SECURITY NATIONAL FINANCIAL CORPORATION
The Company’s commercial real estate held for sale for the years ended December 31, is summarized as follows:
|
|
Net Ending Balance
|
|
|
Total Square Footage
|
|
|
|
2019
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Arizona
|
|
$
|
2,500
|
|
(1
|
)
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Kansas
|
|
|
4,800,000
|
|
|
|
|
|
-
|
|
|
|
222,679
|
|
|
|
-
|
|
Mississippi
|
|
|
318,322
|
|
|
|
|
|
-
|
|
|
|
12,300
|
|
|
|
-
|
|
Nevada
|
|
|
655,499
|
|
|
|
|
|
-
|
|
|
|
4,800
|
|
|
|
-
|
|
Texas
|
|
|
300,000
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,076,321
|
|
|
|
|
$
|
-
|
|
|
|
239,779
|
|
|
|
-
|
|
_________
(1)
|
|
(2)
|
Improved commercial pad
|
These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell
within the coming 12 months.
Residential Real Estate Held for Investment and Held for Sale
The Company owns a portfolio of residential homes primarily as a result of loan foreclosures. The strategy has been to lease these homes to produce cash flow, and allow time for the economic
fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns. The Company also invests in residential
subdivision developments.
The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs
and quality of work performed on the portfolio of homes across the country.
As of December 31, 2019, SNRE manages 38 residential properties in 6 states across the United States.
During the years ended December 31, 2019 and 2018, the Company recorded impairment losses on residential real estate held for investment of $700,134 and $486,457, respectively. These impairment
losses are included in gains (losses) on investments and other assets on the consolidated statements of earnings.
The net ending balance of foreclosed residential real estate included in residential real estate held for investment is approximately $12,434,000 and $23,532,000 as of December 31, 2019 and 2018,
respectively.
SECURITY NATIONAL FINANCIAL CORPORATION
The Company’s residential real estate held for investment for the years ended December 31, is summarized as follows:
|
|
Net Ending Balance
|
|
|
|
|
|
2019
|
|
|
|
|
2018
|
|
|
|
California
|
|
$
|
-
|
|
|
|
|
$
|
2,644,321
|
|
|
|
Florida
|
|
|
2,487,723
|
|
|
|
|
|
6,534,277
|
|
|
|
Nevada
|
|
|
293,516
|
|
|
|
|
|
-
|
|
|
|
Ohio
|
|
|
-
|
|
|
|
|
|
10,000
|
|
|
|
Oklahoma
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
Tennessee
|
|
|
-
|
|
|
|
|
|
105,260
|
|
|
|
Texas
|
|
|
-
|
|
|
|
|
|
139,174
|
|
|
|
Utah
|
|
|
9,462,886
|
|
(1
|
)
|
|
|
19,598,218
|
|
(1
|
)
|
Washington
|
|
|
286,181
|
|
|
|
|
|
476,181
|
|
|
|
|
|
$
|
12,530,306
|
|
|
|
|
$
|
29,507,431
|
|
|
|
________
(1)
|
Includes subdivision developments
|
The Company’s residential real estate held for sale for the years ended December 31, is summarized as follows:
|
|
Net Ending Balance
|
|
|
|
2019
|
|
|
2018
|
|
California
|
|
|
640,452
|
|
|
|
-
|
|
Florida
|
|
|
1,300,641
|
|
|
|
-
|
|
Ohio
|
|
|
10,000
|
|
|
|
-
|
|
Utah
|
|
|
5,880,213
|
|
|
|
-
|
|
Washington
|
|
|
190,000
|
|
|
|
-
|
|
|
|
$
|
8,021,306
|
|
|
$
|
-
|
|
These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12
months.
SECURITY NATIONAL FINANCIAL CORPORATION
Real Estate Owned and Occupied by the Company
The primary business units of the Company occupy a portion of the commercial real estate owned by the Company. As of December 31, 2019, real estate owned and occupied by the Company is summarized as
follows:
Location
|
|
Business Segment
|
|
Approximate
Square Footage
|
|
Square
Footage
Occupied
by the
Company
|
121 W. Election Rd., Draper, UT
|
|
Corporate Offices, Life Insurance and Cemetery/Mortuary Operations
|
|
78,979
|
|
18%
|
5201 Green Street, Salt Lake City, UT (1)
|
|
Life Insurance and Mortgage Operations
|
|
39,157
|
|
73%
|
1044 River Oaks Dr., Flowood, MS
|
|
Life Insurance Operations
|
|
19,694
|
|
28%
|
1818 Marshall Street, Shreveport, LA (1)(2)
|
|
Life Insurance Operations
|
|
12,274
|
|
100%
|
909 Foisy Street, Alexandria, LA (1)(2)
|
|
Life Insurance Sales
|
|
8,059
|
|
100%
|
812 Sheppard Street, Minden, LA (1)(2)
|
|
Life Insurance Sales
|
|
1,560
|
|
100%
|
1550 N 3rd Street, Jena, LA (1)(2)
|
|
Life Insurance Sales
|
|
1,737
|
|
100%
|
__________
(1)
|
Included in property and equipment on the consolidated balance sheets
|
(2)
|
See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company.
|
Mortgage Loans Held for Investment
The Company reports mortgage loans held for investment pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0 % to 10.5%, maturity dates range from nine months to 30 years and are secured by real
estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.
Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’
ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states
of Utah, Florida, Texas, California, Nevada and Arizona, respectively.
SECURITY NATIONAL FINANCIAL CORPORATION
The Company establishes a valuation allowance for credit losses in its portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:
Allowance for Credit Losses and Recorded Investment in Mortgage Loans Held for Investment
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Residential
Construction
|
|
|
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
187,129
|
|
|
$
|
1,125,623
|
|
|
$
|
35,220
|
|
|
$
|
1,347,972
|
|
Charge-offs
|
|
|
-
|
|
|
|
(32,692
|
)
|
|
|
-
|
|
|
|
(32,692
|
)
|
Provision
|
|
|
-
|
|
|
|
129,775
|
|
|
|
7,982
|
|
|
|
137,757
|
|
Ending balance
|
|
$
|
187,129
|
|
|
$
|
1,222,706
|
|
|
$
|
43,202
|
|
|
$
|
1,453,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
195,993
|
|
|
$
|
-
|
|
|
$
|
195,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
187,129
|
|
|
$
|
1,026,713
|
|
|
$
|
43,202
|
|
|
$
|
1,257,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
38,718,220
|
|
|
$
|
113,043,965
|
|
|
$
|
89,430,237
|
|
|
$
|
241,192,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
4,488,719
|
|
|
$
|
3,752,207
|
|
|
$
|
655,000
|
|
|
$
|
8,895,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
34,229,501
|
|
|
$
|
109,291,758
|
|
|
$
|
88,775,237
|
|
|
$
|
232,296,496
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
187,129
|
|
|
$
|
1,546,447
|
|
|
$
|
35,220
|
|
|
$
|
1,768,796
|
|
Charge-offs
|
|
|
-
|
|
|
|
(5,725
|
)
|
|
|
-
|
|
|
|
(5,725
|
)
|
Provision
|
|
|
-
|
|
|
|
(415,099
|
)
|
|
|
-
|
|
|
|
(415,099
|
)
|
Ending balance
|
|
$
|
187,129
|
|
|
$
|
1,125,623
|
|
|
$
|
35,220
|
|
|
$
|
1,347,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
74,185
|
|
|
$
|
-
|
|
|
$
|
74,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
187,129
|
|
|
$
|
1,051,438
|
|
|
$
|
35,220
|
|
|
$
|
1,273,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
27,785,927
|
|
|
$
|
89,935,600
|
|
|
$
|
71,366,544
|
|
|
$
|
189,088,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
196,182
|
|
|
$
|
2,939,651
|
|
|
$
|
502,991
|
|
|
$
|
3,638,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
27,589,745
|
|
|
$
|
86,995,949
|
|
|
$
|
70,863,553
|
|
|
$
|
185,449,247
|
|
SECURITY NATIONAL FINANCIAL CORPORATION
The following is a summary of the aging of mortgage loans held for investment for the periods presented.
