See Note 20 regarding non cash transactions included in the acquisitions of Rivera Funerals, Cremations and Memorial Gardens and Holbrook Mortuary
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies
General
Overview of Business
Security
National Financial Corporation and its wholly owned subsidiaries (the “Company”) operate in three reportable business segments:
life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing
selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the states located in western,
mid-western and southern regions of the United States. The cemetery and mortuary segment of the Company consists of eleven mortuaries
and five cemeteries in Utah, one cemetery in California, and four mortuaries and one cemetery in New Mexico. The mortgage segment is
an approved government and conventional lender that originates and underwrites residential and commercial loans for new construction,
existing homes and real estate projects primarily in Florida, Nevada, Texas, and Utah.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States of America (GAAP).
Principles
of Consolidation
These
consolidated financial statements include the financial statements of the Company and its majority owned subsidiaries. All intercompany
transactions and accounts have been eliminated in consolidation.
Use
of Estimates
Management
of the Company has made a number of estimates and assumptions related to the reported amounts of assets and liabilities, reported amounts
of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity
with GAAP. 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.
Investments
The
Company’s management determines the appropriate classifications of investments in fixed maturity securities and equity securities
at the acquisition date and re-evaluates the classifications at each balance sheet date.
Fixed
maturity securities available for sale are carried at estimated fair value. Changes in fair values are reported as unrealized gains
or losses and are recorded in accumulated other comprehensive income.
Equity
securities are carried at estimated fair value. Changes in fair values are reported as unrealized gains or losses and are recorded
through net earnings as a component of gains on investments and other assets.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
Mortgage
loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, net discounts, charge-offs
and the related allowance for loan losses. Interest income is included in net investment income on the consolidated statements of earnings
and is recognized when earned. The Company defers related 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 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.
Real
estate held for investment is carried at cost, less accumulated depreciation provided on a straight-line basis over the estimated
useful lives of the properties, or is adjusted to a new basis for impairment in value, if any. Included are foreclosed properties which
the Company intends to hold for investment purposes. These properties are recorded at the lower of cost or fair value upon foreclosure.
Also, included are residential subdivision land developments which are carried at cost.
Real
estate held for sale is carried at lower of cost or fair value. Depreciation is not recognized on real estate classified as held
for sale.
Other
investments and policy loans are carried at the aggregate unpaid balances, less allowances for losses.
Accrued
investment income refers to earned income from investments that has not yet been received by the Company.
Gains
and losses on investments (except for equity securities carried at fair value through net earnings) arise when investments are sold
(as determined on a specific identification basis) or are other than temporarily impaired. If in management’s judgment a decline
in the value of an investment below cost is other than temporary, the cost of the investment is written down to fair value with a corresponding
charge to earnings. Factors considered in judging whether an impairment is other than temporary include: the financial condition, business
prospects and credit worthiness of the issuer, the length of time that fair value has been less than cost, the relative amount of the
decline, and the Company’s ability and intent to hold the investment until the fair value recovers, which is not assured.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The
Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Loans
Held for Sale
Accounting
Standards Codification (“ASC”) No. 825, “Financial Instruments”, allows for the option to report certain financial
assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The
option may be applied instrument by instrument, but it is irrevocable. The Company elected the fair value option for loans held for sale.
The Company believes the fair value option most closely aligns the timing of the recognition of gains and costs. These loans are intended
for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Electing fair value also
reduces certain timing differences and better matches changes in the fair value of these assets with changes in the fair value of the
related derivatives used for these assets. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding
loans held for sale.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
Mortgage
Fee Income
Mortgage
fee income consists of origination fees, processing fees, interest income and certain other income related to the origination of mortgage
loans held for sale. All revenues and costs are recognized when the mortgage loan is funded and any changes in fair value are shown as
a component of mortgage fee income. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding
loans held for sale.
The
Company, through its mortgage subsidiaries, sells mortgage loans to third-party investors without recourse unless defects are identified
in the representations and warranties made at loan sale. It may be required, however, to repurchase a loan or pay a fee instead of repurchase
under certain events, which include the following:
|
● |
Failure
to deliver original documents specified by the investor, |
|
● |
The
existence of misrepresentation or fraud in the origination of the loan, |
|
● |
The
loan becomes delinquent due to nonpayment during the first several months after it is sold, |
|
● |
Early
pay-off of a loan, as defined by the agreements, |
|
● |
Excessive
time to settle a loan, |
|
● |
Investor
declines purchase, and |
|
● |
Discontinued
product and expired commitment. |
Loan
purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending
on market conditions, these commitment settlement dates can be extended at a cost to the Company.
It
is the Company’s policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month time period
and to pursue efforts to enforce loan purchase commitments from third-party investors concerning the loans. The Company believes that
six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives.
Remedial methods include the following:
|
● |
Research
reasons for rejection, |
|
● |
Provide
additional documents, |
|
● |
Request
investor exceptions, |
|
● |
Appeal
rejection decision to purchase committee, and |
|
● |
Commit
to secondary investors. |
Once
purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period,
the loans are repurchased and transferred to the long-term investment portfolio at the lower of cost or fair value and previously recorded
mortgage fee income that was to be received from a third-party investor is written off against the loan loss reserve.
Determining
Fair Value
Cost
for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Fair value
is often difficult to determine and may contain significant unobservable inputs, but is based on the following:
|
● |
For
loans that are committed, the Company uses the commitment price. |
|
● |
For
loans that are non-committed that have an active market, the Company uses the market price. |
|
● |
For
loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar
product. |
|
● |
For
loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates
the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and the
loan interest rate. |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1) Significant Accounting Policies (Continued)
The
appraised value of the real estate underlying the original mortgage loan adds support to the Company’s determination of fair value
because if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value
of the loan, thus minimizing credit losses.
The
majority of loans originated are sold to third-party investors. The amounts expected to be sold to investors are shown on the consolidated
balance sheets as loans held for sale.
Loan
Loss Reserve
The
loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on loans sold.
The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination
of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu
of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and
the best estimate of the probable loan loss liabilities.
Upon
completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities
incurred in a sale relating to any guarantee or recourse provisions. The Company accrues a monthly allowance for indemnification losses
to investors based on total production. This estimate is based on the Company’s historical experience and is included as a component
of mortgage fee income. Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and
administrative expenses as a component of provision for loan loss reserve. The estimated liability for indemnification losses is included
in other liabilities and accrued expenses.
The
loan loss reserve analysis involves mortgage loans that have been sold to third-party investors, which were believed to have met investor
underwriting guidelines at the time of sale, where the Company has received a demand from the investor. There are generally three types
of demands: make whole, repurchase, or indemnification. These types of demands are further described as follows:
Make
whole demand — A make whole demand occurs when an investor forecloses on a property and then sells the property. The make whole
amount is calculated as the difference between the original unpaid principal balance, payments received, accrued interest and fees, less
the sale proceeds.
Repurchase
demand — A repurchase demand usually occurs when there is a significant payment default, error in underwriting or detected
loan fraud.
Indemnification
demand — On certain loans the Company has negotiated a set fee that is to be paid in lieu of repurchase. The fee varies by
investor and by loan product type.
The
Company believes the allowance for loan losses and the loan loss reserve represent probable loan losses incurred as of the balance sheet
date.
Additional
information related to the Loan Loss Reserve is included in Note 3.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
Restricted
Assets
Restricted
assets are assets held in a trust account for future mortuary services and merchandise and consist of cash and cash equivalents; participations
in mortgage loans held for investment with Security National Life Insurance Company (“Security National Life”); mutual funds
carried at estimated fair value; equity securities carried at estimated fair value; and a surplus note with Security National Life (which
is eliminated in consolidation). Restricted assets also include escrows held for borrowers and investors under servicing and appraisal
agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow
for certain real estate construction development projects. Additionally, the Company funded its medical benefit safe-harbor limit based
on the qualified direct costs, and has included this amount as a component of restricted cash.
Cemetery
Perpetual Care Trust Investments
Cemetery
endowment care trusts have been set up for five of the seven cemeteries owned by the Company. Under endowment care arrangements a portion
of the price for each lot sold is withheld and invested in a portfolio of investments similar to those described in the prior paragraph.
The earnings stream from the investments is designed to fund future maintenance and upkeep of the cemetery.
Cemetery
Land and Improvements
The
development of a cemetery involves not only the initial acquisition of raw land but also the installation of roads, water lines, landscaping
and other costs to establish a marketable cemetery lot. The costs of developing the cemetery are shown as an asset on the balance sheet.
The amount on the balance sheet is reduced by the total cost assigned to the development of a particular lot when the criterion for recognizing
a sale of that lot is met.
Deferred
Policy Acquisition Costs and Value of Business Acquired
Commissions
and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production
of new insurance business have been deferred. Deferred policy acquisition costs (“DAC”) for traditional life insurance are
amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy benefit
reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present
value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when
estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are
written off when policies lapse or are surrendered.
When
accounting for DAC, the Company considers internal replacements of insurance and investment contracts. An internal replacement is a modification
in product benefits, features, rights or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement,
or rider to contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract
that is substantially changed from the replaced contract are accounted for as an extinguishment of the replaced contract. Unamortized
DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract are written-off. Modifications that result
in a contract that is substantially unchanged from the replaced contract are accounted for as a continuation of the replaced contract.
Value
of business acquired (“VOBA”) is the present value of estimated future profits of the acquired business and is amortized
similar to deferred policy acquisition costs.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
Premium
Deficiency and Loss Recognition Testing
At
least annually, the Company tests the adequacy of the net benefit reserves (liability for future policy benefits, net of DAC and VOBA)
recorded for life insurance and annuity products. The Company tests for recoverability by using the Company’s current best-estimate
assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns. These tests evaluate whether
the present value of future contract-related cash flows will support the capitalized DAC and VOBA assets. These cash flows consist primarily
of premium income, less benefits and expenses. If the current contract liabilities plus the present value of future premiums is greater
than the sum of the present values of future policy benefits, commissions, and expenses plus the current DAC and VOBA less unearned premium
reserve balances, then the capitalized assets are deemed recoverable. The present values are calculated using the best estimate of the
after tax net investment earned rate.
Mortgage
Servicing Rights
Mortgage
Servicing Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents)
when mortgage loans are sold. Under these contracts, the Company is obligated to retain and provide loan servicing functions on loans
sold, in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities,
collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound)
funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition of real
estate owned and property dispositions.
The
total residential mortgage loans serviced for others consist primarily of agency conforming fixed-rate mortgage loans. The value of MSRs
is derived from the net cash flows associated with the servicing contracts. The Company receives a servicing fee of generally about 0.250%
annually on the remaining outstanding principal balances of the loans. Based on the result of the cash flow analysis, an asset or liability
is recorded for mortgage servicing rights. The servicing fees are collected from the monthly payments made by the mortgagors. The Company
generally receives other remuneration including rights to various mortgagor-contracted fees such as late charges, and collateral reconveyance
charges and the Company is generally entitled to retain the interest earned on funds held pending remittance of mortgagor principal,
interest, tax and insurance payments. Contractual servicing fees and late fees are included in other revenues on the consolidated statements
of earnings.
The
Company’s subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed
by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes
between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market. After being
initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense
is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance
in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.
Interest
rate risk, prepayment risk, and default risk are inherent risks in MSR valuation. Interest rate changes largely drive prepayment rates.
Refinance activity generally increases as rates decline. A significant decrease in rates beyond expectation could cause a decline in
the value of the MSR. On the contrary, if rates increase borrowers are less likely to refinance or prepay their mortgage, which extends
the duration of the loan and MSR values are likely to rise. Because of these risks, discount rates and prepayment speeds are used to
estimate the fair value.
The
Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s
carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment
is recognized in current period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.
Management
periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to
recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for
that stratum to its estimated recoverable value is charged to the valuation allowance.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives
of the assets which range from three to forty years. Leasehold improvements paid for by the Company as a lessee are amortized over the
lesser of the useful life or remaining lease terms.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
Long-lived
Assets
Long-lived
assets to be held and used, including property and equipment and real estate held for investment, are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses
on assets to be held and used are recognized based on the fair value of the asset, and long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell. No impairment of long-lived assets has been recognized in the accompanying
financial statements except for certain impairments of real estate held for investment as disclosed in Note 2.
Derivative
Instruments
Mortgage
Banking Derivatives
Loan
Commitments
The
Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the
time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded.
Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number
of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn
within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the
issuance of the loan commitment.
In
general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the
relative attractiveness of current mortgage rates compared to the applicant’s committed rate. The probability that a loan will
not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or
correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application
approval status. The Company has developed fallout estimates using historical data that take into account all of the variables, as well
as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate
the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect
the most current data.
The
Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted
mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the
probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage
loan is measured from the date the loan commitment is issued and is shown net of expenses. Following issuance, the value of a loan commitment
can be either positive or negative depending upon the change in value of the underlying mortgage loans.
Forward
Sale Commitments
The
Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments.
A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management
expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby
reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
The
net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee
income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued
expenses on the consolidated balance sheets.
Call
and Put Option Derivatives
The
Company uses a strategy of selling “out of the money” call options on its equity securities as a source of revenue. The options
give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future.
The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current
market prices. The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair
value of the option. The liability for options is adjusted to fair value at each reporting date. In the event a call option is exercised,
the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised,
the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security
at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated
as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in
current earnings as a component of gains (losses) on investments and other assets. Call and put options are shown in other liabilities
and accrued expenses on the consolidated balance sheets.
Allowance
for Doubtful Accounts and Loan Losses and Impaired Loans
The
Company records an allowance and recognizes an expense for potential losses from mortgage loans held for investment, other investments
and receivables in accordance with GAAP.
Receivables
are the result of cemetery and mortuary operations, mortgage loan operations and life insurance operations. The allowance is based upon
the Company’s historical experience for collectively evaluated impairment. Other allowances are based upon receivables individually
evaluated for impairment. Collectability of the cemetery and mortuary receivables is significantly influenced by current economic conditions.
The critical issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the
overall economy.
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. As a practical expedient, upon determining impairment, the Company establishes an individual
impairment allowance based upon an assessment of the fair value of the underlying collateral. See the schedules in Note 2 for additional
information. 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:
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
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 and second mortgages on the unit. The borrower’s
ability to repay is sensitive to the life events and general economic condition of the region. Where loan to values exceed 80%, the loan
is generally guaranteed by private mortgage insurance, FHA or VA.
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.
Future
Policy Benefits and Unpaid Claims
Future
policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment
yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries’ experience, modified
as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are,
for some plans, graded to equal statutory values or cash values at or prior to maturity, which are deemed a reasonable equivalent for
GAAP. The range of assumed interest rates for all traditional life insurance policy reserves was 4% to 10%. Benefit reserves for traditional
limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred
premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims
are incurred. Increases in future policy benefits are charged to expense.
Future
policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy
account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred
in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged
from 3% to 6.5%.
The
Company records an unpaid claims liability for claims in the course of settlement equal to the death benefit amount less any reinsurance
recoverable amount for claims reported. There is also an unpaid claims liability for claims incurred but not reported. This liability
is based on the historical experience of the net amount of claims that were reported in reporting periods subsequent to the reporting
period when claims were incurred.
Participating
Insurance
Participating
business constituted 2% of insurance in force for the years ended 2021 and 2020. The provision for policyholders’ dividends included
in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of
Directors.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1) Significant Accounting Policies (Continued)
Recognition
of Insurance Premiums and Other Considerations
Premiums
and other consideration for traditional life insurance products (which include those products with fixed and guaranteed premiums and
benefits and consist principally of whole life insurance policies, limited payment life insurance policies, and certain annuities with
life contingencies) are recognized as revenues when due from policyholders. Premiums and other consideration for interest-sensitive insurance
policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies)
are recognized when earned and consist of amounts assessed against policyholder account balances during the period for policy administration
charges and surrender charges.
Reinsurance
The
Company follows the procedure of reinsuring risks in excess of $100,000 to provide for greater diversification of business to allow management
to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable
for amounts ceded in the event the reinsurers are unable to meet their obligations.
The
Company entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for
certain life insurance policies and certain other policy-related liabilities of the insurance company.
Reinsurance
premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with
those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in
connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized
accordingly.
Pre-need
Sales and Costs
Pre-need
contract sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets
are deferred until the performance obligations are fulfilled (services are performed or the caskets are delivered).
Sales
of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sale of cemetery interment rights
are deferred until 10% of the sales price has been collected.
Pre-need
contract sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sale of pre-need cemetery
merchandise is deferred until the merchandise is delivered to the Company.
Pre-need
contract sales of cemetery services (primarily merchandise delivery, installation fees and burial opening and closing fees) - revenue
and costs associated with the sales of pre-need cemetery services are deferred until the services are performed.
Prearranged
funeral and pre-need cemetery customer acquisition costs - costs incurred related to obtaining new pre-need contract cemetery and
prearranged funeral services, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery
and prearranged funeral services, are deferred until the merchandise is delivered or services are performed.
Revenues
and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured and
there are no significant performance obligations remaining.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1)
Significant Accounting Policies (Continued)
The
Company, through its cemetery and mortuary operations, provides guaranteed funeral arrangements wherein a prospective customer can receive
future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the
customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential
mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between
the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy.
However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure
is minimal.
Goodwill
Previous
acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values
with the excess purchase price recognized as goodwill. The Company evaluates annually or when changes in circumstances warrant the recoverability
of goodwill and if there is a decrease in value, the related impairment is recognized as a charge against income. No impairment of goodwill
has been recognized in the accompanying financial statements.
Other
Intangibles
Other
intangibles are recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or
whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged,
either individually or in combination with a related contract, asset, or liability. The Company engages a third-party valuation firm
to analyze the value of the intangible assets that result from significant acquisitions. The value of the intangible assets that result
from these acquisitions are included in Other Assets and are determined using the income approach, relying on a relief from the royalty
method.
Income
Taxes
Income
taxes include taxes currently payable plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to the temporary differences in the financial reporting basis and tax basis of assets and liabilities and operating loss
carry-forwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
Liabilities
are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not”
threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax penalties are included
as a component of income tax expense.
Earnings
Per Common Share
The
Company computes earnings per share which requires presentation of basic and diluted earnings per share. Basic earnings per equivalent
Class A common share are computed by dividing net earnings by the weighted-average number of Class A common shares outstanding during
each year presented, after the effect of the assumed conversion of Class C common stock to Class A common stock. Diluted earnings per
share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the year used to compute
basic earnings per share plus dilutive potential incremental shares. Basic and diluted earnings per share amounts have been adjusted
retroactively for the effect of annual stock dividends.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
1) Significant Accounting Policies (Continued)
Stock
Based Compensation
The
cost of employee services received in exchange for an award of equity instruments is recognized in the financial statements and is measured
based on the fair value on the grant date of the award. The fair value of stock options is calculated using the Black Scholes Option
Pricing Model. Stock option compensation expense is recognized over the period during which an employee is required to provide service
in exchange for the award and is included in personnel expenses on the consolidated statements of earnings.
Concentration
of Credit Risk
For
a description of the concentration risk regarding available for sale debt securities, mortgage loans held for investment and real
estate held for investment, refer to Note 2 of the Notes to Consolidated Financial Statements.
