XNAS:SNFCA Security National Financial Corp Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2012, or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to ________

Commission file number: 000-09341

SECURITY NATIONAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

UTAH
87-0345941
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
5300 South 360 West, Suite 250 Salt Lake City, Utah
84123
(Address of principal executive office)
(Zip Code)
   
 (801) 264-1060
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 Yes [X] No [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes [  ] No[X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
   
9,639,121
Title of Class
 
Number of Shares Outstanding as of
   
August 14, 2012
     
Class C Common Stock, $.20 par value
 
10,132,749
Title of Class
 
Number of Shares Outstanding as of
   
August 14, 2012
     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  [  ]      Accelerated filer   [  ]      Non-accelerated filer   [  ]       Smaller reporting company   [X]
(Do not check if a smaller reporting company)


 
 

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED JUNE 30, 2012

TABLE OF CONTENTS
 

   
Page No.
 
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2012 and June 30, 2011 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
40
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
50
     
Item 4.
Controls and Procedures
50
     
 
PART II ‑ OTHER INFORMATION
 
     
 
Other Information
52
     
 
Signature Page
54
     
 
Certifications
55
 
 
 
2

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

Assets
 
June 30,
2012
   
December 31,
2011
 
Investments:
           
Fixed maturity securities, held to maturity, at amortized cost
  $ 131,592,564     $ 127,579,087  
Equity securities, available for sale, at estimated fair value
    5,882,433       6,299,392  
Mortgage loans on real estate and construction loans, held for investment net of allowances for losses of $4,699,410 and $4,881,173 for 2012 and 2011
    97,975,694       115,155,967  
Real estate held for investment, net of accumulated depreciation of $4,352,818 and $4,189,641 for 2012 and 2011
    4,272,796       3,786,780  
Other real estate owned held for investment, net of accumulated depreciation of $2,420,635 and $1,810,238 for 2012 and 2011
    56,127,842       46,398,095  
Other real estate owned held for sale
    5,998,740       5,793,900  
Policy and other loans, net of allowances for doubtful accounts of $461,775 and $427,136 for 2012 and 2011
    17,818,019       18,463,277  
Short-term investments
    5,562,045       6,932,023  
Accrued investment income
    2,282,826       2,323,080  
Total investments
    327,512,959       332,731,601  
Cash and cash equivalents
    45,476,876       17,083,604  
Mortgage loans sold to investors
    72,674,336       77,339,445  
Receivables, net
    12,431,419       9,934,075  
Restricted assets of cemeteries and mortuaries
    3,697,483       3,392,497  
Cemetery perpetual care trust investments
    1,965,244       1,810,185  
Receivable from reinsurers
    14,351,927       7,484,466  
Cemetery land and improvements
    11,096,723       11,105,809  
Deferred policy and pre-need contract acquisition costs
    37,025,433       36,237,069  
Property and equipment, net
    9,830,193       9,300,185  
Value of business acquired
    10,524,072       11,020,834  
Goodwill
    677,039       677,039  
Other
    6,346,834       3,022,113  
                 
Total Assets
  $ 553,610,538     $ 521,138,922  
 
See accompanying notes to condensed consolidated financial statements.

 
3

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)



   
June 30,
2012
   
December 31,
2011
 
Liabilities and Stockholders' Equity
           
Liabilities
           
Future life, annuity, and other benefits
  $ 396,253,821     $ 381,595,568  
Unearned premium reserve
    4,942,074       5,030,443  
Bank and other loans payable
    27,836,728       25,019,119  
Deferred pre-need cemetery and mortuary contract revenues
    13,280,079       13,140,483  
Cemetery perpetual care obligation
    3,065,606       2,983,077  
Accounts payable
    2,717,565       2,672,479  
Other liabilities and accrued expenses
    19,086,401       14,456,887  
Income taxes
    17,749,085       15,010,279  
Total liabilities
    484,931,359       459,908,335  
                 
Stockholders' Equity
               
Common Stock:
               
