UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009, 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 0-9341
SECURITY
NATIONAL FINANCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
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UTAH
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87-0345941
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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5300
South 360 West, Suite 250 Salt Lake City, Utah
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84123
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(801)
264-1060
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Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Class
A Common Stock, $2.00 Par Value
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Nasdaq
National Market
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Class
C Common Stock, $0.20 Par Value
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes __ No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes __ No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one): Large
accelerated filer ___ Accelerated filer ___ Nonaccelerated filer X Smaller
reporting company ___ (Do not check if a smaller reporting
company).
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes No
[X]
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and ask price of such common equity, as of the
last business date of the registrant’s most recently completed second fiscal
quarter. $16,175,000
As of
March 26, 2010, there were outstanding 8,735,383 shares of Class A Common Stock,
$2.00 par value per share, and 9,213,182 shares of Class C Common Stock, $.20
par value per share.
Documents
Incorporated by Reference
Portions
of the definitive Proxy Statement for the registrant’s 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form
10-K.
2
Item 1.
Business
Security
National Financial Corporation (the “Company”) operates in three main business
segments: life insurance, cemetery and mortuary, and mortgage loans. The life
insurance segment is engaged in the business of selling and servicing selected
lines of life insurance, annuity products and accident and health insurance.
These products are marketed in 38 states through a commissioned sales force of
independent licensed insurance agents who may also sell insurance products of
other companies. The cemetery and mortuary segment of the Company consists of
five cemeteries in the state of Utah and one cemetery in the state of
California, and seven mortuaries in the state of Utah and three mortuaries
in the state of Arizona. The Company also engages in pre-need selling of
funeral, cemetery, mortuary and cremation services through its Utah, Arizona and
California operations. Many of the insurance agents also sell pre-need funeral,
cemetery and cremation services. The mortgage loan segment is an approved
government and conventional lender that originates and underwrites residential
and commercial loans for new construction, existing homes and real estate
projects. The mortgage loan segment operates through 32 wholesale and retail
offices in eleven states, and is an approved mortgage lender in several other
states.
The
design and structure of the Company is that each business segment is related to
the other business segments and contributes to the profitability of the other
segments. Because of the Company’s cemetery and mortuary operations in Utah,
California and Arizona, the Company enjoys a level of public awareness that
assists in the sales and marketing of insurance and pre-need cemetery and
funeral products. The Company’s insurance subsidiaries invest their assets
(representing, in part, the pre-paid funerals) in investments authorized by the
respective insurance departments of their states of domicile. One such
investment authorized by insurance departments is mortgage loans. The Company
funded relatively few subprime mortgage loans during 2007 and no longer funds
such loans. Thus, while each business segment is a profit center on a
stand-alone basis, this horizontal integration of each segment is planned to
lead to improved profitability of the Company. The Company also pursues growth
through acquisitions. The Company’s acquisition business strategy is based on
reducing the overhead cost of the acquired company by utilizing the Company’s
existing personnel, management, and technology while still providing quality
service to customers and policyholders.
The
Company was organized as a holding company in 1979, when Security National Life
Insurance Company (“Security National Life”) became a wholly owned subsidiary of
the Company and the former stockholders of Security National Life became
stockholders of the Company. Security National Life was formed in 1965 and has
grown through the direct sales of life insurance and annuities and through the
acquisition of other insurance companies. In 1994, Security National Life
acquired Capital Investors Life Insurance Company. In 1995, Security National
Life acquired Civil Service Employees Life Insurance Company. In 1998, Security
National Life acquired Southern Security Life Insurance Company, a Florida
domiciled insurance company (“Southern Security Life”), in a stock purchase
transaction involving the purchase of 57.4% of the outstanding common shares of
Southern Security Life.
In 2002,
Security National Life acquired a block of business from Acadian Life Insurance
Company and, in 2004, it acquired Paramount Security Life Insurance Company, now
Security National Life Insurance Company of Louisiana. In 2005, Security
National Life completed a merger transaction involving the purchase of the
remaining outstanding shares of Southern Security Life, which resulted in
Southern Security Life becoming a wholly-owned subsidiary of Security National
Life. Security National Life additionally acquired Memorial Insurance Company of
America in 2005 and C & J Financial in 2007. In 2007, Security
National Life acquired Capital Reserve Life Insurance Company and, in 2008, it
acquired Southern Security Life Insurance Company, a Mississippi domiciled
insurance company (“Southern Security of Mississippi”).
Also in
2007, Southern Security Life (formerly a Florida domiciled insurance company)
was liquidated and all the remaining insurance business and operations of
Southern Security Life was transferred to Security National Life. In
2009, Security National Life Insurance Company of Louisiana was liquidated and
all of the insurance business and operations of Security National Life Insurance
Company of Louisiana was transferred to Security National Life. Also
in 2009, Capital Reserve Life Insurance Company was liquidated and all of the
insurance business and operations of Capital Reserve Life Insurance Company,
except for its corporate charter and the required capital and surplus to
preserve its corporate existence in Missouri, was transferred to Security
National Life.
The
cemetery and mortuary operations have also grown through the acquisition of
other cemetery and mortuary companies. In 1989, the Company acquired Paradise
Chapel Funeral Home, Inc. and, in 1991, it acquired Holladay Memorial Park,
Inc., Cottonwood Mortuary, Inc. and Deseret Memorial, Inc. In 1994, the Company
acquired Sunset
Funeral Home. In 1995, the Company acquired Greer-Wilson Funeral Home, Inc. and,
in 1997, it acquired Crystal Rose Funeral Home. In 1993, the Company formed
SecurityNational Mortgage Company (“SecurityNational Mortgage”) to originate and
refinance mortgage loans. Since the beginning of business in 1993,
SecurityNational Mortgage has now grown to 32 branches in eleven states. See
Notes to Consolidated Financial Statements for additional disclosure and
discussion regarding segments of the business.
3
Life
Insurance
Products
The
Company, through Security National Life and its insurance subsidiaries, Security
National Life of Louisiana, Memorial Insurance Company of America, Capital
Reserve Life Insurance Company and Southern Security Life Insurance Company,
issues and distributes selected lines of life insurance and annuities. The
Company’s life insurance business includes funeral plans, and interest-sensitive
life insurance, as well as other traditional life and accident and health
insurance products. The Company places specific marketing emphasis on funeral
plans through pre-need planning and traditional whole life products sold in
association with the costs of higher education.
A funeral
plan is a small face value life insurance policy that generally has face
coverage of up to $15,000. The Company believes that funeral plans represent a
marketing niche that has lower competition because most insurance companies do
not offer similar coverages. 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.
Through
the Company’s Higher Education Division, the Company markets strategies for fund
accumulations for college and repayment of student loans and expenses a student
may have after college. The product used for this market is a 10-Pay Whole Life
Policy which is usually sold with an annuity and payor rider. Both the paid-up
aspect of the whole life policy and the fund accumulation aspect of the annuity
are marketed as a tool for parents to help accumulate money to help fund college
expenses or repay loans incurred during college. These products are generally
offered to parents who have children under the age of 25.
Markets and Distribution
The
Company is licensed to sell insurance in 38 states. The Company, in marketing
its life insurance products, seeks to locate, develop and service specific
“niche” markets. A “niche” market is an identifiable market that the Company
believes is not emphasized by most insurers. Funeral plan policies are sold
primarily to persons who range in age from 45 to 85. Even though people of all
ages and income levels purchase funeral plans, the Company believes that the
highest percentage of funeral plan purchasers are individuals who are older than
45 and have low to moderate income.
Higher
Education insurance plans are for families who desire to prepare for their
children’s higher education financial needs. Such preparation can include
searches for scholarships, grant applications, government student loan
applications, and the purchase of life insurance and annuities as a vehicle to
help repay education related debt. In 1965, the Higher Education Act created the
guaranteed student loan programs previously participated in by the Company.
Federal Family Education Loan (FFEL) Programs now consist of Federal Stafford
Loans (formerly Guaranteed Student Loans), Federal Plus Loans, and Federal
Consolidation Loans. The FFEL Program makes these long-term loans available to
students attending institutions of higher education, vocation, technical,
business and trade schools and some foreign schools.
State or
private nonprofit guaranty agencies insure that the FFEL Programs and the
Federal Government reimburse these agencies for all or part of the insurance
loans they pay to lenders. The federal guaranty on an FFEL replaces the security
(collateral) usually required for a long-term consumer loan. These government
programs have numerous rules for qualification and have limits on how much you
can borrow. The Company’s whole life insurance product and annuity
product can provide a way for families to accumulate additional funds
for their children’s education. The Company has a student service center, which
is available to policyholders to help parents and students plan for their
student’s higher education experience.
A
majority of the Company’s funeral plan premiums come from the states of Arizona,
Arkansas, California, Idaho, Kansas, Louisiana, Mississippi, Missouri, Oklahoma,
Tennessee, Texas and Utah. A majority of the Company’s non-funeral
plan life insurance premiums come from the states of Georgia, Louisiana,
Maryland, South Carolina, Tennessee, Texas, Utah, Virginia, and the District of
Columbia.
4
The
Company sells its life insurance products through direct agents, brokers and
independent licensed agents who may also sell insurance products of other
companies. The commissions on life insurance products range from approximately
10% to 120% of first year premiums. In those cases where the Company utilizes
its direct agents in selling such policies, those agents customarily receive
advances against future commissions.
In some
instances, funeral plan insurance is marketed in conjunction with the Company’s
cemetery and mortuary sales force. When it is marketed by that group, the
beneficiary is usually the Company’s cemeteries and mortuaries. Thus, death
benefits that become payable under the policy are paid to the Company’s cemetery
and mortuary subsidiaries to the extent of services performed and products
purchased.
In
marketing funeral plan insurance, the Company also seeks and obtains third-party
endorsements from other cemeteries and mortuaries within its marketing areas.
Typically, these cemeteries and mortuaries will provide letters of endorsement
and may share in mailing and other lead-generating costs. The incentive for such
businesses to share the costs is that these businesses are usually made the
beneficiary of the policy. The following table summarizes the life insurance
business for the five years ended December 31, 2009:
|
2009
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2008
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2007
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2006
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2005
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||||||||||||||||||||||||
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Life
Insurance
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||||||||||||||||||||||||||||
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Policy/Cert. Count
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||||||||||||||||||||||||||||
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as
of December 31
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407,673 | 415,656 | (3 | ) | 405,224 | (2 | ) | 401,441 | 413,753 | (1 | ) | |||||||||||||||||
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Insurance
in force as of
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||||||||||||||||||||||||||||
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December
31
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||||||||||||||||||||||||||||
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(omitted
000)
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$ | 2,617,946 | $ | 2,454,409 | (3 | ) | $ | 2,434,733 | (2 | ) | $ | 2,620,694 | $ | 3,216,946 | (1 | ) | ||||||||||||
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Premiums
Collected
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||||||||||||||||||||||||||||
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(omitted
000)
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$ | 38,399 |
(3)
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$ | 36,063 | (2 | ) | $ | 32,173 | $ | 31,619 |
(1)
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$ | 27,275 | ||||||||||||||
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(1)
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Includes
the purchase of Memorial Insurance Company of America on December 29,
2005.