Age Analysis of Past Due Mortgage Loans Held for Investment
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59
Days Past
Due
|
|
|
60-89
Days Past
Due
|
|
|
Greater
Than 90
Days (1)
|
|
|
In Process
of
Foreclosure (1)
|
|
|
Total Past
Due
|
|
|
Current
|
|
|
Total
Mortgage
Loans
|
|
|
Allowance
for Loan
Losses
|
|
|
Unamortized deferred
loan fees,
net
|
|
|
Unamortized discounts, net
|
|
|
Net Mortgage Loans
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,872,000
|
|
|
$
|
-
|
|
|
$
|
4,488,719
|
|
|
$
|
-
|
|
|
$
|
6,360,719
|
|
|
$
|
32,357,501
|
|
|
$
|
38,718,220
|
|
|
$
|
(187,129
|
)
|
|
$
|
(88,918
|
)
|
|
$
|
(653,272
|
)
|
|
$
|
37,788,901
|
|
Residential
|
|
|
10,609,296
|
|
|
|
4,085,767
|
|
|
|
2,100,742
|
|
|
|
1,651,465
|
|
|
|
18,447,270
|
|
|
|
94,596,695
|
|
|
|
113,043,965
|
|
|
|
(1,222,706
|
)
|
|
|
(1,567,581
|
)
|
|
|
-
|
|
|
|
110,253,678
|
|
Residential
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
655,000
|
|
|
|
-
|
|
|
|
655,000
|
|
|
|
88,775,237
|
|
|
|
89,430,237
|
|
|
|
(43,202
|
)
|
|
|
(735,068
|
)
|
|
|
-
|
|
|
|
88,651,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,481,296
|
|
|
$
|
4,085,767
|
|
|
$
|
7,244,461
|
|
|
$
|
1,651,465
|
|
|
$
|
25,462,989
|
|
|
$
|
215,729,433
|
|
|
$
|
241,192,422
|
|
|
$
|
(1,453,037
|
)
|
|
$
|
(2,391,567
|
)
|
|
$
|
(653,272
|
)
|
|
$
|
236,694,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,588,424
|
|
|
$
|
-
|
|
|
$
|
196,182
|
|
|
$
|
-
|
|
|
$
|
4,784,606
|
|
|
$
|
23,001,321
|
|
|
$
|
27,785,927
|
|
|
$
|
(187,129
|
)
|
|
$
|
32,003
|
|
|
$
|
-
|
|
|
$
|
27,630,801
|
|
Residential
|
|
|
9,899,380
|
|
|
|
2,312,252
|
|
|
|
1,715,362
|
|
|
|
1,224,289
|
|
|
|
15,151,283
|
|
|
|
74,784,317
|
|
|
|
89,935,600
|
|
|
|
(1,125,623
|
)
|
|
|
(862,411
|
)
|
|
|
-
|
|
|
|
87,947,566
|
|
Residential
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
502,991
|
|
|
|
502,991
|
|
|
|
70,863,553
|
|
|
|
71,366,544
|
|
|
|
(35,220
|
)
|
|
|
(444,622
|
)
|
|
|
-
|
|
|
|
70,886,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,487,804
|
|
|
$
|
2,312,252
|
|
|
$
|
1,911,544
|
|
|
$
|
1,727,280
|
|
|
$
|
20,438,880
|
|
|
$
|
168,649,191
|
|
|
$
|
189,088,071
|
|
|
$
|
(1,347,972
|
)
|
|
$
|
(1,275,030
|
)
|
|
$
|
-
|
|
|
$
|
186,465,069
|
|
_________
(1)
|
There was not any interest income recognized on loans past due greater than 90 days or in foreclosure.
|
SECURITY NATIONAL FINANCIAL CORPORATION
Impaired Mortgage Loans Held for Investment
Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the
impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if
any, for each reporting
period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:
Impaired Loans
|
|
Years Ended December 31
|
|
|
|
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,488,719
|
|
|
$
|
4,488,719
|
|
|
$
|
-
|
|
|
$
|
1,499,043
|
|
|
$
|
-
|
|
Residential
|
|
|
2,254,189
|
|
|
|
2,254,189
|
|
|
|
-
|
|
|
|
3,367,151
|
|
|
|
-
|
|
Residential construction
|
|
|
655,000
|
|
|
|
655,000
|
|
|
|
-
|
|
|
|
1,457,278
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Residential
|
|
|
1,498,018
|
|
|
|
1,498,018
|
|
|
|
195,993
|
|
|
|
665,270
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
4,488,719
|
|
|
$
|
4,488,719
|
|
|
$
|
-
|
|
|
$
|
1,499,043
|
|
|
$
|
-
|
|
Residential
|
|
|
3,752,207
|
|
|
|
3,752,207
|
|
|
|
195,993
|
|
|
|
4,032,421
|
|
|
|
-
|
|
Residential construction
|
|
|
655,000
|
|
|
|
655,000
|
|
|
|
-
|
|
|
|
1,457,278
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
196,182
|
|
|
$
|
196,182
|
|
|
$
|
-
|
|
|
$
|
98,023
|
|
|
$
|
-
|
|
Residential
|
|
|
1,612,164
|
|
|
|
1,612,164
|
|
|
|
-
|
|
|
|
2,423,135
|
|
|
|
-
|
|
Residential construction
|
|
|
502,991
|
|
|
|
502,991
|
|
|
|
-
|
|
|
|
675,950
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Residential
|
|
|
1,327,487
|
|
|
|
1,327,487
|
|
|
|
74,185
|
|
|
|
1,543,416
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
196,182
|
|
|
$
|
196,182
|
|
|
$
|
-
|
|
|
$
|
98,023
|
|
|
$
|
-
|
|
Residential
|
|
|
2,939,651
|
|
|
|
2,939,651
|
|
|
|
74,185
|
|
|
|
3,966,551
|
|
|
|
-
|
|
Residential construction
|
|
|
502,991
|
|
|
|
502,991
|
|
|
|
-
|
|
|
|
675,950
|
|
|
|
-
|
|
Credit Risk Profile Based on Performance Status
The Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an
indication of impairment. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status.
SECURITY NATIONAL FINANCIAL CORPORATION
The Company’s performing and non-performing mortgage loans held for investment were as follows:
Mortgage Loans Held for Investment Credit Exposure
|
|
Credit Risk Profile Based on Payment Activity
|
|
Years Ended December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
Residential Construction
|
|
|
Total
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
34,229,501
|
|
|
$
|
27,589,745
|
|
|
$
|
109,291,758
|
|
|
$
|
86,995,949
|
|
|
$
|
88,775,237
|
|
|
$
|
70,863,553
|
|
|
$
|
232,296,496
|
|
|
$
|
185,449,247
|
|
Non-performing
|
|
|
4,488,719
|
|
|
|
196,182
|
|
|
|
3,752,207
|
|
|
|
2,939,651
|
|
|
|
655,000
|
|
|
|
502,991
|
|
|
|
8,895,926
|
|
|
|
3,638,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,718,220
|
|
|
$
|
27,785,927
|
|
|
$
|
113,043,965
|
|
|
$
|
89,935,600
|
|
|
$
|
89,430,237
|
|
|
$
|
71,366,544
|
|
|
$
|
241,192,422
|
|
|
$
|
189,088,071
|
|
Non-Accrual Mortgage Loans Held for Investment
Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any income that had been accrued. Payments received for loans on a
non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans
totals approximately $203,000 and $151,000 as of December 31, 2019 and 2018, respectively.
The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented.
|
|
Mortgage Loans on
Non-accrual
Status Years
Ended December 31
|
|
|
|
2019
|
|
|
2018
|
|
Commercial
|
|
$
|
4,488,719
|
|
|
$
|
196,182
|
|
Residential
|
|
|
3,752,207
|
|
|
|
2,939,651
|
|
Residential construction
|
|
|
655,000
|
|
|
|
502,991
|
|
Total
|
|
$
|
8,895,926
|
|
|
$
|
3,638,824
|
|
Principal Amounts Due
The amortized cost and contractual payments on mortgage loans held for investment by category as of December 31, 2019 are shown below. Expected principal payments may differ from
contractual obligations because certain borrowers may elect to pay off mortgage obligations with or without early payment penalties.
|
|
|
|
|
Principal
|
|
|
Principal
|
|
|
Principal
|
|
|
|
|
|
|
Amounts
|
|
|
Amounts
|
|
|
Amounts
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
Due
|
|
|
|
Total
|
|
|
1 Year
|
|
|
2-5 Years
|
|
|
Thereafter
|
|
Residential
|
|
$
|
113,043,965
|
|
|
$
|
6,234,913
|
|
|
$
|
27,161,628
|
|
|
$
|
79,647,424
|
|
Residential Construction
|
|
|
89,430,237
|
|
|
$
|
60,376,688
|
|
|
$
|
29,053,549
|
|
|
|
-
|
|
Commercial
|
|
|
38,718,220
|
|
|
|
24,175,464
|
|
|
|
4,020,999
|
|
|
|
10,521,757
|
|
Total
|
|
$
|
241,192,422
|
|
|
$
|
90,787,065
|
|
|
$
|
60,236,176
|
|
|
$
|
90,169,181
|
|
3) Loans Held for Sale
The Company has elected the fair value option for loans held for sale as disclosed in Note 1. Interest income is recorded based on the contractual terms of the loan and in accordance with the
Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the consolidated statement of earnings. There are five loans with an aggregate unpaid principal balance of $1,130,028 that are 90 or more days past due
and on a nonaccrual status as of December 31, 2019. See Note 17 of the Notes to Consolidated Financial Statements for additional disclosures regarding loans held for sale.
The following is a summary of the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for the periods presented:
|
|
As of
December 31
2019
|
|
|
As of
December 31
2018
|
|
|
|
|
|
|
|
|
Aggregate fair value
|
|
$
|
213,457,632
|
|
|
$
|
136,210,853
|
|
Unpaid principal balance
|
|
|
206,417,122
|
|
|
|
131,663,946
|
|
Unrealized gain
|
|
|
7,040,510
|
|
|
|
4,546,907
|
|
Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for
sale.
Major categories of mortgage fee income for loans held for sale for the years ended December 31, were as follows:
|
|
2019
|
|
|
2018
|
|
Loan fees
|
|
$
|
28,660,966
|
|
|
$
|
27,429,237
|
|
Interest income
|
|
|
6,978,930
|
|
|
|
6,156,796
|
|
Secondary gains
|
|
|
93,581,956
|
|
|
|
80,416,718
|
|
Change in fair value of loan commitments
|
|
|
899,417
|
|
|
|
(404,773
|
)
|
Change in fair value of loans held for sale
|
|
|
2,498,097
|
|
|
|
3,736,209
|
|
Provision for loan loss reserve
|
|
|
(643,284
|
)
|
|
|
(1,148,334
|
)
|
Mortgage fee income
|
|
$
|
131,976,082
|
|
|
$
|
116,185,853
|
|
Loan Loss Reserve
When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is
reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v)
interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase
demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor.
