SECURITY NATIONAL FINANCIAL CORP 10-Q

Item 1. Financial Statements. September 30, 2023 (Unaudited) December 31, 2022 Assets Investments: Fixed maturity securities, available for sale, at estimated fair value (amortized cost of $ 380,283,562 and $ 362,750,511 for 2023 and 2022, respectively; net of allowance for credit losses of $ 211,500 and nil for 2023 and 2022, respectively) $ 356,448,259 $ 345,858,492 Equity securities at estimated fair value (cost of $ 10,470,974 and $ 9,942,265 for 2023 and 2022, respectively) 12,309,544 11,682,526 Mortgage loans held for investment (net of allowance for credit losses of $ 2,612,944 and $ 1,970,311 for 2023 and 2022, respectively) 249,307,098 308,123,927 Real estate held for investment (net of accumulated depreciation of $ 28,516,470 and $ 23,793,204 for 2023 and 2022, respectively) 184,691,463 191,328,616 Real estate held for sale 4,764,367 11,161,582 Other investments and policy loans (net of allowance for credit losses of $ 1,555,261 and $ 1,609,951 for 2023 and 2022, respectively) 66,253,417 70,508,156 Accrued investment income 12,266,695 10,299,826 Total investments 886,040,843 948,963,125 Cash and cash equivalents 134,751,854 120,919,805 Loans held for sale at estimated fair value 152,546,566 141,179,620 Receivables (net of allowance for credit losses of $ 1,520,801 and $ 2,229,791 for 2023 and 2022, respectively) 15,498,951 28,573,092 Restricted assets (including $ 7,847,136 and $ 6,565,552 for 2023 and 2022 respectively, at estimated fair value; net of allowance for credit losses of $ 2,232 and nil for 2023 and 2022, respectively) 19,907,485 18,935,055 Cemetery perpetual care trust investments (including $ 4,223,197 and $ 3,859,893 for 2023 and 2022, respectively, at estimated fair value; net of allowance for credit losses of $ 3,933 and nil for 2023 and 2022, respectively) 7,640,990 7,276,210 Receivable from reinsurers 14,764,228 15,033,938 Cemetery land and improvements 9,068,760 9,101,474 Deferred policy and pre-need contract acquisition costs 114,422,565 108,655,128 Mortgage servicing rights, net 3,494,723 3,039,765 Property and equipment, net 19,580,298 20,579,649 Value of business acquired 8,922,400 9,803,736 Goodwill 5,253,783 5,253,783 Other 21,878,789 23,798,512 Total Assets $ 1,413,772,235 $ 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) September 30, 2023 (Unaudited) December 31, 2022 Liabilities and Stockholders’ Equity Liabilities Future policy benefits and unpaid claims $ 908,917,966 $ 889,327,303 Unearned premium reserve 2,611,873 2,773,616 Bank and other loans payable 108,431,028 161,712,804 Deferred pre-need cemetery and mortuary contract revenues 17,573,212 16,226,836 Cemetery perpetual care obligation 5,265,166 5,099,542 Accounts payable 2,977,402 5,361,449 Other liabilities and accrued expenses 56,431,051 57,113,888 Income taxes 13,670,993 30,710,527 Total liabilities 1,115,878,691 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; 20,007,611 shares issued and outstanding as of September 30, 2023 and 18,758,031 shares issued and outstanding as of December 31, 2022 40,015,222 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; 2,971,854 shares issued and outstanding as of September 30, 2023 and 2,889,859 shares issued and outstanding as of December 31, 2022 5,943,708 5,779,718 Common Stock , Value 5,943,708 5,779,718 Additional paid-in capital 72,190,361 64,767,769 Accumulated other comprehensive loss, net of taxes ( 18,282,298 ) ( 13,070,277 ) Retained earnings 204,117,486 202,160,306 Treasury stock at cost - 870,523 Class A shares and 35,717 Class C shares as of September 30, 2023; and 525,870 Class A shares and 34,016 Class C shares as of December 31, 2022 ( 6,090,935 ) ( 4,366,651 ) Total stockholders’ equity 297,893,544 292,786,927 Total Liabilities and Stockholders’ Equity $ 1,413,772,235 $ 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 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues: Mortgage fee income $ 24,936,019 $ 28,607,888 $ 77,003,778 $ 118,983,231 Insurance premiums and other considerations 28,906,803 26,237,417 85,687,394 78,491,364 Net investment income 19,248,463 18,603,070 57,195,320 49,768,664 Net mortuary and cemetery sales 7,234,031 6,470,363 20,874,174 20,926,587 Losses on investments and other assets ( 932,414 ) ( 2,178,952 ) ( 4,676 ) ( 2,921,372 ) Other 848,825 5,737,434 2,832,630 16,221,307 Total revenues 80,241,727 83,477,220 243,588,620 281,469,781 Benefits and expenses: Death benefits 14,678,251 13,996,753 46,811,922 45,720,503 Surrenders and other policy benefits 1,467,066 1,337,507 3,550,416 3,814,442 Increase in future policy benefits 9,476,678 7,389,732 26,031,421 20,761,276 Amortization of deferred policy and pre-need acquisition costs and value of business acquired 4,480,457 5,061,713 13,615,359 13,511,235 Selling, general and administrative expenses: Commissions 10,467,796 15,004,275 30,877,232 53,303,814 Personnel 20,234,106 24,392,703 62,705,033 76,772,417 Advertising 994,433 1,372,636 2,863,597 4,680,169 Rent and rent related 1,677,701 1,701,164 5,285,492 5,062,696 Depreciation on property and equipment 590,168 636,246 1,765,797 1,880,095 Costs related to funding mortgage loans 1,563,172 1,371,315 5,246,881 6,255,415 Other 7,124,347 11,178,276 22,308,291 34,444,040 Interest expense 1,151,534 2,136,763 4,019,669 5,764,327 Cost of goods and services sold-mortuaries and cemeteries 1,177,328 1,200,481 3,614,599 3,628,334 Total benefits and expenses 75,083,037 86,779,564 228,695,709 275,598,763 Earnings (loss) before income taxes 5,158,690 ( 3,302,344 ) 14,892,911 5,871,018 Income tax benefit (expense) ( 1,117,397 ) 949,159 ( 3,258,740 ) ( 1,421,036 ) Net earnings (loss) $ 4,041,293 $ ( 2,353,185 ) $ 11,634,171 $ 4,449,982 Net earnings (loss) per Class A Equivalent common share (1) $ 0.18 $ ( 0.11 ) $ 0.53 $ 0.20 Net earnings (loss) per Class A Equivalent common share-assuming dilution (1) $ 0.18 $ ( 0.10 ) $ 0.51 $ 0.19 Weighted-average Class A equivalent common shares outstanding (1) 22,063,495 21,976,292 22,066,243 22,213,846 Weighted-average Class A equivalent common shares outstanding-assuming dilution (1) 22,831,726 22,695,996 22,700,342 23,036,213 (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 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net earnings (loss) $ 4,041,293 $ ( 2,353,185 ) $ 11,634,171 $ 4,449,982 Other comprehensive income: Unrealized losses on fixed maturity securities available for sale $ ( 6,805,602 ) ( 13,523,240 ) ( 6,580,750 ) ( 41,845,274 ) Unrealized gains (losses) on restricted assets (1) ( 12,284 ) 27,060 ( 14,340 ) ( 88,058 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) ( 2,487 ) 28,931 ( 3,299 ) ( 24,294 ) Other comprehensive loss, before income tax ( 6,820,373 ) ( 13,467,249 ) ( 6,598,389 ) ( 41,957,626 ) Income tax benefit 1,432,846 2,825,936 1,386,368 8,815,498 Other comprehensive loss, net of income tax ( 5,387,527 ) ( 10,641,313 ) ( 5,212,021 ) ( 33,142,128 ) Comprehensive income (loss) $ ( 1,346,234 ) $ ( 12,994,498 ) $ 6,422,150 $ ( 28,692,146 ) (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) Nine Months Ended September 30, 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 income - - - 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 Net earnings - - - - 6,352,706 - 6,352,706 Other comprehensive loss - - - ( 3,952,052 ) - - ( 3,952,052 ) Stock-based compensation expense - - 141,954 - - - 141,954 Exercise of stock options 159,284 - ( 154,424 ) - - - 4,860 Vesting of restricted stock units 810 - ( 810 ) - - - - Sale of treasury stock - - ( 54,350 ) - - 623,056 568,706 Purchase of treasury stock - - 126,990 - - ( 1,514,049 ) ( 1,387,059 ) Conversion Class C to Class A 113,930 ( 113,930 ) - - - - - Stock dividends 1,899,350 283,188 6,820,431 - ( 9,002,969 ) - - June 30, 2023 $ 39,787,400 $ 5,947,104 $ 71,685,665 $ ( 12,894,771 ) $ 200,078,709 $ ( 5,841,350 ) $ 298,762,757 Net earnings - - - - 4,041,293 - 4,041,293 Other comprehensive loss - - - ( 5,387,527 ) - - ( 5,387,527 ) Stock-based compensation expense - - 145,973 - - - 145,973 Exercise of stock options 223,006 - ( 196,926 ) - - - 26,080 Vesting of restricted stock units 810 - ( 810 ) - - - - Sale of treasury stock - - 98,387 - - 458,530 556,917 Purchase of treasury stock - - 456,166 - - ( 708,115 ) ( 251,949 ) Conversion Class C to Class A 3,396 ( 3,396 ) - - - - - Stock dividends 610 - 1,906 - ( 2,516 ) - - September 30, 2023 $ 40,015,222 $ 5,943,708 $ 72,190,361 $ ( 18,282,298 ) $ 204,117,486 $ ( 6,090,935 ) $ 297,893,544 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued) (Unaudited) Nine Months Ended September 30, 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 ) 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 