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|
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(2)
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Includes
the purchase of Capital Reserve Life Insurance Company on December 17,
2007.
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|
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(3)
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Includes
the purchase of Southern Security Life Insurance Company on December 18,
2008.
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Underwriting
The
Factors considered in evaluating an application for ordinary life insurance
coverage can include the applicant’s age, occupation, general health and medical
history. Upon receipt of a satisfactory (non-funeral plan insurance)
application, which contains pertinent medical questions, the Company writes
insurance based upon its medical limits and requirements subject to the
following general non-medical limits:
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Age
Nearest
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Non-Medical
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|||
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Birthday
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Limits
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|||
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0-50
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$75,000
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|||
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51-up
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Medical
information
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|||
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required
(APS or exam)
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When
underwriting life insurance, the Company will sometimes issue policies with
higher premium rates for substandard risks.
The
Company also sells funeral plan insurance. This insurance is a small face
amount, with a maximum policy size of $15,000. It is written on a simplified
medical application with underwriting requirements being a completed
application, a phone inspection on selected applicant and a Medical Information
Bureau inquiry. There are several underwriting classes in which an applicant can
be placed.
Annuities
Products
The
Company’s annuity business includes single premium deferred annuities, flexible
premium deferred annuities and immediate annuities. A single premium deferred
annuity is a contract where the individual remits a sum of money to the Company,
which is retained on deposit until such time as the individual may wish to
annuitize or surrender
the contract for cash. A flexible premium deferred annuity gives the contract
holder the right to make premium payments of varying amounts or to make no
further premium payments after his initial payment. These single and flexible
premium deferred annuities can have initial surrender charges. The surrender
charges act as a deterrent to individuals who may wish to surrender their
annuity contracts.
5
Annuities
have guaranteed interest rates of 3% to 6.5% per annum. Above that, the interest
rate credited is periodically determined by the Board of Directors at their
discretion. An immediate annuity is a contract in which the individual remits to
the Company a sum of money in return for the Company’s obligation to pay a
series of payments on a periodic basis over a designated period of time, such as
an individual’s life, or for such other period as may be
designated.
Holders
of annuities generally enjoy a significant benefit under current federal income
tax law in that interest accretions that are credited to the annuities do not
incur current income tax expense on the part of the contract holder. Instead,
the interest income is tax deferred until such time as it is paid out to the
contract holder. In order for the Company to realize a profit on an annuity
product, the Company must maintain an interest rate spread between its
investment income and the interest rate credited to the annuities. From that
spread must be deducted commissions, issuance expenses and general and
administrative expenses. The Company’s annuities currently have credited
interest rates ranging from 3% to 6.5%.
Markets and Distribution
The
general market for the Company’s annuities is middle to older age individuals
who wish to save or invest their money in a tax-deferred environment, having
relatively high yields. The major source of annuity considerations comes from
direct agents. Annuities are also sold in conjunction with other insurance
sales. This is true in both the funeral planning and higher education planning
areas. If an individual does not qualify for a funeral plan due to health
considerations, the agent will often sell that individual an annuity to fund
those final expenses. In the higher education planning area, most life insurance
sales have as part of the transaction an annuity portion that is used to
accumulate funds. The commission rates on annuities are up to 10%.
The
following table summarizes the annuity business for the five years ended
December 31, 2009:
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||
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Annuities
Policy/Cert.
|
||||||||||||||||||||||||
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Count
as of December 31
|
12,366 | 11,411 | (3 | ) | 11,175 | (2 | ) | 8,475 | 8,904 | (1 | ) | |||||||||||||
|
Deposits
Collected (omitted 000)
|
$ 6,737 | $ 8,959 | (2 | )(3) | $ 4,080 | $ 3,977 | (1 | ) | $ 2,416 | |||||||||||||||
|
|
(1)
|
Includes
the purchase of Memorial Insurance Company of America on December 29,
2005.
|
|
|
(2)
|
Includes
the purchase of Capital Reserve Life Insurance Company on December 17,
2007.
|
|
|
(3)
|
Includes
the purchase of Southern Security Life Insurance Company on December 18,
2008.
|
Accident
and Health
Products
Prior to
the acquisition of Capital Investors in 1994, the Company did not actively
market accident and health products. With the acquisition of Capital Investors,
the Company acquired a block of accident and health policies that pay limited
benefits to policyholders. The Company is currently offering low-cost
comprehensive diver’s and limited recreational accident policies. These policies
provide worldwide coverage for medical expense reimbursement in the event of
diving or certain recreational sports accidents.
Markets and Distribution
The
Company currently markets its accident policies through web
marketing.
6
The
following table summarizes the accident and health insurance business for the
five years ended December 31, 2009:
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
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Accident
and Health Policy/Cert.
|
||||||||||||||||||||
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Count
as of December 31
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13,436 | 14,060 | 14,845 | 15,340 | 14,934 | |||||||||||||||
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Premiums
Collected (omitted 000)
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$ 219 | $ 232 | $ 257 | $ 274 | $ 285 | |||||||||||||||
Reinsurance
When a
given policy exceeds the Company’s retention limits, the Company reinsures with
other companies that portion of the individual life insurance and accident and
health policies it has underwritten. The primary purpose of reinsurance is to
enable an insurance company to write a policy in an amount larger than the risk
it is willing to assume for itself. The Company remains obligated for amounts
ceded in the event the reinsurers do not meet their obligations.
The
Company’s policy is to retain no more than $75,000 of ordinary insurance per
insured life. Excess risk is reinsured. The total amount of life insurance in
force at December 31, 2009, reinsured by other companies, aggregated
$102,830,000, representing approximately 4.0% of the Company’s life insurance in
force on that date.
The
Company currently cedes and assumes certain risks with various authorized
unaffiliated reinsurers pursuant to reinsurance treaties, which are renewable
annually. The premiums paid by the Company are based on a number of factors,
primarily including the age of the insured and the risk ceded to the
reinsurer.
On
December 31, 2008, the Company entered into a Coinsurance Funds Withheld
Reinsurance Agreement with Continental American Insurance Company (“Continental
American”), a South Carolina domiciled insurance company. This agreement was
effective November 30, 2008. Under the terms of the agreement, the Company ceded
to Continental American 100% of a block of deferred annuities in the amount of
$4,828,487 as of December 31, 2008 and retained the assets and recorded a funds
held under coinsurance liability for the same amount. Continental American
agreed to pay the Company an initial ceding commission of $60,000 and a
quarterly management fee of $16,500 per quarter to administer the policies. The
Company will also receive a 90% experience refund for any profits from the
business. The Company has the right to recapture the business on each January 1
subsequent to December 31, 2008, or any other date if mutually agreed and with
at least 90 days’ prior written notice to Continental American. The Company and
Continental American have agreed to terminate this agreement on March 31,
2010.
Investments
The
investments that support the Company’s life insurance and annuity obligations
are determined by the Investment Committee of the Board of Directors of the
various subsidiaries and ratified by the full Board of Directors of the
respective subsidiaries. A significant portion of the investments must meet
statutory requirements governing the nature and quality of permitted investments
by insurance companies. The Company’s interest-sensitive type products,
primarily annuities and interest-sensitive whole life, compete with other
financial products such as bank certificates of deposit, and brokerage sponsored
money market funds as well as competing life insurance company products.
Although it is not the Company’s policy to offer the highest yield in this
economic climate, in order to offer what the Company considers to be a
competitive yield, it maintains a diversified portfolio consisting of common
stocks, preferred stocks, municipal bonds, investment and non-investment grade
bonds, mortgage loans, real estate, short-term investments and other securities
and investments.
See
“Management’s Discussion and Analysis of Results of Operations and Financial
Condition” and “Notes to Consolidated Financial Statements” for additional
disclosure and discussion regarding investments.
Cemetery
and Mortuary
Products
The
Company has six wholly-owned cemeteries and ten wholly owned mortuaries. The
cemeteries are non-denominational. Through its cemetery and mortuary operations,
the Company markets a variety of products and services both on a pre-need basis
(prior to death) and an at-need basis (at the time of death). The products
include grave spaces, interment vaults, mausoleum crypts and niches, markers,
caskets, flowers and other related products. The services include professional
services of funeral directors, opening and closing of graves, use of chapels and
viewing rooms, and use of automobiles and clothing. The Company has a funeral
chapel at each of its cemeteries, other
than Holladay Memorial Park and Singing Hills Memorial Park, and has six
separate stand-alone mortuary facilities.
7
Markets and Distribution
The
Company’s pre-need cemetery and mortuary sales are marketed to persons of all
ages but are generally purchased by persons 45 years of age and older. The
Company also markets its mortuary and cemetery products on an at-need basis. The
Company is limited in its geographic distribution of these products to areas
lying within an approximate 20-mile radius of its mortuaries and cemeteries. The
Company’s at-need sales are similarly limited in geographic area.
The
Company actively seeks to sell its cemetery and funeral products to customers on
a pre-need basis. The Company employs cemetery sales representatives on a
commission basis to sell these products. Many of these pre-need cemetery and
mortuary sales representatives are also licensed insurance salesmen and sell
funeral plan insurance. In many instances, the Company’s cemetery and mortuary
facilities are the named beneficiary of the funeral plan policies.
The sales
representatives of the Company’s cemetery and mortuary operations are split into
two groups. The pre planning consultants are commissioned and receive no
salary. The sales commissions range from 4% to 25% for cemetery products
and services and 10% to 100% of first year premiums for funeral plan
insurance. Potential customers are located via telephone sales
prospecting, responses to letters mailed by the pre planning consultants,
newspaper inserts, referrals, and door-to-door canvassing. If a customer
comes to one of the Company’s cemeteries, the cemetery directors are compensated
on a base wage plus volume bonus ranging from 3% to 6%. The Company trains its
sales representatives and generates leads for them.
Mortgage
Loans
Products
Beginning
in 1993, the Company, through its wholly owned subsidiary, SecurityNational
Mortgage Company (“SecurityNational Mortgage”) has been active in both the
residential as well as commercial real estate markets. The Company has current
approvals through HUD, Fannie Mae, Freddie Mac and other substantial secondary
market investors, which enable it to originate a variety of residential mortgage
loan products that are subsequently sold to investors. The Company uses internal
and external funding sources with unaffiliated financial institutions. The
Company also originates residential construction loans.