Advertising
The
Company expenses advertising costs as incurred.
Recent
Accounting Pronouncements
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 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. In October
2019, the FASB proposed an update to ASU No. 2016-13 that would make the ASU effective for the Company on January 1, 2023. The Company
is in the process of evaluating the potential impact of this standard.
ASU
No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts”
— Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future
policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying
the rate used to discount future cash flows. The ASU will improve the accounting for certain market-based options or guarantees associated
with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required
disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that made the ASU effective for the Company on January 1,
2025. The Company has made progress in the implementation of the new standard, including the involvement of actuaries, accountants, and
systems specialists. However, the Company has not yet estimated the impact the new guidance will have on the consolidated financial statements.
The
Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s
results of operations or financial position.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments
The
Company’s investments as of December 31, 2021 are summarized as follows:
Schedule
of Investments
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Estimated Fair Value | |
December 31, 2021: | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities, available for sale, at estimated fair value: | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities and obligations of U.S. Government agencies | |
$ | 22,307,736 | | |
$ | 578,567 | | |
$ | - | | |
$ | 22,886,303 | |
| |
| | | |
| | | |
| | | |
| | |
Obligations of states and political subdivisions | |
| 4,649,917 | | |
| 212,803 | | |
| (1,989 | ) | |
| 4,860,731 | |
| |
| | | |
| | | |
| | | |
| | |
Corporate securities including public utilities | |
| 174,711,061 | | |
| 21,791,370 | | |
| (353,668 | ) | |
| 196,148,763 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
| | |
| | |
| ) | |
| |
| |
| | | |
| | | |
| | | |
| | |
Redeemable preferred stock | |
| 269,214 | | |
| 13,383 | | |
| - | | |
| 282,597 | |
| |
| | | |
| | | |
| | | |
| | |
Total fixed maturity securities available for sale | |
$ | 236,303,310 | | |
$ | 23,501,282 | | |
$ | (516,989 | ) | |
$ | 259,287,603 | |
| |
| | | |
| | | |
| | | |
| | |
Equity securities at estimated fair value: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Common stock: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Industrial, miscellaneous and all other | |
$ | 8,275,772 | | |
$ | 3,626,444 | | |
$ | (305,802 | ) | |
$ | 11,596,414 | |
| |
| | | |
| | | |
| | | |
| | |
Total equity securities at estimated fair value | |
$ | 8,275,772 | | |
$ | 3,626,444 | | |
$ | (305,802 | ) | |
$ | 11,596,414 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage loans held for investment at amortized cost: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 53,533,712 | | |
| | | |
| | | |
| | |
Residential construction | |
| 175,117,783 | | |
| | | |
| | | |
| | |
Commercial | |
| 51,683,022 | | |
| | | |
| | | |
| | |
Less: Unamortized deferred loan fees, net | |
| (918,586 | ) | |
| | | |
| | | |
| | |
Less: Allowance for loan losses | |
| (1,699,902 | ) | |
| | | |
| | | |
| | |
Less: Net discounts | |
| (409,983 | ) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total mortgage loans held for investment | |
$ | 277,306,046 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Real estate held for investment - net of accumulated depreciation: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 41,972,462 | | |
| | | |
| | | |
| | |
Commercial | |
| 155,393,335 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total real estate held for investment | |
$ | 197,365,797 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Real estate held for sale: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 1,190,602 | | |
| | | |
| | | |
| | |
Commercial | |
| 2,540,698 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total real estate held for sale | |
$ | 3,731,300 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Other investments and policy loans at amortized cost: | |
| | | |
| | | |
| | | |
| | |
Policy loans | |
$ | 13,478,214 | | |
| | | |
| | | |
| | |
Insurance assignments | |
| 48,632,808 | | |
| | | |
| | | |
| | |
Federal Home Loan Bank stock (1) | |
| 2,547,100 | | |
| | | |
| | | |
| | |
Other investments | |
| 4,983,251 | | |
| | | |
| | | |
| | |
Less: Allowance for doubtful accounts | |
| (1,686,218 | ) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total policy loans and other investments | |
$ | 67,955,155 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Accrued investment income | |
$ | 6,313,012 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total investments | |
$ | 823,555,327 | | |
| | | |
| | | |
| | |
(1) |
Includes $905,700 of Membership stock and $1,641,400
of Activity stock due to short-term advances and letters of credit. |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2) Investments (Continued)
The
Company’s investments as of December 31, 2020 are summarized as follows:
| |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Estimated Fair Value | |
December 31, 2020: | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities, available for sale, at estimated fair value: | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury securities and obligations of U.S. Government agencies | |
$ | 42,381,805 | | |
$ | 1,358,562 | | |
$ | - | | |
$ | 43,740,367 | |
| |
| | | |
| | | |
| | | |
| | |
Obligations of states and political subdivisions | |
| 5,383,762 | | |
| 312,214 | | |
|
(1,261 | ) | |
| 5,694,715 | |
| |
| | | |
| | | |
| | | |
| | |
Corporate securities including public utilities | |
| 186,067,912 | | |
| 27,216,496 | | |
| (681,478 | ) | |
| 212,602,930 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage-backed securities | |
| | |
| | |
| ) | |
| |
| |
| | | |
| | | |
| | | |
| | |
Redeemable preferred stock | |
| 269,214 | | |
| 3,391 | | |
| - | | |
| 272,605 | |
| |
| | | |
| | | |
| | | |
| | |
Total fixed maturity securities available for sale | |
$ | 265,150,484 | | |
$ | 30,456,040 | | |
$ | (949,845 | ) | |
$ | 294,656,679 | |
| |
| | | |
| | | |
| | | |
| | |
Equity securities at estimated fair value: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Common stock: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Industrial, miscellaneous and all other | |
$ | 9,698,490 | | |
$ | 2,376,156 | | |
$ | (750,407 | ) | |
$ | 11,324,239 | |
| |
| | | |
| | | |
| | | |
| | |
Total equity securities at estimated fair value | |
$ | 9,698,490 | | |
$ | 2,376,156 | | |
$ | (750,407 | ) | |
$ | 11,324,239 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage loans held for investment at amortized cost: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 95,822,448 | | |
| | | |
| | | |
| | |
Residential construction | |
| 111,111,777 | | |
| | | |
| | | |
| | |
Commercial | |
| 46,836,866 | | |
| | | |
| | | |
| | |
Less: Unamortized deferred loan fees, net | |
| (1,161,132 | ) | |
| | | |
| | | |
| | |
Less: Allowance for loan losses | |
| (2,005,127 | ) | |
| | | |
| | | |
| | |
Less: Net discounts | |
| (1,260,896 | ) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total mortgage loans held for investment | |
$ | 249,343,936 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Real estate held for investment - net of accumulated depreciation: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 24,843,743 | | |
| | | |
| | | |
| | |
Commercial | |
| 106,840,710 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total real estate held for investment | |
$ | 131,684,453 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Real estate held for sale: | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 3,478,254 | | |
| | | |
| | | |
| | |
Commercial | |
| 4,400,553 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total real estate held for sale | |
$ | 7,878,807 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Other investments and policy loans at amortized cost: | |
| | | |
| | | |
| | | |
| | |
Policy loans | |
$ | 14,171,589 | | |
| | | |
| | | |
| | |
Insurance assignments | |
| 53,231,131 | | |
| | | |
| | | |
| | |
Federal Home Loan Bank stock (1) | |
| 2,506,600 | | |
| | | |
| | | |
| | |
Other investments | |
| 5,432,816 | | |
| | | |
| | | |
| | |
Less: Allowance for doubtful accounts | |
| (1,645,475 | ) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total policy loans and other investments | |
$ | 73,696,661 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Accrued investment income | |
$ | 5,360,523 | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Total investments | |
$ | 773,945,298 | | |
| | | |
| | | |
| | |
(1) |
Includes $866,900 of Membership stock and $1,639,700 of Activity
stock due to short-term advances and letters of credit. |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2) Investments (Continued)
Fixed
Maturity Securities
The
following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at December 31,
2021 and at December 31, 2020. The unrealized losses were primarily related to interest rate fluctuations and uncertainties relating
to COVID-19. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:
Schedule
of Fair Value of Fixed Maturity Securities
| |
Unrealized Losses for Less than Twelve Months | | |
Fair Value | | |
Unrealized Losses for More than Twelve Months | | |
Fair Value | | |
Total Unrealized Loss | | |
Fair Value | |
At December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Obligations of States and Political Subdivisions | |
$ | 1,989 | | |
$ | 548,715 | | |
$ | - | | |
$ | - | | |
$ | 1,989 | | |
$ | 548,715 | |
Corporate Securities | |
| 73,507 | | |
| 4,638,750 | | |
| 280,161 | | |
| 3,771,813 | | |
| 353,668 | | |
| 8,410,563 | |
Mortgage and other asset-backed securities | |
| | |
| | |
| | |
| | |
| | |
| |
Total unrealized losses | |
$ | 148,448 | | |
$ | 13,122,225 | | |
$ | 368,541 | | |
$ | 5,354,617 | | |
$ | 516,989 | | |
$ | 18,476,842 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2020 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Obligations of States and Political Subdivisions | |
$ | 1,261 | | |
$ | 206,812 | | |
$ | - | | |
$ | - | | |
$ | 1,261 | | |
$ | 206,812 | |
Corporate Securities | |
| 242,596 | | |
| 9,919,298 | | |
| 438,882 | | |
| 2,593,026 | | |
| 681,478 | | |
| 12,512,324 | |
Mortgage and other asset-backed securities | |
| | |
| | |
| | |
| | |
| | |
| |
Total unrealized losses | |
$ | 510,379 | | |
$ | 13,581,684 | | |
$ | 439,466 | | |
$ | 2,644,987 | | |
$ | 949,845 | | |
$ | 16,226,671 | |
There
were 55 securities with fair value of 97.3% of amortized cost at December 31, 2021. There were 63 securities with fair value of 94.7%
of amortized cost at December 31, 2020. Credit losses of $39,502 and $370,975 have been recognized for the years ended December 31, 2021
and 2020, respectively.
On
a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale. 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, unless current market or recent company news could lead to a credit
downgrade. 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.
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.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
The
following table presents a rollforward of the Company’s cumulative other than temporary credit impairments (“OTTI”)
recognized in earnings on fixed maturity securities available for sale.
Schedule
of Earnings on Fixed Maturity Securities
| |
2021 | | |
2020 | |
Balance of credit-related OTTI at January 1 | |
$ | 370,975 | | |
$ | - | |
| |
| | | |
| | |
Additions for credit impairments recognized on: | |
| | | |
| | |
Securities not previously impaired | |
| 39,502 | | |
| 370,975 | |
Securities previously impaired | |
| - | | |
| - | |
| |
| | | |
| | |
Reductions for credit impairments previously recognized on: | |
| | | |
| | |
Securities that matured or were sold during the period (realized) | |
| (145,500 | ) | |
| - | |
Securities due to an increase in expected cash flows | |
| - | | |
| - | |
| |
| | | |
| | |
Balance of credit-related OTTI at December 31 | |
$ | 264,977 | | |
$ | 370,975 | |
The
following table presents the amortized cost and estimated fair value of fixed maturity securities available for sale at December 31,
2021, by contractual maturity. Expected maturities may differ from contractual maturities because certain borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Schedule
of Investments Classified by Contractual Maturity Date
| |
Amortized | | |
Estimated Fair | |
| |
Cost | | |
Value | |
Due in 1 year | |
$ | 68,966 | | |
$ | 70,024 | |
Due in 2-5 years | |
| 62,958,696 | | |
| 65,605,915 | |
Due in 5-10 years | |
| 70,740,783 | | |
| 77,346,448 | |
Due in more than 10 years | |
| 67,900,269 | | |
| 80,873,410 | |
Mortgage-backed securities | |
| | |
| |
Redeemable preferred stock | |
| 269,214 | | |
| 282,597 | |
Total | |
$ | 236,303,310 | | |
$ | 259,287,603 | |
The
Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $28,993,126,
at estimated fair value, of fixed maturity securities with the FHLB at December 31, 2021. These securities are used as collateral on
any cash borrowings from the FHLB. As of December 31, 2021, the Company owed $-0- to the FHLB and its estimated maximum borrowing capacity
was $27,054,347.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
Investment
Related Earnings
The
following tables presents the net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity
securities, and other than temporary impairments from investments and other assets.
Schedule
of Gain (Loss) on Investments
| |
| | |
| |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Fixed maturity securities available for sale: | |
| | | |
| | |
Gross realized gains | |
$ | 984,740 | | |
$ | 445,749 | |
Gross realized losses | |
| (139,728 | ) | |
| (77,546 | ) |
Other than temporary impairments | |
| (39,502 | ) | |
| (370,975 | ) |
| |
| | | |
| | |
Equity securities: | |
| | | |
| | |
Gains on securities sold | |
| 390,597 | | |
| 74,836 | |
Unrealized gains on securities held at the end of the period | |
| 2,732,130 | | |
| 1,125,304 | |
| |
| | | |
| | |
Other assets: | |
| | | |
| | |
Gross realized gains | |
| 4,786,535 | | |
| 2,342,418 | |
Gross realized losses | |
| (2,489,140 | ) | |
| (1,984,911 | ) |
Total | |
$ | 6,225,632 | | |
$ | 1,554,875 | |
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.
Information
regarding sales of fixed maturity securities available for sale is presented as follows.
Schedule of Major
Categories of Net Investment Income
| |
| | |
| |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Proceeds from sales | |
$ | 2,896,351 | | |
$ | 5,477,438 | |
Gross realized gains | |
| 208,698 | | |
| 358,236 | |
Gross realized losses | |
| (4,046 | ) | |
| (21,137 | ) |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
Major
categories of net investment income were as follows:
| |
| | |
| |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Fixed maturity securities available for sale | |
$ | 10,769,979 | | |
$ | 12,233,394 | |
Equity securities | |
| 446,337 | | |
| 642,433 | |
Mortgage loans held for investment | |
| 28,758,614 | | |
| 25,672,746 | |
Real estate held for investment and sale | |
| 12,334,989 | | |
| 11,945,401 | |
Policy loans | |
| 940,890 | | |
| 1,025,179 | |
Insurance assignments | |
| 19,062,052 | | |
| 17,837,578 | |
Other investments | |
| 131,145 | | |
| 126,013 | |
Cash and cash equivalents | |
| 235,470 | | |
| 426,623 | |
Gross investment income | |
| 72,679,476 | | |
| 69,909,367 | |
Investment expenses | |
| (14,414,793 | ) | |
| (13,579,564 | ) |
Net investment income | |
$ | 58,264,683 | | |
$ | 56,329,803 | |
Net
investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $1,472,295 and $676,313 for the
years ended December 31, 2021 and 2020, 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 for regulatory authorities as required by law amounted to $101,681,853 and $9,684,409 at December 31, 2021 and 2020, respectively.
The restricted securities are included in various assets under investments on the accompanying consolidated balance sheets.
There
were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses) at
December 31, 2021, other than investments issued or guaranteed by the United States Government.
Real
Estate Held for Investment and Held for Sale
The
Company strategically deploys resources into real estate to match the income and yield durations of its primary obligations. The sources
for these real estate assets come through its various business segments in the form of acquisition, development and mortgage foreclosures.
The Company reports real estate held for investment and held for sale pursuant to the accounting policy discussed in Note 1 of the Notes
to Consolidated Financial Statements.
Commercial
Real Estate Held for Investment and Held for Sale
The
Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance
with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and
third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction
of the Board of Directors.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
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 assets that provide operational efficiencies.
The
Company currently owns and operates 11 commercial properties in 5 states. These properties include office buildings, flex office space,
and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company does
use 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 loans was $134,251,205 and $71,517,902 as
of December 31, 2021 and 2020, respectively. The associated bank loan carrying values totaled $85,663,148 and $46,153,283 as of December
31, 2021 and 2020, respectively.
During
the years ended December 31, 2021 and 2020, the Company recorded impairment losses on commercial real estate held for sale of $2,028,378
and $897,980, respectively. These impairment losses relate to a funeral home and an office building held by the life insurance segment.
The funeral home was subsequently sold. Impairment losses are included in gains (losses) on investments and other assets on the consolidated
statements of earnings.
The
Company’s commercial real estate held for investment is summarized as follows:
Schedule
of Commercial Real Estate Investment
| |
Net Ending Balance | | |
Total Square Footage | |
| |
December 31 | | |
December 31 | |
| |
2021 | | |
2020 | | |
2021 | | |
2020 | |
Utah (1) | |
$ | 150,105,948 | | |
$ | 100,927,528 | | |
| | |
| |
Louisiana | |
| 2,426,612 | | |
| 2,998,684 | | |
| | |
| |
Mississippi | |
| 2,860,775 | | |
| 2,914,498 | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
| |
$ | 155,393,335 | | |
$ | 106,840,710 | | |
| | |
| |
(1) |
Includes Center53 phase 1 and phase 2 |
The
Company’s commercial real estate held for sale is summarized as follows:
| |
Net Ending Balance | | |
Total Square Footage | |
| |
December 31 | | |
December 31 | |
| |
2021 | | |
2020 | | |
2021 | | |
2020 | |
Kansas | |
$ | 2,000,000 | | |
$ | 4,000,000 | | |
| | |
| |
Louisiana | |
| 389,145 | | |
| - | | |
| | |
| |
Mississippi (1) | |
| 151,553 | | |
| 151,553 | | |
| | |
| |
Texas (2) | |
| | | |
| 249,000 | | |
| | |
| |
| |
| | | |
| | | |
| | | |
| | |
| |
$ | 2,540,698 | | |
$ | 4,400,553 | | |
| | |
| |
(1) |
Approximately 93 acres of undeveloped land, in 2021, the existing
building was removed |
(2) |
Improved commercial pad |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
These
properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties
are located. The Company expects these properties to sell within the coming 12 months.
Residential
Real Estate Held for Investment and Held for Sale
The
Company owns a small portfolio of residential homes primarily as a result of loan foreclosures. The Company has the option to sell them
or to continue to hold them for cash flow and acceptable returns. The Company also invests in residential subdivision land developments.
The
Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates
and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across
the country.
During
the years ended December 31, 2021 and 2020, the Company recorded impairment losses on residential real estate held for sale of $-0- and
$43,394, respectively. These impairment losses are included in gains (losses) on investments and other assets on the consolidated statements
of earnings.
The
net ending balance of foreclosed residential real estate included in residential real estate held for investment or sale is $1,190,602
and $4,327,079 as of December 31, 2021 and 2020, respectively.