SECURITY NATIONAL FINANCIAL CORPORATION
The following is a summary of the loan loss reserve which is included in other liabilities and accrued expenses:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of period
|
|
$
|
3,604,869
|
|
|
$
|
2,571,524
|
|
Provision for current loan originations (1)
|
|
|
643,284
|
|
|
|
1,148,334
|
|
Charge-offs, net of recaptured amounts
|
|
|
(201,865
|
)
|
|
|
(114,989
|
)
|
Balance, at December 31
|
|
$
|
4,046,288
|
|
|
$
|
3,604,869
|
|
__________
(1)
|
Included in Mortgage fee income
|
The Company maintains reserves for estimated losses on current production volumes. The Company also retains loss reserves for loans that the Company originated between 2005 and 2007, in which the
possibility of an investor claim or potential settlement may still exist. During 2019, reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated. During 2018, reserves were added
at an average rate of 5.0 basis points per loan originated.
Based on the Company’s best estimate for potential loan losses and considering published industry data, loss reserve basis points are established to create an adequate reserve. The reserve is
intended to cover both expected losses on recent period loan production and possible losses on earlier loans that were sold. The strong housing market over the last several years has reduced the Company’s exposure to losses on more recent loan
production, but exposure still remains on older loans.
During the period from 2006 to 2019, over $60 million has been reserved for loan losses. A large majority of that reserve has been used to settle investor claims or potential claims on alternative
documentation loans originated between 2005 to 2007. As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim
becomes more difficult. However, because some loans remain from the original 2005 to 2007 time period that have not been settled, the Company still includes a reserve for the potential of future loan demands and potential settlements of such loans.
As of December 31, 2019, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans from this time period with a general reserve for more recent loan production. Thus, the Company believes
that the final loan loss reserve as of December 31, 2019, represents its best estimate for adequate loss reserves on loans sold.
The Company believes that actual loan loss experience could change in the near-term from the established reserve based upon claims that could be asserted by a third-party investor. The Company
believes there is potential to resolve any alleged claims by a third-party investor on acceptable terms. If the Company is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third-party
investor, the Company believes it has significant defenses to any such action and intends to vigorously defend itself against such action.
SECURITY NATIONAL FINANCIAL CORPORATION
4) Receivables
Receivables consist of the following:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Trade contracts
|
|
$
|
2,795,471
|
|
|
$
|
2,816,225
|
|
Receivables from sales agents
|
|
|
2,962,571
|
|
|
|
3,079,688
|
|
Other
|
|
|
5,202,444
|
|
|
|
4,559,272
|
|
Total receivables
|
|
|
10,960,486
|
|
|
|
10,455,185
|
|
Allowance for doubtful accounts
|
|
|
(1,724,156
|
)
|
|
|
(1,519,842
|
)
|
Net receivables
|
|
$
|
9,236,330
|
|
|
$
|
8,935,343
|
|
5) Value of Business Acquired, Intangible Assets and Goodwill
Information with regard to value of business acquired was as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
|
|
2018
|
|
Balance at beginning of year
|
|
$
|
5,765,190
|
|
|
|
|
$
|
6,588,759
|
|
Value of business acquired
|
|
|
4,962,831
|
|
(1
|
)
|
|
|
-
|
|
Imputed interest at 7% included in earnings
|
|
|
472,916
|
|
|
|
|
|
421,122
|
|
Amortization included in earnings
|
|
|
(1,320,456
|
)
|
|
|
|
|
(1,244,691
|
)
|
Shadow amortization included in other comprehensive income
|
|
|
(3,834
|
)
|
|
|
|
|
-
|
|
Net amortization
|
|
|
(851,374
|
)
|
|
|
|
|
(823,569
|
)
|
Balance at end of year
|
|
$
|
9,876,647
|
|
|
|
|
$
|
5,765,190
|
|
_________
(1)
|
See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company
|
Presuming no additional acquisitions, net amortization charged to income is expected to approximate $1,194,000, $1,065,000, $985,000, $916,000, and $845,000 for the years 2020 through 2025. Actual
amortization may vary based on changes in assumptions or experience. As of December 31, 2019, value of business acquired is being amortized over a weighted average life of 6.8 years.
The carrying value of the Company’s intangible assets were as follows:
|
|
|
December 31
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
Intangible asset - customer lists
|
15 years
|
|
$
|
890,000
|
|
(1
|
)
|
|
$
|
890,000
|
|
(1
|
)
|
Intangible asset - trade name
|
15 years
|
|
$
|
610,000
|
|
(2
|
)
|
|
$
|
-
|
|
|
|
Less accumulated amortization
|
|
|
|
(98,222
|
)
|
|
|
|
|
(34,611
|
)
|
|
|
Balance at end of year
|
|
|
$
|
1,401,778
|
|
|
|
|
$
|
855,389
|
|
|
|
_________
(1)
|
See Note 20 regarding the acquisition of Beta Capital Corp.
|
(2)
|
See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company
|
SECURITY NATIONAL FINANCIAL CORPORATION
Information regarding goodwill by segment was as follows:
|
|
Life Insurance
|
|
|
Cemetery/Mortuary
|
|
|
|
|
Total
|
|
Balance at January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,765,570
|
|
|
$
|
-
|
|
|
|
|
$
|
2,765,570
|
|
Accumulated impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Total goodwill, net
|
|
|
2,765,570
|
|
|
|
-
|
|
|
|
|
|
2,765,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,765,570
|
|
|
|
-
|
|
|
|
|
|
2,765,570
|
|
Accumulated impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Total goodwill, net
|
|
|
2,765,570
|
|
|
|
-
|
|
|
|
|
|
2,765,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
-
|
|
|
|
754,018
|
|
(1
|
)
|
|
|
754,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,765,570
|
|
|
|
754,018
|
|
|
|
|
|
3,519,588
|
|
Accumulated impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Total goodwill, net
|
|
$
|
2,765,570
|
|
|
$
|
754,018
|
|
|
|
|
$
|
3,519,588
|
|
_________
(1)
|
See Note 20 regarding the acquisition of Probst Family Funerals and Cremations and Heber Valley Funeral Home
|
Goodwill of $3,519,588 is not amortized but is tested annually for impairment. The annual impairment tests resulted in no impairment of goodwill for the years ended December 31, 2019 and 2018.
6) Property and Equipment
The cost of property and equipment is summarized below:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Land and buildings
|
|
$
|
15,131,301
|
|
|
$
|
7,775,922
|
|
Furniture and equipment
|
|
|
18,987,984
|
|
|
|
16,731,457
|
|
|
|
|
34,119,285
|
|
|
|
24,507,379
|
|
Less accumulated depreciation
|
|
|
(19,518,891
|
)
|
|
|
(17,496,601
|
)
|
Total
|
|
$
|
14,600,394
|
|
|
$
|
7,010,778
|
|
Depreciation expense for the years ended December 31, 2019 and 2018 was $1,711,369 and $1,867,001, respectively. During 2019, the Company transferred $3,261,259 from real estate held for investment
to property and equipment. This transfer is shown as a non cash item on the consolidated statements of cash flows. See Note 20 for additional information regarding property and equipment acquired through acquisitions.
SECURITY NATIONAL FINANCIAL CORPORATION
7) Bank and Other Loans Payable
Bank and other loans payable are summarized as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
2.25% above the monthly LIBOR rate plus 1/16th of the monthly LIBOR rate note payable in monthly principal payments of $13,167 plus interest, collateralized by real property with a book value
of approximately $4,244,000, due September 2021.
|
|
$
|
2,659,769
|
|
|
$
|
2,817,775
|
|
|
|
|
|
|
|
|
|
|
4.27% fixed note payable in monthly installments of $53,881 including principal and interest, collateralized by shares of Security National Life Insurance Company stock, due December 2021.
|
|
|
1,238,619
|
|
|
|
1,817,905
|
|
|
|
|
|
|
|
|
|
|
Prime rate note payable in monthly installments of $75,108 including principal and interest, collateralized by shares of Security National Life Insurance Company stock, due December 2024.
|
|
|
4,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
4.40% fixed note payable in monthly installments of $46,825 including principal and interest, collateralized by real property with a book value of approximately $12,923,000, due January 2026.
|
|
|
7,247,651
|
|
|
|
7,492,140
|
|
|
|
|
|
|
|
|
|
|
4.329% fixed note payable in monthly installments of $9,775 including principal and interest, collateralized by real property with a book value of approximately $3,261,000, due September
2025.
|
|
|
1,896,450
|
|
|
|
1,929,725
|
|
|
|
|
|
|
|
|
|
|
2.5% above the monthly LIBOR rate plus 1/16th of the monthly LIBOR rate construction loan payable in monthly principal payments of $113,000 plus interest, collateralized by real property with
a book value of approximately $49,378,000, due August 2020.
|
|
|
33,811,559
|
|
|
|
30,796,861
|
|
|
|
|
|
|
|
|
|
|
4.7865% fixed interest only note payable in monthly installments, collateralized by real property with a book value of approximately $18,009,000, due June 2028.
