Investments

3 Months Ended

Mar. 31, 2023

Investments, Debt and Equity Securities [Abstract]

Investments

3) Investments

The Company’s investments as of March 31, 2023 are summarized as follows:

	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses (1)			Allowance for Credit Losses			Estimated Fair Value
March 31, 2023:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies	$	95,362,166		$	305,924	$	(2,047,395	)	$	-		$	93,620,695
Obligations of states and political subdivisions		6,766,771			14,954		(337,946	)		-			6,443,779
Corporate securities including public utilities		233,143,391			3,467,771		(9,039,301	)		(179,500	)		227,392,361
Mortgage-backed securities		33,859,690			203,490		(4,209,488	)		-			29,853,692
Redeemable preferred stock		250,000			10,000		-			-			260,000
Total fixed maturity securities available for sale	$	369,382,018		$	4,002,139	$	(15,634,130	)	$	(179,500	)	$	357,570,527
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other	$	10,356,783		$	2,741,720	$	(744,496	)				$	12,354,007
Total equity securities at estimated fair value	$	10,356,783		$	2,741,720	$	(744,496	)				$	12,354,007
Mortgage loans held for investment at amortized cost:
Residential	$	94,471,213
Residential construction		146,093,947
Commercial		50,807,452
Less: Unamortized deferred loan fees, net		(1,752,369	)
Less: Allowance for credit losses		(2,735,419	)
Less: Net discounts		(338,185	)
Total mortgage loans held for investment	$	286,546,639
Real estate held for investment - net of accumulated depreciation:
Residential	$	35,358,867
Commercial		151,718,145
Total real estate held for investment	$	187,077,012
Real estate held for sale:
Residential	$	7,238,709
Commercial		151,553
Total real estate held for sale	$	7,390,262
Other investments and policy loans at amortized cost:
Policy loans	$	13,012,347
Insurance assignments		45,573,831
Federal Home Loan Bank stock (2)		3,896,800
Other investments		9,421,702
Less: Allowance for credit losses for insurance assignments		(1,685,901	)
Total other investments and policy loans	$	70,218,779
Accrued investment income	$	9,427,239
Total investments	$	930,584,465

(1)	Gross unrealized losses are net of allowance for credit losses
(2)	Includes $978,100 of Membership stock and $2,918,700 of Activity stock due to short-term borrowings and letters of credit.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The Company’s investments as of December 31, 2022 are summarized as follows:

	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2022:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies	$	93,182,210		$	180,643	$	(2,685,277	)	$	90,677,576
Obligations of states and political subdivisions		6,675,071			13,869		(458,137	)		6,230,803
Corporate securities including public utilities		229,141,544			1,909,630		(11,930,773	)		219,120,401
Mortgage-backed securities		33,501,686			168,700		(4,100,674	)		29,569,712
Redeemable preferred stock		250,000			10,000		-			260,000
Total fixed maturity securities available for sale	$	362,750,511		$	2,282,842	$	(19,174,861	)	$	345,858,492
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other	$	9,942,265		$	2,688,375	$	(948,114	)	$	11,682,526
Total equity securities at estimated fair value	$	9,942,265		$	2,688,375	$	(948,114	)	$	11,682,526
Mortgage loans held for investment at amortized cost:
Residential	$	93,355,623
Residential construction		172,516,125
Commercial		46,311,955
Less: Unamortized deferred loan fees, net		(1,746,605	)
Less: Allowance for credit losses		(1,970,311	)
Less: Net discounts		(342,860	)
Total mortgage loans held for investment	$	308,123,927
Real estate held for investment - net of accumulated depreciation:
Residential	$	38,437,960
Commercial		152,890,656
Total real estate held for investment	$	191,328,616
Real estate held for sale:
Residential	$	11,010,029
Commercial		151,553
Total real estate held for sale	$	11,161,582
Other investments and policy loans at amortized cost:
Policy loans	$	13,095,473
Insurance assignments		46,942,536
Federal Home Loan Bank stock (1)		2,600,300
Other investments		9,479,798
Less: Allowance for credit losses for insurance assignments		(1,609,951	)
Total other investments and policy loans	$	70,508,156
Accrued investment income	$	10,299,826
Total investments	$	948,963,125