The
Company’s residential real estate held for investment is summarized as follows:
Schedule
of Residential Real Estate Investment
| |
| | |
| |
| |
Net Ending Balance | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Utah (1) | |
$ | 41,686,281 | | |
$ | 24,557,562 | |
Washington (2) | |
| 286,181 | | |
| 286,181 | |
Residential Real Estate
Investment | |
$ | 41,972,462 | | |
$ | 24,843,743 | |
(1) | Including subdivision
land developments |
(2) | Improved residential
lots |
The
following table presents additional information regarding the Company’s subdivision land developments in Utah.
| |
| | |
| |
| |
December 31 | |
| |
2021 | | |
2020 | |
Lots available for sale | |
| 67 | | |
| 36 | |
Lots to be developed | |
| 548 | | |
| 350 | |
Ending Balance | |
$ | 41,479,434 | | |
$ | 23,777,478 | |
Residential Real Estate Investment | |
$ | 41,479,434 | | |
$ | 23,777,478 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
The
Company’s residential real estate held for sale is summarized as follows:
| |
| | |
| |
| |
Net Ending Balance | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Nevada | |
$ | 979,640 | | |
$ | 979,640 | |
Texas | |
| 200,962 | | |
| - | |
Ohio | |
| 10,000 | | |
| 10,000 | |
Florida | |
| - | | |
| 744,322 | |
Utah | |
| - | | |
| 1,744,292 | |
Real Estate held for
Sale | |
$ | 1,190,602 | | |
$ | 3,478,254 | |
These
properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties
are located. The Company expects these properties to sell within the coming 12 months.
Real
Estate Owned and Occupied by the Company
The
primary business units of the Company occupy a portion of the commercial real estate owned by the Company. As of December 31, 2021, real
estate owned and occupied by the Company is summarized as follows:
Schedule
of Real Estate Owned and Occupied by the Company
Location | |
Business Segment | |
Approximate Square Footage | | |
Square Footage Occupied by the Company | |
433 West Ascension Way, Salt Lake City, UT - Center53 Phase 2 | |
Corporate Offices, Life Insurance, Cemetery/Mortuary Operations, and Mortgage Operations and Sales | |
| | |
| % |
1044 River Oaks Dr., Flowood, MS | |
Life Insurance Operations | |
| | |
| | % |
1818 Marshall Street, Shreveport, LA (1) | |
Life Insurance Operations | |
| | |
| | % |
909 Foisy Street, Alexandria, LA (1) | |
Life Insurance Sales | |
| | |
| | % |
812 Sheppard Street, Minden, LA (1) | |
Life Insurance Sales | |
| | |
| | % |
1550 N 3rd Street, Jena, LA (1) | |
Life Insurance Sales | |
| | |
| | % |
(1) | Included in property
and equipment on the consolidated balance sheets |
Mortgage
Loans Held for Investment
The
Company reports mortgage loans held for investment pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated
Financial Statements.
Mortgage
loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0 % to 10.5%, maturity dates range
from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors
have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes
in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial
loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’
ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At December
31, 2021, the Company had 70%, 7%, 5%, 4%, 4% and 2% of its mortgage loans from borrowers located in the states of Utah, Florida, California,
Texas, Nevada and Arizona, respectively. At December 31, 2020, the Company had 57%, 13%, 9%, 4%, 3% and 3% of its mortgage loans from
borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
The
Company establishes a valuation allowance for credit losses in its mortgage loans held for investment portfolio. The following table
presents the valuation allowance for loan losses as a contra-asset account.
Schedule
of Allowance for Loan Losses as Contra- Asset Account
| |
Commercial | | |
Residential | | |
Residential Construction | | |
Total | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 187,129 | | |
$ | 1,774,796 | | |
$ | 43,202 | | |
$ | 2,005,127 | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| - | |
Provision | |
| - | | |
| (305,225 | ) | |
| - | | |
| (305,225 | ) |
Ending balance | |
$ | 187,129 | | |
$ | 1,469,571 | | |
$ | 43,202 | | |
$ | 1,699,902 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: individually evaluated for impairment | |
$ | - | | |
$ | 105,384 | | |
$ | - | | |
$ | 105,384 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: collectively evaluated for impairment | |
$ | 187,129 | | |
$ | 1,364,187 | | |
$ | 43,202 | | |
$ | 1,594,518 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage loans: | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 51,683,022 | | |
$ | 53,533,712 | | |
$ | 175,117,783 | | |
$ | 280,334,517 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: individually evaluated for impairment | |
$ | 1,723,372 | | |
$ | 2,548,656 | | |
$ | - | | |
$ | 4,272,028 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: collectively evaluated for impairment | |
$ | 49,959,650 | | |
$ | 50,985,056 | | |
$ | 175,117,783 | | |
$ | 2,760,162,489 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2020 | |
| | | |
| | | |
| | | |
| | |
Allowance for credit losses: | |
| | | |
| | | |
| | | |
| | |
Beginning balance | |
$ | 187,129 | | |
$ | 1,222,706 | | |
$ | 43,202 | | |
$ | 1,453,037 | |
Charge-offs | |
| - | | |
| - | | |
| - | | |
| - | |
Provision | |
| - | | |
| 552,090 | | |
| - | | |
| 552,090 | |
Ending balance | |
$ | 187,129 | | |
$ | 1,774,796 | | |
$ | 43,202 | | |
$ | 2,005,127 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: individually evaluated for impairment | |
$ | - | | |
$ | 219,905 | | |
$ | - | | |
$ | 219,905 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: collectively evaluated for impairment | |
$ | 187,129 | | |
$ | 1,554,891 | | |
$ | 43,202 | | |
$ | 1,785,222 | |
| |
| | | |
| | | |
| | | |
| | |
Mortgage loans: | |
| | | |
| | | |
| | | |
| | |
Ending balance | |
$ | 46,836,866 | | |
$ | 111,111,777 | | |
$ | 95,822,448 | | |
$ | 253,771,091 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: individually evaluated for impairment | |
$ | 2,148,827 | | |
$ | 7,932,680 | | |
$ | 200,963 | | |
$ | 10,282,470 | |
| |
| | | |
| | | |
| | | |
| | |
Ending balance: collectively evaluated for impairment | |
$ | 44,688,039 | | |
$ | 103,179,097 | | |
$ | 95,621,485 | | |
$ | 243,488,621 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
The
following table presents the aging of mortgage loans held for investment.
Schedule of Aging of Mortgage Loans
| |
Commercial | | |
Residential | | |
Residential
Construction | | |
Total | |
December
31, 2021 | |
| | | |
| | | |
| | | |
| | |
30-59
Days Past Due | |
$ | - | | |
$ | 3,117,826 | | |
$ | 1,363,127 | | |
$ | 4,480,953 | |
60-89
Days Past Due | |
| 100,204 | | |
| 580,815 | | |
| - | | |
| 681,019 | |
Greater
Than 90 Days (1) | |
| 1,723,372 | | |
| 2,052,062 | | |
| - | | |
| 3,775,434 | |
In
Process of Foreclosure (1) | |
| - | | |
| 496,594 | | |
| - | | |
| 496,594 | |
Total
Past Due | |
| 1,823,576 | | |
| 6,247,297 | | |
| 1,363,127 | | |
| 9,434,000 | |
Current | |
| 49,859,446 | | |
| 47,286,415 | | |
| 173,754,656 | | |
| 270,900,517 | |
Total
Mortgage Loans | |
| 51,683,022 | | |
| 53,533,712 | | |
| 175,117,783 | | |
| 280,334,517 | |
Allowance
for Loan Losses | |
| (187,129 | ) | |
| (1,469,571 | ) | |
| (43,202 | ) | |
| (1,699,902 | ) |
Unamortized
deferred loan fees, net | |
| (36,813 | ) | |
| (498,600 | ) | |
| (383,173 | ) | |
| (918,586 | ) |
Unamortized
discounts, net | |
| (240,614 | ) | |
| (169,369 | ) | |
| - | | |
| (409,983 | ) |
Net
Mortgage Loans | |
$ | 51,218,466 | | |
$ | 51,396,172 | | |
$ | 174,691,408 | | |
$ | 277,306,046 | |
| |
| | | |
| | | |
| | | |
| | |
December
31, 2020 | |
| | | |
| | | |
| | | |
| | |
30-59
Days Past Due | |
$ | 233,200 | | |
$ | 5,866,505 | | |
$ | 127,191 | | |
$ | 6,226,896 | |
60-89
Days Past Due | |
| 812,780 | | |
| 2,048,148 | | |
| - | | |
| 2,860,928 | |
Greater
Than 90 Days (1) | |
| 2,148,827 | | |
| 5,669,583 | | |
| - | | |
| 7,818,410 | |
In
Process of Foreclosure (1) | |
| - | | |
| 2,263,097 | | |
| 200,963 | | |
| 2,464,060 | |
Total
Past Due | |
| 3,194,807 | | |
| 15,847,333 | | |
| 328,154 | | |
| 19,370,294 | |
Current | |
| 43,642,059 | | |
| 79,975,115 | | |
| 110,783,623 | | |
| 234,400,797 | |
Total
Mortgage Loans | |
| 46,836,866 | | |
| 95,822,448 | | |
| 111,111,777 | | |
| 253,771,091 | |
Allowance
for Loan Losses | |
| (187,129 | ) | |
| (1,774,796 | ) | |
| (43,202 | ) | |
| (2,005,127 | ) |
Unamortized
deferred loan fees, net | |
| (32,557 | ) | |
| (909,864 | ) | |
| (218,711 | ) | |
| (1,161,132 | ) |
Unamortized
discounts, net | |
| (880,721 | ) | |
| (380,175 | ) | |
| - | | |
| (1,260,896 | ) |
Net
Mortgage Loans | |
$ | 45,736,459 | | |
$ | 92,757,613 | | |
$ | 110,849,864 | | |
$ | 249,343,936 | |
(1) | | Interest income
is not recognized on loans past due greater than 90 days or in foreclosure. |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
Impaired
Mortgage Loans Held for Investment
Impaired
mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been
reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in
and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting
period and the average recorded investment and interest income recognized during the time the loans were impaired are summarized as follows:
Schedule of Impaired Mortgage Loans
| |
Recorded Investment | | |
Unpaid Principal Balance | | |
Related Allowance | | |
Average Recorded Investment | | |
Interest Income Recognized | |
December 31, 2021 | |
| | | |
| | | |
| | | |
| | | |
| | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 1,723,372 | | |
$ | 1,723,372 | | |
$ | - | | |
$ | 1,053,865 | | |
$ | - | |
Residential | |
| 1,591,368 | | |
| 1,591,368 | | |
| - | | |
| 2,731,421 | | |
| - | |
Residential construction | |
| - | | |
| - | | |
| - | | |
| 100,481 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential | |
| 957,288 | | |
| 957,288 | | |
| 105,384 | | |
| 726,449 | | |
| - | |
Residential construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 1,723,372 | | |
$ | 1,723,372 | | |
$ | - | | |
$ | 1,053,865 | | |
$ | - | |
Residential | |
| 2,548,656 | | |
| 2,548,656 | | |
| 105,384 | | |
| 3,457,870 | | |
| - | |
Residential construction | |
| - | | |
| - | | |
| - | | |
| 100,481 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2020 | |
| | | |
| | | |
| | | |
| | | |
| | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 2,148,827 | | |
$ | 2,148,827 | | |
$ | - | | |
$ | 1,866,819 | | |
$ | - | |
Residential | |
| 6,415,419 | | |
| 6,415,419 | | |
| - | | |
| 5,010,078 | | |
| - | |
Residential construction | |
| 200,963 | | |
| 200,963 | | |
| - | | |
| 555,278 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
Residential | |
| 1,517,261 | | |
| 1,517,261 | | |
| 219,905 | | |
| 1,182,368 | | |
| - | |
Residential construction | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 2,148,827 | | |
$ | 2,148,827 | | |
$ | - | | |
$ | 1,866,819 | | |
$ | - | |
Residential | |
| 7,932,680 | | |
| 7,932,680 | | |
| 219,905 | | |
| 6,192,446 | | |
| - | |
Residential construction | |
| 200,963 | | |
| 200,963 | | |
| - | | |
| 555,278 | | |
| - | |
Credit
Risk Profile Based on Performance Status
The
Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan
increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage
loans as loans 90 days or greater delinquent or on non-accrual status.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
2)
Investments (Continued)
The
Company’s performing and non-performing mortgage loans held for investment are summarized as follows:
Schedule of Credit Risk of Mortgage Loans Based on Performance Status
| |
Commercial | | |
Residential | | |
Residential Construction | | |
Total | |
| |
December 31 | | |
December 31 | | |
December 31 | | |
December 31 | |
| |
2021 | | |
2020 | | |
2021 | | |
2020 | | |
2021 | | |
2020 | | |
2021 | | |
2020 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Performing | |
$ | 49,959,650 | | |
$ | 44,688,039 | | |
$ | 50,985,056 | | |
$ | 87,889,768 | | |
$ | 175,117,783 | | |
$ | 110,910,814 | | |
$ | 276,062,489 | | |
$ | 243,488,621 | |
Non-performing | |
| 1,723,372 | | |
| 2,148,827 | | |
| 2,548,656 | | |
| 7,932,680 | | |
| - | | |
| 200,963 | | |
| 4,272,028 | | |
| 10,282,470 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 51,683,022 | | |
$ | 46,836,866 | | |
$ | 53,533,712 | | |
$ | 95,822,448 | | |
$ | 175,117,783 | | |
$ | 111,111,777 | | |
$ | 280,334,517 | | |
$ | 253,771,091 | |
Non-Accrual
Mortgage Loans Held for Investment
Once
a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any income
that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized
from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current.
Interest not accrued on these loans totals approximately $236,000 and $491,000 as of December 31, 2021 and 2020, respectively.
Principal
Amounts Due
The
following table presents the amortized cost and contractual payments on mortgage loans held for investment by category as of December
31, 2021. Expected principal payments may differ from contractual obligations because certain borrowers may elect to pay off mortgage
obligations with or without early payment penalties.
Schedule
of Mortgage loans Held for Investment
| |
| | |
Principal | | |
Principal | | |
Principal | |
| |
| | |
Amounts | | |
Amounts | | |
Amounts | |
| |
| | |
Due in | | |
Due in | | |
Due | |
| |
Total | | |
1 Year | | |
2-5 Years | | |
Thereafter | |
Residential | |
$ | 53,533,712 | | |
$ | 7,451,252 | | |
$ | 6,031,628 | | |
$ | 40,050,832 | |
Residential Construction | |
| 175,117,783 | | |
| 145,711,262 | | |
| 29,406,521 | | |
| - | |
Commercial | |
| 51,683,022 | | |
| 17,007,282 | | |
| 25,761,914 | | |
| 8,913,826 | |
Total | |
$ | 280,334,517 | | |
$ | 170,169,796 | | |
$ | 61,200,063 | | |
$ | 48,964,658 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
3)
Loans Held for Sale
The
Company elected the fair value option for loans held for sale. Changes in the fair value of the loans are included in mortgage fee income.
Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage
loans held for investment and is included in mortgage fee income on the consolidated statement of earnings. See Note 17 of the Notes
to Consolidated Financial Statements for additional disclosures regarding loans held for sale.
The
following table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale.
Schedule
of Aggregate Fair Value - Loans Held for Sale
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Aggregate fair value | |
$ | 302,776,827 | | |
$ | 422,772,418 | |
Unpaid principal balance | |
| 294,481,503 | | |
| 406,407,323 | |
Unrealized gain | |
| 8,295,324 | | |
| 16,365,095 | |
Mortgage
Fee Income
Mortgage
fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale
of mortgage loans held for sale.
Major
categories of mortgage fee income for loans held for sale are summarized as follows:
Schedule of Mortgage Fee Income for Loans Held for Sale
| |
2021 | | |
2020 | |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Loan fees | |
$ | 37,723,433 | | |
$ | 43,432,532 | |
Interest income | |
| 9,385,469 | | |
| 10,628,581 | |
Secondary gains | |
| 230,417,029 | | |
| 231,759,342 | |
Change in fair value of loan commitments | |
| (3,113,095 | ) | |
| 7,637,377 | |
Change in fair value of loans held for sale | |
| (8,783,376 | ) | |
| 10,413,492 | |
Provision for loan loss reserve | |
| (2,211,230 | ) | |
| (4,938,214 | ) |
Mortgage fee income | |
$ | 263,418,230 | | |
$ | 298,933,110 | |
Loan
Loss Reserve
When
a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party
investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used
in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance,
(v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated
loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances,
the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments
to the investor.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
3)
Loans Held for Sale (Continued)
The
loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows:
Schedule
of Loan Loss Reserve Included in Other Liabilities and Accrued Expenses
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Balance, beginning of period | |
$ | 20,583,618 | | |
$ | 4,046,288 | |
Provision for current loan originations (1) | |
| 2,211,230 | | |
| 4,938,214 | |
Additional provision for loan loss reserve | |
| - | | |
| 16,506,030 | |
Charge-offs, net of recaptured amounts | |
| (20,347,709 | ) | |
| (4,906,914 | ) |
Balance, at December 31 | |
$ | 2,447,139 | | |
$ | 20,583,618 | |
(1) |
Included in Mortgage fee income |
The
Company maintains reserves for estimated losses on current production volumes. For the year ended December 31, 2021, $2,211,230 in reserves
were added at a rate of 3.9 basis points per loan, the equivalent of $390 per $1,000,000 in loans originated. This is a decrease over
the year ended December 31, 2020, when $4,938,214 in reserves were added at a rate of 8.9 basis points per loan originated, the equivalent
of $890 per $1,000,000 in loans originated. The Company also increased its loan loss reserve for the year ended December 31, 2020 by
an additional $16,506,030 to account for changes in estimates specific to settlements of loan losses. See Note 10 for additional information
regarding mortgage loan loss settlements. The unique nature of COVID-19 creates significant difficulty for forecasting potential future
losses. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production.
