Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

8) Fair Value of Financial Instruments

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:

Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

Level 2: Financial assets and financial liabilities whose values are based on the following:

a)	Quoted prices for similar assets or liabilities in active markets.
b)	Quoted prices for identical or similar assets or liabilities in non-active markets; or
c)	Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect the Company’s estimates of the assumptions that market participants would use in valuing financial assets and financial liabilities.

The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value.

The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments.

The items shown under Level 1 and Level 2 are valued as follows:

Fixed Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 financial assets), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

Equity Securities: The fair values for equity securities are based on quoted market prices.

Restricted Assets: A portion of these assets include mutual funds and equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Cemetery Perpetual Care Trust Investments: A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature.

Call and Put Option Derivatives: The fair values for call and put options are based on quoted market prices.

Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The items shown under Level 3 are valued as follows:

Loans Held for Sale: The Company has elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. Fair value is often difficult to determine in volatile markets and may contain significant unobservable inputs.

Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters loan commitments with potential borrowers and forward sale commitments to sell loans with third-party investors. The Company also uses a hedging strategy for these transactions. A loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period, generally up to 30 days after issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings.

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

Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers comparable sales in the area, property condition, and potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction.

Impaired Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims.

It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company also considers area comparable properties and property condition when determining fair value.

In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.

Mortgage Servicing Rights: The Company initially recognizes Mortgage Servicing Rights (“MSRs”) at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet as of September 30, 2023:

	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturity securities available for sale	$	356,448,259		$	-	$	355,216,072	$	1,232,187
Equity securities		12,309,544			12,309,544		-		-
Loans held for sale		152,546,566			-		-		152,546,566
Restricted assets (1)		1,534,526			-		1,534,526		-
Restricted assets (2)		6,312,610			6,312,610		-		-
Cemetery perpetual care trust investments (1)		367,392			-		367,392		-
Cemetery perpetual care trust investments (2)		3,855,805			3,855,805		-		-
Derivatives - loan commitments (3)		4,817,703			-		-		4,817,703
Total assets accounted for at fair value on a recurring basis	$	538,192,405		$	22,477,959	$	357,117,990	$	158,596,456
Liabilities accounted for at fair value on a recurring basis
Derivatives - loan commitments (4)		(3,088,542	)		-		-		(3,088,542	)
Total liabilities accounted for at fair value on a recurring basis	$	(3,088,542	)	$	-	$	-	$	(3,088,542	)

(1) Fixed maturity securities available for sale

(2) Equity securities

(3) Included in other assets on the consolidated balance sheets

(4) Included in other liabilities and accrued expenses on the consolidated balance sheets

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet as of December 31, 2022:

	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturity securities available for sale	$	345,858,492		$	-		$	344,422,973	$	1,435,519
Equity securities		11,682,526			11,682,526			-		-
Loans held for sale		141,179,620			-			-		141,179,620
Restricted assets (1)		1,217,308			-			1,217,308		-
Restricted assets (2)		5,348,244			5,348,244			-		-
Cemetery perpetual care trust investments (1)		254,731			-			254,731		-
Cemetery perpetual care trust investments (2)		3,605,162			3,605,162			-		-
Derivatives - loan commitments (3)		4,089,856			-			-		4,089,856
Total assets accounted for at fair value on a recurring basis	$	513,235,939		$	20,635,932		$	345,895,012	$	146,704,995
Liabilities accounted for at fair value on a recurring basis
Derivatives - call options (4)	$	(29,715	)	$	(29,715	)	$	-	$	-
Derivatives - put options (4)		(13,888	)		(13,888	)		-		-
Derivatives - loan commitments (4)		(1,382,979	)		-			-		(1,382,979	)
Total liabilities accounted for at fair value on a recurring basis	$	(1,426,582	)	$	(43,603	)	$	-	$	(1,382,979	)

(1) Fixed maturity securities available for sale

(2) Equity securities

(3) Included in other assets on the consolidated balance sheets

(4) Included in other liabilities and accrued expenses on the consolidated balance sheets

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

For Level 3 assets and liabilities measured at fair value on a recurring basis as of September 30, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

