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3) Investments
 3 Months Ended
Mar. 31, 2015
Notes  
3) Investments

3)         Investments

 

The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of March 31, 2015 are summarized as follows:

 

Amortized Cost

Gross Unrealized Gains

 Gross Unrealized Losses

 Estimated Fair Value

March 31, 2015

 

 

 

 

Fixed maturity securities held to maturity carried at amortized cost:

Bonds:

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

 $         1,870,964

 $          361,034

 $                    -

 $         2,231,998

Obligations of states and political subdivisions

            1,984,709

             247,576

              (4,322)

            2,227,963

Corporate securities including public utilities

        124,944,246

        16,894,360

          (830,091)

        141,008,515

Mortgage-backed securities

            3,859,088

             311,980

                 (467)

            4,170,601

Redeemable preferred stock

               612,023

               35,937

                     -  

               647,960

Total fixed maturity securities held to maturity

 $     133,271,030

 $     17,850,887

 $       (834,880)

 $     150,287,037

 

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

March 31, 2015

 

 

 

 

Equity securities available for sale at estimated fair value:

Common stock:

Industrial, miscellaneous and all other

 $         7,095,225

 $    298,891

 $    (1,010,614)

 $    6,383,502

Total equity securities available for sale at estimated fair value

 $         7,095,225

 $    298,891

 $    (1,010,614)

 $    6,383,502

Mortgage loans on real estate and construction loans held for investment at amortized cost:

Residential

$       52,045,350

Residential construction

          29,684,359

Commercial

          46,067,130

Less: Allowance for loan losses

          (1,902,396)

Total mortgage loans on real estate and construction loans held for investment

$     125,894,443

Real estate held for investment - net of depreciation

$     113,025,790

Policy and other loans at amortized cost:

Policy loans

$         7,187,804

Other loans

          32,809,669

Less: Allowance for doubtful accounts

             (813,223)

Total policy and other loans at amortized cost

$       39,184,250

Short-term investments at amortized cost

$       20,620,236

 

The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2014 are summarized as follows:

 

Amortized Cost 

Gross Unrealized Gains

 Gross Unrealized Losses  

 Estimated Fair Value  

December 31, 2014:

 

 

 

 

Fixed maturity securities held to maturity carried at amortized cost:

Bonds:

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

 $         1,873,146

 $          345,715

 $                    -

 $         2,218,861

Obligations of states and political subdivisions

            1,736,489

             221,893

              (5,278)

            1,953,104

Corporate securities including public utilities

        126,533,483

        15,841,536

          (980,357)

        141,394,662

Mortgage-backed securities

            4,263,206

             305,381

            (11,894)

            4,556,693

Redeemable preferred stock

               612,023

               22,032

                       -

               634,055

Total fixed maturity securities held to maturity

 $     135,018,347

 $     16,736,557

 $       (997,529)

 $     150,757,375

 

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

December 31, 2014:

 

 

 

 

Equity securities available for sale at estimated fair value:

Common stock:

Industrial, miscellaneous and all other

 $         7,179,010

 $      393,873

 $      (820,133)

 $    6,752,750

Total securities available for sale carried at estimated fair value

 $         7,179,010

 $      393,873

 $      (820,133)

 $    6,752,750

Mortgage loans on real estate and construction loans held for investment at amortized cost:

Residential

$       53,592,433

Residential construction

          33,071,938

Commercial

          35,388,756

Less: Allowance for loan losses

          (2,003,055)

Total mortgage loans on real estate and construction loans held for investment

$     120,050,072

Real estate held for investment - net of depreciation

$     111,411,351

Policy and other loans at amortized cost:

Policy loans

$         7,011,012

Other loans

          27,807,829

Less: Allowance for doubtful accounts

             (693,413)

Total policy and other loans at amortized cost

$       34,125,428

Short-term investments at amortized cost

$       27,059,495

 

Fixed Maturity Securities

 

The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at March 31, 2015 and December 31, 2014. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related fixed maturity securities:

 

 

Unrealized Losses for Less than Twelve Months

 

No. of Investment Positions

 

Unrealized Losses for More than Twelve Months

 

No. of Investment Positions

 

Total Unrealized Loss

At March 31 2015

 

 

 

 

 

Obligations of states and political subdivisions

 $                    -

 $          4,322

1

 $            4,322

Corporate securities including public utilities

           566,310

23

         263,781

10

           830,091

Mortgage-backed securities

                  467

1

                     -

                  467

Total unrealized losses

 $        566,777

24

 $      268,103

11

 $        834,880

Fair Value

$     9,346,785

$   2,522,624

$   11,869,409

At December 31, 2014

Obligations of states and political subdivisions

 $                    -

0

 $          5,278

1

 $            5,278

Corporate securities including public utilities

           548,310

21

         432,047

11

           980,357

Mortgage-backed securities

               3,966

1

             7,928

1

             11,894

Total unrealized losses

 $        552,276

22

 $      445,253

13

 $        997,529

Fair Value

$     7,081,352

$   2,777,587

$     9,858,939

 

As of March 31, 2015, the average market value of the related fixed maturities was 93.4% of amortized cost and the average market value was 90.8% of amortized cost as of December 31, 2014. During the three months ended March 31, 2015 and 2014 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $30,000 for each reporting period.