(1) Includes $938,500 of Membership stock and $1,661,800 of Activity stock due to short-term advances and letters of credit.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Fixed Maturity Securities

The following table summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value at March 31, 2023 and at December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations and inflation. 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 table below sets 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		Combined Fair Value
At March 31, 2023
U.S. Treasury Securities And Obligations of U.S. Government Agencies	$	644,240	$	53,196,137	$	1,403,155	$	29,019,470	$	2,047,395	$	82,215,607
Obligations of States and Political Subdivisions		204,976		4,644,270		132,970		1,213,482		337,946		5,857,752
Corporate Securities		5,315,889		123,534,510		3,723,412		26,399,408		9,039,301		149,933,918
Mortgage and other asset-backed securities		586,825		6,984,005		3,622,663		19,465,113		4,209,488		26,449,118
Totals	$	6,751,930	$	188,358,922	$	8,882,200	$	76,097,473	$	15,634,130	$	264,456,395
At December 31, 2022
U.S. Treasury Securities And Obligations of U.S. Government Agencies	$	2,685,277	$	79,400,753	$	-	$	-	$	2,685,277	$	79,400,753
Obligations of States and Political Subdivisions		378,067		5,467,910		80,070		429,020		458,137		5,896,930
Corporate Securities		10,935,114		162,995,969		995,659		5,781,822		11,930,773		168,777,791
Mortgage and other asset-backed securities		2,884,731		19,909,907		1,215,943		6,978,745		4,100,674		26,888,652
Totals	$	16,883,189	$	267,774,539	$	2,291,672	$	13,189,587	$	19,174,861	$	280,964,126

There were 656 securities with fair value of 94.4% of aggregate amortized cost at March 31, 2023. There were 713 securities with fair value of 93.6% of aggregate amortized cost at December 31, 2022. Credit losses of $179,500 and nil have been recognized for the three month periods ended March 31, 2023 and 2022 and are included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. Other unrealized losses for which no credit loss was recognized are primarily the result of the recent rise in interest rates and inflation.

Evaluation of Allowance for Credit Losses

See Note 2 regarding the adoption of ASU 2016-13.

On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale to identify any potential credit losses. 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 credit loss, unless current market or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings. The evaluation involves assessing all facts and circumstances surrounding each security including, but not limited 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Where the decline in fair value of fixed maturity securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and the Company anticipates recovery of all contractual or expected cash flows, the Company does not consider these securities to have credit loss because the Company does not intend to sell these securities and it is not more likely than not the Company will be required to sell these securities before a recovery of amortized cost, which may be maturity.

If the Company intends to sell a fixed maturity security or if it is more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, a credit loss has occurred and the difference between the amortized cost and the fair value that relates to the expected credit loss is recognized as a loss in earnings, included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings.

If the Company does not intend to sell and it is not more likely than not the Company will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, a credit loss would be recognized in earnings for the amount of the expected credit loss with a corresponding allowance for credit losses as a contra-asset account. The credit loss is included in gains (losses) on investments and other assets on the condensed consolidated statements of earnings. The recognized credit loss is limited to the total unrealized loss on the security due to a change in credit.

Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if the Company intends to sell a security or when it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost.

The Company does not measure a credit loss allowance on accrued interest receivable, included in accrued investment income on the condensed consolidated balance sheets, as the Company writes off any accrued interest receivable balance to net investment income in a timely manner (after 90 days) when the Company has concerns regarding collectability.

The following table presents a roll forward of the Company’s allowance for credit losses on fixed maturity securities available for sale:

	Three Months Ended March 31, 2023
	U.S. Treasury Securities And Obligations of U.S. Government Agencies		Obligations of states and political subdivisions		Corporate securities		Mortgage-backed securities		Total
Beginning balance	$	-	$	-	$	-	$	-	$	-
Additions for credit losses not previously recorded		-		-		179,500		-		179,500
Change in allowance on securities with previous allowance		-		-		-		-		-
Reductions for securities sold during the period		-		-		-		-		-
Reductions for securities with credit losses due to intent to sell		-		-		-		-		-
Write-offs charged against the allowance		-		-		-		-		-
Recoveries of amounts previously written off		-		-		-		-		-
Ending Balance	$	-	$	-	$	179,500	$	-	$	179,500

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The following table presents a roll forward of the Company’s cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale which was required to be presented prior to the adoption of ASU 2016-13.