Thus, the Company believes that the final loan loss reserve as of December 31, 2021, represents its best estimate for adequate loss reserves
on loans sold.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
4)
Receivables
Receivables
consist of the following:
Schedule of Receivables
| |
| | | |
| | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Trade contracts | |
$ | 5,298,636 | | |
$ | 4,119,988 | |
Receivables from sales agents | |
| 2,360,807 | | |
| 2,677,774 | |
Other | |
| 12,457,398 | | |
| 5,786,827 | |
Total receivables | |
| 20,116,841 | | |
| 12,584,589 | |
Allowance for doubtful accounts | |
| (1,800,725 | ) | |
| (1,685,382 | ) |
Net receivables | |
$ | 18,316,116 | | |
$ | 10,899,207 | |
5)
Value of Business Acquired, Intangible Assets and Goodwill
Information
with regard to value of business acquired was as follows:
Schedule of Value of Business Acquired
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Balance at beginning of year | |
$ | 8,955,249 | | |
$ | 9,876,647 | |
Value of business acquired | |
| 586,840 | | |
| - | |
Imputed interest at 7% included in earnings | |
| 613,028 | | |
| 670,565 | |
Amortization included in earnings | |
| (1,728,157 | ) | |
| (1,457,390 | ) |
Shadow amortization included in other comprehensive income | |
| (5,528 | ) | |
| (134,573 | ) |
Net amortization | |
| (1,120,657 | ) | |
| (921,398 | ) |
Balance at end of year | |
$ | 8,421,432 | | |
$ | 8,955,249 | |
Presuming
no additional acquisitions, net amortization charged to income is expected to approximate $1,059,000, $972,000, $893,000, $810,000, and
$753,000 for the years 2022 through 2027 . Actual amortization may vary based on changes in assumptions or experience. As of December
31, 2021, value of business acquired is being amortized over a weighted average life of 5.9 years.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
5)
Value of Business Acquired, Intangible Assets and Goodwill (Continued)
The
carrying value of the Company’s intangible assets were as follows which is included in other assets:
Schedule of Carrying Value of Intangible Asset
| |
| |
December 31 | |
| |
Useful Life | |
2021 | | |
2020 | |
Intangible asset - trade name (1) | |
15 years | |
$ | 2,100,000 | | |
$ | - | |
Intangible asset - customer lists | |
15 years | |
| 890,000 | | |
| 890,000 | |
Intangible asset - trade name (2) | |
15 years | |
| 610,000 | | |
| 610,000 | |
Intangible assets - other (1) | |
15 years | |
| 210,000 | | |
| - | |
Less accumulated amortization | |
| |
| (297,333 | ) | |
| (197,334 | ) |
Balance at end of year | |
| |
$ | 3,512,667 | | |
$ | 1,302,666 | |
(1) |
See Note 20 regarding the acquisition of Rivera Funerals, Cremations
and Memorial Gardens |
Information
regarding goodwill by segment was as follows:
Schedule of Goodwill by Segment
| |
Life Insurance | | |
Cemetery/ Mortuary | | |
Total | |
Balance at January 1, 2020: | |
| | | |
| | | |
| | |
Goodwill | |
$ | 2,765,570 | | |
$ | 754,018 | | |
$ | 3,519,588 | |
Accumulated impairment | |
| - | | |
| - | | |
| - | |
Total goodwill, net | |
| 2,765,570 | | |
| 754,018 | | |
| 3,519,588 | |
| |
| | | |
| | | |
| | |
Acquisition | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Balance at December 31, 2020: | |
| | | |
| | | |
| | |
Goodwill | |
| 2,765,570 | | |
| 754,018 | | |
| 3,519,588 | |
Accumulated impairment | |
| - | | |
| - | | |
| - | |
Total goodwill, net | |
| 2,765,570 | | |
| 754,018 | | |
| 3,519,588 | |
| |
| | | |
| | | |
| | |
Acquisition | |
| - | | |
| 1,734,195 | (1) | |
| 1,734,195 | |
| |
| | | |
| | | |
| | |
Balance at December 31, 2021: | |
| | | |
| | | |
| | |
Goodwill | |
| 2,765,570 | | |
| 2,488,213 | | |
| 5,253,783 | |
Accumulated impairment | |
| - | | |
| - | | |
| - | |
Total goodwill, net | |
$ | 2,765,570 | | |
$ | 2,488,213 | | |
$ | 5,253,783 | |
(1) |
See Note 20 regarding the acquisition of Rivera Funerals, Cremations and Memorial Gardens and Holbrook Mortuary |
Goodwill is not amortized but is tested annually
for impairment. The annual impairment tests resulted in no impairment of goodwill for the years ended December 31, 2021 and 2020.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
6)
Property and Equipment
Property
and equipment is summarized below:
Schedule of Property, Plant and Equipment
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Land and buildings | |
$ | 16,532,593 | | |
$ | 11,972,802 | |
Furniture and equipment | |
| 24,799,115 | | |
| 19,679,682 | |
Property, Plant and Equipment, Gross | |
| 41,331,708 | | |
| 31,652,484 | |
Less accumulated depreciation | |
| (19,814,110 | ) | |
| (19,179,139 | ) |
Total | |
$ | 21,517,598 | | |
$ | 12,473,345 | |
Depreciation
expense for the years ended December 31, 2021 and 2020 was $1,935,613 and $2,078,738, respectively. During 2021, the Company reclassified
a building with a gross building cost of $3,640,755 with its associated accumulated depreciation of $532,074 from property and equipment
to real estate held for investment. During 2020, the Company demolished a building with a gross building cost of $1,723,000 with its
associated accumulated depreciation (net book value of $-0-) and transferred land with a cost of $1,516,700 to real estate held for investment
to make way for phase 2 of the redevelopment and expansion of Center53. See Note 20 for additional information regarding property and
equipment acquired through acquisitions.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
7)
Bank and Other Loans Payable
Bank
and other loans payable are summarized as follows:
Summary of Bank Loans Payable
| |
December 31 | |
| |
2021 | | |
2020 | |
| |
| - | | |
| 633,890 | |
| |
| | |
| |
4.27% fixed note payable in monthly installments of $53,881 including principal and
interest, collateralized by shares of Security National Life Insurance Company stock, paid in full December 2021. | |
| - | | |
| 633,890 | |
| |
| | | |
| | |
Prime rate note payable in monthly installments of $75,108 including principal and interest,
collateralized by shares of Security National Life Insurance Company stock, due December 2024. | |
| 2,481,878 | | |
| 3,257,113 | |
| |
| | | |
| | |
4.329% fixed note payable in monthly installments of $9,775 including principal and interest,
collateralized by real property with a book value of approximately $3,103,000, due September 2025. | |
| 1,825,608 | | |
| 1,861,920 | |
| |
| | | |
| | |
4.00% variable with LIBOR at a 1% floor and a spread at 3% rate construction loan collateralized by
real property with a book value of approximately $64,730,000, due March 2024. | |
| 34,547,181 | | |
| - | |
| |
| | | |
| | |
2.5% above the monthly LIBOR rate plus 1/16th of the monthly LIBOR rate construction loan payable in
monthly principal payments of $113,000 plus interest, collateralized by real property with a book value of approximately
$49,118,000, paid in full March 2021. | |
| - | | |
| 35,091,364 | |
| |
| | | |
| | |
3.30% fixed note payable in monthly installments of $179,562 including principal and interest,
collateralized by real property with a book value of approximately $49,118,000, due April 2051. | |
| 40,090,359 | | |
| - | |
| |
| | | |
| | |
4.7865% fixed interest only note payable in monthly installments, collateralized by real property with
a book value of approximately $17,301,000, due June 2028. | |
| 9,200,000 | | |
| 9,200,000 | |
| |
| | | |
| | |
1 month LIBOR rate plus 2.1% loan purchase agreement with a warehouse line availability of
$100,000,000, matures June 2022. | |
| 66,305,025 | | |
| 116,598,834 | |
| |
| | | |
| | |
1 month LIBOR rate plus 2% loan purchase agreement with a warehouse line availability of $100,000,000,
matures August 2022. | |
| 50,555,909 | | |
| 68,766,572 | |
| |
| | | |
| | |
1 month LIBOR rate plus 2.15% loan purchase agreement with a warehouse line availability of
$75,000,000, matures May 2022. | |
| 43,196,986 | | |
| 60,715,374 | |
| |
| | | |
| | |
1 month LIBOR rate plus 2.0% loan purchase agreement with a warehouse line availability of
$100,000,000, matures June 2022. | |
| 1,764,386 | | |
| - | |
| |
| | | |
| | |
1 month LIBOR rate plus 2.5% loan purchase agreement with a warehouse line availability of $5,000,000,
matured August 2021. | |
| - | | |
| 317,582 | |
| |
| | | |
| | |
Other short-term borrowings (1) | |
| 1,250,000 | | |
| 1,250,000 | |
| |
| | | |
| | |
Finance lease liabilities | |
| 62,767 | | |
| 104,951 | |
| |
| | | |
| | |
Other loans payable | |
| 6,828 | | |
| 26,768 | |
Total bank and other loans | |
| 251,286,927 | | |
| 297,824,368 | |
| |
| | | |
| | |
Less current installments | |
| 164,747,672 | | |
| 284,250,996 | |
Bank and other loans, excluding current installments | |
$ | 86,539,255 | | |
$ | 13,573,372 | |
(1) |
Revolving Line of Credit |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
7)
Bank and Other Loans Payable (Continued)
Sources
of Liquidity
Federal
Home Loan Bank Membership
The
Federal Home Loan Banks (“the FHLBs”) are a group of cooperatives that lending institutions use to finance housing and economic
development in local communities. The Company is a member of the FHLB based in Des Moines, Iowa and based in Dallas, Texas. As a member
of the FHLB, the Company is required to maintain a minimum investment in capital stock of the FHLB and may pledge collateral to the bank
for advances of funds to be used in its operations.
Federal
Home Loan Bank of Des Moines
At
December 31, 2021, the amount available for borrowings from the FHLB of Des Moines was approximately $19,259,722, compared with $39,102,336
at December 31, 2020. United States Treasury fixed maturity securities with an estimated fair value of $20,244,900 at December 31, 2021
have been pledged at the FHLB of Des Moines as collateral for current and potential borrowings compared with $40,729,400 at December
31, 2020. At December 31, 2021 and 2020, the Company had no outstanding FHLB borrowings. At December 31, 2021, the Company’s total
investment in FHLB stock was $826,800 compared with $786,300 at December 31, 2020. The Company’s increased investment in FHLB stock
was a result of its increase in short-term FHLB borrowings during 2021. At December 31, 2021, the Company was contingently liable under
a standby letter of credit aggregating $443,758, to be used as collateral to cover any contingency related to additional risk assessments
pertaining to the Company’s captive insurance program.
Federal
Home Loan Bank of Dallas
At
December 31, 2021, the amount available for borrowings from the FHLB of Dallas was approximately $7,794,625, compared with $-0- at December
31, 2020. Mortgage-Backed fixed maturity securities with an estimated fair value of $8,774,352 at December 31, 2021 have been pledged
at the FHLB of Dallas as collateral for current and potential borrowings compared with $-0- at December 31, 2020. At December 31, 2021
and 2020, the Company had no outstanding FHLB borrowings. At December 31, 2021, the Company’s total investment in FHLB stock was
$1,720,300 compared with $1,720,300 at December 31, 2020.
Revolving
Lines of Credit
The
Company has a $2,000,000 revolving line-of-credit with a bank with interest payable at the prime rate minus .75%, secured by the capital
stock of Security National Life and maturing December 31, 2022, renewable annually. At December 31, 2021, the Company was contingently
liable under standby letters of credit aggregating $941,711, to be used as collateral for residential subdivision land developments.
The standby letters of credit will draw on the line of credit if necessary. The Company does not expect any material losses to result
from the issuance of the standby letters of credit. As of December 31, 2021, there were no amounts outstanding under the revolving line-of-credit.
The
Company also has a $2,500,000 revolving line-of-credit with a bank with interest payable at the overnight LIBOR rate plus 2.25% maturing
December 31, 2022. As of December 31, 2021, there was $1,250,000 outstanding under the revolving line-of-credit.
Debt
Covenants for Mortgage Warehouse Lines of Credit
The
Company, through its subsidiary SecurityNational Mortgage, has a $100,000,000 line of credit with Wells Fargo Bank N.A. The agreement
charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 9, 2022. SecurityNational Mortgage is required to comply with
covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the
liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
7)
Bank and Other Loans Payable (Continued)
The
Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement with the
bank allows SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans. The agreement charges
interest at the 1-Month LIBOR rate plus 2% and matures on August 9, 2022. The Company is required to comply with covenants for adjusted
tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage
servicing rights) of at least $1.00 on a rolling four-quarter basis.
The
Company through its subsidiary SecurityNational Mortgage, has a line of credit with Comerica Bank. This agreement with the bank allows
SecurityNational Mortgage to borrow up to $75,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest
at the 1-Month LIBOR rate plus 2.15% and matures on May 27, 2022. The Company is required to comply with covenants for adjusted tangible
net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing
rights) of at least $1.00 on a rolling twelve months.
The
Company through its subsidiary SecurityNational Mortgage, has a line of credit with U.S Bank. This agreement with the bank allows SecurityNational
Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR
rate plus 2.0% and matures on June 4, 2022. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted
cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least
$1.00 on a rolling twelve months.
The
agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant
violation under the other agreement. As of December 31, 2021, the Company was in compliance with all debt covenants.
The
following tabulation shows the combined maturities of bank and other loans payable:
Schedule of Combined Maturities of Bank Loans Payable, Lines of Credit and Notes and Contracts Payable
2022 | |
$ | 164,747,672 | |
2023 | |
| 1,745,541 | |
2024 | |
| 36,333,278 | |
2025 | |
| 2,512,683 | |
2026 | |
| 735,981 | |
Thereafter | |
| 45,211,772 | |
Total | |
$ | 251,286,927 | |
Interest
expense in 2021 and 2020 was $7,127,516 and $8,578,810, respectively. Interest paid in 2021 and 2020 was $7,290,867 and $8,385,270, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
8)
Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets
State
law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment
rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as variable interest entities
pursuant to GAAP. Also, management has determined that the Company is the primary beneficiary of these trusts, as it absorbs both a majority
of the losses and returns associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding
amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets.
The
components of the cemetery perpetual care investments and obligation are as follows:
Schedule of The Components of The Cemetery Perpetual Care Obligation
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Cash and cash equivalents | |
$ | 1,059,519 | | |
$ | 402,913 | |
Fixed maturity securities, available for sale, at estimated fair value | |
| 784,765 | | |
| 747,767 | |
Equity securities, at estimated fair value | |
| 3,302,480 | | |
| 2,062,303 | |
Participating interests in residential construction mortgage loans held for investment with Security National Life | |
| 1,823,533 | | |
| 1,468,600 | |
Real estate held for investment | |
| 865,424 | | |
| 1,731,584 | |
Total cemetery perpetual care trust investments | |
| 7,835,721 | | |
| 6,413,167 | |
Cemetery perpetual care obligation | |
| (4,915,285 | ) | |
| (4,087,704 | ) |
Trust investments in excess of trust obligations | |
$ | 2,920,436 | | |
$ | 2,325,463 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
8)
Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued)
The
Company has also established certain restricted assets to provide for future merchandise and service obligations incurred in connection
with its pre-need sales for its cemetery and mortuary segment.
Restricted
cash also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds
held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development
projects. Additionally, the Company elected to maintain its medical benefit fund without change from the prior year and has included
this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments.
Restricted
assets are summarized as follows:
Schedule of Restricted Assets in Cemetery and Mortuary Endowment Care and Pre need Merchandise Funds
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Cash and cash equivalents (1) | |
$ | 9,000,293 | | |
$ | 8,842,744 | |
Fixed maturity securities, available for sale, at estimated fair value | |
| 1,601,688 | | |
| 1,473,637 | |
Equity securities, at estimated fair value | |
| 3,603,822 | | |
| 2,515,778 | |
Participating interests in mortgage loans held for investment with Security
National Life | |
| 2,732,319 | | |
| 3,317,877 | |
Total | |
$ | 16,938,122 | | |
$ | 16,150,036 | |
(1) |
Including cash and cash equivalents of $7,869,295 and $852,499 as of December 31, 2021 and 2020, respectively, for the life insurance and mortgage segments. |
A
surplus note receivable in the amount of $4,000,000 at
December 31, 2021 and 2020, from Security National Life,
was eliminated in consolidation.
See
Notes 1 and 17 for additional information regarding restricted assets.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
9)
Income Taxes
The
Company’s income tax liability is summarized as follows:
Summary of Income Tax Liability
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Current | |
$ | (1,558,687 | ) | |
$ | 2,595,877 | |
Deferred | |
| 32,594,783 | | |
| 22,662,923 | |
Total | |
$ | 31,036,096 | | |
$ | 25,258,800 | |
Significant
components of the Company’s deferred tax (assets) and liabilities are approximately as follows:
Schedule of Deferred Tax Assets and Liabilities
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Assets | |
| | |
| |
Future policy benefits | |
$ | (13,015,255 | ) | |
$ | (12,657,045 | ) |
Loan loss reserve | |
| (636,256 | ) | |
| (5,352,942 | ) |
Unearned premium | |
| (642,755 | ) | |
| (699,011 | ) |
Net operating loss | |
| (898,029 | ) | |
| (334,085 | ) |
Deferred compensation | |
| (2,750,406 | ) | |
| (2,833,298 | ) |
Deposit obligations | |
| (635,878 | ) | |
| (610,041 | ) |
Other | |
| (1,712,895 | ) | |
| (1,269,533 | ) |
Less: Valuation allowance | |
| 882,535 | | |
| 961,920 | |
Total deferred tax assets | |
| (19,408,939 | ) | |
| (22,794,035 | ) |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Deferred policy acquisition costs | |
| 17,166,200 | | |
| 16,430,001 | |
Basis difference in property, equipment and real estate | |
| 9,247,242 | | |
| 5,312,787 | |
Value of business acquired | |
| 1,768,501 | | |
| 1,880,602 | |
Deferred gains | |
| 15,598,360 | | |
| 12,124,226 | |
Trusts | |
| 1,064,387 | | |
| 1,064,387 | |
Tax on unrealized appreciation | |
| 7,159,032 | | |
| 8,644,955 | |
Total deferred tax liabilities | |
| 52,003,722 | | |
| 45,456,958 | |
Net deferred tax liability | |
$ | 32,594,783 | | |
$ | 22,662,923 | |
The
valuation allowance relates to differences between recorded deferred tax assets and liabilities and ultimate anticipated realization.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
9)
Income Taxes (Continued)
The
Company’s income tax expense is summarized as follows:
Schedule of Components of Income Tax Expense (Benefit)
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Current | |
| | |
| |
Federal | |
$ | 629,921 | | |
$ | 10,678,612 | |
State | |
| 343,428 | | |
| 2,320,233 | |
Total Current Income Tax Expense (Benefit) | |
| 973,349 | | |
| 12,998,845 | |
| |
| | | |
| | |
Deferred | |
| | | |
| | |
Federal | |
| 9,832,556 | | |
| 2,677,943 | |
State | |
| 1,475,880 | | |
| 176,726 | |
Total Deferred Income Tax
Expense (Benefit) | |
| 11,308,436 | | |
| 2,854,669 | |
Total | |
$ | 12,281,785 | | |
$ | 15,853,514 | |
The
reconciliation of income tax expense at the U.S. federal statutory rates is as follows:
Schedule of Effective Income Tax Rate Reconciliation
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Computed expense at statutory rate | |
$ | 10,878,163 | | |
$ | 15,004,527 | |
State tax expense, net of federal tax benefit | |
| 1,437,255 | | |
| 1,972,598 | |
Change in valuation allowance | |
| (79,385 | ) | |
| (1,477,474 | ) |
Other, net | |
| 45,752 | | |
| 353,863 | |
Income tax expense | |
$ | 12,281,785 | | |
$ | 15,853,514 | |
The
Company’s overall effective tax rate for the years ended December 31, 2021 and 2020 was 23.7% and 22.2% respectively. The Company’s
effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes and a decrease
to the valuation allowance. The increase in the effective tax rate when compared to the prior year is partially due to a smaller decrease
to the valuation allowance in the current period when compared to the prior period year.
At
December 31, 2021, the Company had no significant unrecognized tax benefits. As of December 31, 2021, the Company does not expect any
material changes to the estimated amount of unrecognized tax benefits in the next twelve months. Federal and state income tax returns
for 2018 through 2021 are subject to examination by taxing authorities.
Net
Operating Losses and Tax Credit Carryforwards:
Summary of Operating Loss Carryforwards
Year of Expiration | |
| |
2022 | |
$ | - | |
2023 | |
| - | |
2024 | |
| - | |
2025 | |
| - | |
2026 | |
| - | |
Thereafter up through 2037 | |
| 1,237,784 | |
Indefinite carryforwards | |
| 2,742,661 | |
| |
$ | 3,980,445 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
10)
Reinsurance, Commitments and Contingencies
Reinsurance
The
Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $25,000 to $100,000 during the years
2021 and 2020. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The
Company has also assumed insurance from other companies having insurance in force amounting to approximately $129,000,000 and approximately
$96,000,000 at December 31, 2021 and 2020, respectively. See Financial Statement Schedule IV for information regarding premiums for direct
business, reinsurance assumed and reinsurance ceded.