Net earnings - - - - 3,574,449 - 3,574,449 Other comprehensive loss - - - ( 10,310,485 ) - - ( 10,310,485 ) Stock-based compensation expense - - 220,175 - - - 220,175 Exercise of stock options 37,746 - ( 2,440 ) - - - 35,306 Sale of treasury stock - - 50,401 - - 1,119,392 1,169,793 Purchase of treasury stock - - - - - ( 6,505,050 ) ( 6,505,050 ) Conversion Class C to Class A 154,218 ( 154,218 ) - - - - - Stock dividends 1,779,108 278,924 6,009,453 - ( 8,067,485 ) - - June 30, 2022 $ 37,357,376 $ 5,857,422 $ 64,657,027 $ ( 4,430,367 ) $ 183,273,171 $ ( 6,229,574 ) $ 280,485,055 Balance $ 37,357,376 $ 5,857,422 $ 64,657,027 $ ( 4,430,367 ) $ 183,273,171 $ ( 6,229,574 ) $ 280,485,055 Net loss - - - - ( 2,353,185 ) - ( 2,353,185 ) Net earnings (loss ) - - - - ( 2,353,185 ) - ( 2,353,185 ) Other comprehensive loss - - - ( 10,641,313 ) - - ( 10,641,313 ) Other comprehensive income (loss) - - - ( 10,641,313 ) - - ( 10,641,313 ) Stock-based compensation expense - - 230,853 - - - 230,853 Sale of treasury stock - - ( 47,285 ) - - 1,187,752 1,140,467 Conversion Class C to Class A 77,704 ( 77,704 ) - - - - - September 30, 2022 $ 37,435,080 $ 5,779,718 $ 64,840,595 $ ( 15,071,680 ) $ 180,919,986 $ ( 5,041,822 ) $ 268,861,877 Balance $ 37,435,080 $ 5,779,718 $ 64,840,595 $ ( 15,071,680 ) $ 180,919,986 $ ( 5,041,822 ) $ 268,861,877 8 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 2023 2022 Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net cash provided by operating activities $ 18,383,768 $ 109,318,230 Cash flows from investing activities: Purchases of fixed maturity securities ( 50,158,586 ) ( 115,680,915 ) Sales, calls and maturities of fixed maturity securities 33,160,924 11,695,675 Purchases of equity securities ( 6,464,200 ) ( 3,591,283 ) Sales of equity securities 5,891,964 2,295,931 Purchases of restricted assets ( 1,836,290 ) ( 1,157,021 ) Sales, calls and maturities of restricted assets 387,049 - Purchases of cemetery perpetual care trust investments ( 493,833 ) - Sales, calls and maturities of perpetual care trust investments 177,932 325,908 Mortgage loans held for investment, other investments and policy loans made ( 467,172,350 ) ( 569,434,389 ) Payments received for mortgage loans held for investment, other investments and policy loans 532,511,486 577,997,140 Purchases of property and equipment ( 791,569 ) ( 966,375 ) Sales of property and equipment - 62,561 Purchases of real estate ( 17,219,245 ) ( 20,892,501 ) Sales of real estate 25,727,541 22,941,365 Net cash provided by (used in) investing activities 53,720,823 ( 96,403,904 ) Cash flows from financing activities: Investment contract receipts 9,323,700 8,853,710 Investment contract withdrawals ( 11,657,189 ) ( 11,964,046 ) Proceeds from stock options exercised 64,959 127,265 Purchases of treasury stock ( 2,843,365 ) ( 7,277,291 ) Repayment of bank loans ( 69,133,305 ) ( 48,383,522 ) Proceeds from bank loans 68,500,000 59,618,050 Net change in warehouse line borrowings for loans held for sale ( 52,720,401 ) ( 61,081,557 ) Net cash used in financing activities ( 58,465,601 ) ( 60,107,391 ) Net change in cash, cash equivalents, restricted cash and restricted cash equivalents 13,638,990 ( 47,193,065 ) 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 $ 147,122,807 $ 94,221,217 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 4,182,368 $ 5,646,811 Income taxes (net of refunds) 18,911,907 468,578 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 6,111,550 - Transfer from loans held for sale to mortgage loans held for investment 3,017,626 49,428,757 Benefit plans funded with treasury stock 1,702,781 4,214,440 Right-of-use assets obtained in exchange for operating lease liabilities 139,095 1,164,287 Right-of-use assets obtained in exchange for finance lease liabilities 12,332 - Accrued real estate construction costs and retainage - 1,401,437 9 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: Nine Months Ended September 30, 2023 2022 Cash and cash equivalents $ 134,751,854 $ 84,947,720 Restricted assets 10,946,379 8,276,613 Cemetery perpetual care trust investments 1,424,574 996,884 Total cash, cash equivalents, restricted cash and restricted cash equivalents $ 147,122,807 $ 94,221,217 Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period $ 147,122,807 $ 94,221,217 See accompanying notes to condensed consolidated financial statements (unaudited). 10 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 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 and nine month periods ended September 30, 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 . 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. 11 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 an 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 standard is aimed at improving the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplifying 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 requires the standard to be adopted by the Company commencing on January 1, 2025. The Company is nearing completion of its analysis and implementation of the new standard, including the identification of cohorts, system updates, design and a preliminary analysis of the Company’s “Cold Start.” The Company has engaged its team of actuaries, accountants, and systems specialists and consulted external system providers as part of the implementation. The Company is in the process of estimating the impact of the new guidance 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. 12 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments The Company’s investments as of September 30, 2023 are summarized as follows: Schedule of Investments Amortized Cost Gross Unrealized Gains Gross Unrealized Losses (1) Allowance for Credit Losses Estimated Fair Value September 30, 2023: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 108,680,913 $ 5,981 $ ( 2,498,554 ) $ - $ 106,188,340 Obligations of states and political subdivisions 6,649,289 218 ( 586,789 ) - 6,062,718 Corporate securities including public utilities 231,814,067 600,075 ( 15,412,932 ) ( 211,500 ) 216,789,710 Mortgage-backed securities 32,889,293 13,422 ( 5,755,224 ) - 27,147,491 Redeemable preferred stock 250,000 10,000 - - 260,000 Total fixed maturity securities available for sale $ 380,283,562 $ 629,696 $ ( 24,253,499 ) $ ( 211,500 ) $ 356,448,259 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 10,470,974 $ 2,684,920 $ ( 846,350 ) $ 12,309,544 Total equity securities at estimated fair value $ 10,470,974 $ 2,684,920 $ ( 846,350 ) $ 12,309,544 Mortgage loans held for investment at amortized cost: Residential $ 96,591,643 Residential construction 101,295,751 Commercial 55,991,027 Less: Unamortized deferred loan fees, net ( 1,629,546 ) Less: Allowance for credit losses ( 2,612,944 ) Less: Net discounts ( 328,833 ) Total mortgage loans held for investment $ 249,307,098 Real estate held for investment - net of accumulated depreciation: Residential $ 38,034,997 Commercial 146,656,466 Total real estate held for investment $ 184,691,463 Real estate held for sale: Residential $ 2,285,707 Commercial 2,478,660 Total real estate held for sale $ 4,764,367 Other investments and policy loans at amortized cost: Policy loans $ 13,154,845 Insurance assignments 42,624,001 Federal Home Loan Bank stock (2) 2,699,300 Other investments 9,330,532 Less: Allowance for credit losses for insurance assignments ( 1,555,261 ) Total other investments and policy loans $ 66,253,417 Accrued investment income $ 12,266,695 Total investments $ 886,040,843 (1) Gross unrealized losses are net of allowance for credit losses (2) Includes $ 978,600 of Membership stock and $ 1,720,700 of Activity stock attributable to short-term borrowings and letters of credit. 13 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 attributable to short-term borrowings and letters of credit. 14 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) Fixed Maturity Securities The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023, and December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations. 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 September 30, 2023 U.S. Treasury Securities And Obligations of U.S. Government Agencies $ 331,740 $ 36,115,986 $ 2,166,815 $ 69,967,155 $ 2,498,555 $ 106,083,141 Obligations of States and Political Subdivisions 155,458 1,469,753 431,331 4,142,748 586,789 5,612,501 Corporate Securities 4,092,910 86,409,480 11,320,021 106,047,158 15,412,931 192,456,638 Mortgage and other asset-backed securities 123,790 4,627,445 5,631,434 22,003,452 5,755,224 26,630,897 Totals $ 4,703,898 $ 128,622,664 $ 19,549,601 $ 202,160,513 $ 24,253,499 $ 330,783,177 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 Relevant holdings were comprised of 816 securities with fair values aggregating 93.2 % of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of 703 securities with fair values aggregating 93.1 % of the aggregate amortized cost as of December 31, 2022. Credit loss provision (release) of $( 1,741 ) and nil have been recognized for the three month periods ended September 30, 2023 and 2022, respectively. Credit loss provision (release) of $ 222,264 and nil have been recognized for the nine month periods ended September 30, 2023 and 2022, respectively. Credit losses 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 increases in interest rates. 