Security
National Capital, a subsidiary of SecurityNational Mortgage, originates
commercial real estate loans both for internal investment as well as for sale to
unaffiliated investors.
Markets and Distribution
The
Company’s residential mortgage lending services are marketed primarily to
mortgage originators. SecurityNational Mortgage maintains a retail origination
presence in the Utah, California and Texas markets in addition to 19 wholesale
branch offices located in Arizona, California, Florida, Hawaii, Indiana, Kansas,
Oklahoma, Oregon, Texas, Utah and Washington, with sales representatives in
these and other states. See “Management’s Discussion and Analysis of Results of
Operations and Financial Condition” and “Notes to Consolidated Financial
Statements” for additional disclosure and discussion regarding mortgage
loans.
Recent
Acquisitions and Other Business Activities
Transaction
to Liquidate Security National Life Insurance Company of Louisiana
On
December 31, 2009, Security National Life Insurance Company of Louisiana
("Security National Life of Louisiana") entered into an Assumption Reinsurance
Agreement with Security National Life Insurance Company ("Security National
Life") to reinsure the remaining in force business of Security National Life of
Louisiana with Security National Life to the extent permitted by the Louisiana
Department of Insurance. The Louisiana Department of Insurance
approved the Assumption Reinsurance Agreement on December 2, 2009.
As a
result of the Assumption Reinsurance Agreement, all of the insurance business
and operations of Security National Life of Louisiana, including assets and
liabilities, were transferred to Security National Life, as reinsurer, as of
December 31, 2009. Thus, $3,189,000 in statutory assets and
liabilities were transferred from Security National Life of Louisiana to
Security National Life pursuant to the Assumption Reinsurance
Agreement. In addition, Security National Life of Louisiana entered
into an Assignment dated December 31, 2009 with Security National
Life to assign and transfer to Security National Life all of the assets and
liabilities that remained following the transfer of assets and liabilities
pursuant to the Assumption Reinsurance Agreement.
8
The
liquidation of Security National Life of Louisiana was completed as of December
31, 2009 in accordance with the terms and conditions of the Agreement and Plan
of Complete Liquidation to liquidate Security National Life of Louisiana into
Security National Life. The Board of Directors of both Security
National Life of Louisiana and Security National Life approved a plan of
liquidation as of September 18, 2009. Under the terms of the Agreement and Plan
of Complete Liquidation, Security National Life of Louisiana was liquidated into
Security National Life in essentially the same manner as the liquidation
described in Private Letter Ruling 9847027 in order to achieve the same tax
treatment and consequences under Section 332 of the Internal Revenue Code of
1986, as amended, and other applicable provisions described in such Letter
Ruling. During 2010, Security National Life plans to take appropriate
legal action to dissolve Security National Life of Louisiana in accordance with
Louisiana law.
Transaction
to Liquidate Capital Reserve Life Insurance Company
Effective
as of December 31, 2009, Security National Life exercised its right of recapture
pursuant to the Reinsurance Agreement effective as of November 30, 2008, between
Capital Reserve Life Insurance Company ("Capital Reserve") and Security National
Life in which Security National Life recaptured all of the previously reinsured
liabilities under the Reinsurance Agreement. As a result of the
recapture, Security National Life is primarily liable for the liabilities on the
insurance contracts and annuities originally issued by Capital Reserve to its
policyholders. The assets transferred by Capital Reserve to Security
National Life pursuant to such recapture have a fair market value of
$4,895,000, which was equal to the assumed liabilities.
In
addition, Capital Reserve entered into an Assignment dated December 31, 2009
with Security National Life to assign and transfer to Security National Life all
of the assets and liabilities that remained following the recapture, except for
Capital Reserve's corporate charter, insurance licenses, and $1,681,000 in
statutory capital and surplus, which will allow Capital Reserve to preserve its
corporate existence in Missouri. During January 2010, Security
National Life entered into a letter of intent to sell its 100% ownership in
Capital Reserve to American Life and Security Corporation (“American Life”), a
Nebraska domiciled insurance company. The consideration to be paid to Security
National Life will be $105,000 and the capital and surplus of Capital Reserve.
This sale is contingent upon American Life obtaining approvals from the Nebraska
and Missouri insurance departments before December 2010. If the sale is not
completed by December 2010, Capital Reserve will be dissolved in accordance with
Missouri law.
The
purpose of Security National Life exercising its right of recapture pursuant to
the 2008 Reinsurance Agreement was so that the $4,895,000 in statutory assets
and liabilities of Capital Reserve could be transferred to Security National
Life by December 31, 2009 in accordance with the terms of the plan of
liquidation between Capital Reserve and Security National Life. On
December 4, 2009, Capital Reserve and Security National Life entered into an
Agreement and Plan of Complete Liquidation to liquidate Capital Reserve into
Security National Life in the same manner as the liquidation described in
Private Letter Ruling 9847027 in order to achieve the same tax treatment and
consequences under Section 332 of the Internal Revenue code of 1986, as amended,
and other applicable provisions described in such Letter Ruling.
Acquisition of Southern Security Life
Insurance Company, a Mississippi Insurance Company
On
December 18, 2008, Security National Financial Corporation, through its wholly
owned subsidiary, Security National Life, completed a stock purchase transaction
with Southern Security Life Insurance Company, a Mississippi domiciled insurance
company ("Southern Security"), and its shareholders to purchase all of the
outstanding shares of common stock of Southern Security from its shareholders.
Under the terms of the transaction as set forth in the Stock Purchase Agreement
among Security National Life, Southern Security and the shareholders of Southern
Security, Security National Life paid to the shareholders of Southern Security
purchase consideration equal to $1,352,134, representing the capital and
surplus, interest maintenance reserve, and asset valuation reserve of Southern
Security as of September 1, 2008, the date that Security National Life assumed
administrative control over Southern Security, plus $1,500,000, representing the
ceding commission that had been paid on August 29, 2008, plus $75,888,
representing an allowance for the actual losses experienced by Southern Security
in the second quarter ended June 30, 2008, less certain adjustments. Thus, the
total purchase price before adjustments was $2,928,022.
As of
December 31, 2007, Southern Security had 24,323 policies in force and
approximately 393 agents. For the year ended December 31, 2007, Southern
Security had revenues of $4,231,000 and a net loss of $496,000. As of December
31, 2007, the statutory assets and the capital and surplus of Southern Security
were $24,402,000 and $758,000, respectively. As of June 30, 2008, the statutory
assets and the capital and surplus of Southern Security were $24,780,000 and
$713,000, respectively.
9
The Stock
Purchase Agreement further provides that Security National Life and Southern
Security each agree to enter into a reinsurance agreement contemporaneous with
the execution of such Stock Purchase Agreement. Under the terms of this
reinsurance agreement, Security National Life is required to reinsure all of the
in force and future insurance liabilities of Southern Security. Security
National Life will also assume complete administrative control of all of the
then current and future insurance related business operations of Southern
Security at such time as Security National Life notifies Southern Security in
writing that it is capable of assuming administrative control over such
insurance related business operations, provided Security National Life assumes
administrative control no later than September 1, 2008. On September 1, 2008,
Security National Life assumed said administrative control over the insurance
related operations of Southern Security.
On August
29, 2008, in furtherance of the requirements of the Stock Purchase Agreement,
Security National Life and Southern Security entered into a reinsurance
agreement (the “Reinsurance Agreement”) to reinsure the majority of the in force
business of Southern Security, as reinsurer, to the extent permitted by the
Mississippi Department of Insurance. Pursuant to the terms of the Reinsurance
Agreement, Security National Life paid a ceding commission to Southern Security
in the amount of $1,500,000.
As a
result of the Reinsurance Agreement, certain insurance business and operations
of Southern Security were transferred to Security National Life, including all
policies in force as of the administrative control date. Any future business by
Southern Security would be covered by this Reinsurance Agreement. As of
September 1, 2008, when Security National Life assumed administrative
control over the insurance related business operations of Southern Security,
Southern Security transferred approximately $23,600,000 in assets and
liabilities to Wachovia Bank, N.A. of St. Louis, Missouri, as custodian for
Security National Life pursuant to the Reinsurance Agreement and the Custodial
Agreement among Southern Security, Security National Life, and Wachovia Bank
N.A. Following the completion of the stock purchase transaction.
Regulation
The
Company’s insurance subsidiaries, Security National Life, Security National Life
of Louisiana, Memorial Insurance Company of America (“Memorial Insurance
Company”), Capital Reserve Life and Southern Security are subject to
comprehensive regulation in the jurisdictions in which they do business under
statutes and regulations administered by state insurance commissioners. Such
regulation relates to, among other things, prior approval of the acquisition of
a controlling interest in an insurance company; standards of solvency which must
be met and maintained; licensing of insurers and their agents; nature of and
limitations on investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates; periodic examinations
of the affairs of insurance companies; annual and other reports required to be
filed on the financial condition of insurers or for other purposes; and
requirements regarding aggregate reserves for life policies and annuity
contracts, policy claims, unearned premiums, and other matters. The Company’s
insurance subsidiaries are subject to this type of regulation in any state in
which they are licensed to do business. Such regulation could involve additional
costs, restrict operations or delay implementation of the Company’s business
plans.
The
Company is currently subject to regulation in Utah, Louisiana, Arkansas,
Mississippi and Missouri under insurance holding company legislation, and other
states where applicable. Generally, intercompany transfers of assets and
dividend payments from insurance subsidiaries are subject to prior notice of
approval from the state insurance department, if they are deemed “extraordinary”
under these statutes. The insurance subsidiaries are required, under state
insurance laws, to file detailed annual reports with the supervisory agencies in
each of the states in which they do business. Their business and accounts are
also subject to examination by these agencies.
The
Company’s cemetery and mortuary subsidiaries are subject to the Federal Trade
Commission’s comprehensive funeral industry rules and to state regulations in
the various states where such operations are domiciled. The morticians must be
licensed by the respective state in which they provide their services.
Similarly, the mortuaries and cemeteries are governed and licensed by state
statutes and city ordinances in Utah, Arizona and California. Reports are
required to be kept on file on a yearly basis which include financial
information concerning the number of spaces sold and, where applicable, funds
provided to the Endowment Care Trust Fund. Licenses are issued annually on the
basis of such reports. The cemeteries maintain city or county licenses where
they conduct business.
The
Company’s mortgage loan subsidiary, SecurityNational Mortgage, is subject to the
rules and regulations of the U.S. Department of Housing and Urban Development
and to various state licensing acts and regulations. These regulations,
among other things, specify minimum capital requirements, the procedures for the
origination, the underwriting, the licensing of wholesale brokers, quality
review audits and the amounts that can be charged to borrowers for all FHA and
VA loans. Each year, the Company must have an audit by an independent registered
public accounting firm to verify compliance under these regulations. In addition
to the government regulations, the Company must meet loan requirements of
various investors who purchase the loans.
