10-Q 1 security.htm 10Q

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 quarterly period ended March 31, 2019, 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 offices)
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [X]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer [  ]
Accelerated filer [  ]
 
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
   
Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

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

As of May 14, 2019, the registrant had 15,320,346 shares of Class A Common Stock, $2.00 par value, outstanding and 2,190,361 shares of Class C Common Stock, $2.00 par value, outstanding.



SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED MARCH 31, 2019

Table of Contents

   
Page No.
 
Part I  - Financial Information
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the three months Ended March 31, 2019 and 2018 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the three months Ended March 31, 2019 and 2018 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of March 31, 2019 and March 31, 2018 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the three months Ended March 31, 2019 and 2018 (unaudited)
8-9
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
10
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
50
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
54
     
Item 4.
Controls and Procedures
55
     
 
Part II - Other Information
 
     
Item 1.
Legal Proceedings
55
     
Item 1A.
Risk Factors
55
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
55
     
Item 3.
Defaults Upon Senior Securities
56
     
Item 4.
Mine Safety Disclosures
56
     
Item 5.
Other Information
56
     
Item 6.
Exhibits
57
     
 
Signature Page
60

2

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1.   Financial Statements.

Assets
 
March 31
2019
(Unaudited)
   
December 31
2018
 
Investments:
           
Fixed maturity securities, held to maturity, at amortized cost
 
$
231,378,413
   
$
232,078,723
 
Equity securities at estimated fair value
   
6,927,352
     
5,558,611
 
Mortgage loans held for investment (net of allowances for loan losses of $1,378,215 and $1,347,972 for 2019 and 2018)
   
196,344,356
     
186,465,069
 
Real estate held for investment (net of accumulated depreciation of $17,213,134 and $16,739,578 for 2019 and 2018)
   
121,282,747
     
121,558,222
 
Other investments and policy loans (net of allowances for doubtful accounts of $1,263,475 and $1,092,528 for 2019 and 2018)
   
50,649,956
     
46,617,655
 
Accrued investment income
   
3,712,606
     
3,566,146
 
Total investments
   
610,295,430
     
595,844,426
 
Cash and cash equivalents
   
130,133,196
     
142,199,942
 
Loans held for sale at estimated fair value
   
123,374,303
     
136,210,853
 
Receivables (net of allowances for doubtful accounts of $1,538,608 and $1,519,842 for 2019 and 2018)
   
8,990,449
     
8,935,343
 
Restricted assets (including $799,835 and $744,673 for 2019 and 2018 at estimated fair value)
   
12,087,375
     
10,981,562
 
Cemetery perpetual care trust investments (including $543,284 and $483,353 for 2019 and 2018 at estimated fair value)
   
4,080,363
     
4,335,869
 
Receivable from reinsurers
   
10,852,082
     
10,820,102
 
Cemetery land and improvements
   
9,873,851
     
9,878,427
 
Deferred policy and pre-need contract acquisition costs
   
90,734,682
     
89,362,096
 
Mortgage servicing rights, net
   
19,049,013
     
20,016,822
 
Property and equipment, net
   
9,347,138
     
7,010,778
 
Value of business acquired
   
5,626,782
     
5,765,190
 
Goodwill
   
3,516,315
     
2,765,570
 
Other
   
17,810,980
     
6,684,143
 
                 
Total Assets
 
$
1,055,771,959
   
$
1,050,811,123
 

See accompanying notes to condensed consolidated financial statements (unaudited).
3

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

   
March 31
2019
(Unaudited)
   
December 31
2018
 
Liabilities and Stockholders' Equity
           
Liabilities
           
Future policy benefits and unpaid claims
 
$
623,507,974
   
$
620,399,714
 
Unearned premium reserve
   
3,859,495
     
3,920,473
 
Bank and other loans payable
   
175,090,614
     
187,521,188
 
Deferred pre-need cemetery and mortuary contract revenues
   
12,650,552
     
12,508,625
 
Cemetery perpetual care obligation
   
3,851,164
     
3,821,979
 
Accounts payable
   
3,407,759
     
2,883,349
 
Other liabilities and accrued expenses
   
42,713,828
     
31,821,624
 
Income taxes
   
16,641,088
     
16,122,998
 
Total liabilities
   
881,722,474
     
878,999,950
 
                 
Stockholders' Equity
               
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 15,312,687 shares in 2019 and 15,304,798 shares in 2018
   
