10-Q 1 snfc_10q.htm SNFCA 10-Q

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 quarterly period ended September 30, 2020

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.)
121 West Election Road, Suite 100, Draper, Utah | 84020
(Address of principal executive offices) | (Zip Code)
(801) 264-1060 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading symbol | Name of each exchange on which registered
Class A Common Stock | SNFCA | The Nasdaq Global Select Market

``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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

`Yes [X] No [ ]`

``Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

`Large accelerated filer [ ]` ``Accelerated filer [ ]

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

``Emerging growth company [ ]

``If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

``Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

`Yes [ ] No[X]`

``As of November 10, 2020, the registrant had 16,573,341 shares of Class A Common Stock, $2.00 par value, outstanding and 2,589,783 shares of Class C Common Stock, $2.00 par value, outstanding.

===================================================================================

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2020

Table of Contents

|  | Page No.
| Part I - Financial Information |
Item 1. | Financial Statements |
| Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 | 3-4
| Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2020 and 2019 (unaudited) | 5
| Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited) | 6
| Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2020 and September 30, 2019 (unaudited) | 7-8
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited) | 9-10
| Notes to Condensed Consolidated Financial Statements (unaudited) | 11
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 57
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 64
Item 4. | Controls and Procedures | 64
| Part II - Other Information |
Item 1. | Legal Proceedings | 65
Item 1A. | Risk Factors | 65
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 65
Item 3. | Defaults Upon Senior Securities | 66
Item 4. | Mine Safety Disclosures | 66
Item 5. | Other Information | 66
Item 6. | Exhibits | 66
| Signature Page | 68

2

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

`Item 1.` ``Financial Statements.

Assets | September 30 2020 (Unaudited) |  | December 31 2019
Investments: |  |  |
Fixed maturity securities, available for sale, at estimated fair value | $ 344,917,387 |  | $ 355,977,820
Equity securities at estimated fair value | 11,215,606 |  | 7,271,165
Mortgage loans held for investment (net of allowances for loan losses of $2,046,481 and $1,453,037 for 2020 and 2019) | 245,609,527 |  | 236,694,546
Real estate held for investment (net of accumulated depreciation of $13,497,759 and $12,788,739 for 2020 and 2019) | 123,002,683 |  | 102,756,946
Real estate held for sale | 7,990,181 |  | 14,097,627
Other investments and policy loans (net of allowances for doubtful accounts of $1,602,483 and $1,448,026 for 2020 and 2019) | 68,008,150 |  | 60,245,269
Accrued investment income | 5,712,998 |  | 4,833,232
Total investments | 806,456,532 |  | 781,876,605
Cash and cash equivalents | 151,686,960 |  | 127,754,719
Loans held for sale at estimated fair value | 445,878,979 |  | 213,457,632
Receivables (net of allowances for doubtful accounts of $1,698,836 and $1,724,156 for 2020 and 2019) | 10,423,683 |  | 9,236,330
Restricted assets (including $3,663,945 and $2,985,347 for 2020 and 2019 at estimated fair value) | 16,242,387 |  | 13,935,317
Cemetery perpetual care trust investments (including $2,408,995 and $2,581,124 for 2020 and 2019 at estimated fair value) | 5,387,732 |  | 4,411,864
Receivable from reinsurers | 15,849,961 |  | 15,747,768
Cemetery land and improvements | 9,117,882 |  | 9,519,950
Deferred policy and pre-need contract acquisition costs | 98,432,491 |  | 94,701,920
Mortgage servicing rights, net | 28,387,476 |  | 17,155,529
Property and equipment, net | 12,636,951 |  | 14,600,394
Value of business acquired | 9,188,492 |  | 9,876,647
Goodwill | 3,519,588 |  | 3,519,588
Other | 33,988,873 |  | 18,649,812
Total Assets | $ 1,647,197,987 |  | $ 1,334,444,075

See accompanying notes to condensed consolidated financial statements (unaudited).

3

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

| September 30 2020 (Unaudited) |  | December 31 2019
Liabilities and Stockholders' Equity |  |  |
Liabilities |  |  |
Future policy benefits and unpaid claims | $ 840,604,906 |  | $ 825,600,918
Unearned premium reserve | 3,404,592 |  | 3,621,697
Bank and other loans payable | 424,932,007 |  | 217,572,612
Deferred pre-need cemetery and mortuary contract revenues | 13,045,307 |  | 12,607,978
Cemetery perpetual care obligation | 4,038,169 |  | 3,933,719
Accounts payable | 5,185,265 |  | 5,056,983
Other liabilities and accrued expenses | 68,639,787 |  | 50,652,591
Income taxes | 31,301,997 |  | 18,686,972
Total liabilities | 1,391,152,030 |  | 1,137,733,470
Stockholders' Equity |  |  |
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding | - |  | -
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,559,987 shares in 2020 and 16,107,779 shares in 2019 | 33,119,974 |  | 32,215,558
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding | - |  | -
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,549,383 shares in 2020 and 2,500,887 shares in 2019 | 5,098,766 |  | 5,001,774
Additional paid-in capital | 49,355,124 |  | 46,091,112
Accumulated other comprehensive income, net of taxes | 19,909,604 |  | 13,726,514
Retained earnings | 149,428,819 |  | 101,256,229
Treasury stock at cost - 189,390 Class A shares in 2020 and 490,823 Class A shares in 2019 | (866,330) |  | (1,580,582)
Total stockholders' equity | 256,045,957 |  | 196,710,605
Total Liabilities and Stockholders' Equity | $ 1,647,197,987 |  | $ 1,334,444,075

See accompanying notes to condensed consolidated financial statements (unaudited).

4

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Revenues: |  |  |  |  |  |  |
Insurance premiums and other considerations | $ 23,766,576 |  | $ 19,832,492 |  | $ 68,982,561 |  | $ 58,504,712
Net investment income | 14,709,142 |  | 10,478,566 |  | 41,072,386 |  | 31,061,069
Net mortuary and cemetery sales | 5,371,715 |  | 3,526,416 |  | 14,530,584 |  | 11,205,774
Gains (losses) on investments and other assets | 800,507 |  | (519,673) |  | (173,461) |  | 261,095
Mortgage fee income | 98,559,624 |  | 39,735,752 |  | 212,209,718 |  | 97,161,190
Other | 2,997,001 |  | 2,326,106 |  | 7,853,468 |  | 7,124,836
Total revenues | 146,204,565 |  | 75,379,659 |  | 344,475,256 |  | 205,318,676
Benefits and expenses: |  |  |  |  |  |  |
Death benefits | 16,026,897 |  | 9,937,711 |  | 43,021,247 |  | 29,264,410
Surrenders and other policy benefits | 1,056,318 |  | 636,366 |  | 2,964,984 |  | 2,266,275
Increase in future policy benefits | 4,892,972 |  | 5,980,721 |  | 18,534,848 |  | 17,407,962
Amortization of deferred policy and pre-need acquisition costs and value of business acquired | 4,239,935 |  | 3,477,160 |  | 10,781,658 |  | 9,678,912
Selling, general and administrative expenses: |  |  |  |  |  |  |
Commissions | 37,761,992 |  | 16,714,061 |  | 81,555,823 |  | 40,243,042
Personnel | 21,700,446 |  | 16,287,957 |  | 60,959,099 |  | 47,018,553
Advertising | 1,607,138 |  | 1,361,745 |  | 3,842,296 |  | 3,566,823
Rent and rent related | 1,797,161 |  | 1,749,402 |  | 5,074,755 |  | 5,377,869
Depreciation on property and equipment | 516,243 |  | 421,970 |  | 1,550,526 |  | 1,294,576
Costs related to funding mortgage loans | 3,057,276 |  | 1,917,390 |  | 7,392,373 |  | 4,831,604
Other | 11,701,986 |  | 9,355,218 |  | 33,080,916 |  | 25,154,712
Interest expense | 2,363,169 |  | 2,078,733 |  | 6,063,218 |  | 5,353,177
Cost of goods and services sold-mortuaries and cemeteries | 899,101 |  | 701,403 |  | 2,401,592 |  | 2,044,937
Total benefits and expenses | 107,620,634 |  | 70,619,837 |  | 277,223,335 |  | 193,502,852
Earnings before income taxes | 38,583,931 |  | 4,759,822 |  | 67,251,921 |  | 11,815,824
Income tax expense | (9,279,162) |  | (1,142,408) |  | (15,965,656) |  | (2,788,038)
Net earnings | $ 29,304,769 |  | $ 3,617,414 |  | $ 51,286,265 |  | $ 9,027,786
Net earnings per Class A Equivalent common share (1) | $1.55 |  | $0.19 |  | $2.73 |  | $0.49
Net earnings per Class A Equivalent common share-assuming dilution (1) | $1.51 |  | $0.19 |  | $2.68 |  | $0.48
Weighted-average Class A equivalent common share outstanding (1) | 18,873,886 |  | 18,551,116 |  | 18,760,884 |  | 18,560,874
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1) | 19,433,619 |  | 18,755,091 |  | 19,164,890 |  | 18,769,435

(1) Net earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.

See accompanying notes to condensed consolidated financial statements (unaudited).

5

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Net earnings | $ 29,304,769 |  | $ 3,617,414 |  | $ 51,286,265 |  | $ 9,027,786
Other comprehensive income: |  |  |  |  |  |  |
Unrealized gains on fixed maturity securities available for sale | $ 3,810,906 |  | - |  | 7,810,537 |  | -
Unrealized gains on restricted assets | 23,323 |  | - |  | 28,309 |  | -
Unrealized losses on cemetery perpetual care trust investments | (16,883) |  | - |  | (11,114) |  | -
Foreign currency translation adjustments | 84 |  | (340) |  | (196) |  | 1,707
Other comprehensive income, before income tax | 3,817,430 |  | (340) |  | 7,827,536 |  | 1,707
Income tax benefit (expense) | (801,915) |  | 85 |  | (1,644,446) |  | (426)
Other comprehensive income, net of income tax | 3,015,515 |  | (255) |  | 6,183,090 |  | 1,281
Comprehensive income | $ 32,320,284 |  | $ 3,617,159 |  | $ 57,469,355 |  | $ 9,029,067

See accompanying notes to condensed consolidated financial statements (unaudited).

6

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

|  | Nine Months Ended September 30, 2020
|  | Class A Common Stock |  | Class C Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Income |  | Retained Earnings |  | Treasury Stock |  | Total
January 1, 2020 |  | $ 32,215,558 |  | $ 5,001,774 |  | $ 46,091,112 |  | $ 13,726,514 |  | $ 101,256,229 |  | $ (1,580,582) |  | $ 196,710,605
Net earnings |  | - |  | - |  | - |  | - |  | 1,424,449 |  | - |  | 1,424,449
Other comprehensive loss |  | - |  | - |  | - |  | (8,852,313) |  | - |  | - |  | (8,852,313)
Stock-based compensation expense |  | - |  | - |  | 65,877 |  | - |  | - |  | - |  | 65,877
Exercise of stock options |  | 44,822 |  | - |  | (33,930) |  | - |  | - |  | - |  | 10,892
Sale of treasury stock |  | - |  | - |  | 218,280 |  | - |  | - |  | 264,081 |  | 482,361
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (129,608) |  | (129,608)
Stock dividends |  | 2,322 |  | (1,020) |  | 2,292 |  | - |  | (3,594) |  | - |  | -
Conversion Class C to Class A |  | 22,324 |  | (22,324) |  | - |  | - |  | - |  | - |  | -
March 31, 2020 |  | $ 32,285,026 |  | $4,978,430 |  | $ 46,343,631 |  | $ 4,874,201 |  | $ 102,677,084 |  | $ (1,446,109) |  | $ 189,712,263
Net earnings |  | - |  | - |  | - |  | - |  | 20,557,047 |  | - |  | 20,557,047
Other comprehensive income |  | - |  | - |  | - |  | 12,019,888 |  | - |  | - |  | 12,019,888
Stock-based compensation expense |  | - |  | - |  | 101,520 |  | - |  | - |  | - |  | 101,520
Exercise of stock options |  | 22,726 |  | - |  | (22,726) |  | - |  | - |  | - |  | -
Sale of treasury stock |  | - |  | - |  | 319,676 |  | - |  | - |  | 664,546 |  | 984,222
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (760,713) |  | (760,713)
Stock dividends |  | 807,356 |  | 124,460 |  | 2,175,790 |  | - |  | (3,107,607) |  | - |  | (1)
Conversion Class C to Class A |  | - |  | - |  | - |  | - |  | - |  | - |  | -
June 30, 2020 |  | $ 33,115,108 |  | $ 5,102,890 |  | $ 48,917,891 |  | $ 16,894,089 |  | $ 120,126,524 |  | $ (1,542,276) |  | $ 222,614,226
Net earnings |  | - |  | - |  | - |  | - |  | 29,304,769 |  | - |  | 29,304,769
Other comprehensive income |  | - |  | - |  | - |  | 3,015,515 |  | - |  | - |  | 3,015,515
Stock-based compensation expense |  | - |  | - |  | 104,562 |  | - |  | - |  | - |  | 104,562
Sale of treasury stock |  | - |  | - |  | 330,939 |  | - |  | - |  | 886,452 |  | 1,217,391
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (210,506) |  | (210,506)
Stock dividends |  | 742 |  | - |  | 1,732 |  | - |  | (2,474) |  | - |  | -
Conversion Class C to Class A |  | 4,124 |  | (4,124) |  | - |  | - |  | - |  | - |  | -
September 30, 2020 |  | $ 33,119,974 |  | $5,098,766 |  | $ 49,355,124 |  | $ 19,909,604 |  | $ 149,428,819 |  | $ (866,330) |  | $256,045,957