15 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) 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”) and other industry rating agencies. Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss, unless current market data or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. 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. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings. 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 at 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 a debt security and it is less likely than not that the Company will be required to sell the debt security but the Company also does not expect to recover the entire amortized cost basis of the security, a credit loss is 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 that 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. 16 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) 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 98.2 % and 97.7 % of its fixed maturity securities rated investment grade as of September 30, 2023 and December 31, 2022, respectively. The following table summarizes the credit quality, by NAIC designation, of the Company’s fixed maturity securities available for sale, excluding redeemable preferred stock. Schedule of Credit Quality of Fixed Maturity Security Portfolio by NAIC Designation September 30, 2023 December 31, 2022 NAIC Designation Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value 1 $ 210,224,246 $ 198,601,878 $ 197,753,818 $ 189,691,540 2 162,752,957 151,279,566 156,261,804 148,073,873 3 5,329,117 4,890,504 7,080,305 6,635,786 4 1,462,481 1,325,409 1,377,541 1,157,454 5 263,504 90,901 25,736 39,155 6 1,257 1 1,307 684 Total $ 380,033,562 $ 356,188,259 $ 362,500,511 $ 345,598,492 The following tables 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 Nine Months Ended September 30, 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 - December 31, 2022 $ - $ - $ - $ - $ - Additions for credit losses not previously recorded - - 179,500 - 179,500 Change in allowance on securities with previous allowance - - 42,764 - 42,764 Reductions for securities sold during the period - - ( 10,764 ) - ( 10,764 ) 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 - September 30, 2023 $ - $ - $ 211,500 $ - $ 211,500 17 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) Three Months Ended September 30, 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 - June 30, 2023 $ - $ - $ 224,005 $ - $ 224,005 Beginning balance $ - $ - $ 224,005 $ - $ 224,005 Additions for credit losses not previously recorded - - - - - Change in allowance on securities with previous allowance - - ( 1,741 ) - ( 1,741 ) Reductions for securities sold during the period - - ( 10,764 ) - ( 10,764 ) 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 - September 30, 2023 $ - $ - $ 211,500 $ - $ 211,500 Ending balance $ - $ - $ 211,500 $ - $ 211,500 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 September 30 $ 225,475 The table below presents the amortized cost and the estimated fair value of fixed maturity securities available for sale as of September 30, 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 $ 6,818,008 $ 6,812,398 Due in 2-5 years 160,874,392 155,802,499 Due in 5-10 years 93,763,663 88,297,470 Due in more than 10 years 85,688,206 78,128,401 Mortgage-backed securities 32,889,293 27,147,491 Redeemable preferred stock 250,000 260,000 Total $ 380,283,562 $ 356,448,259 18 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $ 92,437,113 , at estimated fair value, of fixed maturity securities with the FHLB as of September 30, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of September 30, 2023, the Company owed nil to the FHLB and its estimated maximum borrowing capacity was $ 85,218,402 . Information regarding sales of fixed maturity securities available for sale is presented as follows: Schedule of Major Categories of Net Investment Income 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Proceeds from sales $ 207,522 $ 1,198,240 $ 1,163,132 $ 1,886,891 Gross realized gains - 21,926 11,257 24,281 Gross realized losses ( 3,368 ) ( 24,811 ) ( 57,472 ) ( 32,656 ) Assets on deposit with life insurance regulatory authorities as required by law were as follows: Schedule of Assets on Deposit With Life Insurance As of September 30, 2023 As of December 31, 2022 Fixed maturity securities available for sale $ 6,248,114 $ 8,817,959 Cash and cash equivalents 1,956,777 2,214,206 Total $ 8,204,891 $ 11,032,165 There were no investments, aggregated by issuer, of more than 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) as of September 30, 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 assets 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 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 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. 19 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) The aggregated net book value of commercial real estate serving as collateral for bank loans was $ 125,641,402 and $ 129,330,119 as of September 30, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $ 98,250,725 and $ 97,112,131 as of September 30, 2023, and December 31, 2022, respectively. During the three and nine month periods ended September 30, 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 September 30, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $ 1,572,494 and $ 1,604,195 , respectively, and of $ 4,715,322 and $ 4,593,468 during the nine month periods ended September 30, 2023, and 2022, 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 September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Utah (1) $ 143,735,609 $ 147,627,946 625,920 625,920 Louisiana 19,416 2,380,847 1,622 31,778 Mississippi 2,901,441 2,881,863 19,694 19,694 $ 146,656,466 $ 152,890,656 647,236 677,392 (1) Includes Center53 The Company’s commercial real estate held for sale is summarized as follows as of the respective dates indicated: Net Book Value Total Square Footage September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 Louisiana $ 2,327,107 $ - 30,156 - Mississippi (1) 151,553 151,553 - - $ 2,478,660 $ 151,553 30,156 - (1) Consists of approximately 93 acres of undeveloped land These properties are being marketed with the assistance of commercial real estate brokers in Mississippi and Louisiana. Residential Real Estate Held for Investment and Held for Sale The Company occasionally acquires a small portfolio of residential homes primarily because 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 development. 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. 20 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) During the three and nine month periods ended September 30, 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 September 30, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $ 2,648 and $ 2,648 , respectively, and of $ 7,944 and $ 7,944 during the nine month periods ended September 30, 2023, and 2022, 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 September 30, 2023 December 31, 2022 Utah (1) $ 38,034,997 $ 38,437,960 $ 38,034,997 $ 38,437,960 (1) Includes residential subdivision development The following table presents additional information regarding the Company’s residential subdivision development in Utah: September 30, 2023 December 31, 2022 Lots developed 50 80 Lots to be developed 1,080 1,131 Book Value $ 37,846,685 $ 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 September 30, 2023 December 31, 2022 Utah $ 2,285,707 (1) $ 11,010,029 $ 2,285,707 $ 11,010,029 (1) Unimproved land The net book value of foreclosed residential real estate included in residential real estate held for sale was nil and $ 11,010,029 as of September 30, 2023, and December 31, 2022, respectively. 