Mortgage
Loan Loss Settlements
Future
loan losses can be extremely difficult to estimate. However, the Company believes that its reserve methodology and its current practice
of property preservation allow it to estimate potential losses on loans sold. The estimated liability for indemnification losses is included
in other liabilities and accrued expenses and, as of December 31, 2021 and 2020, the balances were $2,447,000 and $20,584,000, respectively.
The Company believes that the loan loss reserve as of December 31, 2021, represents its best estimate for adequate loss reserves on loans
sold.
Mortgage
Loan Loss Litigation
Settlement
Agreement and Mutual Release with Lehman Brothers Holdings Inc.
From
2004 to early 2008, SecurityNational Mortgage Company (“SecurityNational Mortgage”), a wholly owned subsidiary of the Company,
originated “limited documentation” or “reduced documentation” loans which were sold to certain affiliates of
Lehman Brothers Holdings Inc. (“Lehman Holdings”). Certain of these loans became the subject of disputes between SecurityNational
Mortgage and Lehman Holdings and certain Lehman Holdings affiliates. Lehman Holdings filed a Petition for Relief under Chapter 11 of
the United States Bankruptcy Code in 2008. In May of 2011, SecurityNational Mortgage filed a complaint in U.S. District Court against
certain Lehman Holdings affiliates. In June of 2011, Lehman Holdings filed a complaint in Federal District Court against SecurityNational
Mortgage, both the complaint filed in May 2011 and that filed in June 2011 were later resolved. In 2016, certain other pending loan disputes
between SecurityNational Mortgage and Lehman Holdings became the subject of an unsuccessful, non-binding alternate dispute resolution
mediation proceeding.
Thereafter,
in 2016, Lehman Holdings filed an adversary proceeding complaint against approximately 150 mortgage loan originators, including SecurityNational
Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York, which included seeking damages relating to the alleged obligations
of the defendants under indemnification provisions of alleged agreements, in amounts to be determined at trial, including interest, attorneys’
fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. The complaint was later amended with the latest
amended complaint filed against SecurityNational Mortgage on December 27, 2016, seeking damages to be determined at trial, including
interest, attorneys’ fees and costs. This complaint involved approximately 135 mortgage loans, there being millions of dollars
allegedly in dispute. These claims against SecurityNational Mortgage were asserted as a result of Lehman Holdings’ earlier settlements
with the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Corporation (“Freddie Mac”).
In
2018, Lehman Holdings filed a separate adversary proceeding complaint against SecurityNational Mortgage. This adversary proceeding allegedly
involved approximately 577 mortgage loans relative to private securitization trusts (“RMBS Loans”) and millions of dollars
in damages. Thereafter, Lehman Holdings made a filing that effectively reduced the number of RMBS Loans to 248. This proceeding was in
addition to the above-referenced proceeding involving the Fannie Mae and Freddie Mac mortgage loans. As with the above-referenced proceeding,
damages were sought including interest, costs, and attorneys’ fees.
SecurityNational Mortgage, as well as other defendants, have been involved in written discovery, and production of documents relative
to the cases, and the filing of motions. The deposition phase of the cases was yet to begin, as well as the later expert witness phase.
Those phases would require substantial expenditures of legal fees and costs.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
10)
Reinsurance, Commitments and Contingencies (Continued)
On
February 1, 2021, SecurityNational Mortgage executed a settlement agreement with Lehman Holdings in relation to these two adversary proceedings
wherein all mortgage loan related claims were resolved, thereby ending all liabilities asserted by Lehman Holdings and conclusively ending
all proceedings between SecurityNational Mortgage and Lehman Holdings. The full amount of SecurityNational Mortgage’s settlement
payment was accounted for in the Company’s loan loss reserve as of December 31, 2020 and was paid during the first quarter 2021.
Non-Cancelable
Leases
The
Company leases office space and equipment under various non-cancelable agreements. See Note 24 regarding leases.
Other
Contingencies and Commitments
The
Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition
and development. As of December 31, 2021, the Company’s commitments were approximately $329,903,000, for these loans of which $179,674,000
had been funded. The Company advances funds once the work has been completed and an independent inspection is made. The maximum loan
commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate
is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.
The
Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves
are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and
aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management
considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided
by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional
reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate
the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of
the balance sheet date.
The
Company is a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the
actions will have a material effect on the Company’s financial position or results of operations. Based on management’s assessment
and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above
claims in the consolidated financial statements.
The
Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings,
which, if adversely determined, would have a material adverse effect on its financial condition or results of operations.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
11)
Retirement Plans
The
Company and its subsidiaries had a noncontributory Employee Stock Ownership Plan (“ESOP”) for all eligible employees. Eligible
employees are primarily those with more than one year of service, who work in excess of 1,000 hours per year. Contributions, which may
be in cash or stock of the Company, are determined annually by the Board of Directors. The Company’s contributions are allocated
to eligible employees based on the ratio of each eligible employee’s compensation to total compensation for all eligible employees
during each year. The Company did not make any contributions for the years ended December 31, 2021 and 2020. On November 25, 2019, the
Company distributed a notice of intent to terminate the ESOP Plan to all current plan participants. The Company also filed Form 5310
application for determination for terminating plan, with the IRS on December 6, 2019. As of the 4th quarter of 2020, the Company
began to distribute the ESOP Plan assets to participants that had made a distribution election. The Company received approval of its
application from the IRS and distributed all the remaining ESOP Plan assets to the participants during 2021.
The
Company has three 401(k) savings plans covering all eligible employees which includes employer participation in accordance with the provisions
of Section 401(k) of the Internal Revenue Code. The plans allow participants to make pretax contributions up to a maximum of $19,500
and $19,500 for the years 2021 and 2020, respectively or the statutory limits. Beginning in January 2008, the Company elected to be a
“Safe Harbor” Plan for its matching 401(k) contributions. The Company matched 100% of up to 3% of an employee’s total
annual compensation and matched 50% of 4% to 5% of an employee’s annual compensation. The match was in Company stock. The Company’s
contribution for the years ended December 31, 2021 and 2020 was $2,820,315 and $1,690,568, respectively under the “Safe Harbor”
plan.
In
2001, the Company’s Board of Directors adopted a Non-Qualified Deferred Compensation Plan, and this plan was amended in 2005. Under
the terms of the Plan, the Company will provide deferred compensation for a select group of management or highly compensated employees,
within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The
Board has appointed a Committee of the Company to be the Plan Administrator and to determine the employees who are eligible to participate
in the plan. The employees who participate may elect to defer a portion of their compensation into the plan. The Company may contribute
into the plan at the discretion of the Company’s Board of Directors. The Company did not make any contributions for 2021 and 2020.
Effective
December 4, 2018, the Board members approved a motion to extend the Chief Executive Officer’s employment agreement, dated December
4, 2012, for an additional four-year term ending December 2022. In the event of disability, the Chief Executive Officer’s salary
would be continued for up to five years at 75% of its current level of compensation. In the event of a sale or merger of the Company
and the Chief Executive Officer is not retained in his current position, the Company would be obligated to continue paying the Chief
Executive Officer’s current compensation and benefits for seven years following the merger or sale. The agreement further provides
that the Chief Executive Officer is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement
(to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without
cause. These retirement benefits are to be paid for a period of twenty years in annual installments in the amount equal to 75% of his
then current level of compensation. In the event that the Chief Executive Officer dies prior to receiving all retirement benefits thereunder,
the remaining benefits are to be paid to his heirs. The Company expensed $900,000 and $900,000 during the years ended December 31, 2021
and 2020, respectively, to cover the present value of anticipated retirement benefits under the employment agreement. The liability accrued
was $7,556,363 and $6,656,363 as of December 31, 2021 and 2020, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
11)
Retirement Plans (Continued)
The
Company, through its wholly owned subsidiary, SecurityNational Mortgage, also has an employment agreement with its former Vice President
of Mortgage Operations and President of SecurityNational Mortgage, who retired from the Company on December 31, 2015. Under the terms
of the employment agreement, this individual is entitled to receive retirement benefits from the Company for a period of ten years in
an amount equal to 50% of his rate of compensation at the time of his retirement, which was $267,685 for the year ended December 31,
2015. Such retirement payments are paid monthly during the ten-year period. In the event that this individual dies prior to receiving
all of his retirement benefits under his employment agreement, the remaining benefits will be made to his heirs. The company paid $133,843
and $133,843 in retirement compensation to this individual during the years ended December 31, 2021 and 2020, respectively. The liability
accrued was $535,370 and $669,212 as of December 31, 2021 and 2020, respectively and is included in Other liabilities and accrued expenses
on the consolidated balance sheets.
12)
Capital Stock
The
Company has one class of preferred stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. The preferred stock
is non-voting.
The
Company has two classes of common stock with shares outstanding, Class A common shares and Class C common shares. Class C shares have
10 votes per share on all matters except for the election of one third of the directors who are elected solely by the Class A shares.
Class C shares are convertible into Class A shares at any time on a one to one ratio. The decrease in treasury stock was the result of
treasury stock being used to fund the company’s 401(k) and deferred compensation plans.
Stockholders
of both Class A and Class C common stock have received 5% stock dividends in the years 1990 through 2019, a 7.5% stock dividend in the
year 2020, and a 5% stock dividend in the year 2021, as authorized by the Company’s Board of Directors.
The
Company has Class B common stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting
stock except to any proposed amendment to the Articles of Incorporation which would affect Class B common stock.
The
following table summarizes the activity in shares of capital stock.
Summary
of Activities in Shares of Capital Stock
| |
Class A | | |
Class C | |
Outstanding shares at December 31, 2019 | |
| 16,107,779 | | |
| 2,500,887 | |
| |
| | | |
| | |
Exercise of stock options | |
| 68,970 | | |
| 130,820 | |
Stock dividends | |
| 405,210 | | |
| 61,720 | |
Conversion of Class C to Class A | |
| 13,824 | | |
| (13,824 | ) |
| |
| | | |
| | |
Outstanding shares at December 31, 2020 | |
| 16,595,783 | | |
| 2,679,603 | |
| |
| | | |
| | |
Exercise of stock options | |
| 160,282 | | |
| 104,656 | |
Stock dividends | |
| 837,410 | | |
| 131,553 | |
Conversion of Class C to Class A | |
| 49,247 | | |
| (49,247 | ) |
| |
| | | |
| | |
Outstanding shares at December 31, 2021 | |
| 17,642,722 | | |
| 2,866,565 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
12)
Capital Stock (Continued)
Earnings
per share amounts have been retroactively adjusted for the effect of annual stock dividends. In accordance with GAAP, the basic and diluted
earnings per share amounts were calculated as follows:
Schedule of Earnings Per Share, Basic and Diluted
| |
2021 | | |
2020 | |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Numerator: | |
| | |
| |
Net earnings | |
$ | 39,518,990 | | |
$ | 55,596,613 | |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Denominator for basic earnings per share-weighted-average shares | |
| 20,154,878 | | |
| 19,788,984 | |
| |
| | | |
| | |
Effect of dilutive securities | |
| | | |
| | |
Employee stock options | |
| 774,206 | | |
| 465,423 | |
Dilutive potential common shares | |
| 774,206 | | |
| 465,423 | |
| |
| | | |
| | |
Denominator for diluted earnings per share-adjusted weighted-average | |
| | | |
| | |
shares and assumed conversions | |
| 20,929,084 | | |
| 20,254,407 | |
| |
| | | |
| | |
Basic earnings per share | |
$ | 1.96 | | |
$ | 2.81 | |
Diluted earnings per share | |
$ | 1.89 | | |
$ | 2.74 | |
For
the years ended December 31, 2021 and 2020, there were 50,000 and -0- of anti-dilutive employee stock option shares, respectively, that
were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
13)
Stock Compensation Plans
The
Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options
issued of $118,384 and $358,878 has been recognized under these plans for the years ended December 31, 2021 and 2020, respectively, and
is included in personnel expenses on the consolidated statements of earnings. As of December 31, 2021, the total unrecognized compensation
expense related to the options issued was $875,735, which is expected to be recognized over the vesting period of one year.
The
fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates
the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility
of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for
the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.
The
following table summarizes the assumptions used in estimating the fair value of each option granted along with the weighted-average fair
value of the options granted.
Schedule of Assumptions Used
| |
| |
| | |
Assumptions | |
Grant Date | |
Plan | |
Weighted-Average Fair Value of Each Option | | |
Expected Dividend Yield (1) | | |
Underlying stock FMV | | |
Weighted-Average Volatility | | |
Weighted-Average Risk-Free Interest Rate | | |
Weighted-Average Expected Life (years) | |
December 3, 2021 | |
All Plans | |
$ | 2.99 | | |
| 5 | % | |
$ | 8.62 | | |
| 36.50 | % | |
| 1.15 | % | |
| 5.31 | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
March 27, 2020 | |
All Plans | |
$ | 0.65 | | |
| 5 | % | |
$ | 3.76 | | |
| 32.29 | % | |
| 1.64 | % | |
| 4.82 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
13)
Stock Compensation Plans (Continued)
Activity
of the stock option plans is summarized as follows:
Schedule of Activity of Stock Option Plans
| |
Number of Class A Shares | | |
Weighted Average Exercise Price | | |
Number of Class C Shares | | |
Weighted Average Exercise Price | |
Outstanding at January 1, 2020 | |
| 1,086,053 | | |
$ | 4.20 | | |
| 594,132 | | |
$ | 5.10 | |
Adjustment for the effect of stock dividends | |
| 27,968 | | |
| | | |
| 19,354 | | |
| | |
Granted | |
| 77,000 | | |
| | | |
| 180,000 | | |
| | |
Exercised | |
| (116,487 | ) | |
| | | |
| (130,820 | ) | |
| | |
Cancelled | |
| (1,671 | ) | |
| | | |
| - | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2020 | |
| 1,072,863 | | |
$ | 4.12 | | |
| 662,666 | | |
$ | 4.50 | |
Adjustment for the effect of stock dividends | |
| 47,594 | | |
| | | |
| 33,136 | | |
| | |
Granted | |
| 89,500 | | |
| | | |
| 230,000 | | |
| | |
Exercised | |
| (183,935 | ) | |
| | | |
| (104,656 | ) | |
| | |
Cancelled | |
| (1,671 | ) | |
| | | |
| - | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at December 31, 2021 | |
| 1,024,351 | | |
$ | 4.61 | | |
| 821,146 | | |
$ | 5.48 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at end of year | |
| 934,851 | | |
$ | 4.23 | | |
| 591,146 | | |
$ | 4.26 | |
| |
| | | |
| | | |
| | | |
| | |
Available options for future grant | |
| 232,376 | | |
| | | |
| 16,689 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average contractual term of options outstanding at December 31, 2021 | |
| 4.54 years | | |
| | | |
| 7.24 years | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average contractual term of options exercisable at December 31, 2021 | |
| 4.03 years | | |
| | | |
| 6.62 years | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Aggregated intrinsic value of options outstanding at December 31, 2021 (1) | |
$ | 4,700,708 | | |
| | | |
$ | 3,009,168 | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Aggregated intrinsic value of options exercisable at December 31, 2021 (1) | |
$ | 4,648,798 | | |
| | | |
$ | 2,918,768 | | |
| | |
(1) |
The Company used a stock price of $9.20 as of December 31,
2021 to derive intrinsic value. |
The
total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on
the exercise date) of stock options exercised during the years ended December 31, 2021 and 2020 was $1,153,417 and $663,901, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
14)
Statutory Financial Information and Dividend Limitations
The
Company’s insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed
or permitted by the insurance department of the applicable state of domicile. Prescribed statutory accounting practices include a variety
of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed.
The
states in which the Company’s life insurance subsidiaries are domiciled require the preparation of statutory-basis financial statements
in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable
insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy
acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial
assumptions, and valuing certain investments and establishing deferred taxes on a different basis.
Statutory
net income and capital and surplus of the Company’s insurance subsidiaries, determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities are as follows:
Schedule of Statutory Accounting Practices
| |
Statutory Net Income | | |
Statutory Capital and Surplus | |
| |
Years Ended December 31 | | |
December 31 | |
| |
2021 | | |
2020 | | |
2021 | | |
2020 | |
Amounts by insurance subsidiary: | |
| | | |
| | | |
| | | |
| | |
Security National Life Insurance Company | |
$ | 5,552,116 | | |
$ | 6,054,764 | | |
$ | 57,424,808 | | |
$ | 53,089,185 | |
Kilpatrick Life Insurance Company | |
| 1,312,718 | | |
| 1,574,128 | | |
| 15,566,231 | | |
| 15,177,996 | |
First Guaranty Insurance Company | |
| 624,550 | | |
| 790,221 | | |
| 7,734,357 | | |
| 7,045,644 | |
Memorial Insurance Company of America | |
| 37 | | |
| 55 | | |
| - | | |
| 1,088,034 | |
Southern Security Life Insurance Company, Inc. | |
| 275 | | |
| 183 | | |
| 1,578,225 | | |
| 1,581,647 | |
Trans-Western Life Insurance Company | |
| (2,089 | ) | |
| (1,527 | ) | |
| 508,547 | | |
| 510,636 | |
Total | |
$ | 7,487,607 | | |
$ | 8,417,824 | | |
$ | 82,812,168 | | |
$ | 78,493,142 | |
The
Utah, Louisiana, Mississippi and Texas Insurance Departments impose minimum risk-based capital (RBC) requirements that were developed
by the NAIC on insurance enterprises. The formulas for determining the RBC specify various factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio (the Ratio) of the
enterprise’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level, as defined by the NAIC.
Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective
action. The life insurance subsidiaries each have a ratio that is greater than the first level of regulatory action as of December 31,
2021.
Generally,
the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts of the life insurance
subsidiaries net assets, as determined in accordance with statutory accounting practices, that exceed minimum statutory capital requirements.
Additional requirements must be met depending on the state, and payments of such amounts as dividends are subject to approval by regulatory
authorities.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
14)
Statutory Financial Information and Dividend Limitations (Continued)
Under
the Utah Insurance Code, Security National Life Insurance Company is permitted to pay stockholder dividends, or otherwise make distributions,
to the Company subject to certain limitations. Security National Life Insurance Company must ensure that its surplus held for policyholders
is reasonable in relation to its outstanding liabilities and adequate to its financial needs after payment of any such dividend or distribution.
Furthermore, where any dividend or distribution, together with all other dividends and distributions made within the preceding 12 months,
exceeds the lesser of (i) 10% of its surplus held for policyholders as of the next preceding December 31; or (ii) its net gain from operations,
not including realized capital gains, for the 12-month period ending the next preceding December 31, such dividend or distribution constitutes
“extraordinary” under Utah law and Security National Life Insurance Company would be required to file notice of its intention
to declare such a dividend or make such a distribution with the Utah Commissioner and the Utah Commissioner must either approve the distribution
or dividend or not disapprove the dividend or distribution within 30 days’ of the notice filing. Based on Security National Life
Insurance Company’s surplus held for policyholders and net gain from operations as of December 31, 2021, the maximum aggregate
amount of dividends and distributions that it could pay or make in 2022 and which would not constitute an “extraordinary”
dividend or distribution under Utah law, and would therefore not require notice and approval or lack of disproval from the Utah Commissioner,
would be approximately $5,054,000.