7

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited) (Continued)

|  | Nine Months Ended September 30, 2019
|  | Class A Common Stock |  | Class C Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Income |  | Retained Earnings |  | Treasury Stock |  | Total
January 1, 2019 |  | $ 30,609,596 |  | $ 4,387,286 |  | $ 41,821,778 |  | $ (2,823) |  | $ 95,201,732 |  | $ (206,396) |  | 171,811,173
Net earnings |  | - |  | - |  | - |  | - |  | 1,930,318 |  | - |  | 1,930,318
Other comprehensive income |  | - |  | - |  | - |  | 820 |  | - |  | - |  | 820
Stock-based compensation expense |  | - |  | - |  | 64,704 |  | - |  | - |  | - |  | 64,704
Exercise of stock options |  | 8,936 |  | - |  | 8,444 |  | - |  | - |  | - |  | 17,380
Sale of treasury stock |  | - |  | - |  | 295,153 |  | - |  | - |  | 42,343 |  | 337,496
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (112,404) |  | (112,404)
Stock dividends |  | 282 |  | (4) |  | 489 |  | - |  | (769) |  | - |  | (2)
Conversion Class C to Class A |  | 6,560 |  | (6,560) |  | - |  | - |  | - |  | - |  | -
March 31, 2019 |  | $ 30,625,374 |  | $ 4,380,722 |  | $ 42,190,568 |  | $ (2,003) |  | $ 97,131,281 |  | $ (276,457) |  | $ 174,049,485
Net earnings |  | - |  | - |  | - |  | - |  | 3,480,054 |  | - |  | 3,480,054
Other comprehensive income |  | - |  | - |  | - |  | 716 |  |  |  | - |  | 716
Stock-based compensation expense |  | - |  | - |  | 65,037 |  | - |  | - |  | - |  | 65,037
Exercise of stock options |  | 20,274 |  | - |  | 9,519 |  | - |  | - |  | - |  | 29,793
Sale of treasury stock |  | - |  | - |  | 92,605 |  | - |  | - |  | 25,190 |  | 117,795
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (174,704) |  | (174,704)
Conversion Class C to Class A |  | 12 |  | (14) |  | 2 |  | - |  | - |  | - |  | -
June 30, 2019 |  | $ 30,645,660 |  | $ 4,380,708 |  | $ 42,357,731 |  | $ (1,287) |  | $100,611,335 |  | $ (425,971) |  | $ 177,568,176
Net earnings |  | - |  | - |  | - |  | - |  | 3,617,414 |  | - |  | 3,617,414
Other comprehensive loss |  | - |  | - |  | - |  | (255) |  | - |  | - |  | (255)
Stock-based compensation expense |  | - |  | - |  | 65,746 |  | - |  | - |  | - |  | 65,746
Exercise of stock options |  | 8,936 |  | 127,628 |  | 114,376 |  | - |  | - |  | - |  | 250,940
Sale of treasury stock |  | - |  | - |  | 88,162 |  | - |  | - |  | 35,400 |  | 123,562
Purchase of treasury stock |  | - |  | - |  | - |  | - |  | - |  | (553,193) |  | (553,193)
Conversion Class C to Class A |  | - |  | - |  | - |  | - |  | - |  | - |  | -
September 30, 2019 |  | $ 30,654,596 |  | $ 4,508,336 |  | $ 42,626,015 |  | $ (1,542) |  | $104,228,749 |  | $ (943,764) |  | $ 181,072,390

See accompanying notes to condensed consolidated financial statements (unaudited).

8

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

| Nine Months Ended September 30
| 2020 |  | 2019
Cash flows from operating activities: |  |  |
Net cash used in operating activities | $(164,589,158) |  | $ (62,865,938)
Cash flows from investing activities: |  |  |
Purchases of fixed maturity securities | (56,899,073) |  | (27,227,180)
Sales, calls and maturities of fixed maturity securities | 75,523,084 |  | 19,444,922
Purchases of equity securities | (6,492,243) |  | (3,521,610)
Sales of equity securities | 2,011,568 |  | 1,691,231
Net changes in restricted assets | (2,650,188) |  | (514,574)
Net changes in perpetual care trusts | (870,485) |  | (111,076)
Mortgage loans held for investment, other investments and policy loans made | (486,189,616) |  | (421,682,247)
Payments received for mortgage loans held for investment, other investments and policy loans | 478,445,833 |  | 410,303,611
Purchases of property and equipment | (1,111,360) |  | (931,691)
Sales of property and equipment | - |  | 51,104
Purchases of real estate | (27,528,643) |  | (6,465,802)
Sales of real estate | 13,052,416 |  | 8,291,147
Cash paid for purchase of subsidiaries, net of cash acquired | - |  | (3,261,788)
Net cash used in investing activities | (12,708,707) |  | (23,933,953)
Cash flows from financing activities: |  |  |
Investment contract receipts | 8,656,037 |  | 9,628,472
Investment contract withdrawals | (13,759,734) |  | (13,282,143)
Proceeds from stock options exercised | 10,892 |  | 298,113
Purchases of treasury stock | (1,100,827) |  | (840,301)
Repayment of bank and other loans | (251,041,466) |  | (139,046,605)
Proceeds from bank borrowings | 329,672,821 |  | 149,304,399
Net change in warehouse line borrowings for loans held for sale | 128,600,308 |  | 62,987,462
Net cash provided by financing activities | 201,038,031 |  | 69,049,397
Net change in cash, cash equivalents, restricted cash and restricted cash equivalents | 23,740,166 |  | (17,750,494)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period | 137,735,673 |  | 150,936,673
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period | $ 161,475,839 |  | $ 133,186,179
Supplemental Disclosure of Cash Flow Information: |  |  |
Cash paid during the year for: |  |  |
Interest | $ 5,917,344 |  | $ 5,292,868
Income taxes (net of refunds) | 4,995,073 |  | 3,350,434
Non Cash Operating, Investing and Financing Activities: |  |  |
Transfer of loans held for sale to mortgage loans held for investment | $ 9,170,610 |  | $ -
Right-of-use assets obtained in exchange for operating lease liabilities | 4,796,580 |  | 13,441,537
Benefit plans funded with treasury stock | 2,683,974 |  | 578,853
Mortgage loans held for investment foreclosed into real estate held for investment | 686,124 |  | 1,410,499
Accrued real estate construction costs and retainage | 347,826 |  | 689,291
Right-of-use assets obtained in exchange for finance lease liabilities | 8,494 |  | 255,147
Mortgage loans held for investment foreclosed into receivables | - |  | 155,347
See Note 15 regarding non cash transactions included in the acquisition of Probst Family Funeral and Cremations and Heber Valley Funeral Home.

9

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the condensed consolidated statements of cash flows is presented in the table below:

| Nine Months Ended September 30
| 2020 |  | 2019
Cash and cash equivalents | $ 151,686,960 |  | $ 123,178,762
Restricted assets | 8,468,191 |  | 9,166,838
Cemetery perpetual care trust investments | 1,320,688 |  | 840,579
Total cash, cash equivalents, restricted cash and restricted cash equivalents | $ 161,475,839 |  | $ 133,186,179

See accompanying notes to condensed consolidated financial statements (unaudited).

10

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`1)```Basis of Presentation

The accompanying unaudited condensed 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, 2019, 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 nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to adopt policies and make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In applying these policies and estimates, the Company makes judgments that frequently require assumptions about matters that are inherently uncertain. The novel coronavirus (“COVID-19”) spread rapidly across the world in the first, second and third quarters of 2020 and was declared a pandemic (the “COVID-19 Pandemic”) by the World Health Organization. The government and private sector responses to contain its spread began to affect the Company’s operations in March, have continued to affect the Company’s operations and will likely continue to affect nearly all of the Company’s operations, although such effects may vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect the Company’s future earnings, cash flows, and financial condition include the nature and duration of the curtailment or closure of the Company’s various facilities and the long-term effect on the demand for the Company’s products and services. Accordingly, significant estimates used in the preparation of the Company’s financial statements may be subject to significant adjustments in future periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits; those used in estimating other than temporary impairments on available for sale securities; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.

`2)```Recent Accounting Pronouncements

Accounting Standards Adopted in 2020

ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures.

11

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`2)```Recent Accounting Pronouncements (Continued)

Accounting Standards Adopted in 2019

ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate met hod or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20.

The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases.

The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor.

Accounting Standards Issued But Not Yet Adopted

ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. In November 2019, the FASB issued an update to ASU No. 2016-13 that made the ASU effective for the Company on January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment.

12

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`2)```Recent Accounting Pronouncements (Continued)

ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that made the ASU effective for the Company on January 1, 2025. The Company is in the process of evaluating the potential impact of this standard.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position.

13

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments

The Company’s investments as of September 30, 2020 are summarized as follows:

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
September 30, 2020: |  |  |  |  |  |  |  |
Fixed maturity securities, available for sale, at estimated fair value: |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. Government agencies |  | $ 92,395,468 |  | $ 2,059,112 |  | $ - |  | $ 94,454,580
Obligations of states and political subdivisions |  | 5,765,286 |  | 322,859 |  | (1,792) |  | 6,086,353
Corporate securities including public utilities |  | 189,323,616 |  | 24,248,838 |  | (2,137,953) |  | 211,434,501
Mortgage-backed securities |  | 31,887,810 |  | 1,313,395 |  | (499,496) |  | 32,701,709
Redeemable preferred stock |  | 269,214 |  | 3,530 |  | (32,500) |  | 240,244
Total fixed maturity securities available for sale |  | $ 319,641,394 |  | $ 27,947,734 |  | $ (2,671,741) |  | $ 344,917,387
Equity securities at estimated fair value: |  |  |  |  |  |  |  |
Common stock: |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 11,304,152 |  | $ 1,845,615 |  | $ (1,934,161) |  | $ 11,215,606
Total equity securities at estimated fair value |  | $ 11,304,152 |  | $ 1,845,615 |  | $ (1,934,161) |  | $ 11,215,606
Mortgage loans held for investment at amortized cost: |  |  |  |  |  |  |  |
Residential |  | $ 80,051,914 |  |  |  |  |  |
Residential construction |  | 120,298,836 |  |  |  |  |  |
Commercial |  | 49,378,938 |  |  |  |  |  |
Less: Unamortized deferred loan fees, net |  | (905,018) |  |  |  |  |  |
Less: Allowance for loan losses |  | (2,066,481) |  |  |  |  |  |
Less: Net discounts |  | (1,148,662) |  |  |  |  |  |
Total mortgage loans held for investment |  | $ 245,609,527 |  |  |  |  |  |
Real estate held for investment - net of accumulated depreciation: |  |  |  |  |  |  |  |
Residential |  | $ 25,166,274 |  |  |  |  |  |
Commercial |  | 97,836,409 |  |  |  |  |  |
Total real estate held for investment |  | $ 123,002,683 |  |  |  |  |  |
Real estate held for sale: |  |  |  |  |  |  |  |
Residential |  | $ 3,455,244 |  |  |  |  |  |
Commercial |  | 4,534,937 |  |  |  |  |  |
Total real estate held for sale |  | $ 7,990,181 |  |  |  |  |  |
Other investments and policy loans at amortized cost: |  |  |  |  |  |  |  |
Policy loans |  | $ 14,234,935 |  |  |  |  |  |
Insurance assignments |  | 45,858,660 |  |  |  |  |  |
Federal Home Loan Bank stock (1) |  | 4,066,600 |  |  |  |  |  |
Other investments |  | 5,450,438 |  |  |  |  |  |
Less: Allowance for doubtful accounts |  | (1,602,483) |  |  |  |  |  |
Total policy loans and other investments |  | $ 68,008,150 |  |  |  |  |  |
Accrued investment income |  | $ 5,712,998 |  |  |  |  |  |
Total investments |  | $ 806,456,532 |  |  |  |  |  |
(1) Includes $866,900 of Membership stock and $3,199,700 of Activity stock due to short-term borrowings.

14

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

The Company’s investments as of December 31, 2019 are summarized as follows:

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
December 31, 2019: |  |  |  |  |  |  |  |
Fixed maturity securities, available for sale, at estimated fair value: |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. Government agencies |  | $ 142,740,641 |  | $ 632,185 |  | $ (25,215) |  | $ 143,347,611
Obligations of states and political subdivisions |  | 7,450,366 |  | 87,812 |  | (9,026) |  | 7,529,152
Corporate securities including public utilities |  | 156,599,184 |  | 16,768,449 |  | (463,413) |  | 172,904,220
Mortgage-backed securities |  | 31,475,280 |  | 597,395 |  | (240,177) |  | 31,832,498
Redeemable preferred stock |  | 364,339 |  | - |  | - |  | 364,339
Total fixed maturity securities available for sale |  | $ 338,629,810 |  | $ 18,085,841 |  | $ (737,831) |  | $ 355,977,820
Equity securities at estimated fair value: |  |  |  |  |  |  |  |
Common stock: |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 6,900,537 |  | $ 1,139,799 |  | $ (769,171) |  | $ 7,271,165
Total equity securities at estimated fair value |  | $ 6,900,537 |  | $ 1,139,799 |  | $ (769,171) |  | $ 7,271,165
Mortgage loans held for investment at amortized cost: |  |  |  |  |  |  |  |
Residential |  | $ 113,043,965 |  |  |  |  |  |
Residential construction |  | 89,430,237 |  |  |  |  |  |
Commercial |  | 38,718,220 |  |  |  |  |  |
Less: Unamortized deferred loan fees, net |  | (2,391,567) |  |  |  |  |  |
Less: Allowance for loan losses |  | (1,453,037) |  |  |  |  |  |
Less: Net discounts |  | (653,272) |  |  |  |  |  |
Total mortgage loans held for investment |  | $ 236,694,546 |  |  |  |  |  |
Real estate held for investment - net of accumulated depreciation: |  |  |  |  |  |  |  |
Residential |  | $ 12,530,306 |  |  |  |  |  |
Commercial |  | 90,226,640 |  |  |  |  |  |
Total real estate held for investment |  | $ 102,756,946 |  |  |  |  |  |
Real estate held for sale: |  |  |  |  |  |  |  |
Residential |  | $ 8,021,306 |  |  |  |  |  |
Commercial |  | 6,076,321 |  |  |  |  |  |
Total real estate held for sale |  | $ 14,097,627 |  |  |  |  |  |
Other investments and policy loans at amortized cost: |  |  |  |  |  |  |  |
Policy loans |  | $ 14,762,805 |  |  |  |  |  |
Insurance assignments |  | 41,062,965 |  |  |  |  |  |
Federal Home Loan Bank stock (1) |  | 894,300 |  |  |  |  |  |
Other investments |  | 4,973,225 |  |  |  |  |  |
Less: Allowance for doubtful accounts |  | (1,448,026) |  |  |  |  |  |
Total policy loans and other investments |  | $ 60,245,269 |  |  |  |  |  |
Accrued investment income |  | $ 4,833,232 |  |  |  |  |  |
Total investments |  | $ 781,876,605 |  |  |  |  |  |
(1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings.