				Significant	Range of Inputs
	Fair Value at		Valuation	Unobservable	Minimum			Maximum			Weighted
	September 30, 2023		Technique	Input(s)	Value			Value			Average
Loans held for sale	$	152,546,566	Market approach	Investor contract pricing as a percentage of unpaid principal balance		70.0	%		107.0	%		99.0	%
Derivatives - loan commitments (net)		1,729,161	Market approach	Pull-through rate		70.0	%		95.0	%		88.0	%
				Initial-Value		N/A			N/A			N/A
				Servicing		0 bps			138 bps			61 bps
Fixed maturity securities available for sale		1,232,187	Broker quotes	Pricing quotes	$	98.40		$	100.00		$	99.32

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:

				Significant	Range of Inputs
	Fair Value at		Valuation	Unobservable	Minimum			Maximum			Weighted
	December 31, 2022		Technique	Input(s)	Value			Value			Average
Loans held for sale	$	141,179,620	Market approach	Investor contract pricing as a percentage of unpaid principal balance		69.9	%		106.1	%		99.8	%
Derivatives - loan commitments (net)		2,706,877	Market approach	Pull-through rate		65.0	%		95.0	%		82.2	%
				Initial-Value		N/A			N/A			N/A
				Servicing		0 bps			153 bps			73 bps
Fixed maturity securities available for sale		1,435,519	Broker quotes	Pricing quotes	$	100.00		$	111.11		$	104.97

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the nine month period ended September 30, 2023:

	Net Loan Commitments			Loans Held for Sale			Fixed Maturity Securities Available for Sale
Balance - December 31, 2022	$	2,706,877		$	141,179,620		$	1,435,519
Originations and purchases		-			1,708,831,185			-
Sales, maturities and paydowns		-			(1,726,023,095	)		(129,521	)
Transfer to mortgage loans held for investment		-			(3,017,626	)		-
Total gains (losses):
Included in earnings		(977,716	)(1)		31,576,482	(1)		(109	)(2)
Included in other comprehensive income		-			-			(73,702	)
Balance - September 30, 2023	$	1,729,161		$	152,546,566		$	1,232,187

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

(2) As a component of Net investment income on the condensed consolidated statements of earnings

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the nine month period ended September 30, 2022:

	Net Loan Commitments			Loans Held for Sale			Fixed Maturity Securities Available for Sale
Balance - December 31, 2021	$	7,015,515		$	302,776,827		$	2,023,348
Originations and purchases		-			2,837,349,328			-
Sales, maturities and paydowns		-			(2,987,906,269	)		(368,980	)
Transfer to mortgage loans held for investment		-			(49,428,757	)		-
Total gains (losses):
Included in earnings		(2,843,155	)(1)		59,190,794	(1)		1,957	(2)
Included in other comprehensive income		-			-			(31,127	)
Balance - September 30, 2022	$	4,172,360		$	161,981,923		$	1,625,198

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

(2) As a component of Net investment income on the condensed consolidated statements of earnings

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended September 30, 2023:

	Net Loan Commitments			Loans Held for Sale			Fixed Maturity Securities Available for Sale
Balance - June 30, 2023	$	3,233,447		$	161,310,060		$	1,431,874
Originations and purchases		-			569,095,944			-
Sales, maturities and paydowns		-			(585,545,472	)		(129,521	)
Transfer to mortgage loans held for investment		-			(1,867,552	)
Total gains (losses):
Included in earnings		(1,504,286	)(1)		9,553,586	(1)		(109	)(2)
Included in other comprehensive income		-			-			(70,057	)
Balance - September 30, 2023	$	1,729,161		$	152,546,566		$	1,232,187

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

(2) As a component of Net investment income on the condensed consolidated statements of earnings

The following table is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs for the three month period ended September 30, 2022:

	Net Loan Commitments			Loans Held for Sale			Fixed Maturity Securities Available for Sale
Balance - June 30, 2022	$	7,443,642		$	209,860,409		$	1,962,789
Originations and purchases		-			787,389,868			-
Sales, maturities and paydowns		-			(800,430,402	)		(344,630	)
Transfer to mortgage loans held for investment		-			(49,428,757	)		-
Total gains (losses):
Included in earnings		(3,271,282	)(1)		14,590,805	(1)		-	(2)
Included in other comprehensive income		-			-			7,039
Balance - September 30, 2022	$	4,172,360		$	161,981,923		$	1,625,198

(1) As a component of Mortgage fee income on the condensed consolidated statements of earnings

(2) As a component of Net investment income on the condensed consolidated statements of earnings

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The Company did not have any financial assets and financial liabilities measured at fair value on a nonrecurring basis as of September 30, 2023.

