Investments

9 Months Ended

Sep. 30, 2023

Investments, Debt and Equity Securities [Abstract]

Investments

3) Investments

The Company’s investments as of September 30, 2023 are summarized as follows:

	Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses (1)			Allowance for Credit Losses			Estimated Fair Value
September 30, 2023:
Fixed maturity securities, available for sale, at estimated fair value:
U.S. Treasury securities and obligations of U.S. Government agencies	$	108,680,913		$	5,981	$	(2,498,554	)	$	-		$	106,188,340
Obligations of states and political subdivisions		6,649,289			218		(586,789	)		-			6,062,718
Corporate securities including public utilities		231,814,067			600,075		(15,412,932	)		(211,500	)		216,789,710
Mortgage-backed securities		32,889,293			13,422		(5,755,224	)		-			27,147,491
Redeemable preferred stock		250,000			10,000		-			-			260,000
Total fixed maturity securities available for sale	$	380,283,562		$	629,696	$	(24,253,499	)	$	(211,500	)	$	356,448,259
Equity securities at estimated fair value:
Common stock:
Industrial, miscellaneous and all other	$	10,470,974		$	2,684,920	$	(846,350	)				$	12,309,544
Total equity securities at estimated fair value	$	10,470,974		$	2,684,920	$	(846,350	)				$	12,309,544
Mortgage loans held for investment at amortized cost:
Residential	$	96,591,643
Residential construction		101,295,751
Commercial		55,991,027
Less: Unamortized deferred loan fees, net		(1,629,546	)
Less: Allowance for credit losses		(2,612,944	)
Less: Net discounts		(328,833	)
Total mortgage loans held for investment	$	249,307,098
Real estate held for investment - net of accumulated depreciation:
Residential	$	38,034,997
Commercial		146,656,466
Total real estate held for investment	$	184,691,463
Real estate held for sale:
Residential	$	2,285,707
Commercial		2,478,660
Total real estate held for sale	$	4,764,367
Other investments and policy loans at amortized cost:
Policy loans	$	13,154,845
Insurance assignments		42,624,001
Federal Home Loan Bank stock (2)		2,699,300
Other investments		9,330,532
Less: Allowance for credit losses for insurance assignments		(1,555,261	)
Total other investments and policy loans	$	66,253,417
Accrued investment income	$	12,266,695
Total investments	$	886,040,843

(1) Gross unrealized losses are net of allowance for credit losses

(2) Includes $978,600 of Membership stock and $1,720,700 of Activity stock attributable to short-term borrowings and letters of credit.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 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 attributable to short-term borrowings and letters of credit.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

Fixed Maturity Securities

The table below summarizes unrealized losses on fixed maturity securities available for sale that were carried at estimated fair value as of September 30, 2023, and December 31, 2022. The unrealized losses were primarily related to interest rate fluctuations. 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
September 30, 2023
U.S. Treasury Securities And Obligations of U.S. Government Agencies	$	331,740	$	36,115,986	$	2,166,815	$	69,967,155	$	2,498,555	$	106,083,141
Obligations of States and Political Subdivisions		155,458		1,469,753		431,331		4,142,748		586,789		5,612,501
Corporate Securities		4,092,910		86,409,480		11,320,021		106,047,158		15,412,931		192,456,638
Mortgage and other asset-backed securities		123,790		4,627,445		5,631,434		22,003,452		5,755,224		26,630,897
Totals	$	4,703,898	$	128,622,664	$	19,549,601	$	202,160,513	$	24,253,499	$	330,783,177
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

Relevant holdings were comprised of 816 securities with fair values aggregating 93.2% of the aggregate amortized cost as of September 30, 2023. Relevant holdings were comprised of 703 securities with fair values aggregating 93.1% of the aggregate amortized cost as of December 31, 2022. Credit loss provision (release) of $(1,741) and nil have been recognized for the three month periods ended September 30, 2023 and 2022, respectively. Credit loss provision (release) of $222,264 and nil have been recognized for the nine month periods ended September 30, 2023 and 2022, respectively. Credit losses 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 increases in interest rates.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

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”) and other industry rating agencies. Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for credit loss, unless current market data or recent company news could lead to a credit downgrade. Securities with ratings of 3 to 5 are evaluated for credit loss. 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. Securities with a rating of 6 are automatically determined to be impaired and a credit loss is recognized in earnings.

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 at 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 a debt security and it is less likely than not that the Company will be required to sell the debt security but the Company also does not expect to recover the entire amortized cost basis of the security, a credit loss is 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 that 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

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 98.2% and 97.7% of its fixed maturity securities rated investment grade as of September 30, 2023 and December 31, 2022, respectively.

