10-Q 1 secnat10q.htm SECURITY NATIONAL FINANCIAL CORPORATION 10Q 2012-09-30 secnat10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2012, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ________

Commission file number: 000-09341

SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

UTAH
87-0345941
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5300 South 360 West, Suite 250 Salt Lake City, Utah
84123
(Address of principal executive office)
(Zip Code)
   
 (801) 264-1060
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 Yes [X] No [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ] No[X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class A Common Stock, $2.00 par value
 
9,770,443
Title of Class
 
Number of Shares Outstanding as of
   
November 13, 2012
     
Class C Common Stock, $.20 par value
 
10,451,661
Title of Class
 
Number of Shares Outstanding as of
   
November 13, 2012

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
 Large accelerated filer [  ]  Accelerated filer [  ]
 Non-accelerated filer [  ] (Do not check if a smaller reporting company)  Smaller reporting company [X]
 
 
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2012

TABLE OF CONTENTS


   
Page No.
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2012 and September 30, 2011 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
51
     
Item 4.
Controls and Procedures
52
     
 
PART II - OTHER INFORMATION
 
 
Other Information
52
     
 
Signature Page
56
     
 
Certifications
57


 
2

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)



Assets
 
September 30,
2012
   
December 31,
2011
 
Investments:
           
Fixed maturity securities, held to maturity, at amortized cost
  $ 131,017,591     $ 127,579,087  
Equity securities, available for sale, at estimated fair value
    5,404,888       6,299,392  
Mortgage loans on real estate and construction loans, held for investment net of allowances for losses of $4,263,375 and $4,881,173 for 2012 and 2011
    83,868,637       115,155,967  
Real estate held for investment, net of accumulated depreciation of $4,417,735 and $4,189,641 for 2012 and 2011
    3,596,336       3,786,780  
Other real estate owned held for investment, net of accumulated depreciation of $2,748,820 and $1,810,238 for 2012 and 2011
    59,562,388       46,398,095  
Other real estate owned held for sale
    5,998,740       5,793,900  
Policy and other loans, net of allowances for doubtful accounts of $449,011 and $427,136 for 2012 and 2011
    18,443,304       18,463,277  
Short-term investments
    8,248,217       6,932,023  
Accrued investment income
    2,501,814       2,323,080  
Total investments
    318,641,915       332,731,601  
Cash and cash equivalents
    57,172,185       17,083,604  
Mortgage loans sold to investors
    75,798,504       77,339,445  
Receivables, net
    14,692,059       9,934,075  
Restricted assets of cemeteries and mortuaries
    3,935,062       3,392,497  
Cemetery perpetual care trust investments
    2,049,165       1,810,185  
Receivable from reinsurers
    14,401,284       7,484,466  
Cemetery land and improvements
    11,086,542       11,105,809  
Deferred policy and pre-need contract acquisition costs
    37,271,008       36,237,069  
Property and equipment, net
    10,271,152       9,300,185  
Value of business acquired
    10,251,094       11,020,834  
Goodwill
    677,039       677,039  
Other
    4,513,891       3,022,113  
                 
Total Assets
  $ 560,760,900     $ 521,138,922  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)




   
September 30,
2012
   
December 31,
2011
 
Liabilities and Stockholders' Equity
           
Liabilities
           
Future life, annuity, and other benefits
  $ 400,594,188     $ 381,595,568  
Unearned premium reserve
    4,889,796       5,030,443  
Bank and other loans payable
    22,687,673       25,019,119  
Deferred pre-need cemetery and mortuary contract revenues
    13,396,419       13,140,483  
Cemetery perpetual care obligation
    3,091,056       2,983,077  
Accounts payable
    2,939,381       2,672,479  
Other liabilities and accrued expenses
    23,628,940       14,456,887  
Income taxes
    18,784,667       15,010,279  
Total liabilities
    490,012,120       459,908,335  
                 
Stockholders' Equity
               
Common Stock:
               