15

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities available for sale, which were carried at estimated fair value, at September 30, 2020 and December 31, 2019. The unrealized losses were primarily related to interest rate fluctuations and uncertainties relating to COVID-19. The tables set 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 |  | Fair Value
At September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |
Obligations of States and Political Subdivisions |  | $ 1,792 |  | $ 207,330 |  | $ - |  | $ - |  | $ 1,792 |  | $ 207,330
Corporate Securities |  | 1,305,034 |  | 28,511,620 |  | 832,919 |  | 3,366,248 |  | 2,137,953 |  | 31,877,868
Mortgage and other asset-backed securities |  | 476,698 |  | 5,601,677 |  | 22,798 |  | 401,217 |  | 499,496 |  | 6,002,894
Redeemable preferred stock |  | 32,500 |  | 217,500 |  | - |  | - |  | 32,500 |  | 217,500
Total unrealized losses |  | $ 1,816,024 |  | $ 34,538,127 |  | $ 855,717 |  | $ 3,767,465 |  | $ 2,671,741 |  | $ 38,305,592
At December 31, 2019 |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Securities and Obligations |  |  |  |  |  |  |  |  |  |  |  |
of U.S. Government Agencies |  | $ 20,211 |  | $ 30,629,288 |  | $ 5,004 |  | $ 10,000,400 |  | $ 25,215 |  | $ 40,629,688
Obligations of States and Political Subdivisions |  | 9,026 |  | 3,062,889 |  | - |  | - |  | 9,026 |  | 3,062,889
Corporate Securities |  | 118,746 |  | 7,184,311 |  | 344,667 |  | 3,950,509 |  | 463,413 |  | 11,134,820
Mortgage and other asset-backed securities |  | 205,470 |  | 13,266,443 |  | 34,707 |  | 502,769 |  | 240,177 |  | 13,769,212
Total unrealized losses |  | $ 353,453 |  | $ 54,142,931 |  | $ 384,378 |  | $ 14,453,678 |  | $ 737,831 |  | $ 68,596,609

There were 113 securities with fair value of 93.5% of amortized cost at September 30, 2020. There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019. No credit losses have been recognized for the three and nine months ended September 30, 2020 and 2019.

On a quarterly basis, the Company evaluates its fixed maturity securities available for sale. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation 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. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment.

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.

16

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities available for sale, at September 30, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

|  | Amortized Cost |  | Estimated Fair Value
Due in 1 year |  | $ 50,670,550 |  | $ 51,171,942
Due in 2-5 years |  | 74,293,341 |  | 77,094,479
Due in 5-10 years |  | 85,128,399 |  | 92,517,720
Due in more than 10 years |  | 77,392,080 |  | 91,191,293
Mortgage-backed securities |  | 31,887,810 |  | 32,701,709
Redeemable preferred stock |  | 269,214 |  | 240,244
Total |  | $ 319,641,394 |  | $ 344,917,387

The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $90,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at September 30, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of September 30, 2020, the Company owed $88,000,000 to the FHLB and its estimated remaining maximum borrowing capacity was $384,000.

Investment Related Earnings

The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments are summarized as follows:

|  | Three Months Ended September 30 |  | Nine Months Ended September 30
|  | 2020 |  | 2019 |  | 2020 |  | 2019
Fixed maturity securities: |  |  |  |  |  |  |  |
Gross realized gains |  | $ 50,171 |  | $ 113,849 |  | $ 201,130 |  | $ 362,475
Gross realized losses |  | (39,130) |  | (16,814) |  | (51,219) |  | (121,829)
Equity securities: |  |  |  |  |  |  |  |
Gains (losses) on securities sold |  | 95,331 |  | 85,998 |  | (12,141) |  | 138,662
Unrealized gains and (losses) on securities held at the end of the period |  | 511,168 |  | (98,635) |  | (512,629) |  | 676,589
Other assets: |  |  |  |  |  |  |  |
Gross realized gains |  | 1,480,053 |  | 472,691 |  | 1,985,817 |  | 2,265,914
Gross realized losses |  | (1,297,086) |  | (1,076,762) |  | (1,784,419) |  | (3,060,716)
Total |  | $ 800,507 |  | $ (519,673) |  | $ (173,461) |  | $ 261,095

The net 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.

On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity available for sale securities for the nine months ended September 30, 2020, were $2,967,531, and resulted in gross realized gains and gross realized losses of $149,641 and $1,043, respectively. The carrying amount of held to maturity securities sold for the nine months ended September 30, 2019 was $2,724,199 and the net realized loss related to these sales was $12,394.

17

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

Major categories of net investment income are as follows:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Fixed maturity securities | $ 3,191,064 |  | $ 2,563,481 |  | $ 9,258,850 |  | $ 7,596,035
Equity securities | 126,369 |  | 74,629 |  | 329,534 |  | 227,280
Mortgage loans held for investment | 6,918,081 |  | 4,558,232 |  | 18,154,123 |  | 13,187,416
Real estate held for investment | 2,998,806 |  | 2,259,064 |  | 8,940,072 |  | 6,266,286
Policy loans | 264,422 |  | 113,541 |  | 755,914 |  | 308,583
Insurance assignments | 4,561,574 |  | 3,851,804 |  | 13,244,176 |  | 11,970,755
Other investments | - |  | - |  | 25,421 |  | 106,678
Cash and cash equivalents | 65,460 |  | 398,997 |  | 385,848 |  | 1,363,873
Gross investment income | 18,125,776 |  | 13,819,748 |  | 51,093,938 |  | 41,026,906
Investment expenses | (3,416,634) |  | (3,341,182) |  | (10,021,552) |  | (9,965,837)
Net investment income | $ 14,709,142 |  | $ 10,478,566 |  | $ 41,072,386 |  | $ 31,061,069

Net investment income includes income earned by the restricted assets cemeteries and mortuaries of $129,347 and $102,888 for the three months ended September 30, 2020 and 2019, respectively, and $380,079 and $323,404 for the nine months ended September 30, 2020 and 2019, respectively.

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

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

Securities on deposit with regulatory authorities as required by law amounted to $9,735,147 at September 30, 2020 and $9,633,818 at December 31, 2019. These restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities and fixed maturity securities) at September 30, 2020, other than investments issued or guaranteed by the United States Government.

Real Estate Held for Investment and Held for Sale

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

Commercial Real Estate Held for Investment and Held for Sale

The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is 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 when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.

The Company currently owns and operates 12 commercial properties in 5 states. These properties include office buildings, an assisted living facility, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be

18

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

used for future commercial developments. The Company uses bank debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset.

The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $70,054,000 and $87,815,000 as of September 30, 2020 and December 31, 2019, respectively. The associated bank loan carrying values totaled approximately $46,681,000 and $54,917,000 as of September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $800,000 and $790,827, respectively. During the nine months ended September 30, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $846,980 and $2,658,024, respectively. These impairment losses relate to an office building held by the life insurance segment. Impairment losses are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

The following is a summary of the Company’s commercial real estate held for investment for the periods presented:

|  | Net Ending Balance |  | Total Square Footage
|  | September 30 2020 |  | December 31 2019 |  | September 30 2020 |  | December 31 2019
Louisiana |  | $ 5,889,327 |  | $ 6,009,079 |  | 125,114 |  | 125,114
Mississippi |  | 2,932,976 |  | 2,951,478 |  | 21,521 |  | 21,521
Utah (1) |  | 89,014,106 |  | 81,266,083 |  | 462,730 |  | 465,230
|  | $ 97,836,409 |  | $ 90,226,640 |  | 609,365 |  | 611,865
(1) Includes Center53 phase 1 completed in July 2017 and phase 2 which is under construction

19

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

The following is a summary of the Company’s commercial real estate held for sale for the periods presented:

|  | Net Ending Balance |  | Total Square Footage
|  | September 30 2020 |  | December 31 2019 |  | September 30 2020 |  | December 31 2019
Arizona (1) |  | $ - |  | $ 2,500 |  | - |  | -
Kansas |  | 4,000,000 |  | 4,800,000 |  | 222,679 |  | 222,679
Mississippi |  | 234,937 |  | 318,322 |  | 12,300 |  | 12,300
Nevada |  | - |  | 655,499 |  | - |  | 4,800
Texas (2) |  | 300,000 |  | 300,000 |  | - |  | -
|  | $ 4,534,937 |  | $ 6,076,321 |  | 234,979 |  | 239,779
(1) Undeveloped land |  |  |  |  |  |
(2) Improved commercial pad |  |  |  |  |  |

These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

Residential Real Estate Held for Investment and Held for Sale

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures. The strategy has been to lease these homes to produce cash flow and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns. The Company also invests in residential subdivision developments.

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

As of September 30, 2020, SNRE manages 19 residential properties in 5 states across the United States.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment and sale is $6,256,000 and $12,434,000 as of September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $-0- and $125,980, respectively, and during the nine months ended September 30, 2020 and 2019 the Company recorded impairment losses on residential real estate held for investment of $43,394 and $125,980, respectively. Impairment losses, if any, are included in gains (losses) on investment and other assets on the condensed consolidated statements of earnings.

20

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

The following is a summary of the Company’s residential real estate held for investment for the periods presented:

|  | Net Ending Balance
|  | September 30 2020 |  | December 31 2019
Florida |  | $ 1,261,975 |  | $ 2,487,723
Nevada |  | 686,124 |  | 293,516
Utah (1) |  | 22,931,994 |  | 9,462,886
Washington |  | 286,181 |  | 286,181
|  | $ 25,166,274 |  | $ 12,530,306
(1) Includes subdivision land developments

The following is a summary of the Company’s residential real estate held for sale for the periods presented:

|  | Net Ending Balance
|  | September 30 2020 |  | December 31 2019
California |  | - |  | 640,452
Florida |  | 1,104,936 |  | 1,300,641
Nevada |  | 293,516 |  | -
Ohio |  | 10,000 |  | 10,000
Utah |  | 2,046,792 |  | 5,880,213
Washington |  | - |  | 190,000
|  | $ 3,455,244 |  | $ 8,021,306

21

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months.

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, 2020, real estate owned and occupied by the Company is summarized as follows:

Location |  | Business Segment |  | Approximate Square Footage |  | Square Footage Occupied by the Company
121 W. Election Rd., Draper, UT |  | Corporate Offices, Life Insurance and Cemetery/Mortuary Operations |  | 78,979 |  | 18%
5201 Green Street, Salt Lake City, UT (1) |  | Life Insurance and Mortgage Operations |  | 39,157 |  | 73%
1044 River Oaks Dr., Flowood, MS |  | Life Insurance Operations |  | 19,694 |  | 28%
1818 Marshall Street, Shreveport, LA (1)(2) |  | Life Insurance Operations |  | 12,274 |  | 100%
909 Foisy Street, Alexandria, LA (1)(2) |  | Life Insurance Sales |  | 8,059 |  | 100%
812 Sheppard Street, Minden, LA (1)(2) |  | Life Insurance Sales |  | 1,560 |  | 100%
1550 N 3rd Street, Jena, LA (1)(2) |  | Life Insurance Sales |  | 1,737 |  | 100%
(1) Included in property and equipment on the condensed consolidated balance sheets |  |  |  |
(2) See Note 15 regarding the acquisition of Kilpatrick Life Insurance Company |  |  |  |

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 are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At September 30, 2020, the Company had 62%, 11%, 8%, 3%, 5% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, and Arizona, respectively. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively.

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

Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value. Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer.

The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90

22

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment or held for sale.

The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events.

For purposes of determining the allowance for 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 secondary on the borrower’s (or guarantors) ability to repay.

Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less.

Residential construction (including land acquisition and development) – 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. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. 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 is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity.

23

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

The Company establishes a valuation allowance for credit losses in its mortgage loans held for investment portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:

| Commercial |  | Residential |  | Residential Construction |  | Total
September 30, 2020 |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |
Beginning balance - January 1, 2020 | $ 187,129 |  | $ 1,222,706 |  | $ 43,202 |  | $ 1,453,037
Charge-offs | - |  | - |  | - |  | -
Provision | - |  | 613,444 |  | - |  | 613,444
Ending balance - September 30, 2020 | $ 187,129 |  | $ 1,836,150 |  | $ 43,202 |  | $ 2,066,481
Ending balance: individually evaluated for impairment | $ - |  | $ 238,997 |  | $ - |  | $ 238,997
Ending balance: collectively evaluated for impairment | $ 187,129 |  | $ 1,597,153 |  | $ 43,202 |  | $ 1,827,484
Mortgage loans: |  |  |  |  |  |  |
Ending balance | $ 49,378,938 |  | $ 80,051,914 |  | $ 120,298,836 |  | $ 249,729,688
Ending balance: individually evaluated for impairment | $ 3,414,719 |  | $ 5,193,865 |  | $ 630,574 |  | $ 9,239,158
Ending balance: collectively evaluated for impairment | $ 45,964,219 |  | $ 74,858,049 |  | $ 119,668,262 |  | $ 240,490,530
December 31, 2019 |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |
Beginning balance - January 1, 2019 | $ 187,129 |  | $ 1,125,623 |  | $ 35,220 |  | $ 1,347,972
Charge-offs | - |  | (32,692) |  | - |  | (32,692)
Provision | - |  | 129,775 |  | 7,982 |  | 137,757
Ending balance - December 31, 2019 | $ 187,129 |  | $ 1,222,706 |  | $ 43,202 |  | $ 1,453,037
Ending balance: individually evaluated for impairment | $ - |  | $ 195,993 |  | $ - |  | $ 195,993
Ending balance: collectively evaluated for impairment | $ 187,129 |  | $ 1,026,713 |  | $ 43,202 |  | $ 1,257,044
Mortgage loans: |  |  |  |  |  |  |
Ending balance | $ 38,718,220 |  | $ 113,043,965 |  | $ 89,430,237 |  | $ 241,192,422
Ending balance: individually evaluated for impairment | $ 4,488,719 |  | $ 3,752,207 |  | $ 655,000 |  | $ 8,895,926
Ending balance: collectively evaluated for impairment | $ 34,229,501 |  | $ 109,291,758 |  | $ 88,775,237 |  | $ 232,296,496

24

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

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

| 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days (1) | In Process of Foreclosure (1) | Total Past Due | Current | Total Mortgage Loans | Allowance for Loan Losses | Unamortized deferred loan fees, net | Unamortized discounts, net | Net Mortgage Loans
September 30, 2020 |  |  |  |  |  |  |  |  |  |
Commercial | $ 255,858 | $ 495,937 | $ 3,414,719 | $ - | $ 4,166,514 | $ 45,212,424 | $ 49,378,938 | $ (187,129) | $ (43,338) | $ (828,049) | $ 48,320,422
Residential | 5,261,818 | 1,930,361 | 3,745,621 | 1,448,244 | 12,386,044 | 67,665,870 | 80,051,914 | (1,836,150) | (521,661) | (320,613) | 77,373,490
Residential Construction | 276,403 | 1,630,000 | 630,574 | - | 2,536,977 | 117,761,859 | 120,298,836 | (43,202) | (340,019) | - | 119,915,615
Total | $ 5,794,079 | $ 4,056,298 | $ 7,790,914 | $ 1,448,244 | $ 19,089,535 | $ 230,640,153 | $ 249,729,688 | $ (2,066,481) | $ (905,018) | $ (1,148,662) | $ 245,609,527
December 31, 2019 |  |  |  |  |  |  |  |  |  |
Commercial | $ 1,872,000 | $ - | $ 4,488,719 | $ - | $ 6,360,719 | $ 32,357,501 | $ 38,718,220 | $ (187,129) | $ (88,918) | $ (653,272) | $ 37,788,901
Residential | 10,609,296 | 4,085,767 | 2,100,742 | 1,651,465 | 18,447,270 | 94,596,695 | 113,043,965 | (1,222,706) | (1,567,581) | - | 110,253,678
Residential Construction | - | - | 655,000 | - | 655,000 | 88,775,237 | 89,430,237 | (43,202) | (735,068) | - | 88,651,967
Total | $ 12,481,296 | $ 4,085,767 | $ 7,244,461 | $ 1,651,465 | $ 25,462,989 | $ 215,729,433 | $ 241,192,422 | $ (1,453,037) | $ (2,391,567) | $ (653,272) | $ 236,694,546
(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure.