21 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 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 the relevant debtors’ ability to honor obligations is dependent upon the economic stability of the geographic region in which the debtors do business or are employed. As of September 30, 2023, the Company had 45 % , 12 % , 9 % , 7 % and 6 % , of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, and Arizona, respectively. As of December 31, 2022, the Company had 64 % , 10 % , 5 % and 5 % of its mortgage loans from borrowers located in the states of Utah, Florida, California, and Texas, 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 terms 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 of more than 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required. 22 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 reverse any interest income that had been accrued. Given this policy, the Company does not measure a credit loss allowance on accrued interest receivable. 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 when received. The interest income recognized from 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 $ 249,000 and $ 226,000 as of September 30, 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. To determine 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 guarantor’s) 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 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. 23 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 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 September 30, 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) (1) 555,807 ( 192,607 ) 301,830 665,030 Change in provision for credit losses (2) 67,246 52,797 ( 142,440 ) ( 22,397 ) Charge-offs - - - - Ending balance - September 30, 2023 $ 810,182 $ 1,600,170 $ 202,592 $ 2,612,944 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 (2) - 270,409 - 270,409 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 24 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 2023 30-59 days past due $ 3,139,403 $ 3,816,822 $ 805,766 $ 7,761,991 60-89 days past due - 1,795,326 - 1,795,326 Over 90 days past due (1) 1,646,508 3,778,582 1,005,417 6,430,507 In process of foreclosure (1) - 276,580 - 276,580 Total past due 4,785,911 9,667,310 1,811,183 16,264,404 Current 51,205,116 86,924,333 99,484,568 237,614,017 Total mortgage loans 55,991,027 96,591,643 101,295,751 253,878,421 Allowance for credit losses ( 810,182 ) ( 1,600,170 ) ( 202,592 ) ( 2,612,944 ) Unamortized deferred loan fees, net ( 145,572 ) ( 1,129,517 ) ( 354,457 ) ( 1,629,546 ) Unamortized discounts, net ( 220,276 ) ( 108,557 ) - ( 328,833 ) Net mortgage loans held for investment $ 54,814,997 $ 93,753,399 $ 100,738,702 $ 249,307,098 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 held for investment $ 45,694,074 $ 90,290,776 $ 172,139,077 $ 308,123,927 (1) Interest income is not recognized on loans which are more than 90 days past due or in foreclosure. 25 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023: Schedule of Commercial Mortgage Loans By Credit Quality Indicator Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total % of Total LTV: Less than 65% $ 17,525,000 $ 13,396,458 $ 3,800,378 $ - $ 2,989,026 $ 6,796,621 $ 44,507,483 79.49 % 65% to 80% - 4,585,706 1,050,000 4,913,313 - - 10,549,019 18.84 % Greater than 80% - 529,525 405,000 - - - 934,525 1.67 % Total $ 17,525,000 $ 18,511,689 $ 5,255,378 $ 4,913,313 $ 2,989,026 $ 6,796,621 $ 55,991,027 100.00 % DSCR >1.20x $ 5,725,000 $ 1,000,000 $ 1,750,000 $ 4,913,313 $ 2,989,026 $ 2,754,604 $ 19,131,943 34.17 % 1.00x - 1.20x 5,300,000 8,496,130 3,505,378 - - 4,042,017 21,343,525 38.12 % <1.00x 6,500,000 9,015,559 (1) (1) - - - - 15,515,559 27.71 % Total $ 17,525,000 $ 18,511,689 $ 5,255,378 $ 4,913,313 $ 2,989,026 $ 6,796,621 $ 55,991,027 100.00 % (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 more than 90 days past due 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 aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023: Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total % of Total Performance Indicators: Performing $ 7,788,450 $ 55,306,009 $ 7,249,701 $ 7,495,836 $ 2,808,390 $ 11,888,093 $ 92,536,479 95.80 % Non-performing (1) 324,111 838,669 741,534 800,486 - 1,350,364 4,055,164 4.20 % Total $ 8,112,561 $ 56,144,678 $ 7,991,235 $ 8,296,322 $ 2,808,390 $ 13,238,457 $ 96,591,643 100.00 % (1) Includes residential mortgage loans in the process of foreclosure of $ 276,580 as of September 30, 2023 26 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023: Schedule of Residential Construction Mortgage Loans Credit Quality Indicator 2023 2022 2021 Total % of Total Performance Indicators: Performing $ 48,525,276 $ 27,213,555 $ 24,551,503 $ 100,290,334 99.01 % Non-performing - 1,005,417 - 1,005,417 0.99 % Total $ 48,525,276 $ 28,218,972 $ 24,551,503 $ 101,295,751 100.00 % LTV: Less than 65% $ 29,476,916 $ 8,675,281 $ 17,117,181 $ 55,269,378 54.56 % 65% to 80% 19,048,360 19,543,691 7,434,322 46,026,373 45.44 % Greater than 80% - - - - 0.00 % Total $ 48,525,276 $ 28,218,972 $ 24,551,503 $ 101,295,751 100.00 % 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 September 30, 2023 As of December 31, 2022 30-59 days past due $ 9,374,806 $ 10,621,443 60-89 days past due 3,591,685 3,997,484 Over 90 days past due 4,611,748 5,813,013 Total past due 17,578,239 20,431,941 Current 25,045,762 26,510,594 Total insurance assignments 42,624,001 46,942,536 Allowance for credit losses ( 1,555,261 ) ( 1,609,951 ) Net insurance assignments $ 41,068,740 $ 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 recorded at that time. See Note 2 regarding the adoption of ASU 2016-13. 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) The following table presents a roll forward of the allowance for credit losses for insurance assignments as of the dates indicated: Schedule of Allowance for Credit Losses Allowance Beginning balance - January 1, 2023 $ 1,609,951 Change in provision for credit losses ( 1 ) 667,260 Charge-offs ( 721,950 ) Ending balance - September 30, 2023 $ 1,555,261 Beginning balance - January 1, 2022 $ 1,686,218 Change in provision for credit losses ( 1 ) 889,480 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 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Fixed maturity securities: Gross realized gains $ 37,565 $ 30,121 $ 54,619 $ 205,755 Gross realized losses ( 10,383 ) ( 26,203 ) ( 102,182 ) ( 36,961 ) Net credit loss (provision) release 1,740 - ( 222,264 ) - Equity securities: Gains (losses) on securities sold 324,009 ( 131,472 ) 277,057 ( 60,154 ) Unrealized losses on securities held at the end of the period ( 1,321,511 ) ( 1,383,627 ) ( 423,448 ) ( 4,097,049 ) Real estate held for investment and sale: Gross realized gains 36,166 - 197,194 1,260,548 Gross realized losses - ( 727,370 ) - ( 825,593 ) Other assets, including call and put option derivatives: Gross realized gains - 59,599 214,348 632,082 Gross realized losses - - - - Total $ ( 932,414 ) $ ( 2,178,952 ) $ ( 4,676 ) $ ( 2,921,372 ) 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 $ 452,115 and $ 640,593 in net losses for the three month periods ended September 30, 2023, and 2022, respectively, and of $ 200,605 and $ 1,636,469 in net losses for the nine month periods ended September 30, 2023, and 2022, respectively. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 3) Investments (Continued) Major categories of net investment income were as follows: 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Fixed maturity securities available for sale $ 4,242,185 $ 3,188,521 $ 12,398,685 $ 8,636,387 Equity securities 167,348 139,412 448,564 382,246 Mortgage loans held for investment 9,842,845 10,477,672 27,797,908 27,682,315 Real estate held for investment and sale 3,291,047 3,918,310 11,553,643 10,970,535 Policy loans 191,843 213,520 599,498 727,103 Insurance assignments 4,340,644 4,218,184 13,570,659 13,708,894 Other investments 213,560 181,597 555,720 350,603 Cash and cash equivalents 1,083,241 514,869 2,651,148 698,601 Gross investment income 23,372,713 22,852,085 69,575,825 63,156,684 Investment expenses ( 4,124,250 ) ( 4,249,015 ) ( 12,380,505 ) ( 13,388,020 ) Net investment income $ 19,248,463 $ 18,603,070 $ 57,195,320 $ 49,768,664 Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $ 372,277 and $ 675,259 for the three month periods ended September 30, 2023 and 2022, respectively, and of $ 2,224,629 and $ 1,882,502 for the nine month periods ended September 30, 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 September 30, 2023 As of December 31, 2022 Fixed maturity securities available for sale $ 4,343,327 $ 3,563,767 Equity securities 12,729 14,496 Mortgage loans held for investment 4,732,717 3,220,709 Real estate held for investment 3,158,708 3,455,305 Policy Loans 4,463 37,951 Cash and cash equivalents 14,751 7,598 Total accrued investment income $ 12,266,695 $ 10,299,826 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 4) Loans Held for Sale The Company’s loans held for sale portfolio is valued using the fair value option. 