10-K 1 snfca_10k.htm SECURITY NATIONAL FINANCIAL CORP FORM 10-K Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2020

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _____ to _____

 

Commission File Number 000-09341

 

SECURITY NATIONAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

UTAH

87-0345941

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

121 West Election Road, Draper, Utah

84020

(Address of principal executive offices)

(Zip Code)

 

 

Registrant’s telephone number, including area code:

(801) 264-1060

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Trading symbol

Name of exchange on which registered

Class A Common Stock

SNFCA

The Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, as amended (“Securities Act”).  

[  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  

[  ] Yes [X] No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

[X] Yes [  ] No




Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  

[X] Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ] 

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]    

Non-accelerated filer [  ]Smaller reporting company [X] 

Emerging growth company [  ] 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

[  ] Yes [X] No

 

As of June 30, 2020, the aggregate market value of the registrant’s Class A common stock held by non-affiliates of the registrant was approximately $50,000,000 based on the $6.58 closing sale price of the Class A common stock as reported on The Nasdaq Global Select Market.  

 

As of March 23, 2021, there were outstanding 16,621,147 shares of Class A common stock, $2.00 par value per share, and 2,679,603 shares of Class C common stock, $2.00 par value per share. 

 

Documents Incorporated by Reference

 

None.




Security National Financial Corporation

Form 10-K

For the Fiscal Year Ended December 31, 2020

 

TABLE OF CONTENTS

 

 

 

Page

 

Part I

 

 

 

 

Item 1.

Business

4

Item 2.

Properties

12

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

16

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

17

Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 8.

Financial Statements and Supplementary Data

33

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

114

Item 9A.

Controls and Procedures

114

Item 9B.

Other Information

115

 

 

 

 

Part III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

116

Item 11.

Executive Compensation

120

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

131

Item 13.

Certain Relationships and Related Transactions, and Director Independence

133

Item 14.

Principal Accounting Fees and Services

134

 

 

 

 

Part IV

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

134




 PART I

 

Item 1. Business

 

Security National Financial Corporation (the “Company”) operates 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. These products are marketed in 40 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment consists of eight mortuaries and five cemeteries in the state of Utah and one cemetery in the state of California. The Company also engages in pre-need selling of funeral, cemetery, mortuary, and cremation services through its Utah and California operations. Many of the insurance agents also sell pre-need funeral, cemetery, and cremation services. The mortgage segment originates and underwrites or otherwise purchases residential and commercial loans for new construction, existing homes, and other real estate projects. The mortgage segment operates through 98 retail offices in 23 states, and is an approved mortgage lender in several other states.

 

The Company’s design and structure are that each business segment is related to the other business segments and contributes to the profitability of the other segments. The Company’s cemetery and mortuary segment provides a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. The Company’s insurance segment invests their assets (including, in part, pre-need funeral products and services) in investments authorized by the respective insurance departments of their states of domicile. The Company also pursues growth through acquisitions. The Company’s mortgage segment provides mortgage loans and other real estate investment opportunities.

 

The Company was organized as a holding company in 1979 when Security National Life Insurance Company (“Security National Life”) became a wholly owned subsidiary of the Company and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has acquired or purchased significant blocks of business which include Capital Investors Life Insurance Company (1994), Civil Service Employees Life Insurance Company (1995), Southern Security Life Insurance Company (1998), Menlo Life Insurance Company (1999), Acadian Life Insurance Company (2002), Paramount Security Life Insurance Company (2004), Memorial Insurance Company of America (2005), Capital Reserve Life Insurance Company (2007), Southern Security Life Insurance Company, Inc. (2008), North America Life Insurance Company (2011, 2015), Trans-Western Life Insurance Company (2012), Mothe Life Insurance Company (2012), DLE Life Insurance Company (2012), American Republic Insurance Company (2015), First Guaranty Insurance Company (2016), and Kilpatrick Life Insurance Company (2019).

 

The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies. The cemetery and mortuary companies that the Company has acquired are Holladay Memorial Park, Inc. (1991), Cottonwood Mortuary, Inc. (1991), Deseret Memorial, Inc. (1991), Probst Family Funerals and Cremations L.L.C. (2019), and Heber Valley Funeral Home, Inc. (2019).

 

In 1993, the Company formed SecurityNational Mortgage Company (“SecurityNational Mortgage”) to originate and refinance residential mortgage loans. In 2012, the Company formed Green Street Mortgage Services, Inc. (now known as EverLEND Mortgage Company) (“EverLEND Mortgage”) also to originate and refinance residential mortgage loans.

 

See Note 15 of the Notes to Consolidated Financial Statements for additional information regarding business segments of the Company.

 

Life Insurance

 

Products 

 

The Company, through Security National Life, First Guaranty Insurance Company (“First Guaranty”), and Kilpatrick Life Insurance Company (“Kilpatrick”), issues and distributes selected lines of life insurance and annuities. The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident, and health insurance products. The Company places specific marketing emphasis on funeral


4



plans through pre-need planning. The Company’s insurance subsidiaries, Memorial Insurance Company of America (“Memorial Insurance”), Southern Security Life Insurance Company, Inc. (“Southern Security”), Trans-Western Life Insurance Company (“Trans-Western”), First Guaranty, and Kilpatrick, service and maintain policies that were purchased prior to their acquisition by Security National Life.

 

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that has lower competition because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

 

Markets and Distribution 

 

The Company is licensed to sell insurance in 40 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific niche markets. The Company’s funeral plan policies are sold primarily to persons who range in age from 45 to 85 and have low to moderate income. A majority of the Company’s funeral plan premiums come from the states of Arkansas, California, Florida, Georgia, Louisiana, Mississippi, Texas, and Utah.

 

The Company sells its life insurance products through direct agents, brokers, and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 50% to 120% of first year premiums. In those cases, where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions.

 

In some instances, funeral plan insurance is marketed in conjunction with the Company’s cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company’s cemeteries and mortuaries. Thus, death benefits that become payable under the policy are paid to the Company’s cemetery and mortuary subsidiaries to the extent of services performed and products purchased.

 

In marketing funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs since these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 2020:

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

Life Insurance

 

 

 

 

 

 

 

 

 

 

Policy/Cert Count as of December 31

659,237

 

669,064

(1)

531,831

 

533,065

 

531,775

(2)

Insurance in force as of December 31 (omitted 000)

$2,890,791

 

$2,877,402

(1)

$1,838,488

 

$1,759,148

 

$1,672,081

(2)

Premiums Collected (omitted 000)

$92,058

 

$78,253

(1)

$74,965

 

$69,565

 

$65,220

(2)

_____________

 

(1)Includes the acquisition of Kilpatrick  

(2)Includes the acquisition of First Guaranty and the termination of the reinsurance assumed from Servicemembers’ Group Life Insurance (“SGLI”) 


5



Underwriting 

 

The factors considered in evaluating an application for ordinary life insurance coverage can include the applicant’s age, occupation, general health, and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company issues insurance based upon its medical limits and requirements subject to the following general non-medical limits:

 

Age Nearest
Birthday

 

 

Non-Medical
Limits

0-50

 

$

100,000

51-up

 

 

Medical information

 

 

  

required (APS or exam)

 

When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks.

 

The Company’s funeral plan insurance is written on a simplified medical application with underwriting requirements being a completed application, a phone inspection on the applicant, and an intelliscript prescription history inquiry. There are several underwriting classes in which an applicant can be placed.

 

Annuities

 

Products 

 

The Company’s annuity business includes single premium deferred annuities, flexible premium deferred annuities, and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to annuitize or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to prematurely surrender their annuity contracts. An immediate annuity is a contract in which the individual remits a sum of money to the Company in return for the Company’s obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual’s life, or for such other period as may be designated.

 

Annuities have guaranteed interest rates that range from 1% to 6.5% per annum. Rates above the guaranteed interest rate credited are periodically modified by the Board of Directors at its discretion. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. Commissions, issuance expenses, and general and administrative expenses are deducted from this interest rate spread.

 

Markets and Distribution 

 

The general market for the Company’s annuities is middle to older age individuals. A major source of annuity sales come from direct agents and are sold in conjunction with other insurance sales. If an individual does not qualify for a funeral plan, the agent will often sell that individual an annuity to fund final expenses.

 

The following table summarizes the annuity business for the five years ended December 31, 2020:

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

Annuities Policy/Cert Count as of December 31

25,476

 

26,565

(1)

22,313

 

22,729

 

21,364

(2)

Deposits Collected (omitted 000)

$9,637

 

$10,400

(1)

$9,644

 

$10,353

 

$11,019

(2)

____________

 

(1)Includes the acquisition of Kilpatrick 

(2)Includes the acquisition of First Guaranty 


6



Accident and Health

 

Products 

 

With the acquisition of Capital Investors in 1994, the Company acquired a small block of accident and health policies. Since 1999, the Company has offered a low-cost comprehensive diver’s accident policy that provides worldwide coverage for medical expense reimbursement in the event of a diving accident. With the acquisition of Kilpatrick in 2019, the Company also acquired a block of accident and health policies.

 

Markets and Distribution 

 

The Company currently markets its diver’s accident policies through the internet.

 

The following table summarizes the accident and health insurance business for the five years ended December 31, 2020:

 

 

2020

 

2019

 

2018

 

2017

 

2016

Accident and Health Policy/Cert Count as of December 31

13,735

 

15,133

(1)

3,763

 

4,069

 

4,761

Premiums Collected (omitted 000)

$296

 

$110

(1)

$98

 

$104

 

$113

____________

 

(1)Includes the acquisition of Kilpatrick 

 

Reinsurance

 

The primary purpose of reinsurance is to enable an insurance company to issue an insurance policy in an amount larger than the risk the insurance company is willing to assume for itself. The insurance company remains obligated for the amounts reinsured (ceded) in the event the reinsurers do not meet their obligations.

 

The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are generally renewed annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer.

 

It is the Company’s policy to retain no more than $100,000 of ordinary insurance per insured life, with the excess risk being reinsured. The total amount of life insurance reinsured by other companies as of December 31, 2020, was $377,138,000, which represents approximately 13.0% of the Company’s life insurance in force on that date.

 

See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding reinsurance.

 

Investments

 

The investments that support the Company’s life insurance and annuity obligations are determined by the investment committees of the Company’s subsidiaries and ratified by the full Board of Directors of the respective subsidiaries. A significant portion of the Company’s investments must meet statutory requirements governing the nature and quality of permitted investments by its insurance subsidiaries. The Company maintains a diversified investment portfolio consisting of common stocks, preferred stocks, municipal bonds, corporate bonds, mortgage loans, real estate, and other securities and investments.

 

See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding investments.


7



Cemetery and Mortuary

 

Products 

 

Through its cemetery and mortuary segment, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include: plots, interment vaults, mausoleum crypts, markers, caskets, urns and other death care related products. These services include: professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a mortuary at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has six separate stand-alone mortuary facilities.

 

Markets and Distribution 

 

The Company’s pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20-mile radius of its mortuaries and cemeteries. The Company’s at-need sales are similarly limited in geographic area.

 

The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In some instances, the Company’s cemetery and mortuary facilities are the named beneficiaries of the funeral plan policies.

 

Potential customers are located via telephone sales prospecting, responses to letters mailed by the pre-planning consultants, newspaper inserts, referrals, and door-to-door canvassing. The Company trains its sales representatives and helps generate leads for them. 

 

Mortgage Loans

 

Products 

 

The Company, through its wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage, are active in the residential real estate market. SecurityNational Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. EverLEND Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. The Company uses internal and external funding sources to fund mortgage loans.

 

Security National Life originates and funds commercial real estate loans, residential construction loans, and land development loans for internal investment.

 

Markets and Distribution 

 

The Company’s residential mortgage lending services are marketed primarily to real estate brokers, builders and directly with consumers.  The Company has a strong retail origination presence in the Utah, Florida, Texas, Nevada and Arizona markets and is experiencing rapid growth with sales representatives in these and many other states across the country. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding mortgage loans.


8



Recent Acquisitions and Other Business Activities

 

Acquisitions 

 

Acquisition of Kilpatrick Life Insurance Company 

 

On December 13, 2019, the Company, through its wholly-owned subsidiary, Security National Life, completed a stock purchase transaction with Kilpatrick, a Louisiana domiciled insurance company, and Kilpatrick’s shareholders, to purchase all the outstanding shares of common stock of Kilpatrick.

 

Under the terms of the transaction, as set forth in the Stock Purchase Agreement, dated October 11, 2019, the Company paid purchase consideration at the closing of the transaction equal to $23,779,940 subject to a $1,400,000 holdback that was deposited into an interest bearing escrow account to be held for a period of eighteen months from the closing date. The current amount that is available to be disbursed to the prior owners is $598,949.

 

Acquisition of Probst Family Funerals and Cremations and Heber Valley Funeral Home 

 

On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City.

 

Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, the Company paid the net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback. In August 2019, this escrow account was settled and $137,550 was paid to the prior owners.