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 9,638,798 shares in 2012 and 9,638,798 shares in 2011
    19,277,596       19,277,596  
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
    -       -  
Class C: convertible common stock - $0.20 par value; 15,000,000 shares authorized; issued 10,135,976 shares in 2012 and 10,135,976 in 2011
    2,027,195       2,027,195  
Additional paid-in capital
    19,483,976       19,487,565  
Accumulated other comprehensive income, net of taxes
    2,594,453       654,443  
Retained earnings
    27,801,838       22,546,623  
Treasury stock at cost - 1,094,204 Class A shares in 2012 and 1,198,167 Class A shares in 2011
    (2,505,879 )     (2,762,835 )
                 
Total stockholders' equity
    68,679,179       61,230,587  
                 
Total Liabilities and Stockholders' Equity
  $ 553,610,538     $ 521,138,922  
 
See accompanying notes to condensed consolidated financial statements.

 
4

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
Insurance premiums and other considerations
  $ 12,281,896     $ 11,893,298     $ 24,869,684     $ 24,585,601  
Net investment income
    6,137,898       4,717,358       12,191,945       8,987,806  
Net mortuary and cemetery sales
    2,626,690       2,762,610       5,501,639       5,704,603  
Realized gains on investments and other assets
    186,926       1,257,566       357,986       1,602,656  
Other than temporary impairments on investments
    (45,000 )     (30,000 )     (90,000 )     (65,129 )
Mortgage fee income
    35,087,056       15,645,290       60,577,640       29,097,881  
Other
    252,744       220,296       442,539       725,180  
Total revenues
    56,528,210       36,466,418       103,851,433       70,638,598  
                                 
Benefits and expenses:
                               
Death benefits
    4,923,798       5,135,908       10,110,097       11,284,571  
Surrenders and other policy benefits
    277,925       307,089       1,112,990       1,015,123  
Increase in future policy benefits
    5,294,936       5,407,593       10,936,560       9,538,690  
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
    1,949,308       1,955,321       3,873,735       3,955,538  
Selling, general and administrative expenses:
                               
Commissions
    20,394,230       9,288,848       35,280,020       17,149,481  
Salaries
    6,807,364       5,717,905       13,320,207       11,902,692  
Provision for loan losses and loss reserve
    1,097,873       415,541       1,500,347       1,107,335  
Costs related to funding mortgage loans
    1,800,348       1,001,329       3,160,652       1,845,834  
Other
    7,706,098       6,222,289       14,704,988       12,300,160  
Interest expense
    847,141       378,100       1,615,885       693,642  
Cost of goods and services sold-mortuaries and cemeteries
    392,812       495,317       870,983       1,026,936  
Total benefits and expenses
    51,491,833       36,325,240       96,486,464       71,820,002  
                                 
Earnings (loss) before income taxes
    5,036,377       141,178       7,364,969       (1,181,404 )
Income tax (provision) benefit
    (1,443,345 )     63,689       (2,109,754 )     867,798  
                                 
Net earnings (loss)
  $ 3,593,032     $ 204,867     $ 5,255,215     $ (313,606 )
                                 
Net earnings (loss) per Class A Equivalent common share (1)
  $ 0.38     $ 0.02     $ 0.55     $ (0.03 )
                                 
Net earnings (loss) per Class A Equivalent common share-assuming dilution (1)
  $ 0.36     $ 0.02     $ 0.54     $ (0.03 )
                                 
Weighted-average Class A equivalent common share outstanding (1)
    9,540,238       9,350,042       9,518,058       9,311,131  
                                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
    9,901,764       9,392,736       9,684,868       9,311,131  

(1) Net earnings (loss) per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted-average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common share basis. Net earnings (loss) per common share represent net earnings (loss) per equivalent Class A common share. Net earnings (loss) per Class C common share is equal to one-tenth (1/10) of such amount.

See accompanying notes to condensed consolidated financial statements.

 
5

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net earnings (loss)
  $ 3,593,032     $ 204,867     $ 5,255,215     $ (313,606 )
Other comprehensive income:
                               
  Net unrealized gains on derivative instruments
    1,273,757       403,906       1,923,850       451,090  
  Net unrealized gains (losses) on available for sale securities
    (313,677 )     (344,686 )     16,160       (358,655 )
Other comprehensive income:
    960,080       59,220       1,940,010       92,435  
Comprehensive income (loss)
  $ 4,553,112     $ 264,087     $ 7,195,225     $ (221,171 )
 
See accompanying notes to condensed consolidated financial statements.