|
|
|
9,200,000
|
|
|
|
9,200,000
|
|
|
|
|
|
|
|
|
|
|
1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of $100,000,000, matures June 2020.
|
|
|
88,509,536
|
|
|
|
60,438,156
|
|
|
|
|
|
|
|
|
|
|
1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of $100,000,000, matures September 2020.
|
|
|
67,537,600
|
|
|
|
25,680,649
|
|
|
|
|
|
|
|
|
|
|
Other short-term borrowings (1)
|
|
|
1,250,000
|
|
|
|
47,250,000
|
|
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
|
153,439
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other loans payable
|
|
|
67,989
|
|
|
|
97,977
|
|
Total bank and other loans
|
|
|
217,572,612
|
|
|
|
187,521,188
|
|
|
|
|
|
|
|
|
|
|
Less current installments
|
|
|
192,985,602
|
|
|
|
165,219,632
|
|
Bank and other loans, excluding current installments
|
|
$
|
24,587,010
|
|
|
$
|
22,301,556
|
|
________
(1)
|
Federal Home Loan Bank and Revolving Lines of Credit
|
SECURITY NATIONAL FINANCIAL CORPORATION
Federal Home Loan Bank Membership
The Federal Home Loan Banks (“the FHLBs”) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. The Company is a member of the
FHLB based in Des Moines, Iowa and based in Dallas, Texas. As a member of the FHLB, the Company is required to maintain a minimum investment in capital stock of the FHLB and may pledge collateral to the bank for advances of funds to be used in its
operations.
Federal Home Loan Bank of Des Moines
At December 31, 2019, the amount available for borrowings from the FHLB of Des Moines was approximately $57,727,738, compared with $534,579 at December 31, 2018. United States Treasury fixed maturity
securities with an estimated fair value of $59,877,900 at December 31, 2019 have been pledged at the FHLB of Des Moines as collateral for current and potential borrowings compared with $49,342,210 at December 31, 2018. At December 31, 2019, the
Company had no outstanding FHLB borrowings. At December 31, 2019, the Company’s total investment in FHLB stock was $806,500 compared with $2,548,700 at December 31, 2018. The Company’s decreased investment in FHLB stock was a result of its decrease
in short-term FHLB borrowings during 2019.
Federal Home Loan Bank of Dallas
The membership of the FHLB of Dallas was acquired with the acquisition of Kilpatrick Life Insurance Company. See Note 20 regarding this acquisition. At December 31, 2019, the Company’s total
investment in FHLB stock was $87,800. The Company does not have any collateral pledged at the FHLB of Dallas or any outstanding borrowings.
Revolving Lines of Credit
The Company has a $2,000,000 revolving line-of-credit with a bank with interest payable at the prime rate minus .75%, secured by the capital stock of Security National Life and maturing September 30,
2020, renewable annually. At December 31, 2019, the Company was contingently liable under a standby letter of credit aggregating $625,405, to be used as collateral to cover any contingency related to additional risk assessments pertaining to the
Company's captive insurance program. The Company does not expect any material losses to result from the issuance of the standby letter of credit. The standby letter of credit will draw on the line of credit if necessary. The Company does not expect
any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid. As of December 31, 2019, there were no amounts outstanding under the revolving line-of-credit.
The Company also has a $2,500,000 revolving line-of-credit with a bank with interest payable at the overnight LIBOR rate plus 2.25% maturing September 30, 2020. As of December 31, 2019, there was
$1,250,000 outstanding under the revolving line-of-credit.
Debt Covenants for Mortgage Warehouse Lines of Credit
The Company, through its subsidiary SecurityNational Mortgage, has a $100,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month
LIBOR rate plus 2.1% and matures on June 16, 2020. 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.
The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to
$100,000,000 for the sole purpose of funding mortgage loans. SecurityNational Mortgage is currently approved to borrow $30,000,000 of the $100,000,000 available. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on
September 9, 2020. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1
on a rolling four-quarter basis.
SECURITY NATIONAL FINANCIAL CORPORATION
The agreements for both warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement. As of December
31, 2019, the Company had approximately $67,538,000 and $88,510,000 outstanding on the Texas Capital Bank and Wells Fargo warehouse lines, respectively, and was in compliance with all debt covenants.
The following tabulation shows the combined maturities of bank and other loans payable:
2019
|
|
$
|
192,985,602
|
|
2020
|
|
|
4,256,684
|
|
2021
|
|
|
1,151,703
|
|
2022
|
|
|
1,218,742
|
|
2023
|
|
|
1,247,461
|
|
Thereafter
|
|
|
16,712,420
|
|
Total
|
|
$
|
217,572,612
|
|
Interest expense in 2019 and 2018 was $7,386,688 and $6,956,707, respectively.
Interest paid in 2019 and 2018 was $7,284,078 and $6,878,048,
respectively.
8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets
State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have
established an endowment care trust. These endowment care trusts are defined as variable interest entities pursuant to GAAP. Also, management has determined that the Company is the primary beneficiary of these trusts, as it absorbs both a majority of
the losses and returns associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets.
The components of the cemetery perpetual care investments and obligation are as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
1,306,740
|
|
|
$
|
1,557,506
|
|
Fixed maturity securities, available for sale, at estimated fair value
|
|
|
975,673
|
|
|
|
990,390
|
|
Equity securities, at estimated fair value
|
|
|
1,605,451
|
|
|
|
483,353
|
|
Commerical mortgage loans held for investment
|
|
|
524,000
|
|
|
|
-
|
|
Real estate held for investment
|
|
|
-
|
|
|
|
1,304,620
|
|
Note receivables from Cottonwood Mortuary, Singing Hills
|
|
|
|
|
|
|
|
|
Cemetery and Memorial Estates eliminated in consolidation
|
|
|
1,541,120
|
|
|
|
1,606,155
|
|
Total cemetery perpetual care trust investments
|
|
|
5,952,984
|
|
|
|
5,942,024
|
|
Cemetery perpetual care obligation
|
|
|
(3,933,719
|
)
|
|
|
(3,821,979
|
)
|
Trust investments in excess of trust obligations
|
|
$
|
2,019,265
|
|
|
$
|
2,120,045
|
|
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 fund its medical benefit safe-harbor limit based on 35% of the qualified direct costs for the preceding year,
and has included this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments.
Restricted assets are summarized as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents (1)
|
|
$
|
8,674,214
|
|
|
$
|
7,179,225
|
|
Mutual funds, at estimated fair value
|
|
|
-
|
|
|
|
677,795
|
|
Fixed maturity securities, available for sale, at estimated fair value
|
|
|
1,008,867
|
|
|
|
1,258,397
|
|
Equity securities, at estimated fair value
|
|
|
1,976,480
|
|
|
|
66,878
|
|
Participating interests in mortgage loans held for investment with Security National Life
|
|
|
2,275,756
|
|
|
|
1,799,267
|
|
Total
|
|
$
|
13,935,317
|
|
|
$
|
10,981,562
|
|
_________
(1)
|
Including cash and cash equivalents of $7,170,092 and $5,668,580 as of December 31, 2019 and 2018, respectively, for the life insurance and mortgage segments.
|
A surplus note receivable in the amount of $4,000,000 at December 31, 2019 and 2018, from Security National Life, was eliminated in consolidation.
See Notes 1 and 17 for additional information regarding restricted assets.
SECURITY NATIONAL FINANCIAL CORPORATION
9) Income Taxes
The Company’s income tax liability is summarized as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Current
|
|
$
|
1,410,153
|
|
|
$
|
473,800
|
|
Deferred
|
|
|
17,276,819
|
|
|
|
15,649,198
|
|
Total
|
|
$
|
18,686,972
|
|
|
$
|
16,122,998
|
|
Significant components of the Company’s deferred tax (assets) and liabilities are approximately as follows:
|
|
December 31
|
|
|
|
2019
|
|
|
2018
|
|
Assets
|
|
|
|
|
|
|
Future policy benefits
|
|
$
|
(12,450,229
|
)
|
|
$
|
(8,293,592
|
)
|
Loan loss reserve
|
|
|
(1,053,256
|
)
|
|
|
(938,496
|
)
|
Unearned premium
|
|
|
(760,556
|
)
|
|
|
(823,299
|
)
|
Available for sale securities
|
|
|
-
|
|
|
|
(366,279
|
)
|
Net operating loss
|
|
|
(438,420
|
)
|
|
|
(593,272
|
)
|
Deferred compensation
|
|
|
(1,996,865
|
)
|
|
|
(1,677,118
|
)
|
Deposit obligations
|
|
|
(619,633
|
)
|
|
|
(610,769
|
)
|
Other
|
|
|
(1,020,718
|
)
|
|
|
(185,557
|
)
|
Less: Valuation allowance
|
|
|
2,439,394
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
(15,900,283
|
)
|
|
|
(13,488,382
|
)
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
15,536,717
|
|
|
|
15,255,960
|
|
Basis difference in property and equipment
|
|
|
3,638,512
|
|
|
|
4,309,162
|
|
Value of business acquired
|
|
|
2,074,096
|
|
|
|
1,210,690
|
|
Deferred gains
|
|
|
5,169,104
|
|
|
|
6,267,373
|
|
Trusts
|
|
|
1,064,387
|
|
|
|
1,064,387
|
|
Tax on unrealized appreciation
|
|
|
5,694,286
|
|
|
|
1,030,008
|
|
Total deferred tax liabilities
|
|
|
33,177,102
|
|
|
|
29,137,580
|
|
Net deferred tax liability
|
|
$
|
17,276,819
|
|
|
$
|
15,649,198
|
|
The valuation allowance relates to differences between recorded deferred tax assets and liabilities and ultimate anticipated realization. For the year ended December 31, 2019, the Company has
recorded a valuation allowance related to Kilpatrick Life Insurance Company that was acquired in December 2019. See Note 20 regarding the acquisition.