25

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

Impaired Mortgage Loans Held for Investment

Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:

| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
September 30, 2020 |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ 3,414,719 |  | $ 3,414,719 |  | $ - |  | $ 1,772,817 |  | $ -
Residential | 3,435,710 |  | 3,435,710 |  | - |  | 4,235,285 |  | -
Residential construction | 630,574 |  | 630,574 |  | - |  | 673,383 |  | -
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ - |  | $ - |  | $ - |  | $ - |  | $ -
Residential | 1,758,155 |  | 1,758,155 |  | 238,997 |  | 1,186,545 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
Total: |  |  |  |  |  |  |  |  |
Commercial | $ 3,414,719 |  | $ 3,414,719 |  | $ - |  | $ 1,772,817 |  | $ -
Residential | 5,193,865 |  | 5,193,865 |  | 238,997 |  | 5,421,830 |  | -
Residential construction | 630,574 |  | 630,574 |  | - |  | 673,383 |  | -
December 31, 2019 |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ 4,488,719 |  | $ 4,488,719 |  | $ - |  | $ 1,499,043 |  | $ -
Residential | 2,254,189 |  | 2,254,189 |  | - |  | 3,367,151 |  | -
Residential construction | 655,000 |  | 655,000 |  | - |  | 1,457,278 |  | -
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ - |  | $ - |  | $ - |  | $ - |  | $ -
Residential | 1,498,018 |  | 1,498,018 |  | 195,993 |  | 665,270 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
Total: |  |  |  |  |  |  |  |  |
Commercial | $ 4,488,719 |  | $ 4,488,719 |  | $ - |  | $ 1,499,043 |  | $ -
Residential | 3,752,207 |  | 3,752,207 |  | 195,993 |  | 4,032,421 |  | -
Residential construction | 655,000 |  | 655,000 |  | - |  | 1,457,278 |  | -

26

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`3)```Investments (Continued)

Credit Risk Profile Based on Performance Status

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

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

| Commercial |  | Residential |  | Residential Construction |  | Total
| September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019 |  | September 30, 2020 |  | December 31, 2019
Performing | $ 45,964,219 |  | $ 34,229,501 |  | $ 74,858,049 |  | $ 109,291,758 |  | $ 119,668,262 |  | $ 88,775,237 |  | $ 240,490,530 |  | $ 232,296,496
Non-performing | 3,414,719 |  | 4,488,719 |  | 5,193,865 |  | 3,752,207 |  | 630,574 |  | 655,000 |  | 9,239,158 |  | 8,895,926
Total | $ 49,378,938 |  | $ 38,718,220 |  | $ 80,051,914 |  | $ 113,043,965 |  | $ 120,298,836 |  | $ 89,430,237 |  | $ 249,729,688 |  | $ 241,192,422

Non-Accrual Mortgage Loans Held for Investment

Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $397,000 and $203,000 as of September 30, 2020 and December 31, 2019, respectively.

The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented.

| As of September 30 2020 |  | As of December 31 2019
Commercial | $ 3,414,719 |  | $ 4,488,719
Residential | 5,193,865 |  | 3,752,207
Residential construction | 630,574 |  | 655,000
Total | $ 9,239,158 |  | $ 8,895,926

`4)```Loans Held for Sale

The Company has elected the fair value option for loans held for sale. Changes in the fair value of the loans are included in mortgage fee income. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the condensed consolidated statement of earnings. There is one loan with an unpaid principal balance of $190,560 that is 90 or more days past due and on a nonaccrual status as of September 30, 2020. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

27

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`4)```Loans Held for Sale (Continued)

The following is a summary of the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for the periods presented:

| As of September 30 2020 | As of December 31 2019
Aggregate fair value | $ 445,878,979 | $ 213,457,632
Unpaid principal balance | 428,860,105 | 206,417,122
Unrealized gain | 17,018,874 | 7,040,510

Mortgage Fee Income

Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale.

Major categories of mortgage fee income for loans held for sale are as follows:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Loan fees | $ 20,630,052 |  | $ 8,438,471 |  | $ 40,167,476 |  | $ 22,162,455
Interest income | 3,348,929 |  | 2,127,775 |  | 7,630,993 |  | 5,032,505
Secondary gains | 70,627,864 |  | 27,574,294 |  | 151,215,666 |  | 66,434,923
Change in fair value of loan commitments | 3,901,086 |  | 378,899 |  | 12,454,218 |  | 1,915,223
Change in fair value of loans held for sale | 1,404,131 |  | 1,411,322 |  | 4,231,347 |  | 2,065,978
Provision for loan loss reserve | (1,352,438) |  | (195,009) |  | (3,489,982) |  | (449,894)
Mortgage fee income | $ 98,559,624 |  | $ 39,735,752 |  | $ 212,209,718 |  | $ 97,161,190

Loan Loss Reserve

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

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

| As of September 30 2020 |  | As of December 31 2019
Balance, beginning of period | $ 4,046,288 |  | $ 3,604,869
Provision on current loan originations (1) | 3,489,982 |  | 643,284
Charge-offs, net of recaptured amounts | (4,527,157) |  | (201,865)
Balance, end of period | $ 3,009,113 |  | $ 4,046,288
(1) Included in mortgage fee income |  |  |

28

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`4)```Loans Held for Sale (Continued)

The Company maintains reserves for estimated losses on current production volumes. For the nine months ended September 30, 2020, $3,489,982 in reserves were added at a rate of 8.9 basis points per loan, the equivalent of $890 per $1,000,000 in loans originated. This is an increase over the nine months ended September 30, 2019, when reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated. The economic impact of COVID-19 and subsequent government action has increased the potential for losses due to early payoff penalties and potential for losses due to increased delinquency. The unique nature of these current events creates significant difficulty for forecasting potential future losses. Based on the Company’s best estimate for potential loan losses and considering published industry data, a loss reserve of 8 basis points per loan originated will be used in the fourth quarter 2020. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007. No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

29

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`5)```Stock Compensation Plans

The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options issued of $104,562 and $65,746 has been recognized for these plans for the three months ended September 30, 2020 and 2019, respectively, and $271,959 and $195,487 has been recognized for these plans for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the total unrecognized compensation expense related to the options issued was $126,071, which is expected to be recognized over the vesting period of one year.

The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant.

A summary of the status of the Company’s stock compensation plans as of September 30, 2020, and the changes during the nine months ended September 30, 2020, are presented below:

|  | Number of Class A Shares |  | Weighted Average Exercise Price |  | Number of Class C Shares |  | Weighted Average Exercise Price
Outstanding at January 1, 2020 |  | 1,086,053 |  | $ 4.41 |  | 594,132 |  | $ 5.36
Adjustment for effect of stock dividends |  | 27,968 |  |  |  | 19,354 |  |
Granted |  | 77,000 |  |  |  | 180,000 |  |
Exercised |  | (78,803) |  |  |  | - |  |
Cancelled |  | - |  |  |  | - |  |
Outstanding at September 30, 2020 |  | 1,112,218 |  | $ 4.28 |  | 793,486 |  | $ 4.88
As of September 30, 2020: |  |  |  |  |  |  |  |
Options exercisable |  | 1,053,033 |  | $ 4.39 |  | 652,805 |  | $ 5.14
As of September 30, 2020: |  |  |  |  |  |  |  |
Available options for future grant |  | 325,372 |  |  |  | 266,500 |  |
Weighted average contractual term of options |  |  |  |  |  |  |  |
outstanding at September 30, 2020 |  | 5.72 years |  |  |  | 5.94 years |  |
Weighted average contractual term of options |  |  |  |  |  |  |  |
exercisable at September 30, 2020 |  | 5.51 years |  |  |  | 5.49 years |  |
Aggregated intrinsic value of options |  |  |  |  |  |  |  |
outstanding at September 30, 2020 (1) |  | $2,242,693 |  |  |  | $1,115,985 |  |
Aggregated intrinsic value of options |  |  |  |  |  |  |  |
exercisable at September 30, 2020 (1) |  | $2,228,291 |  |  |  | $894,505 |  |
(1) The Company used a stock price of $6.40 as of September 30, 2020 to derive intrinsic value.

30

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`5)```Stock Compensation Plans (Continued)

A summary of the status of the Company’s stock compensation plans as of September 30, 2019, and the changes during the nine months ended September 30, 2019, are presented below:

|  | Number of Class A Shares |  | Weighted Average Exercise Price |  | Number of Class C Shares |  | Weighted Average Exercise Price
Outstanding at January 1, 2019 |  | 1,011,274 |  | $ 4.49 |  | 577,280 |  | $ 5.15
Granted |  | 2,000 |  |  |  | - |  |
Exercised |  | (19,796) |  |  |  | (63,814) |  |
Cancelled |  | - |  |  |  | - |  |
Outstanding at September 30, 2019 |  | 993,478 |  | $ 4.50 |  | 513,466 |  | $ 5.33
As of September 30, 2019: |  |  |  |  |  |  |  |
Options exercisable |  | 955,195 |  | $ 4.46 |  | 489,840 |  | $ 5.34
As of September 30, 2019: |  |  |  |  |  |  |  |
Available options for future grant |  | 299,351 |  |  |  | 146,425 |  |
Weighted average contractual term of options |  |  |  |  |  |  |  |
outstanding at September 30, 2019 |  | 5.40 years |  |  |  | 3.63 years |  |
Weighted average contractual term of options |  |  |  |  |  |  |  |
exercisable at September 30, 2019 |  | 5.34 years |  |  |  | 3.37 years |  |
Aggregated intrinsic value of options |  |  |  |  |  |  |  |
outstanding at September 30, 2019 (1) |  | $765,360 |  |  |  | $106,646 |  |
Aggregated intrinsic value of options |  |  |  |  |  |  |  |
exercisable at September 30, 2019 (1) |  | $765,360 |  |  |  | $106,646 |  |
(1) The Company used a stock price of $4.90 as of September 30, 2019 to derive intrinsic value.

The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the nine months September 30, 2020 and 2019 was $191,309 and $112,340, respectively.

31

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`6)```Earnings Per Share

The basic and diluted earnings per share amounts were calculated as follows:

|  |  | Three Months Ended September 30 |  | Nine Months Ended September 30
|  |  | 2020 |  | 2019 |  | 2020 |  | 2019
Numerator: |  |  |  |  |  |  |  |
| Net earnings |  | $ 29,304,769 |  | $ 3,617,414 |  | $ 51,286,265 |  | $ 9,027,786
Denominator: |  |  |  |  |  |  |  |
| Basic weighted-average shares outstanding |  | 18,873,886 |  | 18,551,116 |  | 18,760,884 |  | 18,560,874
Effect of dilutive securities: |  |  |  |  |  |  |  |
| Employee stock options |  | 559,733 |  | 203,975 |  | 404,006 |  | 208,561
| Diluted weighted-average shares outstanding |  | 19,433,619 |  | 18,755,091 |  | 19,164,890 |  | 18,769,435
Basic net earnings per share |  | $1.55 |  | $0.19 |  | $2.73 |  | $0.49
Diluted net earnings per share |  | $1.51 |  | $0.19 |  | $2.68 |  | $0.48

Net earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. For the nine months September 30, 2020 and 2019, there were -0- and 864,915 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive.

`7)```Business Segment Information

Description of Products and Services by Segment

The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale.

Measurement of Segment Profit or Loss and Segment Assets

The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles of the Form 10-K for the year ended December 31, 2019. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation.

Factors Management Used to Identify the Enterprise’s Reportable Segments

The Company’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.

32

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`7)```Business Segment Information (Continued)

|  | Life Insurance |  | Cemetery/ Mortuary |  | Mortgage |  | Intercompany Eliminations |  | Consolidated
For the Three Months Ended |  |  |  |  |  |  |  |  |  |
September 30, 2020 |  |  |  |  |  |  |  |  |  |
Revenues from external customers |  | $ 39,261,044 |  | $ 5,495,990 |  | $ 101,447,531 |  | $ - |  | $ 146,204,565
Intersegment revenues |  | 2,952,836 |  | 79,096 |  | 168,890 |  | (3,200,822) |  | -
Segment profit before income taxes |  | 4,807,280 |  | 1,322,303 |  | 32,454,348 |  | - |  | 38,583,931
|  |  |  | - |  |  |  |  |  |
For the Three Months Ended |  |  |  |  |  |  |  |  |  |
September 30, 2019 |  |  |  |  |  |  |  |  |  |
Revenues from external customers |  | $ 29,824,686 |  | $ 3,570,419 |  | $ 41,984,554 |  | $ - |  | $ 75,379,659
Intersegment revenues |  | 1,465,778 |  | 106,638 |  | 120,891 |  | (1,693,307) |  | -
Segment profit before income taxes |  | 1,263,836 |  | 213,198 |  | 3,282,788 |  | - |  | 4,759,822
For the Nine Months Ended |  |  |  |  |  |  |  |  |  |
September 30, 2020 |  |  |  |  |  |  |  |  |  |
Revenues from external customers |  | $ 110,255,399 |  | $ 14,815,991 |  | $ 219,403,866 |  | $ - |  | $ 344,475,256
Intersegment revenues |  | 5,677,189 |  | 272,409 |  | 559,923 |  | (6,509,521) |  | -
Segment profit before income taxes |  | 5,408,482 |  | 2,975,556 |  | 58,867,883 |  | - |  | 67,251,921
Identifiable Assets |  | 1,232,786,760 |  | 55,339,760 |  | 443,756,079 |  | (88,204,200) |  | 1,643,678,399
Goodwill |  | 2,765,570 |  | 754,018 |  | - |  | - |  | 3,519,588
Total Assets |  | 1,235,552,330 |  | 56,093,778 |  | 443,756,079 |  | (88,204,200) |  | 1,647,197,987
For the Nine Months Ended |  |  |  |  |  |  |  |  |  |
September 30, 2019 |  |  |  |  |  |  |  |  |  |
Revenues from external customers |  | $ 88,937,110 |  | $ 12,472,711 |  | $ 103,908,855 |  | $ - |  | $ 205,318,676
Intersegment revenues |  | 3,441,497 |  | 336,911 |  | 372,170 |  | (4,150,578) |  | -
Segment profit before income taxes |  | 4,568,178 |  | 2,421,845 |  | 4,825,801 |  | - |  | 11,815,824
Identifiable Assets |  | 941,739,161 |  | 84,250,592 |  | 243,272,631 |  | (110,132,588) |  | 1,159,129,796
Goodwill |  | 2,765,570 |  | 754,018 |  | - |  | - |  | 3,519,588
Total Assets |  | 944,504,731 |  | 85,004,610 |  | 243,272,631 |  | (110,132,588) |  | 1,162,649,384

33

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`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 the 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 investments), 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.

