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Loans Held for Sale

3 Months Ended

Mar. 31, 2022

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. See Note 8 to the condensed consolidated financial statements for additional disclosures regarding loans held for sale.

The following table presents the aggregate fair value and the aggregate unpaid principal balance of loans held for sale.

	As of March 31 2022		As of December 31 2021

Aggregate fair value	$	234,012,872	$	302,776,827
Unpaid principal balance		228,907,138		294,481,503
Unrealized gain		5,105,734		8,295,324

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 summarized as follows:

	2022			2021
	Three Months Ended March 31
	2022			2021
Loan fees	$	7,087,182		$	9,539,956
Interest income		2,031,869			2,311,802
Secondary gains		39,602,614			68,438,933
Change in fair value of loan commitments		2,675,371			314,466
Change in fair value of loans held for sale		(2,746,565	)		(6,945,882	)
Provision for loan loss reserve		(306,026	)		(660,663	)
Mortgage fee income	$	48,344,445		$	72,998,612

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2022 (Unaudited)

4) Loans Held for Sale (Continued)

The loan loss reserve, which is included in other liabilities and accrued expenses, is summarized as follows:

	As of March 31 2022			As of December 31 2021
Balance, beginning of period	$	2,447,139		$	20,583,618
Provision on current loan originations (1)		306,026			2,211,230
Charge-offs, net of recaptured amounts		(609,775	)		(20,347,709	)
Balance, end of period	$	2,143,390		$	2,447,139

(1) Included in mortgage fee income

The Company maintains reserves for estimated losses on current production volumes. For the three months ended March 31, 2022, $306,026 in reserves were added at a rate of 2.9 basis points per loan, the equivalent of $290 per $1,000,000 in loans originated. This is a decrease over the three months ended March 31, 2021, when reserves of $660,663 were added at a rate of 4.5 basis points per loan originated, the equivalent of $450 per $1,000,000 in loans originated. The unique nature of COVID-19 creates significant difficulty for forecasting potential future losses. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production. Thus, the Company believes that the final loan loss reserve as of March 31, 2022, represents its best estimate for adequate loss reserves on loans sold.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2022 (Unaudited)