10
Income
Taxes
The
Company’s insurance subsidiaries, Security National Life, Security National Life
of Louisiana, Memorial Insurance Company, Capital Reserve Life and Southern
Security are taxed under the Life Insurance Company Tax Act of 1984. Under the
act, life insurance companies are taxed at standard corporate rates on life
insurance company taxable income. Life insurance company taxable income is gross
income less general business deductions, reserves for future policyholder
benefits (with modifications), and a small life insurance company deduction (up
to 60% of life insurance company taxable income). The Company may be subject to
the corporate Alternative Minimum Tax (AMT). The exposure to AMT is primarily a
result of the small life insurance company deduction. Also, under the Tax Reform
Act of 1986, distributions in excess of stockholders’ surplus account or a
significant decrease in life reserves will result in taxable
income.
Security
National Life, Security National Life of Louisiana, Memorial Insurance Company,
Capital Reserve Life and Southern Security may continue to receive the benefit
of the small life insurance company deduction. In order to qualify for the small
company deduction, the combined assets of the Company must be less than
$500,000,000 and the taxable income of the life insurance companies must be less
than $3,000,000. To the extent that the net income limitation is exceeded, the
small life insurance company deduction is phased out over the next $12,000,000
of life insurance company taxable income.
Since
1990 Security National Life, Security National Life of Louisiana, Memorial
Insurance Company, Capital Reserve Life and Southern Security have computed
their life insurance taxable income after establishing a provision representing
a portion of the costs of acquisition of such life insurance business. The
effect of the provision is that a certain percentage of the Company’s premium
income is characterized as deferred expenses and recognized over a five to ten
year period.
The
Company’s non-life insurance company subsidiaries are taxed in general under the
regular corporate tax provisions. For taxable years beginning January 1, 1987,
the Company may be subject to the Corporate Alternative Minimum Tax and the
proportionate disallowance rules for installment sales under the Tax Reform Act
of 1986.
Competition
The life
insurance industry is highly competitive. There are approximately 2,000 legal
reserve life insurance companies in business in the United States. These
insurance companies differentiate themselves through marketing techniques,
product features, price and customer service. The Company’s insurance
subsidiaries compete with a large number of insurance companies, many of which
have greater financial resources, a longer business history, and more
diversified line of insurance coverage than the Company. In addition, such
companies generally have a larger sales force. Further, many of the companies
with which the Company competes are mutual companies which may have a
competitive advantage because all profits accrue to policyholders. Because the
Company is small by industry standards and lacks broad diversification of risk,
it may be more vulnerable to losses than larger, better-established companies.
The Company believes that its policies and rates for the markets it serves are
generally competitive.
The
cemetery and mortuary industry is also highly competitive. In Salt Lake City,
Phoenix and San Diego areas where the Company competes, there are a number of
cemeteries and mortuaries which have longer business histories, more established
positions in the community, and stronger financial positions than the Company.
In addition, some of the cemeteries with which the Company must compete for
sales are owned by municipalities and, as a result, can offer lower prices than
can the Company. The Company bears the cost of a pre-need sales program that is
not incurred by those competitors which do not have a pre-need sales force. The
Company believes that its products and prices are generally competitive with
those in the industry.
The
mortgage loan industry is highly competitive with a number of mortgage companies
and banks in the same geographic area in which the Company is operating. The
mortgage market in general is sensitive to changes in interest rates and the
refinancing market is particularly vulnerable to changes in interest
rates.
Employees
As of
December 31, 2009, the Company had 659 full-time and 200 part-time
employees.
11
Item 2.
Properties
The
following table sets forth the location of the Company’s office facilities and
certain other information relating to these properties.
|
Location
|
Function
|
Owned
Leased
|
Approximate
Square
Footage
|
|
5300
South 360 West
|
Corporate
Headquarters
|
Owned
(1)
|
27,200
|
|
Salt
Lake City, Utah
|
|||
|
755
Rinehart Road
|
Mortgage
Sales
|
Owned
(2)
|
5,000
|
|
Lake
Mary, Florida
|
|||
|
3935
I-55 South, Frontage Road
|
Insurance
Operations
|
Owned
(3)
|
12,000
|
|
Jackson,
Mississippi
|
|||
|
175
Jester Parkway
|
Fast
Funding Operations
|
Leased
(4)
|
5,000
|
|
Rainbow
City, Alabama
|
|||
|
NEC
Glendale Avenue & 91st Avenue, Suite 110
|
Mortgage
Sales
|
Leased
(5)
|
2,050
|
|
Glendale,
Arizona
|
|||
|
4634
Town Center Blvd., Suite 314
|
Mortgage
Sales
|
Leased
(6)
|
600
|
|
Eldorado
Hills, California
|
|||
|
12150
Tributary Point Dr., Suite 140
|
Mortgage
Sales
|
Leased
(7)
|
2,400
|
|
Gold
River, California
|
|||
|
16835
West Bernardo Drive, Suite 150
|
Mortgage
Sales
|
Leased
(8)
|
2,500
|
|
San
Diego, California
|
|||
|
27433
Tourney Road, Suites 130, 220
|
Mortgage
Sales
|
Leased
(9)
|
3,600
|
|
Santa
Clarita, California
|
|||
|
550
West Cienega, Suite H
|
Mortgage
Sales
|
Leased
(10)
|
2,600
|
|
San
Dimas, California
|
|||
|
8950
Dr. MLK St. N., Suite 103
|
Mortgage
Sales
|
Leased
(11)
|
3,500
|
|
St.
Petersburg, Florida
|
|||
|
970
No. Kalaheo Ave, Suite A-214
|
Mortgage
Sales
|
Leased
(12)
|
700
|
|
Kailua,
Hawaii
|
|||
|
45
South Park Blvd., Suite 45
|
Mortgage
Sales
|
Leased
(13)
|
4,800
|
|
Greenwood,
Indiana
|
|||
|
6900
College Blvd., Suite 950
|
Mortgage
Sales
|
Leased
(14)
|
2,800
|
|
Overland
Park, Kansas
|
|||
|
4045
NW 64th
Street, Suite 500
|
Mortgage
Sales
|
Leased
(15)
|
3,500
|
|
Oklahoma
City, Oklahoma
|
|||
|
999
Southwest Disk Drive, Suite 104
|
Mortgage
Sales
|
Leased
(16)
|
1,600
|
|
Bend,
Oregon
|
12
Item 2. Properties
(Continued)
|
Location
|
Function
|
Owned
Leased
|
Approximate
Square
Footage
|
|
4800
SW Griffith Drive, Suite 250
|
Mortgage
Sales
|
Leased
(17)
|
2,600
|
|
Beaverton,
Oregon
|
|||
|
5000
Plaza on the Lake Drive, Suite 250
|
Mortgage
Sales
|
Leased
(18)
|
9,500
|
|
Austin,
Texas
|
|||
|
6805
Capitol of Texas Highway, Suite 315
|
Mortgage
Sales
|
Leased
(19)
|
2,300
|
|
Austin,
Texas 78731
|
|||
|
12201
Merit Drive, Suite 400
|
Mortgage
Sales
|
Leased
(20)
|
4,600
|
|
Dallas,
Texas
|
|||
|
5353
W. Sam Houston Parkway N., Suite 170
|
Mortgage
Sales
|
Leased
(21)
|
5,400
|
|
Houston,
Texas
|
|||
|
613
Northwest Loop 410, Suite 685
|
Mortgage
Sales
|
Leased
(22)
|
2,300
|
|
San
Antonio, Texas
|
|||
|
6955
and 6975 South Union Park,
|
Mortgage
Sales
|
Leased
(23)
|
7,000
|
|
Suites
100 and 150
|
|||
|
Midvale,
Utah
|
|||
|
5247
Greenpine Drive
|
Insurance
Operations
|
Owned
(24)
|
13,400
|
|
Murray,
Utah
|
|||
|
5251
Green Street, Suite 350
|
Mortgage
Sales
|
Owned
(25)
|
5,800
|
|
Salt
Lake City, Utah
|
|||
|
6740
South 1300 East, Suite 100
|
Mortgage
Sales
|
Leased
(26)
|
3,200
|
|
Salt
Lake City, Utah
|
|||
|
970
East Murray-Holladay Rd., Suite 603
|
Mortgage
Sales
|
Leased
(27)
|
6,400
|
|
Salt
Lake City, Utah
|
|||
|
5525
South 900 East, Suite 210
|
Mortgage
Sales
|
Leased
(28)
|
2,000
|
|
Salt
Lake City, Utah
|
|||
|
474
West 800 North, Suite 102
|
Mortgage
Sales
|
Leased
(29)
|
2,000
|
|
Orem,
Utah
|
|||
|
378
East 720 South
|
Mortgage
Sales
|
Leased
(30)
|
2,000
|
|
Orem,
Utah
|
|||
|
6584
North Creekside Lane, Suite 150
|
Mortgage
Sales
|
Leased
(31)
|
200
|
|
Park
City, Utah
|
|||
|
1244
North Main Street, Suite 203
|
Mortgage
Sales
|
Leased
(32)
|
1,200
|
|
Tooele,
Utah
|
|||
|
3500-188th
Street, S.W. Suite 275
|
Mortgage
Sales
|
Leased
(33)
|
1,000
|
|
Lynnwood,
Washington
|
13
Item 2. Properties
(Continued)
|
(1)
|
The
Company leases an additional 3,000 square feet of the facility to an
unrelated third party for approximately $24,000 per year, under a lease
expiring December 2014.
|
|
(2)
|
The
Company leases an additional 11,400 square feet of the facility to
unrelated third parties for approximately $237,000 per year, under leases
expiring at various dates after 2009.
|
|
(3)
|
The
building is located on 104 undeveloped acres.
|
|
(4)
|
The
Company leases this facility for $14,400 per year. The lease expires in
July 2010.
|
|
(5)
|
The
Company leases this facility for $44,300 per year. The lease expires in
May 2015.
|
|
(6)
|
The
Company leases this facility for $27,200 per year. The lease expires in
July 2011.
|
|
(7)
|
The
Company leases this facility for $49,400 per year. The lease expires in
June 2012.
|
|
(8)
|
The
Company leases this facility for $66,700 per year. The lease expires in
December 2011.
|
|
(9)
|
The
Company leases this facility for $119,000 per year. The lease expires in
April 2012.
|
|
(10)
|
The
Company leases this facility for $31,700 per year. The lease expires in
February 2011.
|
|
(11)
|
The
Company leases this facility for $86,700 per year. The lease expires in
March 2011.