The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the condensed consolidated balance sheet as of December 31, 2022:

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets accounted for at fair value on a nonrecurring basis
Impaired mortgage loans held for investment	$	471,786	$	-	$	-	$	471,786
Total assets accounted for at fair value on a nonrecurring basis	$	471,786	$	-	$	-	$	471,786

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Fair Value of Financial Instruments Carried at Other Than Fair Value

ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value.

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction as of September 30, 2023 and December 31, 2022.

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2023:

	Carrying Value			Level 1		Level 2		Level 3			Total Estimated Fair Value
Assets
Mortgage loans held for investment
Residential	$	93,753,399		$	-	$	-	$	91,471,266		$	91,471,266
Residential construction		100,738,702			-		-		100,740,713			100,740,713
Commercial		54,814,997			-		-		53,928,941			53,928,941
Mortgage loans held for investment, net	$	249,307,098		$	-	$	-	$	246,140,920		$	246,140,920
Policy loans		13,154,845			-		-		13,154,845			13,154,845
Insurance assignments, net (1)		41,068,740			-		-		41,068,740			41,068,740
Restricted assets (2)		1,113,970			-		-		1,113,970			1,113,970
Cemetery perpetual care trust investments (2)		1,962,587			-		-		1,962,587			1,962,587
Mortgage servicing rights, net		3,494,723			-		-		5,012,375			5,012,375
Liabilities
Bank and other loans payable	$	(108,431,028	)	$	-	$	-	$	(108,431,028	)	$	(108,431,028	)
Policyholder account balances (3)		(39,988,385	)		-		-		(41,141,921	)		(41,141,921	)
Future policy benefits - annuities (3)		(106,278,388	)		-		-		(123,165,600	)		(123,165,600	)

(1) Included in other investments and policy loans on the condensed consolidated balance sheets

(2) Mortgage loans held for investment

(3) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheets

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2022:

	Carrying Value			Level 1		Level 2		Level 3			Total Estimated Fair Value
Assets
Mortgage loans held for investment
Residential	$	90,290,776		$	-	$	-	$	88,575,293		$	88,575,293
Residential construction		172,139,077			-		-		172,139,077			172,139,077
Commercial		45,694,074			-		-		44,079,537			44,079,537
Mortgage loans held for investment, net	$	308,123,927		$	-	$	-	$	304,793,907		$	304,793,907
Policy loans		13,095,473			-		-		13,095,473			13,095,473
Insurance assignments, net (1)		45,332,585			-		-		45,332,585			45,332,585
Restricted assets (2)		1,731,469			-		-		1,731,469			1,731,469
Cemetery perpetual care trust investments (2)		1,506,517			-		-		1,506,517			1,506,517
Mortgage servicing rights, net		3,039,765			-		-		3,927,877			3,927,877
Liabilities
Bank and other loans payable	$	(161,712,804	)	$	-	$	-	$	(161,712,804	)	$	(161,712,804	)
Policyholder account balances (3)		(41,146,171	)		-		-		(42,181,089	)		(42,181,089	)
Future policy benefits - annuities (3)		(106,637,094	)		-		-		(126,078,031	)		(126,078,031	)

(1) Included in other investments and policy loans on the consolidated balance sheets

(2) Mortgage loans held for investment

(3) Included in future policy benefits and unpaid claims on the consolidated balance sheets

The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these financial instruments are summarized as follows:

Mortgage Loans Held for Investment: The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment.

Residential – The estimated fair value is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single-family mortgages) and considering pricing of similar loans that were sold recently.

Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value.

Commercial – The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current interest rates for commercial mortgages.

Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies.

Insurance Assignments, Net: These investments are primarily short in maturity, accordingly, the carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2023 (Unaudited)

8) Fair Value of Financial Instruments (Continued)

Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates.

Policyholder Account Balances and Future Policy Benefits-Annuities: Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period of more than related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.