 

On a quarterly basis, the Company reviews its fixed maturity investment securities related to corporate securities and other public utilities, consisting of bonds and preferred stocks that are in a loss position. The review involves an analysis of the securities in relation to historical values, and projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.

 

Equity Securities

 

The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at March 31, 2015 and December 31, 2014. The unrealized losses were primarily the result of decreases in fair value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available-for-sale in a loss position:

 

 

 

Unrealized Losses for Less than Twelve Months

 

No. of Investment Positions

 

Unrealized Losses for More than Twelve Months

 

No. of Investment Positions

 

Total Unrealized Losses

At March 31, 2015

 

 

 

 

 

Industrial, miscellaneous and all other

 $      461,641

158

 $      548,973

28

 $   1,010,614

Total unrealized losses

 $      461,641

158

 $      548,973

28

 $   1,010,614

Fair Value

$   2,444,324

$      609,689

$   3,054,013

At December 31, 2014

Industrial, miscellaneous and all other

 $      327,389

138

 $      492,744

27

 $      820,133

Total unrealized losses

 $      327,389

138

 $      492,744

27

 $      820,133

Fair Value

$   2,162,425

$      676,706

$   2,839,131

 

As of March 31, 2015, the average market value of the equity securities available for sale was 75.1% of the original investment and the average market value was 77.6% of the original investment as of December 31, 2014. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. During the three months ended March 31, 2015 and 2014, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $25,896 and $-0-, respectively.

 

On a quarterly basis, the Company reviews its investment in industrial, miscellaneous and all other equity securities that are in a loss position. The review involves an analysis of the securities in relation to historical values, price earnings ratios, projected earnings and revenue growth rates. Based on the analysis a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized.

 

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

 

The amortized cost and estimated fair value of fixed maturity securities at March 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Amortized Cost   

Estimated Fair Value

Held to Maturity:

 

 

Due in 2015

 $         3,816,196

 $         3,880,262

Due in 2016 through 2019

          33,339,908

          36,890,422

Due in 2020 through 2024

          25,469,059

          28,347,845

Due after 2024

          66,174,756

          76,349,947

Mortgage-backed securities

            3,859,088

            4,170,601

Redeemable preferred stock

               612,023

               647,960

Total held to maturity

 $     133,271,030

 $     150,287,037

 

The amortized cost and estimated fair value of available for sale securities at March 31, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equities are valued using the specific identification method.

 

 

Amortized Cost

Estimated Fair Value

Available for Sale:

Common stock

 $    7,095,225

 $        6,383,502

Total available for sale

 $    7,095,225

 $        6,383,502

 

The Company’s realized gains and losses, other than temporary impairments from investments and other assets, are summarized as follows:

Three Months Ended March 31

2015

2014

Fixed maturity securities held to maturity:

Gross realized gains

 $        85,997

 $                -

Gross realized losses

           (9,776)

                   -

Other than temporary impairments

         (30,000)

         (30,000)

Securities available for sale:

Gross realized gains

           87,720

           53,253

Gross realized losses

           (1,016)

                   -

Other than temporary impairments

         (25,896)

                   -

Other assets:

Gross realized gains

         257,139

         145,740

Gross realized losses

                   -

                   -

Other than temporary impairments

                   -

                   -

Total

$      364,168

$      168,993

 

The net carrying amount of held to maturity securities sold was $257,962 and $-0- for the three months ended March 31, 2015 and 2014, respectively.  The net realized gain related to these sales was $8,962 and $-0- for the three months ended March 31, 2015 and 2014, respectively.

 

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on available for sale securities) at March 31, 2015, other than investments issued or guaranteed by the United States Government.

 

Major categories of net investment income are as follows:

Three Months Ended March 31

2015

2014

Fixed maturity securities

 $     1,980,696

 $     2,109,121

Equity securities

            59,418

            39,247

Mortgage loans on real estate

        1,850,626

        1,552,110

Real estate

        1,623,741

        1,689,595

Policy and other loans

          188,546

          197,568

Short-term investments,  principally gains on sale of mortgage loans and other

        4,225,785

        1,899,113

Gross investment income

        9,928,812

        7,486,754

Investment expenses

      (2,105,968)

      (1,844,254)

Net investment income

 $     7,822,844

 $     5,642,500

 

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $92,922 and $94,745 for the three months ended March 31, 2015 and 2014, respectively.