	2022
Balance of credit-related OTTI at January 1	$	264,977
Additions for credit impairments recognized on:
Securities not previously impaired		-
Securities previously impaired		-
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period (realized)		(39,502	)
Securities due to an increase in expected cash flows		-
Balance of credit-related OTTI at March 31	$	225,475

The following table presents the amortized cost and the estimated fair value of fixed maturity securities available for sale at March 31, 2023, by contractual maturity. Actual or 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
Due in 1 year	$	18,103,991	$	18,032,556
Due in 2-5 years		149,458,111		145,781,675
Due in 5-10 years		81,699,121		80,082,902
Due in more than 10 years		86,011,105		83,559,702
Mortgage-backed securities		33,859,690		29,853,692
Redeemable preferred stock		250,000		260,000
Total	$	369,382,018	$	357,570,527

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $93,436,027, at estimated fair value, of fixed maturity securities with the FHLB at March 31, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of March 31, 2023, the Company owed $31,000,000 to the FHLB and its estimated maximum borrowing capacity was $55,351,809.

Credit Quality Indicators

The NAIC assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 are considered “investment grade” while the NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, the Company had 98.1% and 97.7% of its fixed maturity securities rated investment grade as of March 31, 2023 and December 31, 2022, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The following table summarizes the credit quality, as determined by NAIC designation, of the Company’s fixed maturity securities available for sale, excluding redeemable preferred stock.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

	March 31, 2023				December 31, 2022
NAIC Designation	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
1	$	202,589,256	$	197,298,515	$	197,753,818	$	189,691,540
2		159,006,458		153,332,558		156,261,804		148,073,873
3		6,036,229		5,540,009		7,080,305		6,635,786
4		1,472,550		1,098,745		1,377,541		1,157,454
5		26,236		40,316		25,736		39,155
6		1,289		384		1,307		684
Total	$	369,132,018	$	357,310,527	$	362,500,511	$	345,598,492

Information regarding sales of fixed maturity securities available for sale is presented as follows.

	Three Months Ended March 31
	2023			2022
Proceeds from sales	$	1,209,844		$	455,651
Gross realized gains		15,490			2,354
Gross realized losses		(54,104	)		(20	)

Securities and cash on deposit with regulatory authorities as required by law amounted to $10,952,850 at March 31, 2023 and $11,032,165 at December 31, 2022. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at March 31, 2023, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment and Held for Sale

The Company strategically deploys resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development, and mortgage foreclosures.

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 resources. The geographic locations and asset classes of investments are 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 where the geographic location does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets that are located in regions expected to have high growth in employment and population and that provide operational efficiencies.

The Company currently owns and operates nine commercial properties in three states. These properties include office buildings, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company uses bank debt in strategic cases, primarily where it is anticipated to improve yields, or facilitate the acquisition of higher quality assets or asset class diversification.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The aggregated net book value of commercial real estate serving as collateral for bank loans was $128,272,775 and $129,330,119 as of March 31, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $96,652,659 and $97,112,131 as of March 31, 2023, and December 31, 2022, respectively.

During the three month periods ended March 31, 2023, and 2022, the Company did not record any impairment losses on commercial real estate held for investment or held for sale. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $1,565,927 and $1,323,930, respectively. Commercial real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

The Company’s commercial real estate held for investment is summarized as follows as of the respective dates indicated:

	Net Book Value				Total Square Footage
	March 31 2023		December 31 2022		March 31 2023		December 31 2022
Utah (1)	$	146,397,779	$	147,627,946		625,920		625,920
Louisiana		2,369,405		2,380,847		31,778		31,778
Mississippi		2,950,961		2,881,863		19,694		19,694
	$	151,718,145	$	152,890,656		677,392		677,392

(1) Includes Center53 phase 1 and phase 2

The Company’s commercial real estate held for sale is summarized as follows as of the respective dates indicated:

	Net Book Value
	March 31 2023		December 31 2022
Mississippi (1)	$	151,553	$	151,553
	$	151,553	$	151,553

(1) Consists of approximately 93 acres of undeveloped land

This property is being marketed with the assistance of commercial real estate brokers in Mississippi.

