97,982,000, or 95.7% of total revenues, for the comparable period in 2022. Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $887,000 or 3.6%, to $25,866,000 for the three month period ended March 31, 2023, from $24,979,000 for the comparable period in 2022. This increase was primarily the result of a $1,283,000 increase in future policy benefits, which was partially offset by a $206,000 decrease in death benefits and a $190,000 decrease in surrender and other policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $487,000, or 11.1%, to $4,883,000 for the three month period ended March 31, 2023, from $4,396,000 for the comparable period in 2022. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs. 62 Selling, general and administrative expenses decreased by $21,168,000, or 32.2%, to $44,527,000 for the three month period ended March 31, 2023, from $65,695,000 for the comparable period in 2022. This decrease was primarily the result of a $10,229,000 decrease in commissions, a $4,912,000 decrease in personnel expenses, a $4,311,000 decrease in other expenses, a $997,000 decrease in costs related to funding mortgage loans, a $809,000 decrease in advertising expense, and a $27,000 decrease in depreciation on property and equipment, which were partially offset by a $117,000 increase in rent and rent related expenses. Interest expense decreased by $274,000, or 15.9%, to $1,453,000 for the three month period ended March 31, 2023, from $1,727,000 for the comparable period in 2022. This decrease was primarily due to a decrease of $401,000 in interest expense on mortgage warehouse lines for loans held for sale, which was partially offset by an increase of $127,000 in interest expense on bank loans. Liquidity and Capital Resources The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees from mortgage loans held for sale that are sold to investors into the secondary market. It should be noted that current conditions in the financial markets and economy may affect the realization of these expected cash flows. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses. As of March 31, 2023, the Company was not in compliance with the net income covenant on its warehouse line with U.S. Bank and has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $8,900,000 on the Texas Capital Bank N.A. warehouse line that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines that have provided covenant waivers to fund its origination activities. During the three month periods ended March 31, 2023 and 2022, the Company’s operations used cash of $16,074,000 and provided cash of $72,509,000, respectively. The decrease in cash provided by operations was due primarily to decreased proceeds from the sale of mortgage loans held for sale. The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs. Policyholders generally keep these policies in force and do not surrender them prior to death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate, and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in their fair values. The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing matching. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products. The Company’s investment philosophy is intended to provide a rate of return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements. The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $357,311,000 (at estimated fair value) and $345,598,000 (at estimated fair value) as of March 31, 2023 and December 31, 2022, respectively. This represented 38.4% and 36.4% of the total investments as of March 31, 2023, and December 31, 2022, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At March 31, 2023, 1.9% (or $6,679,000) and at December 31, 2022, 2.2% (or $7,833,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade. 63 The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At March 31, 2023 and December 31, 2022, the life insurance subsidiaries were in compliance with the regulatory criteria. The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $435,425,000 as of March 31, 2023, as compared to $454,499,000 as of December 31, 2022. Stockholders’ equity as a percent of total capitalization was 68.2% and 64.4% as of March 31, 2023, and December 31, 2022, respectively. Bank loans and other loans payable decreased by $23,321,000 as of March 31, 2023, as compared to December 31, 2022, which was partially offset by an increase in stockholders’ equity of $4,247,000 as of March 31, 2023 as compared to December 31, 2022, thus causing the increase in the stockholders’ equity percentage. Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2022 was 4.3% as compared to a rate of 4.8% for 2021. The 2023 lapse rate to date has been approximately the same as 2022. The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $94,133,000 and $94,254,000 as of March 31, 2023, and December 31, 2022, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities. Banking Environment Item 7.01 Regulation FD Disclosure. On March 10, 2023 and March 12, 2023, Silicon Valley Bank and Signature Bank were placed in receivership with the Federal Deposit Insurance Corporation (“FDIC”). Normal banking activities resumed shortly thereafter. On May 1, 2023, First Republic bank was placed in receivership with the FDIC and was immediately purchased by a national bank. The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank. The Company may periodically transfer funds to these banks to pay for services rendered by third party vendors that continue to maintain banking relationships with these banks. The Company continues to monitor the banking industry and its relationships with regional and community banks. The information furnished in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, the Company is not required to provide information typically disclosed under this item. 64 Item 4. Controls and Procedures. Disclosure Controls and Procedures As of March 31, 2023, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP). Changes in Internal Control over Financial Reporting There have not been any significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Part II - Other Information Item 1. Legal Proceedings . The Company is not a party to any material legal proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would be expected to have a material adverse effect on its financial condition or results of operation. Item 1A. Risk Factors. As a smaller reporting company, the Company is not required to provide information typically disclosed under this item. 65 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities None. Issuer Purchases of Equity Securities On December 27, 2022, the Company executed a 10b5-1 agreement with a broker to repurchase shares of the Company’s Class A Common Stock. Under the terms of the agreement, the broker is permitted to repurchase up to 1,000,000 shares of the Company’s Class A Common Stock. The agreement is subject to the daily time, price and volume conditions of Rule 10b-18. The initial term of the agreement is for one year. The following table shows the Company’s repurchase activity during the three month period ended March 31, 2023 under the 10b5-1 agreement. Period (a) Total Number of Class A Shares Purchased (b) Average Price Paid per Class A Share (1) (c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program (d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program (2) 1/1/2023-1/31/2023 73,112 $ 7.37 - 383,207 2/1/2023-2/28/2023 46,753 7.22 - 336,454 3/1/2023-3/31/2023 18,411 6.74 - 318,043 Total 138,276 $ 7.16 - 318,043 (1) Includes fees and commissions paid on stock repurchases. (2) In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company’s Class A Common Stock in the open market. The Company amended the Stock Repurchase Plan on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. Any repurchased shares of Class A common stock are to be held as treasury shares to be used as the Company’s employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. None. Item 5. Other Information. None. 66 Item 6. Exhibits, Financial Statements Schedules and Reports on Form 8-K. (a)(1) Financial Statements See “Table of Contents – Part I – Financial Information” under page 2 above (a)(2) Financial Statement Schedules None All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. (a)(3) Exhibits The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings. 3.1 Amended and Restated Articles of Incorporation (4) 3.2 Amended and Restated Bylaws (6) 4.1 Specimen Class A Stock Certificate (1) 4.2 Specimen Class C Stock Certificate (1) 4.3 Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1) 10.1 Employee Stock Ownership Plan, as amended and restated (ESOP) and Trust Agreement (1) 10.2 Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan (3) 10.3 Amended and Restated 2014 Director Stock Option Plan (7) 10.4 Employment Agreement with Scott M. Quist (2) 10.5 Stock Repurchase Plan (5) 14 Code of Business Conduct and Ethics (6) 21 Subsidiaries of the Registrant 31.1 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) (1) Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987 (2) Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2015 (3) Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016 (4) Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017 (5) Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2018 (6) Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019 (7) Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2020 67 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT SECURITY NATIONAL FINANCIAL CORPORATION Registrant Dated: May 15, 2023 /s/ Scott M. Quist Scott M. Quist Chairman, President and Chief Executive Officer (Principal Executive Officer) Dated: May 15, 2023 /s/ Garrett S. Sill Garrett S. Sill Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) 68