 

Real Estate Development 

 

The Company is capitalizing on the opportunity to develop commercial and residential assets on its existing properties. The cost to acquire existing for-sale assets currently exceeds the replacement costs, thus creating the opportunity for development and redevelopment of the land that the Company currently owns. The Company has developed, or is in the process of developing, assets that have an initial development cost exceeding $100,000,000.  The Company plans to continue its development endeavors as the market demands.

 

Center53 Development

 

In 2015, the Company broke ground and commenced development on the first phase of its new corporate campus.  The anticipated project, comprising nearly 20 acres of land that is currently owned by the Company in the central valley of Salt Lake City, is envisioned to be a multi-year, phased development. At full development, the project will include nearly one million square-feet in five buildings, ranging from four to ten stories, and will be serviced by three parking structures with about 4,000 stalls. The first phase of the project includes a building and a parking garage consisting of nearly 200,000 square feet of office space with 748 parking stalls. This phase of the campus was completed in July 2017 and is currently 96% occupied. The second phase of the project began in March 2020 and includes a six story building of nearly 218,000 square feet and a parking garage with approximately 870 stalls.  The Company will occupy half of the building as its corporate headquarters, and has leased the remainder of the building. It is anticipated that the Company will occupy the building in September 2021.

 

Regulation

 

The Company’s insurance subsidiaries are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies


9



and annuity contracts, policy claims, unearned premiums, and other matters. The Company’s insurance subsidiaries are subject to this type of regulation in any state in which they are licensed to do business. Such regulation could involve additional costs, restrict operations, or delay implementation of the Company’s business plans.

 

The Company’s life insurance subsidiaries are currently subject to regulation in Utah, Arkansas, Louisiana, Mississippi and Texas under insurance holding company legislation, and other states where applicable. Generally, intercompany transfers of assets and dividend payments from insurance subsidiaries are subject to prior notice of approval from the state insurance department, if they are deemed “extraordinary” under these statutes. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies. The Company was notified that all of its life insurance subsidiaries have been selected for examination for the year ended December 31, 2020 and periods since their last examination. The Company was last examined in 2016 (First Guaranty Insurance), 2017 (Security National Life) and 2019 (Kilpatrick Life). The Texas Department of Banking also audits pre-need insurance policies that are issued in the state of Texas.  Pre-need policies are life and annuity products sold as the funding mechanism for funeral plans through funeral homes by Security National agents.  The Company is required to send the Texas Department of Banking an annual report that summarizes the number of policies in force and the face amount or death benefit for each policy.  This annual report also indicates the number of new policies issued for that year, all death claims paid that year, and all premiums received.

 

The Company’s cemetery and mortuary subsidiaries are subject to the Federal Trade Commission’s comprehensive funeral industry rules and to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah and California. Reports are required to be kept on file on a yearly basis which include financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business.

 

The Company’s mortgage subsidiaries are subject to the rules and regulations of the U.S. Department of Housing and Urban Development (HUD), and to various state licensing acts and regulations and the Consumer Financial Protection Bureau (CFPB). These regulations, among other things, specify minimum capital requirements, procedures for loan origination and underwriting, licensing of brokers and loan officers, quality review audits and the fees that can be charged to borrowers. Each year, the Company is required to have an audit completed for each mortgage subsidiary by an independent registered public accounting firm to verify compliance under some of these regulations. In addition to the government regulations, the Company must meet loan requirements, and underwriting guidelines of various investors who purchase the loans.

 

Income Taxes

 

The Company’s insurance subsidiaries, Security National Life, First Guaranty and Kilpatrick, are taxed under the Life Insurance Company Tax Act of 1984. Under the act, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions and reserves for future policyholder benefits (with modifications). The Company may be subject to the corporate Alternative Minimum Tax (AMT) for tax years ending prior to January 1, 2018. The Tax Cuts and Jobs Act (the “Tax Act”) repealed the corporate AMT for tax years beginning after December 31, 2017. Also, under the Tax Act, December 31, 2017 policyholder surplus account balances result in taxable income over a period of eight years.

 

Security National Life, First Guaranty and Kilpatrick calculate their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company’s premium income is characterized as deferred expenses and recognized over a five or ten-year period. The Tax Act changed this recognition period for amounts deferred after December 31, 2017 to a five or fifteen-year period.

 

The Company’s non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. The following subsidiaries are regulated as life insurance companies but do not meet the Internal Revenue Code definition of a life insurance company, so they are taxed as insurance companies other than life insurance companies: Memorial Insurance, Southern Security, and Trans-Western.  


10



Competition

 

The life insurance industry is highly competitive. There are approximately 800 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price, and customer service. The Company’s insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and more diversified line of insurance products than the Company. In addition, such companies generally have a larger sales force. Further, the Company competes with mutual insurance companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is smaller by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better-established companies. The Company believes that its policies and rates for the markets it serves are generally competitive.

 

The cemetery and mortuary industry is also highly competitive. In the Utah and California markets where the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community, and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors which do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry.

 

The mortgage industry is highly competitive with a large number of mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage industry in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates.

 

Employees

 

As of December 31, 2020, the Company had 1,511 full-time and 197 part-time employees.


11



Item 2.  Properties

 

The following table sets forth the location of the Company’s office facilities and certain other information relating to these properties.

 

Street

City

State

Function

Owned / Leased

Approximate Square Footage

Lease
Amount

Expiration

121 W. Election Rd., Suite 100

Draper

UT

Corporate Headquarters

Owned

        14,145

N/A

 

 

N/A

5201 S. Green St.

Salt Lake City

UT

Mortgage and Insurance Operations

Owned

        28,448

N/A

 

 

N/A

1044 River Oaks Dr.

Flowood

MS

Insurance Operations

Owned

          5,522

N/A

 

 

N/A

1818 Marshall St.

Shreveport

LA

Insurance Operations

Owned

        12,274

N/A

 

 

N/A

812 Sheppard St.

Minden

LA

Insurance Sales

Owned

          1,560

N/A

 

 

N/A

909 Foisy Ave.

Alexandria

LA

Insurance Sales

Owned

          8,059

N/A

 

 

N/A

1550 N. Third St.

Jena

LA

Insurance Sales

Owned

          1,737

N/A

 

 

N/A

4455 South 700 East

Salt Lake City

UT

Insurance Operations

Leased

        16,134

$ 23,196

/

mo

6/30/2021

1 Sanctuary Blvd. Suite 302A

Mandeville

LA

Insurance Sales

Leased

          1,337

$  2,196

/

mo

6/30/2023

79 E. Main Street

Midway

UT

Funeral Service Sales

Leased

          4,476

$  5,304

/

mo

10/31/2022

200 Market Way

Rainbow City

AL

Fast Funding Operations

Leased

        12,850

$ 10,490

/

mo

1/31/2025

6000 Pelham Rd.

Greenville

SC

Fast Funding Operations

Leased

          4,483

$  4,233

/

mo

8/31/2022

199 Deauville Dr.

Maumelle

AR

Mortgage Sales

Leased

              50

$     100

 

mo

month to month

1819 S. Dobson Rd., Suite 202/203

Mesa

AZ

Mortgage Sales

Leased

          2,397

$  1,633

/

mo

7/31/2021

17015 N. Scottsdale Rd., Suite 125

Scottsdale

AZ

Mortgage Sales

Leased

          6,070

$  7,130

/

mo

7/31/2023

4725 N. 19th Ave.

Phoenix

AZ

Mortgage Sales

Leased

          1,480

$  1,700

/

mo

month to month

5100 N. 99th Ave., Suite 101/103

Phoenix

AZ

Mortgage Sales

Sub-Leased

          3,940

$  5,348

/

mo

month to month

5100 N. 99th Ave., Suite 111

Phoenix

AZ

Mortgage Sales

Sub-Leased

            720

$  1,023

/

mo

8/31/2022

10609 N. Hayden Rd., Suite 100

Scottsdale

AZ

Mortgage Sales

Leased

          3,585

$  8,500

/

mo

month to month

11225 N. 28th Dr., #C-200

Phoenix

AZ

Mortgage Sales

Leased

          1,031

$  2,000

/

mo

month to month

1819 Dobson Rd., Suite 202

Mesa

AZ

Mortgage Sales

Leased

            890

$     964

/

mo

7/31/2021

2828 N. Central Ave., Suite 1100A

Phoenix

AZ

Mortgage Sales

Sub-Leased

          1,691

$  4,859

/

mo

month to month

2777 S. Arizona Ave., Suite 3169

Chandler

AZ

Mortgage Sales

Leased

            100

$     100

/

mo

month to month

1490 S. Price Road, Suite 318

Chandler

AZ

Mortgage Sales

Leased

          1,600

$  3,050

/

mo

8/31/2021

2436 E. 4th St., Suite 920

Long Beach

CA

Mortgage Sales

Leased

            100

$     100

/

mo

month to month

40977 Oak Dr.

Forest Falls

CA

Mortgage Sales

Leased

            250

$       -   

/

mo

month to month

2934 E. Garvey Ave. South, Suite 250

West Covina

CA

Mortgage Sales

Leased

            500

$     712

/

mo

month to month

1910 Union St., Suite 2020

Anaheim

CA

Mortgage Sales

Sub-Leased

            100

$     100

/

mo

month to month

573 Chouinard Cir.

Claremont

CA

Mortgage Sales

Leased

            100

$       50

/

mo

month to month

7398 Fox Trail Unit B

Yucca Valley

CA

Mortgage Sales

Leased

            900

$     550

/

mo

month to month

26511 Silver Spring

Lake Forest

CA

Mortgage Sales

Leased

            100

$       50

/

mo

month to month

18647 Marimba St.

Rowland Heights

CA

Mortgage Sales

Leased

            100

$       50

/

mo

month to month

2325 El Empino

La Habra Heights

CA

Mortgage Sales

Leased

            100

$       50

/

mo

month to month

445 W. University Ave., Apt. A

San Deigo

CA

Mortgage Sales

Leased

            120

$       -   

/

mo

month to month

5475 Tech Center Dr., Suite 100

Colorado Springs

CO

Mortgage Sales

Leased

          3,424

$  4,565

/

mo

9/30/2023

8480 E. Orchard Rd., Suite 4200

Greenwood Village

CO

Mortgage Sales

Leased

          4,631

$ 10,227

/

mo

5/31/2021

1120 W. 122nd Ave., Suite 104

Denver

CO

Mortgage Sales

Leased

          2,088

$  3,828

/

mo

10/31/2021

27 Main St., Suite C-104B

Edwards

CO

Mortgage Sales

Leased

            680

$  1,600

/

mo

month to month

4501 Mohawk Dr.

Larkspur

CO

Mortgage Sales

Leased

            250

$       50

/

mo

month to month

7800 E. Union Ave., Suite 550

Denver

CO

Mortgage Sales

Sub-Leased

          4,656

$  9,312

/

mo

9/30/2022

1145 Town Park Ave., Suite 2215

Lake Mary

FL

Mortgage Sales

Leased

          5,901

$ 12,835

/

mo

2/28/2023

8191 College Parkway, Suite 201

Ft Myers

FL

Mortgage Sales

Leased

          4,676

$  4,006

/

mo

8/21/2021

1545 S. Belcher Rd., Suite B

Clearwater

FL

Mortgage Sales

Leased

            100

$  1,573

/

mo

month to month

3180 Curlew Rd. Unit 107

Oldsmar

FL

Mortgage Sales

Leased

          1,705

$  2,707

/

mo

2/14/2023

113th St. N. and 82nd Ave. N.