The Company paid $4,861,318 and $5,701,565 in income taxes for the years ended December 31, 2019 and 2018, respectively.
SECURITY NATIONAL FINANCIAL CORPORATION
The Company’s income tax expense is summarized as follows for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
4,404,041
|
|
|
$
|
6,933,145
|
|
State
|
|
|
504,272
|
|
|
|
166,567
|
|
|
|
|
4,908,313
|
|
|
|
7,099,712
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,551,725
|
)
|
|
|
(1,838,947
|
)
|
State
|
|
|
(306,172
|
)
|
|
|
(766,454
|
)
|
|
|
|
(1,857,897
|
)
|
|
|
(2,605,401
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,050,416
|
|
|
$
|
4,494,311
|
|
The reconciliation of income tax expense at the U.S. federal statutory rates is as follows:
|
|
2019
|
|
|
2018
|
|
Computed expense at statutory rate
|
|
$
|
2,928,226
|
|
|
$
|
5,497,882
|
|
State tax expense, net of federal tax benefit
|
|
|
156,499
|
|
|
|
(473,911
|
)
|
Change in valuation allowance
|
|
|
194,364
|
|
|
|
-
|
|
Other, net
|
|
|
(228,673
|
)
|
|
|
(529,660
|
)
|
Income tax expense
|
|
$
|
3,050,416
|
|
|
$
|
4,494,311
|
|
The Company’s overall effective tax rate for the years ended December 31, 2019 and 2018 was 21.9% and 17.2%, respectively. The Company’s effective tax rates differ from the U.S. federal statutory
corporate income tax rate of 21% partially due to its provision for state income taxes and an increase to the valuation allowance related to Kilpatrick Life Insurance Company that increased the effective income tax rate when compared to the prior
year.
At December 31, 2019, the Company had no significant unrecognized tax benefits. As of December 31, 2019, the Company does not expect any material changes to the estimated amount of unrecognized tax
benefits in the next twelve months. Federal and state income tax returns for 2016 through 2019 are subject to examination by taxing authorities.
Net Operating Losses and Tax Credit Carryforwards:
Year of Expiration
|
|
|
|
2020
|
|
$
|
114,601
|
|
2021
|
|
|
17,101
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
2024
|
|
|
-
|
|
Thereafter up through 2037
|
|
|
1,701,126
|
|
|
|
|
|
|
|
|
$
|
1,832,828
|
|
10) Reinsurance, Commitments and Contingencies
The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $25,000 to $100,000 during the years 2019 and 2018. The Company is liable for these amounts in
the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies having insurance in force amounting to approximately $99,000,000 and approximately $103,000,000 at December 31, 2019
and 2018, respectively.
Mortgage Loan Loss Settlements
Future loan losses can be extremely difficult to estimate. However, the Company believes that its reserve methodology and its current practice of property preservation allow it to estimate potential
losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2019 and 2018, the balances were $4,046,000 and $3,605,000, respectively.
During the period from 2006 to 2019, over $60 million has been reserved for loan losses. A large majority of that reserve has been used to settle investor claims or potential claims on alternative
documentation loans originated between 2005 to 2007. As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim
becomes more difficult. However, because some loans remain from the original 2005 to 2007 time period that have not been settled, the Company still includes a reserve for the potential of future loan demands and potential settlements of such loans.
As of December 31, 2019, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans from this time period with a general reserve for more recent loan production. Thus, the Company believes
that the final loan loss reserve as of December 31, 2019, represents its best estimate for adequate loss reserves on loans sold.
Mortgage Loan Loss Litigation
Lehman Brothers Holdings Litigation – Delaware and New York
In January 2014, Lehman Brothers Holdings Inc. (“Lehman Holdings”) entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that
Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae. Lehman Holdings had acquired these loans from Aurora
Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage Company (“SecurityNational Mortgage”). A settlement based on similar
circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.
Lehman Holdings filed a motion in May 2014 with the U.S. Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage
in non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings. The mediation was not successful in resolving any issues between
SecurityNational Mortgage and Lehman Holdings.
On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware. In the Delaware action, SecurityNational
Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans. SecurityNational Mortgage sought a declaratory judgment as
to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings’ settlements with Fannie Mae and Freddie Mac. Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory
judgment action. On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings’ motion to dismiss.
SECURITY NATIONAL FINANCIAL CORPORATION
On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the
Southern District of New York seeking a declaration of rights similar in nature to the declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under
indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. No response was required to be filed
relative to the Complaint or the Amended Complaint dated March 7, 2016. A Case Management Order was entered on November 1, 2016.
On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but
retains a similar claim for damages as in the Complaint. Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter
and that venue is improper. Lehman Holdings’ response memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017. A hearing on the motion was held on June 12, 2018.
On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion. On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a
joint motion with the United States District Court (Case No. 18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction. Included with the motion were proposed objections to the Bankruptcy Court’s Decision. On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’
reply was filed on October 2, 2018.
On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy
Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law. Separately, certain other defendants also filed a notice of
appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue. Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’
response on November 26, 2018. The motions to file appeals were consolidated before Valerie Caproni, U.S. District Court Judge, Case No. 18-cv-08986 (VEC). Case No. 18-mc-00392 (VEC) was also before Judge Caproni.
On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage. In addition to the Fannie Mae and
Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”). The RMBS loans had allegedly been sold by defendants to Lehman Bank that, in
turn, sold them to Lehman Holdings. The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings. Lehman Holdings asserts that it made
representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.
On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue. Further, the judge
denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.
The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac
related loans. Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation. Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’
motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants, including SecurityNational Mortgage.
SECURITY NATIONAL FINANCIAL CORPORATION
Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint")
(United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint already on file. The RMBS Complaint seeks alleged damages
relating to obligations under alleged contractual indemnification provisions in an amount to be determined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert
witness fees incurred in litigation; and such other relief as the Court deems just and proper. SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.
In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order
pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as document production, taking depositions, and use
of experts. At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019. SecurityNational
Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case. Discovery is in process.
Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019. SecurityNational Mortgage sent its Statement of Position to Lehman
Brothers Holdings dated September 3, 2019 in response to the notice. Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage. On January 9, 2020, SecurityNational Mortgage submitted further information to the
mediator. Mediation was set to take place on January 23, 2020 in New York.
On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing. It was not filed in
the Bankruptcy Court but in the United States District Court for the Southern District of New York. The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial
motions, and settlement,” as well as for “a Report and Recommendation” as to the pending motion. The final disposition of the motion will be with the District Court judge. Lehman Holdings has asked the District Court to transfer the case to one of
two other judges allegedly due to related matters. No action has been taken by the District Court on the request.
However, a briefing schedule is in place before the original assigned magistrate judge. Lehman Holdings’ response brief to SecurityNational Mortgage’s motion is due March 6, 2020, and
SecurityNational Mortgage’s reply brief is due April 6, 2020. In view of SecurityNational Mortgage’s motion to dismiss, Lehman Holdings requested that the mediation set for January 23, 2020 be adjourned “pending resolution of your [SecurityNational
Mortgage] motion by the court.” On January 17, 2020, the mediator adjourned the scheduled mediation without a date.
Non-Cancelable Leases
The Company leases office space and equipment under various non-cancelable agreements. See Note 24 regarding leases.
Other Contingencies and Commitments
The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of December 31, 2019, the Company’s
commitments were approximately $123,601,000, for these loans of which $90,566,000 had been funded. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50%
and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.
SECURITY NATIONAL FINANCIAL CORPORATION
The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves are maintained relative to these programs. The level of
exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors,
which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional
reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but
not reported as of the balance sheet date.
The Company is a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the actions will have a material effect on the Company’s
financial position or results of operations. Based on management’s assessment and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial
statements.
The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which, if adversely determined, would have a material
adverse effect on its financial condition or results of operations.
11) Retirement Plans
The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (“ESOP”) for all eligible employees. Eligible employees are primarily those with more than one year of service,
who work in excess of 1,000 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors.
The Company’s contributions are allocated to eligible employees based on the ratio of each eligible employee’s compensation to total compensation for all eligible employees during each year. The
Company did not make any contributions for the years ended December 31, 2019 and 2018. On November 25, 2019, the Company distributed a “Notice of Intent to Terminate” the ESOP Plan to all current plan participants. The
Company also filed Form 5310 “Application for Determination for Terminating Plan”, with the IRS on December 6, 2019. The Company is awaiting approval of its application from the IRS prior to its final distribution of the ESOP Plan assets to the
participants. At December 31, 2019, the ESOP held 495,618 shares of Class A and 307,491 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the
ESOP are considered outstanding for purposes of computing earnings per share.
The Company has three 401(k) savings plans covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal
Revenue Code. The plans allow participants to make pretax contributions up to a maximum of $19,000 and $18,500 for the years 2019 and 2018, respectively or the statutory limits.