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 recognition of mortgage loan interest income 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 September 30, 2023 As of December 31, 2022 Aggregate fair value $ 152,546,566 $ 141,179,620 Unpaid principal balance 153,420,558 141,337,811 Unrealized loss ( 873,992 ) ( 158,191 ) Mortgage Fee Income Mortgage fee income consists of origination fees, processing fees, interest income and 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 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Loan fees $ 6,033,227 $ 4,729,445 $ 16,408,443 $ 19,766,856 Interest income 2,637,971 2,570,511 7,265,516 7,525,826 Secondary gains 17,625,394 28,940,898 54,884,965 103,336,118 Change in fair value of loan commitments ( 1,504,286 ) ( 3,271,282 ) ( 977,716 ) ( 2,843,155 ) Change in fair value of loans held for sale ( 108,676 ) ( 4,131,363 ) ( 715,799 ) ( 7,973,171 ) Provision (release) for loan loss reserve 252,389 ( 230,321 ) 138,369 ( 829,243 ) Mortgage fee income $ 24,936,019 $ 28,607,888 $ 77,003,778 $ 118,983,231 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 can resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor. 30 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 2023 As of December 31, 2022 Balance, beginning of period $ 1,725,667 $ 2,447,139 Provision on current loan originations (1) 770,220 1,078,812 Charge-offs, net of recaptured amounts ( 1,804,134 ) ( 1,800,284 ) Balance, end of period $ 691,753 $ 1,725,667 (1) Included in mortgage fee income The Company maintains reserves for estimated losses on current production volumes. For the nine month period ended September 30, 2023, $ 770,220 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 nine month period ended September 30, 2022, when reserves of $ 829,243 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 monitors market data and trends, economic conditions (including forecasts) and its own experience to maintain adequate loss reserves on current production. 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 5) Stock Compensation Plans The Company has equity incentive plans (the “2013 Plan”, the “2014 Director Plan” and the “2022 Plan”). Stock Options Stock based compensation expense for stock options issued of $ 145,973 and $ 230,853 has been recognized for these plans for the three month periods ended September 30, 2023, and 2022, respectively, and $ 430,856 and $ 722,775 has been recognized for these plans for the nine month periods ended September 30, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of September 30, 2023, the total unrecognized compensation expense related to the options issued was $ 102,775 , which is expected to be recognized over the remaining 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 nine month period ended September 30, 2023, is summarized as follows: Schedule of Activity of Stock Option Plans Number of Class A Shares Weighted Average Exercise Price (2) Number of Class C Shares Weighted Average Exercise Price (2) Outstanding at January 1, 2023 976,605 $ 4.56 1,157,203 $ 5.31 Adjustment for the effect of stock dividends 38,266 57,859 Granted 16,000 - Exercised ( 233,180 ) - Cancelled - - Outstanding at September 30, 2023 797,691 $ 4.78 1,215,062 $ 5.31 As of September 30, 2023: Options exercisable 770,066 $ 4.73 1,141,312 $ 5.25 As of September 30, 2023: Available options for future grant 171,386 834,750 Weighted average contractual term of options outstanding at September 30, 2023 4.69 years 6.15 years Weighted average contractual term of options exercisable at September 30, 2023 4.53 years 6.03 years Aggregated intrinsic value of options outstanding at September 30, 2023 (1) $ 2,438,675 $ 3,074,037 Aggregated intrinsic value of options exercisable at September 30, 2023 (1) $ 2,398,360 $ 2,955,012 (1) The Company used a stock price of $ 7.84 as of September 30, 2023 to derive intrinsic value. (2) Adjusted for the effect of annual stock dividends. 32 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 5) Stock Compensation Plans (Continued) Activity of the stock option plans during the nine month period ended September 30, 2022, is summarized as follows: Number of Class A Shares Weighted Average Exercise Price (2) Number of Class C Shares Weighted Average Exercise Price (2) Outstanding at January 1, 2022 1,024,351 $ 4.38 821,146 $ 5.26 Adjustment for the effect of stock dividends 47,780 41,057 Granted 4,000 - Exercised ( 71,330 ) - Cancelled ( 1,591 ) - Outstanding at September 30, 2022 1,003,210 $ 4.58 862,203 $ 5.26 As of September 30, 2022: Options exercisable 978,835 $ 4.49 804,703 $ 5.04 As of September 30, 2022: Available options for future grant 1,239,795 17,523 Weighted average contractual term of options outstanding at September 30, 2022 4.32 years 6.75 years Weighted average contractual term of options exercisable at September 30, 2022 4.19 years 6.63 years Aggregated intrinsic value of options outstanding at September 30, 2022 (1) $ 1,775,100 $ 939,395 Aggregated intrinsic value of options exercisable at September 30, 2022 (1) $ 1,819,950 $ 1,055,445 (1) The Company used a stock price of $ 6.35 as of September 30, 2022 to derive intrinsic value. (2) Adjusted for the effect of annual stock dividends. The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine month periods ended September 30, 2023 and 2022 was $ 454,923 and $ 521,527 , respectively. 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 5) Stock Compensation Plans (Continued) Restricted Stock Units (“RSUs”) Stock based compensation expense for RSUs issued of nil has been recognized under these plans for each of the three month periods ended September 30, 2023 and 2022, and of $ 742 and nil has been recognized under these plans for the nine month periods ended September 30, 2023 and 2022, respectively, and is included in personnel expenses on the condensed consolidated statements of earnings. As of September 30, 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 nine month period ended September 30, 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 ( 810 ) Non-vested at September 30, 2023 810 $ 6.48 Available RSUs for future grant $ 18,380 Aggregated intrinsic value of RSUs outstanding at September 30, 2023 (1) $ 1,102 (1) The Company used a stock price of $ 7.84 as of September 30, 2023 to derive intrinsic value. 34 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 2023 2022 2023 2022 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Numerator: Net earnings (loss) $ 4,041,293 $ ( 2,353,185 ) $ 11,634,171 $ 4,449,982 Denominator: Basic weighted-average shares outstanding 22,063,495 21,976,292 22,066,243 22,213,846 Effect of dilutive securities: Employee stock options 768,231 719,704 634,099 822,367 Diluted weighted-average shares outstanding 22,831,726 22,695,996 22,700,342 23,036,213 Basic net earnings (loss) per share $ 0.18 $ ( 0.11 ) $ 0.53 $ 0.20 Diluted net earnings (loss) per share $ 0.18 $ ( 0.10 ) $ 0.51 $ 0.19 For the nine month periods ended September 30, 2023, and 2022, there were 55,125 and 339,150 anti-dilutive 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 69,096 - Vesting of restricted stock units - - Stock dividends 889,554 139,462 Conversion of Class C to Class A 116,168 ( 116,168 ) Outstanding shares at September 30, 2022 18,717,540 2,889,859 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 239,191 - Vesting of restricted stock units 810 - Stock dividends 949,980 141,594 Conversion of Class C to Class A 59,599 ( 59,599 ) Outstanding shares at September 30, 2023 20,007,611 2,971,854 Common stock, shares, outstanding, ending 20,007,611 2,971,854 35 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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. 