Seminole

FL

Mortgage Sales

Leased

          1,400

$  1,692

/

mo

8/31/2023

136 Parliament Loop

Lake Mary

FL

Mortgage Sales

Leased

          1,527

$  3,100

/

mo

11/30/2022

6456 Cypressdale Dr., Unit 102

Riverview

FL

Mortgage Sales

Leased

              50

$       -   

/

mo

month to month

800 Avalon Blvd., Suite 100

Alpharetta

GA

Mortgage Sales

Sub-Leased

          1,000

$     841

/

mo

month to month

106 A Adamson Square

Carrolton

GA

Mortgage Sales

Leased

          1,000

$  1,550

/

mo

10/31/2021

4370 Kukui Grove St., Suite 201

Lihue

HI

Mortgage Sales

Leased

            864

$  1,412

/

mo

2/28/2022

1001 Kamokila Blvd.

Kapolei

HI

Mortgage Sales

Leased

            737

$  1,708

/

mo

12/31/2022

116 N. 3rd St., Suite 12

Mccall

ID

Mortgage Sales

Leased

            480

$     466

/

mo

month to month

9963 Crosspoint Blvd Suites 101/102

Indianapolis

IN

Mortgage Sales

Leased

          1,350

$  1,570

/

mo

month to month

1739 E. Michigan St.

Indianapolis

IN

Mortgage Sales

Leased

            200

$     100

/

mo

month to month

568 Greenluster Dr.

Covington

LA

Mortgage Sales

Leased

            150

$     750

/

mo

month to month

3828 Veterans Blvd., Suite 101

Metairie

LA

Mortgage Sales

Sub-Leased

              80

$     350

/

mo

6/30/2021

8530 Veterans Hwy

Millersville

MD

Mortgage Sales

Leased

          4,000

$  6,000

/

mo

4/30/2021

4987 Fall Creek Rd. Suite 1

Branson

MO

Mortgage Sales

Leased

            700

$  1,000

/

mo

month to month

330 Camp Rd., Suite B-39

Charlotte

NC

Mortgage Sales

Leased

N/A

$     650

/

mo

month to month

1980 Festival Plaza Dr., Suite 850

Las Vegas

NV

Mortgage Sales

Leased

        12,866

$ 44,902

/

mo

10/31/2021


12



Item 2. Properties (Continued)

 

Street

City

State

Function

Owned / Leased

Approximate Square Footage

Lease
Amount

Expiration

840 Pinnacle Ct., Suite 3

Mesquite

NV

Mortgage Sales

Leased

            900

$     720

/

mo

3/12/2022

2635 St. Rose Pkwy, Suites D 100, 110, 120

Hendeson

NV

Mortgage Sales

Leased

          5,788

$ 11,576

/

mo

9/30/2025

8720 Orion Place, Suite 160

Colombus

OH

Mortgage Sales

Leased

          1,973

$  1,809

/

mo

6/30/2023

4294 Martin Dr.

North Olmstead

OH

Mortgage Sales

Leased

            100

$       -   

/

mo

month to month

3311 NE MLK Jr Blvd., Suite 203

Portland

OR

Mortgage Sales

Leased

          1,400

$     875

/

mo

month to month

10365 SE Sunnyside Rd., Suite 310

Clackamus

OR

Mortgage Sales

Leased

          1,288

$  2,653

/

mo

11/30/2022

11104 SE Stark St., Suite S

Portland

OR

Mortgage Sales

Sub-Leased

            506

$     600

/

mo

month to month

8285 SW Numbus, Suite 160

Beaverton

OR

Mortgage Sales

Sub-Leased

            800

$     888

/

mo

month to month

13 Park Shore Dr. North

Columbia

SC

Mortgage Sales

Leased

              50

$     100

/

mo

month to month

6263 Poplar Ave., Suite 900

Memphis

TN

Mortgage Sales

Leased

          1,680

$  1,921

/

mo

3/31/2022

144 Alf Taylor Rd.

Johnson City

TN

Mortgage Sales

Sub-Leased

          1,521

$     800

/

mo

month to month

347 Main St., Suite 200

Franklin

TN

Mortgage Sales

Leased

          2,444

$  5,703

/

mo

8/31/2025

3027 Marina Bay Dr., Suite 200

League City

TX

Mortgage Sales

Leased

          1,225

$  2,246

/

mo

4/30/2023

11550 Fuqua, Suite 200

Houston

TX

Mortgage Sales

Leased

          1,865

$  3,575

/

mo

4/30/2021

1848 Norwood Plaza, Suite 213

Hurst

TX

Mortgage Sales

Sub-Leased

          1,596

$  1,031

/

mo

month to month

17347 Village Green Dr., Suite 102

Houston

TX

Mortgage Sales

Sub-Leased

          3,300

$  8,970

/

mo

12/1/2024

1626 Lee Trevino, Suite A

El Paso

TX

Mortgage Sales

Leased

          4,200

$  7,853

/

mo

12/31/2022

9737 Great Hills Trail, Suites 150, 200, 220

Austin

TX

Mortgage Sales

Leased

        19,891

$ 37,710

/

mo

8/31/2024

1213 East Alton Gloor Blvd., Suite H

Brownsville

TX

Mortgage Sales

Leased

          2,000

$  2,200

/

mo

2/28/2022

7920 Belt Line Rd., Suite 720

Dallas

TX

Mortgage Sales

Sub-Leased

          1,714

$  2,428

/

mo

month to month

5020 Collinwood Ave., Suite 100

Fort Worth

TX

Mortgage Sales

Leased

          2,687

$  5,300

/

mo

1/31/2025

3000 Joe DiMaggio Blvd., Bldg 12 Suite 42

Round Rock

TX

Mortgage Sales

Leased

            920

$  1,750

/

mo

5/15/2021

2408 Jacaman Road, Suite F

Laredo

TX

Mortgage Sales

Leased

N/A

$     900

/

mo

6/1/2022

1900 Country Club Dr., Suite 150

Mansfield

TX

Mortgage Sales

Leased

            175

$     325

/

mo

month to month

3220 Gus Thomasson Rd.

Mesquite

TX

Mortgage Sales

Sub-Leased

            130

$  1,000

/

mo

month to month

722 Kiowa Dr. West

Lake Kiowa

TX

Mortgage Sales

Leased

            150

$     495

/

mo

month to month

1785 Preston Rd., Suite 550

Dallas

TX

Mortgage Sales

Leased

            200

$     657

/

mo

8/31/2021

6860 N. Dallas Pkwy

Plano

TX

Mortgage Sales

Leased

            200

$     582

/

mo

2/28/2021

2102 Jitterbug Ln.

Katy

TX

Mortgage Sales

Leased

            100

$     100

/

mo

month to month

124 N. Main St.

Mansfield

TX

Mortgage Sales

Sub-Leased

            100

$  3,000

/

mo

month to month

4411 W. Illinois, Suite B-4

Midland

TX

Mortgage Sales

Sub-Leased

            100

$  1,700

/

mo

month to month

590 W. State Street

Pleasant Grove

UT

Mortgage Sales

Leased

            250

$     500

/

mo

month to month

5965 S. Redwood Rd.

Taylorsville

UT

Mortgage Sales

Leased

          1,000

$  1,400

/

mo

month to month

6575 S. Redwood Rd.

Taylorsville

UT

Mortgage Sales

Leased

          3,323

$  5,491

/

mo

12/31/2022

126 W. Sego Lily Dr., Suite 260

Sandy

UT

Mortgage Sales

Leased

          2,794

$  5,944

/

mo

8/31/2021

75 Towne Ridge Parkway, Suite 100

Sandy

UT

Mortgage Sales

Leased

          6,867

$ 16,695

/

mo

8/31/2023

1133 North Main St., Suite 150

Layton

UT

Mortgage Sales

Sub-Leased

            300

$  1,000

/

mo

month to month

497 S. Main

Ephraim

UT

Mortgage Sales

Leased

          1,884

$  1,600

/

mo

4/30/2025

6965 S. Union Park, Suites 100, 190, 260, 300, 460, 470, & 480

Midvale

UT

Mortgage Sales

Leased

        39,649

$ 82,465

/

mo

6/30/2021

11240 S. River Heights Dr.

South Jordan

UT

Mortgage Sales

Leased

          3,403

$  7,740

/

mo

11/30/2024

500 East Village Blvd.

Stansbury Park

UT

Mortgage Sales

Leased

          1,950

$  3,180

/

mo

10/31/2024

833 N. 900 W.

Orem

UT

Mortgage Sales

Leased

          2,391

$  3,104

/

mo

1/31/2023

1350 E. 300 S. 3rd Floor

Lehi

UT

Mortgage Sales

Leased

        15,446

$ 35,140

/

mo

12/22/2026

2455 E. Parleys Way, Suites 120 & 150

Salt Lake City

UT

Mortgage Sales

Leased

          5,256

$  8,322

/

mo

7/31/2030

859 W. South Jordan Pkwy, Suite 101

South Jordan

UT

Mortgage Sales

Leased

          3,376

$  5,751

/

mo

3/22/2022

558 E. Riverside Dr., Suite 204

St. George

UT

Mortgage Sales

Leased

          1,685

$  2,106

/

mo

8/31/2023

21430 Cedar Dr., Suite 200-202

Sterling

VA

Mortgage Sales

Leased

          6,850

$ 12,984

/

mo

3/9/2023

15640 NE Fourth Plain Blvd., Suite 220/221

Vancouver

WA

Mortgage Sales

Leased

            360

$     425

/

mo

9/30/2021

2701 Currant St.

Lynden

WA

Mortgage Sales

Leased

          1,500

$       50

/

mo

month to month

1508 24th Ave., Suite 23

Kenosha

WI

Mortgage Sales

Leased

            250

$     150

/

mo

month to month

27903 99th St.

Trevor

WI

Mortgage Sales

Leased

            300

$     150

/

mo

month to month

219 W. Washington St.

Charlestown

WV

Mortgage Sales

Leased

N/A

$  1,700

/

mo

4/14/2023

 

The Company believes the office facilities it occupies are in good operating condition and adequate for current operations. The Company will enter into additional leases or modify existing leases to meet market demand.  Those leases will be month to month where possible. As leases expire, the Company will either renew or find comparable leases or acquire additional office space.


13



Item 2.  Properties (Continued)

 

The following table summarizes the location and acreage of the six Company owned cemeteries, each of which includes one or more mausoleums:

 

 

 

 

 

Net Saleable Acreage

Name of Cemetery

Location

Date Acquired

Developed Acreage (1)

Total Acreage (1)

Acres Sold as Cemetery Spaces (2)

Total Available Acreage (1)

Memorial Estates, Inc.

 

 

 

 

 

Lakeview Cemetery

1640 East Lakeview Drive
Bountiful, Utah

1973

9

39

7

32

 

 

 

 

 

 

 

Mountain View Cemetery

3115 East 7800 South
Salt Lake City, Utah

1973

26

54

20

34

 

 

 

 

 

 

 

Redwood Cemetery (3)

6500 South Redwood Road
West Jordan, Utah

1973

28

71

35

36

 

 

 

 

 

 

 

Deseret Memorial Inc.
Lake Hills Cemetery (3)(6)

 

 

 

 

 

Lake Hills Cemetery

10055 South State Street
Sandy, Utah

1991

9

28

6

22

 

 

 

 

 

 

 

Holladay Memorial Park, Inc.

 

 

 

 

 

Holladay Memorial Park (3)

4900 South Memory Lane
Holladay, Utah

1991

12

14

7

7

 

 

 

 

 

 

 

California Memorial Estates, Inc.

 

 

 

 

 

Singing Hills Memorial Park (4)

2800 Dehesa Road
El Cajon, California

1995

8

97

6

91

 

______________

 

(1)The acreage represents estimates of acres that are based upon survey reports, title reports, appraisal reports, or the Company’s inspection of the cemeteries. The Company estimates that there are approximately 1,200 spaces per developed acre. 

(2)Includes both reserved and occupied spaces. 

(3)Includes two granite mausoleums. 

(4)Includes an open easement. 


14



Item 2. Properties (Continued)

 

The following table summarizes the location, square footage and the number of viewing rooms and chapels of the eight Company owned mortuaries:

 

 

 

Date

Viewing

 

Square

Name of Mortuary

Location

Acquired

Room(s)

Chapel(s)

Footage

Memorial Mortuary, Inc.

 

 

 

 

 

Memorial Mortuary

5850 South 900 East

 

 

 

 

 

Murray, Utah

1973

3

1

20,000

 

 

 

 

 

 

Affordable Funerals and
 Cremations, St. George

157 East Riverside Dr., No. 3A

2016

1

1

2,360

 

St. George, Utah

 

 

 

 

 

 

 

 

 

 

Memorial Estates, Inc.

 

 

 

 

 

Redwood Mortuary (1)

6500 South Redwood Rd.

 

 

 

 

 

West Jordan, Utah

1973

2

1

10,000

 

 

 

 

 

 

Mountain View Mortuary (1)

3115 East 7800 South

 

 

 

 

 

Salt Lake City, Utah

1973

2

1

16,000

 

 

 

 

 

 

Lakeview Mortuary (1)

1640 East Lakeview Dr.

 

 

 

 

 

Bountiful, Utah

1973

0

1

5,500

 

 

 

 

 

 

Lakehills Mortuary (1)

10055 South State St.

 

 

 

 

 

Sandy, Utah

1991

2

1

18,000

 

 

 

 

 

 

Cottonwood Mortuary, Inc.

 

 

 

 

 

Cottonwood Mortuary (1)

4670 South Highland Dr.

 

 

 

 

 

Holladay, Utah

1991

2

1

14,500

 

 

 

 

 

 

SN Probst LLC

 

 

 

 

 

Heber Valley Funeral Home

288 North Main St.

 

 

 

 

 

Heber City, Utah

2019

1

1

5,900

 

__________

 

(1)These funeral homes also provide burial niches at their respective locations. 

 

Item 3.  Legal Proceedings

 

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 of which 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’


15



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.

 

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. In accordance with GAAP, the full amount of SecurityNational Mortgage’s settlement payment has been accounted for in the Company’s loan loss reserve as of December 31, 2020.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.