 
6

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

   
Class A Common Stock
   
Class C Common Stock
   
Additional Paid-in Capital
   
Accumulated Other Comprehensive Income (Loss)
   
Retained Earnings
   
Treasury Stock
   
Total
 
Balance at December 31, 2010
  $ 18,357,890     $ 1,932,031     $ 19,689,993     $ 1,188,246     $ 21,907,579     $ (3,147,271 )   $ 59,928,468  
                                                         
Comprehensive income:
                                                       
Net loss
    -       -       -       -       (313,606 )     -       (313,606 )
Other comprehensive income
    -       -       -       92,435       -       -       92,435  
Grant of stock options
    -       -       128,688       -       -       -       128,688  
Sale of treasury stock
    -       -       (7,108 )     -       -       147,343       140,235  
Stock dividends
    218       2       (29 )     -       (191 )     -       -  
Conversion Class C to Class A
    958       (959 )     1       -       -       -       -  
Balance at June 30, 2011
  $ 18,359,066     $ 1,931,074     $ 19,811,545     $ 1,280,681     $ 21,593,782     $ (2,999,928 )   $ 59,976,220  
                                                         
                                                         
Balance at December 31, 2011
  $ 19,277,596     $ 2,027,195     $ 19,487,565     $ 654,443     $ 22,546,623     $ (2,762,835 )   $ 61,230,587  
                                                         
Comprehensive income:
                                                       
Net earnings
    -       -       -       -       5,255,215       -       5,255,215  
Other comprehensive income
    -       -       -       1,940,010       -       -       1,940,010  
Grant of stock options
    -       -       94,436       -       -       -       94,436  
Sale of treasury stock
    -       -       (98,025 )     -       -       256,956       158,931  
Balance at June 30, 2012
  $ 19,277,596     $ 2,027,195     $ 19,483,976     $ 2,594,453     $ 27,801,838     $ (2,505,879 )   $ 68,679,179  
 
See accompanying notes to condensed consolidated financial statements.

 
7

 

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six Months Ended June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
     Net cash provided by operating activities
  $ 24,431,101     $ 34,177,623  
                 
Cash flows from investing activities:
               
Securities held to maturity:
               
        Purchase-fixed maturity securities
    (7,752,826 )     (46,298,806 )
        Calls and maturities - fixed maturity securities
    3,705,012       8,366,456  
Securities available for sale:
               
       Purchase - equity securities
    (887,917 )     (3,477,093 )
       Sales - equity securities
    1,445,020       3,457,030  
Purchase of short-term investments
    (6,579,805 )     (32,008,356 )
Sales of short-term investments
    7,949,783       30,358,108  
Purchase of restricted assets
    (285,626 )     (150,163 )
Changes in assets for perpetual care trusts
    (139,322 )     (138,661 )
Amount received for perpetual care trusts
    82,529       55,590  
Mortgage, policy, and other loans made
    (55,936,935 )     (64,347,843 )
Payments received for mortgage, policy and other loans
    62,940,253       52,272,804  
Purchase of property and equipment
    (1,191,210 )     (298,209 )
Disposal of property and equipment
    14,768       2,250,000  
Purchase of real estate
    (55,682 )     (218,836 )
Sale of real estate
    366,720       2,032,992  
Reinsurance with North America Life
    -       12,990,444  
Cash paid for purchase of subsidiaries, net of cash received
    (180,591 )     -  
      Net cash provided by (used in) investing activities
    3,494,171       (35,154,543 )
                 
Cash flows from financing activities:
               
Annuity contract receipts
    4,388,970       4,074,901  
Annuity contract withdrawals
    (6,748,612 )     (7,246,850 )
Repayment of bank loans on notes and contracts
    (772,358 )     (1,186,821 )
Proceeds from borrowing on bank loans
    -       3,559,026  
Change in line of credit borrowings
    3,600,000       -  
      Net cash provided by (used in) financing activities
    468,000       (799,744 )
                 
Net change in cash and cash equivalents
    28,393,272       (1,776,664 )
                 
Cash and cash equivalents at beginning of period
    17,083,604       39,556,503  
                 
Cash and cash equivalents at end of period
  $ 45,476,876     $ 37,779,839  
                 
Non Cash Investing and Financing Activities
               
Mortgage loans foreclosed into real estate
  $ 11,527,488     $ 4,916,403  
 
See accompanying notes to condensed consolidated financial statements.