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 2023 Revenues from external customers $ 47,199,169 $ 7,416,423 $ 25,626,135 $ - $ 80,241,727 Intersegment revenues 2,330,292 85,699 133,639 ( 2,549,630 ) - Segment profit (loss) before income taxes 7,175,181 1,469,592 ( 3,486,083 ) - 5,158,690 For the Nine Months Ended September 30, 2023 Revenues from external customers $ 140,685,555 $ 23,427,327 $ 79,475,738 $ - $ 243,588,620 Intersegment revenues 6,357,810 254,302 393,145 ( 7,005,257 ) - Segment profit (loss) before income taxes 20,017,102 6,082,343 ( 11,206,534 ) - 14,892,911 Identifiable Assets $ 1,299,027,212 $ 92,299,022 $ 107,800,781 $ ( 90,608,563 ) $ 1,408,518,452 Goodwill 2,765,570 2,488,213 - - 5,253,783 Total Assets $ 1,301,792,782 $ 94,787,235 $ 107,800,781 $ ( 90,608,563 ) $ 1,413,772,235 For the Three Months Ended September 30, 2022 Revenues from external customers $ 43,118,076 $ 6,691,998 $ 33,667,146 $ - $ 83,477,220 Intersegment revenues 1,723,812 91,699 101,019 ( 1,916,530 ) - Segment profit (loss) before income taxes 4,233,619 901,084 ( 8,437,047 ) - ( 3,302,344 ) For the Nine Months Ended September 30, 2022 Revenues from external customers $ 125,786,154 $ 21,446,210 $ 134,237,417 $ - $ 281,469,781 Intersegment revenues 5,495,578 359,439 253,554 ( 6,108,571 ) - Segment profit (loss) before income taxes 8,981,888 4,407,339 ( 7,518,209 ) - 5,871,018 Identifiable Assets $ 1,222,265,692 $ 80,402,663 $ 239,915,479 $ ( 87,763,750 ) $ 1,454,820,084 Goodwill 2,765,570 2,488,213 - - 5,253,783 Total Assets $ 1,225,031,262 $ 82,890,876 $ 239,915,479 $ ( 87,763,750 ) $ 1,460,073,867 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 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. 38 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 has 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 in volatile markets and may contain significant unobservable inputs. Loan Commitments and Forward Sale Commitments : The Company’s mortgage segment enters 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, 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 be funded 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. 39 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 as of September 30, 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 $ 356,448,259 $ - $ 355,216,072 $ 1,232,187 Equity securities 12,309,544 12,309,544 - - Loans held for sale 152,546,566 - - 152,546,566 Restricted assets (1) 1,534,526 - 1,534,526 - Restricted assets (2) 6,312,610 6,312,610 - - Cemetery perpetual care trust investments (1) 367,392 - 367,392 - Cemetery perpetual care trust investments (2) 3,855,805 3,855,805 - - Derivatives - loan commitments (3) 4,817,703 - - 4,817,703 Total assets accounted for at fair value on a recurring basis $ 538,192,405 $ 22,477,959 $ 357,117,990 $ 158,596,456 Liabilities accounted for at fair value on a recurring basis Derivatives - loan commitments (4) ( 3,088,542 ) - - ( 3,088,542 ) Total liabilities accounted for at fair value on a recurring basis $ ( 3,088,542 ) $ - $ - $ ( 3,088,542 ) (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 40 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 as of 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 (2) 5,348,244 5,348,244 - - Cemetery perpetual care trust investments (1) 254,731 - 254,731 - Cemetery perpetual care trust investments (2) 3,605,162 3,605,162 - - 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 ) 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 41 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 2023, the significant unobservable inputs used in the fair value measurements were as follows: Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis Significant Range of Inputs Fair Value at Valuation Unobservable Minimum Maximum Weighted September 30, 2023 Technique Input(s) Value Value Average Loans held for sale $ 152,546,566 Market approach Investor contract pricing as a percentage of unpaid principal balance 70.0 % 107.0 % 99.0 % Derivatives - loan commitments (net) 1,729,161 Market approach Pull-through rate 70.0 % 95.0 % 88.0 % Initial-Value N/A N/A N/A Servicing 0 bps 138 bps 61 bps Fixed maturity securities available for sale 1,232,187 Broker quotes Pricing quotes $ 98.40 $ 100.00 $ 99.32 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 December 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 42 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 nine month period ended September 30, 2023: Schedule of Changes in 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 - 1,708,831,185 - Sales, maturities and paydowns - ( 1,726,023,095 ) ( 129,521 ) Transfer to mortgage loans held for investment - ( 3,017,626 ) - Total gains (losses): Included in earnings ( 977,716 )(1) 31,576,482 (1) ( 109 )(2) Included in other comprehensive income - - ( 73,702 ) Balance - September 30, 2023 $ 1,729,161 $ 152,546,566 $ 1,232,187 (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 nine month period ended September 30, 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 - 2,837,349,328 - Sales, maturities and paydowns - ( 2,987,906,269 ) ( 368,980 ) Transfer to mortgage loans held for investment - ( 49,428,757 ) - Total gains (losses): Included in earnings ( 2,843,155 )(1) 59,190,794 (1) 1,957 (2) Included in other comprehensive income - - ( 31,127 ) Balance - September 30, 2022 $ 4,172,360 $ 161,981,923 $ 1,625,198 (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 43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 period ended September 30, 2023: Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - June 30, 2023 $ 3,233,447 $ 161,310,060 $ 1,431,874 Originations and purchases - 569,095,944 - Sales, maturities and paydowns - ( 585,545,472 ) ( 129,521 ) Transfer to mortgage loans held for investment - ( 1,867,552 ) Total gains (losses): Included in earnings ( 1,504,286 )(1) 9,553,586 (1) ( 109 )(2) Included in other comprehensive income - - ( 70,057 ) Balance - September 30, 2023 $ 1,729,161 $ 152,546,566 $ 1,232,187 (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 period ended September 30, 2022: Net Loan Commitments Loans Held for Sale Fixed Maturity Securities Available for Sale Balance - June 30, 2022 $ 7,443,642 $ 209,860,409 $ 1,962,789 Originations and purchases - 787,389,868 - Sales, maturities and paydowns - ( 800,430,402 ) ( 344,630 ) Transfer to mortgage loans held for investment - ( 49,428,757 ) - Total gains (losses): Included in earnings ( 3,271,282 )(1) 14,590,805 (1) - (2) Included in other comprehensive income - - 7,039 Balance - September 30, 2022 $ 4,172,360 $ 161,981,923 $ 1,625,198 (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 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) The Company did not have any financial assets and financial liabilities measured at fair value on a nonrecurring basis as of September 30, 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 as of 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 $ 471,786 $ - $ - $ 471,786 Total assets accounted for at fair value on a nonrecurring basis $ 471,786 $ - $ - $ 471,786 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 8) Fair Value of Financial Instruments (Continued) Fair Value of Financial Instruments Carried at Other Than Fair Value ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction as of September 30, 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 September 30, 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 $ 93,753,399 $ - $ - $ 91,471,266 $ 91,471,266 Residential construction 100,738,702 - - 100,740,713 100,740,713 Commercial 54,814,997 - - 53,928,941 53,928,941 Mortgage loans held for investment, net $ 249,307,098 $ - $ - $ 246,140,920 $ 246,140,920 Policy loans 13,154,845 - - 13,154,845 13,154,845 Insurance assignments, net (1) 41,068,740 - - 41,068,740 41,068,740 Restricted assets (2) 1,113,970 - - 1,113,970 1,113,970 Cemetery perpetual care trust investments (2) 1,962,587 - - 1,962,587 1,962,587 Mortgage servicing rights, net 3,494,723 - - 5,012,375 5,012,375 Liabilities Bank and other loans payable $ ( 108,431,028 ) $ - $ - $ ( 108,431,028 ) $ ( 108,431,028 ) Policyholder account balances (3) ( 39,988,385 ) - - ( 41,141,921 ) ( 41,141,921 ) Future policy benefits - annuities (3) ( 106,278,388 ) - - ( 123,165,600 ) ( 123,165,600 ) (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 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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. 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 of more than 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 several 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 consider all 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 be funded within the terms of the commitments. 