Residential Real Estate Held for Investment and Held for Sale

The Company occasionally acquires a small portfolio of residential homes primarily as a result of loan foreclosures. The Company has the option to sell these properties or to continue to hold them for expected cash flow and price appreciation. The Company also invests in residential subdivision land developments.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The Company established Security National Real Estate Services (“SNRE”) to manage its residential property portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the Company’s entire residential property portfolio.

During the three month periods ended March 31, 2023, and 2022 the Company did not record any impairment losses on residential real estate held for sale or held for investment. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

During the three month periods ended March 31, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $2,648 and $2,648, respectively. Residential real estate held for investment is stated at cost and is depreciated over the estimated useful life, primarily using the straight-line method. Depreciation is included in net investment income on the consolidated statements of earnings.

The Company’s residential real estate held for investment is summarized as follows as of the respective dates indicated:

	Net Book Value
	March 31 2023		December 31 2022
Utah (1)	$	35,358,867	$	38,437,960
	$	35,358,867	$	38,437,960

(1) Includes subdivision land developments

The following table presents additional information regarding the Company’s subdivision land developments in Utah.

	March 31 2023		December 31 2022
Lots developed		67		80
Lots to be developed		1,123		1,131
Book Value	$	34,825,972	$	38,241,705

The Company’s residential real estate held for sale is summarized as follows as of the respective dates indicated:

	Net Book Value
	March 31 2023		December 31 2022
Utah	$	7,238,709	$	11,010,029
	$	7,238,709	$	11,010,029

The net book value of foreclosed residential real estate included in residential real estate held for sale was $5,570,788 and $11,010,029 as of March 31, 2023, and December 31, 2022, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Real Estate Owned and Occupied by the Company

The primary business units of the Company occupy a portion of the real estate owned by the Company. As of March 31, 2023, real estate owned and occupied by the Company is summarized as follows:

Location	Business Segment	Approximate Square Footage		Square Footage Occupied by the Company
433 Ascension Way, Floors 4, 5 and 6, Salt Lake City, UT - Center53 Building 2 (1)	Corporate Offices, Life Insurance, Cemetery/Mortuary Operations, and Mortgage Operations and Sales		221,000		50	%
1044 River Oaks Dr., Flowood, MS (1)	Life Insurance Operations		19,694		28	%
1818 Marshall Street, Shreveport, LA (2)	Life Insurance Operations		12,274		100	%
909 Foisy Street, Alexandria, LA (2)	Life Insurance Sales		8,059		100	%
812 Sheppard Street, Minden, LA (2)	Life Insurance Sales		1,560		100	%
1550 N 3rd Street, Jena, LA (2)	Life Insurance Sales		1,737		100	%

(1)	Included in real estate held for investment on the condensed consolidated balance sheets
(2)	Included in property and equipment on the condensed consolidated balance sheets

Mortgage Loans Held for Investment

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and the loans 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 or are employed. As of March 31, 2023, the Company had 60%, 10%, 6%, 5%, 5%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, Arizona, Hawaii, and Nevada, respectively. As of December 31, 2022, the Company had 64%, 10%, 5%, 5%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, Nevada, and Arizona, respectively.

Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs, premiums, discounts, and the related allowance for credit losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings.

Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company requires that loans not exceed 80% of the fair market value of the respective loan collateral. For loans in excess of 80% of the fair market value of the respective loan collateral, additional collateral or mortgage insurance by an approved third-party insurer is required.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Evaluation of Allowance for Credit Losses

See Note 2 regarding the adoption of ASU 2016-13.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the Company’s mortgage loans held for investment to present the net amount expected to be collected. The Company reports in net earnings, as a credit loss expense, the amount necessary to adjust the allowance for credit losses for the Company’s current estimate of expected credit losses on mortgage loans held for investment. This credit loss expense is included in other expenses on the condensed consolidated statements of earnings.