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

	September 30, 2023				December 31, 2022
NAIC Designation	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
1	$	210,224,246	$	198,601,878	$	197,753,818	$	189,691,540
2		162,752,957		151,279,566		156,261,804		148,073,873
3		5,329,117		4,890,504		7,080,305		6,635,786
4		1,462,481		1,325,409		1,377,541		1,157,454
5		263,504		90,901		25,736		39,155
6		1,257		1		1,307		684
Total	$	380,033,562	$	356,188,259	$	362,500,511	$	345,598,492

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

	Nine Months Ended September 30, 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 - December 31, 2022	$	-	$	-	$	-		$	-	$	-
Additions for credit losses not previously recorded		-		-		179,500			-		179,500
Change in allowance on securities with previous allowance		-		-		42,764			-		42,764
Reductions for securities sold during the period		-		-		(10,764	)		-		(10,764	)
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 - September 30, 2023	$	-	$	-	$	211,500		$	-	$	211,500

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

	Three Months Ended September 30, 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 - June 30, 2023	$	-	$	-	$	224,005		$	-	$	224,005
Additions for credit losses not previously recorded		-		-		-			-		-
Change in allowance on securities with previous allowance		-		-		(1,741	)		-		(1,741	)
Reductions for securities sold during the period		-		-		(10,764	)		-		(10,764	)
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 - September 30, 2023	$	-	$	-	$	211,500		$	-	$	211,500

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 September 30	$	225,475

The table below presents the amortized cost and the estimated fair value of fixed maturity securities available for sale as of September 30, 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	$	6,818,008	$	6,812,398
Due in 2-5 years		160,874,392		155,802,499
Due in 5-10 years		93,763,663		88,297,470
Due in more than 10 years		85,688,206		78,128,401
Mortgage-backed securities		32,889,293		27,147,491
Redeemable preferred stock		250,000		260,000
Total	$	380,283,562	$	356,448,259

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company had pledged a total of $92,437,113, at estimated fair value, of fixed maturity securities with the FHLB as of September 30, 2023. These pledged securities are used as collateral for any FHLB cash advances. As of September 30, 2023, the Company owed nil to the FHLB and its estimated maximum borrowing capacity was $85,218,402.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Proceeds from sales	$	207,522		$	1,198,240		$	1,163,132		$	1,886,891
Gross realized gains		-			21,926			11,257			24,281
Gross realized losses		(3,368	)		(24,811	)		(57,472	)		(32,656	)

Assets on deposit with life insurance regulatory authorities as required by law were as follows:

	As of September 30, 2023		As of December 31, 2022
Fixed maturity securities available for sale	$	6,248,114	$	8,817,959
Cash and cash equivalents		1,956,777		2,214,206
Total	$	8,204,891	$	11,032,165

There were no investments, aggregated by issuer, of more than 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) as of September 30, 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 assets 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 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 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

September 30, 2023 (Unaudited)

3) Investments (Continued)

The aggregated net book value of commercial real estate serving as collateral for bank loans was $125,641,402 and $129,330,119 as of September 30, 2023, and December 31, 2022, respectively. The associated bank loan carrying values totaled $98,250,725 and $97,112,131 as of September 30, 2023, and December 31, 2022, respectively.

During the three and nine month periods ended September 30, 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 September 30, 2023, and 2022, the Company recorded depreciation expense on commercial real estate held for investment of $1,572,494 and $1,604,195, respectively, and of $4,715,322 and $4,593,468 during the nine month periods ended September 30, 2023, and 2022, 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
	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Utah (1)	$	143,735,609	$	147,627,946		625,920		625,920
Louisiana		19,416		2,380,847		1,622		31,778
Mississippi		2,901,441		2,881,863		19,694		19,694
	$	146,656,466	$	152,890,656		647,236		677,392

(1) Includes Center53

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

	Net Book Value				Total Square Footage
	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Louisiana	$	2,327,107	$	-		30,156		-
Mississippi (1)		151,553		151,553		-		-
	$	2,478,660	$	151,553		30,156		-

(1) Consists of approximately 93 acres of undeveloped land

These properties are being marketed with the assistance of commercial real estate brokers in Mississippi and Louisiana.