30,625,374
     
30,609,596
 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,190,361 shares in 2019 and 2,193,643 shares in 2018
   
4,380,722
     
4,387,286
 
Additional paid-in capital
   
42,190,568
     
41,821,778
 
Accumulated other comprehensive income, net of taxes
   
(2,003
)
   
(2,823
)
Retained earnings
   
97,131,281
     
95,201,732
 
Treasury stock at cost - 261,384 Class A shares in 2019 and 302,541 Class A shares in 2018
   
(276,457
)
   
(206,396
)
                 
Total stockholders' equity
   
174,049,485
     
171,811,173
 
                 
Total Liabilities and Stockholders' Equity
 
$
1,055,771,959
   
$
1,050,811,123
 

See accompanying notes to condensed consolidated financial statements (unaudited).
4

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

   
Three Months Ended
March 31
 
   
2019
   
2018
 
Revenues:
           
Insurance premiums and other considerations
 
$
19,027,002
   
$
18,810,358
 
Net investment income
   
10,041,668
     
10,074,431
 
Net mortuary and cemetery sales
   
3,678,628
     
3,232,729
 
Gains on investments and other assets
   
1,806,661
     
22,020,939
 
Mortgage fee income
   
24,478,871
     
25,460,160
 
Other
   
2,461,005
     
2,477,492
 
Total revenues
   
61,493,835
     
82,076,109
 
                 
Benefits and expenses:
               
Death benefits
   
10,077,903
     
9,608,098
 
Surrenders and other policy benefits
   
865,931
     
810,128
 
Increase in future policy benefits
   
5,751,130
     
5,584,936
 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
   
3,128,274
     
3,109,933
 
Selling, general and administrative expenses:
               
Commissions
   
9,675,092
     
11,282,401
 
Personnel
   
15,031,336
     
16,566,688
 
Advertising
   
1,033,175
     
1,029,591
 
Rent and rent related
   
1,904,288
     
1,963,350
 
Depreciation on property and equipment
   
449,680
     
477,031
 
Costs related to funding mortgage loans
   
1,354,925
     
1,369,281
 
Other
   
7,645,127
     
6,810,324
 
Interest expense
   
1,491,887
     
1,761,677
 
Cost of goods and services sold-mortuaries and cemeteries
   
652,928
     
515,490
 
Total benefits and expenses
   
59,061,676
     
60,888,928
 
                 
Earnings before income taxes
   
2,432,159
     
21,187,181
 
Income tax expense
   
(501,841
)
   
(4,261,258
)
                 
Net earnings
 
$
1,930,318
   
$
16,925,923
 
                 
Net earnings per Class A Equivalent common share (1)
 
$
0.11
   
$
1.00
 
                 
Net earnings per Class A Equivalent common share-assuming dilution (1)
 
$
0.11
   
$
0.99
 
                 
Weighted-average Class A equivalent common share outstanding (1)
   
17,239,564
     
16,993,229
 
                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
   
17,450,120
     
17,178,412
 

(1) Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.

See accompanying notes to condensed consolidated financial statements (unaudited).
5

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

   
Three Months Ended
March 31
 
   
2019
   
2018
 
Net earnings
 
$
1,930,318
   
$
16,925,923
 
Other comprehensive income:
               
Foreign currency translation adjustments
   
1,092
     
-
 
Other comprehensive income, before income tax
   
1,092
     
-
 
Income tax expense
   
(272
)
   
-
 
Other comprehensive income, net of income tax
   
820
     
-
 
Comprehensive income
 
$
1,931,138
   
$
16,925,923
 

See accompanying notes to condensed consolidated financial statements (unaudited).
6

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

   
Three Months Ended March 31, 2019
 
   
Class A
Common Stock
   
Class C
Common Stock
   
Additional
Paid-in
Capital
   
Accumulated
Other
Comprehensive
Income
   
Retained
Earnings
   
Treasury
Stock
   
Total
 
                                           
January 1, 2019
 
$
30,609,596
   
$
4,387,286
   
$
41,821,778
   
$
(2,823
)
 
$
95,201,732
   
$
(206,396
)
 
$
171,811,173
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
1,930,318
     
-
     
1,930,318
 
Other comprehensive gain
   
-
     
-
     
-
     
820
     
-
     
-
     
820
 
Stock-based compensation expense
   
-
     
-
     
64,704
     
-
     
-
     
-
     
64,704
 
Exercise of stock options
   
8,936
     
-
     
8,444
     
-
     
-
     
-
     
17,380
 
Sale of treasury stock
   
-
     
-
     
295,153
     
-
     
-
     
42,343
     
337,496
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(112,404
)
   