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 9,639,121 shares in 2012 and 9,638,798 shares in 2011
    19,278,242       19,277,596  
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
    -       -  
Class C: convertible common stock - $0.20 par value; 15,000,000 shares authorized; issued 10,132,749 shares in 2012 and 10,135,976 in 2011
    2,026,550       2,027,195  
Additional paid-in capital
    19,577,091       19,487,565  
Accumulated other comprehensive income, net of taxes
    492,886       654,443  
Retained earnings
    31,791,885       22,546,623  
Treasury stock at cost - 1,060,011 Class A shares in 2012 and 1,198,167 Class A shares in 2011
    (2,417,874 )     (2,762,835 )
                 
Total stockholders' equity
    70,748,780       61,230,587  
                 
Total Liabilities and Stockholders' Equity
  $ 560,760,900     $ 521,138,922  

See accompanying notes to condensed consolidated financial statements.
 
4

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)



   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Insurance premiums and other considerations
  $ 12,045,553     $ 11,823,557     $ 36,915,237     $ 36,409,158  
Net investment income
    5,732,572       5,107,590       17,924,518       14,095,396  
Net mortuary and cemetery sales
    2,619,605       2,442,221       8,121,244       8,146,824  
Realized gains on investments and other assets
    222,621       226,480       580,607       1,829,136  
Other than temporary impairments on investments
    (440,315 )     (30,000 )     (530,315 )     (95,129 )
Mortgage fee income
    43,294,916       21,517,970       103,872,556       50,615,851  
Other
    272,951       236,869       715,490       962,049  
Total revenues
    63,747,903       41,324,687       167,599,337       111,963,285  
                                 
Benefits and expenses:
                               
Death benefits
    5,914,468       5,303,622       16,024,565       16,588,193  
Surrenders and other policy benefits
    453,838       398,556       1,566,828       1,425,175  
Increase in future policy benefits
    4,806,944       5,153,073       15,743,504       14,680,267  
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
    1,930,760       1,863,959       5,804,495       5,819,497  
Selling, general and administrative expenses:
                               
Commissions
    23,486,730       13,268,027       58,766,750       30,417,508  
Salaries
    7,344,712       5,690,438       20,664,919       17,593,130  
Provision for loan losses and loss reserve
    1,763,090       466,025       3,263,437       1,573,360  
Costs related to funding mortgage loans
    1,980,512       1,219,729       5,141,164       3,065,563  
Other
    8,328,740       6,191,082       23,033,728       18,491,242  
Interest expense
    1,142,428       497,714       2,758,313       1,191,356  
Cost of goods and services sold-mortuaries and cemeteries
    463,386       437,972       1,334,369       1,464,908  
Total benefits and expenses
    57,615,608       40,490,197       154,102,072       112,310,199  
                                 
Earnings (loss) before income taxes
    6,132,295       834,490       13,497,265       (346,914 )
Income tax (provision) benefit
    (2,142,249 )     (64,168 )     (4,252,003 )     803,630  
                                 
Net earnings
  $ 3,990,046     $ 770,322     $ 9,245,262     $ 456,716  
                                 
Net earnings per Class A Equivalent common share (1)
  $ 0.42     $ 0.08     $ 0.97     $ 0.05  
                                 
Net earnings per Class A Equivalent common share-assuming dilution (1)
  $ 0.38     $ 0.08     $ 0.97     $ 0.05  
                                 
Weighted-average Class A equivalent common share outstanding (1)
    9,585,285       9,390,822       9,540,631       9,258,945  
                                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
    10,439,161       9,408,180       9,553,397       9,284,488  
 
(1) Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common share basis. Net earnings per common share represent net earnings per equivalent Class A common share. Net earnings per Class C common share is equal to one-tenth (1/10) of such amount.

See accompanying notes to condensed consolidated financial statements.

 
5

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net earnings
  $ 3,990,046     $ 770,322     $ 9,245,262     $ 456,716  
Other comprehensive income:
                               
  Net unrealized gains (losses) on derivative instruments
    (2,184,088 )     904,655       (260,238 )     1,355,745  
  Net unrealized gains (losses) on available for sale securities
    82,521       (1,287,086 )     98,681       (1,645,741 )
Other comprehensive loss
    (2,101,567 )     (382,431 )     (161,557 )     (289,996 )
Comprehensive income
  $ 1,888,479     $ 387,891     $ 9,083,705     $ 166,720  
 
See accompanying notes to condensed consolidated financial statements.