Once a mortgage loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Given this policy of timely writing off uncollectible accrued interest, the Company does not measure a credit loss allowance on accrued interest receivable as it writes off any uncollectible accrued interest receivable balances to net investment income in a timely manner. Accrued interest receivable is included in accrued investment income on the condensed consolidated balance sheets. Payments received for mortgage loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for mortgage loans on a non-accrual status was immaterial. Accrual of interest resumes if a mortgage loan is brought current. Interest not accrued on these loans totaled approximately $110,000 and $226,000 as of March 31, 2023, and December 31, 2022, respectively.

The Company measures expected credit losses based on the fair value of the collateral when the Company determines that foreclosure is probable. When a mortgage loan becomes delinquent, the Company proceeds to foreclose and all expenses for foreclosure are expensed as incurred. Once foreclosed, the property is classified as real estate held for investment or held for sale.

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

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

Commercial loans are evaluated for credit loss by analyzing loan attributes that are predictors for future credit losses. The Company uses a combination of the debt service coverage ratio (“DSCR”) and loan to value (“LTV”) to group similar commercial loans. The Company applies a future loss factor to the outstanding balance of each group to arrive at the allowance for credit loss.

Residential — These loans are secured by first and second mortgages on single family dwellings. The borrower’s ability to repay is sensitive to the life events and the general economic condition of the region. Where loan to value exceeds 80%, the loan is generally guaranteed by private mortgage insurance, the FHA, or VA.

The Company uses a third-party to provide a monthly analysis of its residential portfolio for credit losses. The third-party uses the Company’s current loan data and runs it through various models to project cash flows and provide a projected life of loan loss. The models consider loan features such as loan type, loan to value, payment status, age, and current property values. The Company also considers historical delinquency rates and current unemployment trends.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Residential construction (including land acquisition and development) – These loans are 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, and factor in estimates of the value of construction projects upon completion. 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 acquisition and development loans are underwritten in accordance with the Company’s underwriting policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. 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.

To determine the allowance for credit losses on residential construction mortgage loans, the Company considers historical activity and housing market trends. Given the continued volatility in the housing market, the Company has adjusted its credit loss analysis.

The following table presents a roll forward of the allowance for credit losses as of the dates indicated.

	Commercial		Residential			Residential Construction			Total
March 31, 2023
Allowance for credit losses:
Beginning balance - January 1, 2023	$	187,129	$	1,739,980		$	43,202		$	1,970,311
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13)		555,807		(192,607	)		301,830			665,030	(1)
Change in provision for credit losses		15,195		137,727			(52,844	)		100,078	(2)
Charge-offs		-		-			-			-
Ending balance - March 31, 2023	$	758,131	$	1,685,100		$	292,188		$	2,735,419
December 31, 2022
Allowance for credit losses:
Beginning balance - January 1, 2022	$	187,129	$	1,469,571		$	43,202		$	1,699,902
Change in provision for credit losses		-		270,409			-			270,409	(2)
Charge-offs		-		-			-			-
Ending balance - December 31, 2022	$	187,129	$	1,739,980		$	43,202		$	1,970,311

(1)	See Note 2 of the notes to the condensed consolidated financial statements
(2)	Included in other expenses on the condensed consolidated statements of earnings

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The following table presents the aging of mortgage loans held for investment by loan type as of the dates indicated.