Under
the Louisiana Insurance Code, First Guaranty Insurance Company and Kilpatrick Life Insurance Company are permitted to pay stockholder
dividends, or otherwise make distributions, to the Company subject to certain limitations. First Guaranty Insurance Company and Kilpatrick
Life Insurance Company must ensure that its surplus held for policyholders is reasonable in relation to its outstanding liabilities and
adequate to its financial needs after payment of any such dividend or distribution. Furthermore, where any dividend or distribution,
together with all other dividends and distributions made within the preceding 12 months, exceeds the lesser of (i) 10% of its surplus
held for policyholders as of the next preceding December 31; or (ii) its net gain from operations, not including realized capital gains,
for the 12-month period ending the next preceding December 31, such dividend or distribution constitutes “extraordinary”
under Louisiana law and First Guaranty Insurance Company and Kilpatrick Life Insurance Company would be required to file notice of its
intention to declare such a dividend or make such a distribution with the Louisiana Commissioner and the Louisiana Commissioner must
either approve the distribution or dividend or not disapprove the dividend or distribution within 30 days’ of the notice filing.
Based on First Guaranty Insurance Company’s and Kilpatrick Life Insurance Company’s surplus held for policyholders and net
gain from operations as of December 31, 2021, the maximum aggregate amount of dividends and distributions that it could pay or make in
2022 and which would not constitute an “extraordinary” dividend or distribution under Louisiana law, and would therefore
not require notice and approval or lack of disproval from the Louisiana Commissioner, would be approximately $605,000 for First Guaranty
Insurance Company and $950,000 for Kilpatrick Life Insurance Company.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
15)
Business Segment Information
Description
of Products and Services by Segment
The
Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance
segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent
agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and
mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services
at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net
investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from
the originations of residential mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds
are received from financial institutional investors.
Measurement
of Segment Profit or Loss and Segment Assets
The
accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment
revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.
Factors
Management Used to Identify the Enterprise’s Reportable Segments
The
Company’s reportable segments are business units that are managed separately due to the different products provided and the need
to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria
to determine when other business segments may need to be reported.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
15)
Business Segment Information (Continued)
Schedule of Revenues and Expenses by Reportable Segment
| |
Year Ended December 31, 2021 | |
| |
Life | | |
Cemetery/ | | |
| | |
Intercompany | | |
| |
| |
Insurance | | |
Mortuary | | |
Mortgage | | |
Eliminations | | |
Consolidated | |
Revenues: | |
| | |
| | |
| | |
| | |
| |
From external sources: | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue from customers | |
$ | 100,254,573 | | |
$ | 23,997,313 | | |
$ | 263,418,230 | | |
| - | | |
$ | 387,670,116 | |
Net investment income | |
| 56,091,725 | | |
| 1,653,940 | | |
| 519,018 | | |
| - | | |
| 58,264,683 | |
Gains on investments and other assets | |
| 4,554,528 | | |
| 1,511,965 | | |
| 198,641 | | |
| - | | |
| 6,265,134 | |
Other than temporary impairments | |
| (39,502 | ) | |
| - | | |
| - | | |
| - | | |
| (39,502 | ) |
Other revenues | |
| 2,152,531 | | |
| 100,255 | | |
| 16,282,325 | | |
| - | | |
| 18,535,111 | |
Intersegment revenues: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net investment income | |
| 7,569,875 | | |
| 314,001 | | |
| 599,115 | | |
| (8,482,991 | ) | |
| - | |
Total revenues | |
| 170,583,730 | | |
| 27,577,474 | | |
| 281,017,329 | | |
| (8,482,991 | ) | |
| 470,695,542 | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Death, surrenders and other policy benefits | |
| 67,218,455 | | |
| - | | |
| - | | |
| - | | |
| 67,218,455 | |
Increase in future policy benefits | |
| 26,263,312 | | |
| - | | |
| - | | |
| - | | |
| 26,263,312 | |
Amortization of deferred policy and pre-need acquisition costs and value of business acquired | |
| 15,611,374 | | |
| 531,596 | | |
| - | | |
| - | | |
| 16,142,970 | |
Selling, general and administrative expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commissions | |
| 3,514,498 | | |
| 1,917,899 | | |
| 112,854,072 | | |
| - | | |
| 118,286,469 | |
Personnel | |
| 25,009,096 | | |
| 6,850,617 | | |
| 68,880,448 | | |
| - | | |
| 100,740,161 | |
Advertising | |
| 1,160,640 | | |
| 570,924 | | |
| 4,894,854 | | |
| - | | |
| 6,626,418 | |
Rent and rent related | |
| 733,726 | | |
| 109,318 | | |
| 6,399,243 | | |
| - | | |
| 7,242,287 | |
Depreciation on property and equipment | |
| 806,543 | | |
| 479,005 | | |
| 650,065 | | |
| - | | |
| 1,935,613 | |
Provision for loan loss reserve | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Cost related to funding mortgage loans | |
| - | | |
| - | | |
| 10,541,570 | | |
| - | | |
| 10,541,570 | |
Intersegment | |
| 497,113 | | |
| 113,062 | | |
| 671,107 | | |
| (1,281,282 | ) | |
| - | |
Other | |
| 12,075,374 | | |
| 5,224,178 | | |
| 35,766,430 | | |
| - | | |
| 53,065,982 | |
Interest expense: | |
| | | |
| | | |
| | | |
| | | |
| | |
Intersegment | |
| 392,003 | | |
| 97,195 | | |
| 6,712,511 | | |
| (7,201,709 | ) | |
| - | |
Other | |
| 2,328,868 | | |
| 54,620 | | |
| 4,744,028 | | |
| - | | |
| 7,127,516 | |
Costs of goods and services sold-mortuaries and cemeteries | |
| - | | |
| 3,704,014 | | |
| - | | |
| - | | |
| 3,704,014 | |
Total benefits and expenses | |
| 155,611,002 | | |
| 19,652,428 | | |
| 252,114,328 | | |
| (8,482,991 | ) | |
| 418,894,767 | |
Earnings before income taxes | |
$ | | |
$ | 7,925,046 | | |
$ | | |
$ | | |
$ | |
Income tax benefit (expense) | |
| (2,943,715 | ) | |
| (1,975,787 | ) | |
| (7,362,283 | ) | |
| - | | |
| (12,281,785 | ) |
Net earnings | |
$ | 12,029,013 | | |
$ | 5,949,259 | | |
$ | 21,540,718 | | |
$ | - | | |
$ | 39,518,990 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Identifiable assets | |
$ | 1,236,406,557 | | |
$ | 73,432,116 | | |
$ | 328,600,841 | | |
$ | (96,099,992 | ) | |
$ | 1,542,339,522 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goodwill | |
$ | 2,765,570 | | |
$ | 2,488,213 | | |
$ | - | | |
$ | - | | |
$ | 5,253,783 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
15)
Business Segment Information (Continued)
| |
Year Ended December 31, 2020 | |
| |
Life | | |
Cemetery/ | | |
| | |
Intercompany | | |
| |
| |
Insurance | | |
Mortuary | | |
Mortgage | | |
Eliminations | | |
Consolidated | |
Revenues: | |
| | |
| | |
| | |
| | |
| |
From external sources: | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenue from customers | |
$ | 93,020,617 | | |
$ | 20,307,435 | | |
$ | 298,933,110 | | |
$ | - | | |
$ | 412,261,162 | |
Net investment income | |
| 54,811,486 | | |
| 807,695 | | |
| 710,622 | | |
| - | | |
| 56,329,803 | |
Gains on investments and other assets | |
| 2,088,541 | | |
| (162,652 | ) | |
| (39 | ) | |
| - | | |
| 1,925,850 | |
Other than temporary impairments | |
| (370,975 | ) | |
| - | | |
| - | | |
| - | | |
| (370,975 | ) |
Other revenues | |
| 1,491,585 | | |
| 94,349 | | |
| 9,731,548 | | |
| - | | |
| 11,317,482 | |
Intersegment revenues: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net investment income | |
| 8,022,503 | | |
| 351,505 | | |
| 716,240 | | |
| (9,090,248 | ) | |
| - | |
Total revenues | |
| 159,063,757 | | |
| 21,398,332 | | |
| 310,091,481 | | |
| (9,090,248 | ) | |
| 481,463,322 | |
Expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Death, surrenders and other policy benefits | |
| 62,841,360 | | |
| - | | |
| - | | |
| - | | |
| 62,841,360 | |
Increase in future policy benefits | |
| 23,568,650 | | |
| - | | |
| - | | |
| - | | |
| 23,568,650 | |
Amortization of deferred policy and pre-need acquisition costs and value of business acquired | |
| 13,618,204 | | |
| 689,221 | | |
| - | | |
| - | | |
| 14,307,425 | |
Selling, general and administrative expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Commissions | |
| 4,149,241 | | |
| 1,506,320 | | |
| 118,770,736 | | |
| - | | |
| 124,426,297 | |
Personnel | |
| 25,449,100 | | |
| 5,669,367 | | |
| 53,871,504 | | |
| - | | |
| 84,989,971 | |
Advertising | |
| 614,114 | | |
| 391,836 | | |
| 4,374,946 | | |
| - | | |
| 5,380,896 | |
Rent and rent related | |
| 861,602 | | |
| 89,253 | | |
| 5,922,706 | | |
| - | | |
| 6,873,561 | |
Depreciation on property and equipment | |
| 843,335 | | |
| 488,570 | | |
| 746,833 | | |
| - | | |
| 2,078,738 | |
Provision for loan loss reserve | |
| - | | |
| - | | |
| 16,506,030 | | |
| - | | |
| 16,506,030 | |
Cost related to funding mortgage loans | |
| - | | |
| - | | |
| 9,877,700 | | |
| - | | |
| 9,877,700 | |
Intersegment | |
| 621,161 | | |
| 142,999 | | |
| 580,976 | | |
| (1,345,136 | ) | |
| - | |
Other | |
| 11,808,818 | | |
| 4,417,805 | | |
| 31,104,479 | | |
| - | | |
| 47,331,102 | |
Interest expense: | |
| | | |
| | | |
| | | |
| | | |
| | |
Intersegment | |
| 410,024 | | |
| 152,175 | | |
| 7,182,913 | | |
| (7,745,112 | ) | |
| - | |
Other | |
| 2,354,760 | | |
| 198,968 | | |
| 6,025,082 | | |
| - | | |
| 8,578,810 | |
Costs of goods and services sold-mortuaries and cemeteries | |
| - | | |
| 3,252,655 | | |
| - | | |
| - | | |
| 3,252,655 | |
Total benefits and expenses | |
| 147,140,369 | | |
| 16,999,169 | | |
| 254,963,905 | | |
| (9,090,248 | ) | |
| 410,013,195 | |
Earnings before income taxes | |
$ | | |
$ | 4,399,163 | | |
$ | | |
$ | | |
$ | |
Income tax benefit (expense) | |
| (1,433,901 | ) | |
| (1,009,137 | ) | |
| (13,410,476 | ) | |
| - | | |
| (15,853,514 | ) |
Net earnings | |
$ | 10,489,487 | | |
$ | 3,390,026 | | |
$ | 41,717,100 | | |
$ | - | | |
$ | 55,596,613 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Identifiable assets | |
$ | 1,171,158,235 | | |
$ | 56,335,498 | | |
$ | 408,325,196 | | |
$ | (90,398,039 | ) | |
$ | 1,545,420,890 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goodwill | |
$ | 2,765,570 | | |
$ | 754,018 | | |
$ | - | | |
$ | - | | |
$ | 3,519,588 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
16)
Related Party Transactions
The
Company’s Board of Directors has a written procedure, which requires disclosure to the Board of any material interest or any affiliation
on the part of any of its officers, directors or employees that is in conflict or may be in conflict with the interests of the Company.
The Company and its Board of Directors is unaware of any related party transactions that require disclosure as of December 31, 2021.
17)
Fair Value of Financial Instruments
GAAP
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair
value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market
data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair
value measurements are classified under the following hierarchy:
Level
1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities
in an active market that the Company can access.
Level
2: Financial assets and financial liabilities whose values are based on the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets; or
c)
Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.
Level
3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the
assumptions that market participants would use in valuing the financial assets and financial liabilities.
The
Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.
The
following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial
instruments:
The
items shown under Level 1 and Level 2 are valued as follows:
Fixed
Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on quoted market prices, when
available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing
services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows
using a current market value applicable to the coupon rate, credit and maturity of the investments.
Equity
Securities: The fair values for equity securities are based on quoted market prices.
Loans
Held for Sale: The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices,
when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar
assets.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
Restricted
Assets: A portion of these assets include mutual funds, equity securities and fixed maturity securities available for sale that
have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage
loans. The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their
fair values due to their short-term nature.
Cemetery
Perpetual Care Trust Investments: A portion of these assets include equity securities and fixed maturity securities available
for sale that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying
amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values due to
their short-term nature
Call
and Put Options: The Company uses quoted market prices to value its call and put options.
Additionally,
there were no transfers between Level 1 and Level 2 in the fair value hierarchy.
The
items shown under Level 3 are valued as follows:
Loan
Commitments and Forward Sale Commitments: The Company’s mortgage segment enters into loan commitments with potential borrowers
and forward sale commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions.
A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period
of time, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and
are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings.
The
Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted
MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will
fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the loan
commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the
change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are
used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.
Impaired
Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the
unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial
properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparables
and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential
construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider
of building cost information to the real estate construction.
Impaired
Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement
cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use
of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties,
matching the income from the investment in rental properties with the funds required for future estimated policy claims.
It
should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider
of building cost information to the real estate construction industry. For the investment analysis, the Company used market data based
upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also
considers area comparable properties and property condition when determining fair value.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
In
addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces
the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.
Mortgage
Servicing Rights: The Company initially recognizes MSRs at their estimated fair values derived from the net cash flows associated
with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction.
The
following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by
their classification in the consolidated balance sheet at December 31, 2021.
Schedule of Fair Value Assets and Liabilities Measured on a Recurring Basis
| |
Total | | |
Quoted Prices in Active Markets for Identical Assets
(Level 1) | | |
Significant Observable Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | |
Assets accounted for at fair value on a
recurring basis | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities available for sale | |
$ | 259,287,603 | | |
$ | - | | |
$ | 257,264,255 | | |
$ | 2,023,348 | |
Equity securities | |
| 11,596,414 | | |
| 11,596,414 | | |
| - | | |
| - | |
Loans held for sale | |
| 302,776,827 | | |
| - | | |
| - | | |
| 302,776,827 | |
Restricted assets (1) | |
| 1,601,688 | | |
| - | | |
| 1,601,688 | | |
| - | |
Restricted assets (2) | |
| 3,603,822 | | |
| 3,603,822 | | |
| - | | |
| - | |
Cemetery perpetual care trust investments (1) | |
| 784,765 | | |
| - | | |
| 784,765 | | |
| - | |
Cemetery perpetual care trust investments (2) | |
| 3,302,480 | | |
| 3,302,480 | | |
| - | | |
| - | |
Derivatives - loan commitments (3) | |
| 8,563,410 | | |
| - | | |
| - | | |
| 8,563,410 | |
Total assets accounted for at fair value on a
recurring basis | |
$ | 591,517,009 | | |
$ | 18,502,716 | | |
$ | 259,650,708 | | |
$ | 313,363,585 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities accounted for at fair value on a
recurring basis | |
| | | |
| | | |
| | | |
| | |
Derivatives - call options (4) | |
$ | (50,936 | ) | |
$ | (50,936 | ) | |
$ | - | | |
$ | - | |
Derivatives - put options (4) | |
| (4,493 | ) | |
| (4,493 | ) | |
| - | | |
| - | |
Derivatives - loan commitments (4) | |
| (1,547,895 | ) | |
| - | | |
| - | | |
| (1,547,895 | ) |
Total liabilities accounted for at fair value
on a recurring basis | |
$ | (1,603,324 | ) | |
$ | (55,429 | ) | |
$ | - | | |
$ | (1,547,895 | ) |
(1) |
Fixed maturity securities available for sale |
(3) |
Included in other assets on the consolidated balance sheets |
(4) |
Included in other liabilities and accrued expenses on the consolidated
balance sheets |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
The
following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by
their classification in the consolidated balance sheet at December 31, 2020.