Beginning January 1, 2008, the Company elected to be a “Safe Harbor” Plan for its matching 401(k) contributions. The Company matched 100% of up to 3% of an employee’s total annual compensation and
matched 50% of 4% to 5% of an employee’s annual compensation. The match was in Company stock. The Company’s contribution for the years ended December 31, 2019 and 2018 was $695,560 and $1,480,913, respectively under the “Safe Harbor” plan.
In 2001, the Company’s Board of Directors adopted a Non-Qualified Deferred Compensation Plan, and this plan was amended in 2005. Under the terms of the Plan, the Company will provide deferred
compensation for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Board has appointed a Committee of
the Company to be the Plan Administrator and to determine the employees who are eligible to participate in the plan. The employees who participate may elect to defer a portion of their compensation into the plan. The Company may contribute into the
plan at the discretion of the Company’s Board of Directors. The Company did not make any contributions for 2019 and 2018.
Effective December 4, 2018, the Board members approved a motion to extend Mr. Quist’s employment agreement, dated December 4, 2012, for an additional four-year term ending December 2022. In the event
of disability, Mr. Quist’s salary would be continued for up to five years at 75% of its current level of compensation.
In the event of a sale or merger of the Company and Mr. Quist is not retained in his current position, the Company would be obligated to continue paying Mr. Quist’s current compensation and benefits
for seven years following the merger or sale. The agreement further provides that Mr. Quist is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years
following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of twenty years in annual installments in the amount equal to 75% of his then current level of
compensation. In the event that Mr. Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed $660,000 and $660,000 during the years ended December 31, 2019 and 2018,
respectively, to cover the present value of anticipated retirement benefits under the employment agreement. The liability accrued was $5,722,837 and $5,191,670 as of December 31, 2019 and 2018, respectively.
The Company, through its wholly owned subsidiary, SecurityNational Mortgage, also has an employment agreement with its former Vice President of Mortgage Operations and President of SecurityNational
Mortgage, who retired from the Company on December 31, 2015. Under the terms of the employment agreement, this individual is entitled to receive retirement benefits from the Company for a period of ten years in an amount equal to 50% of his rate of
compensation at the time of his retirement, which was $267,685 for the year ended December 31, 2015. Such retirement payments are paid monthly during the ten-year period. In the event that this individual dies prior to receiving all of his retirement
benefits under his employment agreement, the remaining benefits will be made to his heirs. The company paid $133,843 and $133,843 in retirement compensation to this individual during the years ended December 31, 2019 and 2018, respectively. The
liability accrued was $803,055 and $841,591 as of December 31, 2019 and 2018, respectively and is included in Other liabilities and accrued expenses on the consolidated balance sheets.
SECURITY NATIONAL FINANCIAL CORPORATION
12) Capital Stock
The Company has one class of preferred stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. The preferred stock is non-voting.
The Company has two classes of common stock with shares outstanding, Class A common shares and Class C common shares. Class C shares have 10 votes per share on all matters except for the election of
one third of the directors who are elected solely by the Class A shares. Class C shares are convertible into Class A shares at any time on a one to one ratio. The decrease in treasury stock was the result of treasury stock being used to fund the
company’s 401(k) Plans.
Stockholders of both Class A and Class C common stock have received 5% stock dividends in the years 1990 through 2019, as authorized by the Company’s Board of Directors.
The Company has Class B common stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of
Incorporation which would affect Class B common stock.
The following table summarizes the activity in shares of capital stock for the two-year period ended December 31, 2019:
|
|
Class A
|
|
|
Class C
|
|
Outstanding shares at December 31, 2017
|
|
|
14,535,577
|
|
|
|
2,089,374
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
38,473
|
|
|
|
-
|
|
Stock dividends
|
|
|
730,560
|
|
|
|
104,457
|
|
Conversion of Class C to Class A
|
|
|
188
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding shares at December 31, 2018
|
|
|
15,304,798
|
|
|
|
2,193,643
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
32,517
|
|
|
|
191,443
|
|
Stock dividends
|
|
|
767,178
|
|
|
|
119,087
|
|
Conversion of Class C to Class A
|
|
|
3,286
|
|
|
|
(3,286
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding shares at December 31, 2019
|
|
|
16,107,779
|
|
|
|
2,500,887
|
|
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:
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
Net earnings
|
|
$
|
10,893,519
|
|
|
$
|
21,686,079
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share-weighted-average shares
|
|
|
18,104,681
|
|
|
|
17,968,062
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
|
124,435
|
|
|
|
220,603
|
|
Dilutive potential common shares
|
|
|
124,435
|
|
|
|
220,603
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions
|
|
|
18,229,116
|
|
|
|
18,188,665
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.60
|
|
|
$
|
1.21
|
|
Diluted earnings per share
|
|
$
|
0.60
|
|
|
$
|
1.19
|
|
For the years ended December 31, 2019 and 2018, there were 382,289 and 862,915 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net
earnings per common share as their effect would be anti-dilutive.
SECURITY NATIONAL FINANCIAL CORPORATION
13) Stock Compensation Plans
The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options issued of $256,996 and $237,123 has been recognized under these plans for the
years ended December 31, 2019 and 2018, respectively, and is included in personnel expenses on the consolidated statements of earnings. As of December 31, 2019, the total unrecognized compensation expense related to the options issued in December
2019 was $230,446, which is expected to be recognized over the vesting period of one year.
The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates the expected life of the options using the simplified
method. Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for
the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.
The following table summarizes the assumptions used in estimating the fair value of each option granted along with the weighted-average fair value of the options granted:
|
|
|
|
|
|
Assumptions
|
|
Grant Date
|
Plan
|
|
Weighted-Average
Fair Value
of Each Option
|
|
|
Expected
Dividend Yield
|
|
|
Underlying
stock FMV
|
|
|
Weighted-Average
Volatility
|
|
|
Weighted-Average
Risk-Free
Interest Rate
|
|
|
Weighted-Average
Expected Life
(years)
|
|
December 6, 2019
|
All Plans
|
|
$
|
0.96
|
|
|
|
5
|
%
|
|
$
|
5.19
|
|
|
|
32.79
|
%
|
|
|
1.64
|
%
|
|
|
4.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 17, 2019
|
All Plans
|
|
$
|
1.12
|
|
|
|
5
|
%
|
|
$
|
4.98
|
|
|
|
36.04
|
%
|
|
|
2.56
|
%
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2018
|
All Plans
|
|
$
|
1.12
|
|
|
|
5
|
%
|
|
$
|
4.91
|
|
|
|
34.61
|
%
|
|
|
2.86
|
%
|
|
|
4.56
|
|
|
|
Number of
Class A Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Class C Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at January 1, 2018
|
|
|
880,426
|
|
|
$
|
4.35
|
|
|
|
523,603
|
|
|
$
|
5.24
|
|
Adjustment for the effect of stock dividends
|
|
|
48,168
|
|
|
|
|
|
|
|
27,491
|
|
|
|
|
|
Granted
|
|
|
142,000
|
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
Exercised
|
|
|
(42,211
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(17,109
|
)
|
|
|
|
|
|
|
(63,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
1,011,274
|
|
|
$
|
4.49
|
|
|
|
577,280
|
|
|
$
|
5.15
|
|
Adjustment for the effect of stock dividends
|
|
|
51,018
|
|
|
|
|
|
|
|
28,295
|
|
|
|
|
|
Granted
|
|
|
81,000
|
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
Exercised
|
|
|
(45,834
|
)
|
|
|
|
|
|
|
(191,443
|
)
|
|
|
|
|
Cancelled
|
|
|
(11,405
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
1,086,053
|
|
|
$
|
4.41
|
|
|
|
594,132
|
|
|
$
|
5.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,002,603
|
|
|
$
|
4.34
|
|
|
|
405,132
|
|
|
$
|
5.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available options for future grant
|
|
|
205,664
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average contractual term of options outstanding at December 31, 2019
|
|
5.62 years
|
|
|
|
|
|
|
5.82 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average contractual term of options exercisable at December 31, 2019
|
|
5.26 years
|
|
|
|
|
|
|
4.54 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregated intrinsic value of options outstanding at December 31, 2019 (1)
|
|
$
|
1,291,602
|
|
|
|
|
|
|
$
|
2,177,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregated intrinsic value of options exercisable at December 31, 2019 (1)
|
|
$
|
1,259,786
|
|
|
|
|
|
|
$
|
159,028
|
|
|
|
|
|
_________
(1)
|
The Company used a stock price of $5.57 as of December 31, 2019 to derive intrinsic value.
|
The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the
years ended December 31, 2019 and 2018 was $271,220 and $123,154, respectively.