(112,404
)
Stock dividends
   
282
     
(4
)
   
489
     
-
     
(769
)
   
-
     
(2
)
Conversion Class C to Class A
   
6,560
     
(6,560
)
   
-
     
-
     
-
     
-
     
-
 
March 31, 2019
 
$
30,625,374
   
$
4,380,722
   
$
42,190,568
   
$
(2,003
)
 
$
97,131,281
   
$
(276,457
)
 
$
174,049,485
 
                                                         
   
Three Months Ended March 31, 2018
 
   
Class A
Common Stock
   
Class C
Common Stock
   
Additional
Paid-in
 Capital
   
Accumulated
Other
 Comprehensive
 Income
   
Retained
Earnings
   
Treasury
Stock
   
Total
 
                                                         
January 1, 2018
 
$
29,071,154
   
$
4,178,748
   
$
38,125,042
   
$
603,170
   
$
77,520,951
   
$
(931,075
)
 
$
148,567,990
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
16,925,923
     
-
     
16,925,923
 
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)
   
-
     
-
     
-
     
(603,170
)
   
603,170
     
-
     
-
 
Stock-based compensation expense
   
-
     
-
     
58,087
     
-
     
-
     
-
     
58,087
 
Sale of treasury stock
   
-
     
-
     
88,964
     
-
     
-
     
222,410
     
311,374
 
Exercise of stock options
   
63,968
     
-
     
(22,115
)
   
-
     
-
     
-
     
41,853
 
Stock dividends
   
3,520
     
(4
)
   
5,362
     
-
     
(8,878
)
   
-
     
-
 
March 31, 2018
   
29,138,642
     
4,178,744
     
38,255,340
     
-
     
95,041,166
     
(708,665
)
   
165,905,227
 

See accompanying notes to condensed consolidated financial statements (unaudited).
7

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

   
Three Months Ended
March 31
 
   
2019
   
2018
 
Cash flows from operating activities:
           
     Net cash provided by operating activities
 
$
19,519,486
   
$
8,712,560
 
                 
Cash flows from investing activities:
               
Purchases of fixed maturity securities
   
(928,996
)
   
(7,155,114
)
Calls and maturities of fixed maturity securities
   
1,541,770
     
3,604,516
 
Purchases of equity securities
   
(1,061,710
)
   
(1,084,398
)
Sales of equity securities
   
355,562
     
922,402
 
Net changes in restricted assets
   
(482,975
)
   
(48,832
)
Net changes in perpetual care trusts
   
484,581
     
2,376,461
 
Mortgage loans, other investments and policy loans made
   
(137,912,509
)
   
(132,321,562
)
Payments received for mortgage loans, other investments and policy loans
   
123,293,624
     
131,816,474
 
Purchase of property and equipment
   
(76,403
)
   
(169,564
)
Sale of property and equipment
   
799
     
48,314
 
Purchase of real estate
   
(1,309,373
)
   
(768,942
)
Sale of real estate
   
2,349,864
     
58,476,379
 
Cash paid for purchase of subsidiaries, net of cash acquired
   
(3,261,788
)
   
-
 
      Net cash provided by (used in) investing activities
   
(17,007,554
)
   
55,696,134
 
                 
Cash flows from financing activities:
               
Investment contract receipts
   
2,760,871
     
2,867,412
 
Investment contract withdrawals
   
(3,959,861
)
   
(4,410,074
)
Proceeds from stock options exercised
   
17,380
     
41,853
 
Purchase of treasury stock
   
(112,404
)
   
-
 
Repayment of bank and other loans
   
(46,299,191
)
   
(27,369,431
)
Proceeds from borrowing on bank loans
   
47,273,807
     
20,421,042
 
Net change in warehouse line borrowings
   
(13,643,525
)
   
(309,286
)
Net change in line of credit borrowings
   
-
     
1,250,000
 
      Net cash used in financing activities
   
(13,962,923
)
   
(7,508,484
)
                 
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents
   
(11,450,991
)
   
56,900,210
 
                 
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
   
150,936,673
     
54,501,923
 
                 
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
 
$
139,485,682
   
$
111,402,133
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest
 
$
1,508,895
   
$
1,674,074
 
Income taxes (net of refunds)
   