 
8

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)


1)         Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K (file number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims, those used in determining valuation allowances for mortgage loans on real estate and construction loans held for investment, those used in determining loan loss reserve, and those used in determining the estimated future costs for pre-need sales. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.

Certain 2011 amounts have been reclassified to bring them into conformity with the 2012 presentation.

2)       Recent Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities – In December 2011, the Financial Accounting Standards Board ("FASB") issued authoritative guidance related to balance sheet offsetting. The new guidance requires disclosures about assets and liabilities that are offset or have the potential to be offset. These disclosures are intended to address differences in the asset and liability offsetting requirements under U.S. GAAP and International Financial Reporting Standards (“IFRS”). This new guidance will be effective for us for interim and annual reporting periods beginning January 1, 2013, with retrospective application required. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.


 
9

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)


3)           Investments

The Company’s investments in fixed maturity securities held-to-maturity and equity securities available for sale as of June 30, 2012 are summarized as follows:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
 Unrealized
Losses
   
Estimated
Fair
Value
 
June 30, 2012:
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
  $ 2,811,474     $ 558,830     $ -     $ 3,370,304  
Obligations of states and political subdivisions
    2,960,476       353,439       (6,560 )     3,307,355  
Corporate securities including public utilities
    118,961,564       12,950,236       (1,409,269 )     130,502,531  
Mortgage-backed securities
    5,348,172       288,026       (193,980 )     5,442,218  
Redeemable preferred stock
    1,510,878       75,472       (8,000 )     1,578,350  
Total fixed maturity securities held to maturity
  $ 131,592,564     $ 14,226,003     $ (1,617,809 )   $ 144,200,758  



 
10

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
June 30, 2012:
                       
                         
Equity securities available for sale at estimated fair value:
                       
                         
Non-redeemable preferred stock
  $ 20,281     $ -     $ (1,797 )   $ 18,484  
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
    6,840,761       378,015       (1,354,827 )     5,863,949  
                                 
Total equity securities available for sale at estimated fair value
  $ 6,861,042     $ 378,015     $ (1,356,624 )   $ 5,882,433  
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
  $ 52,498,871                          
Residential construction
    9,085,386                          
Commercial
    41,090,847                          
Less: Allowance for loan losses
    (4,699,410 )                        
Total mortgage loans on real estate and construction loans held for investment
  $ 97,975,694                          
                                 
Real estate held for investment - net of depreciation
  $ 4,272,796                          
Other real estate owned held for investment - net of  depreciation
    56,127,842                          
Other real estate owned held for sale
    5,998,740                          
Total real estate
  $ 66,399,378                          
                                 
Policy and other loans at amortized cost - net of allowance for doubtful accounts
  $ 17,818,019                          
                                 
Short-term investments at amortized cost
  $ 5,562,045                          


 
11

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)
 

3)         Investments (Continued)

The Company’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2011 are summarized as follows:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
 Losses
   
Estimated
Fair
Value
 
December 31, 2011:
                       
                         
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
  $ 2,820,159     $ 551,740     $ -     $ 3,371,899  
Obligations of states and political subdivisions
    3,024,425       309,986       (13,156 )     3,321,255  
Corporate securities including public utilities
    113,648,447       10,075,071       (2,268,146 )     121,455,372  
Mortgage-backed securities
    6,575,178       354,286       (356,900 )     6,572,564  
Redeemable preferred stock
    1,510,878       72,639       (129,200 )     1,454,317  
Total fixed maturity securities held to maturity
  $ 127,579,087     $ 11,363,722     $ (2,767,402 )   $ 136,175,407  
 