14)
Statutory Financial Information and Dividend
Limitations
The Company’s insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable
state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations
prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred,
establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory net income and capital and surplus of the Company’s insurance subsidiaries, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory
authorities are as follows:
|
|
Statutory Net Income
|
|
|
Statutory Capital and Surplus
|
|
|
|
2019
|
|
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Amounts by insurance subsidiary:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security National Life Insurance Company
|
|
$
|
3,589,552
|
|
|
|
|
$
|
17,963,528
|
|
|
$
|
49,390,181
|
|
|
$
|
47,184,064
|
|
Kilpatrick Life Insurance Company
|
|
|
12,752,100
|
|
(1
|
)
|
|
|
-
|
|
|
|
15,208,071
|
|
|
|
-
|
|
First Guaranty Insurance Company
|
|
|
1,078,733
|
|
|
|
|
|
1,042,683
|
|
|
|
6,352,670
|
|
|
|
5,786,369
|
|
Memorial Insurance Company of America
|
|
|
(107
|
)
|
|
|
|
|
94
|
|
|
|
1,088,559
|
|
|
|
1,088,880
|
|
Southern Security Life Insurance Company, Inc.
|
|
|
87
|
|
|
|
|
|
68
|
|
|
|
1,588,396
|
|
|
|
1,586,915
|
|
Trans-Western Life Insurance Company
|
|
|
3,773
|
|
|
|
|
|
5,460
|
|
|
|
512,163
|
|
|
|
508,390
|
|
Total
|
|
$
|
17,424,138
|
|
|
|
|
$
|
19,011,833
|
|
|
$
|
74,140,040
|
|
|
$
|
56,154,618
|
|
_________
(1)
|
Includes 12 months even though Kilpatrick Life Insurance Company wasn't acquired by the Company until December 2019.
|
The Utah, Arkansas, Louisiana, Mississippi and Texas Insurance Departments impose minimum risk-based capital (RBC) requirements that were developed by the NAIC on insurance enterprises. The formulas
for determining the RBC specify various factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio (the Ratio) of the enterprise’s regulatory
total adjusted capital, as defined by the NAIC, to its authorized control level, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The
life insurance subsidiaries each have a ratio that is greater than the first level of regulatory action as of December 31, 2019.
Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts of the life insurance subsidiaries net
assets, as determined in accordance with statutory accounting practices, that exceed minimum statutory capital requirements. Additional requirements must be met depending on the state, and payments of such amounts as dividends are subject to approval
by regulatory authorities.
Under the Utah Insurance Code, Security National Life Insurance Company is permitted to pay a stockholder dividend to the Company as long as the Company provides the Utah Insurance Commissioner (the
“Utah Commissioner”) with at least 30 days notice and the aggregate amount of all such dividends in any 12 month period does not exceed the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year,
or (ii) net gain from operations, not including realized capital gains, for the immediately preceding calendar year, not including pro rata distributions of the Company’s own securities. In determining whether a dividend is extraordinary, the Company
may include carryforward net income from the previous two calendar years, excluding realized capital gains less dividends paid in the second and immediately preceding calendar years. Security National Life Insurance Company will be permitted to pay a
dividend to the Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Utah Commissioner and the Utah Commissioner either approves the distribution of
the dividend or does not disapprove the distribution within 30 days of its filing. In all cases, a dividend may not be paid that would reduce the insurer’s total adjusted capital below the insurer’s company action level risk-based capital, as defined
for statutory reporting purposes. Amounts available to be paid as dividends in the next 12 months totals approximately $4,795,000.
Under the Louisiana Insurance Code, First Guaranty Insurance Company and Kilpatrick Life Insurance Company are permitted to pay a stockholder dividend to Security National Life as long as their
capital has been (i) fully paid in cash, (ii) is unimpaired, (iii) has a surplus beyond its capital stock and (iv) has a surplus beyond its minimum required surplus. In 2018, First Guaranty Insurance Company paid to Security National Life a cash
dividend of $500,000 and Kilpatrick Life Insurance Company paid a cash dividend of $3,000,000. Amounts available to be paid as dividends at December 31, 2019 totaled approximately $2,453,000 for First Guaranty Insurance Company and totaled
approximately $11,508,000 for Kilpatrick Life Insurance Company.
15) 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 pre-sold loans before the funds are
received from financial institutional investors.
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. 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.
SECURITY NATIONAL FINANCIAL CORPORATION
|
|
2019
|
|
|
|
Life
|
|
|
Cemetery/
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
Insurance
|
|
|
Mortuary
|
|
|
Mortgage
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From external sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
81,860,610
|
|
|
$
|
15,296,235
|
|
|
$
|
131,976,082
|
|
|
$
|
-
|
|
|
$
|
229,132,927
|
|
Net investment income
|
|
|
41,610,831
|
|
|
|
579,995
|
|
|
|
828,647
|
|
|
|
-
|
|
|
|
43,019,473
|
|
Gains on investments and other assets
|
|
|
138,330
|
|
|
|
530,098
|
|
|
|
59,939
|
|
|
|
-
|
|
|
|
728,367
|
|
Other revenues
|
|
|
2,128,961
|
|
|
|
95,197
|
|
|
|
7,956,005
|
|
|
|
-
|
|
|
|
10,180,163
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
4,455,034
|
|
|
|
443,548
|
|
|
|
508,637
|
|
|
|
(5,407,219
|
)
|
|
|
-
|
|
Total revenues
|
|
|
130,193,766
|
|
|
|
16,945,073
|
|
|
|
141,329,310
|
|
|
|
(5,407,219
|
)
|
|
|
283,060,930
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death, surrenders and other policy benefits
|
|
|
44,911,805
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44,911,805
|
|
Increase in future policy benefits
|
|
|
23,568,497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,568,497
|
|
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
|
|
|
14,199,152
|
|
|
|
435,425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,634,577
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
3,632,780
|
|
|
|
1,084,079
|
|
|
|
52,046,032
|
|
|
|
-
|
|
|
|
56,762,891
|
|
Personnel
|
|
|
20,311,591
|
|
|
|
5,177,810
|
|
|
|
38,731,869
|
|
|
|
-
|
|
|
|
64,221,270
|
|
Advertising
|
|
|
595,118
|
|
|
|
368,173
|
|
|
|
3,821,267
|
|
|
|
-
|
|
|
|
4,784,558
|
|
Rent and rent related
|
|
|
451,380
|
|
|
|
47,525
|
|
|
|
6,556,551
|
|
|
|
-
|
|
|
|
7,055,456
|
|
Depreciation on property and equipment
|
|
|
477,247
|
|
|
|
428,633
|
|
|
|
805,489
|
|
|
|
-
|
|
|
|
1,711,369
|
|
Cost related to funding mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
6,278,954
|
|
|
|
-
|
|
|
|
6,278,954
|
|
Intersegment
|
|
|
412,853
|
|
|
|
180,594
|
|
|
|
544,463
|
|
|
|
(1,137,910
|
)
|
|
|
-
|
|
Other
|
|
|
11,769,097
|
|
|
|
3,241,023
|
|
|
|
19,912,641
|
|
|
|
-
|
|
|
|
34,922,761
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
|
|
|
490,756
|
|
|
|
154,615
|
|
|
|
3,623,938
|
|
|
|
(4,269,309
|
)
|
|
|
-
|
|
Other
|
|
|
2,808,081
|
|
|
|
288,768
|
|
|
|
4,289,839
|
|
|
|
-
|
|
|
|
7,386,688
|
|
Costs of goods and services sold-mortuaries and cemeteries
|
|
|
-
|
|
|
|
2,878,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,878,169
|
|
Total benefits and expenses
|
|
|
123,628,357
|
|
|
|
14,284,814
|
|
|
|
136,611,043
|
|
|
|
(5,407,219
|
)
|
|
|
269,116,995
|
|
Earnings before income taxes
|
|
$
|
6,565,409
|
|
|
$
|
2,660,259
|
|
|
$
|
4,718,267
|
|
|
$
|
-
|
|
|
$
|
13,943,935
|
|
Income tax benefit (expense)
|
|
|
(1,085,848
|
)
|
|
|
(649,144
|
)
|
|
|
(1,315,424
|
)
|
|
|
-
|
|
|
|
(3,050,416
|
)
|
Net earnings
|
|
$
|
5,479,561
|
|
|
$
|
2,011,115
|
|
|
$
|
3,402,843
|
|
|
$
|
-
|
|
|
$
|
10,893,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
1,110,641,526
|
|
|
$
|
81,014,182
|
|
|
$
|
249,970,323
|
|
|
$
|
(110,701,544
|
)
|
|
$
|
1,330,924,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,765,570
|
|
|
$
|
754,018
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,519,588
|
|
|
|
2018
|
|
|
|
Life
|
|
|
Cemetery/
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
Insurance
|
|
|
Mortuary
|
|
|
Mortgage
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From external sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from customers
|
|
$
|
75,928,910
|
|
|
$
|
13,726,518
|
|
|
$
|
116,185,853
|
|
|
$
|
-
|
|
|
$
|
205,841,281
|
|
Net investment income
|
|
|
38,720,365
|
|
|
|
283,343
|
|
|
|
909,559
|
|
|
|
-
|
|
|
|
39,913,267
|
|
Gains on investments and other assets
|
|
|
21,396,282
|
|
|
|
2,301,342
|
|
|
|
243,555
|
|
|
|
-
|
|
|
|
23,941,179
|
|
Other revenues
|
|
|
1,636,901
|
|
|
|
128,797
|
|
|
|
8,157,302
|
|
|
|
-
|
|
|
|
9,923,000
|
|
Intersegment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
3,972,532
|
|
|
|
429,312
|
|
|
|
503,794
|
|
|
|
(4,905,638
|
)
|
|
|
-
|
|
Total revenues
|
|
|
141,654,990
|
|
|
|
16,869,312
|
|
|
|
126,000,063
|
|
|
|
(4,905,638
|
)
|
|
|
279,618,727
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death, surrenders and other policy benefits
|
|
|
39,185,087
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,185,087
|
|
Increase in future policy benefits
|
|
|
24,332,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,332,088
|
|
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
|
|
|