	Commercial			Residential			Residential Construction			Total
March 31, 2023
30-59 days past due	$	3,221,608		$	5,807,400		$	1,205,232		$	10,234,240
60-89 days past due		-			-			-			-
Over 90 days past due (1)		405,000			2,224,933			-			2,629,933
In process of foreclosure (1)		-			713,552			-			713,552
Total past due		3,626,608			8,745,885			1,205,232			13,577,725
Current		47,180,844			85,725,328			144,888,715			277,794,887
Total mortgage loans		50,807,452			94,471,213			146,093,947			291,372,612
Allowance for credit losses		(758,131	)		(1,685,100	)		(292,188	)		(2,735,419	)
Unamortized deferred loan fees, net		(224,118	)		(1,258,174	)		(270,077	)		(1,752,369	)
Unamortized discounts, net		(227,417	)		(110,768	)		-			(338,185	)
Net mortgage loans	$	49,597,786		$	91,417,171		$	145,531,682		$	286,546,639
December 31, 2022
30-59 days past due	$	1,000,000		$	3,553,390		$	-		$	4,553,390
60-89 days past due		-			814,184			-			814,184
Over 90 days past due (1)		-			1,286,211			-			1,286,211
In process of foreclosure (1)		405,000			876,174			-			1,281,174
Total past due		1,405,000			6,529,959			-			7,934,959
Current		44,906,955			86,825,664			172,516,125			304,248,744
Total mortgage loans		46,311,955			93,355,623			172,516,125			312,183,703
Allowance for credit losses		(187,129	)		(1,739,980	)		(43,202	)		(1,970,311	)
Unamortized deferred loan fees, net		(199,765	)		(1,212,994	)		(333,846	)		(1,746,605	)
Unamortized discounts, net		(230,987	)		(111,873	)		-			(342,860	)
Net mortgage loans	$	45,694,074		$	90,290,776		$	172,139,077		$	308,123,927

(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Credit Quality Indicators

The Company evaluates and monitors the credit quality of its commercial loans by analyzing loan to value (“LTV”) and debt service coverage ratios (“DSCR”). Monitoring a commercial mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

The unpaid principal balance of commercial mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

Credit Quality Indicator	2023		2022			2021		2020		2019		Prior		Total		% of Total
LTV:
Less than 65%	$	8,525,000	$	14,383,954		$	3,842,851	$	-	$	3,025,549	$	7,009,216	$	36,786,570		72.40	%
65% to 80%		-		6,073,044			2,100,000		4,913,313		-		-		13,086,357		25.76	%
Greater than 80%		-		529,525			405,000		-		-		-		934,525		1.84	%
Total	$	8,525,000	$	20,986,523		$	6,347,851	$	4,913,313	$	3,025,549	$	7,009,216	$	50,807,452		100.00	%
DSCR
>1.20x	$	5,725,000	$	1,000,000		$	2,800,000	$	4,913,313	$	3,025,549	$	1,507,378	$	18,971,240		37.34	%
1.00x - 1.20x		2,800,000		11,425,114			3,547,851		-		-		5,501,838		23,274,803		45.81	%
<1.00x		-		8,561,409	(1)		-		-		-		-		8,561,409		16.85	%
Total	$	8,525,000	$	20,986,523		$	6,347,851	$	4,913,313	$	3,025,549	$	7,009,216	$	50,807,452		100.00	%

(1) Commercial construction loan

The Company evaluates and monitors the credit quality of its residential mortgage loans by analyzing loan performance. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent and on a non-accrual status. Monitoring a residential mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

The unpaid principal balance of residential mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

Credit Quality Indicator	2023		2022		2021		2020		2019		Prior		Total		% of Total
Performance Indicators:
Performing	$	5,386,918	$	53,760,980	$	6,923,101	$	8,466,520	$	3,264,494	$	13,730,714	$	91,532,727		96.89	%
Non-performing (1)		-		1,104,327		366,646		-		353,092		1,114,421		2,938,486		3.11	%
Total	$	5,386,918	$	54,865,307	$	7,289,747	$	8,466,520	$	3,617,586	$	14,845,135	$	94,471,213		100.00	%

(1) Includes residential mortgage loans in the process of foreclosure of $713,552 at March 31, 2023

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The company evaluates and monitors the credit quality of its residential construction loans (including land acquisition and development loans) by analyzing LTV and loan performance. Monitoring a residential construction mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment.

The unpaid principal balance of residential construction mortgage loans by credit quality indicator and vintage year was as follows as of March 31, 2023:

Credit Quality Indicator	2023		2022		2021		Total		% of Total
Performance Indicators:
Performing	$	12,541,324	$	87,110,137	$	46,442,486	$	146,093,947		100.00	%
Non-performing		-		-		-		-		0.00	%
Total	$	12,541,324	$	87,110,137	$	46,442,486	$	146,093,947		100.00	%
LTV:
Less than 65%	$	9,072,543	$	51,392,028	$	8,626,153	$	69,090,724		47.29	%
65% to 80%		3,468,781		33,790,358		21,588,236		58,847,375		40.28	%
Greater than 80%		-		1,927,751		16,228,097		18,155,848		12.43	%
Total	$	12,541,324	$	87,110,137	$	46,442,486	$	146,093,947		100.00	%

Insurance Assignments

The following table presents the aging of insurance assignments, included in other investments and policy loans on the condensed consolidated balance sheets.