|
|
(12)
|
The
Company leases this facility for $18,000 per year. The lease expires in
September 2012.
|
|
(13)
|
The
Company leases this facility for $69,800 per year, but subleases
approximately half for $30,000 per year. The lease expires in April
2012.
|
|
(14)
|
The
Company leases this facility for $55,100 per year. The lease expires in
January 2013.
|
|
(15)
|
The
Company leases this facility for $51,300 per year. The lease expires in
March 2010.
|
|
(16)
|
The
Company leases this facility for $42,100 per year. The lease expires in
January 2012.
|
|
(17)
|
The
Company leases this facility for $40,400 per year. The lease expires in
May 2009.
|
|
(18)
|
The
Company leases this facility for $180,600 per year. The lease expires in
July 2011.
|
|
(19)
|
The
Company leases this facility for $49,000 per year. The lease expires in
September 2011.
|
|
(20)
|
The
Company leases this facility for $80,700 per year. The lease expires in
August 2012.
|
|
(21)
|
The
Company leases this facility for $64,300 per year. The lease expires in
April 2013.
|
|
(22)
|
The
Company leases this facility for $48,500 per year. The lease expires in
October 2012.
|
|
(23)
|
The
Company leases these facilities for $167,900 per year. The leases expire
November 2011 and June 2010.
|
|
(24)
|
The
Company leases an additional 117,500 square feet of the facility to
unrelated third parties for approximately $647,000 per year, under leases
expiring at various dates after December 2009.
|
|
(25)
|
The
Company leases an additional 12,200 square feet of the facility to an
unrelated third party for approximately $192,000 per year, under a lease
expiring May 2014.
|
|
(26)
|
The
Company leases this facility for $70,900 per year. The lease expires in
August 2012.
|
|
(27)
|
The
Company leases this facility for $79,500 per year, with a month-to-month
lease.
|
|
(28)
|
The
Company leases this facility for $37,000 per year, with a month-to-month
lease.
|
|
(29)
|
The
Company leases this facility for $33,800 per year. The lease expires in
February 2010.
|
|
(30)
|
The
Company leases this facility for $30,000 per year, with a month-to-month
lease.
|
|
(31)
|
The
Company leases this facility for $4,800 per year, with a month-to-month
lease.
|
|
(32)
|
The
Company leases this facility for $26,400 per year. The lease expires in
October 2010.
|
|
(33)
|
The
Company leases this facility for $18,600 per year. The lease expires in
June 2010.
|
14
Item 2. Properties
(Continued)
The
Company believes the office facilities it occupies are in good operating
condition and adequate for current operations, and has no plans to build or
acquire additional office facilities. The Company believes its office facilities
are adequate for handling its business in the foreseeable future. As leases
expire the Company will either renew or find comparable leases or acquire
additional office space.
The
following table summarizes the location and acreage of the six Company owned
cemeteries, each of which includes one or more mausoleums:
|
Net
Saleable Acreage
|
||||||
|
Name
of Cemetery
|
Location
|
Date
Acquired
|
Developed
Acreage (1)
|
Total
Acreage (1)
|
Acres
Sold as Cemetery Spaces (2)
|
Total
Available Acreage (1)
|
|
Memorial
Estates, Inc.
|
||||||
|
Lakeview
Cemetery
|
1640
East Lakeview Drive
Bountiful,
Utah
|
1973
|
7
|
40
|
6
|
34
|
|
Mountain
View Cemetery
|
3115
East 7800 South
Salt
Lake City, Utah
|
1973
|
15
|
54
|
14
|
40
|
|
Redwood
Cemetery (4)
|
6500
South Redwood Road
West
Jordan, Utah
|
1973
|
27
|
78
|
28
|
50
|
|
Cottonwood
Mortuary, Inc.
|
||||||
|
Deseret
Memorial Inc.
Lake
Hills Cemetery (3)
|
10055
South State Street
Sandy,
Utah
|
1991
|
9
|
41
|
4
|
37
|
|
Holladay
Memorial Park (3)(4)
|
4900
South Memory Lane
Holladay,
Utah
|
1991
|
5
|
14
|
4
|
10
|
|
California
Memorial Estates
|
||||||
|
Singing
Hills Memorial Park
|
2800
Dehesa Road
El
Cajon, California
|
1995
|
8
|
35
|
4
|
31
|
|
|
(1)
|
The
acreage represents estimates of acres that are based upon survey reports,
title reports, appraisal reports or the Company’s inspection of the
cemeteries.
|
|
|
(2)
|
Includes
spaces sold for cash and installment contract
sales.
|
|
|
(3)
|
As
of December 31, 2009, there were mortgages of approximately $1,110,000
collateralized by the property and facilities at Deseret Mortuary,
Cottonwood Mortuary, Holladay Memorial Park, and Lake Hills
Cemetery.
|
|
|
(4)
|
These
cemeteries include two granite
mausoleums.
|
15
Item 2. Properties
(Continued)
The
following table summarizes the location, square footage and the number of
viewing rooms and chapels of the eleven Company owned mortuaries:
|
Date
|
Viewing
|
Square
|
|||
|
Name of
Mortuary
|
Location
|
Acquired
|
Room(s)
|
Chapel(s)
|
Footage
|
|
Memorial
Mortuary
|
5850
South 900 East
|
||||
|
Murray,
Utah
|
1973
|
3
|
1
|
20,000
|
|
|
Memorial
Estates, Inc.:
|
|||||
|
Redwood
Mortuary(3)
|
6500
South Redwood Rd.
|
||||
|
West
Jordan, Utah
|
1973
|
2
|
1
|
10,000
|
|
|
Mountain
View Mortuary(3)
|
3115
East 7800 South
|
||||
|
Salt
Lake City, Utah
|
1973
|
2
|
1
|
16,000
|
|
|
Lakeview
Mortuary(3)
|
1640
East Lakeview Dr.
|
||||
|
Bountiful,
Utah
|
1973
|
0
|
1
|
5,500
|
|
|
Paradise
Chapel Funeral Home
|
3934
East Indian School Road
|
||||
|
Phoenix,
Arizona
|
1989
|
2
|
1
|
9,800
|
|
|
Deseret
Memorial, Inc.:
|
36
East 700 South
|
||||
|
Deseret
Mortuary(1)
|
Salt
Lake City, Utah
|
1991
|
2
|
2
|
36,300
|
|
Lakehills
Mortuary(3)
|
10055
South State St.
|
||||
|
Sandy,
Utah
|
1991
|
2
|
1
|
18,000
|
|
|
Cottonwood
Mortuary(1)(3)
|
4670
South Highland Dr.
|
||||
|
Holladay,
Utah
|
1991
|
2
|
1
|
14,500
|
|
|
Greer-Wilson
Funeral Home
|
5921
West Thomas Road
|
||||
|
Phoenix,
Arizona
|
1995
|
2
|
2
|
25,000
|
|
|
Crystal
Rose Funeral Home(2)
|
9155
W. VanBuren
|
||||
|
Tolleson,
Arizona
|
1997
|
0
|
1
|
9,000
|
|
|
(1)
|
As
of December 31, 2009, there were mortgages of approximately $1,110,000,
collateralized by the property and facilities at Deseret Mortuary,
Cottonwood Mortuary, Holladay Memorial Park and Lake Hills
Cemetery.
|
|
|
(2)
|
As
of December 31, 2009, there was a mortgage of approximately $77,000,
collateralized by the property and facilities of Crystal Rose Funeral
Home.
|
|
|
(3)
|
These
funeral homes also provide burial niches at their respective
locations.
|
16
Item 3. Legal Proceedings
Florida
Office of Insurance Regulation Proposed Consent Order
On March
5, 2007, the Company received a proposed consent order from the Florida Office
of Insurance Regulation concerning the New Success Life Program, the higher
education product previously marketed and sold by Southern Security Life and now
marketed and sold by Security National Life. The proposed order states that as a
result of an investigation the Florida Office of Insurance Regulation has
determined that Southern Security Life violated Florida law (i) by knowingly
making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making advertisements, announcements, or
statements containing representations that were untrue or
misleading.
The
proposed order would require Security National Life and Southern Security Life
to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated
value.
Moreover,
the written notice is to provide an opportunity for the Florida consumers who
purchased the New Success Life Program on or after January 1, 1998 to
cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000.
The
proposed consent order would also require Security National Life and Southern
Security Life to issue refunds including interest to the eleven policyholders
whose affidavits were taken in connection with the administrative complaint that
the Florida Office of Insurance Regulation had previously filed against Franz
Wallace, the former National Sales Director of Southern Security Life. Security
National Life and Southern Security Life would additionally be required to issue
refunds, including interest, to any Florida policyholder in the New Success Life
Program who had filed a complaint with the Florida Department of Financial
Services or whose coverage had lapsed. Furthermore, Security National Life and
Southern Security Life would be required to notify the state insurance
department in each state in which the New Success Life Program is marketed of
the order and any complaint that Southern Security Life received relating to the
New Success Life Program from policyholders in that state. Finally, Security
National Life and Southern Security Life would be required to pay the Florida
Office of Insurance Regulation a penalty of $100,000 and administrative costs of
$5,000.
The
Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office of Insurance Regulation has
with the New Success Life Program because it has received no specific
administrative complaint from the Florida Office of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company has engaged in discussions with the Florida
Office of Insurance Regulation in an effort to settle the dispute concerning the
proposed order. If the Company is unable to reach a satisfactory resolution with
the Florida Office of Insurance Regulation with respect to the terms of the
proposed consent order and the Florida Office of Insurance Regulation issues a
similar order, the Company intends to take action necessary to protect its
rights and interests, including requesting a hearing before an administrative
law judge to oppose the order.
CitiMortgage
Litigation and Settlement
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claims that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements
under certain agreements between CitiMortgage and SecurityNational Mortgage, the
complaint specifically addressing nineteen mortgage loans. The
requirements that SecurityNational Mortgage did not meet, according to the
allegations in the complaint, include delivering mortgage loans (i) that were
underwritten or originated based upon materially inaccurate information or on
material misrepresentations made by the borrower or by SecurityNational Mortgage
or its officers, employees or agents; (ii) for which CitiMortgage discovered
discrepancies concerning property ownership, income representations, prior
undisclosed mortgage or other debts, and occupancy; (iii) for which applicable
requirements or guidelines of CitiMortgage, SecurityNational Mortgage, the loan
originator, Fannie Mae, Freddie Mac, FHA, VA and/or HUD were not followed; (iv)
that were subject to early payment defaults; and/or (v) that have turned out to
be otherwise defective or not in compliance with certain agreements between
CitiMortgage and SecurityNational Mortgage.