Loans Held for Sale: The Company 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.

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 Endowment 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.

34

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`8)```Fair Value of Financial Instruments (Continued)

The items shown under Level 3 are valued as follows:

Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to 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 of time, 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 fund 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 area comparables and property condition as well as 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.

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 comparables 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.

35

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 at September 30, 2020.

| 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 | $ 344,917,387 |  | $ - |  | $ 342,627,234 |  | $ 2,290,153
Equity securities | 11,215,606 |  | 11,215,606 |  | - |  | -
Loans held for sale | 445,878,979 |  | - |  | - |  | 445,878,979
Restricted assets (1) | 1,470,114 |  | - |  | 1,470,114 |  | -
Restricted assets (2) | 2,193,831 |  | 2,193,831 |  | - |  | -
Cemetery perpetual care trust investments (1) | 576,292 |  | - |  | 576,292 |  | -
Cemetery perpetual care trust investments (2) | 1,832,703 |  | 1,832,703 |  | - |  | -
Derivatives - loan commitments (3) | 17,945,259 |  | - |  | - |  | 17,945,259
Total assets accounted for at fair value on a recurring basis | $ 826,030,171 |  | $ 15,242,140 |  | $ 344,673,640 |  | $ 466,114,391
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |
Derivatives - call options (4) | $ (126,193) |  | $ (126,193) |  | $ - |  | $ -
Derivatives - loan commitments (4) | (2,999,809) |  | - |  | - |  | (2,999,809)
Total liabilities accounted for at fair value on a recurring basis | $ (3,126,002) |  | $ (126,193) |  | $ - |  | $ (2,999,809)
(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 |  |

36

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 at December 31, 2019.

| 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 | $ 355,977,820 |  | $ - |  | $ 352,761,438 |  | $ 3,216,382
Equity securities | 7,271,165 |  | 7,271,165 |  | - |  | -
Loans held for sale | 213,457,632 |  | - |  | - |  | 213,457,632
Restricted assets (1) | 1,008,867 |  | - |  | 1,008,867 |  | -
Restricted assets (2) | 1,976,480 |  | 1,976,480 |  | - |  | -
Cemetery perpetual care trust investments (1) | 975,673 |  | - |  | 975,673 |  | -
Cemetery perpetual care trust investments (2) | 1,605,451 |  | 1,605,451 |  | - |  | -
Derivatives - loan commitments (3) | 2,722,580 |  | - |  | - |  | 2,722,580
Total assets accounted for at fair value on a recurring basis | $ 584,995,668 |  | $ 10,853,096 |  | $ 354,745,978 |  | $ 219,396,594
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |
Derivatives - call options (4) | $ (62,265) |  | $ (62,265) |  | $ - |  | $ -
Derivatives - put options (4) | (22,282) |  | (22,282) |  | - |  | -
Derivatives - loan commitments (4) | (231,347) |  | - |  | - |  | (231,347)
Total liabilities accounted for at fair value on a recurring basis | $ (315,894) |  | $ (84,547) |  | $ - |  | $ (231,347)
(1) Fixed maturity securities available for sale |  |  |  |  |  |  |
(2) Mutual funds and equity securities |  |  |  |  |  |  |
(3) Included in other assets on the condensed consolidated balance sheets |  |  |  |
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheets |  |

37

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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, 2020, 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
|  | 9/30/2020 |  | Technique |  | Input(s) |  | Value | Value |  | Average
Loans held for sale |  | $ 445,878,979 |  | Market approach |  | Investor contract pricing as a percentage of unpaid principal balance |  | 99.0% | 110.0% |  | 104.0%
Derivatives - loan commitments (net) |  | 14,945,451 |  | Market approach |  | Fall-out factor |  | 1.0% | 92.0% |  | 80.0%
|  |  |  |  |  | Initial-Value |  | N/A | N/A |  | N/A
|  |  |  |  |  | Servicing |  | 0 bps | 133 bps |  | 67 bps
Fixed maturity securities available for sale |  | 2,290,153 |  | Broker quotes |  | Pricing quotes |  | $ 91.49 | $ 123.46 |  | $ 117.45

For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, 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
|  | 12/31/2019 |  | Technique |  | Input(s) |  | Value | Value |  | Average
Loans held for sale |  | $ 213,457,632 |  | Market approach |  | Investor contract pricing as a percentage of unpaid principal balance |  | 98.0% | 109.0% |  | 103.0%
Derivatives - loan commitments (net) |  | 2,491,233 |  | Market approach |  | Fall-out factor |  | 1.0% | 92.0% |  | 81.0%
|  |  |  |  |  | Initial-Value |  | N/A | N/A |  | N/A
|  |  |  |  |  | Servicing |  | 0 bps | 318 bps |  | 79 bps
Fixed maturity securities available for sale |  | 3,216,382 |  | Broker quotes |  | Pricing quotes |  | $ 95.02 | $ 115.80 |  | $ 107.98

38

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`8)```Fair Value of Financial Instruments (Continued)

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

|  | Net Loan Commitments |  | Loans Held for Sale |  | Fixed Maturity Securities Available for Sale |
Balance - December 31, 2019 |  | $ 2,491,233 |  | $ 213,457,632 |  | $ 3,216,382 |
Originations and purchases |  | - |  | 3,824,329,264 |  | - |
Sales, maturities and paydowns |  | - |  | (3,709,992,155) |  | (1,031,500) |
Transfer to mortgage loans held for investment |  | - |  | (9,170,610) |  | - |
Total gains (losses): |  |  |  |  |  |  |
Included in earnings |  | 12,454,218 | (1) | 127,254,848 | (1) | 2,532 | (2)
Included in other comprehensive income |  | - |  | - |  | 102,739 |
Balance - September 30, 2020 |  | $ 14,945,451 |  | $ 445,878,979 |  | $ 2,290,153 |
(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 |

Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:

|  | Net Derivatives Loan Commitments |  | Loans Held for Sale |  | Fixed Maturity Securities Available for Sale
Balance - December 31, 2018 |  | $ 1,591,816 |  | $ 136,210,853 |  | $ -
Originations/purchases |  | - |  | 2,606,839,175 |  | -
Sales |  | - |  | (2,580,875,055) |  | -
Transfer to mortgage loans held for investment |  | - |  | (31,881,851) |  | -
Transfer from fixed maturity securities held to maturity |  | - |  | - |  | 3,216,382
Total gains (losses): |  |  |  |  |  |
Included in earnings (1) |  | 899,417 |  | 83,164,510 |  | -
Balance - December 31, 2019 |  | $ 2,491,233 |  | $ 213,457,632 |  | $ 3,216,382
(1) As a component of mortgage fee income on the condensed consolidated statements of earnings

39

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 nonrecurring basis by their classification in the condensed consolidated balance sheet at September 30, 2020.

| 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 | $ 1,519,159 |  | $ - |  | $ - |  | $ 1,519,159
Impaired real estate held for sale | 4,000,000 |  | - |  | - |  | 4,000,000
Total assets accounted for at fair value on a nonrecurring basis | $ 5,519,159 |  | $ - |  | $ - |  | $ 5,519,159

The following tables summarize 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 at December 31, 2019.

| 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 | $ 1,302,025 |  | $ - |  | $ - |  | $ 1,302,025
Impaired real estate held for investment | 8,375,884 |  | - |  | - |  | 8,375,884
Total assets accounted for at fair value on a nonrecurring basis | $ 9,677,909 |  | $ - |  | $ - |  | $ 9,677,909

40

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 at September 30, 2020 and December 31, 2019.

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, 2020:

| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Mortgage loans held for investment |  |  |  |  |  |  |  |  |
Residential | $ 77,373,490 |  | $ - |  | $ - |  | $ 82,076,345 |  | $ 82,076,345
Residential construction | 119,915,615 |  | - |  | - |  | 119,915,615 |  | 119,915,615
Commercial | 48,320,422 |  | - |  | - |  | 47,954,726 |  | 47,954,726
Mortgage loans held for investment, net | $ 245,609,527 |  | $ - |  | $ - |  | $ 249,946,686 |  | $ 249,946,686
Policy loans | 14,234,935 |  | - |  | - |  | 14,234,935 |  | 14,234,935
Insurance assignments, net (1) | 44,256,177 |  | - |  | - |  | 44,256,177 |  | 44,256,177
Restricted assets (2) | 4,110,252 |  | - |  | - |  | 4,110,252 |  | 4,110,252
Mortgage servicing rights, net | 28,387,476 |  | - |  | - |  | 30,288,406 |  | 30,288,406
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (424,932,007) |  | $ - |  | $ - |  | $ (424,932,007) |  | $ (424,932,007)
Policyholder account balances (3) | (44,246,123) |  | - |  | - |  | (41,229,265) |  | (41,229,265)
Future policy benefits - annuities (3) | (110,638,182) |  | - |  | - |  | (115,049,853) |  | (115,049,853)
(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 |  |

41

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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, 2019:

| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Mortgage loans held for investment |  |  |  |  |  |  |  |  |
Residential | $ 110,253,678 |  | $ - |  | $ - |  | $ 115,320,638 |  | $ 115,320,638
Residential construction | 88,651,967 |  | - |  | - |  | 88,651,967 |  | 88,651,967
Commercial | 37,788,901 |  | - |  | - |  | 39,289,462 |  | 39,289,462
Mortgage loans held for investment, net | $ 236,694,546 |  | $ - |  | $ - |  | $ 243,262,067 |  | $ 243,262,067
Policy loans | 14,762,805 |  | - |  | - |  | 14,762,805 |  | 14,762,805
Insurance assignments, net (1) | 39,614,939 |  | - |  | - |  | 39,614,939 |  | 39,614,939
Restricted assets (2) | 2,275,756 |  | - |  | - |  | 2,289,679 |  | 2,289,679
Cemetery perpetual care trust investments (2) | 524,000 |  | - |  | - |  | 536,553 |  | 536,553
Mortgage servicing rights, net | 17,155,529 |  | - |  | - |  | 22,784,571 |  | 22,784,571
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (217,572,612) |  | $ - |  | $ - |  | $ (217,572,612) |  | $ (217,572,612)
Policyholder account balances (3) | (45,154,180) |  | - |  | - |  | (41,828,469) |  | (41,828,469)
Future policy benefits - annuities (3) | (113,579,830) |  | - |  | - |  | (117,304,614) |  | (117,304,614)
(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 |  |

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.

42

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (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 in excess of 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.

`9)```Allowance for Doubtful Accounts

The Company records an allowance and recognizes an expense for potential losses from other investments and receivables in accordance with generally accepted accounting principles.

Receivables are the result of cemetery and mortuary operations, mortgage loan operations and life insurance operations. The allowance is based upon the Company’s historical experience for collectively evaluated impairment. Other allowances are based upon receivables individually evaluated for impairment. Collectability of the cemetery and mortuary receivables is significantly influenced by current economic conditions. The critical issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the overall economy

`10)```Derivative Instruments

Mortgage Banking Derivatives

Loan Commitments

The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded. Managing price risk is complicated by the fact that the ultimate percentage of loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment.

In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant’s committed rate. The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance), product type and the application approval status. The Company has developed fallout estimates using historical data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the loan commitments and are updated periodically to reflect the most current data.

43

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`10)```Derivative Instruments (Continued)

The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“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 and is shown net of expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans.

Forward Sale Commitments

The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments.

The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets.

Call and Put Options

The Company uses a strategy of selling “out of the money” call options on its equity securities as a source of revenue. The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future. The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices. The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option. The liability for options is adjusted to fair value at each reporting date. In the event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets.

The following table shows the notional amount and fair value of derivatives as of September 30, 2020 and December 31, 2019.

| Fair Values and Notional Values of Derivative Instruments
|  |  | September 30, 2020 |  | December 31, 2019
| Balance Sheet Location |  | Notional Amount |  | Asset Fair Value |  | Liability Fair Value |  | Notional Amount | Asset Fair Value |  | Liability Fair Value
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Loan commitments | Other assets and Other liabilities |  | $977,036,503 |  | $17,945,259 |  | $2,999,809 |  | $224,202,514 | $2,722,580 |  | $231,347
Call options | Other liabilities |  | 1,957,000 |  | - |  | 126,193 |  | 1,813,500 | - |  | 62,265
Put options | Other liabilities |  | - |  | - |  | - |  | 1,573,100 | - |  | 22,282
Total |  |  | $978,993,503 |  | $17,945,259 |  | $3,126,002 |  | $227,589,114 | $2,722,580 |  | $315,894

44

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`10)```Derivative Instruments (Continued)

The following table shows the gains and losses on derivatives for the periods presented.

|  |  |  | Net Amount Gain (Loss) |  | Net Amount Gain (Loss)
|  |  |  | Three Months Ended September 30 |  | Nine Months Ended September 30
Derivative |  | Classification |  | 2020 |  | 2019 |  | 2020 |  | 2019
Loan commitments |  | Mortgage fee income |  | $ 3,901,086 |  | $ 378,899 |  | $ 12,454,218 |  | $ 1,915,223
Call and put options |  | Gains on investments and other assets |  | $ 34,171 |  | $ 104,702 |  | $ 124,516 |  | $ 509,639

`11)```Reinsurance, Commitments and Contingencies

Reinsurance

The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranges from $25,000 to $100,000. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies.

Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate. However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of September 30, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.

During the third quarter 2020, the loan loss reserve decreased significantly primarily due to a $3,000,000 settlement that was paid to an investor for loans originated between 2004 and 2007. No additional loss reserves are being held for loans originated between 2004 and 2007.

Thus, the Company believes that the final loan loss reserve as of September 30, 2020, represents its best estimate for adequate loss reserves on loans sold.

Mortgage Loan Loss Litigation

Lehman Brothers Holdings Litigation – Delaware and New York

In January 2014, Lehman Brothers Holdings Inc. (“Lehman Holdings”) entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae. Lehman Holdings had acquired these loans from Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage Company (“SecurityNational Mortgage”). A settlement based on similar circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

45

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`11)```Reinsurance, Commitments and Contingencies (Continued)

Lehman Holdings filed a motion in May 2014 with the U.S. Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage in non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings. The mediation was not successful in resolving any issues between SecurityNational Mortgage and Lehman Holdings.