| |
Total | | |
Quoted Prices in Active Markets
for Identical Assets
(Level 1) | | |
Significant Observable Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | |
Assets accounted for at fair value on a
recurring basis | |
| | | |
| | | |
| | | |
| | |
Fixed maturity securities available for sale | |
$ | 294,656,679 | | |
$ | - | | |
$ | 292,455,504 | | |
$ | 2,201,175 | |
Equity securities | |
| 11,324,239 | | |
| 11,324,239 | | |
| - | | |
| - | |
Loans held for sale | |
| 422,772,418 | | |
| - | | |
| - | | |
| 422,772,418 | |
Restricted assets (1) | |
| 1,473,637 | | |
| - | | |
| 1,473,637 | | |
| - | |
Restricted assets (2) | |
| 2,515,778 | | |
| 2,515,778 | | |
| - | | |
| - | |
Cemetery perpetual care trust investments (1) | |
| 747,767 | | |
| - | | |
| 747,767 | | |
| - | |
Cemetery perpetual care trust investments (2) | |
| 2,062,303 | | |
| 2,062,303 | | |
| - | | |
| - | |
Derivatives - loan commitments (3) | |
| 12,592,672 | | |
| - | | |
| - | | |
| 12,592,672 | |
Total assets accounted for at fair value on a
recurring basis | |
$ | 748,145,493 | | |
$ | 15,902,320 | | |
$ | 294,676,908 | | |
$ | 437,566,265 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities accounted for at fair value on a
recurring basis | |
| | | |
| | | |
| | | |
| | |
Derivatives - call options (4) | |
$ | (43,097 | ) | |
$ | (43,097 | ) | |
$ | - | | |
$ | - | |
Derivatives - loan commitments (4) | |
| (2,464,062 | ) | |
| - | | |
| - | | |
| (2,464,062 | ) |
Total liabilities accounted for at fair value
on a recurring basis | |
$ | (2,507,159 | ) | |
$ | (43,097 | ) | |
$ | - | | |
$ | (2,464,062 | ) |
(1) |
Fixed maturity securities available for sale |
(3) |
Included in other assets on the consolidated balance sheets |
(4) |
Included in other liabilities and accrued expenses on the consolidated
balance sheets |
For
Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2021, the significant unobservable inputs
used in the fair value measurements were as follows:
Assets and Liabilities Measured at Fair Value on A Recurring Basis
| |
| | |
| |
Significant | |
Range of Inputs | | |
| |
| |
Fair Value at | | |
Valuation | |
Unobservable | |
Minimum | | |
Maximum | | |
Weighted | |
| |
12/31/2021 | | |
Technique | |
Input(s) | |
Value | | |
Value | | |
Average | |
Loans held for sale | |
$ | 302,776,827 | | |
Market approach | |
Investor contract pricing as a percentage of unpaid principal balance | |
| 95.0 | % | |
| 109.0 | % | |
| 103.0 | % |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Derivatives - loan commitments (net) | |
| 7,015,515 | | |
Market approach | |
Pull-through rate | |
| 66.0 | % | |
| 95.0 | % | |
| 81.0 | % |
| |
| | | |
| |
Initial-Value | |
| N/A | | |
| N/A | | |
| N/A | |
| |
| | | |
| |
Servicing | |
| 0 bps | | |
| 148 bps | | |
| 61 bps | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Fixed maturity securities available for sale | |
| 2,023,348 | | |
Broker quotes | |
Pricing quotes | |
$ | 96.87 | | |
$ | 111.11 | | |
$ | 106.73 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
For
Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2020, the significant unobservable inputs
used in the fair value measurements were as follows:
| |
| | |
| |
Significant | |
Range of Inputs | | |
| |
| |
Fair Value at | | |
Valuation | |
Unobservable | |
Minimum | | |
Maximum | | |
Weighted | |
| |
12/31/2020 | | |
Technique | |
Input(s) | |
Value | | |
Value | | |
Average | |
Loans held for sale | |
$ | 422,772,418 | | |
Market approach | |
Investor contract pricing as a percentage of unpaid principal balance | |
| 99.0 | % | |
| 110.0 | % | |
| 104.0 | % |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Derivatives - loan commitments (net) | |
| 10,128,610 | | |
Market approach | |
Pull-through rate | |
| 52.0 | % | |
| 92.0 | % | |
| 81.0 | % |
| |
| | | |
| |
Initial-Value | |
| N/A | | |
| N/A | | |
| N/A | |
| |
| | | |
| |
Servicing | |
| 0 bps | | |
| 184 bps | | |
| 58 bps | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Fixed maturity securities available for sale | |
| 2,201,175 | | |
Broker quotes | |
Pricing quotes | |
$ | 90.83 | | |
$ | 119.33 | | |
$ | 113.47 | |
Following
is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
Schedule of Changes in the Consolidated Balance Sheet Line Items Measured Using Level 3 Inputs
| |
Net Derivatives
Loan
Commitments | | |
Loans Held for
Sale | | |
Fixed Maturity Securities
Available for Sale | |
| |
| | |
| | |
| |
Balance - December 31, 2020 | |
$ | 10,128,610 | | |
$ | 422,772,418 | | |
$ | 2,201,175 | |
Originations/purchases | |
| - | | |
| 5,611,189,587 | | |
| - | |
Sales, maturities and paydowns | |
| - | | |
| (5,900,076,766 | ) | |
| (45,700 | ) |
Transfer to mortgage loans held for investment | |
| - | | |
| (201,951 | ) | |
| - | |
Total gains (losses): | |
| | | |
| | | |
| | |
Included in earnings | |
| (3,113,095 | )(1) | |
| 169,093,539 | (1) | |
| 3,674 | (2) |
Included in other comprehensive income | |
| - | | |
| - | | |
| (135,801 | ) |
| |
| | | |
| | | |
| | |
Balance - December 31, 2021 | |
$ | 7,015,515 | | |
$ | 302,776,827 | | |
$ | 2,023,348 | |
(1) |
As a component of mortgage fee income on the consolidated statements
of earnings |
(2) |
As a component of net investment income on the consolidated
statements of earnings |
Following
is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
| |
Net Derivatives
Loan
Commitments | | |
Loans Held for
Sale | | |
Fixed Maturity Securities
Available for Sale | |
| |
| | |
| | |
| |
Balance - December 31, 2019 | |
$ | 2,491,233 | | |
$ | 213,457,632 | | |
$ | 3,216,382 | |
Originations/purchases | |
| - | | |
| 5,627,013,749 | | |
| - | |
Sales, maturities and paydowns | |
| - | | |
| (5,600,045,285 | ) | |
| (1,042,400 | ) |
Transfer to mortgage loans held for investment | |
| - | | |
| (16,960,549 | ) | |
| - | |
Total gains (losses): | |
| | | |
| | | |
| | |
Included in earnings | |
| 7,637,377 | (1) | |
| 199,306,871 | (1) | |
| 3,408 | (2) |
Included in other comprehensive income | |
| - | | |
| - | | |
| 23,785 | |
| |
| | | |
| | | |
| | |
Balance - December 31, 2020 | |
$ | 10,128,610 | | |
$ | 422,772,418 | | |
$ | 2,201,175 | |
(1) |
As a component of mortgage fee income on the consolidated statements
of earnings |
(2) |
As a component of net investment income on the consolidated
statements of earnings |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
The
following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis
by their classification in the consolidated balance sheet at December 31, 2021.
Schedule of Fair Value Assets Measured on a Nonrecurring Basis
| |
Total | | |
Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | | |
Significant Observable
Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | |
Assets accounted for at fair value on a nonrecurring basis | |
| | | |
| | | |
| | | |
| | |
Impaired mortgage loans held for investment | |
$ | 851,903 | | |
$ | - | | |
$ | - | | |
$ | 851,903 | |
Impaired real estate held for sale | |
| 2,000,000 | | |
| - | | |
| - | | |
| 2,000,000 | |
Total assets accounted for at fair value on a nonrecurring basis | |
$ | 2,851,903 | | |
$ | - | | |
$ | - | | |
$ | 2,851,903 | |
The
following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis
by their classification in the consolidated balance sheet at December 31, 2020.
| |
Total | | |
Quoted Prices in Active Markets
for Identical
Assets
(Level 1) | | |
Significant Observable
Inputs
(Level 2) | | |
Significant Unobservable Inputs
(Level 3) | |
Assets accounted for at fair value on a nonrecurring basis | |
| | | |
| | | |
| | | |
| | |
Impaired mortgage loans held for investment | |
$ | 1,297,356 | | |
$ | - | | |
$ | - | | |
$ | 1,297,356 | |
Impaired real estate held for sale | |
| 4,249,000 | | |
| - | | |
| - | | |
| 4,249,000 | |
Total assets accounted for at fair value on a nonrecurring basis | |
$ | 5,546,356 | | |
$ | - | | |
$ | - | | |
$ | 5,546,356 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
Fair
Value of Financial Instruments Carried at Other Than Fair Value
ASC
825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
Management
uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations
in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not
necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2021 and 2020.
The
carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy,
are summarized as follows as of December 31, 2021:
Schedule of Financial Instruments Carried at Other Than Fair Value
| |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total Estimated Fair Value | |
Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage loans held for investment | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 51,396,172 | | |
$ | - | | |
$ | - | | |
$ | 55,159,167 | | |
$ | 55,159,167 | |
Residential construction | |
| 174,691,408 | | |
| - | | |
| - | | |
| 174,691,408 | | |
| 174,691,408 | |
Commercial | |
| 51,218,466 | | |
| - | | |
| - | | |
| 51,008,709 | | |
| 51,008,709 | |
Mortgage loans held for investment, net | |
$ | 277,306,046 | | |
$ | - | | |
$ | - | | |
$ | 280,859,284 | | |
$ | 280,859,284 | |
Policy loans | |
| 13,478,214 | | |
| - | | |
| - | | |
| 13,478,214 | | |
| 13,478,214 | |
Insurance assignments, net (1) | |
| 46,946,590 | | |
| - | | |
| - | | |
| 46,946,590 | | |
| 46,946,590 | |
Restricted assets (2) | |
| 2,732,320 | | |
| - | | |
| - | | |
| 2,732,320 | | |
| 2,732,320 | |
Cemetery perpetual care trust investments (2) | |
| 1,823,533 | | |
| - | | |
| - | | |
| 1,823,533 | | |
| 1,823,533 | |
Mortgage servicing rights, net | |
| 53,060,455 | | |
| - | | |
| - | | |
| 68,811,809 | | |
| 68,811,809 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Bank and other loans payable | |
$ | (251,286,927 | ) | |
$ | - | | |
$ | - | | |
$ | (251,286,927 | ) | |
$ | (251,286,927 | ) |
Policyholder account balances (3) | |
| (42,939,055 | ) | |
| - | | |
| - | | |
| (35,855,934 | ) | |
| (35,855,934 | ) |
Future policy benefits - annuities (3) | |
| (107,992,830 | ) | |
| - | | |
| - | | |
| (116,215,717 | ) | |
| (116,215,717 | ) |
(1) |
Included in other investments and policy loans on the consolidated
balance sheets |
(2) |
Mortgage loans held for investment |
(3) |
Included in future policy benefits and unpaid claims on the
consolidated balance sheets |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
The
carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy,
are summarized as follows as of December 31, 2020:
| |
Carrying Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total Estimated Fair Value | |
Assets | |
| | | |
| | | |
| | | |
| | | |
| | |
Mortgage loans held for investment | |
| | | |
| | | |
| | | |
| | | |
| | |
Residential | |
$ | 92,757,613 | | |
$ | - | | |
$ | - | | |
$ | 100,384,283 | | |
$ | 100,384,283 | |
Residential construction | |
| 110,849,864 | | |
| - | | |
| - | | |
| 110,849,864 | | |
| 110,849,864 | |
Commercial | |
| 45,736,459 | | |
| - | | |
| - | | |
| 45,259,425 | | |
| 45,259,425 | |
Mortgage loans held for investment, net | |
$ | 249,343,936 | | |
$ | - | | |
$ | - | | |
$ | 256,493,572 | | |
$ | 256,493,572 | |
Policy loans | |
| 14,171,589 | | |
| - | | |
| - | | |
| 14,171,589 | | |
| 14,171,589 | |
Insurance assignments, net (1) | |
| 51,585,656 | | |
| - | | |
| - | | |
| 51,585,656 | | |
| 51,585,656 | |
Restricted assets (2) | |
| 3,317,877 | | |
| - | | |
| - | | |
| 3,317,877 | | |
| 3,317,877 | |
Cemetery perpetual care trust investments (2) | |
| 1,468,600 | | |
| - | | |
| - | | |
| 1,468,600 | | |
| 1,468,600 | |
Mortgage servicing rights, net | |
| 35,210,516 | | |
| - | | |
| - | | |
| 38,702,358 | | |
| 38,702,358 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
Bank and other loans payable | |
$ | (297,824,368 | ) | |
$ | - | | |
$ | - | | |
$ | (297,824,368 | ) | |
$ | (297,824,368 | ) |
Policyholder account balances (3) | |
| (44,026,809 | ) | |
| - | | |
| - | | |
| (42,220,725 | ) | |
| (42,220,725 | ) |
Future policy benefits - annuities (3) | |
| (106,522,113 | ) | |
| - | | |
| - | | |
| (112,354,186 | ) | |
| (112,354,186 | ) |
(1) |
Included in other investments and policy loans on the consolidated
balance sheets |
(2) |
Mortgage loans held for investment |
(3) |
Included in future policy benefits and unpaid claims on the
consolidated balance sheets |
The
methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized
as follows:
Mortgage
Loans Held for Investment: The estimated fair value of the Company’s mortgage loans held for investment is determined using
various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial.
When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing
are evaluated individually for impairment.
Residential
— The estimated fair value of mortgage loans is determined through a combination of discounted cash flows (estimating expected
future cash flows of payments and discounting them using current interest rates from single family mortgages) and considering pricing
of similar loans that were sold recently.
Residential
Construction — These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying
value.
Commercial
— The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current
interest rates for commercial mortgages.
Policy
Loans: The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate
their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.
Insurance
Assignments, Net: These investments are short in maturity. Accordingly, the carrying amounts reported in the accompanying consolidated
balance sheet for these financial instruments approximate their fair values.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
17)
Fair Value of Financial Instruments (Continued)
Bank
and Other Loans Payable: The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments
approximate their fair values due to their relatively short-term maturities and variable interest rates.
Policyholder
Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products
are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits
and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest
crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance
contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts
other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts
are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure
to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
18)
Accumulated Other Comprehensive Income
The
following summarizes the changes in accumulated other comprehensive income:
Schedule of Changes in accumulated other comprehensive income
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
| |
| | |
| |
Unrealized gains on fixed maturity securities available for sale | |
$ | (7,323,241 | ) | |
$ | 12,016,464 | |
Amounts reclassified into net earnings | |
| 805,510 | | |
| (2,772 | ) |
Net unrealized gains before taxes | |
| (6,517,731 | ) | |
| 12,013,692 | |
Tax expense | |
| 1,368,721 | | |
| (2,522,876 | ) |
Net | |
| (5,149,010 | ) | |
| 9,490,816 | |
Unrealized gains on restricted assets (1) | |
| (23,250 | ) | |
| 41,225 | |
Tax expense | |
| 5,792 | | |
| (10,269 | ) |
Net | |
| (17,458 | ) | |
| 30,956 | |
Unrealized gains on cemetery perpetual care trust investments (1) | |
| (11,114 | ) | |
| (6,817 | ) |
Tax expense | |
| 2,769 | | |
| 1,698 | |
Net | |
| (8,345 | ) | |
| (5,119 | ) |
Unrealized gains for foreign currency translations adjustments | |
| 2,835 | | |
| (46 | ) |
Tax expense | |
| (707 | ) | |
| 12 | |
Net | |
| 2,128 | | |
| (34 | ) |
Other comprehensive income changes | |
$ | (5,172,685 | ) | |
$ | 9,516,619 | |
(1) |
Fixed maturity securities available for sale |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
18)
Accumulated Other Comprehensive Income (Continued)
The
following is the accumulated balances of other comprehensive income as of December 31, 2021:
Schedule of Accumulated Balances of Other Comprehensive Income
| |
Beginning
Balance
December 31,
2020 | | |
Change for
the period | | |
Ending
Balance
December 31,
2021 | |
Unrealized gains (losses) on fixed maturity securities available for sale | |
$ | 23,170,275 | | |
$ | (5,149,010 | ) | |
$ | 18,021,265 | |
Unrealized gains (losses) on restricted assets (1) | |
| 57,650 | | |
| (17,458 | ) | |
| 40,192 | |
Unrealized gains (losses) on cemetery perpetual care trust investments (1) | |
| 17,336 | | |
| (8,345 | ) | |
| 8,991 | |
Foreign currency translation adjustments | |
| (2,128 | ) | |
| 2,128 | | |
| - | |
Other comprehensive income | |
$ | 23,243,133 | | |
$ | (5,172,685 | ) | |
$ | 18,070,448 | |
(1) |
Fixed maturity securities available for sale |
The
following is the accumulated balances of other comprehensive income as of December 31, 2020:
| |
Beginning
Balance
December 31,
2019 | | |
Change for
the period | | |
Ending
Balance
December 31,
2020 | |
Unrealized gains on fixed maturity securities available for sale | |
$ | 13,679,459 | | |
$ | 9,490,816 | | |
$ | 23,170,275 | |
Unrealized gains on restricted assets (1) | |
| 26,694 | | |
| 30,956 | | |
| 57,650 | |
Unrealized gains (losses) on cemetery perpetual care trust investments (1) | |
| 22,455 | | |
| (5,119 | ) | |
| 17,336 | |
Foreign currency translation adjustments | |
| (2,094 | ) | |
| (34 | ) | |
| (2,128 | ) |
Other comprehensive income | |
$ | 13,726,514 | | |
$ | 9,516,619 | | |
$ | 23,243,133 | |
(1) |
Fixed maturity securities available for sale |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
19)
Derivative Instruments
The
following table shows the fair value and notional amounts of derivative instruments.
Schedule of Derivative Assets at Fair Value
| |
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
Balance Sheet Location | |
Notional Amount | | |
Asset Fair Value | | |
Liability Fair Value | | |
Notional Amount | | |
Asset Fair Value | | |
Liability Fair
Value | |
Derivatives not designated as hedging instruments: | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loan commitments | |
Other assets and Other liabilities | |
$ | 862,568,967 | | |
$ | 8,563,410 | | |
$ | 1,547,895 | | |
$ | 659,245,038 | | |
$ | 12,592,672 | | |
$ | 2,464,062 | |
Call options | |
Other liabilities | |
| 982,500 | | |
| — | | |
| 50,936 | | |
| 1,873,200 | | |
| — | | |
| 43,097 | |
Put options | |
Other liabilities | |
| 362,900 | | |
| — | | |
| 4,493 | | |
| — | | |
| — | | |
| — | |
Total | |
| |
$ | 863,914,367 | | |
$ | 8,563,410 | | |
$ | 1,603,324 | | |
$ | 661,118,238 | | |
$ | 12,592,672 | | |
$ | 2,507,159 | |
The
following table presents the gains (losses) on derivatives. There were no gains or losses reclassified from accumulated other comprehensive
income into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective
testing.
Schedule of Gains and Losses on Derivatives
| |
| |
Years ended December 31 | |
Derivative | |
Classification | |
2021 | | |
2020 | |
Loan commitments | |
Mortgage fee income | |
$ | (3,113,095 | ) | |
$ | 7,637,377 | |
| |
| |
| | | |
| | |
Call and put options | |
Gains on investments and other assets | |
$ | 160,410 | | |
$ | 272,758 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
20)
Acquisitions
Rivera
Funerals, Cremations and Memorial Gardens
On
December 21, 2021, the Company, through its wholly-owned subsidiary, Memorial Estates Inc., completed a business combination transaction
with Rivera Funerals, Cremations and Memorial Gardens. The mortuaries and cemetery are located in New Mexico.
Under
the terms of the transaction, as set forth in the Asset Purchase Agreement, dated December 21, 2021, Memorial Estates Inc. paid a net
purchase price of $10,693,395 for the business and assets of Rivera Funerals, Cremations and Memorial Gardens, subject to holdback amounts
held by Memorial Estates, Inc. in the total amount of $1,120,000. Pursuant to the Asset Purchase Agreement, Memorial Estates, Inc. is
to use $70,000 of the holdback amount to pay, perform and discharge when due, trade accounts payable of Rivera Funerals, Cremations and
Memorial Gardens to third parties that remained unpaid. Unapplied portions of the remaining $1,050,000 holdback amount are to be released
and paid by Memorial Estates Inc. in annual payments of up to $105,000 each, beginning on the first anniversary date of the closing date
and continuing thereafter on the anniversary dates of the closing date.
The
estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:
Schedule
of Estimated Fair Values of Assets Acquired and Liabilities Assumed
| |
| | |
Restricted assets (1) | |
$ | 618,006 | |
Property and equipment (2) | |
| 6,255,836 | |
Cemetery land and improvements | |
| 658,280 | |
Goodwill | |
| 1,338,763 | |
Other (3) | |
| 2,440,516 | |
Total assets acquired | |
| 11,311,401 | |
| |
| | |
Cemetery perpetual care obligation | |
| (618,006 | ) |
Other liabilities - holdback | |
| (1,120,000 | ) |
Total liabilities assumed | |
| (1,738,006 | ) |
Fair value of net assets acquired/consideration paid | |
$ | 9,573,395 | |
(1) | | Includes $39,000
of cash and $579,006 of fixed maturity securities, available for sale, at estimated fair value which is a Level 2 asset in the fair value
hierarchy |
| | |
(2) | | At
estimated fair value which is a Level 3 asset in the fair value hierarchy |
| | |
(3) | | Including $2,310,000
of intangible assets |
Rivera
Funerals, Cremations and Memorial Gardens revenues and net earnings since the date of acquisition for the year ended December 31, 2021
were $137,386 and $14,892, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
20)
Acquisitions (Continued)
Holbrook
Mortuary
On
December 28, 2021, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed a business combination transaction
with Holbrook Mortuary located in Salt Lake City, Utah.