17
The
complaint further alleges that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contends that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requests an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including to repurchase the defective mortgage
loans and indemnify CitiMortgage for its costs and attorneys’ fees in the
lawsuit, interest, and such further relief as the court deems just and
proper.
SecurityNational
Mortgage disputes the claims that CitiMortgage asserts in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010, SecurityNational Mortgage
and CitiMortgage entered into a written Settlement Agreement and Release
encompassing the aforesaid settlement. Under the terms of the
Settlement Agreement and Release, SecurityNational Mortgage paid a settlement
amount to CitiMortgage. The Company has reserved a sufficient amount
to cover the settlement payment in its consolidated financial statements at
December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers. Moreover, the
release does not take effect until 91 days have passed from the date in which
SecurityNational Mortgage made payment to CitiMortgage under the Settlement
Agreement and Release, provided there has been no bankruptcy petition filed by
or against SecurityNational Mortgage during the 91-day period.
The
Company is not a party to any other material 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 4. Submission of
Matters to a Vote of Security Holders
No
matters were submitted to a vote of the Company’s shareholders during the
quarter ended December 31, 2009.
18
PART
II
Item 5. Market for the
Registrant’s Common Stock and Related Security Holder
Matters
The
Company’s Class A Common Stock trades on the Nasdaq National Market under the
symbol “SNFCA.” Prior to August 13, 1987, there was no active public market for
the Class A and Class C Common Stock. As of March 26, 2010, the closing sales
price of the Class A Common Stock was $3.01 per share. The following were the
high and low market closing sales prices for the Class A Common Stock by quarter
as reported by Nasdaq since January 1, 2008:
|
Price Range
(1)
|
||||||||
|
High
|
Low
|
|||||||
|
Period (Calendar
Year)
|
||||||||
|
2008
|
||||||||
|
First
Quarter
|
$ | 4.20 | $ | 2.86 | ||||
|
Second
Quarter
|
$ | 4.02 | $ | 2.75 | ||||
|
Third
Quarter
|
$ | 3.73 | $ | 2.00 | ||||
|
Fourth
Quarter
|
$ | 2.30 | $ | 1.09 | ||||
|
2009
|
||||||||
|
First
Quarter
|
$ | 2.12 | $ | 1.19 | ||||
|
Second
Quarter
|
$ | 3.51 | $ | 1.14 | ||||
|
Third
Quarter
|
$ | 3.76 | $ | 2.16 | ||||
|
Fourth
Quarter
|
$ | 3.79 | $ | 2.86 | ||||
|
2010
|
||||||||
|
First
Quarter (through March 26, 2010)
|
$ | 3.75 | $ | 3.00 | ||||
(1)
Sales prices have been adjusted retroactively for the effect of annual stock
dividends.
The Class
C Common Stock is not actively traded, although there are occasional
transactions in such stock by brokerage firms. (See Note 13 to the Consolidated
Financial Statements.)
The
Company has never paid a cash dividend on its Class A or Class C Common Stock.
The Company currently anticipates that all of its earnings will be retained for
use in the operation and expansion of its business and does not intend to pay
any cash dividends on its Class A or Class C Common Stock in the foreseeable
future. Any future determination as to cash dividends will depend upon the
earnings and financial position of the Company and such other factors as the
Board of Directors may deem appropriate. A 5% stock dividend on Class A and
Class C Common Stock has been paid each year from 1990 through
2009.
19
The graph
below compares the cumulative total stockholder return of the Company’s Class A
common stock with the cumulative total return on the Standard & Poor’s 500
Stock Index and the Standard & Poor’s Insurance Index for the period from
December 31, 2004 through December 31, 2009. The graph assumes that the value of
the investment in the Company’s Class A common stock and in each of the indexes
was 100 at December 31, 2004 and that all dividends were
reinvested.
The
comparisons in the graph below are based on historical data and are not intended
to forecast the possible future performance of the Company’s Class A common
stock.
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
|
|
SNFC
|
100
|
121
|
183
|
142
|
64
|
138
|
|
S
& P 500
|
100
|
103
|
117
|
121
|
75
|
92
|
|
S
& P Insurance
|
100
|
113
|
123
|
113
|
46
|
52
|
The graph
set forth above is required by the Securities and Exchange Commission and shall
not be deemed to be incorporated by reference by any general statement
incorporating by reference this Form 10-K into any filing under the Securities
Act of 1933, as amended, or under the Securities Exchange Act of 1934, as
amended, except to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed soliciting material
or filed under such acts.
As of
December 31, 2009, there were 4,164 record holders of Class A Common Stock and
120 record holders of Class C Common Stock.
20
Item 6. Selected Financial
Data - The Company and Subsidiaries (Consolidated)
The
following selected financial data is for each of the five years ended December
31, 2009, and is derived from the audited consolidated financial statements. The
data as of December 31, 2009 and 2008, and for the three years ended December
31, 2009, should be read in conjunction with the consolidated financial
statements, related notes and other financial information.
Consolidated
Statement of Earnings Data:
|
2009
|
2008(1)
|
2007(2)
|
2006(3)
|
2005
|
||||||||||||||||
|
Revenue
|
|
|||||||||||||||||||
|
Premiums
|
$ | 38,413,000 | $ | 35,981,000 | $ | 32,263,000 | $ | 30,776,000 | $ | 27,170,000 | ||||||||||
|
Net
investment income
|
21,035,000 | 28,104,000 | 31,956,000 | 23,246,000 | 19,387,000 | |||||||||||||||
|
Net
mortuary and cemetery sales
|
11,974,000 | 12,726,000 | 13,189,000 | 12,123,000 | 10,839,000 | |||||||||||||||
|
Realized
(losses) gains on investments
|
897,000 | (1,734,000 | ) | 1,008,000 | 891,000 | 74,000 | ||||||||||||||
|
Mortgage
fee income
|
144,861,000 | 143,412,000 | 130,472,000 | 85,113,000 | 71,859,000 | |||||||||||||||
|
Other
|
1,415,000 | 1,015,000 | 860,000 | 381,000 | 621,000 | |||||||||||||||
|
Total
revenue
|
218,595,000 | 219,504,000 | 209,748,000 | 152,530,000 | 129,950,000 | |||||||||||||||
|
Expenses
|
||||||||||||||||||||
|
Policyholder
benefits
|
35,920,000 | 32,904,000 | 29,742,000 | 27,319,000 | 24,477,000 | |||||||||||||||
|
Amortization
of deferred
|
||||||||||||||||||||
|
policy
acquisition costs
|
7,161,000 | 6,010,000 | 5,571,000 | 4,125,000 | 3,031,000 | |||||||||||||||
|
Selling,
general and administrative expenses
|
163,491,000 | 169,973,000 | 155,504,000 | 105,728,000 | 90,690,000 | |||||||||||||||
|
Interest
expense
|
3,326,000 | 7,449,000 | 13,271,000 | 6,141,000 | 4,921,000 | |||||||||||||||
|
Cost
of goods and services of
|
||||||||||||||||||||
|
the
mortuaries and cemeteries
|
2,349,000 | 2,437,000 | 2,537,000 | 2,322,000 | 2,103,000 | |||||||||||||||
|
Total
benefits and expenses
|
212,247,000 | 218,773,000 | 206,625,000 | 145,635,000 | 125,222,000 | |||||||||||||||
|
Income
before income tax expense
|
6,348,000 | 731,000 | 3,123,000 | 6,895,000 | 4,728,000 | |||||||||||||||
|
Income
tax expense
|
(2,574,000 | ) | (156,000 | ) | (858,000 | ) | (1,771,000 | ) | (1,240,000 | ) | ||||||||||
|
Net
earnings
|
$ | 3,774,000 | $ | 575,000 | $ | 2,265,000 | $ | 5,124,000 | $ | 3,488,000 | ||||||||||
|
Net
earnings per common share (4)
|
$ | 0.46 | $ | 0.07 | $ | 0.27 | $ | 0.62 | $ | 0.43 | ||||||||||
|
Weighted
average outstanding
|
||||||||||||||||||||
|
common
shares (4)
|
8,214,000 | 8,620,000 | 8,470,000 | 8,268,000 | 8,194,000 | |||||||||||||||
|
Net
earnings per common
|
||||||||||||||||||||
|
share-assuming
dilution (4)
|
$ | 0.46 | $ | 0.07 | $ | 0.26 | $ | 0.61 | $ | 0.42 | ||||||||||
|
Weighted
average outstanding
|
||||||||||||||||||||
|
common
shares-assuming dilution (4)
|
8,216,000 | 8,620,000 | 8,669,000 | 8,443,000 | 8,229,000 | |||||||||||||||
21
Item 6. Selected Financial
Data - The Company and Subsidiaries (Consolidated)
(Continued)
Balance
Sheet Data:
|
December
31,
|
||||||||||||||||||||
|
2009
|
2008(1)
|
2007(2)
|
2006
|
2005(3)
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Investments
and restricted assets
|
$ | 302,083,000 | $ | 308,310,000 | $ | 257,410,000 | $ | 222,683,000 | $ | 211,249,000 | ||||||||||
|
Cash
|
39,464,000 | 19,914,000 | 5,203,000 | 10,377,000 | 16,633,000 | |||||||||||||||
|
Receivables
|
50,143,000 | 33,021,000 | 80,445,000 | 74,695,000 | 61,787,000 | |||||||||||||||
|
Other
assets
|
78,887,000 | 80,560,000 | 75,105,000 | 69,640,000 | 69,976,000 | |||||||||||||||
|
Total
assets
|
$ | 470,577,000 | $ | 441,805,000 | $ | 418,163,000 | $ | 377,395,000 | $ | 359,645,000 | ||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Policyholder
benefits
|
$ | 341,124,000 | $ | 330,533,000 | $ | 301,064,000 | $ | 272,923,000 | $ | 263,981,000 | ||||||||||
|
Notes
& contracts payable
|
8,940,000 | 6,640,000 | 13,372,000 | 7,671,000 | 10,273,000 | |||||||||||||||
|
Cemetery
& mortuary liabilities
|
13,382,000 | 13,467,000 | 12,643,000 | 11,534,000 | 10,829,000 | |||||||||||||||
|
Cemetery
perpetual care obligation
|
2,756,000 | 2,648,000 | 2,474,000 | 2,278,000 | 2,173,000 | |||||||||||||||
|
Other
liabilities
|
44,570,000 | 34,605,000 | 32,826,000 | 30,018,000 | 26,691,000 | |||||||||||||||
|
Total
liabilities
|
410,772,000 | 387,893,000 | 362,379,000 | 324,424,000 | 313,947,000 | |||||||||||||||
|
Stockholders’
equity
|
59,805,000 | 53,912,000 | 55,784,000 | 52,971,000 | 45,698,000 | |||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||
|
stockholders’
equity
|
$ | 470,577,000 | $ | 441,805,000 | $ | 418,163,000 | $ | 377,395,000 | $ | 359,645,000 | ||||||||||
|
(1)
|
Includes
the purchase of Southern Security Life Insurance Company, effective
December 18, 2008.
|
|
(2)
|
Includes
the purchase of C & J Financial on July 16, 2007 and the purchase of
Capital Reserve Life Insurance Company on December 17,
2007.
|
|
(3)
|
Includes
the purchase of Memorial Insurance Company of America on December 29,
2005.
|
|
(4)
|
Earnings
per share amounts have been adjusted retroactively for the effect of
annual stock dividends.
|
Item 7. 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: (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 low interest rates by originating and
refinancing mortgage loans.