 
6

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

   
Class A
 Common
Stock
   
Class C
Common
 Stock
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
 Income (Loss)
   
Retained
Earnings
   
Treasury
Stock
   
Total
 
Balance at December 31, 2010
  $ 18,357,890     $ 1,932,031     $ 19,689,993     $ 1,188,246     $ 21,907,579     $ (3,147,271 )   $ 59,928,468  
                                                         
Net earnings
    -       -       -       -       456,716       -       456,716  
Other comprehensive loss
    -       -       -       (289,996 )     -       -       (289,996 )
Grant of stock options
    -       -       193,032       -       -       -       193,032  
Sale of treasury stock
    -       -       (45,303 )     -       -       255,218       209,915  
Stock dividends
    218       2       (29 )     -       (191 )     -       -  
Conversion Class C to Class A
    1,370       (1,371 )     1       -       -       -       -  
Balance at September 30, 2011
  $ 18,359,478     $ 1,930,662     $ 19,837,694     $ 898,250     $ 22,364,104     $ (2,892,053 )   $ 60,498,135  
                                                         
                                                         
Balance at December 31, 2011
  $ 19,277,596     $ 2,027,195     $ 19,487,565     $ 654,443     $ 22,546,623     $ (2,762,835 )   $ 61,230,587  
                                                         
Net earnings
    -       -       -       -       9,245,262       -       9,245,262  
Other comprehensive loss
    -       -       -       (161,557 )     -       -       (161,557 )
Grant of stock options
    -       -       187,510       -       -       -       187,510  
Sale of treasury stock
    -       -       (97,983 )     -       -       344,961       246,978  
Conversion Class C to Class A
    646       (645 )     (1 )     -       -       -       -  
Balance at September 30, 2012
  $ 19,278,242     $ 2,026,550     $ 19,577,091     $ 492,886     $ 31,791,885     $ (2,417,874 )   $ 70,748,780  

See accompanying notes to condensed consolidated financial statements.

 
7

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


   
Nine Months Ended September 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
     Net cash provided by operating activities
  $ 34,508,526     $ 18,747,200  
                 
Cash flows from investing activities:
               
Securities held to maturity:
               
        Purchase-fixed maturity securities
    (10,022,393 )     (46,815,511 )
        Calls and maturities - fixed maturity securities
    6,721,257       10,003,703  
Securities available for sale:
               
       Purchase - equity securities
    (1,077,129 )     (4,531,858 )
       Sales - equity securities
    2,318,410       3,961,997  
Purchase of short-term investments
    (11,921,131 )     (47,770,901 )
Sales of short-term investments
    10,604,937       46,348,579  
Purchase of restricted assets
    (511,969 )     (214,064 )
Changes in assets for perpetual care trusts
    (196,621 )     (198,090 )
Amount received for perpetual care trusts
    107,979       72,463  
Mortgage, policy, and other loans made
    (87,585,273 )     (98,585,760 )
Payments received for mortgage, policy and other loans
    104,728,438       78,249,928  
Purchase of property and equipment
    (1,880,302 )     (474,301 )
Disposal of property and equipment
    14,769       2,295,329  
Purchase of real estate
    (81,095 )     (416,580 )
Sale of real estate
    401,443       4,255,993  
Cash received for reinsurance with North America Life
    -       12,990,444  
Cash paid for purchase of subsidiaries, net of cash received
    (180,591 )     -  
      Net cash provided by (used in) investing activities
    11,440,729       (40,828,629 )
                 
Cash flows from financing activities:
               
Annuity contract receipts
    6,713,474       6,096,392  
Annuity contract withdrawals
    (10,257,481 )     (10,603,426 )
Repayment of bank loans on notes and contracts
    (1,069,127 )     (1,580,448 )
Proceeds from borrowing on bank loans
    152,460       3,615,085  
Change in line of credit borrowings
    (1,400,000 )     8,000,000  
      Net cash provided by (used in) financing activities
    (5,860,674 )     5,527,603  
                 
Net change in cash and cash equivalents
    40,088,581       (16,553,826 )
                 
Cash and cash equivalents at beginning of period
    17,083,604       39,556,503  
                 
Cash and cash equivalents at end of period
  $ 57,172,185     $ 23,002,677  
                 
Non Cash Investing and Financing Activities
               
Mortgage loans foreclosed into real estate
  $ 15,200,527     $ 7,680,063  
 
See accompanying notes to condensed consolidated financial statements.