16



PART II

 

Item 5. Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

The Company’s Class A common stock trades on The Nasdaq Global Select Market under the symbol “SNFCA.” As of March 23, 2021, the closing stock price of the Class A common stock was $9.69 per share. The following were the high and low market closing stock prices for the Class A common stock by quarter as reported by NASDAQ since January 1, 2019:

 

 

 

Price Range (1)

 

 

High

 

Low

Period (Calendar Year)

 

 

 

 

2019

 

 

 

 

First Quarter

 

$5.21

 

$4.39

Second Quarter

 

$5.25

 

$4.42

Third Quarter

 

$5.07

 

$4.44

Fourth Quarter

 

$5.60

 

$4.47

 

 

 

 

 

2020

 

 

 

 

First Quarter

 

$6.10

 

$3.67

Second Quarter

 

$7.32

 

$4.01

Third Quarter

 

$6.98

 

$5.55

Fourth Quarter

 

$8.91

 

$6.42

 

 

 

 

 

2021

 

 

 

 

First Quarter (through March 23, 2021)

  

$10.54

  

$8.48

_____________

(1)Stock prices have been adjusted retroactively for the effect of annual stock dividends. 

 

The Class C common stock is not registered or traded on a national exchange. See Note 12 of the Notes to Consolidated Financial Statements.

 

The Company has never paid a cash dividend on its Class A or Class C common stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C common stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C common stock has been paid each year from 1990 through 2019 and a 7.5% stock dividend was paid for year 2020.

 

On September 7, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company's Class A Common Stock in the open market. The Stock Repurchase Plan was amended on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. The repurchased shares of Class A common stock will be held as treasury shares to be used as the Company's employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan. The following table shows the Company’s repurchase activity of its common stock during the three months ended December 31, 2020 under its Stock Repurchase Plan.


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Period

(a) Total Number of Class A Shares Purchased

 

(b) Average Price Paid per Class A Share

 

(c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program

 

(d) Maximum Number of Class A Shares that May Yet Be Purchased Under the Plan or Program

10/1/2020-10/31/2020

              8,630

 

$               6.46

 

                              -   

 

                              80,488

11/1/2020-11/30/2020

              9,960

 

$               7.55

 

                              -   

 

                              70,528

12/1/2020-12/31/2020

            19,551

 

$               8.36

 

                              -   

 

                            750,977

 

 

 

 

 

 

 

 

Total

            38,141

 

$               7.79

 

                              -   

 

                            750,977

 

The graph below compares the cumulative total stockholder return of the Company’s Class A common stock with the cumulative total return on the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Insurance Index for the period from December 31, 2016 through December 31, 2020. The graph assumes that the value of the investment in the Company’s Class A common stock and in each of the indexes was $100 at December 31, 2016 and that all dividends were reinvested.

 

The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Company’s Class A common stock.

 

 

 

12/31/16

12/31/17

12/31/18

12/31/19

12/31/20

SNFC

100

85

88

104

160

S & P 500

100

119

112

144

168

S & P Insurance

100

114

99

125

121

 

The stock performance graph set forth above is required by the Securities and Exchange Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts.


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Item 6. Selected Financial Data

 

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The Company’s operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. The Company has adjusted its operations and sales approach to respond to the changing economic circumstances resulting from the COVID-19 pandemic.

 

Insurance Operations

 

The following table shows the condensed financial results for the Company’s insurance operations for the years ended December 31, 2020 and 2019.  See Note 15 of the Notes to Consolidated Financial Statements.

 

 

Years ended December 31
(in thousands of dollars)

 

2020

 

2019

 

2020 vs 2019 % Increase (Decrease)

Revenues from external customers:

 

 

 

 

 

Insurance premiums

$    93,021

 

$    81,861

 

14%

Net investment income

54,811

 

41,611

 

32%

Gains (losses) on investments and other assets

2,089

 

138

 

1414%

Other than temporary impairments

(371)

 

              -   

 

(100)%

Other

1,492

 

2,129

 

(30%)

Total

$  151,042

 

$  125,739

 

20%

Intersegment revenue

$      8,023

 

$      4,455

 

80%

Earnings before income taxes

$    11,923

 

$      6,565

 

82%

 

Intersegment revenues for the Company’s insurance operations were primarily interest income from the warehouse lines provided to its mortgage lending affiliates to fund loans held for sale. Profitability in 2020 increased due to a $13,201,000 increase in net investment income, a $11,160,000 increase in insurance premiums and other considerations, a $3,567,000 increase in intersegment revenue, a $1,950,000 increase in gains on investments and other assets primarily due to a decrease in impairment losses on commercial real estate, a $581,000 decrease in amortization of deferred policy acquisition costs, and a $453,000 decrease in interest expense. This increase was partially offset by a $17,930,000 increase in death, surrenders and other policy benefits ($6,239,000 for COVID-19 related deaths), a $6,449,000 increase in selling, general and administrative expenses, and a $637,000 decrease in other revenues. The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019. See Note 15 to the condensed consolidated financial statements. This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and selling, general and administrative expenses.

 

In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.


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Cemetery and Mortuary Operations

 

The following table shows the condensed financial results for the Company’s cemetery and mortuary operations for the years ended December 31, 2020 and 2019. See Note 15 of the Notes to Consolidated Financial Statements.

 

 

Years ended December 31
(in thousands of dollars)

 

2020

 

2019

 

2020 vs 2019 % Increase (Decrease)

Revenues from external customers:

 

 

 

 

 

Mortuary revenues

$        7,854

 

$        6,541

 

20%

Cemetery revenues

12,454

 

8,755

 

42%

Net investment income

808

 

580

 

39%

Gains on investments and other assets

(163)

 

530

 

(131%)

Other

94

 

95

 

(1%)

Total

$      21,047

 

$      16,501

 

28%

Earnings before income taxes

$        4,399

 

$        2,660

 

65%

 

Profitability in 2020 has increased due to a $2,133,000 increase in cemetery pre-need sales, a $1,566,000 increase in cemetery at-need sales, a $1,312,000 increase in mortuary at-need sales, and a $228,000 increase in net investment income. This increase was partially offset by a $2,178,000 increase in selling, general and administrative expenses, a $693,000 decrease in gains on investments and other assets primarily attributable to a $621,000 decrease in gains on real estate sales and a $72,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 pandemic, and a $374,000 increase in costs of goods sold.

 

As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited. The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.

 

Mortgage Operations

 

The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions.

 

The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 67% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

 

For the twelve months ended December 31, 2020 and 2019, SecurityNational Mortgage originated 21,206 loans ($5,472,503,000 total volume) and 10,885 loans ($2,534,399,000 total volume), respectively. For the twelve months ended December 31, 2020 and 2019, EverLEND Mortgage originated 511 loans ($154,511,000 total volume) and 275 loans ($72,440,000 total volume), respectively.

 

During the COVID-19 pandemic, the demand for mortgage loans has increased. The Company has seen most markets increase their demand for new homes and refinances on existing homes. The Company has transitioned 90% of its processes to a remote work environment.


20



The following table shows the condensed financial results for the Company’s mortgage operations for the years ended 2020 and 2019.  See Note 15 of the Notes to Consolidated Financial Statements.

 

 

Years ended December 31
(in thousands of dollars)

 

2020

 

2019

 

2020 vs 2019 % Increase (Decrease)

Revenues from external customers:

 

 

 

 

 

Income from loan originations

$      67,174

 

$      38,394

 

75%

Secondary gains from investors

231,759

 

93,582

 

148%

Net investment income

711

 

829

 

(14%)

Gains on investments and other assets

0

 

60

 

(100%)

Other

9,732

 

7,956

 

22%

Total

$    309,376

 

$    140,821

 

120%

Earnings before income taxes

$      55,128

 

$        4,718

 

1068%

 

Included in other revenues is service fee income. The increase in revenues for the Company’s mortgage operations for the twelve months ended December 31, 2020 as compared to December 31, 2019 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

 

Mortgage Loan Loss Settlements

 

Future loan losses can be extremely difficult to estimate.  However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate potential losses on mortgage loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2020 and 2019, the balances were $20,584,000 and $4,046,000, respectively.

 

Mortgage Loan Loss Litigation

 

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 3. Legal Proceedings.

 

Significant Accounting Policies

 

The following is a brief summary of the Company’s significant accounting policies and a review of the Company’s most critical accounting estimates. See Note 1 of the Notes to Consolidated Financial Statements.

 

Insurance Operations

 

In accordance with generally accepted accounting principles in the United States of America (“GAAP”), premiums and other considerations received for interest sensitive products are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses.

 

The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements.

 

Premiums and other considerations received for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits.

 

The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life products, these costs are amortized over the premium paying period of


21



the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity.

 

Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits. The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. The Company has the ability to mitigate adverse experience through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges.

 

Cemetery and Mortuary Operations

 

Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the caskets are delivered.

 

Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with the retail land sales provisions of GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above.

 

Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is delivered, fulfilling the performance obligation.

 

Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including 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 obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of GAAP. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, 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 company obligations remaining.

 

Mortgage Operations

 

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans. The Company has elected to use fair value accounting for all mortgage loans that are held for sale. Accordingly, all revenues and costs are now recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income.


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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 mortgage loans held for investment at the lower of cost or fair value and the previously recorded sales revenue that was to be received from a third-party investor is written off against the loan loss reserve. Any loan that later becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly.

 

Determining lower of cost or market. Cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Market value, while often difficult to determine, is based on the following guidelines:

 

·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 loan interest rate. 

 

The appraised value of the real estate underlying the original mortgage loan adds significance 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 risk.

 

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.


23



Use of Significant Accounting Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements. The following is a summary of our significant accounting estimates, and critical issues that impact them:

 

Loan Commitments

 

The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage backed security (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense. The change in fair value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued and is shown net of related expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments.

 

Deferred Acquisition Costs

 

Amortization of deferred policy acquisition costs for interest sensitive products is dependent upon estimates of current and future gross profits or margins on this business. Key assumptions used include the following: yield on investments supporting the liabilities, amount of interest or dividends credited to the policies, amount of policy fees and charges, amount of expenses necessary to maintain the policies, amount of death and surrender benefits, and the length of time the policies will stay in force.

 

For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued.

 

Value of Business Acquired

 

Value of business acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred acquisition costs. The critical issues explained for deferred acquisition costs would also apply for value of business acquired.

 

Mortgage Loans Foreclosed to Real Estate Held for Investment or Sale

 

These properties are recorded at the lower of cost or fair value upon foreclosure. The Company believes that in an orderly market, fair value approximates 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 estimated future policy benefits. Accordingly, the fair value determination is generally weighted more heavily toward the rental analysis. The fair value is also estimated by obtaining an independent appraisal, which typically considers area comparables and property condition.

 

Future Policy Benefits

 

Reserves for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, expenses, investment yield, lapse rates, surrender rates, and dividend crediting rates.


24



These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation. For traditional life insurance, once established for a particular series of products, these assumptions are generally held constant.

 

Unearned Revenue

 

The universal life products the Company sells have significant policy initiation fees (front-end load) that are deferred and amortized into revenues over the estimated expected gross profits from surrender charges and investment, mortality and expense margins. The same issues that impact deferred acquisition costs would apply to unearned revenue.

 

Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future Cost of Pre-need Sales

 

The revenue and cost associated with the sales of pre-need cemetery merchandise and funeral services are deferred until the merchandise is delivered or the service is performed.

 

The Company, through its cemetery and mortuary operations, provides a guaranteed funeral arrangement 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 or 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.

 

Mortgage Servicing Rights

 

Mortgage Service 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 the 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 Company initially accounts for MSRs at fair value and subsequently accounts for them using the amortization method. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. The Company periodically assesses MSRs accounted for using the amortization method for impairment.

 

Mortgage Allowance for Loan Losses and Loan Loss Reserve

 

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account) and through the mortgage loan loss reserve (a liability account). The allowance for loan losses is an allowance for losses on the Company’s mortgage loans held for investment. The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired.

 

Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them.

 

The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on mortgage loans sold to third-party investors. 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


25



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 in the event of defects in the representations and warranties made at loan sale. 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. The estimated liability for indemnification losses is included in other liabilities and accrued expenses.

 

The Company believes the allowance for loan losses and the loan loss reserve represent probable loan losses incurred as of the balance sheet date.

 

Deferred Tax Assets and Liabilities

 

Deferred tax assets and liabilities require various estimates and judgments and may be affected favorably or unfavorably by various internal and external factors.  These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities that arise from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and in estimating the ultimate amount of deferred tax assets recoverable in future periods. Factors affecting the deferred tax assets and liabilities include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, and changes to overall levels of pre-tax earnings.  Changes in these estimates, judgments or factors may result in an increase or decrease to the Company’s deferred tax assets and liabilities with a related increase or decrease in the Company’s provision for income taxes.