Over
fifty percent of revenues and expenses of the Company are through its wholly
owned subsidiary SecurityNational Mortgage. SecurityNational Mortgage is a
mortgage lender incorporated under the laws of the State of Utah.
SecurityNational Mortgage is approved and regulated by the Federal Housing
Administration (FHA), a department of the U.S. Department of Housing and Urban
Development (HUD), to originate mortgage loans that qualify for government
insurance in the event of default by the borrower. SecurityNational Mortgage
obtains loans primarily from its retail offices and independent brokers.
SecurityNational Mortgage funds the loans from internal cash flows and loan
purchase agreements with unaffiliated financial institutions. SecurityNational
Mortgage receives fees from the borrowers and other secondary fees from third
party investors that purchase its loans. SecurityNational Mortgage sells its
loans to third party investors and does not retain servicing of these loans.
SecurityNational Mortgage pays the brokers and retail loan officers a commission
for loans that are brokered through SecurityNational Mortgage. For the twelve
months ended December 31, 2009, 2008, and 2007, SecurityNational Mortgage
originated and sold 17,797 loans ($3,243,734,000 total volume), 19,321 loans
($3,680,015,000 total volume), and 20,656 loans ($3,852,801,000 total volume),
respectively.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at December 31, 2009 was
$230,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to
warehouse banks. As of December 31, 2009, there were $152,560,000 in mortgage
loans in which settlements with third party investors were still pending.
Generally, when mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on September 30, 2009 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement. In addition, the Company
has been successful in obtaining a loan purchase agreement with another
warehouse bank.
22
Mortgage
fee income consists of origination fees, processing fees and certain other
income related to the origination and sale of mortgage loans. For mortgage loans
sold to third party investors, mortgage fee income and related expenses are
recognized pursuant to generally accepted accounting principles at the time the
sales of mortgage loans meet the sales criteria for the transfer of financial
assets which are: (i) the transferred assets have been isolated from the Company
and its creditors, (ii) the transferee has the right to pledge or exchange the
mortgage, and (iii) the Company does not maintain effective control over the
transferred mortgage. The Company must determine that all three criteria are met
at the time a loan is funded. All rights and title to the mortgage loans are
assigned to unrelated financial institution investors, including any investor
commitments for these loans, prior to warehouse banks purchasing the loans under
the purchase commitments.
The
Company, through SecurityNational Mortgage, sells all mortgage loans to third
party investors without recourse. However, it may be required to repurchase a
loan or pay a fee instead of repurchase under certain events such as the
following:
|
|
·
|
Failure
to deliver original documents specified by the
investor.
|
|
|
·
|
The
existence of misrepresentation or fraud in the origination of the
loan.
|
|
|
·
|
The
loan becomes delinquent due to nonpayment during the first several months
after it is sold.
|
|
|
·
|
Early
pay-off of a loan, as defined by the
agreements.
|
|
|
·
|
Excessive
time to settle a loan.
|
|
|
·
|
Investor
declines purchase.
|
|
|
·
|
Discontinued
product and expired commitment.
|
Loan
purchase commitments generally specify a date 30 to 45 days after delivery upon
which the underlying loans should be settled. Depending on market conditions,
these commitment settlement dates can be extended at a cost to the Company.
Generally, a ten day extension will cost .125% (12.5 basis points) of the loan
amount. The Company’s historical data shows that 99% of all loans originated by
SecurityNational Mortgage are generally settled by the investors as agreed
within 16 days after delivery. There are situations, however, when the Company
determines that it is unable to enforce the settlement of loans rejected by the
third-party investors and that it is in its best interest to repurchase those
loans from the warehouse banks. It is the Company's policy to cure any
documentation problems with respect to such loans at a minimal cost for up to a
six-month time period and to pursue efforts to enforce loan purchase commitments
from third-party investors concerning the loans. The Company believes that six
months allows adequate time to remedy any documentation issues, to enforce
purchase commitments, and to exhaust other alternatives. Remedy methods include,
but are not limited to:
|
|
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Research
reasons for rejection.
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Provide
additional documents.
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Request
investor exceptions.
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Appeal
rejection decision to purchase
committee.
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Commit
to secondary investors.
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Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the loans are
repurchased and transferred to the long term investment portfolio at the lower
of cost or market value and previously recorded sales revenue is reversed. Any
loan that later becomes delinquent is evaluated by the Company at that time and
any impairment is adjusted accordingly.
23
Determining lower of cost or
market: Cost is equal to the amount paid to the warehouse bank and the
amount originally funded by the Company. Market value is often difficult to
determine, but is based on the following:
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·
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For
loans that have an active market, the Company uses the market price on the
repurchased date.
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For
loans where there is no market but there is a similar product, the Company
uses the market value for the similar product on the repurchased
date.
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For
loans where no active market exists on the repurchased date, the Company
determines that the unpaid principal balance best approximates the market
value on the repurchased date, after considering the fair value of the
underlying real estate collateral and estimated future cash
flows.
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The
appraised value of the real estate underlying the original mortgage loan adds
significance to the Company’s determination of fair value because, if the loan
becomes delinquent, the Company has sufficient value to collect the unpaid
principal balance or the carrying value of the loan. In determining the market
value on the date of repurchase, the Company considers the total value of all of
the loans because any sale of loans would be made as a pool.
For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.
The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans. The market for new subprime loans
has been substantially reduced and several mortgage companies whose primary
product was subprime mortgage originations have ceased operations. The Company
funded $5,505,000 (0.14% of its production) in subprime loans during the twelve
months ending December 31, 2007 and eliminated subprime loans from its product
offerings in August 2007. The Company believes that its potential losses from
subprime loans are minimal.
The
industry problem with subprime mortgages has created a volatile secondary market
for other products, especially alternative documentation (Alt A) loans. Alt A
loans are typically offered to qualified borrowers who have relatively high
credit scores but are not required to provide full documentation to support
personal income and assets owned. Alt A loans can have a loan to value ratio as
high as 100%. As a result of these changes, the Company discontinued
offering these loans in September 2007.
As a
result of the volatile secondary market for mortgage loans, the Company sold
mortgage loans in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of such loans was $52,556,000, of which $36,499,000 were loans in
which the secondary market no longer existed. Due to these changes in
circumstances, the Company regained control of the mortgages and, in accordance
with generally accepted accounting principles, accounted for the loans retained
in the same manner as a purchase of assets from the former transferee(s) in
exchange for liabilities assumed. At the time of repurchase, the loans were
determined to be held for investment purposes, and the fair value of the loans
was determined to approximate the unpaid principal balances adjusted for
chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans. The 2008 and 2009 financial statements reflect the
transfer of mortgage loans from “Mortgage Loans Sold to Investors” to “Mortgage
Loans on Real Estate”. The loan sale revenue recorded on the sale of the
mortgage loans was reversed on the date the loans were repurchased.
As a
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
During this period the Company services these loans through Security National
Life, its life insurance subsidiary.
As of
December 31, 2009, the Company’s long term mortgage loan portfolio contained
mortgage loans of $19,538,000 in unpaid principal with delinquencies more than
90 days. Of this amount, $12,108,000 in mortgage loans were in foreclosure
proceedings. The Company has not received or recognized any interest income on
the $19,538,000 in mortgage loans with delinquencies more than 90 days. During
the twelve months ended December 31, 2009 and 2008, the Company increased its
allowance for mortgage losses by $3,166,000 and $4,339,000, respectively, which
was charged to loan loss expense and included in selling, general and
administrative expenses for the period. The allowance for mortgage loan losses
as of December 31, 2009 and 2008 was $6,809,000 and $4,780,000,
respectively.
Also at
December 31, 2009, the Company has foreclosed on a total of $44,251,000 in long
term mortgage loans, of which $24,441,000 in loans were foreclosed on and
reclassified as real estate during 2009. The Company carries the foreclosed
properties in Security National Life, Memorial Estates, and SecurityNational
Mortgage, its life,
cemeteries and mortuaries, and mortgage subsidiaries, and will rent the
properties until it is deemed desirable to sell them.
24
In 1998,
SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman
Brothers Bank and its wholly owned subsidiary, Aurora Loan Services, LLC. Under
the terms of the Loan Purchase Agreement, Lehman Brothers, through its
subsidiary, Aurora Loan Services, agreed to purchase mortgage loans from time to
time from SecurityNational Mortgage. During 2007, Aurora Loan Services purchased
a total of 1,490 mortgage loans in the aggregate amount of $352,774,000 from
SecurityNational Mortgage. On January 17, 2008, Aurora Loan Services announced
it was suspending all wholesale and correspondent mortgage originations. As a
result of this policy change, Aurora Loan Services discontinued purchasing
mortgage loans from all mortgage brokers and lenders, including SecurityNational
Mortgage.
During
2007, Aurora Loan Services maintained that as part of its quality control
efforts it reviewed mortgage loans purchased from SecurityNational Mortgage and
determined that certain of the loans contained alleged misrepresentations and
early payment defaults. Aurora Loan Services further maintained that these
alleged breaches in the purchased mortgage loans provide it with the right to
require SecurityNational Mortgage to immediately repurchase the mortgage loans
containing the alleged breaches in accordance with the terms of the Loan
Purchase Agreement. In order for Lehman Brothers and Aurora Loan Services to
refrain from demanding immediate repurchase of the mortgage loans by
SecurityNational Mortgage, SecurityNational Mortgage was willing to enter into
an agreement to indemnify Lehman Brothers and Aurora Loan Services for any
losses incurred in connection with certain mortgage loans with alleged breaches
that were purchased from SecurityNational Mortgage.
On
December 17, 2007, SecurityNational Mortgage entered into an Indemnification
Agreement with Lehman Brothers and Aurora Loan Services. Under the terms of the
Indemnification Agreement, SecurityNational Mortgage agrees to indemnify Lehman
Brothers and Aurora Loan Services for 75% of all losses that Lehman Brothers and
Aurora Loan Services may have as a result of any current or future defaults by
mortgagors on 54 mortgage loans that were purchased from SecurityNational
Mortgage and listed as an attachment to the Indemnification Agreement.