 
8

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


1)         Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K (file number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, those used in determining valuation allowances for mortgage loans on real estate and construction loans held for investment, those used in determining loan loss reserve, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.

Certain 2011 amounts have been reclassified to bring them into conformity with the 2012 presentation.

2)       Recent Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities – In December 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to balance sheet offsetting. The new guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). This new guidance will be effective for us for interim and annual reporting periods beginning January 1, 2013, with retrospective application required. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

 
9

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

3)           Investments

The Company’s investments in fixed maturity securities held-to-maturity and equity securities available for sale as of September 30, 2012 are summarized as follows:


   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
Value
 
September 30, 2012:
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
  $ 2,607,083     $ 548,554     $ -     $ 3,155,637  
Obligations of states and political subdivisions
    2,040,113       267,896       (6,119 )     2,301,890  
Corporate securities including public utilities
    119,561,259       16,644,289       (648,386 )     135,557,162  
Mortgage-backed securities
    5,298,258       344,811       (111,241 )     5,531,828  
Redeemable preferred stock
    1,510,878       79,742       (2,000 )     1,588,620  
Total fixed maturity securities held to maturity
  $ 131,017,591     $ 17,885,292     $ (767,746 )   $ 148,135,137  

 
 
10

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
September 30, 2012:
                       
                         
Equity securities available for sale at estimated fair value:
                       
                         
Non-redeemable preferred stock
  $ 20,281     $ 394     $ (1,100 )   $ 19,575  
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
    6,295,937       339,392       (1,250,016 )     5,385,313  
                                 
Total equity securities available for sale at estimated fair value
  $ 6,316,218     $ 339,786     $ (1,251,116 )   $ 5,404,888  
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
  $ 50,133,436                          
Residential construction
    5,589,673                          
Commercial
    32,408,903                          
Less: Allowance for loan losses
    (4,263,375 )                        
Total mortgage loans on real estate and construction loans held for investment
  $ 83,868,637                          
                                 
Real estate held for investment - net of depreciation
  $ 3,596,336                          
Other real estate owned held for investment - net of  depreciation
    59,562,388                          
Other real estate owned held for sale
    5,998,740                          
Total real estate
  $ 69,157,464                          
                                 
Policy and other loans at amortized cost - net of allowance for doubtful accounts
  $ 18,443,304                          
                                 
Short-term investments at amortized cost
  $ 8,248,217                          
 

 
11

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)


The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2011 are summarized as follows:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2011:
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
  $ 2,820,159     $ 551,740     $ -     $ 3,371,899  
Obligations of states and political subdivisions
    3,024,425       309,986       (13,156 )     3,321,255  
Corporate securities including public utilities
    113,648,447       10,075,071       (2,268,146 )     121,455,372  
Mortgage-backed securities
    6,575,178       354,286       (356,900 )     6,572,564  
Redeemable preferred stock
    1,510,878       72,639       (129,200 )     1,454,317  
Total fixed maturity securities held to maturity
  $ 127,579,087     $ 11,363,722     $ (2,767,402 )   $ 136,175,407  


 
12

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2011:
                       
                         
Equity securities available for sale at estimated fair value:
                       
                         
Non-redeemable preferred stock
  $ 20,281     $ -     $ (1,843 )   $ 18,438  
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
    7,250,991       363,387       (1,333,424 )     6,280,954  
                                 