 
12

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2011:
                       
                         
Equity securities available for sale at estimated fair value:
                       
                         
Non-redeemable preferred stock
  $ 20,281     $ -     $ (1,843 )   $ 18,438  
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
    7,250,991       363,387       (1,333,424 )     6,280,954  
                                 
Total equity securities available for sale at estimated fair value
  $ 7,271,272     $ 363,387     $ (1,335,267 )   $ 6,299,392  
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
  $ 54,344,327                          
Residential construction
    17,259,666                          
Commercial
    48,433,147                          
Less: Allowance for loan losses
    (4,881,173 )                        
Total mortgage loans on real estate and construction loans held for investment
  $ 115,155,967                          
                                 
Real estate held for investment - net of depreciation
  $ 3,786,780                          
Other real estate owned held for investment - net of depreciation
    46,398,095                          
Other real estate owned held for sale
    5,793,900                          
Total real estate
  $ 55,978,775                          
                                 
Policy and other loans at amortized cost - net of allowance for doubtful accounts
  $ 18,463,277                          
                                 
Short-term investments at amortized cost
  $ 6,932,023                          


 
13

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at June 30, 2012 and December 31, 2011. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related fixed maturity securities:

   
Unrealized Losses for Less than Twelve Months
   
No. of Investment Positions
   
Unrealized Losses for More than Twelve Months
   
No. of Investment Positions
   
Total Unrealized Loss
 
At June 30, 2012
                             
Obligations of states and political subdivisions
  $ -       0     $ 6,560       2     $ 6,560  
Corporate securities including public utilities
    598,070       22       811,199       17       1,409,269  
Mortgage-backed securities
    54,149       1       139,831       3       193,980  
Redeemable preferred stock
    -       0       8,000       1       8,000  
Total unrealized losses
  $ 652,219       23     $ 965,590       23     $ 1,617,809  
Fair Value
  $ 10,581,908             $ 8,353,472             $ 18,935,380  
                                         
At December 31, 2011
                                       
Obligations of states and political subdivisions
  $ -       0     $ 13,156       2     $ 13,156  
Corporate securities including public utilities
    1,544,224       47       723,922       12       2,268,146  
Mortgage-backed securities
    161,300       3       195,600       1       356,900  
Redeemable preferred stock
    800       1       128,400       1       129,200  
Total unrealized losses
  $ 1,706,324       51     $ 1,061,078       16     $ 2,767,402  
Fair Value
  $ 24,249,533             $ 3,762,892             $ 28,012,425  
 
As of June 30, 2012, the average market value of the related fixed maturities was 92.1% of amortized cost and the average market value was 91.0% of amortized cost as of December 31, 2011. During the six months ended June 30, 2012 and 2011 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $90,000 and $65,129, respectively.

On a quarterly basis, the Company reviews its available-for-sale fixed investment securities related to corporate securities and other public utilities, consisting of bonds and preferred stocks that are in a loss position. The review involves an analysis of the securities in relation to historical values, and projected earnings and revenue growth rates. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized. No other than temporary impairment loss was considered to exist for these fixed maturity securities as of June 30, 2012 and 2011.


 
14

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)

Equity Securities

The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at June 30, 2012 and December 31, 2011. The unrealized losses were primarily the result of decreases in fair value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available-for-sale in a loss position:

   
Unrealized Losses
 for Less than Twelve Months
   
No. of
Investment Positions
   
Unrealized Losses
 for More than
Twelve Months
   
No. of Investment
Positions
   
Total
Unrealized
 Losses
 
At June 30, 2012
                             
Non-redeemable preferred stock
  $ 213       1     $ 1,584       1     $ 1,797  
Industrial, miscellaneous and all other
    582,951       61       771,876       30       1,354,827  
Total unrealized losses
  $ 583,164       62     $ 773,460       31     $ 1,356,624  
Fair Value
  $ 2,213,889             $ 1,005,768             $ 3,219,657  
                                         
At December 31, 2011
                                       
Non-redeemable preferred stock
  $ -       -     $ 1,843       2     $ 1,843  
Industrial, miscellaneous and all other
    955,400       79       378,024       14       1,333,424  
Total unrealized losses
  $ 955,400       79     $ 379,867       16     $ 1,335,267  
Fair Value
  $ 2,857,082             $ 560,529             $ 3,417,611  

As of June 30, 2012, the average market value of the equity securities available for sale was 70.4% of the original investment and the average market value was 71.9% of the original investment as of December 31, 2011. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. During the six months ended June 30, 2012 and 2011, there was no other than temporary decline in fair value.