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 September 30, 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 $ 268,292,962 $ 4,817,703 $ 3,088,542 $ 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 $ 268,292,962 $ 4,817,703 $ 3,088,542 $ 454,894,908 $ 4,089,859 $ 1,426,582 The table below presents the gains (losses) 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) Net Amount Gain (Loss) Three Months Ended September 30, Nine Months Ended September 30, Derivative Classification 2023 2022 2023 2022 Loan commitments Mortgage fee income $ ( 1,504,286 ) $ ( 3,271,282 ) $ ( 977,716 ) $ ( 2,843,155 ) Call and put options Gains on investments and other assets $ - $ 50,045 $ 49,963 $ 176,274 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 10) Reinsurance, Commitments and Contingencies Reinsurance The Company follows the procedure of reinsuring risks of more than a specified limit, which ranges from $ 25,000 to $ 100,000 on newly issued policies. The Company has also assumed various reinsurance agreements through acquisition of various life companies. The Company is ultimately liable for these reinsured 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 is also a reinsurer of insurance with 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 line of credit with Wells Fargo Bank N.A. This agreement allows SecurityNational Mortgage to borrow up to $ 100,000,000 for the sole purpose of funding mortgage loans (the “Wells Fargo Bank Warehouse Line of Credit”). charges interest at the 1-Month Secured Overnight Financing Rate (“SOFR”) rate plus 2.1% and expired and was not renewed on October 31, 2023 and will not be renewed because of the lender exiting the marketplace. 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 allows SecurityNational Mortgage to borrow up to $ 100,000,000 for the sole purpose of funding mortgage loans (the “Texas Capital Bank Warehouse Line of Credit”). The agreement charges interest at the 1-Month SOFR rate plus 2.0% and matures on November 30, 2024 . 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 U.S Bank. This agreement allows SecurityNational Mortgage to borrow up to $ 25,000,000 for the sole purpose of funding mortgage loans (the “U.S. Bank Warehouse Line of Credit” and, together with the Wells Fargo Bank Warehouse Line of Credit and the Texas Capital Bank Warehouse Line of Credit, the “Warehouse Lines of Credit”). 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 December 1, 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. 50 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 10) Reinsurance, Commitments and Contingencies (Continued) The agreements for the Warehouse Lines of Credit include cross default provisions where certain events of default under other of SecurityNational Mortgage’s obligations constitute events of default under the Warehouse Lines of Credit. As of September 30, 2023, the Company was not in compliance with the net income covenant of the Warehouse Lines of Credit and has received or is in the process of receiving waivers under the Warehouse Lines of Credit from the warehouse banks. In the unlikely event the Company is required to repay the outstanding advances of approximately $ 10,200,000 on the warehouse line of credit that has not provided a covenant waiver, the Company has sufficient cash and borrowing capacity on the warehouse lines of credit that have provided covenant waivers to fund its origination activities. The Company has performed an internal analysis of its funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders. Other Contingencies and Commitments The Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of September 30, 2023, the Company’s commitments were approximately $ 157,247,000 for these loans, of which $ 104,378,000 had been funded. The Company advances funds in accordance with the loan agreements 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 at 5.25 % to 8.50 % per annum. Maturities range between six and eighteen months. The Company belongs to a captive insurance group (“the captive group”) for certain casualty insurance, worker compensation and general liability programs. The captive group maintains insurance reserves 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 group considers several 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 from the Company and its members. 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. 51 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 11) Mortgage Servicing Rights The Company initially records its 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. The Company periodically reviews the various loan strata to determine whether the value of the MSRs in each stratum is impaired and likely to recover. If the Company 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 September 30, 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) 907,546 10,243,922 Amortization (2) ( 452,588 ) ( 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 $ 3,494,723 $ 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 $ 3,494,723 $ 3,039,765 Estimated fair value of MSRs at end of period $ 5,012,375 $ 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 52 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 11) Mortgage Servicing Rights (Continued) The table below summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the Company’s assumptions in its September 30, 2023 valuation of MSRs. The assumptions used in the following table are likely to change as market conditions, portfolio composition and borrower behavior change, causing both actual and projected amortization levels to change over time. Schedule of Finite-Lived Intangible Assets, Future Amortization Expense, Mortgage Servicing Rights Estimated MSR Amortization 2023 351,687 2024 317,526 2025 293,311 2026 265,639 2027 240,113 Thereafter 2,026,447 Total $ 3,494,723 The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings. Schedule of Other Revenues Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Contractual servicing fees $ 249,050 $ 4,644,397 $ 892,668 $ 13,845,626 Late fees 21,037 107,219 84,358 288,854 Total $ 270,087 $ 4,751,616 $ 977,026 $ 14,134,480 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 September 30, 2023 As of December 31, 2022 Servicing UPB $ 411,911,166 $ 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 September 30, 2023 8.00 8.59 12.22 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 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 holdbacks have been received in 2023. 53 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 12) Income Taxes The Company’s overall effective tax rate for the three month periods ended September 30, 2023 and 2022 was 21.7 % and 28.7 %, respectively, which resulted in a provision for income taxes of $ 1,117,397 and $ ( 949,159 ) , respectively, and for the nine month periods ended September 30, 2023 and 2022 was 21.9 % and 24.2 %, respectively, which resulted in a provision for income taxes of $ 3,258,740 and $ 1,421,036 , respectively The Company’s effective tax rate is higher than the U.S. federal statutory rate of 21 % due to, among other factors, state taxes as offset by certain state income tax benefits, along with certain permanent tax adjustments, such as meals and entertainment and stock-based compensation. The decrease in the effective tax rate when compared to the prior year was primarily due to a smaller increase in the valuation allowance. 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 a 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. The transfer of goods and services does not fulfill an obligation and revenue remains deferred. 54 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 (January 1, 2023) $ 5,392,779 $ - $ 16,226,836 Closing (September 30, 2023) 6,088,152 - 17,573,212 Increase/(decrease) 695,373 - 1,346,376 Contract Balances Receivables (1) Contract Asset Contract Liability Opening (January 1, 2022) $ 5,298,636 $ - $ 14,508,022 Closing (December 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 September 30, 2023 and 2022 was $ 1,279,750 and $ 1,034,035 , respectively, and for the nine month periods ended September 30, 2023 and 2022 was $ 3,516,215 and $ 3,624,463 , 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 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Major goods/service lines At-need $ 4,832,352 $ 4,839,289 $ 14,985,838 $ 16,304,276 Pre-need 2,401,679 1,631,074 5,888,336 4,622,311 Net mortuary and cemetery sales $ 7,234,031 $ 6,470,363 $ 20,874,174 $ 20,926,587 Timing of Revenue Recognition Goods transferred at a point in time $ 4,762,777 $ 4,040,381 $ 13,321,412 $ 12,815,582 Services transferred at a point in time 2,471,254 2,429,982 7,552,762 8,111,005 Net mortuary and cemetery sales $ 7,234,031 $ 6,470,363 $ 20,874,174 $ 20,926,587 55 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 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 Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net mortuary and cemetery sales $ 7,234,031 $ 6,470,363 $ 20,874,174 $ 20,926,587 Losses on investments and other assets ( 452,120 ) ( 640,593 ) ( 200,610 ) ( 1,615,253 ) Net investment income 516,094 681,239 2,460,859 1,916,970 Other revenues 118,418 180,989 292,904 217,906 Revenues from external customers 7,416,423 6,691,998 23,427,327 21,446,210 14) Receivables Receivables consist of the following: Schedule of Receivables As of September 30, 2023 As of December 31, 2022 Contracts with