Total equity securities available for sale at estimated fair value
  $ 7,271,272     $ 363,387     $ (1,335,267 )   $ 6,299,392  
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
  $ 54,344,327                          
Residential construction
    17,259,666                          
Commercial
    48,433,147                          
Less: Allowance for loan losses
    (4,881,173 )                        
Total mortgage loans on real estate and construction loans held for investment
  $ 115,155,967                          
                                 
Real estate held for investment - net of depreciation
  $ 3,786,780                          
Other real estate owned held for investment - net of depreciation
    46,398,095                          
Other real estate owned held for sale
    5,793,900                          
Total real estate
  $ 55,978,775                          
                                 
Policy and other loans at amortized cost - net of allowance for doubtful accounts
  $ 18,463,277                          
                                 
Short-term investments at amortized cost
  $ 6,932,023                          

 
 
13

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at September 30, 2012 and December 31, 2011. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related fixed maturity securities:

   
Unrealized Losses
for Less than
Twelve Months
   
No. of
 Investment
 Positions
   
Unrealized Losses
 for More than
Twelve Months
   
No. of
 Investment
 Positions
   
Total
Unrealized
 Loss
 
At September 30, 2012
                             
Obligations of states and political subdivisions
  $ -       -     $ 6,119       2     $ 6,119  
Corporate securities including public utilities
    129,509       23       518,877       11       648,386  
Mortgage-backed securities
    -       -       111,241       4       111,241  
Redeemable preferred stock
    -       -       2,000       1       2,000  
Total unrealized losses
  $ 129,509       23     $ 638,237       18     $ 767,746  
Fair Value
  $ 4,701,177             $ 7,091,113             $ 11,792,290  
                                         
At December 31, 2011
                                       
Obligations of states and political subdivisions
  $ -       -     $ 13,156       2     $ 13,156  
Corporate securities including public utilities
    1,544,224       47       723,922       12       2,268,146  
Mortgage-backed securities
    161,300       3       195,600       1       356,900  
Redeemable preferred stock
    800       1       128,400       1       129,200  
Total unrealized losses
  $ 1,706,324       51     $ 1,061,078       16     $ 2,767,402  
Fair Value
  $ 24,249,533             $ 3,762,892             $ 28,012,425  
 
As of September 30, 2012, the average market value of the related fixed maturities was 93.9% of amortized cost and the average market value was 91.0% of amortized cost as of December 31, 2011. During the nine months ended September 30, 2012 and 2011 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $135,000 and $95,129, respectively.

On a quarterly basis, the Company reviews its available-for-sale fixed investment securities related to corporate securities and other public utilities, consisting of bonds and preferred stocks that are in a loss position. The review involves an analysis of the securities in relation to historical values, and projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized. No other than temporary impairment loss was considered to exist for these fixed maturity securities as of September 30, 2012 and 2011.

 
14

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

Equity Securities

The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at September 30, 2012 and December 31, 2011. The unrealized losses were primarily the result of decreases in fair value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available-for-sale in a loss position:

   
Unrealized Losses
 for Less than
 Twelve Months
   
No. of
Investment
Positions
   
Unrealized Losses
 for More than
Twelve Months
   
No. of
 Investment
 Positions
   
Total
Unrealized
 Losses
 
At September 30, 2012
                             
Non-redeemable preferred stock
  $ -       -     $ 1,100       1     $ 1,100  
Industrial, miscellaneous and all other
    148,049       36       1,101,967       50       1,250,016  
Total unrealized losses
  $ 148,049       36     $ 1,103,067       51     $ 1,251,116  
Fair Value
  $ 1,390,452             $ 1,638,714             $ 3,029,166  
                                         
At December 31, 2011
                                       
Non-redeemable preferred stock
  $ -       -     $ 1,843       2     $ 1,843  
Industrial, miscellaneous and all other
    955,400       79       378,024       14       1,333,424  
Total unrealized losses
  $ 955,400       79     $ 379,867       16     $ 1,335,267  
Fair Value
  $ 2,857,082             $ 560,529             $ 3,417,611  
 
As of September 30, 2012, the average market value of the equity securities available for sale was 70.8% of the original investment and the average market value was 71.9% of the original investment as of December 31, 2011. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. During the nine months ended September 30, 2012 and 2011, there was no other than temporary decline in fair value.