 

Results of Consolidated Operations

 

2020 Compared to 2019

 

Total revenues increased by $198,402,000, or 70.1%, to $481,463,000 for 2020 from $283,061,000 for the fiscal year 2019. Contributing to this increase in total revenues was a $166,957,000 increase in mortgage fee income, a $13,310,000 increase in net investment income, a $11,160,000 increase in insurance premiums and other considerations, a $5,011,000 increase in net cemetery and mortuary sales, a $1,198,000 increase in gains on investments and other assets, and a $1,137,000 increase in other revenues. This increase in total revenues was offset by a $371,000 increase in other than temporary impairments.

 

Insurance premiums and other considerations increased by $11,160,000, or 13.6%, to $93,021,000 for 2020, from $81,861,000 for the comparable period in 2019. This increase was primarily due to $10,452,000 from the acquisition of Kilpatrick Life in December 2019. See Note 20 to the consolidated financial statements. This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

 

Net investment income increased by $13,310,000, or 30.9%, to $56,330,000 for 2020, from $43,019,000 for the comparable period in 2019. This increase was primarily attributable to a $7,268,000 increase in mortgage loan interest ($4,048,000 due to interest on residential construction loans and $1,763,000 due to the acquisition of Kilpatrick Life), a $3,162,000 increase in rental income from real estate held for investment ($1,711,000 due to the acquisition of Kilpatrick Life and $1,651,000 due to Center53 building 1 now at 96% occupancy), a $1,861,000 increase in fixed maturity securities income ($2,233,000 due to the acquisition of Kilpatrick Life), a $1,752,000 increase in insurance assignment income, a $470,000 increase in policy loan income ($489,000 due to the acquisition of Kilpatrick Life), and a $333,000 increase in equity securities income ($44,000 due to the acquisition of Kilpatrick Life). This increase was partially offset by a $1,398,000 decrease in interest on cash and cash equivalents ($118,000 increase due to the acquisition of Kilpatrick Life), a $79,000 increase in investment expenses ($502,000 due to the acquisition of Kilpatrick Life), and a $59,000 decrease in income from other investments ($25,000 increase due to the acquisition of Kilpatrick Life).


26



Net mortuary and cemetery sales increased by $5,011,000, or 32.8%, to $20,307,000 for 2020, from $15,296,000 for the comparable period in 2019. This increase was primarily due to a $2,133,000 increase in cemetery pre-need sales, a $1,566,000 increase in cemetery at-need sales, and a $1,312,000 increase in mortuary at-need sales.

 

Gains on investments and other assets increased by $1,197,000, or 164.4%, to $1,926,000 for 2020, from $728,000 for the comparable period in 2019. This increase in gains on investments and other assets was primarily due to a $1,268,000 increase in gains on other assets ($341,000 due to the acquisition of Kilpatrick Life) mostly attributable to a decrease in impairment losses on commercial real estate. This increase in gains on investments and other assets was also due to a $71,000 increase in gains on fixed maturity securities ($137,000 due to the acquisition of Kilpatrick Life). This decrease in gains on investments and other assets was partially offset by a $142,000 decrease in gains on equity securities ($549,000 increase due to the acquisition of Kilpatrick Life).

 

Mortgage fee income increased by $166,957,000, or 126.5%, to $298,933,000 for 2020, from $131,976,000 for the comparable period in 2019. This increase was primarily due to a $138,177,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $18,421,000 increase in loan fees and interest income, and a $14,653,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage fee income was partially offset by a $4,294,000 increase in the provision for loan loss reserve.

 

Other revenues increased by $1,137,000, or 11.2%, to $11,317,000 for 2020 from $10,180,000 for the comparable period in 2019. This increase was primarily attributable to an increase in servicing fee revenue.

 

Total benefits and expenses were $410,013,000, or 85.2% of total revenues for 2020, as compared to $269,117,000, or 95.1% of total revenues for the comparable period in 2019.

 

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $17,930,000, or 26.2%, to $86,410,000 for 2020, from $68,480,000 for the comparable period in 2019. This increase was primarily the result of a $17,449,000 increase in death benefits ($8,324,000 due to the acquisition of Kilpatrick Life and $6,239,000 for COVID-19 related deaths) and a $481,000 increase in surrender and other policy benefits ($918,000 due to the acquisition of Kilpatrick Life).

 

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $327,000, or 2.2%, to $14,307,000 for 2020, from $14,634,000 for the comparable period in 2019. This decrease was primarily due to improved persistency in the payment of premiums in the traditional life business. ($125,000 increase due to the acquisition of Kilpatrick Life).

 

Selling, general and administrative expenses increased by $121,727,000, or 69.3%, to $297,464,000 for 2020, from $175,737,000 for the comparable period in 2019. This increase was primarily the result of a $67,663,000 increase in commissions, a $20,769,000 increase in personnel expenses, a $16,506,000 increase in the provision for loan loss reserve, a $12,408,000 increase in other expenses, a $3,599,000 increase in costs related to funding mortgage loans, a $596,000 increase in advertising expenses, and a $367,000 increase in depreciation on property and equipment. This increase was partially offset by a $182,000 decrease in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $66,600,000 in commissions, $15,140,000 in personnel expenses, $11,192,000 in other expenses, and $554,838 in advertising expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $2,027,000 in personnel expenses, $1,329,000 in other expenses, and $1,047,000 in commissions.

 

Interest expense increased by $1,192,000, or 16.1%, to $8,579,000 for 2020, from $7,387,000 for the comparable period in 2019. This increase was primarily due to an increase of $1,735,000 in interest expense on mortgage warehouse lines for loans held for sale. This increase was partially offset by a $598,000 decrease in interest expense on bank loans collateralized by real estate held for investment.

 

Cost of goods and services sold of the cemeteries and mortuaries increased by $374,000, or 13.0%, to $3,252,000 for 2020, from $2,878,000 for the comparable period in 2019. This increase was primarily due to an $176,000 increase in mortuary at-need sales, a $126,000 increase in cemetery at-need sales, and a $72,000 increase in cemetery pre-need sales.


27



Income tax expense increased by $12,803,000, or 412.4%, to $15,854,000 for 2020, from $3,050,00 for the comparable period in 2019.  This increase was primarily due to an increase in earnings before income taxes for 2020 compared to 2019.

 

Risks

 

The following is a description of the most significant risks facing the Company and how it mitigates those risks:

 

Legal and Regulatory Risks. Changes in the legal or regulatory environment in which the Company operates may create additional expenses and risks not anticipated by the Company in developing and pricing its products. Regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company’s mortgage sales. Also, the Company may be subject to further regulations in the cemetery and mortuary business. The Company mitigates these risks by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices that identify and minimize the adverse impact of such risks.

 

Mortgage Industry Risks. Developments in the mortgage industry and credit markets can adversely affect the Company’s ability to sell its mortgage loans to investors, which can impact the Company’s financial results by requiring it to assume the risk of holding and servicing any unsold loans.

 

The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company could realize in the future on mortgage loans sold to third-party investors. The Company’s mortgage subsidiaries may be required to reimburse third-party investors for costs associated with early payoff of loans within the first six months 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.

 

During the twelve months ended December 31, 2020 and 2019 the Company increased its loan loss reserve by $4,938,000 and $643,000, respectively, for loan originations, and the charge has been included in mortgage fee income. During the twelve months ended December 31, 2020 and 2019 the Company increased its loan loss reserve by an additional $16,506,000 and $-0-, respectively, to account for changes in estimates specific to settlements of loan losses. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2020 and 2019, the balances were $20,584,000 and $4,046,000, respectively. The Company believes the loan loss reserve represent probable loan losses incurred as of December 31, 2020. There is a risk, however, that future loan losses may exceed the loan loss reserve.

 

As of December 31, 2020, the Company’s mortgage loans held for investment portfolio consisted of $10,282,000 in mortgage loans with delinquencies more than 90 days. Of this amount, $2,464,000 of the loans were in foreclosure proceedings. The Company has not received or recognized any interest income on the $10,282,000 in mortgage loans with delinquencies more than 90 days. During the twelve months ended December 31, 2020 and 2019, the Company increased its allowance for loan losses by $552,000 and by $105,000, respectively, which was charged to bad debt expense and included in selling, general and administrative expenses for the period. The allowances for loan losses on the Company’s held for investment portfolio as of December 31, 2020 and 2019 were $2,005,000 and $1,453,000, respectively.

 

Interest Rate Risk. The risk that interest rates will change, which may cause a decrease in the value of the Company’s investments or impair the ability of the Company to market its mortgage and cemetery and mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a loss on the sale.

 

Mortality and Morbidity Risks. The risk that the Company’s actuarial assumptions may differ from actual mortality and morbidity experiences may cause the Company’s products to be underpriced, may cause the Company to liquidate


28



insurance or other claims earlier than anticipated, and other potentially adverse consequences to the business. The Company minimizes this risk through sound underwriting practices, asset and liability duration matching, and sound actuarial practices.

 

COVID-19. During 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company is closely monitoring developments relating to the COVID-19 pandemic and assessing its impact on the Company’s business. The COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions.

 

Like most businesses, COVID-19 has impacted the Company. However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company.

 

The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, such as business travel restrictions and remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business.

 

Estimates.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits and unearned revenue; those used in determining the estimated future costs for pre-need sales; those used in determining the value of mortgage servicing rights; those used in determining allowances for 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.

 

Liquidity and Capital Resources

 

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held to maturity investments or sale of other investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees on mortgage loans held for sale that are sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses. It should be noted that current conditions in the financial markets and economy caused by the COVID-19 pandemic may affect the cash flows of the Company.

 

During the twelve months ended December 31, 2020 and 2019, the Company's operations used cash of $129,627,000 and $75,602,000, respectively. This increase was primarily due to originations of mortgage loans held for sale.


29



The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person’s death. A person generally will keep these policies in force and will not surrender them prior to a person’s death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in market values.

 

The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products. The Company’s investment philosophy is intended to provide a rate of return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.

 

The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $294,384,000 (at estimated fair value) and $355,613,000 (at estimated fair value) as of December 31, 2020 and 2019, respectively. This represents 38.0% and 45.5% of the total investments as of December 31, 2020, and 2019, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At December 31, 2020, 4.2% (or $12,418,000) and at December 31, 2019, 2.2% (or $7,633,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

 

See Note 2 of the Notes to Consolidated Financial Statements for the schedule of the maturity of fixed maturity securities available for sale and for the schedule of principal payments for mortgage loans held for investment.

 

See Note 7 of the Notes to Consolidated Financial Statements for a description of the Company’s sources of liquidity.

 

If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio (of approximately $544,001,000), which includes bonds, preferred stocks and mortgage loans held for investment, could change by the following amounts based on the respective basis point swing (the change in the fair values were calculated using a modeling technique):

 

 

-200 bps

-100 bps

+100 bps

+200 bps

Change in Fair Value
(in thousands)

$15,635

$6,869

$(10,662)

$(19,428)

 

The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2020 and 2019, the capital levels of the life insurance subsidiaries exceeded the regulatory criteria.

 

The Company’s total capitalization of stockholders’ equity, and bank loans and other loans payable was $561,811,000 as of December 31, 2020, as compared to $414,283,000 as of December 31, 2019. Stockholders’ equity as a percent of total capitalization was 47.0% and 47.5% as of December 31, 2020 and December 31, 2019, respectively. Bank loans and other loans payable increased by $80,252,000 for the twelve months ended December 31, 2020 as compared to December 31, 2019, thus limiting the increase in the stockholders’ equity percentage.

 

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance was 5.9% in 2020 as compared to a rate of 9.8% for 2019.

 

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $78,493,000 and $74,140,000 as of December 31, 2020 and 2019, respectively. The life insurance subsidiaries cannot pay a dividend to its parent company without the approval of state insurance regulatory authorities.


30



Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the “safe harbor” provisions of the act.

 

This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company’s projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management’s then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate.

 

Factors that may cause the Company’s actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (iv) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative, or general expenses due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives or employees; (vii) increases in medical costs; (viii) changes in the Company’s liquidity due to changes in asset and liability matching; (ix) restrictions on insurance underwriting based on genetic testing and other criteria; (x) adverse changes in the ratings obtained by independent rating agencies; (xi) failure to maintain adequate reinsurance; (xii) possible claims relating to sales practices for insurance products and claim denials; (xiii) adverse trends in mortality and morbidity; (xiv) deterioration of real estate markets; and (xv) lawsuits in the ordinary course of business.

 

Off-Balance Sheet Agreements

 

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, 2020, the Company’s commitments were approximately $185,751,000 for these loans, of which $115,898,000 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 generally range between six and eighteen months.