Residential Real Estate Held for Investment and Held for Sale

The Company occasionally acquires a small portfolio of residential homes primarily because 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 development.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

During the three and nine month periods ended September 30, 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 September 30, 2023, and 2022, the Company recorded depreciation expense on residential real estate held for investment of $2,648 and $2,648, respectively, and of $7,944 and $7,944 during the nine month periods ended September 30, 2023, and 2022, 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
	September 30, 2023		December 31, 2022
Utah (1)	$	38,034,997	$	38,437,960
	$	38,034,997	$	38,437,960

(1) Includes residential subdivision development

The following table presents additional information regarding the Company’s residential subdivision development in Utah:

	September 30, 2023		December 31, 2022
Lots developed		50		80
Lots to be developed		1,080		1,131
Book Value	$	37,846,685	$	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
	September 30, 2023			December 31, 2022
Utah		$ 2,285,707	(1)	$	11,010,029
	$	2,285,707		$	11,010,029

(1) Unimproved land

The net book value of foreclosed residential real estate included in residential real estate held for sale was nil and $11,010,029 as of September 30, 2023, and December 31, 2022, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 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 September 30, 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 the relevant debtors’ ability to honor obligations is dependent upon the economic stability of the geographic region in which the debtors do business or are employed. As of September 30, 2023, the Company had 45%, 12%, 9%, 7% and 6%, of its mortgage loans from borrowers located in the states of Utah, Florida, California, Texas, and Arizona, respectively. As of December 31, 2022, the Company had 64%, 10%, 5% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, California, and Texas, 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 terms 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 of more than 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

September 30, 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 reverse any interest income that had been accrued. Given this policy, the Company does not measure a credit loss allowance on accrued interest receivable. 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 when received. The interest income recognized from 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 $249,000 and $226,000 as of September 30, 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.

To determine 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 guarantor’s) 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 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

September 30, 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 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
September 30, 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) (1)		555,807		(192,607	)		301,830			665,030
Change in provision for credit losses (2)		67,246		52,797			(142,440	)		(22,397	)
Charge-offs		-		-			-			-
Ending balance - September 30, 2023	$	810,182	$	1,600,170		$	202,592		$	2,612,944
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 (2)		-		270,409			-			270,409
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

September 30, 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
September 30, 2023
30-59 days past due	$	3,139,403		$	3,816,822		$	805,766		$	7,761,991
60-89 days past due		-			1,795,326			-			1,795,326
Over 90 days past due (1)		1,646,508			3,778,582			1,005,417			6,430,507
In process of foreclosure (1)		-			276,580			-			276,580
Total past due		4,785,911			9,667,310			1,811,183			16,264,404
Current		51,205,116			86,924,333			99,484,568			237,614,017
Total mortgage loans		55,991,027			96,591,643			101,295,751			253,878,421
Allowance for credit losses		(810,182	)		(1,600,170	)		(202,592	)		(2,612,944	)
Unamortized deferred loan fees, net		(145,572	)		(1,129,517	)		(354,457	)		(1,629,546	)
Unamortized discounts, net		(220,276	)		(108,557	)		-			(328,833	)
Net mortgage loans held for investment	$	54,814,997		$	93,753,399		$	100,738,702		$	249,307,098
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 held for investment	$	45,694,074		$	90,290,776		$	172,139,077		$	308,123,927

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 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 aggregate unpaid principal balance of commercial mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

Credit Quality Indicator	2023		2022			2021		2020		2019		Prior		Total		% of Total
LTV:
Less than 65%	$	17,525,000	$	13,396,458		$	3,800,378	$	-	$	2,989,026	$	6,796,621	$	44,507,483		79.49	%
65% to 80%		-		4,585,706			1,050,000		4,913,313		-		-		10,549,019		18.84	%
Greater than 80%		-		529,525			405,000		-		-		-		934,525		1.67	%
Total	$	17,525,000	$	18,511,689		$	5,255,378	$	4,913,313	$	2,989,026	$	6,796,621	$	55,991,027		100.00	%
DSCR
>1.20x	$	5,725,000	$	1,000,000		$	1,750,000	$	4,913,313	$	2,989,026	$	2,754,604	$	19,131,943		34.17	%
1.00x - 1.20x		5,300,000		8,496,130			3,505,378		-		-		4,042,017		21,343,525		38.12	%
<1.00x		6,500,000		9,015,559	(1)		-		-		-		-		15,515,559		27.71	%
Total	$	17,525,000	$	18,511,689		$	5,255,378	$	4,913,313	$	2,989,026	$	6,796,621	$	55,991,027		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 more than 90 days past due 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 aggregate unpaid principal balance of residential mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

Credit Quality Indicator	2023		2022		2021		2020		2019		Prior		Total		% of Total
Performance Indicators:
Performing	$	7,788,450	$	55,306,009	$	7,249,701	$	7,495,836	$	2,808,390	$	11,888,093	$	92,536,479		95.80	%
Non-performing (1)		324,111		838,669		741,534		800,486		-		1,350,364		4,055,164		4.20	%
Total	$	8,112,561	$	56,144,678	$	7,991,235	$	8,296,322	$	2,808,390	$	13,238,457	$	96,591,643		100.00	%