customers $ 6,088,152 $ 5,392,779 Receivables from sales agents 2,527,586 2,209,185 Other 8,404,014 23,200,919 Total receivables 17,019,752 30,802,883 Allowance for doubtful accounts ( 1,520,801 ) ( 2,229,791 ) Net receivables $ 15,498,951 $ 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 (1) ( 597,430 ) Charge-offs ( 111,560 ) Ending balance - September 30, 2023 $ 1,520,801 Beginning balance - January 1, 2022 $ 1,800,725 Change in provision for credit losses (1) 799,888 Charge-offs ( 370,822 ) Ending balance - December 31, 2022 $ 2,229,791 (1) Included in other expenses on the condensed consolidated statements of earnings 56 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets 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. The Company is the primary beneficiary of these trusts, as it absorbs both the losses and any expenses 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 September 30, 2023, are as follows: Schedule of Investments Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Estimated Fair Value September 30, 2023: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 208,568 $ 668 $ ( 2,297 ) $ - $ 206,939 Obligations of states and political subdivisions 129,509 - ( 9,169 ) - 120,340 Corporate securities including public utilities 41,086 - ( 973 ) - 40,113 Total fixed maturity securities available for sale $ 379,163 $ 668 $ ( 12,439 ) $ - $ 367,392 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 3,507,720 $ 624,037 $ ( 275,952 ) $ 3,855,805 Total equity securities at estimated fair value $ 3,507,720 $ 624,037 $ ( 275,952 ) $ 3,855,805 Mortgage loans held for investment at amortized cost: Residential construction $ 1,966,520 Less: Allowance for credit losses ( 3,933 ) Total mortgage loans held for investment $ 1,962,587 Real estate held for investment: Residential $ 30,632 Cash and cash equivalents $ 1,424,574 Total cemetery perpetual care trust investments $ 7,640,990 Cemetery perpetual care obligation $ ( 5,265,166 ) Trust investments in excess of trust obligations $ 2,375,824 57 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligations 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 table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023 and December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities: 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 September 30, 2023 U.S. Treasury securities and obligations of U.S. Government agencies $ 2,297 $ 139,633 $ - $ - $ 2,297 $ 139,633 Obligations of states and political subdivisions - - 9,169 120,340 9,169 120,340 Corporate securities including public utilities - - 973 40,113 973 40,113 Total unrealized losses $ 2,297 $ 139,633 $ 10,142 $ 160,453 $ 12,439 $ 300,086 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 58 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued) Relevant holdings were comprised of four securities with fair values aggregating 96.0 % of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of five securities with fair values aggregating 96.4 % of aggregate amortized cost as of December 31, 2022. No credit losses have been recognized for the three and nine month periods ended September 30, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent increases in interest and inflation rates. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale. The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of September 30, 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 $ 29,573 $ 30,000 Due in 2-5 years 254,242 245,011 Due in 5-10 years 41,086 40,113 Due in more than 10 years 54,262 52,268 Total $ 379,163 $ 367,392 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. 59 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued) Restricted assets as of September 30, 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 September 30, 2023: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 389,641 $ 924 $ ( 4,002 ) $ - $ 386,563 Obligations of states and political subdivisions 771,564 201 ( 19,526 ) - 752,239 Corporate securities including public utilities 405,171 - ( 9,447 ) - 395,724 Total fixed maturity securities available for sale $ 1,566,376 $ 1,125 $ ( 32,975 ) $ - $ 1,534,526 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 6,011,816 $ 739,197 $ ( 438,403 ) $ 6,312,610 Total equity securities at estimated fair value $ 6,011,816 $ 739,197 $ ( 438,403 ) $ 6,312,610 Mortgage loans held for investment at amortized cost: Residential construction $ 1,116,202 Less: Allowance for credit losses ( 2,232 ) Total mortgage loans held for investment $ 1,113,970 Cash and cash equivalents (1) $ 10,946,379 Total restricted assets $ 19,907,485 (1) Including cash and cash equivalents of $ 8,224,592 for the life insurance and mortgage segments. 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. 60 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 15) Cemetery Perpetual Care Trust Investments and Obligations and Restricted Assets (Continued) Fixed Maturity Securities The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023 and December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities. 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 September 30, 2023 U.S. Treasury securities and obligations of U.S. Government agencies $ 4,002 $ 243,232 $ - $ - $ 4,002 $ 243,232 Obligations of states and political subdivisions 3,189 71,811 16,337 580,227 19,526 652,038 Corporate securities including public utilities 1,016 101,649 8,431 294,075 9,447 395,724 Total unrealized losses $ 8,207 $ 416,692 $ 24,768 $ 874,302 $ 32,975 $ 1,290,994 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 Relevant holdings were comprised of 16 securities with fair values aggregating 97.5 % of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of 17 securities with fair values aggregating 98.2 % of the aggregate amortized cost as of December 31, 2022. No credit losses have been recognized for the three and nine month periods ended September 30, 2023 and 2022, since the increase in unrealized losses is primarily a result of the recent increase in interest and inflation rates. See Note 3 for additional information regarding the Company’s evaluation of the allowance for credit losses for fixed maturity securities available for sale. The table below presents the amortized cost and estimated fair value of fixed maturity securities available for sale as of September 30, 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 702,873 692,458 Due in 5-10 years 111,301 110,090 Due in more than 10 years 752,202 731,978 Total $ 1,566,376 $ 1,534,526 See Notes 3 and 8 for additional information regarding restricted assets and cemetery perpetual care trust investments. 61 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2023 (Unaudited) 16) Accumulated Other Comprehensive Income (loss) The following table summarizes the changes in accumulated other comprehensive income (loss): Schedule of Changes in Accumulated Other Comprehensive Income Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Unrealized losses on fixed maturity securities available for sale $ ( 6,725,752 ) $ ( 13,527,157 ) $ ( 6,310,923 ) $ ( 42,014,068 ) Amounts reclassified into net earnings (loss) ( 79,850 ) 3,917 ( 269,827 ) 168,794 Net unrealized losses before taxes ( 6,805,602 ) ( 13,523,240 ) ( 6,580,750 ) ( 41,845,274 ) Tax benefit 1,429,176 2,839,881 1,381,958 8,787,509 Net ( 5,376,426 ) ( 10,683,359 ) ( 5,198,792 ) ( 33,057,765 ) Unrealized gains (losses) on restricted assets (1) ( 12,284 ) 27,060 ( 14,340 ) ( 88,058 ) Tax benefit (expense) 3,060 ( 6,741 ) 3,572 21,935 Net ( 9,224 ) 20,319 ( 10,768 ) ( 66,123 ) Unrealized gains (losses) on cemetery perpetual care trust investments (1) ( 2,487 ) 28,931 ( 3,299 ) ( 24,294 ) Tax benefit (expense) 610 ( 7,204 ) 838 6,054 Net ( 1,877 ) 21,727 ( 2,461 ) ( 18,240 ) Other comprehensive loss changes $ ( 5,387,527 ) $ ( 10,641,313 ) $ ( 5,212,021 ) $ ( 33,142,128 ) (1) Fixed maturity securities available for sale The following table presents the accumulated balances of other comprehensive income (loss) as of September 30, 2023: Schedule of Accumulated Balances of Other Comprehensive Income Beginning Balance December 31, 2022 Change for the period Ending Balance September 30, 2023 Unrealized losses on fixed maturity securities available for sale $ ( 13,050,767 ) $ ( 5,198,792 ) $ ( 18,249,559 ) Unrealized losses on restricted assets (1) ( 13,148 ) ( 10,768 ) ( 23,916 ) Unrealized losses on cemetery perpetual care trust investments (1) ( 6,362 ) ( 2,461 ) ( 8,823 ) Other comprehensive loss $ ( 13,070,277 ) $ ( 5,212,021 ) $ ( 18,282,298 ) (1) Fixed maturity securities available for sale The following table presents 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 62