	As of March 31 2023			As of December 31 2022
30-59 days past due	$	9,554,122		$	10,621,443
60-89 days past due		4,043,444			3,997,484
Over 90 days past due		5,791,483			5,813,013
Total past due		19,389,049			20,431,941
Current		26,184,781			26,510,594
Total insurance assignments		45,573,831			46,942,536
Allowance for credit losses		(1,685,901	)		(1,609,951	)
Net insurance assignments	$	43,887,930		$	45,332,585

The Company records an allowance for credit losses when the insurance assignment is funded. Once an insurance assignment moves to 90 days or legal proceedings, it is monitored for write-off and collectability, and any adjustments to the allowance are done at that time. See Note 2 regarding the adoption of ASU 2016-13.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

The following table presents a roll forward of the allowance for credit losses as a contra-asset account for insurance assignments.

	Allowance
Beginning balance - January 1, 2023	$	1,609,951
Change in provision for credit losses		233,113	(1)
Charge-offs		(157,163	)
Ending balance - March 31, 2023	$	1,685,901
Beginning balance - January 1, 2022	$	1,686,218
Change in provision for credit losses		889,480	(1)
Charge-offs		(965,747	)
Ending balance - December 31, 2022	$	1,609,951

(1) Included in other expenses on the condensed consolidated statements of earnings

Investment Related Earnings

The following table presents the realized gains and losses from sales, calls, and maturities, and unrealized gains and losses on equity securities from investments and other assets.

	Three Months Ended March 31
	2023			2022
Fixed maturity securities:
Gross realized gains	$	15,491		$	46,123
Gross realized losses		(54,891	)		(930	)
Net credit loss (provision) release		(179,500	)		-
Equity securities:
Gains (losses) on securities sold		(52,315	)		(10,279	)
Unrealized gains and (losses) on securities held at the end of the period		331,430			(607,047	)
Real estate held for investment and sale:
Gross realized gains		-			385,366
Gross realized losses		-			(94,400	)
Other assets, including call and put option derivatives:
Gross realized gains		50,939			453,142
Gross realized losses		-			-
Total	$	111,154		$	171,975

The 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.

Net realized gains and losses includes gains and losses by the restricted assets and cemetery perpetual care trust investments of the cemeteries and mortuaries of $53,931 in net gains and $275,741 in net losses for the three month periods ended March 31, 2023, and 2022, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)

3) Investments (Continued)

Major categories of net investment income were as follows:

	Three Months Ended March 31
	2023			2022
Fixed maturity securities available for sale	$	4,012,732		$	2,636,216
Equity securities		140,507			123,037
Mortgage loans held for investment		8,487,656			7,960,178
Real estate held for investment and sale		3,364,924			3,040,033
Policy loans		200,213			306,282
Insurance assignments		4,768,203			5,396,987
Other investments		129,056			70,645
Cash and cash equivalents		787,762			75,301
Gross investment income		21,891,053			19,608,679
Investment expenses		(4,116,170	)		(4,414,373	)
Net investment income	$	17,774,883		$	15,194,306

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $633,527 and $476,708 for the three month periods ended March 31, 2023 and 2022, 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.

Accrued Investment Income

Accrued investment income consists of the following:

	As of March 31 2023		As of December 31 2022
Fixed maturity securities available for sale	$	3,841,931	$	3,563,767
Equity securities		18,362		14,496
Mortgage loans held for investment		2,710,149		3,220,709
Real estate held for investment		2,809,671		3,455,305
Policy Loans		45,221		37,951
Cash and cash equivalents		1,905		7,598
Total accrued investment income	$	9,427,239	$	10,299,826

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2023 (Unaudited)