(15,975
)
   
164
 
                 
Non Cash Operating, Investing and Financing Activities:
               
Right-of-use assets obtained in exchange for operating lease liabilities
 
$
11,931,889
   
$
-
 
Right-of-use assets obtained in exchange for finance lease liabilities
   
238,335
     
-
 
Accrued real estate construction costs and retainage
   
786,859
     
26,769
 
Mortgage loans held for investment foreclosed into real estate held for investment
   
550,000
     
225,166
 
Benefit plans funded with treasury stock
   
337,496
     
311,374
 
Mortgage loans held for investment foreclosed into receivables
   
155,347
     
-
 
Transfer of loans held for sale to mortgage loans held for investment
   
-
     
139,464
 

See Note 15 regarding non cash transactions included in the acquisition of Probst Family Funeral and Cremations and Heber Valley Funeral Home.
8

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

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below:

   
Three Months Ended
March 31
 
   
2019
   
2018
 
Cash and cash equivalents
 
$
130,133,196
   
$
101,728,202
 
Restricted assets
   
7,751,804
     
7,468,609
 
Cemetery perpetual care trust investments
   
1,600,682
     
2,205,322
 
                 
Total cash, cash equivalents, restricted cash and restricted cash equivalents
 
$
139,485,682
   
$
111,402,133
 

See accompanying notes to condensed consolidated financial statements (unaudited).
9

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q and Articles 8 and 10 of Regulation S‑X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2018, 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 months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

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.

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.

2)   Recent Accounting Pronouncements

Accounting Standards Adopted in 2019

ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.
10

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

2)   Recent Accounting Pronouncements (Continued)

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor. Additional disclosures required by this standard are included in Note 16.

Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current general accepted accounting principles (“GAAP”) and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance will be effective for the Company on January 1, 2020. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to held to maturity portfolios.

ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. This new authoritative guidance will be effective for the Company on January 1, 2020. The Company is in the process of evaluating the potential impact of this standard, which is not expected to materially impact the Company’s financial statements.

ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. This new authoritative guidance will be effective for the Company on January 1, 2021. The Company is in the process of evaluating the potential impact of this standard.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position.
11

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)


3)   Investments

The Company’s investments as of March 31, 2019 are summarized as follows:

   

Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
March 31, 2019
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
52,162,274
   
$
376,785
   
$
(456,728
)
 
$
52,082,331
 
Obligations of states and political subdivisions
   
6,131,310
     
42,653
     
(55,394
)
   
6,118,569
 
Corporate securities including public utilities
   
157,343,929
     
9,982,667
     
(1,445,027
)
   
165,881,569
 
Mortgage-backed securities
   
15,637,703
     
358,905
     
(127,773
)
   
15,868,835
 
Redeemable preferred stock
   
103,197
     
3,872
             
107,069
 
Total fixed maturity securities held to maturity
 
$
231,378,413
   
$
10,764,882
   
$
(2,084,922
)
 
$
240,058,373
 
                                 
Equity securities at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
6,974,259
   
$
739,022
   
$
(785,929
)
 
$
6,927,352
 
                                 
Total equity securities at estimated fair value
 
$
6,974,259
   
$
739,022
   
$
(785,929
)
 
$
6,927,352
 
                                 
Mortgage loans held for investment at amortized cost:
                               
Residential
 
$
89,241,344
                         
Residential construction
   
75,484,460
                         
Commercial
   
34,258,354
                         
Less: Unamortized deferred loan fees, net
   
(1,261,587
)
                       
Less: Allowance for loan losses
   
(1,378,215
)
                       
Total mortgage loans held for investment
 
$
196,344,356
                         
                                 
Real estate held for investment net of accumulated depreciation:
                               
Residential
 
$
27,856,849
                         
Commercial
   
93,425,898
                         
Total real estate held for investment
 
$
121,282,747
                         
                                 
Other investments and policy loans at amortized cost:
                               
Policy loans
 
$
6,354,430
                         
Insurance assignments
   
38,823,751
                         
Federal Home Loan Bank stock (1)
   
2,686,500
                         
Other investments
   
4,048,750
                         
Less: Allowance for doubtful accounts
   
(1,263,475
)
                       
                                 
Total other investments and policy loans
 
$
50,649,956
                         
                                 
Accrued investment income
 
$
3,712,606
                         
                                 
Total investments
 
$
610,295,430
                         
                                 
(1) Includes $806,500 of Membership stock and $1,880,000 of Activity stock due to short-term borrowings.
         