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware. In the Delaware action, SecurityNational Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans. SecurityNational Mortgage sought a declaratory judgment as to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings’ settlements with Fannie Mae and Freddie Mac. Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory judgment action. On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings’ motion to dismiss.

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York seeking a declaration of rights similar in nature to the declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under indemnification provisions of the alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. No response was required to be filed relative to the Complaint or the Amended Complaint dated March 7, 2016. A Case Management Order was entered on November 1, 2016.

On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but retains a similar claim for damages as in the Complaint. Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter and that venue is improper. Lehman Holdings’ response memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017. A hearing on the motion was held on June 12, 2018.

On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion. On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a joint motion with the United States District Court (Case No. 18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction. Included with the motion were proposed objections to the Bankruptcy Court’s Decision. On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’ reply was filed on October 2, 2018.

On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law. Separately, certain other defendants also filed a notice of appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue. Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’ response on November 26, 2018. The motions to file appeals were consolidated before Valerie Caproni, U.S. District Court Judge, Case No. 18-cv-08986 (VEC). Case No. 18-mc-00392 (VEC) was also before Judge Caproni.

46

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`11)```Reinsurance, Commitments and Contingencies (Continued)

On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue. Further, the judge denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.

On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage. In addition to the Fannie Mae and Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”). The RMBS loans had allegedly been sold by defendants to Lehman Bank that, in turn, sold them to Lehman Holdings. The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings. Lehman Holdings asserts that it made representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.

The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac related loans. Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation. Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’ motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants including SecurityNational Mortgage.

Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint") (United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint already on file. The RMBS Complaint seeks alleged damages relating to obligations under alleged contractual indemnification provisions in an amount to be determined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert witness fees incurred in litigation; and such other relief as the Court deems just and proper.

In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as a document production, taking depositions, and use of experts. At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019. SecurityNational Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case. Discovery is in process.

Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019. SecurityNational Mortgage sent its Statement of Position to Lehman Brothers Holdings dated September 3, 2019 in response to the notice. Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage. On January 9, 2020, SecurityNational Mortgage submitted further information to the mediator. Mediation was set to take place on January 23, 2020 in New York. In view of a motion of SecurityNational Mortgage dated January 15, 2020, Lehman Holdings requested that the mediation be continued.

On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing. It was not filed in the Bankruptcy Court but in the United States District Court for the Southern District of New York. The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial motions, and settlement,” as well as for “a Report and Recommendation” as to the pending motion. The final disposition of the motion will be with the District Court judge. Lehman Holdings asked the District Court to transfer the case to one of two other judges allegedly due to related matters. No action has been taken by the District Court to transfer the case.

47

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`11)```Reinsurance, Commitments and Contingencies (Continued)

However, Lehman Holdings filed its response brief to the motion and SecurityNational Mortgage filed its reply. On July 10, 2020, the Magistrate Judge filed a report and recommendation with the District Court judge recommending that SecurityNational Mortgage’s motion to dismiss be denied on the procedural basis that the motion should not be in the District Court, but the Bankruptcy Court. SecurityNational Mortgage filed an objection to the report and recommendation to which Lehman Holdings responded. The District Court entered an order on August 10, 2020 adopting the Magistrate Judge’s recommendation that SecurityNational Mortgage’s motion be denied on the procedural basis that the matter should not be in the District Court at present, and that the Bankruptcy Court may recommend on an interlocutory basis whether there is subject matter jurisdiction and standing, and that later in the proceedings the District Court could then review the recommendation as to subject matter jurisdiction and standing.

On September 15, 2020, SecurityNational Mortgage filed a Petition for a Writ of Mandamus with the Second Circuit Court of Appeals asking that the District Court be ordered to presently resolve SecurityNational Mortgage’s motion as its motion is filed in the proper court. No action has yet to be taken by the Second Circuit.

Earlier, on March 17, 2020, Lehman Holdings filed a motion for partial summary judgment against dozens of defendants asserting that sufficient notice was given defendants concerning the settlement of the RMBS claims so that Lehman Holdings, as an indemnitee, would not have to prove that it (Lehman Holdings) had liability to the RMBS Trustees, but only that its settlement was reasonable and in good faith. Defendants involved filed a response brief that for various reasons Lehman Holdings cannot establish sufficient notice as required by law. Certain defendants, excluding SecurityNational Mortgage, also filed a cross motion to seek an affirmative ruling on the issue of Lehman Holdings’ motion.

Thereafter, Lehman Holdings filed a reply brief in support of its motion, and also a response brief to certain defendants’ cross motion. Defendants that filed a cross motion filed a reply brief in support of the cross motion. The motions are now under advisement with the Bankruptcy Court. Even if Lehman Holdings were to prevail on its motion, it does not absolve Lehman Holdings of its burden to prove indemnity liability to the defendants. SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.

Debt Covenants for Mortgage Warehouse Lines of Credit

The Company, through its subsidiary SecurityNational Mortgage, has a $150,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 24, 2021. SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00.

The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on November 15, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

The Company through its subsidiary SecurityNational Mortgage, also uses a line of credit with Comerica Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $90,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on May 27, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months.

48

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

`11)```Reinsurance, Commitments and Contingencies (Continued)

The Company, through its subsidiary EverLEND Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows EverLEND Mortgage to borrow up to $5,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on August 1, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis.

The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement. As of September 30, 2020, the Company believes that it was in compliance with all debt covenants.

Other Contingencies and Commitments

The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of September 30, 2020, the Company’s commitments were approximately $187,305,000 for these loans, of which $124,409,000 had been funded. The Company will advance funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months.

The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date.

The Company is a defendant in various other legal actions arising from the normal conduct of business. Management believes that none of the actions will have a material effect on the Company’s financial position or results of operations. Based on management’s assessment and legal counsel’s representations concerning the likelihood of unfavorable outcomes, no amounts have been accrued for the above claims in the consolidated financial statements.

The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which, if adversely determined, would have a material adverse effect on its financial condition or results of operations.

49

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

`September 30, 2020 (Unaudited)`

`12)```Mortgage Servicing Rights

The Company initially records these MSRs at fair value as discussed in Note 8.

After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets.

The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance.

Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance.

The following is a summary of the MSR activity for the periods presented.

| As of September 30 2020 | As of December 31 2019
Amortized cost: |  |
Balance before valuation allowance at beginning of year | $ 17,155,529 | $ 20,016,822
MSR additions resulting from loan sales | 19,400,262 | 4,194,502
Amortization (1) | (8,168,315) | (7,055,795)
Application of valuation allowance to write down MSRs with other than temporary impairment | - | -
Balance before valuation allowance at end of period | $ 28,387,476 | $ 17,155,529
Valuation allowance for impairment of MSRs: |  |
Balance at beginning of year | $ - | $ -
Additions | - | -
Application of valuation allowance to write down MSRs with other than temporary impairment | - | -
Balance at end of period | $ - | $ -
Mortgage servicing rights, net | $ 28,387,476 | $ 17,155,529
Estimated fair value of MSRs at end of period | $ 30,288,406 | $ 22,784,571
(1) Included in other expenses on the condensed consolidated statements of earnings

50

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

`September 30, 2020 (Unaudited)`

`12)```Mortgage Servicing Rights (Continued)

The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost:

|  | Estimated MSR Amortization
2020 |  | 4,926,285
2021 |  | 3,690,972
2022 |  | 3,094,986
2023 |  | 2,609,308
2024 |  | 2,213,796
Thereafter | 11,852,129
Total |  | $ 28,387,476

The Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the condensed consolidated statement of earnings:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Contractual servicing fees | $ 2,340,546 |  | $ 1,765,957 |  | $ 6,055,055 |  | $ 5,433,970
Late fees | 69,314 |  | 82,547 |  | 238,826 |  | 261,437
Total | $ 2,409,860 |  | $ 1,848,504 |  | $ 6,293,881 |  | $ 5,695,407

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented:

| As of September 30 2020 |  | As of December 31 2019
Servicing UPB | $ 4,215,559,388 |  | $ 2,804,139,415

The following key assumptions were used in determining MSR value:

| Prepayment Speeds | Average Life (Years) | Discount Rate
September 30, 2020 | 16.70 | 5.06 | 9.5
December 31, 2019 | 15.30 | 5.27 | 9.51

13) Income Taxes

The Company’s overall effective tax rate for the three months ended September 30, 2020 and 2019 was 24.0% and 24.0%, respectively, which resulted in a provision for income taxes of $9,279,162 and $1,142,408, respectively. The Company’s overall effective tax rate for the nine months ended September 30, 2020 and 2019 was 23.7% and 23.6%, respectively, which resulted in a provision for income taxes of $15,965,656 and $2,788,038, respectively. The Company's effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes. The effective tax rate increased when compared to the prior year period partly due the Company’s provision for state income taxes.

51

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers

The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers.

Information about Performance Obligations and Contract Balances

The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled.

The Company’s three types of future obligations are as follows:

Pre-need Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized.

At-need Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received.

Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust.

Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre-need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred.

The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows:

| Contract Balances
| Receivables (1) | Contract Asset | Contract Liability
Opening (1/1/2020) | $ 2,778,879 | $ - | $ 12,607,978
Closing (9/30/2020) | 3,580,669 | - | 13,045,307
Increase/(decrease) | 801,790 | - | 437,329
| Contract Balances
| Receivables (1) | Contract Asset | Contract Liability
Opening (1/1/2019) | $ 2,816,225 | $ - | $ 12,508,625
Closing (12/31/2019) | 2,778,879 | - | 12,607,978
Increase/(decrease) | (37,346) | - | 99,353
(1) Included in Receivables, net on the condensed consolidated balance sheets

52

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

14) Revenues from Contracts with Customers (Continued)

The amount of revenue recognized and included in the opening contract liability balance for the three months ended September 30, 2020 and 2019 was $1,427,418 and $884,180, respectively, and for the nine months ended September 30, 2020 and 2019 was $3,258,824 and $2,515,278, respectively.

The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.

Disaggregation of Revenue

The following table disaggregates revenue for the Company’s cemetery and mortuary contracts for the periods presented:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Major goods/service lines |  |  |  |  |  |  |
At-need | $ 4,272,816 |  | $ 2,888,996 |  | $ 10,915,712 |  | $ 8,883,846
Pre-need | 1,098,899 |  | 637,420 |  | 3,614,872 |  | 2,321,928
| $ 5,371,715 |  | $ 3,526,416 |  | $ 14,530,584 |  | $ 11,205,774
Timing of Revenue Recognition |  |  |  |  |  |  |
Goods transferred at a point in time | $ 3,559,431 |  | $ 2,371,041 |  | $ 9,641,751 |  | $ 7,515,881
Services transferred at a point in time | 1,812,284 |  | 1,155,375 |  | 4,888,833 |  | 3,689,893
| $ 5,371,715 |  | $ 3,526,416 |  | $ 14,530,584 |  | $ 11,205,774

The following table reconciles revenues from cemetery and mortuary contracts to Note 7 – Business Segment Information for the Cemetery/Mortuary Segment for the periods presented:

| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2020 |  | 2019 |  | 2020 |  | 2019
Net mortuary and cemetery sales | $ 5,371,715 |  | $ 3,526,416 |  | $ 14,530,584 |  | $ 11,205,774
Gains (losses) on investments and other assets | (66,673) |  | (100,685) |  | (244,413) |  | 752,412
Net investment income | 168,478 |  | 112,246 |  | 444,971 |  | 387,617
Other revenues | 22,470 |  | 32,442 |  | 84,849 |  | 126,908
Revenues from external customers | 5,495,990 |  | 3,570,419 |  | 14,815,991 |  | 12,472,711

53

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

15) Acquisitions

Probst Family Funerals and Cremations and Heber Valley Funeral Home

On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City.

Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, Memorial Mortuary Inc. paid a net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback. In August 2019, this escrow account was settled and $137,550 was paid to the prior owners.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows:

Cash | $ 53,859
Property and equipment | 2,475,526
Receivables | 13,620
Goodwill | 754,018
Other | 21,800
Total assets acquired | 3,318,823
Bank and other loans payable | (3,176)
Total liabilities assumed | (3,176)
Fair value of net assets acquired/consideration paid | $ 3,315,647

54

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)

Kilpatrick Life Insurance Company

On December 13, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”) completed a stock purchase transaction with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders, which resulted in the purchase of all the outstanding shares of common stock of Kilpatrick Life. The closing of the transaction was subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life, which was received on December 12, 2019. Under the terms of the transaction, the total Purchase Price that Security National Life paid for all the shares held by the Kilpatrick shareholders was $23,779,940 subject to a $1,400,000 holdback, as agreed with the shareholders.

Kilpatrick Life has been in operation since 1932 and provides life insurance products and services through insurance plans such as permanent and term life insurance, asset protection plans, graded whole life insurance, and annuities. Additionally, it provides insurance services for emergencies and pre‐arranged funeral services. Kilpatrick Life is based in Shreveport, Louisiana with additional offices in Jena, Alexandria, Minden, and Arcadia, Louisiana.

Kilpatrick Life employs a staff of almost 120 associates in four offices in Louisiana and is licensed to operate in Louisiana, Texas, Arkansas, Oklahoma, and Mississippi with the home office located in Shreveport, LA. It is the mission of Kilpatrick Life to continue providing the utmost service and protection for its policyholders for generations to come.

Prior to the stock purchase transaction, Security National life and Kilpatrick Life entered into a coinsurance agreement, effective October 1, 2019. After the effective date, Security National Life, as coinsurer, agreed to be responsible for and was obligated with respect to 100% of the contractual liabilities under the Kilpatrick Life’s life insurance policies in accordance with the terms and conditions of the policies and applicable law. Unless otherwise directed by Security National Life, as coinsurer, Kilpatrick Life continued to administer the policies on behalf of Security National Life, as coinsurer, for the duration of the coinsurance agreement.

As part of the coinsurance agreement, effective October 1, 2019, Security National Life acquired the following assets and assumed the following contractual liabilities.

Other investments and policy loans | $ 9,124,459
Real estate held for investment | 2,850,000
Mortgage loans held for investment | 200,000
Receivables | 131,258
Total assets acquired | 12,305,717
Future policy benefits and unpaid claims | (165,404,970)
Other liabilities and accrued expenses | (5,259,341)
Total liabilities assumed | (170,664,311)
Cash received for reinsurance assumed | $ 158,358,594

55

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

15) Acquisitions (Continued)

Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed to terminate the coinsurance agreement, to require the recapture of the life insurance policies by Kilpatrick Life and provided notification to the Louisiana Department of Insurance. The final settlement and transfer of the coinsurance trust assets from Security National Life back to Kilpatrick Life occurred shortly thereafter.