On a quarterly basis, the Company reviews its investment in industrial, miscellaneous and all other equity securities that are in a loss position. The review involves an analysis of the securities in relation to historical values, price earnings ratios, projected earnings and revenue growth rates. Based on the analysis a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the investment will recover from the loss position, the loss is considered to be other than temporary, the security is written down to the impaired value and an impairment loss is recognized. No other than temporary impairment loss was considered to exist for these equity securities as of June 30, 2012 and 2011.
 
The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices.

The amortized cost and estimated fair value of fixed maturity securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
15

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)        Investments (Continued)
 
   
Amortized
Cost
   
Estimated Fair
Value
 
Held to Maturity:
           
Due in 2012
  $ 577,059     $ 582,761  
Due in 2013 through 2016
    19,254,387       20,942,282  
Due in 2017 through 2021
    50,167,095       54,454,126  
Due after 2021
    54,734,973       61,201,021  
Mortgage-backed securities
    5,348,172       5,442,218  
Redeemable preferred stock
    1,510,878       1,578,350  
Total held to maturity
  $ 131,592,564     $ 144,200,758  

The amortized cost and estimated fair value of available for sale securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Equities are valued using the specific identification method.

   
Amortized
Cost
   
Estimated Fair
Value
 
Available for Sale:
           
Due in 2012 through 2015
  $ -     $ -  
Due in 2013 through 2016
    -       -  
Due in 2017 through 2021
    -       -  
Due after 2021
    -       -  
Non-redeemable preferred stock
    20,281       18,484  
Common stock
    6,840,761       5,863,949  
Total available for sale
  $ 6,861,042     $ 5,882,433  

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities held to maturity:
                       
Gross realized gains
  $ 129,651     $ 166,465     $ 137,255     $ 319,957  
Gross realized losses
    -       (93,736 )     (334 )     (131,821 )
Other than temporary impairments
    (45,000 )     (30,000 )     (90,000 )     (65,129 )
                                 
Securities available for sale:
                               
Gross realized gains
    15,372       166,872       152,580       455,123  
Gross realized losses
    -       (27,950 )     (5,705 )     (34,804 )
Other than temporary impairments
    -       -       -       -  
                                 
Other assets:
                               
Gross realized gains
    54,583       1,045,915       86,870       1,055,071  
Gross realized losses
    (12,680 )     -       (12,680 )     (60,870 )
Other than temporary impairments
    -       -       -       -  
Total
  $ 141,926     $ 1,227,566     $ 267,986     $ 1,537,527  
 
The net carrying amount of held to maturity securities sold was $341,173 and $12,341,156 for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively.  The net realized gain related to these sales was $7,242 and $462,267 for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. Certain circumstances lead to these decisions to sell. In 2012 and 2011, the Company sold certain held to maturity bonds in gain positions to reduce its risk in certain industries or companies.
 

 
16

 
 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)
 
There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on available-for-sale securities) at June 30, 2012, other than investments issued or guaranteed by the United States Government.
 
Major categories of net investment income are as follows:
 
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Fixed maturity securities
  $ 1,943,272     $ 1,986,480     $ 3,853,617     $ 3,739,257  
Equity securities
    68,146       59,000       131,723       126,986  
Mortgage loans on real estate
    2,075,430       1,699,220       4,212,006       2,986,433  
Real estate
    800,339       566,777       1,458,794       1,138,089  
Policy and other loans
    189,947       210,914       418,274       424,032  
Short-term investments, principally gains on sale of mortgage loans and other
    2,006,325       1,346,332       4,043,731       2,720,664  
Gross investment income
    7,083,459       5,868,723       14,118,145       11,135,461  
Investment expenses
    (945,561 )     (1,151,365 )     (1,926,200 )     (2,147,655 )
Net investment income
  $ 6,137,898     $ 4,717,358     $ 12,191,945     $ 8,987,806  
 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $168,989 and $170,649 for six months ended June 30, 2012 and 2011, respectively.
 