 

Contractual Obligations

 

The Company’s contractual obligations as of December 31, 2020, and the payments due by period are shown in the following table:

 

 

Less than
1 year

 

1-3 years

 

4-5 years

 

over
5 years

 

Total

Bank and other loans payable

284,242,327

 

 1,810,569

 

 2,571,472

 

    9,200,000

 

  297,824,368

Non-cancelable operating leases

    4,344,756

 

 5,092,299

 

 2,405,450

 

   2,938,906

 

    14,781,411

Future policy benefits (1)

  11,428,444

 

37,020,154

 

51,077,675

 

728,904,251

 

   828,430,524

 

$ 300,015,527

 

$ 43,923,022

 

$ 56,054,597

 

$ 741,043,157

 

$ 1,141,036,303

 

(1)Amounts represent the present value of future policy benefits, net of estimated future premiums.  


31



Casualty Insurance Program

 

In conjunction with the Company’s casualty insurance program, limited equity interests are held in a captive insurance entity. This program permits the Company to self-insure a portion of losses, to gain access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit its risk of loss in any particular year. The maximum exposure to loss related to the Company’s involvement with this entity is limited to approximately $348,183, which is collateralized under a standby letter of credit issued on the insurance entity’s behalf. See Note 10, “Reinsurance, Commitments and Contingencies,” for additional discussion of commitments associated with the insurance program. The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid.

 

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.


32



Item 8.  Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page No.

Financial Statements:

 

 

Report of Independent Registered Public Accounting Firm

34

 

Consolidated Balance Sheets, December 31, 2020 and 2019

36

 

Consolidated Statements of Earnings for the Years Ended December 31, 2020 and 2019

38

 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 and 2019

39

 

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019

40

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019

41

 

Notes to Consolidated Financial Statements

43


33



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors of Security National Financial Corporation:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Future Policy Benefits and Amortization of Deferred Policy Acquisition Costs for Insurance Contracts and Value of Business Acquired - Refer to Notes 1 and 22 to the financial statements

 

Critical Audit Matter Description

 

The Company’s management sets assumptions in (1) recording a liability for policy benefit payments that will be made in the future (future policy benefits) and (2) determining amortization of deferred policy acquisition costs for insurance contracts and value of business acquired. The most significant assumptions include mortality, lapse, and projected investment yield. Assumptions are determined based upon published studies and analysis of Company specific experience, adjusted for changes in exposure and other relevant factors. Given the inherent uncertainty of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment.


34



How the Critical Audit Matter Was Addressed in the Audit

 

Our audit procedures related to management’s judgments regarding the assumptions used in the development of future policy benefits and the amortization of deferred policy acquisition costs for insurance contracts and value of business acquired, included the following, among others:

 

We tested the design and implementation of controls over the assumption development process, the valuation of future policy benefits, and the amortization of deferred policy acquisition costs for insurance contracts and value of business acquired. 

With the assistance of our actuarial specialists, we: 

evaluated management’s selected actuarial assumptions, including testing the accuracy and completeness of the supporting experience studies, 

evaluated management’s judgments regarding the assumptions used in the development of future policy benefits and the amortization of deferred policy acquisition costs and value of business acquired, 

evaluated the results of the Company’s annual premium deficiency tests.  

 

/s/ Deloitte & Touche LLP

 

Salt Lake City, UT

 

March 31, 2021

 

We have served as the Company's auditor since 2017.


35



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31

Assets

 

2020

 

2019

Investments:

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value

 

$  294,656,679

 

$    355,977,820

Equity securities at estimated fair value

 

      11,324,239

 

         7,271,165

Mortgage loans held for investment (net of allowances for loan losses of $2,005,127 and $1,453,037 for 2020 and 2019)

 

    249,343,936

 

     236,694,546

Real estate held for investment (net of accumulated depreciation of $13,800,973 and $12,788,739 for 2020 and 2019)

 

    131,684,453

 

     102,756,946

Real estate held for sale

 

       7,878,807

 

       14,097,627

Other investments and policy loans (net of allowances for doubtful accounts of $1,645,475 and $1,448,026 for 2020 and 2019)

 

      73,696,661

 

       60,245,269

Accrued investment income

 

       5,360,523

 

         4,833,232

Total investments

 

    773,945,298

 

     781,876,605

Cash and cash equivalents

 

    106,219,429

 

     127,754,719

Loans held for sale at estimated fair value

 

    422,772,418

 

     213,457,632

Receivables (net of allowances for doubtful accounts of $1,685,382 and $1,724,156 for 2020 and 2019)

 

      10,899,207

 

         9,236,330

Restricted assets (including $3,989,415 and $2,985,347 for 2020 and 2019 at estimated fair value)

 

      16,150,036

 

       13,935,317

Cemetery perpetual care trust investments (including $2,810,070 and $2,581,124 for 2020 and 2019 at estimated fair value)

 

       6,413,167

 

         4,411,864

Receivable from reinsurers

 

      15,569,156

 

       15,747,768

Cemetery land and improvements

 

       8,761,436

 

         9,519,950

Deferred policy and pre-need contract acquisition costs

 

    100,075,276

 

       94,701,920

Mortgage servicing rights, net

 

      35,210,516

 

       17,155,529

Property and equipment, net

 

      12,473,345

 

       14,600,394

Value of business acquired

 

       8,955,249

 

         9,876,647

Goodwill

 

       3,519,588

 

         3,519,588

Other

 

      27,976,357

 

       18,649,812

Total Assets

 

$1,548,940,478

 

$ 1,334,444,075

 

See accompanying notes to consolidated financial statements.


36



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

 

 

 

 

 

December 31

Liabilities and Stockholders' Equity

 

2020

 

2019

Liabilities

 

 

 

 

Future policy benefits and unpaid claims

 

$   844,790,087

 

$   825,600,918

Unearned premium reserve

 

         3,328,623

 

         3,621,697

Bank and other loans payable

 

     297,824,368

 

     217,572,612

Deferred pre-need cemetery and mortuary contract revenues

 

       13,080,179

 

       12,607,978

Cemetery perpetual care obligation

 

         4,087,704

 

         3,933,719

Accounts payable

 

         8,932,683

 

         5,056,983

Other liabilities and accrued expenses

 

       87,650,981

 

       50,652,591

Income taxes

 

       25,258,800

 

       18,686,972

Total liabilities

 

   1,284,953,425

 

   1,137,733,470

Stockholders’ Equity

 

 

 

 

Preferred Stock:

 

 

 

 

Preferred stock - non-voting-$1.00 par value; 5,000,000 shares authorized; none issued or outstanding

 

                     -

 

                     -

Common Stock:

 

 

 

 

Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,595,783 shares in 2020 and 16,107,779 shares in 2019

 

       33,191,566

 

       32,215,558

Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding

 

                     -

 

                     -

Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,679,603 shares in 2020 and 2,500,887 shares in 2019

 

         5,359,206

 

         5,001,774

Additional paid-in capital

 

       50,287,253

 

       46,091,112

Accumulated other comprehensive income, net of taxes

 

       23,243,133

 

       13,726,514

Retained earnings

 

     153,739,167

 

     101,256,229

Treasury stock, at cost - 227,852 Class A shares and 10,985 Class C shares in 2020; 490,823 Class A shares and -0- Class C shares in 2019

 

       (1,833,272)

 

       (1,580,582)

Total stockholders’ equity

 

     263,987,053

 

     196,710,605

Total Liabilities and Stockholders’ Equity

 

$ 1,548,940,478

 

$ 1,334,444,075

 

See accompanying notes to consolidated financial statements.


37



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

 

 

Years Ended December 31

 

2020

 

2019

Revenues:

 

 

 

Mortgage fee income

$       298,933,110

 

$       131,976,082

Insurance premiums and other considerations

           93,020,617

 

           81,860,610

Net investment income

           56,329,803

 

           43,019,473

Net mortuary and cemetery sales

           20,307,435

 

           15,296,235

Gains on investments and other assets

             1,925,850

 

                728,367

Other than temporary impairments on investments

            (370,975)

 

                            -

Other

           11,317,482

 

           10,180,163

Total revenues

         481,463,322

 

         283,060,930

 

 

 

 

Benefits and expenses:

 

 

 

Death benefits

           59,040,130

 

           41,591,057

Surrenders and other policy benefits

             3,801,230

 

             3,320,748

Increase in future policy benefits

           23,568,650

 

           23,568,497

Amortization of deferred policy and pre-need acquisition costs and value of business acquired

           14,307,425

 

           14,634,577

Selling, general and administrative expenses:

 

 

 

   Commissions

         124,426,297

 

           56,762,891

   Personnel

           84,989,971

 

           64,221,270

   Advertising

             5,380,896

 

             4,784,558

   Rent and rent related

             6,873,561

 

             7,055,456

   Depreciation on property and equipment

             2,078,738

 

             1,711,369

   Provision for loan loss reserve

           16,506,030

 

                            -

   Costs related to funding mortgage loans

             9,877,700

 

             6,278,954

   Other

           47,331,102

 

           34,922,761

Interest expense

             8,578,810

 

             7,386,688

Cost of goods and services sold – cemeteries and mortuaries

             3,252,655

 

             2,878,169

Total benefits and expenses

         410,013,195

 

         269,116,995

 

 

 

 

Earnings before income taxes

           71,450,127

 

           13,943,935

Income tax expense

         (15,853,514)

 

           (3,050,416)

Net earnings

$         55,596,613

 

$         10,893,519

 

 

 

 

Net earnings per Class A equivalent common share (1)

$2.95

 

$0.59

 

 

 

 

Net earnings per Class A equivalent common share -
  assuming dilution (1)

$2.88

 

$0.58

 

 

 

 

Weighted average Class A equivalent common shares
  outstanding (1)

           18,831,991

 

           18,562,056

 

 

 

 

Weighted average Class A equivalent common shares
  outstanding-assuming dilution (1)

           19,275,251

 

           18,689,602

 

(1) Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share.

 

See accompanying notes to consolidated financial statements.


38



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Years Ended December 31

 

2020

 

2019

Net earnings

$  55,596,613

 

$   10,893,519

Other comprehensive income:

 

 

 

 Unrealized gains on fixed maturity securities available for sale

    12,013,692

 

     17,315,770

 Unrealized gains on restricted assets

          41,225

 

           35,550

 Unrealized gains (losses) on cemetery perpetual care trust investments

          (6,817)

 

           29,904

 Foreign currency translation adjustments

              (46)

 

               972

 Other comprehensive income, before income tax

    12,048,054

 

     17,382,196

 Income tax expense

    (2,531,435)

 

     (3,652,859)

 Other comprehensive income, net of income tax

     9,516,619

 

     13,729,337

Comprehensive income

$  65,113,232

 

$   24,622,856

 

See accompanying notes to consolidated financial statements.


39



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

Class A Common Stock

Class C Common Stock

Additional Paid-in Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Treasury Stock

Total

Balance at December 31, 2018

30,609,596

  4,387,286

  41,821,778

           (2,823)

  95,201,732

     (206,396)

171,811,173

 

 

 

 

 

 

 

 

Net earnings

                 -

                 -

                 -

                 -

   10,893,519

                 -

 10,893,519

Other comprehensive income

                 -

                 -

                 -

     13,729,337

                 -

                 -

 13,729,337

Stock based compensation expense

                 -

                 -

       256,996

                 -

                 -

                 -

      256,996

Exercise of stock options

        65,034

    382,886

        415,990

                 -

                 -

                 -

      863,910

Sale of treasury stock

                 -

                 -

       529,858

                 -

                 -

        165,702

      695,560

Purchase of treasury stock

                 -

                 -

                 -

                 -

                 -

 (1,539,888)

(1,539,888)

Stock dividends

   1,534,356

      238,174

      3,066,490

                 -

  (4,839,022)

                 -

             (2)

Conversion Class C to Class A

          6,572

       (6,572)

                 -

                 -

                   -

                 -

                 -

Balance at December 31, 2019

32,215,558

  5,001,774

   46,091,112

      13,726,514

101,256,229

(1,580,582)

196,710,605

 

 

 

 

 

 

 

 

Net earnings

                 -

                 -

                 -

                 -

   55,596,613

                 -

 55,596,613

Other comprehensive income

                 -

                 -

                 -

        9,516,619

                 -

                 -

   9,516,619

Stock based compensation expense

                 -

                 -

       358,878

                 -

                 -

                 -

      358,878

Exercise of stock options

     137,940

      261,640

       432,572

                 -

                 -

                 -

     832,152

Sale of treasury stock

                 -

                 -

    1,224,877

                 -

                 -

     2,715,071

     3,939,948

Purchase of treasury stock

                 -

                 -

                 -

                 -

                 -

  (2,967,761)

(2,967,761)

Stock dividends

      810,420

      123,440

     2,179,814

                 -

   (3,113,675)

                 -

              (1)

Conversion Class C to Class A

        27,648

     (27,648)

                 -

                 -

                 -

                 -

                 -

Balance at December 31, 2020

$33,191,566

$ 5,359,206

$50,287,253

$    23,243,133

$153,739,167

$(1,833,272)

$263,987,053

 

 

See accompanying notes to consolidated financial statements.