The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition, on December 13, 2019, are shown in the following table. At the time of acquisition some of these assets and liabilities became intercompany items, and the Company has eliminated them for consolidation.

Fixed maturity securities, available for sale | $ 22,766,520 |
Fixed maturity securities, held to maturity | 16,436 |
Mortgage loans held for investment | 8,011,660 |
Real estate held for investment | 2,708,557 |
Other investments | 446,655 |
Accrued investment income | 183,527 |
Total investments | 34,133,355 |
Cash and cash equivalents | 6,900,654 |
Receivables, net | 5,407,736 | (1)
Receivables from reinsurers | 168,105,064 | (1)
Property and equipment, net | 1,498,245 |
Value of business acquired | 4,962,831 |
Deferred taxes | 167,344 |
Other | 712,323 |
Total assets acquired | 221,887,552 |
Future policy benefits and unpaid claims | (189,071,407) |
Accounts payable | (283,304) |
Other liabilities and accrued expenses | (7,870,944) |
Income taxes | (881,957) |
Total liabilities assumed | (198,107,612) |
Fair value of net assets acquired/consideration paid | $ 23,779,940 |
Fair value of net assets acquired/consideration paid, net of cash acquired | $ 16,879,286 |
(1) Receivable from reinsurers of $162,907,008 and receivables, net of $5,000,000 were settled with the recapture of the coinsurance agreement by Kilpatrick Life from Security National Life.

56

`Item 2.```Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company’s operations over the last several years generally reflect three trends or events which the Company expects to continue to focus on: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. The Company has adjusted its strategy to respond to the changing economic circumstances resulting from the COVID-19 pandemic.

Insurance Operations

The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning.

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

In response to the COVID-19 pandemic, the life insurance sales force has transitioned to virtual and tele sales processes and transitioned approximately 95% of office staff to work remotely.

The following table shows the condensed financial results of the insurance operations for three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.

| Three months ended September 30 (in thousands of dollars) |  | Nine months ended September 30 (in thousands of dollars)
| 2020 |  | 2019 |  | % Increase (Decrease) |  | 2020 |  | 2019 |  | % Increase (Decrease)
Revenues from external customers |  |  |  |  |  |  |  |  |  |  |
Insurance premiums | $ 23,767 |  | $ 19,832 |  | 20% |  | $ 68,983 |  | $ 58,505 |  | 18%
Net investment income | 14,240 |  | 10,147 |  | 40% |  | 40,074 |  | 30,020 |  | 3%
Gains (losses) on investments and other assets | 860 |  | (486) |  | (277%) |  | 71 |  | (615) |  | (112%)
Other | 394 |  | 331 |  | 19% |  | 1,127 |  | 1,027 |  | 10%
Total | $ 39,261 |  | $ 29,824 |  | 32% |  | $ 110,255 |  | $ 88,937 |  | 24%
Intersegment revenue | $ 2,953 |  | $ 1,466 |  | 101% |  | $ 5,677 |  | $ 3,441 |  | 65%
Earnings before income taxes | $ 4,807 |  | $ 1,264 |  | 280% |  | $ 5,408 |  | $ 4,568 |  | 18%

Intersegment revenues are primarily interest income from the warehouse line for loans held for sale provided to SecurityNational Mortgage Company (“SecurityNational Mortgage”). Profitability for the nine months ended September 30, 2020 has increased due to a $10,478,000 increase in insurance premiums and other considerations, a $10,054,000 increase in net investment income, a $2,236,000 increase in intersegment revenue, a $686,000 increase in gains on investments and other assets primarily due to a decrease in the fair value of equity securities due to the recent downturn of the economy caused by the COVID-19 Pandemic offset by a decrease in impairment losses on commercial real estate, a $100,000 increase in other revenues, and a $238,000 decrease in interest expense. This increase was partially offset by a $14,456,000 increase in death, surrenders and other policy benefits, a $5,907,000 increase in selling, general and administrative expenses, a $1,127,000 increase in future policy benefits, and a $980,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs. The Company acquired Kilpatrick Life Insurance Company (“Kilpatrick Life”) in December 2019. See Note 15 to the condensed consolidated financial statements. This acquisition is the primary reason for the increases in insurance premiums, net investment income, death, surrenders and other policy benefits, and selling, general and administrative expenses.

57

Cemetery and Mortuary Operations

The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in San Diego County, California. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.

As a result of the COVID-19 pandemic, the Company has seen a decrease in its average case size as funeral services have been limited. The Company has transitioned its pre-need sales force to virtual selling and has done in home sales as local regulations permit.

The following table shows the condensed financial results of the cemetery and mortuary operations for the three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.

| Three months ended September 30 (in thousands of dollars) |  | Nine months ended September 30 (in thousands of dollars)
| 2020 |  | 2019 |  | % Increase (Decrease) |  | 2020 |  | 2019 |  | % Increase (Decrease)
Revenues from external customers |  |  |  |  |  |  |  |  |  |  |
Mortuary revenues | $ 2,112 |  | $ 1,465 |  | 44% |  | $ 5,560 |  | $ 4,693 |  | 18%
Cemetery revenues | 3,260 |  | 2,061 |  | 58% |  | 8,970 |  | 6,512 |  | 38%
Net investment income | 168 |  | 112 |  | 50% |  | 445 |  | 388 |  | 15%
Gains (losses) on investments and other assets | (67) |  | (101) |  | (34%) |  | (244) |  | 752 |  | (132%)
Other | 23 |  | 32 |  | (28%) |  | 85 |  | 127 |  | (33%)
Total | $ 5,496 |  | $ 3,569 |  | 54% |  | $ 14,816 |  | $ 12,472 |  | 19%
Earnings before income taxes | $ 1,322 |  | $ 213 |  | 521% |  | $ 2,976 |  | $ 2,422 |  | 23%

Profitability in the nine months ended September 30, 2020 has increased due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, an $867,000 increase in mortuary at-need sales, and an $82,000 increase in net investment income. This increase was partially offset by a $997,000 decrease in gains on investments and other assets primarily attributable to a $564,000 decrease in gains on real estate sales and a $433,000 decrease in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments due to the recent downturn of the economy caused by the COVID-19 Pandemic, an $801,000 increase in selling, general and administrative expenses, and a $357,000 increase in costs of goods sold.

Mortgage Operations

The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life and unaffiliated financial institutions.

The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 65% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

For the nine months ended September 30, 2020 and 2019, SecurityNational Mortgage originated 14,462 loans ($3,708,810,000 total volume) and 7,817 loans ($1,792,058,000 total volume), respectively. For the nine months ended

58

September 30, 2020 and 2019, EverLEND Mortgage originated 400 loans ($115,519,000 total volume) and 185 loans ($48,494,000 total volume), respectively.

During the COVID-19 pandemic, the demand for mortgage loans has remained steady. The Company has seen most markets increase their demand for new homes and refinances on existing homes. The Company has transitioned 90% of its processes to a work from home environment. The largest hurdle that the Company faces is being able to process all applications in a timely manner.

The following table shows the condensed financial results of the mortgage operations for the three and nine months ended September 30, 2020 and 2019. See Note 7 to the condensed consolidated financial statements.

| Three months ended September 30 (in thousands of dollars) |  | Nine months ended September 30 (in thousands of dollars)
| 2020 |  | 2019 |  | % Increase (Decrease) |  | 2020 |  | 2019 |  | % Increase (Decrease)
Revenues from external customers |  |  |  |  |  |  |  |  |  |  |
Income from loan originations | $ 27,932 |  | $ 12,162 |  | 130% |  | $ 60,994 |  | $ 30,726 |  | 99%
Secondary gains from investors | 70,628 |  | 27,574 |  | 156% |  | 151,216 |  | 66,435 |  | 128%
Net investment income | 300 |  | 219 |  | 37 |  | 553 |  | 654 |  | (15%)
Gains on investments and other assets | 7 |  | 67 |  | (90%) |  | - |  | 123 |  | (100%)
Other | 2,581 |  | 1,962 |  | 32% |  | 6,641 |  | 5,971 |  | 11%
Total | $ 101,448 |  | $ 41,984 |  | 142% |  | $ 219,404 |  | $ 103,909 |  | 111%
Earnings before income taxes | $ 32,454 |  | $ 3,283 |  | 889% |  | $ 58,868 |  | $ 4,826 |  | 1120%

Included in other revenues is service fee income. The increase in earnings for the nine months ended September 30, 2020 was due to an increase in mortgage loan originations and refinancings, and subsequent sales of mortgage loans into the secondary market.

Mortgage Loan Loss Settlements

Future mortgage loan losses can be extremely difficult to estimate. However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to estimate its potential losses on mortgage loans sold. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of September 30, 2020 and December 31, 2019, the balances were $3,009,000 and $4,046,000, respectively.

Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.

Consolidation

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Total revenues increased by $70,825,000, or 94.0%, to $146,205,000 for the three months ended September 30, 2020, from $75,380,000 for the comparable period in 2019. Contributing to this increase in total revenues was a $58,824,000 increase in mortgage fee income, a $4,231,000 increase in net investment income, a $3,934,000 increase in insurance premiums and other considerations, a $1,845,000 increase in net mortuary and cemetery sales, a $1,320,000 increase in gains on investments and other assets, and a $671,000 increase in other revenues.

Insurance premiums and other considerations increased by $3,934,000, or 19.8%, to $23,766,000 for the three months ended September 30, 2020, from $19,832,000 for the comparable period in 2019. This increase was primarily due to $2,715,000 from the acquisition of Kilpatrick Life in December 2019. See Note 15 to the condensed consolidated financial statements. This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

59

Net investment income increased by $4,231,000, or 40.4%, to $14,709,000 for the three months ended September 30, 2020, from $10,478,000 for the comparable period in 2019. This increase was primarily attributable to a $2,360,000 increase in mortgage loan interest ($545,000 due to the acquisition of Kilpatrick Life), a $740,000 increase in rental income from real estate held for investment ($52,000 due to the acquisition of Kilpatrick Life), a $628,000 increase in fixed maturity securities income ($719,000 due to the acquisition of Kilpatrick Life), a $710,000 increase in insurance assignment income, a $151,000 increase in policy loan income ($133,000 due to the acquisition of Kilpatrick Life), and a $52,000 increase in equity securities income. This increase was partially offset by a $334,000 decrease in interest on cash and cash equivalents and a $76,000 increase in investment expenses.

Net mortuary and cemetery sales increased by $1,845,000, or 52.3%, to $5,371,000 for the three months ended September 30, 2020, from $3,526,000 for the comparable period in 2019. This increase was primarily due to a $737,000 increase in cemetery at-need sales, a $647,000 increase in mortuary at-need sales, and a $461,000 increase in cemetery pre-need sales.

Gains on investments and other assets increased by $1,320,000, or 254.0%, to gains of $800,000 for the three months ended September 30, 2020, from losses of $520,000 for the comparable period in 2019. This increase in gains on investments and other assets was primarily due a $787,000 increase in gains ($338,000 due to the acquisition of Kilpatrick Life) on other assets mostly attributable to a decrease in impairment losses on commercial real estate. This increase in gains on investments and other assets was also due to a $619,000 increase in gains on equity securities ($149,000 due to the acquisition of Kilpatrick Life) mostly attributable to increases in the fair value of these equity securities. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This decrease in gains on investments and other assets was partially offset by a $86,000 decrease in gains on fixed maturity securities.

Mortgage fee income increased by $58,824,000, or 148.0%, to $98,560,000, for the three months ended September 30, 2020, from $39,736,000 for the comparable period in 2019. This increase was primarily due to a $43,054,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $13,412,000 increase in loan fees and interest income, and a $3,515,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage fee income was partially offset by a $1,157,000 increase in the provision for loan loss reserve.

Other revenues increased by $671,000, or 28.8%, to $2,997,000 for the three months ended September 30, 2020, from $2,326,000 for the comparable period in 2019. This increase was primarily attributable to an increase in servicing fee revenue.

Total benefits and expenses were $107,621,000, or 73.6% of total revenues, for the three months ended September 30, 2020, as compared to $70,620,000, or 93.7% of total revenues, for the comparable period in 2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $5,421,000 or 32.7%, to $21,976,000 for the three months ended September 30, 2020, from $16,555,000 for the comparable period in 2019. This increase was primarily the result of a $6,089,000 increase in death benefits ($2,290,000 due to the acquisition of Kilpatrick Life and $2,045,000 for COVID-19 related deaths) and a $420,000 increase in surrender and other policy benefits ($279,000 due to the acquisition of Kilpatrick Life). This increase was partially offset by a $1,088,000 decrease in future policy benefits ($166,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $763,000, or 21.9%, to $4,240,000 for the three months ended September 30, 2020, from $3,477,000 for the comparable period in 2019.

Selling, general and administrative expenses increased by $30,334,000, or 63.5%, to $78,142,000 for the three months ended September 30, 2020, from $47,808,000 for the comparable period in 2019. This increase was primarily the result of a $21,048,000 increase in commissions, a $5,412,000 increase in personnel expenses, a $2,347,000 increase in other expenses, a $1,140,000 increase in costs related to funding mortgage loans, a $245,000 increase in advertising expenses, a $94,000 increase in depreciation on property and equipment, and a $48,000 increase in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to

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the increase in mortgage loan originations and refinancings, most notably $38,936,000 in commissions, $3,904,000 in personnel expenses, $2,254,000 in other expenses, and $251,838 in advertising expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $490,000 in personnel expenses, $382,000 in other expenses, and $171,000 in commissions.

Interest expense increased by $284,000, or 13.7%, to $2,363,000 for the three months ended September 30, 2020, from $2,079,000 for the comparable period in 2019. This increase was primarily due to an increase of $470,000 in interest expense on mortgage warehouse lines for loans held for sale. This increase was partially offset by a $179,000 decrease in interest expense on bank loans collateralized by real estate held for investment.

Cost of goods and services sold-mortuaries and cemeteries increased by $198,000, or 28.2%, to $899,000 for the three months ended September 30, 2020, from $701,000 for the comparable period in 2019. This increase was primarily due to an $85,000 increase in mortuary at-need sales, a $61,000 increase in cemetery at-need sales, and a $51,000 increase in cemetery pre-need sales.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Total revenues increased by $139,156,000, or 67.8%, to $344,475,000 for the nine months ended September 30, 2020, from $205,319,000 for the comparable period in 2019. Contributing to this increase in total revenues was a $115,048,000 increase in mortgage fee income, a $10,478,000 increase in insurance premiums and other considerations, a $10,011,000 increase in net investment income, a $3,325,000 increase in net mortuary and cemetery sales, and a $729,000 increase in other revenues. This increase in total revenues was partially offset by a $435,000 decrease in gains on investments and other assets.