(1) Includes residential mortgage loans in the process of foreclosure of $276,580 as of September 30, 2023

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 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 aggregate unpaid principal balance of residential construction mortgage loans by credit quality indicator and origination year was as follows as of September 30, 2023:

Credit Quality Indicator	2023		2022		2021		Total		% of Total
Performance Indicators:
Performing	$	48,525,276	$	27,213,555	$	24,551,503	$	100,290,334		99.01	%
Non-performing		-		1,005,417		-		1,005,417		0.99	%
Total	$	48,525,276	$	28,218,972	$	24,551,503	$	101,295,751		100.00	%
LTV:
Less than 65%	$	29,476,916	$	8,675,281	$	17,117,181	$	55,269,378		54.56	%
65% to 80%		19,048,360		19,543,691		7,434,322		46,026,373		45.44	%
Greater than 80%		-		-		-		-		0.00	%
Total	$	48,525,276	$	28,218,972	$	24,551,503	$	101,295,751		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 September 30, 2023			As of December 31, 2022
30-59 days past due	$	9,374,806		$	10,621,443
60-89 days past due		3,591,685			3,997,484
Over 90 days past due		4,611,748			5,813,013
Total past due		17,578,239			20,431,941
Current		25,045,762			26,510,594
Total insurance assignments		42,624,001			46,942,536
Allowance for credit losses		(1,555,261	)		(1,609,951	)
Net insurance assignments	$	41,068,740		$	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 recorded 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

September 30, 2023 (Unaudited)

3) Investments (Continued)

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

	Allowance
Beginning balance - January 1, 2023	$	1,609,951
Change in provision for credit losses (1)		667,260
Charge-offs		(721,950	)
Ending balance - September 30, 2023	$	1,555,261
Beginning balance - January 1, 2022	$	1,686,218
Change in provision for credit losses (1)		889,480
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 September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Fixed maturity securities:
Gross realized gains	$	37,565		$	30,121		$	54,619		$	205,755
Gross realized losses		(10,383	)		(26,203	)		(102,182	)		(36,961	)
Net credit loss (provision) release		1,740			-			(222,264	)		-
Equity securities:
Gains (losses) on securities sold		324,009			(131,472	)		277,057			(60,154	)
Unrealized losses on securities held at the end of the period		(1,321,511	)		(1,383,627	)		(423,448	)		(4,097,049	)
Real estate held for investment and sale:
Gross realized gains		36,166			-			197,194			1,260,548
Gross realized losses		-			(727,370	)		-			(825,593	)
Other assets, including call and put option derivatives:
Gross realized gains		-			59,599			214,348			632,082
Gross realized losses		-			-			-			-
Total	$	(932,414	)	$	(2,178,952	)	$	(4,676	)	$	(2,921,372	)

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 $452,115 and $640,593 in net losses for the three month periods ended September 30, 2023, and 2022, respectively, and of $200,605 and $1,636,469 in net losses for the nine month periods ended September 30, 2023, and 2022, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

3) Investments (Continued)

Major categories of net investment income were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Fixed maturity securities available for sale	$	4,242,185		$	3,188,521		$	12,398,685		$	8,636,387
Equity securities		167,348			139,412			448,564			382,246
Mortgage loans held for investment		9,842,845			10,477,672			27,797,908			27,682,315
Real estate held for investment and sale		3,291,047			3,918,310			11,553,643			10,970,535
Policy loans		191,843			213,520			599,498			727,103
Insurance assignments		4,340,644			4,218,184			13,570,659			13,708,894
Other investments		213,560			181,597			555,720			350,603
Cash and cash equivalents		1,083,241			514,869			2,651,148			698,601
Gross investment income		23,372,713			22,852,085			69,575,825			63,156,684
Investment expenses		(4,124,250	)		(4,249,015	)		(12,380,505	)		(13,388,020	)
Net investment income	$	19,248,463		$	18,603,070		$	57,195,320		$	49,768,664

Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $372,277 and $675,259 for the three month periods ended September 30, 2023 and 2022, respectively, and of $2,224,629 and $1,882,502 for the nine month periods ended September 30, 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 September 30, 2023		As of December 31, 2022
Fixed maturity securities available for sale	$	4,343,327	$	3,563,767
Equity securities		12,729		14,496
Mortgage loans held for investment		4,732,717		3,220,709
Real estate held for investment		3,158,708		3,455,305
Policy Loans		4,463		37,951
Cash and cash equivalents		14,751		7,598
Total accrued investment income	$	12,266,695	$	10,299,826

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)