40



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

Years Ended December 31

 

 

 

 

 

2020

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$   55,596,613

 

$   10,893,519

 

 

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

 

 

Gains on investments and other assets

 

     (1,925,850)

 

       (728,367)

 

 

 

Other than temporary impairments on investments

 

           370,975

 

                     -

 

 

 

Depreciation

 

        5,447,363

 

       5,183,658

 

 

 

Provision for loan losses and doubtful accounts

 

        1,577,370

 

       1,202,688

 

 

 

Net amortization of deferred fees and costs, premiums and discounts

 

     (1,227,773)

 

       (887,605)

 

 

 

Provision for deferred income taxes

 

        2,854,669

 

    (1,857,897)

 

 

 

Policy and pre-need acquisition costs deferred

 

   (18,909,921)

 

  (19,176,531)

 

 

 

Policy and pre-need acquisition costs amortized

 

      13,520,600

 

     13,787,037

 

 

 

Value of business acquired amortized

 

           786,825

 

          847,540

 

 

 

Mortgage servicing rights, additions

 

   (29,896,465)

 

    (4,194,502)

 

 

 

Amortization of mortgage servicing rights

 

      11,841,478

 

       7,055,795

 

 

 

Stock based compensation expense

 

           358,878

 

          256,996

 

 

 

Benefit plans funded with treasury stock

 

        3,939,948

 

          695,560

 

 

 

Net change in fair value of loans held for sale

 

 (10,413,492)

 

    (2,498,097)

 

 

 

Originations of loans held for sale

 

(5,627,013,749)

 

(2,606,839,175)

 

 

 

Proceeds from sales of loans held for sale

 

  5,600,045,285

 

  2,580,875,055

 

 

 

Net gains on sales of loans held for sale

 

   (188,893,379)

 

     (80,666,413)

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Land and improvements held for sale

 

           758,514

 

           358,477

 

 

 

Future policy benefits and unpaid claims

 

      25,804,740

 

      18,394,928

 

 

 

Other operating assets and liabilities

 

      25,750,164

 

        1,695,259

 

 

 

Net cash used in operating activities

 

   (129,627,207)

 

     (75,602,075)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of fixed maturity securities

 

     (58,493,147)

 

   (110,601,438)

 

 

 

Sales, calls and maturities of fixed maturity securities

 

     131,269,730

 

      26,624,182

 

 

 

Purchase of equity securities

 

       (6,991,832)

 

       (3,264,028)

 

 

 

Sales of equity securities

 

        3,902,835

 

        2,639,729

 

 

Net changes in restricted assets

 

       (1,954,437)

 

       (1,254,991)

 

 

Net changes in cemetery perpetual care trust investments

 

       (2,755,856)

 

           299,897

 

 

Mortgage loans held for investment, other investments and policy loans made

 

   (682,170,126)

 

   (572,171,590)

 

 

Payments received for mortgage loans held for investment, other investments and policy loans

 

     672,544,708

 

     556,352,676

 

 

Purchases of property and equipment

 

       (1,630,734)

 

       (1,839,293)

 

 

Sales of property and equipment

 

           194,955

 

            54,496

 

 

Purchases of real estate

 

     (40,190,471)

 

       (8,572,556)

 

 

Sales of real estate

 

      22,418,816

 

      11,614,927

 

 

Cash received for reinsurance assumed

 

                     -

 

     158,358,594

 

 

Cash paid for purchase of subsidiaries, net of cash acquired

 

                     -

 

     (20,141,074)

 

 

Net cash provided by investing activities

 

      36,144,441

 

      38,099,531

 


41



SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

 

 

 

Years Ended December 31

 

 

 

2020

 

2019

 

Cash flows from financing activities:

 

 

 

 

 

 

Investment contract receipts

 

$   11,511,118

 

$   12,141,627

 

 

Investment contract withdrawals

 

   (18,235,107)

 

   (16,911,841)

 

 

Proceeds from stock options exercised

 

         832,152

 

         863,910

 

 

Purchase of treasury stock

 

     (2,967,761)

 

     (1,539,888)

 

 

Repayment of bank loans

 

  (174,865,813)

 

  (236,790,722)

 

 

Proceeds from bank loans

 

   164,586,365

 

   196,610,127

 

 

Net change in warehouse line borrowings for loans held for sale

 

     90,351,225

 

     69,928,331

 

Net cash provided by financing activities

 

     71,212,179

 

     24,301,544

 

Net change in cash, cash equivalents, restricted cash and restricted cash equivalents

 

   (22,270,587)

 

   (13,201,000)

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year

 

   137,735,673

 

   150,936,673

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of year

 

$ 115,465,086

 

$ 137,735,673

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

   

Interest (net of amount capitalized)

 

$     8,385,270

 

$     7,284,078

 

 

Income taxes

 

     11,813,120

 

       4,861,318

 

 

 

 

 

 

 

 

Non Cash Investing and Financing Activities:

 

 

 

 

 

 

Transfer of loans held for sale to mortgage loans held for investment

 

$   16,960,549

 

$   31,881,851

 

 

Accrued real estate construction costs and retainage

 

       6,365,534

 

         590,256

 

 

Right-of-use assets obtained in exchange for operating lease liabilities

 

       5,631,193

 

     16,544,406

 

 

Mortgage loans held for investment foreclosed into real estate held for investment

 

         686,124

 

       1,704,015

 

 

Right-of-use assets obtained in exchange for finance lease liabilities

 

             8,494

 

         252,763

 

 

Transfer of real estate held for investment to property and equipment

 

                   -

 

       3,261,259

 

 

Transfer of property and equipment to real estate held for investment

 

       1,516,700

 

                   -

 

 

Mortgage loans held for investment foreclosed into receivables

 

                   -

 

         155,347

 

 

 

 

 

 

 

 

 

See Note 20 regarding non cash transactions included in the acquisitions of Probst Family Funerals and Cremations and Heber Valley Funeral Home and Kilpatrick Life Insurance Company

 

 

 

 

 

 

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

 

 

Years Ended December 31

 

2020

 

2019

Cash and cash equivalents

$   106,219,429

 

$    127,754,719

Restricted assets

          8,842,744

 

          8,674,214

Cemetery perpetual care trust investments

             402,913

 

          1,306,740

Total cash, cash equivalents, restricted cash and restricted cash equivalents

$     115,465,086

 

$    137,735,673

 

See accompanying notes to consolidated financial statements.


42


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019


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 Intermountain West, California and eleven southern states. The cemetery and mortuary segment of the Company consists of eight mortuaries and five cemeteries in Utah and one cemetery in California. 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. On December 31, 2019, the Company changed the classification of its bond and preferred stock investments to available for sale from held to maturity. As a result, securities available for sale are carried at estimated fair value.


43


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


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.

 

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 material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the 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.

 

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.


44


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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 Lower of Cost or 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, 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. 


45


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


·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. 

 

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.


46


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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 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 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 four of the six 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 is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs.


47


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


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.


48


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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.


49


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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 realized 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. 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:


50


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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.


51


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


Participating Insurance

 

Participating business constituted 2% of insurance in force for the years ended 2020 and 2019. 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.

 

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 recognized in accordance with the retail land sales provisions based on GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be 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.

 

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.


52


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


Prearranged funeral and pre-need cemetery customer acquisition costs - costs incurred related to obtaining new pre-need contract cemetery and prearranged funeral services are accounted for under the guidance of the provisions based on GAAP. Obtaining costs, 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 obligations remaining.

 

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 (trade name and customer lists)

 

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 engaged a valuation firm to analyze the value of the Kilpatrick Life name in conjunction with its acquisition.  The value of the trade name is included in Other Assets and was 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 other expenses.


53


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


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.

 

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 geographic concentration risk regarding 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 Adopted in 2020

 

ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures.

 

Accounting Standards Adopted in 2019

 

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


54


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

1)Significant Accounting Policies (Continued) 


further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

 

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

 

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

 

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, especially as it relates to mortgage loans held for investment.

 

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

 

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


55


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019


2) Investments 

 

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

 

31,047,791

 

1,565,377

 

(267,106)

 

32,346,062

 

 

 

 

 

 

 

 

 

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 borrowings.


56


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


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

 

 

 

Amortized Cost

 

Gross Unrealized Gains

 

Gross Unrealized Losses

 

Estimated Fair Value

December 31, 2019:

 

 

 

 

 

 

 

 

Fixed maturity securities, available for sale, at estimated fair value:

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of U.S. Government agencies

 

$    142,740,641

 

$      632,185

 

$   (25,215)

 

$ 143,347,611

    

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

7,450,366

 

87,812

 

(9,026)

 

7,529,152

 

 

 

 

 

 

 

 

 

Corporate securities including public utilities

 

156,599,184

 

16,768,449

 

(463,413)

 

172,904,220

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

31,475,280

 

597,395

 

(240,177)

 

31,832,498

 

 

 

 

 

 

 

 

 

Redeemable preferred stock

 

364,339

 

                  -   

 

              -   

 

364,339

 

 

 

 

 

 

 

 

 

Total fixed maturity securities available for sale

 

$    338,629,810

 

$ 18,085,841

 

$ (737,831)

 

$ 355,977,820

 

 

 

 

 

 

 

 

 

Equity securities at estimated fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial, miscellaneous and all other

 

$        6,900,537

 

$   1,139,799

 

$ (769,171)

 

$     7,271,165

 

 

 

 

 

 

 

 

 

Total equity securities at estimated fair value

 

$        6,900,537

 

$   1,139,799

 

$ (769,171)

 

$     7,271,165

 

 

 

 

 

 

 

 

 

Mortgage loans held for investment at amortized cost:

 

 

 

 

 

 

 

 

Residential

 

$    113,043,965

 

 

 

 

 

 

Residential construction

 

        89,430,237

 

 

 

 

 

 

Commercial

 

        38,718,220

 

 

 

 

 

 

Less: Unamortized deferred loan fees, net

 

        (2,391,567)

 

 

 

 

 

 

Less: Allowance for loan losses

 

        (1,453,037)

 

 

 

 

 

 

Less: Net discounts

 

           (653,272)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage loans held for investment

 

$    236,694,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for investment - net of accumulated depreciation:

 

 

 

 

 

 

 

 

Residential

 

$      12,530,306

 

 

 

 

 

 

Commercial

 

        90,226,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for investment

 

$    102,756,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale:

 

 

 

 

 

 

 

 

Residential

 

$        8,021,306

 

 

 

 

 

 

Commercial

 

          6,076,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total real estate held for sale

 

$      14,097,627

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments and policy loans at amortized cost:

 

 

 

 

 

 

 

 

Policy loans

 

$      14,762,805

 

 

 

 

 

 

Insurance assignments

 

        41,062,965

 

 

 

 

 

 

Federal Home Loan Bank stock (1)

 

             894,300

 

 

 

 

 

 

Other investments

 

          4,973,225

 

 

 

 

 

 

Less: Allowance for doubtful accounts

 

        (1,448,026)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total policy loans and other investments

 

$      60,245,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued investment income

 

$        4,833,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments

 

$    781,876,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings.


57


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


Fixed Maturity Securities

 

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Such investments are carried at fair value with any unrealized gains and losses reported as a component of other accumulated comprehensive income or loss. At the date of the transfer, the carrying value of the Company’s held to maturity securities was $338,629,810, and net unrealized gains of $17,315,770 were recognized in accumulated other comprehensive income.

 

The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at December 31, 2020 and at December 31, 2019. 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:

 

 

 

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, 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

 

     266,522

 

   3,455,574

 

             584

 

       51,961

 

     267,106

 

   3,507,535

Total unrealized losses

 

$    510,379

 

$13,581,684

 

$   439,466

 

  2,644,987

 

$    949,845

 

$16,226,671

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Securities and Obligations

 

 

 

 

 

 

 

 

 

 

 

 

   of U.S. Government Agencies

 

$      20,211

 

$30,629,288

 

$        5,004

 

$10,000,400

 

$      25,215

 

$40,629,688

Obligations of States and Political Subdivisions

 

         9,026

 

   3,062,889

 

                -

 

                -

 

         9,026

 

   3,062,889

Corporate Securities

 

      118,746

 

  7,184,311

 

     344,667

 

  3,950,509

 

    463,413

 

 11,134,820

Mortgage and other asset-backed securities

 

     205,470

 

 13,266,443

 

       34,707

 

      502,769

 

     240,177

 

 13,769,212

Total unrealized losses

 

$    353,453

 

$54,142,931

 

$    384,378

 

$14,453,678

 

$    737,831

 

$68,596,609

 

There were 63 securities with fair value of 94.7% of amortized cost at December 31, 2020. There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019. Credit losses of $370,975 and $-0- have been recognized for the years ended December 31, 2020 and 2019, 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. 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.