12

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

The Company’s investments as of December 31, 2018 are summarized as follows:

   
Cost
   
Gross
Unrealized
 Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2018:
                       
                         
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
52,017,683
   
$
264,891
   
$
(727,798
)
 
$
51,554,776
 
Obligations of states and political subdivisions
   
6,959,237
     
32,274
     
(111,271
)
   
6,880,240
 
Corporate securities including public utilities
   
157,639,860
     
7,002,864
     
(3,704,137
)
   
160,938,587
 
Mortgage-backed securities
   
15,358,746
     
227,398
     
(308,864
)
   
15,277,280
 
Redeemable preferred stock
   
103,197
     
1,903
     
(5,125
)
   
99,975
 
Total fixed maturity securities held to maturity
 
$
232,078,723
   
$
7,529,330
   
$
(4,857,195
)
 
$
234,750,858
 
                                 
Equity securities at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
6,312,158
   
$
422,528
   
$
(1,176,075
)
 
$
5,558,611
 
                                 
Total equity securities at estimated fair value
 
$
6,312,158
   
$
422,528
   
$
(1,176,075
)
 
$
5,558,611
 
                                 
Mortgage loans held for investment at amortized cost:
                               
Residential
 
$
89,935,600
                         
Residential construction
   
71,366,544
                         
Commercial
   
27,785,927
                         
Less: Unamortized deferred loan fees, net
   
(1,275,030
)
                       
Less: Allowance for loan losses
   
(1,347,972
)
                       
                                 
Total mortgage loans held for investment
 
$
186,465,069
                         
                                 
Real estate held for investment  net of accumulated depreciation:
                               
Residential
 
$
29,507,431
                         
Commercial
   
92,050,791
                         
Total real estate held for investment
 
$
121,558,222
                         
                                 
Other investments and policy loans at amortized cost:
                               
Policy loans
 
$
6,424,325
                         
Insurance assignments
   
35,239,396
                         
Federal Home Loan Bank stock (1)
   
2,548,700
                         
Other investments
   
3,497,762
                         
Less: Allowance for doubtful accounts
   
(1,092,528
)
                       
                                 
Total other investments and policy loans
 
$
46,617,655
                         
                                 
                                 
Accrued investment income
 
$
3,566,146
                         
                                 
Total investments
 
$
595,844,426
                         
                                 
(1) Includes $708,700 of Membership stock and $1,840,000 of Activity stock due to short-term borrowings.
                 

13

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities held to maturity, which are carried at amortized cost, at March 31, 2019 and December 31, 2018. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

   
Unrealized
Losses for
Less than
Twelve
Months
   
Fair Value
   
Unrealized
Losses for
More than
Twelve
Months
   
Fair Value
   
Total
Unrealized
Loss
   
Fair Value
 
At March 31, 2019
                                   
U.S. Treasury securities and obligations of U.S. Government Agencies
 
$
767
   
$
495,115
   
$
455,961
   
$
40,408,121
   
$
456,728
   
$
40,903,236
 
Obligations of states and political subdivisions
   
-
     
-
     
55,394
     
3,032,383
     
55,394
     
3,032,383
 
Corporate securities
   
392,239
     
11,641,590
     
1,052,788
     
23,415,999
     
1,445,027
     
35,057,589
 
Mortgage and other asset-backed securities
   
24,997
     
389,730
     
102,776
     
1,804,667
     
127,773
     
2,194,397
 
Total unrealized losses
 
$
418,003
   
$
12,526,435
   
$
1,666,919
   
$
68,661,170
   
$
2,084,922
   
$
81,187,605
 
                                                 
At December 31, 2018
                                               
U.S. Treasury securities and obligations of U.S. Government Agencies
 
$
10,519
   
$
695,863
   
$
717,279
   
$
39,930,052
   
$
727,798
   
$
40,625,915
 
Obligations of states and political subdivisions
   
6,643
     
1,791,257
     
104,628
     
2,889,517
     
111,271
     
4,680,774
 
Corporate securities
   
2,514,549
     
61,090,431
     
1,189,588
     
11,767,349
     
3,704,137
     
72,857,780
 
Mortgage and other asset-backed securities
   
79,896
     
1,705,296
     
228,968
     
2,690,065
     
308,864
     
4,395,361
 
Redeemable preferred stock
   
5,125
     
90,000
     
-
     
-
     
5,125
     
90,000
 
Total unrealized losses
 
$
2,616,732
   
$
65,372,847
   
$
2,240,463
   
$
57,276,983
   
$
4,857,195
   
$
122,649,830
 

There were 186 securities with fair value of 97.5% of amortized cost at March 31, 2019. There were 361 securities with fair value of 96.2% of amortized cost at December 31, 2018. No credit losses have been recognized for the three months ended March 31, 2019 and 2018.