 

Net investment income on real estate consists primarily of rental revenue.

 

Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.

 

Securities on deposit for regulatory authorities as required by law amounted to $9,310,227 at March 31, 2015 and $8,886,001 at December 31, 2014. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

 

Mortgage Loans

 

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from six months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At March 31, 2015, the Company had 39%, 19%, 13%, 8%, and 6% of its mortgage loans from borrowers located in the states of Utah, California, Texas, Florida, and Nevada, respectively. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for loan losses of $1,902,396 and $2,003,055 at March 31, 2015 and December 31, 2014, respectively.

 

The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

 

Allowance for Credit Losses and Recorded Investment in Mortgage Loans

 

Commercial

Residential

Residential Construction

Total

March 31, 2015

Allowance for credit losses:

Beginning balance - January 1, 2015

 $        187,129

 $     1,715,812

 $        100,114

 $     2,003,055

   Charge-offs

                       -

                       -

                       -

                       -

   Provision

                       -

          (100,659)

                       -

          (100,659)

Ending balance -March 31, 2015

 $        187,129

 $     1,615,153

 $        100,114

 $     1,902,396

Ending balance: individually evaluated for impairment

 $                    -

 $        245,952

 $                    -

 $        245,952

Ending balance: collectively evaluated for impairment

 $        187,129

 $     1,369,201

 $        100,114

 $     1,656,444

Ending balance: loans acquired with deteriorated credit quality

 $                    -

 $                    -

 $                    -

 $                    -

Mortgage loans:

Ending balance

 $   46,067,130

 $   52,045,350

 $   29,684,359

 $ 127,796,839

Ending balance: individually evaluated for impairment

 $                    -

 $     2,544,731

 $                    -

 $     2,544,731

Ending balance: collectively evaluated for impairment

 $   46,067,130

 $   49,500,619

 $   29,684,359

 $ 125,252,108

Ending balance: loans acquired with deteriorated credit quality

 $                    -

 $                    -

 $                    -

 $                    -

December 31, 2014

Allowance for credit losses:

Beginning balance - January 1, 2014

 $        187,129

 $     1,364,847

 $        100,114

 $     1,652,090

   Charge-offs

                       -

            (38,444)

                       -

            (38,444)

   Provision

                       -

           389,409

                       -

           389,409

Ending balance - December 31, 2014

 $        187,129

 $     1,715,812

 $        100,114

 $     2,003,055

Ending balance: individually evaluated for impairment

 $                    -

 $        153,446

 $                    -

 $        153,446

Ending balance: collectively evaluated for impairment

 $        187,129

 $     1,562,366

 $        100,114

 $     1,849,609

Ending balance: loans acquired with deteriorated credit quality

 $                    -

 $                    -

 $                    -

 $                    -

Mortgage loans:

Ending balance

 $   35,388,756

 $   53,592,433

 $   33,071,938

 $ 122,053,127

Ending balance: individually evaluated for impairment

 $                    -

 $     1,556,182

 $        414,499

 $     1,970,681

Ending balance: collectively evaluated for impairment

 $   35,388,756

 $   52,036,251

 $   32,657,439

 $ 120,082,446

Ending balance: loans acquired with deteriorated credit quality

 $                    -

 $                    -

 $                    -

 $                    -

 

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

 

Age Analysis of Past Due Mortgage Loans

 

 30-59 Days Past Due

 60-89 Days Past Due

 Greater Than 90 Days (1)

 In Foreclosure (1)

 Total Past Due

 Current

 Total Mortgage Loans

 Allowance for Loan Losses

 Net Mortgage Loans

March 31, 2015

 

 

 

 

 

 

 

 

 

 

Commercial

 $                       -

 $         272,934

 $                        -

 $                          -

 $           272,934

 $     45,794,196

 $       46,067,130

 $           (187,129)

 $       45,880,001

Residential

           1,092,140

             706,753

            4,107,831

             2,544,731

             8,451,455

        43,593,895

          52,045,350

            (1,615,153)

           50,430,197

Residential Construction

                           -

               25,049

                64,895

                              -

                  89,944

         29,594,415

          29,684,359

                (100,114)

          29,584,245

Total

 $       1,092,140

 $      1,004,736

 $       4,172,726

 $         2,544,731

 $         8,814,333

 $    118,982,506

 $     127,796,839

 $      (1,902,396)

 $    125,894,443

December 31, 2014

Commercial

 $                       -

 $                       -

 $                        -

 $                          -

 $                          -

 $    35,388,756

 $      35,388,756

 $           (187,129)