58


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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 for the years ended December 31:

 

 

2020

2019

Balance of credit-related OTTI at January 1

$                        -

$                       -

 

 

 

Additions for credit impairments recognized on:

 

 

 Securities not previously impaired

              370,975

                         -

 Securities previously impaired

                          -

                         -

 

 

 

Reductions for credit impairments previously recognized on:

 

 

 Securities that matured or were sold during the period (realized)

                          -

                         -

 Securities due to an increase in expected cash flows

                          -

                         -

 

 

 

Balance of credit-related OTTI at December 31

$            370,975

$                       -

 

The amortized cost and estimated fair value of fixed maturity securities available for sale at December 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

Amortized

 

Estimated Fair

 

 

   Cost   

 

    Value      

Due in 1 year

 

$      28,634,042

 

$        28,831,983

Due in 2-5 years

 

        66,183,907

 

          70,910,775

Due in 5-10 years

 

        70,162,166

 

          78,592,046

Due in more than 10 years

 

        68,853,364

 

          83,703,208

Mortgage-backed securities

 

        31,047,791

 

          32,346,062

Redeemable preferred stock

 

             269,214

 

               272,605

Total

 

$    265,150,484

 

$      294,656,679

 

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $40,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at December 31, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of December 31, 2020, the Company did not have any outstanding amounts owed to the FHLB and its estimated maximum borrowing capacity was $39,102,336.


59


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


Investment Related Earnings

 

The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments from investments and other assets for the years ended December 31 are summarized as follows:

 

 

2020

 

2019

Fixed maturity securities available for sale:

 

 

 

Gross realized gains

$         445,749

 

$         459,286

Gross realized losses

           (77,546)

 

         (162,649)

Other than temporary impairments

         (370,975)

 

                       -

 

 

 

 

Equity securities:

 

 

 

Gains on securities sold

             74,836

 

           256,520

Unrealized gains on securities held at the

end of the period

        1,125,304

 

        1,086,116

 

 

 

 

Other assets:

 

 

 

Gross realized gains

        2,342,418

 

        2,844,673

Gross realized losses

      (1,984,911)

 

      (3,755,579)

Total

$      1,554,875

 

$         728,367

 

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.

 

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity securities available for sale securities for the year ended December 31, 2020, were $5,477,438, and resulted in gross realized gains and gross realized losses of $358,236 and $21,137, respectively. The carrying amount of held to maturity securities sold for the year ended December 31, 2019 was $4,950,041 and the net realized gain related to these sales was $43,039.

 

Major categories of net investment income for the years ended December 31, were as follows:

 

 

2020

 

2019

Fixed maturity securities available for sale

$ 12,233,394

 

$ 10,372,559

Equity securities

       642,433

 

       309,918

Mortgage loans held for investment

   25,672,746

 

   18,405,010

Real estate held for investment and sale

   11,945,401

 

     8,782,959

Policy loans

     1,025,179

 

       554,969

Insurance assignments

   17,837,578

 

   16,086,059

Other investments

       126,013

 

       184,439

Cash and cash equivalents

       426,623

 

     1,824,443

Gross investment income

   69,909,367

 

   56,520,356

Investment expenses

  (13,579,564)

 

  (13,500,883)

Net investment income

$ 56,329,803

 

$ 43,019,473

 

Net investment income includes  income earned by the restricted assets of the cemeteries and mortuaries of $676,313 and $448,754 for the years ended December 31, 2020 and 2019, 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.


60


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


Securities on deposit for regulatory authorities as required by law amounted to $9,684,409 and $9,633,818 at December 31, 2020 and 2019, 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, 2020, other than investments issued or guaranteed by the United States Government.

 

Real Estate Held for Investment and Held for Sale

 

The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business 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.

 

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, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be used for future commercial developments. The Company does use debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset. See Note 20 regarding commercial real estate held for investment in Louisiana acquired with the acquisition of Kilpatrick Life Insurance Company.

 

The aggregated net ending balance of commercial real estate that serves as collateral for bank loans was $71,517,902 and $87,814,860 as of December 31, 2020 and 2019, respectively. The associated bank loan carrying values totaled $46,153,283 and $54,917,279 as of December 31, 2020 and 2019, respectively.

 

During the years ended December 31, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $897,980 and $2,768,979, respectively. Impairment losses of $846,980 and of $2,768,979 for the years ended December 31, 2020 and 2019, respectively, relate to an office building located in Kansas held by the life insurance segment. An impairment loss of $51,000 for the year ended December 31, 2020 relates to the improved commercial pad located in Texas held by the life insurance segment. Impairment loss are included in gains (losses) on investments and other assets on the consolidated statements of earnings.


61


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


The Company’s commercial real estate held for investment for the years ended December 31, is summarized as follows:

 

 

 

Net Ending Balance

 

Total Square Footage

 

 

2020

 

2019

 

2020

 

2019

Louisiana

 

$    2,998,684

 

$  6,009,079

 

  84,841

 

125,114

Mississippi

 

      2,914,498

 

    2,951,478

 

  21,521

 

  21,521

Utah (1)

 

   100,927,528

 

  81,266,083

 

379,066

 

465,230

 

 

 

 

 

 

 

 

 

 

 

$ 106,840,710

 

$ 90,226,640

 

485,428

 

611,865

                 

 

 

 

 

 

 

 

 

(1) Includes Center53 phase 1 and phase 2 which is under construction.

 

The Company’s commercial real estate held for sale for the years ended December 31, is summarized as follows:

 

 

 

Net Ending Balance

 

Total Square Footage

 

 

2020

 

2019

 

2020

 

2019

Arizona (1)

 

$               -

 

$        2,500

 

          -

 

          -

Kansas

 

    4,000,000

 

    4,800,000

 

222,679

 

222,679

Mississippi

 

       151,553

 

       318,322

 

  12,300

 

  12,300

Nevada

 

                 -

 

       655,499

 

          -

 

    4,800

Texas (2)

 

       249,000

 

       300,000

 

          -

 

          -

 

 

 

 

 

 

 

 

 

 

 

$  4,400,553

 

$  6,076,321

 

234,979

 

239,779

                 

 

 

 

 

 

 

 

 

(1) Undeveloped land

 

 

 

 

 

 

(2) Improved commercial pad

 

 

 

 

 

 

 

These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

 

Residential Real Estate Held for Investment and Held for Sale

 

The Company owns a 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.

 

As of December 31, 2020, SNRE manages 11 residential properties in 5 states across the United States.

 

 

During the years ended December 31, 2020 and 2019, the Company recorded impairment losses on residential real estate held for sale of $43,394 and $700,134, 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 $4,327,079 and $12,433,986 as of December 31, 2020 and 2019, respectively.


62


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


The Company’s residential real estate held for investment for the years ended December 31, is summarized as follows:

 

 

 

Net Ending Balance

 

 

2020

 

2019

Florida

 

                   -

 

    2,487,723

Nevada

 

                   -

 

       293,516

Utah (1)

 

    24,557,562

 

    9,462,886

Washington (2)

 

         286,181

 

       286,181

 

 

$   24,843,743

 

$ 12,530,306

                 

 

 

 

 

(1) Including subdivision land developments

(2) Improved residential lots

 

Additional information regarding the Company’s subdivision land developments in Utah for the years ended December 31, is summarized as follows:

 

 

 

2020

 

2019

Lots available for sale

 

                36

 

              48

Lots to be developed

 

               350

 

             174

Ending Balance (1)

 

$   23,777,478

 

$  7,889,576

                      

 

 

 

 

(1) The estimated remaining cost to complete the undeveloped lots is $17,354,000 and $1,900,000 as of December 31, 2020 and 2019, respectively.

 

The Company’s residential real estate held for sale for the years ended December 31, is summarized as follows:

 

 

 

Net Ending Balance

 

 

2020

 

2019

California

 

                   -

 

       640,452

Florida

 

         744,322

 

    1,300,641

Nevada

 

         979,640

 

                 -

Ohio

 

          10,000

 

        10,000

Utah

 

      1,744,292

 

    5,880,213

Washington

 

                   -

 

       190,000

 

 

$    3,478,254

 

$  8,021,306

 

These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.


63


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


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, 2020, real estate owned and occupied by the Company is summarized as follows:

 

Location

 

Business Segment

 

Approximate Square Footage

 

Square Footage Occupied by the Company

121 W. Election Rd., Draper, UT

 

Corporate Offices, Life Insurance and Cemetery/Mortuary Operations

 

78,979

 

18%

5201 Green Street, Salt Lake City, UT (1)

 

Life Insurance and Mortgage Operations

 

39,157

 

73%

1044 River Oaks Dr., Flowood, MS

 

Life Insurance Operations

 

19,694

 

28%

1818 Marshall Street, Shreveport, LA (1)(2)

 

Life Insurance Operations

 

12,274

 

100%

909 Foisy Street, Alexandria, LA (1)(2)

 

Life Insurance Sales

 

8,059

 

100%

812 Sheppard Street, Minden, LA (1)(2)

 

Life Insurance Sales

 

1,560

 

100%

1550 N 3rd Street, Jena, LA (1)(2)

 

Life Insurance Sales

 

1,737

 

100%

                      

 

 

 

 

 

 

(1)Included in property and equipment on the consolidated balance sheets 

(2)See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company 

 

Mortgage Loans Held for Investment

 

The Company reports mortgage loans held for investment pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements.

 

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0 % to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At December 31, 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. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.


64


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


The Company establishes a valuation allowance for credit losses in its portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

 

Allowance for Credit Losses and Recorded Investment in Mortgage Loans Held for Investment

Years Ended December 31

 

 

 

 

 

 

 

 

 

Commercial

 

Residential

 

Residential Construction

 

Total

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

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

Beginning balance

$      187,129

 

$     1,125,623

 

$        35,220

 

$     1,347,972

  Charge-offs

                    -

 

          (32,692)

 

                    -

 

           (32,692)

  Provision

                    -

 

          129,775

 

            7,982

 

          137,757

Ending balance

$      187,129

 

$     1,222,706

 

$        43,202

 

$     1,453,037

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$                  -

 

$        195,993

 

$                  -

 

$        195,993

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$      187,129

 

$     1,026,713

 

$        43,202

 

$     1,257,044

 

 

 

 

 

 

 

 

Mortgage loans:

 

 

 

 

 

 

 

Ending balance

$ 38,718,220

 

$ 113,043,965

 

$ 89,430,237

 

$ 241,192,422

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

$   4,488,719

 

$     3,752,207

 

$      655,000

 

$     8,895,926

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

$ 34,229,501

 

$ 109,291,758

 

$ 88,775,237

 

$ 232,296,496


65


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

2)Investments (Continued) 


The following is a summary of the aging of mortgage loans held for investment for the periods presented.

 

Age Analysis of  Past Due Mortgage Loans Held for Investment

Years Ended December 31

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days Past Due

60-89 Days Past Due

Greater Than 90 Days (1)

In Process of Foreclosure (1)

Total Past Due

Current

Total Mortgage Loans

Allowance for Loan Losses

Unamortized deferred loan fees, net

Unamortized discounts, net

Net Mortgage Loans

2020

 

 

 

 

 

 

 

 

 

 

 

Commercial

$   233,200

$     812,780

$   2,148,827

$                    -

$  3,194,807

$  43,642,059

$       46,836,866

$    (187,129)

$       (32,557)

$    (880,721)

$  45,736,459

Residential

 5,866,505

  2,048,148

    5,669,583

     2,263,097

 15,847,333

    79,975,115

          95,822,448

   (1,774,796)

     (909,864)

     (380,175)

    92,757,613

Residential  Construction

     127,191

                   -

                    -

        200,963

       328,154

  110,783,623

         111,111,777

        (43,202)

      (218,711)

                     -

  110,849,864

 

 

 

 

 

 

 

 

 

 

 

 

Total

$ 6,226,896

$ 2,860,928

$   7,818,410

$   2,464,060

$ 19,370,294

$ 234,400,797

$       253,771,091

$ (2,005,127)

$  (1,161,132)

$  (1,260,896)

$ 249,343,936

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

Commercial

$ 1,872,000

$                 -

$   4,488,719

$                    -

$  6,360,719

$   32,357,501

$        38,718,220

$    (187,129)

$      (88,918)

$     (653,272)

$   37,788,901

Residential

10,609,296

   4,085,767

    2,100,742

      1,651,465

 18,447,270

   94,596,695

       113,043,965

   (1,222,706)

   (1,567,581)

                     -

  110,253,678

Residential  Construction

                -

                   -

       655,000

                      -

      655,000

   88,775,237

          89,430,237

        (43,202)

     (735,068)

                     -

   88,651,967

 

 

 

 

 

 

 

 

 

 

 

 

Total

$ 12,481,296

$ 4,085,767

$ 7,244,461

$     1,651,465

$ 25,462,989

$ 215,729,433

$       241,192,422

$ (1,453,037)

$  (2,391,567)

$     (653,272)

$ 236,694,546

                   

 

 

 

 

 

 

 

 

 

 

 

(1)  There was not any interest income recognized on loans past due greater than 90 days or in foreclosure.

 

 

 

 

 


66


SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

 

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 were as follows:

 

Impaired Loans

Years Ended December 31

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

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