Under
the terms of the transaction, as set forth in the Asset Purchase Agreement, dated December 28, 2021, Memorial Mortuary Inc. paid a net
purchase price of $3,051,747 for the business and assets of Holbrook Mortuary.
The
estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:
Estimated Fair Values of Assets Acquired and Liabilities Assumed
| |
| | |
Property and equipment (1) | |
$ | 2,641,210 | |
Goodwill | |
| 395,432 | |
Other | |
| 15,105 | |
Total assets acquired | |
| 3,051,747 | |
| |
| | |
Fair value of net assets acquired/consideration paid | |
$ | 3,051,747 | |
(1) |
|
At estimated fair value which is a Level 3 asset in
the fair value hierarchy |
Holbrook
Mortuary’s revenues and net loss since the date of acquisition for the year ended December 31, 2021 were $-0- and $(98,531), respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
21)
Mortgage Servicing Rights
The
Company reports MSRs pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.
The
following table presents the MSR activity.
Schedule of Mortgage Servicing Rights
| |
2021 | | |
2020 | |
| |
December 31 | |
| |
2021 | | |
2020 | |
Amortized cost: | |
| | | |
| | |
Balance before valuation allowance at beginning of year | |
$ | 35,210,516 | | |
$ | 17,155,529 | |
MSR additions resulting from loan sales | |
| 32,701,819 | | |
| 29,896,465 | |
Amortization (1) | |
| (14,851,880 | ) | |
| (11,841,478 | ) |
Application of valuation allowance to write down MSRs with other than temporary impairment | |
| - | | |
| - | |
Balance before valuation allowance at year end | |
$ | 53,060,455 | | |
$ | 35,210,516 | |
| |
| | | |
| | |
Valuation allowance for impairment of MSRs: | |
| | | |
| | |
Balance at beginning of year | |
$ | - | | |
$ | - | |
Additions | |
| - | | |
| - | |
Application of valuation allowance to write down MSRs with other than temporary impairment | |
| - | | |
| - | |
Balance at year end | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
Mortgage servicing rights, net | |
$ | 53,060,455 | | |
$ | 35,210,516 | |
| |
| | | |
| | |
Estimated fair value of MSRs at year end | |
$ | 68,811,809 | | |
$ | 38,702,358 | |
(1) | | Included in other
expenses on the consolidated statements of earnings |
The
following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection
was developed using the assumptions made by management in its December 31, 2021 valuation of MSRs. The assumptions underlying the following
estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization
levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management.
Schedule of Finite-Lived Intangible Assets, Future Amortization Expense, Mortgage Servicing Rights
| |
Estimated MSR Amortization | |
2022 | |
$ | 7,341,097 | |
2023 | |
| 6,020,240 | |
2024 | |
| 5,263,053 | |
2025 | |
| 4,583,231 | |
2026 | |
| 4,008,838 | |
Thereafter | |
| 25,843,996 | |
Total | |
$ | 53,060,455 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
21)
Mortgage Servicing Rights (Continued)
The
Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the consolidated
statements of earnings.
Schedule of Other Revenues
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Contractual servicing fees | |
$ | 15,471,307 | | |
$ | 8,940,612 | |
Late fees | |
| 321,337 | | |
| 305,962 | |
Total | |
$ | 15,792,644 | | |
$ | 9,246,574 | |
The
following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio.
Summary of Unpaid Principal Balances of the Servicing Portfolio
| |
December 31 | |
| |
2021 | | |
2020 | |
Servicing UPB | |
$ | 7,060,536,350 | | |
$ | 5,070,287,864 | |
The
following key assumptions were used in determining MSR value.
Assumptions Used in Determining MSR Value
| |
Prepayment
Speeds | | |
Average
Life(Years) | | |
Discount
Rate | |
December 31, 2021 | |
| 11.60 | | |
| 6.64 | | |
| 9.50 | |
December 31, 2020 | |
| 15.60 | | |
| 5.30 | | |
| 9.50 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
22)
Future Policy Benefits and Unpaid Claims
The
Company reports future policy benefits and unpaid claims pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated
Financial Statements.
The
following table provides information regarding future policy benefits and unpaid claims and the related receivable from reinsurers.
Schedule of Liability for Future Policy Benefits, by Product Segment
| |
December 31 | |
| |
2021 | | |
2020 | |
Life | |
$ | 698,366,477 | | |
$ | 674,230,463 | |
Annuities | |
| 107,992,830 | | |
| 109,522,112 | |
Policyholder account balances | |
| 42,939,055 | | |
| 44,026,809 | |
Accident and health | |
| 629,302 | | |
| 651,140 | |
Other policyholder funds | |
| 4,352,217 | | |
| 4,354,746 | |
Reported but unpaid claims | |
| 4,887,934 | | |
| 8,689,723 | |
Incurred but not reported claims | |
| 4,106,878 | | |
| 3,315,094 | |
| |
| | | |
| | |
Gross future policy benefits and unpaid claims | |
$ | 863,274,693 | | |
$ | 844,790,087 | |
| |
| | | |
| | |
Receivable from reinsurers | |
| | | |
| | |
| |
| | | |
| | |
Life | |
| 10,482,428 | | |
| 10,841,567 | |
Annuities | |
| 4,082,877 | | |
| 4,047,301 | |
Accident and health | |
| 88,474 | | |
| 90,231 | |
Reported but unpaid claims | |
| 177,829 | | |
| 571,057 | |
Incurred but not reported claims | |
| 19,000 | | |
| 19,000 | |
| |
| | | |
| | |
Total receivable from reinsurers | |
| 14,850,608 | | |
| 15,569,156 | |
| |
| | | |
| | |
Net future policy benefits and unpaid claims | |
$ | 848,424,085 | | |
$ | 829,220,931 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
23)
Revenues from Contracts with Customers
The
Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.
Contracts
with Customers
Information
about Performance Obligations and Contract Balances
The
Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations.
Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled. The total contract liability
for future obligations is included in deferred pre-need cemetery and mortuary contract revenues on the consolidated balance sheets and,
as of December 31, 2021 and 2020, the balances were $14,508,022 and $13,080,179, respectively.
The
Company’s three types of future obligations are as follows:
Pre-need
Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred and the funds are placed in trust until
the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions
are recognized. As of December 31, 2021 and 2020, the balances were $13,722,348 and $12,545,753, respectively.
At-need
Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer
such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is
deferred until the at-need merchandise is received. As of December 31, 2021 and 2020, the balances were $785,674 and $534,426, respectively.
Deferred revenue for at-need specialty revenue is not placed in trust.
Deferred
Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received
from the customer through regular monthly payments. As of December 31, 2021 and 2020, the balances were $-0- and $-0-, respectively.
Deferred pre-need land revenue is not placed in trust.
Complete
payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time
the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good
or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to
another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services
does not fulfill an obligation and revenue remains deferred.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
23)
Revenues from Contracts with Customers (Continued)
The
opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows:
Schedule of Opening and Closing Balances of Receivables, Contract Assets and Contract Liabilities
| |
Contract Balances | |
| |
Receivables (1) | | |
Contract Asset | | |
Contract Liability | |
Opening (1/1/2021) | |
$ | 4,119,988 | | |
$ | - | | |
$ | 13,080,179 | |
Closing (12/31/2021) | |
| 5,298,636 | | |
| - | | |
| 14,508,022 | |
Increase/(decrease) | |
| 1,178,648 | | |
| - | | |
| 1,427,843 | |
| |
Contract Balances | |
| |
Receivables (1) | | |
Contract Asset | | |
Contract Liability | |
Opening (1/1/2020) | |
$ | 2,778,879 | | |
$ | - | | |
$ | 12,607,978 | |
Closing (12/31/2020) | |
| 4,119,988 | | |
| - | | |
| 13,080,179 | |
Increase/(decrease) | |
| 1,341,109 | | |
| - | | |
| 472,201 | |
(1) | | Included in Receivables,
net on the consolidated balance sheets |
The
following table disaggregates the opening and closing balances of the Company’s contract balances.
Schedule of Opening and Closing Balances of the Assets and Liabilities
| |
Contract Balances | |
| |
Contract Asset | | |
Contract Liability | |
Pre-need merchandise and services | |
$ | - | | |
$ | 12,545,753 | |
At-need specialty merchandise | |
| - | | |
| 534,426 | |
Pre-need land sales | |
| - | | |
| - | |
Opening (1/1/2021) | |
$ | - | | |
$ | 13,080,179 | |
| |
| | | |
| | |
Pre-need merchandise and services | |
$ | - | | |
$ | 13,722,348 | |
At-need specialty merchandise | |
| - | | |
| 785,674 | |
Pre-need land sales | |
| - | | |
| - | |
Closing (12/31/2021) | |
$ | - | | |
$ | 14,508,022 | |
| |
Contract Balances | |
| |
Contract Asset | | |
Contract Liability | |
Pre-need merchandise and services | |
$ | - | | |
$ | 12,325,437 | |
At-need specialty merchandise | |
| - | | |
| 282,541 | |
Pre-need land sales | |
| - | | |
| - | |
Opening (1/1/2020) | |
$ | - | | |
$ | 12,607,978 | |
| |
| | | |
| | |
Pre-need merchandise and services | |
$ | - | | |
$ | 12,545,753 | |
At-need specialty merchandise | |
| - | | |
| 534,426 | |
Pre-need land sales | |
| - | | |
| - | |
Closing (12/31/2020) | |
$ | - | | |
$ | 13,080,179 | |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
23)
Revenues from Contracts with Customers (Continued)
The
amount of revenue recognized for the years ended December 31, 2021 and 2020 that was included in the opening contract liability balance
was $4,528,646 and $4,359,709, respectively.
The
difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results
from the timing difference between the Company’s performance and the customer’s payment.
Disaggregation
of Revenue
The
following table disaggregates revenue for the Company’s cemetery and mortuary contracts.
Revenues of the Cemetery and Mortuary Contracts
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Major goods/service lines | |
| | | |
| | |
At-need | |
$ | 16,220,541 | | |
$ | 15,212,822 | |
Pre-need | |
| 7,776,772 | | |
| 5,094,613 | |
| |
$ | 23,997,313 | | |
$ | 20,307,435 | |
| |
| | | |
| | |
Timing of Revenue Recognition | |
| | | |
| | |
Goods transferred at a point in time | |
$ | 16,793,439 | | |
$ | 13,438,592 | |
Services transferred at a point in time | |
| 7,203,874 | | |
| 6,868,843 | |
| |
$ | 23,997,313 | | |
$ | 20,307,435 | |
Significant
Judgments and Estimates
The
Company’s cemetery and mortuary segment recognizes revenue on future performance obligations when goods are delivered and when
services are performed and is not determined by the terms or payments of the contract as long as any good or service is paid in full
prior to delivery. Prices are determined based on the market at the time a contract is created. Goods or services are not partially completed.
There are no significant judgements, estimations or allocation methods when revenue should be recognized.
Practical
Expedients
The
Company has not elected to use any of the practical expedients under ASC 606.
Contract
Costs
The
Company’s cemetery and mortuary segment defers certain costs associated with obtaining a contract on future obligations.
Pre-need
Merchandise and Service Revenue: Pre-need merchandise and service revenues are deferred until the goods or services are delivered.
Recognition can be years until the obligations are satisfied. Commissions and other costs are capitalized and deferred until the obligation
is satisfied. Other costs include rent on pre-need offices and training rooms, and call center costs. Costs that are allocated based
on a percentage include family service advisor compensation, bonuses, utilities and supplies that are all used to procure a pre-need
sale.
At-need
Specialty Merchandise Revenue: At-need specialty merchandise is ordered from a third-party manufacturer. Generally, at-need specialty
merchandise is ordered and received within 90 days of order. These orders are also short-term in nature and are deferred until the product
is received from the manufacturer and the obligation is satisfied.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
23)
Revenues from Contracts with Customers (Continued)
Deferred
Pre-need Land Revenue: Revenue is recognized on pre-need land sales when the customer has paid at least 10% toward the land price.
In cases, where customers pay less than 10%, the revenue and associated commissions are deferred until such time when 10% of the contract
price is received.
The
following table disaggregates contract costs that are included in deferred policy and pre-need contract acquisition costs on the consolidated
balances sheets.
Reconciliation of Revenues from Cemetery and mortuary contracts to Business Segment Information
| |
2021 | | |
2020 | |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Pre-need merchandise and services | |
$ | 3,688,579 | | |
$ | 3,601,638 | |
At-need specialty merchandise | |
| 29,688 | | |
| 5,302 | |
Pre-need land sales | |
| - | | |
| - | |
Deferred policy and pre-need
contract acquisition costs | |
$ | 3,718,267 | | |
$ | 3,606,940 | |
24)
Leases
A
lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment
(an identified asset) for a period of time in exchange for consideration. The Company determines if a contract is a lease at the inception
of the contract. At the commencement date of a lease, the Company measures the lease liability at the present value of the lease payments
over the lease term, discounted using the discount rate for the lease. The Company uses the rate implicit in the lease, if available,
otherwise the Company uses its incremental borrowing rate. Also, at the commencement date of a lease, the Company measures the cost of
the related right-of-use asset which consists of the amount of the initial measurement of the lease liability, any lease payments made
to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred by the Company.
Information
about the Nature of Leases and Subleases
The
Company leases office space and equipment from third-parties under various non-cancelable agreements. The Company has operating leases
for office space for its segments in areas where it conducts business. The Company subleases some of this office space. The Company also
has finance leases for certain equipment, such as copy machines and postage machines. The Company does not have any lease agreements
with variable lease payments. The Company has not included any options to extend or terminate leases in the recognition of the right-of-use
assets or lease liabilities because of the uncertainty that they will be exercised. No residual value guarantees have been provided to
the Company. The Company does not have any restrictions or covenants imposed by leases.
Leases
that have not Commenced
The
Company does not have any leases that have not commenced that create significant rights or obligations for the Company.
Related
Party Lease Transactions
The
Company does not have any related party lease transactions that require disclosure as of December 31, 2021.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
24)
Leases (Continued)
Short-term
Leases
The
Company made an accounting policy election not to apply the recognition requirements of ASC 842 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.
Significant
Judgments and Assumptions
The
Company does not use any significant judgments or assumptions regarding the determination of whether a contract contains a lease; the
allocation of the consideration in a contract between lease and nonlease components; or the determination of the discount rates for the
leases. The following table presents the Company’s total lease cost recognized in earnings, amounts capitalized as right-of- use
assets and cash flows from lease transactions.
Schedule of Lease Cost Recognized in Earnings
| |
2021 | | |
2020 | |
| |
Years Ended December 31 | |
| |
2021 | | |
2020 | |
Lease Cost | |
| | | |
| | |
Finance lease cost: | |
| | | |
| | |
Amortization of right-of-use assets (1) | |
$ | 41,925 | | |
$ | 58,576 | |
Interest on lease liabilities (2) | |
| 4,713 | | |
| 7,341 | |
Operating lease cost (3) | |
| 4,896,315 | | |
| 5,408,737 | |
Short-term lease cost (3)(4) | |
| 167,551 | | |
| 222,311 | |
Sublease income (3) | |
| (275,038 | ) | |
| (394,758 | ) |
Total lease cost | |
$ | 4,835,466 | | |
$ | 5,302,207 | |
| |
| | | |
| | |
Other Information | |
| | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from operating leases | |
$ | 4,697,819 | | |
$ | 5,293,901 | |
Operating cash flows from finance leases | |
| 4,713 | | |
| 7,341 | |
Financing cash flows from finance leases | |
| 42,184 | | |
| 56,982 | |
| |
| | | |
| | |
Right-of-use assets obtained in exchange for lease liabilities: | |
| | | |
| | |
Operating leases | |
$ | 5,216,048 | | |
$ | 5,631,193 | |
Finance leases | |
| - | | |
| 8,494 | |
| |
| | | |
| | |
Weighted-average remaining lease term (in years) | |
| | | |
| | |
Finance leases | |
| 2.07 | | |
| 2.74 | |
Operating leases | |
| 6.04 | | |
| 5.40 | |
| |
| | | |
| | |
Weighted-average discount rate | |
| | | |
| | |
Finance leases | |
| 5.74 | % | |
| 5.59 | % |
Operating leases | |
| 4.14 | % | |
| 4.87 | % |
(1) | | Included in Depreciation
on property and equipment on the consolidated statements of earnings |
(2) | | Included in Interest
expense on the consolidated statements of earnings |
(3) | | Included in Rent
and rent related expenses on the consolidated statements of earnings |
(4) | | Includes leases
with a term of 12 months or less |
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes
to Consolidated Financial Statements
Years
Ended December 31, 2021 and 2020
24)
Leases (Continued)
The
following table presents the maturity analysis of the Company’s lease liabilities.
Schedule
of Future Minimum Rental Payments for Finance Leases and Operating Leases
| |
Finance Leases | | |
Operating Leases | |
Lease payments due in: | |
| | | |
| | |
2022 | |
$ | 34,458 | | |
$ | 4,109,174 | |
2023 | |
| 27,220 | | |
| 3,340,343 | |
2024 | |
| 4,354 | | |
| 2,707,152 | |
2025 | |
| 692 | | |
| 1,809,667 | |
2026 | |
| - | | |
| 1,414,296 | |
Thereafter | |
| - | | |
| 2,449,017 | |
Total undiscounted lease payments | |
| 66,724 | | |
| 15,829,649 | |
Less: Discount on cash flows | |
| (3,957 | ) | |
| (2,889,958 | ) |
Present value of lease liabilities | |
$ | 62,767 | | |
$ | 12,939,691 | |
The
following table presents the Company’s right-of-use assets and lease liabilities.
Schedule of Right-of-Use Assets and Lease
Liabilities
| |
| |
Year Ended December 31 | |
| |
Balance Sheet Location | |
2021 | | |
2020 | |
Operating Leases | |
| |
| | | |
| | |
Right-of-use assets | |
Other assets | |
$ | 12,483,638 | | |
$ | 11,663,245 | |
| |
| |
| | | |
| | |
Lease liabilities | |
Other liabilities and accrued expenses | |
$ | 12,939,691 | | |
$ | 11,921,884 | |
| |
| |
| | | |
| | |
Finance Leases | |
| |
| | | |
| | |
Right-of-use assets | |
| |
$ | 235,867 | | |
$ | 254,276 | |
Accumulated amortization | |
| |
| (177,660 | ) | |
| (154,144 | ) |
Right-of-use assets, net | |
Property and equipment, net | |
$ | 58,207 | | |
$ | 100,132 | |
| |
| |
| | | |
| | |
Lease liabilities | |
Bank and other loans payable | |
$ | 62,767 | | |
$ | 104,951 | |
The
Company is also a lessor and has operating lease agreements with various tenants that lease its commercial and residential properties.
See Note 2 for information about the Company’s real estate held for investment.