Net investment income on real estate consists primarily of rental revenue received under short-term leases.
 
Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities.
 
Securities on deposit for regulatory authorities as required by law amounted to $9,624,656 at June 30, 2012 and $9,593,318 at December 31, 2011. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
 
Mortgage Loans

Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5% per annum, maturity dates range from three months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors live or do business. At June 30, 2012, the Company had 31%, 13% and 12% of its mortgage loans from borrowers located in the states of Utah, California and Florida, respectively. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for loan losses of $4,699,410 and $4,881,173 at June 30, 2012 and December 31, 2011, respectively.

The Company establishes a valuation allowance for credit losses in its portfolio.
 
 
17

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)

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

Allowance for Credit Losses and Recorded Investment in Mortgage Loans
 
                         
   
Commercial
   
Residential
   
Residential Construction
   
Total
 
June 30, 2012
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2011
  $ -     $ 4,338,805     $ 542,368     $ 4,881,173  
   Charge-offs
    -       (168,154 )     (250,524 )     (418,678 )
   Provision
    -       236,915       -       236,915  
Ending balance -March 31, 2012
  $ -     $ 4,407,566     $ 291,844     $ 4,699,410  
                                 
Ending balance: individually evaluated for impairment
  $ -     $ 885,968     $ 188,285     $ 1,074,253  
                                 
Ending balance: collectively evaluated for impairment
  $ -     $ 3,521,598     $ 103,559     $ 3,625,157  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
Mortgage loans:
                               
Ending balance
  $ 41,090,847     $ 52,498,871     $ 9,085,386     $ 102,675,104  
                                 
Ending balance: individually evaluated for impairment
  $ 2,842,962     $ 5,403,395     $ 3,712,761     $ 11,959,118  
                                 
Ending balance: collectively evaluated for impairment
  $ 38,247,885     $ 47,095,476     $ 5,372,625     $ 90,715,986  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
December 31, 2011
                               
Allowance for credit losses:
                               
Beginning balance - January 1, 2011
  $ -     $ 6,212,072     $ 858,370     $ 7,070,442  
   Charge-offs
    -       (2,994,715 )     (430,274 )     (3,424,989 )
   Provision
    -       1,121,448       114,272       1,235,720  
Ending balance - December 31, 2011
  $ -     $ 4,338,805     $ 542,368     $ 4,881,173  
                                 
Ending balance: individually evaluated for impairment
  $ -     $ 738,975     $ 250,524     $ 989,499  
                                 
Ending balance: collectively evaluated for impairment
  $ -     $ 3,599,830     $ 291,844     $ 3,891,674  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  
                                 
Mortgage loans:
                               
Ending balance
  $ 48,433,147     $ 54,344,327     $ 17,259,666     $ 120,037,140  
                                 
Ending balance: individually evaluated for impairment
  $ 2,758,235     $ 4,611,995     $ 5,645,865     $ 13,016,095  
                                 
Ending balance: collectively evaluated for impairment
  $ 45,674,912     $ 49,732,332     $ 11,613,801     $ 107,021,045  
                                 
Ending balance: loans acquired with deteriorated credit quality
  $ -     $ -     $ -     $ -  


 
18

 

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012 (Unaudited)

3)         Investments (Continued)

The following is a summary of the aging of mortgage loans for the periods presented:
 
Age Analysis of Past Due Mortgage Loans
 
                                                       
   
30-59 Days
Past Due
   
60-89 Days
Past Due
   
Greater Than
90 Days 1)
   
In Foreclosure 1)
   
Total
Past Due
   
Current
   
Total
Mortgage Loans
   
Allowance for
Loan Losses
   
Net Mortgage
Loans
 
June 30, 2012
                                                 
Commercial
  $ 572,215     $ -     $ -     $ 2,842,962