11,270,579
|
|
|
|
360,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,631,346
|
|
Selling, general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
3,242,745
|
|
|
|
1,222,642
|
|
|
|
45,825,965
|
|
|
|
-
|
|
|
|
50,291,352
|
|
Personnel
|
|
|
18,489,063
|
|
|
|
4,773,866
|
|
|
|
44,106,023
|
|
|
|
-
|
|
|
|
67,368,952
|
|
Advertising
|
|
|
566,154
|
|
|
|
333,852
|
|
|
|
3,702,585
|
|
|
|
-
|
|
|
|
4,602,591
|
|
Rent and rent related
|
|
|
321,701
|
|
|
|
33,138
|
|
|
|
7,250,536
|
|
|
|
-
|
|
|
|
7,605,375
|
|
Depreciation on property and equipment
|
|
|
400,686
|
|
|
|
372,469
|
|
|
|
1,093,846
|
|
|
|
-
|
|
|
|
1,867,001
|
|
Cost related to funding mortgage loans
|
|
|
-
|
|
|
|
-
|
|
|
|
6,423,944
|
|
|
|
-
|
|
|
|
6,423,944
|
|
Intersegment
|
|
|
402,213
|
|
|
|
182,009
|
|
|
|
531,370
|
|
|
|
(1,115,592
|
)
|
|
|
-
|
|
Other
|
|
|
10,094,626
|
|
|
|
3,046,902
|
|
|
|
17,873,471
|
|
|
|
-
|
|
|
|
31,014,999
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
|
|
|
481,587
|
|
|
|
173,807
|
|
|
|
3,134,652
|
|
|
|
(3,790,046
|
)
|
|
|
-
|
|
Other
|
|
|
2,744,841
|
|
|
|
294,535
|
|
|
|
3,917,331
|
|
|
|
-
|
|
|
|
6,956,707
|
|
Costs of goods and services sold-mortuaries and cemeteries
|
|
|
-
|
|
|
|
2,158,895
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,158,895
|
|
Total benefits and expenses
|
|
|
111,531,370
|
|
|
|
12,952,882
|
|
|
|
133,859,723
|
|
|
|
(4,905,638
|
)
|
|
|
253,438,337
|
|
Earnings before income taxes
|
|
$
|
30,123,620
|
|
|
$
|
3,916,430
|
|
|
$
|
(7,859,660
|
)
|
|
$
|
-
|
|
|
$
|
26,180,390
|
|
Income tax benefit (expense)
|
|
|
(5,275,662
|
)
|
|
|
(946,820
|
)
|
|
|
1,728,171
|
|
|
|
-
|
|
|
|
(4,494,311
|
)
|
Net earnings
|
|
$
|
24,847,958
|
|
|
$
|
2,969,610
|
|
|
$
|
(6,131,489
|
)
|
|
$
|
-
|
|
|
$
|
21,686,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
928,251,387
|
|
|
$
|
90,639,130
|
|
|
$
|
159,680,649
|
|
|
$
|
(130,525,613
|
)
|
|
$
|
1,048,045,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,765,570
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,765,570
|
|
16) Related Party Transactions
The Company’s Board of Directors has a written procedure, which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees
that is in conflict or may be in conflict with the interests of the Company. The Company and its Board of Directors is unaware of any related party transactions that require disclosure as of December 31, 2019.
17) Fair Value of Financial Instruments
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level)
reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:
Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for
identical assets or liabilities in an active market that the Company can access.
Level 2: Financial assets and financial liabilities whose values are based on the following:
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets; or
|
|
|
c)
|
Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
|
Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques
that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and
financial liabilities.
The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.
The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments:
The items shown under Level 1 and Level 2 are valued as follows:
Fixed Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on
quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are
estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.
Equity Securities: The fair values for equity securities are based on quoted market prices.
Loans Held for Sale: The Company elected the fair value option for loans held
for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets.
Restricted Assets: A portion of these assets include mutual funds, 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 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 consolidated balance sheets for these financial instruments
approximate their fair values due to their short-term nature
Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale
commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period
of time, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in
current earnings.
The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage
servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued. Following
issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate
the quantity and value of mortgage loans that will fund within the terms of the commitments.
Call and Put Options: The Company uses quoted market prices to value its call and put options.
Additionally
, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
The items shown under Level 3 are valued as follows:
Impaired Mortgage Loans Held for Investment: The Company believes that the fair
value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining
an independent appraisal.
The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential
construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.
Impaired Real Estate Held for Investment:
The Company believes that in an orderly market, fair value will approximate the
replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the
properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.
It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate
construction industry. For the investment analysis, the Company used market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area comparables
and property condition when determining fair value.
In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure
to the Company from further deterioration in real estate values.
Mortgage Servicing Rights: The Company initially recognizes 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.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
17) Fair Value of Financial Instruments (Continued)
The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the consolidated
balance sheet at December 31, 2019.
|
|
Total
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
|
$
|
355,977,820
|
|
|
$
|
-
|
|
|
$
|
352,761,438
|
|
|
$
|
3,216,382
|
|
Equity securities
|
|
|
7,271,165
|
|
|
|
7,271,165
|
|
|
|
-
|
|
|
|
-
|
|
Loans held for sale
|
|
|
213,457,632
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213,457,632
|
|
Restricted assets (1)
|
|
|
1,008,867
|
|
|
|
-
|
|
|
|
1,008,867
|
|
|
|
-
|
|
Restricted assets (2)
|
|
|
1,976,480
|
|
|
|
1,976,480
|
|
|
|
-
|
|
|
|
-
|
|
Cemetery perpetual care trust investments (1)
|
|
|
975,673
|
|
|
|
-
|
|
|
|
975,673
|
|
|
|
-
|
|
Cemetery perpetual care trust investments (2)
|
|
|
1,605,451
|
|
|
|
1,605,451
|
|
|
|
-
|
|
|
|
-
|
|
Derivatives - loan commitments (3)
|
|
|
2,722,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,722,580
|
|
Total assets accounted for at fair value on a recurring basis
|
|
$
|
584,995,668
|
|
|
$
|
10,853,096
|
|
|
$
|
354,745,978
|
|
|
$
|
219,396,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - call options (4)
|
|
$
|
(62,265
|
)
|
|
$
|
(62,265
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivatives - put options (4)
|
|
|
(22,282
|
)
|
|
|
(22,282
|
)
|
|
|
-
|
|
|
|
-
|
|
Derivatives - loan commitments (4)
|
|
|
(231,347
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(231,347
|
)
|
Total liabilities accounted for at fair value on a recurring basis
|
|
$
|
(315,894
|
)
|
|
$
|
(84,547
|
)
|
|
$
|
-
|
|
|
$
|
(231,347
|
)
|
__________
(1)
|
Fixed maturity securities available for sale
|
(2)
|
Mutual funds and equity securities
|
(3)
|
Included in other assets on the consolidated balance sheets
|
(4)
|
Included in other liabilities and accrued expenses on the consolidated balance sheets
|
For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the
fair value measurements were as follows:
|
|
Fair
|
|
|
Significant
|
|
Range of Inputs
|
|
|
|
|
|
|
Value at
|
|
Valuation
|
Unobservable
|
|
Minimum
|
|
|
Maximum
|
|
|
Weighted
|
|
|
|
12/31/2019
|
|
Technique
|
Input(s)
|
|
Value
|
|
|
Value
|
|
|
Average
|
|
Loans held for sale
|
|
$
|
213,457,632
|
|
Market approach
|
Investor contract pricing as a percentage of unpaid principal balance
|
|
|
98.0
|
%
|
|
|
109.0
|
%
|
|
|
103.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - loan commitments (net)
|
|
|
2,491,233
|
|
Market approach
|
Fall-out factor
|
|
|
1.0
|
%
|
|
|
92.0
|
%
|
|
|
81.0
|
%
|
|
|
|
|
|
|
Initial-Value
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Servicing
|
|
0 bps
|
|
|
318 bps
|
|
|
79 bps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available for sale
|
|
|
3,216,382
|
|
Broker quotes
|
Pricing quotes
|
|
$
|
95.02
|
|
|
$
|
115.80
|
|
|
$
|
107.98
|
|
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2019 and 2018
17) Fair Value of Financial Instruments (Continued)
Following is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
|
|
Net Derivatives
Loan
Commitments
|
|
|
Loans Held
for Sale
|
|
|
Fixed
Maturity
Securities
Available for
Sale
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2018
|
|
$
|
1,591,816
|
|
|
$
|
136,210,853
|
|
|
$
|
-
|
|
Originations/purchases
|
|
|
-
|
|
|
|
2,606,839,175
|
|
|
|
-
|
|
Sales
|
|
|
-
|
|
|
|
(2,580,875,055
|
)
|
|
|
-
|
|
Transfer to mortgage loans held for investment
|
|
|
-
|
|
|
|
(31,881,851
|
)
|
|
|
-
|
|
Transfer from fixed maturity securities held to maturity
|
|
|
-
|
|
|
|
|
|
|
|
3,216,382
|
|
Total gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (1)
|
|
|
899,417
|
|
|
|
83,164,510
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2019
|
|
$
|
2,491,233
|
|
|
$
|
213,457,632
|
|
|
$
|
3,216,382
|
|
___________
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the consolidated
balance sheet at December 31, 2019.