On a quarterly basis, the Company evaluates its fixed maturity securities held to maturity. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment. 

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.

14

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities held to maturity, at March 31, 2019, 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.

   
Amortized
Cost
   
Estimated Fair
Value
 
Held to Maturity:
           
Due in 1 year
 
$
16,752,164
   
$
16,817,929
 
Due in 2-5 years
   
66,507,390
     
67,272,309
 
Due in 5-10 years
   
66,149,179
     
67,744,587
 
Due in more than 10 years
   
66,228,780
     
72,247,644
 
Mortgage-backed securities
   
15,637,703
     
15,868,835
 
Redeemable preferred stock
   
103,197
     
107,069
 
Total held to maturity
 
$
231,378,413
   
$
240,058,373
 

The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”). The Company currently has deposited a total of $50,000,000, par value, of United States Treasury fixed maturity securities with FHLB. These securities generate interest income for the Company and are available to use as collateral on any cash borrowings from the FHLB. As of March 31, 2019, the Company owed $47,000,000 to the FHLB. This amount owed was paid in April 2019.

Equity Securities

The fair values for equity securities are based on quoted market prices. The Company recognizes the changes (unrealized gains and losses) in the fair value of these equity securities through earnings as part of gains on investments and other assets on the condensed consolidated statements of earnings instead of other comprehensive income on the condensed consolidated balance sheets.

Investment Related Earnings

The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows:

   
Three Months Ended
March 31
     
   
2019
   
2018
     
Fixed maturity securities held to maturity:
               
Gross realized gains
 
$
85,587
   
$
28,133
     
Gross realized losses
   
(35,393
)
   
(308,931
)
   
                     
Equity securities:
                   
Gains on securities sold
   
11,576
     
14,650
     
Unrealized gains and (losses) on securities held at the end of the period
   
761,208
     
(372,042
)
   
                     
Other assets:
                   
Gross realized gains
   
1,104,935
     
22,951,723
 
(1
)
Gross realized losses
   
(121,252
)
   
(292,594
)
   
Total
 
$
1,806,661
   
$
22,020,939
     
                     
(1) Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village Apartments.
     

The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method.

15

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

The carrying amount of held to maturity securities sold was $369,263 and $472,883 for the three months ended March 31, 2019 and 2018, respectively.  The net realized loss related to these sales was $35,388 and $306,851 for the three months ended March 31, 2019 and 2018, respectively. Although the Company has the positive intent and ability to buy and hold a fixed maturity security to maturity, the Company will sell a security prior to maturity if conditions and circumstances have changed within the entity that issued the security to increase the risk of default to an unacceptable level.
 
Major categories of net investment income are as follows:

   
Three Months Ended
March 31
 
   
2019
   
2018
 
Fixed maturity securities held to maturity
 
$
2,503,865
   
$
2,529,841
 
Equity securities
   
77,921
     
58,292
 
Mortgage loans held for investment
   
4,103,367
     
4,531,927
 
Real estate held for investment
   
1,910,294
     
2,670,440
 
Policy loans
   
88,137
     
102,866
 
Insurance assignments
   
4,212,120
     
3,860,937
 
Other investments
   
54,548
     
53,673
 
Cash and cash equivalents
   
498,918
     
137,368
 
Gross investment income
   
13,449,170
     
13,945,344
 
Investment expenses
   
(3,407,502
)
   
(3,870,913
)
Net investment income
 
$
10,041,668
   
$
10,074,431
 
 
Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $86,288 and $110,802 for the three months ended March 31, 2019 and 2018, respectively.
 
Net investment income on real estate consists primarily of rental revenue.
 
Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.
 
Securities on deposit with regulatory authorities as required by law amounted to $9,807,938 at March 31, 2019 and $9,220,520 at December 31, 2018. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
 
There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities) at March 31, 2019, other than investments issued or guaranteed by the United States Government.
 
Real Estate Held for Investment
 
The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and mortgage foreclosures.
 