Insurance premiums and other considerations increased by $10,478,000, or 17.9%, to $68,983,000 for the nine months ended September 30, 2020, from $58,505,000 for the comparable period in 2019. This increase was primarily due to $8,560,000 from the acquisition of Kilpatrick Life in December 2019. See Note 15 to the condensed consolidated financial statements. This increase was also due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

Net investment income increased by $10,011,000, or 32.2%, to $41,072,000 for the nine months ended September 30, 2020, from $31,061,000 for the comparable period in 2019. This increase was primarily attributable to a $4,967,000 increase in mortgage loan interest ($1,611,000 due to the acquisition of Kilpatrick Life), a $2,674,000 increase in rental income from real estate held for investment ($145,000 due to the acquisition of Kilpatrick Life), a $1,663,000 increase in fixed maturity securities income ($1,799,000 due to the acquisition of Kilpatrick Life), a $1,273,000 increase in insurance assignment income, a $447,000 increase in policy loan income ($401,000 due to the acquisition of Kilpatrick Life), and a $102,000 increase in equity securities income. This increase was partially offset by a $978,000 decrease in interest on cash and cash equivalents ($120,000 increase due to the acquisition of Kilpatrick Life), a $81,000 decrease in other investment income ($25,000 increase due to the acquisition of Kilpatrick Life), and a $56,000 increase in investment expenses ($169,000 increase due to the acquisition of Kilpatrick Life)

Net mortuary and cemetery sales increased by $3,325,000, or 29.7%, to $14,531,000 for the nine months ended September 30, 2020, from $11,206,000 for the comparable period in 2019. This increase was primarily due to a $1,293,000 increase in cemetery pre-need sales, a $1,165,000 increase in cemetery at-need sales, and a $867,000 increase in mortuary at-need sales.

Gains on investments and other assets decreased by $435,000, or 166.4%, to losses of $174,000 for the nine months ended September 30, 2020, from gains of $261,000 for the comparable period in 2019. This decrease in gains on investments and other assets was primarily due a $1,340,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, due to the recent downturn of the economy caused by the COVID-19 Pandemic. Due to the adoption of Accounting Standards Update (ASU) 2016-01 on January 1, 2019, these changes in fair value are recognized in earnings instead of other comprehensive income. This decrease in gains on investments and other assets was also due to a $91,000 decrease in gains on fixed maturity securities.

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This decrease was partially offset by a $996,000 increase in gains on other assets mostly attributable to a decrease in impairment losses on commercial real estate held for sale.

Mortgage fee income increased by $115,049,000, or118.4%, to $212,210,000, for the nine months ended September 30, 2020, from $97,161,000 for the comparable period in 2019. This increase was primarily due to a $84,781,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $20,604,000 increase in loan fees and interest income, and a $12,704,000 increase in the fair value of loans held for sale and loan commitments. This increase in mortgage fee income was partially offset by a $3,040,000 increase in the provision for loan loss reserve.

Other revenues increased by $729,000, or 10.2%, to $7,854,000 for the nine months ended September 30, 2020, from $7,125,000 for the comparable period in 2019. This increase was primarily attributable to an increase in servicing fee revenue.

Total benefits and expenses were $277,223,000, or 80.5% of total revenues, for the nine months ended September 30, 2020, as compared to $193,503,000, or 94.2% of total revenues, for the comparable period in 2019.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $15,582,000 or 31.8%, to $64,521,000 for the nine months ended September 30, 2020, from $48,939,000 for the comparable period in 2019. This increase was primarily the result of a $13,757,000 increase in death benefits ($6,744,000 due to the acquisition of Kilpatrick Life and $3,338,000 for COVID-19 related deaths), a $1,127,000 increase in future policy benefits ($2,096,000 due to the acquisition of Kilpatrick Life) and a $699,000 increase in surrender and other policy benefits ($840,000 due to the acquisition of Kilpatrick Life).

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,103,000, or 11.4%, to $10,782,000 for the nine months ended September 30, 2020, from $9,679,000 for the comparable period in 2019. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs and $152,000 due to the acquisition of Kilpatrick Life.

Selling, general and administrative expenses increased by $65,969,000, or 51.7%, to $193,456,000 for the nine months ended September 30, 2020, from $127,487,000 for the comparable period in 2019. This increase was primarily the result of a $41,313,000 increase in commissions, a $13,941,000 increase in personnel expenses, a $7,926,000 increase in other expenses, a $2,561,000 increase in costs related to funding mortgage loans, a $256,000 increase in depreciation on property and equipment, and a $275,000 increase in advertising expenses. This increase was partially offset by a $303,000 decrease in rent and rent related expenses. Most of these increases are attributable to the mortgage segment due to the increase in mortgage loan originations and refinancings, most notably $40,244,000 in commissions, $9,111,000 in personnel expenses, and $6,873,000 in other expenses. Also, these increases are attributable to the acquisition of Kilpatrick Life, most notably $1,707,000 in personnel expenses, $1,341,000 in other expenses, and $1,086,000 in commissions.

Interest expense increased by $710,000, or 13.3%, to $6,063,000 for the nine months ended September 30, 2020, from $5,353,000 for the comparable period in 2019. This increase was primarily due to a $1,001,000 increase in interest expense on mortgage warehouse lines for loans held for sale offset by a $260,000 decrease in interest on bank loans collateralized by real estate held for investment.

Cost of goods and services sold-mortuaries and cemeteries increased by $357,000, or 17.4%, to $2,402,000 for the nine months ended September 30, 2020, from $2,045,000 for the comparable period in 2019. This increase was primarily due to a $182,000 increase in cemetery at-need sales, a $99,000 increase in cemetery pre-need sales, and a $76,000 increase in mortuary at-need sales.

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Liquidity and Capital Resources

The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity or sale of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans, and fees earned from mortgage loans held for sale that are sold to investors into the secondary market. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, and debt service, and to meet current operating expenses. It should be noted that current conditions in the financial markets and economy caused by the COVID-19 Pandemic may affect the cash flows of the Company.

During the nine months ended September 30, 2020 and 2019, the Company's operations used cash of $164,589,000 and $62,866,000, respectively. This decrease was due primarily to originations of mortgage loans held for sale.

The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person’s death. A person generally will keep these policies in force and will not surrender them prior to a person’s death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate, and mortgage loans, thus reducing the risk of having to liquidate these long-term investments as a result of any sudden changes in their fair values.

The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products. The Company’s investment philosophy is intended to provide a rate of return that will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.

The Company’s investment policy is to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries and classified as fixed maturity securities available for sale carried at estimated fair value amounted to $344,677,000 and $355,613,000 as of September 30, 2020 and December 31, 2019, respectively. This represents 42.74% and 45.5% of the total investments as of September 30, 2020 and December 31, 2019, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At September 30, 2020, 3.6% (or $12,269,000) and at December 31, 2019, 2.2% (or $7,633,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which were considered non-investment grade.

The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At September 30, 2020 and December 31, 2019, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $682,332,000 as of September 30, 2020, as compared to $414,283,000 as of December 31, 2019. Stockholders’ equity as a percent of total capitalization was 37.7% and 47.5% as of September 30, 2020 and December 31, 2019, respectively.

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2019 was 9.8% as compared to a rate of 9.9% for 2018. The 2020 lapse rate to date has been approximately the same as 2019.

At September 30, 2020, the combined statutory capital and surplus of the Company’s life insurance subsidiaries was $74,881,000. The life insurance subsidiaries cannot pay a dividend to its parent company without approval of state insurance regulatory authorities.

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COVID-19 Pandemic

During the first and second quarters of 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company is closely monitoring developments relating to the COVID-19 pandemic and assessing its impact on the Company’s business. The COVID-19 pandemic has had and continues to have a major impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus, which include the implementation of travel bans, self-imposed quarantine periods, and social distancing. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions.

Like most businesses, COVID-19 has impacted the Company. However, the Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other risks described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risks.” These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company.

The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, such as business travel restrictions and remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business.

`Item 3.```Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

`Item 4.```Controls and Procedures.

Disclosure Controls and Procedures

As of September 30, 2020, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The executive officers have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).

Changes in Internal Control over Financial Reporting

Except for the remediation steps taken to address the material weakness discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, there have not been any significant changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Remediation Efforts to Address the Material Weakness

The Company acquired Kilpatrick Life in December 2019. Prior to the acquisition, the Company identified a material weakness in Kilpatrick Life’s internal control over financial reporting related to change management and segregation of duties for the policy administration system. As of September 30, 2020, the known deficiencies have been remediated to the extent that they no longer give rise to a material weakness with the following controls implemented by management.

`·`Execution of a formal consultant agreement with the former system developer.

`·`Creation of unique login credentials for system users.

`·`Implementation of system change control processes, including the installation of a third-party database logging software.

As of November 13, 2020, the Company had not fully assessed Kilpatrick Life’s internal controls over financial reporting and is currently testing new and revised internal controls for design and operating effectiveness. The Securities and Exchange Commission permits companies to exclude acquisitions from their assessment of internal control over financial reporting during the first year of an acquisition, and the Company has elected to exclude Kilpatrick Life from its assessment. The Company has performed additional analysis and procedures to conclude that it believes the condensed consolidated financial statements included in this Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations, comprehensive income (loss) and cash flows for the periods presented in conformity with U.S. GAAP.

Part II - Other Information

Item 1. Legal Proceedings.

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 1. Notes to Condensed Consolidated Financial Statements (unaudited) in Note 11.

The Company is not a party to any other material legal proceedings outside the ordinary course of business or to any other legal proceedings, which if adversely determined, would have a material adverse effect on its financial condition or results of operation.

`Item 1A.``` Risk Factors.

As a smaller reporting company, the Company is not required to provide information typically disclosed under this item.

`Item 2.```Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities

None.

Issuer Purchases of Equity Securities

In September 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company's Class A Common Stock in the open market. The repurchased shares of Class A common stock will be held as treasury shares to be used as the Company's employer matching contribution to the Employee 401(k) Retirement Savings Plan.

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The following table shows the Company's repurchase activity during the three months ended September 30, 2020 under the Stock Repurchase Plan.

Period | (a) Total Number of Class A Shares Purchased |  | (b) Average Price Paid per Class A Share |  | (c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program |  | (d) Maximum Number (or Approximate Dollar Value) of Class A Shares that May Yet Be Purchased Under the Plan or Program
7/1/2020-7/31/2020 | 12,809 |  | $ 6.26 |  | - |  | 109,118
8/1/2020-8/31/2020 | 8,644 |  | 6.48 |  | - |  | 100,474
9/1/2020-9/30/2020 | 11,356 |  | 6.48 |  | - |  | 89,118
Total | 32,809 |  | $ 6.38 |  | - |  | 89,118

`Item 3.```Defaults Upon Senior Securities.

None.

`Item 4.```Mine Safety Disclosures.

None.

`Item 5.```Other Information.

None.

`Item 6.```Exhibits, Financial Statements Schedules and Reports on Form 8-K.

`(a)(1)```Financial Statements

``See “Table of Contents – Part I – Financial Information” under page 2 above

`(a)(2)```Financial Statement Schedules

``None

All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.

`(a)(3)```Exhibits

The following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or are incorporated by reference to previous filings.

`3.1```Amended and Restated Articles of Incorporation (5)

`3.2```Amended and Restated Bylaws (9)

`4.1```Specimen Class A Stock Certificate (1)

`4.2```Specimen Class C Stock Certificate (1)

`4.3```Specimen Preferred Stock Certificate and Certificate of Designation of Preferred Stock (1)

`10.1```Employee Stock Ownership Plan, as amended and restated (ESOP) and Trust Agreement (1)

`10.2```Amended and Restated 2013 Stock Option and Other Equity Incentive Awards Plan (3)

`10.3```Amended and Restated 2014 Director Stock Option Plan (12)

`10.4```Employment Agreement with Scott M. Quist (2)

`10.5```Stock Purchase Agreement among Security National Financial Corporation, Beta Capital Corp., and Ronald D. Maxson, sole shareholder (6)

`10.6```Stock Repurchase Plan (7)

`10.7```Asset Purchase Agreement among SN Probst LLC, Probst Family Funerals and Cremations, L.L.C, Heber Valley Funeral Home, Inc., Joe T. Probst, Clinton Wayne Probst, Calle J. Probst, and Marsha J. Probst (8)

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`10.8```Coinsurance Agreement between Kilpatrick Life Insurance Company and Security National Life Insurance Company (10)

`10.9` ``Stock Purchase Agreement among Security National Financial Corporation, Kilpatrick Life Insurance Company, and the Shareholders of Kilpatrick Life Insurance Company (10)

`10.10```Consolidated Statement of Assets Acquired and Liabilities Assumed at December 13, 2019 (11)

`14```Code of Business Conduct and Ethics (9)

`21```Subsidiaries of the Registrant

`23.1```Consent of Eide Bailly LLP (4)

`23.2```Consent of Mackey Price & Mecham (4)

`31.1```Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002

`31.2```Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002

`32.1```Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

`32.2```Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

`101.xml```Instance Document

`101.xsd```Taxonomy Extension Schema Document

`101.cal```Taxonomy Extension Calculation Linkbase Document

`101.def```Taxonomy Extension Definition Linkbase Document

`101.lab```Taxonomy Extension Label Linkbase Document

`101.pre```Taxonomy Extension Presentation Linkbase Document

``

`(1)`Incorporated by reference from Registration Statement on Form S-1, as filed on June 29, 1987

`(2)`Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2015

`(3)`Incorporated by reference from Report on Form 10-Q, as filed on August 15, 2016

`(4)`Incorporated by reference from Registration Statement on Form S-8, as filed on September 7, 2016

`(5)`Incorporated by reference from Report on Form 10-K, as filed on March 31, 2017

`(6)`Incorporated by reference from Report on Form 8-K, as filed on June 6, 2018

`(7)`Incorporated by reference from Report on Form 10-Q, as filed on November 13, 2018

`(8)`Incorporated by reference from Report on Form 8-K, as filed on February 28, 2019

`(9)`Incorporated by reference from Report on Form 10-Q, as filed on May 15, 2019

(10) Incorporated by reference from Report on Form 8-K, as filed on November 12, 2019

(11) Incorporated by reference from Report on Form 8-K/A, as filed on February 26, 2020

(12) Incorporated by reference from Report on Form 10-Q, as filed on August 14, 2020

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

REGISTRANT

SECURITY NATIONAL FINANCIAL CORPORATION

Registrant

Dated: November 13, 2020 |  | /s/ Scott M. Quist
|  | Scott M. Quist
|  | Chairman, President and Chief Executive Officer
|  | (Principal Executive Officer)

Dated: November 13, 2020 |  | /s/ Garrett S. Sill
|  | Garrett S. Sill
|  | Chief Financial Officer and Treasurer
|  | (Principal Financial Officer and Principal Accounting Officer)

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