On a quarterly basis, the Company reviews its investment in industrial, miscellaneous and all other equity securities that are in a loss position. The review involves an analysis of the securities in relation to historical values, price earnings ratios, projected earnings and revenue growth rates. Based on the analysis a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized. No other than temporary impairment loss was considered to exist for these equity securities as of September 30, 2012 and 2011.

The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices.

The amortized cost and estimated fair value of fixed maturity securities at September 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
15

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

   
Amortized
Cost
   
Estimated Fair
Value
 
Held to Maturity:
           
Due in 2012
  $ 300,706     $ 301,899  
Due in 2013 through 2016
    17,444,315       19,009,264  
Due in 2017 through 2021
    50,211,439       56,777,245  
Due after 2021
    56,251,995       64,926,282  
Mortgage-backed securities
    5,298,258       5,531,828  
Redeemable preferred stock
    1,510,878       1,588,620  
Total held to maturity
  $ 131,017,591     $ 148,135,138  
 
The amortized cost and estimated fair value of available for sale securities at September 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equities are valued using the specific identification method.

   
Amortized
Cost
   
Estimated Fair
Value
 
Available for Sale:
           
Due in 2012 through 2015
  $ -     $ -  
Due in 2013 through 2016
    -       -  
Due in 2017 through 2021
    -       -  
Due after 2021
    -       -  
Non-redeemable preferred stock
    20,281       19,575  
Common stock
    6,295,937       5,385,313  
Total available for sale
  $ 6,316,218     $ 5,404,888  
 
The Company’s realized gains and losses, other than temporary impairments from investments and other assets, are summarized as follows:

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities held to maturity:
                       
Gross realized gains
  $ 266,801     $ 80,069     $ 404,056     $ 400,026  
Gross realized losses
    (1,292 )     (11,086 )     (1,626 )     (142,907 )
Other than temporary impairments
    (45,000 )     (30,000 )     (135,000 )     (95,129 )
                                 
Securities available for sale:
                               
Gross realized gains
    139,352       48,680       291,932       503,804  
Gross realized losses
    -       (30 )     (5,705 )     (34,834 )
Other than temporary impairments
    -       -       -       -  
                                 
Other assets:
                               
Gross realized gains
    27,244       146,253       114,114       1,182,905  
Gross realized losses
    (209,484 )     (37,406 )     (222,163 )     (79,858 )
Other than temporary impairments
    (395,315 )     -       (395,315 )     -  
Total
  $ (217,694 )   $ 196,480     $ 50,292     $ 1,734,007  
 
The net carrying amount of held to maturity securities sold was $1,976,273 and $12,341,156 for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively.  The net realized gain related to these sales was $273,447 and $462,267 for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. Certain circumstances lead to these decisions to sell. In 2012 and 2011, the Company sold certain held to maturity bonds in gain positions to reduce its risk in certain industries or companies.

 
16

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)
 
There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on available-for-sale securities) at September 30, 2012, other than investments issued or guaranteed by the United States Government.
 
Major categories of net investment income are as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities
  $ 1,949,666     $ 2,033,778     $ 5,803,282     $ 5,773,035  
Equity securities
    65,839       70,589       197,563       197,480  
Mortgage loans on real estate
    1,566,734       1,839,705       5,700,159       4,881,213  
Real estate
    1,058,147       787,465       3,018,346       1,496,912  
Policy and other loans
    192,198       195,843       610,472       619,972  
Short-term investments,  principally gains on sale of mortgage loans and other
    2,172,955       1,509,731       6,216,686       4,423,576  
Gross investment income
    7,005,539       6,437,111       21,546,508       17,392,188  
Investment expenses
    (1,272,967 )     (1,329,521 )     (3,621,990 )     (3,296,792 )
Net investment income
  $ 5,732,572     $ 5,107,590     $ 17,924,518     $ 14,095,396  
 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $247,844 and $240,240 for nine months ended September 30, 2012 and 2011, respectively.
 
Net investment income on real estate consists primarily of rental revenue received under short-term leases.
 
Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.
 
Securities on deposit for regulatory authorities as required by law amounted to $9,549,475 at September 30, 2012 and $9,593,318 at December 31, 2011. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
 
Mortgage Loans

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5% per annum, maturity dates range from three 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 live or do business. At September 30, 2012, the Company had 27%, 19% and 12% of its mortgage loans from borrowers located in the states of Utah, California and Florida, respectively. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for loan losses of $4,263,375 and $4,881,173 at September 30, 2012 and December 31, 2011, respectively.

The Company establishes a valuation allowance for credit losses in its portfolio.

 
17

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

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
 
                         
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
September 30, 2012
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2012
  $ -     $ 4,338,805     $ 542,368     $ 4,881,173  
   Charge-offs
    -       (364,127 )     (490,886 )     (855,013 )
   Provision
    -       237,215       -       237,215  
Ending balance -September 30, 2012
  $ -     $ 4,211,893     $ 51,482     $ 4,263,375  
                                 
Ending balance: individually evaluated for impairment
  $ -     $ 866,394     $ 23,557     $ 889,951  
                                 
Ending balance: collectively evaluated for impairment
  $ -     $ 3,345,499     $ 27,925     $ 3,373,424  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
Mortgage loans:
                               
Ending balance
  $ 32,408,903     $ 50,133,436     $ 5,589,673     $ 88,132,012  
                                 
Ending balance: individually evaluated for impairment
  $ 761,652     $ 5,329,240     $ 1,559,358     $ 7,650,250  
                                 
Ending balance: collectively evaluated for impairment
  $ 31,647,251     $ 44,804,196     $ 4,030,315     $ 80,481,762  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
December 31, 2011
                               
Allowance for credit losses:
                               
Beginning balance - January 1, 2011
  $ -     $ 6,212,072     $ 858,370     $ 7,070,442  
   Charge-offs
    -       (2,994,715 )     (430,274 )     (3,424,989 )
   Provision
    -       1,121,448       114,272       1,235,720  
Ending balance - December 31, 2011
  $ -     $ 4,338,805     $ 542,368     $ 4,881,173  
                                 
Ending balance: individually evaluated for impairment
  $ -     $ 738,975     $ 250,524     $ 989,499  
                                 
Ending balance: collectively evaluated for impairment
  $ -     $ 3,599,830     $ 291,844     $ 3,891,674  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
Mortgage loans:
                               
Ending balance
  $ 48,433,147     $ 54,344,327     $ 17,259,666     $ 120,037,140  

 
 
18

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)


3)           Investments (Continued)

The following is a summary of the aging of mortgage loans for the periods presented:

Age Analysis of Past Due Mortgage Loans
 
                                                       
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days 1)
   
In Foreclosure 1)
   
Total
Past Due
   
Current
   
Total
Mortgage Loans
   
Allowance for
Loan Losses
   
Net Mortgage
Loans
 
September 30, 2012
                                                 
Commercial
  $ -     $ -     $ 125,554     $ 761,652     $ 887,206     $ 31,521,697     $ 32,408,903     $ -     $ 32,408,903  
Residential
    1,773,999       2,354,104       3,978,403       5,329,240       13,435,746       36,697,690       50,133,436       (4,211,893 )     45,921,543  
Residential
  Construction
    -       -       974,758       1,559,358       2,534,116       3,055,557       5,589,673       (51,482 )     5,538,191  
                                                                         
Total
  $ 1,773,999     $ 2,354,104     $ 5,078,715     $ 7,650,250     $ 16,857,068     $ 71,274,944     $ 88,132,012     $ (4,263,375 )   $ 83,868,637  
                                                                         
December 31, 2011
                                                                 
Commercial
  $ -     $ -     $ 1,053,500     $ 2,758,235     $ 3,811,735     $ 44,621,412     $ 48,433,147     $ -     $ 48,433,147  
Residential
    2,478,084       2,058,261       5,500,340       4,611,995       14,648,680       39,695,647       54,344,327       (4,338,805 )     50,005,522  
Residential
  Construction
    859,651       682,532       309,651       5,645,865       7,497,699