Commercial Real Estate Held for Investment
 
The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.
 
The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.

16

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)
 
The Company currently owns and operates 11 commercial properties in 4 states. These properties include industrial warehouses, office buildings, retail centers, a restaurant, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be used for future commercial developments. The Company uses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.
 
The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $85,950,000 and $84,880,000 as of March 31, 2019 and December 31, 2018, respectively. The associated bank loan carrying values totaled approximately $52,395,000 and $52,237,000 as of March 31, 2019 and December 31, 2018, respectively.
 
During the three months ended March 31, 2019 and 2018, the Company did not record any impairment losses on commercial real estate held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.
 
The following is a summary of the Company’s commercial real estate held for investment for the periods presented:
 
   
Net Ending Balance
       
Total Square Footage
 
   
March 31
       
December 31
       
March 31
   
December 31
 
   
2019
       
2018
       
2019
   
2018
 
Arizona
 
$
4,000
 
(1
)
 
$
4,000
 
(1
)
   
-
     
-
 
Kansas
   
7,210,017
         
6,861,898
         
222,679
     
222,679
 
Louisiana
   
461,319
         
467,694
         
7,063
     
7,063
 
Mississippi
   
3,309,692
         
3,329,948
         
33,821
     
33,821
 
New Mexico
   
7,000
 
(1
)
   
7,000
 
(1
)
   
-
     
-
 
Texas
   
300,000
 
(2
)
   
300,000
 
(2
)
   
-
     
-
 
Utah
   
82,133,870
         
81,080,251
         
502,129
     
502,129
 
                                         
   
$
93,425,898
       
$
92,050,791
         
765,692
     
765,692
 
___________________________
                                       
(1) Undeveloped land
                                 
(2) Improved commercial pad
                                 

Residential Real Estate Held for Investment
 
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 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 March 31, 2019, SNRE manages 65 residential properties in 6 states across the United States.
 
The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $21,645,000 and $23,532,000 as of March 31, 2019 and December 31, 2018, respectively.
 
During the three months ended March 31, 2019 and 2018, the Company recorded impairment losses on residential real estate held for investment of $-0- and $147,925, respectively. These impairment losses are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

17

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

The following is a summary of the Company’s residential real estate held for investment for the periods presented:
 
   
Net Ending Balance
 
   
March 31
   
December 31
 
   
2019
   
2018
 
California
 
$
2,256,741
   
$
2,644,321
 
Florida
   
6,093,133
     
6,534,277
 
Ohio
   
10,000
     
10,000
 
Tennessee
   
105,260
     
105,260
 
Texas
   
-
     
139,174
 
Utah
   
18,915,534
     
19,598,218
 
Washington
   
476,181
     
476,181
 
   
$
27,856,849
   
$
29,507,431
 

Real Estate Owned and Occupied by the Company

The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 70,000 square feet, or approximately 10% of the overall commercial real estate holdings.

As of March 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
 
5300 South 360 West, Salt Lake City, UT (1)
Corporate Offices, Life Insurance and Cemetery/Mortuary Operations
   
36,000
     
100
%
5201 Green Street, Salt Lake City, UT
Mortgage Operations
   
36,899
     
34
%
1044 River Oaks Dr., Flowood, MS
Life Insurance Operations
   
21,521
     
27
%
121 West Election Road, Draper, UT
Mortgage Sales
   
78,978
     
19
%
                   
(1) This asset is included in property and equipment on the condensed consolidated balance sheets
         

Mortgage Loans Held for Investment

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and 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 March 31, 2019, the Company had 48%, 14%, 14%, 7%, 6%, 4% and 2% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, Arizona, and Tennessee, respectively.

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs and the related allowance for loan losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings.
  
Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding.  Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value.  Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer.

18

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events.

For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows:

Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay.

Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less.

Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing.  Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.

19

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2019 (Unaudited)

3)   Investments (Continued)

Allowance for Credit Losses and Recorded Investment in Mortgage Loans
 
                         
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
March 31, 2019
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2019
 
$
187,129
   
$
1,125,623
   
$
35,220
   
$
1,347,972
 
   Charge-offs
   
-
     
(24,141
)
   
-
     
(24,141
)
   Provision
   
-
     
46,402
     
7,982
     
54,384
 
Ending balance - March 31, 2019
 
$
187,129
   
$
1,147,884
   
$
43,202
   
$
1,378,215
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
39,884
   
$
-