 $       35,201,627

Residential

            1,631,142

            1,174,516

           5,464,901

              1,556,182

             9,826,741

        43,765,692

          53,592,433

            (1,715,812)

            51,876,621

Residential Construction

                           -

                           -

                64,895

                 414,499

               479,394

        32,592,544

           33,071,938

                (100,114)

           32,971,824

Total

 $        1,631,142

 $        1,174,516

 $      5,529,796

 $          1,970,681

 $       10,306,135

 $     111,746,992

 $      122,053,127

 $     (2,003,055)

 $    120,050,072

 

Impaired Mortgage Loans

 

Impaired mortgage loans 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

 Recorded Investment

 Unpaid Principal Balance

 Related Allowance

 Average Recorded Investment

 Interest Income Recognized

March 31, 2015

With no related allowance recorded:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

                     -

                      -

                     -

                     -

                      -

   Residential construction

                     -

                      -

                     -

                     -

                      -

With an allowance recorded:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

       2,544,731

       2,544,731

         245,952

       2,544,731

                      -

   Residential construction

                     -

                      -

                     -

                     -

                      -

Total:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

       2,544,731

       2,544,731

         245,952

       2,544,731

                      -

   Residential construction

                     -

                      -

                     -

                     -

                      -

December 31, 2014

With no related allowance recorded:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

                     -

                      -

                     -

                     -

                      -

   Residential construction

          414,499

          414,499

                     -

          414,499

                      -

With an allowance recorded:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

      1,556,182

      1,556,182

         153,446

      1,556,182

                      -

   Residential construction

                     -

                      -

                     -

                     -

                      -

Total:

   Commercial

 $                  -

 $                   -

 $                  -

 $                  -

 $                   -

   Residential

      1,556,182

      1,556,182

         153,446

      1,556,182

                      -

   Residential construction

          414,499

          414,499

                     -

          414,499

                      -

 

Credit Risk Profile Based on Performance Status

 

The Company’s mortgage loan portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days past due or on non-accrual status.

 

The Company’s performing and non-performing mortgage loans were as follows:

 

Mortgage Loan Credit Exposure

Credit Risk Profile Based on Payment Activity

 Commercial

 Residential

 Residential Construction

 Total

 

March 31, 2015

December 31, 2014

March 31, 2015

December 31, 2014

March 31, 2015

December 31, 2014

March 31, 2015

December 31, 2014

Performing

 $   46,067,130

 $ 35,388,756

 $  45,392,788

 $   46,571,350

 $  29,619,464

 $ 32,592,544

 $   121,079,382

 $  114,552,650

Nonperforming

                              -

                             -

         6,652,562

          7,021,083

               64,895

            479,394

            6,717,457

          7,500,477

Total

 $   46,067,130

 $ 35,388,756

 $  52,045,350

 $  53,592,433

 $ 29,684,359

 $  33,071,938

 $  127,796,839

 $  122,053,127

 

Non-Accrual Mortgage Loans

 

Once a loan is past due 90 days, it is the Company’s policy to end the accrual of interest income on the loan and write off any income that had been accrued. Interest not accrued on these loans totals $534,000 and $535,000 as of March 31, 2015 and December 31, 2014, respectively.

 

The following is a summary of mortgage loans on a nonaccrual status for the periods presented.

 

Mortgage Loans on Nonaccrual Status

 

As of March 31 2015

As of December 31 2014

Residential

 $                    6,652,562

 $                   7,021,083

Residential construction

                            64,895

                         479,394

Total

 $                    6,717,457

 $                   7,500,477

 

Loan Loss Reserve

 

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 loan loss reserve analysis involves mortgage loans that have been sold to third party investors 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 more particularly 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, 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.

 

When a repurchase demand is received from a third party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third party investor without having to make any payments to the investor.

 

The following is a summary of the loan loss reserve that is included in other liabilities and accrued expenses:

 

As of March 31 2015

As of December 31 2014

Balance, beginning of period

 $                1,718,150

 $               5,506,532

Provisions for losses

                      666,739

                  3,053,403

Charge-offs

                    (173,106)

                (6,841,785)

Balance, end of period

 $                2,211,783

 $               1,718,150

 

The Company believes the loan loss reserve represents probable loan losses incurred as of the balance sheet date. Actual loan loss experience could change, in the near-term, from the established reserve based upon claims that could be asserted by third party investors. SecurityNational Mortgage believes there is potential to resolve any alleged claims by third party investors on acceptable terms. If SecurityNational Mortgage is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third party investor, SecurityNational Mortgage believes it has significant defenses to any such action and intends to vigorously defend itself against such action.