SecurityNational Mortgage is released from any obligation to pay the remaining
25% of such losses. The Indemnification Agreement also requires SecurityNational
Mortgage to indemnify Lehman Brothers and Aurora Loan Services for 100% of
losses incurred on mortgage loans with alleged breaches that are not listed on
the attachment to the agreement.
Concurrently
with the execution of the Indemnification Agreement, SecurityNational Mortgage
paid $395,000 to Aurora Loan Services as a deposit into a reserve account to
secure the obligations of SecurityNational Mortgage under the Indemnification
Agreement. This deposit is in addition to a $250,000 deposit that
SecurityNational Mortgage made to Aurora Loan Services on December 10, 2007, for
a total of $645,000. Losses from mortgage loans with alleged breaches are
payable by SecurityNational Mortgage from the reserve account. However, Lehman
Brothers and Aurora Loan Services are not to apply any funds from the reserve
account to a particular mortgage loan until an actual loss has
occurred.
The
Indemnification Agreement further provides that SecurityNational Mortgage will
be entitled to have held back 25 basis points on any mortgage loans that Aurora
Loan Services purchases from SecurityNational Mortgage and to add the amount of
the basis point holdbacks to the reserve account. SecurityNational Mortgage
agreed to deliver to Aurora Loan Services at least $300,000,000 in mortgage
loans on an annual basis or at least $600,000,000 in 24 months. These provisions
may not be effective, however, because Aurora Loan Services has discontinued
purchasing mortgage loans from SecurityNational Mortgage. SecurityNational
Mortgage also agrees to pay to Aurora Loan Services the difference between the
reserve account balance and $645,000, but in no event will SecurityNational
Mortgage be required to pay any amount into the reserve account that would
result in a total contribution, including both the basis point holdbacks and
cash payments, in excess of $125,000 for any calendar month.
During
2007 and 2008, SecurityNational Mortgage made $1,730,000 in total payments to
Aurora Loan Services pursuant to the Indemnification Agreement. During 2009,
SecurityNational Mortgage made payments to Aurora Loan Services of
$1,174,000.When SecurityNational Mortgage entered into the Indemnification
Agreement, it anticipated using basis point holdbacks from loan production
credits toward satisfying the $125,000 monthly obligations. Because Aurora Loan
Services discontinued purchasing mortgage loans from SecurityNational Mortgage
shortly after the Indemnification Agreement was executed, SecurityNational
Mortgage has not had the benefit of using the basis point holdbacks toward
payment of the $125,000 monthly obligations.
25
During
2008 and 2009, funds were paid out of the reserve account to indemnify
$2,732,000 in losses from 34 mortgage loans that were among the 54 mortgage
loans with alleged breaches which were listed on the attachment to the
Indemnification Agreement. The estimated potential losses from the
remaining 20 mortgage loans listed on the attachment, which would require
indemnification by SecurityNational Mortgage for such losses, is $2,828,000.
During 2008 and 2009, the Company recognized losses related to this matter of
$1,636,000 and $1,032,000, respectively; however, management cannot fully
determine the total losses, if any, nor the rights that the Company may have as
a result of Lehman Brothers’ and Aurora Loan Services’ refusal to purchase
subsequent loans under the Indemnification Agreement. The Company has estimated
and accrued $1,507,000 for losses under the Indemnification Agreement as of
December 31, 2009.
There
have been assertions in third party purchaser correspondence that
SecurityNational Mortgage sold mortgage loans that contained alleged
misrepresentations or that experienced early payment defaults, or that were
otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of America –
Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made demands
that SecurityNational Mortgage repurchase certain alleged defective mortgage
loans that were sold to such investors or indemnify them against any losses
related to such loans. The Company has been reviewing these demands
and has reserved what it believes to be an adequate amount to cover potential
losses. Although the Company believes that it has reserved adequate provisions
for losses, from an industry wide perspective the number of repurchase demands
and the loss per loan have shown sharp increases during the last several months
as compared to historical amounts. It is unclear whether such increases
represent a trend that will continue in the future.
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claims that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements under certain agreements between CitiMortgage and
SecurityNational Mortgage, the complaint specifically addressing nineteen
mortgage loans. The requirements in the agreements that CitiMortgage claims in
the complaint were not met by SecurityNational Mortgage are more particularly
described in “Item 3. Legal Proceedings” of this Form 10-K.
The
complaint further alleges that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contends that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requests an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including to repurchase the defective mortgage
loans and indemnify CitiMortgage for its costs and attorneys’ fees in the
lawsuit, interest, and such further relief as the court deems just and
proper.
SecurityNational
Mortgage disputes the claims that CitiMortgage asserts in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010,
SecurityNational Mortgage and CitiMortgage entered into a written Settlement
Agreement and Release encompassing the aforesaid settlement. Under the terms of
the Settlement Agreement and Release, SecurityNational Mortgage paid a
settlement amount to CitiMortgage. The Company has reserved a
sufficient amount to cover the settlement payment in its consolidated financial
statements at December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers.
26
In 1998,
the Company, through its wholly owned subsidiary, Security National Life,
purchased 57.4% of the outstanding shares of Southern Security Life Insurance
Company, a Florida domiciled insurance company (“Southern Security Life”), for a
total cost of $12,248,194. During the period from January 21, 1999 to April 10,
2003, Security National Life purchased an additional 19.3% of the outstanding
shares of Southern Security Life. In January 2005, Security National Life
purchased the remaining outstanding shares of Southern Security Life by means of
a merger transaction, which resulted in Southern Security Life becoming a wholly
owned subsidiary of Security National Life and the unaffiliated stockholders of
Southern Security Life becoming entitled to receive a total of $1,884,733 for
their shares.
On
December 24, 2007, Southern Security Life was liquidated when Articles of
Dissolution were filed with the Florida Division of Corporations. Southern
Security Life was liquidated in accordance with the terms of the Agreement and
Plan of Complete Liquidation, which the Board of Directors of Security National
Life and Southern Security Life approved on December 12, 2005. On December
31, 2005, pursuant to the Agreement and Plan of Complete Liquidation, all of the
insurance business and operations of Southern Security Life, including
$48,528,000 in assets and liabilities, were transferred to Security National
Life by means of a reinsurance agreement, except for $3,500,000 in capital and
surplus that were required to be maintained under Florida law. Also on December
31, 2005, Southern Security Life paid a $7,181,000 dividend to Security National
Life. Southern Security Life’s remaining assets, including its capital and
surplus, were transferred to Security National Life, effective as of December
29, 2006.
On July
16, 2007, the Company completed a transaction to purchase C & J Financial,
LLC, an Alabama limited liability company, for a total cost of $1,250,000 in
cash and a promissory note from the Company to the seller in the amount of
$381,500 plus interest at 5% per annum. The amount of the note was reduced by
the difference between the total equity on the balance sheet of C & J
Financial on May 31, 2007 and the total equity on the balance sheet on July 16,
2007, which was $47,000.
On
December 20, 2007, the Company purchased all of the outstanding shares of
Capital Reserve Life Insurance Company, a Missouri domiciled life insurance
company. The purchase consideration was $2,521,687 less certain adjustments
consisting of a $220,926 loss related to a litigation matter involving Capital
Reserve, $152,269 representing the difference between Capital Reserve’s adjusted
capital and surplus at closing compared to its adjusted capital and reserve on
September 30, 2007, and $185,902 being held in escrow representing the losses
from a corporate bond held by Capital Reserve at closing. The company issuing
the bond filed for bankruptcy prior to the closing of the transaction and the
amount held in escrow was to reimburse Security National Life for such losses.
As of December 31, 2006, Capital Reserve had 10,851 policies in force and
approximately 30 agents. In addition, the statutory assets and the capital and
surplus of Capital Reserve as of December 31, 2006 were $24,054,000 and
$1,960,000, respectively.
On
December 18, 2008, the Company, through its wholly owned subsidiary, Security
National Life, completed a stock purchase transaction with Southern Security
Life Insurance Company, a Mississippi domiciled insurance company ("Southern
Security"), and its shareholders to purchase all of the outstanding shares of
common stock of Southern Security from its shareholders. Under the terms of the
transaction as set forth in the Stock Purchase Agreement among Security National
Life, Southern Security and the shareholders of Southern Security, Security
National Life paid to the shareholders of Southern Security purchase
consideration equal to $1,352,134, representing the capital and surplus,
interest maintenance reserve, and asset valuation reserve of Southern Security
as of September 1, 2008, the date that Security National Life assumed
administrative control over Southern Security, plus $1,500,000, representing the
ceding commission that had been paid on August 29, 2008, plus $75,883,
representing an allowance for the actual losses experienced by Southern Security
in the second quarter ended June 30, 2008, less certain adjustments. Thus, the
total purchase price before adjustments was $2,928,022.
As of
December 31, 2007, Southern Security had 24,323 policies in force and
approximately 393 agents. For the year ended December 31, 2007, Southern
Security had revenues of $4,231,000 and a net loss of $496,000. As of December
31, 2007, the statutory assets and the capital and surplus of Southern Security
were $24,402,000 and $758,000, respectively. As of June 30, 2008, the statutory
assets and the capital and surplus of Southern Security were $24,780,000 and
$713,000, respectively.
On
December 31, 2008, the Company entered into a Coinsurance Funds Withheld
Reinsurance Agreement with Continental American Insurance Company (“Continental
American”), a South Carolina domiciled insurance company. This agreement
was effective November 30, 2008. Under the terms of the agreement,
the Company ceded to
Continental American 100% of a block of deferred annuities in the amount of
$4,828,487 as of December 31, 2008 and retained the assets and recorded a funds
held under coinsurance liability for the same amount. Continental American
agreed to pay the Company an initial ceding commission of $60,000 and a
quarterly management fee of $16,500 per quarter to administer the policies. The
Company will also receive a 90% experience refund for any profits on the
business. The Company has the right to recapture the business on January 1
subsequent to December 31, 2008 or any other date if mutually agreed and with 90
days written notice to Continental American. The Company and Continental
American have agreed to terminate this agreement on March 31,
2010.
27
On
December 31, 2009, Security National Life Insurance Company of Louisiana
("Security National Life of Louisiana") entered into an Assumption Reinsurance
Agreement with Security National Life Insurance Company ("Security National
Life") to reinsure the remaining in force business of Security National Life of
Louisiana with Security National Life to the extent permitted by the Louisiana
Department of Insurance. The Louisiana Department of Insurance
approved the Assumption Reinsurance Agreement on December 2, 2009.
As a
result of the Assumption Reinsurance Agreement, all of the insurance business
and operations of Security National Life of Louisiana, including assets and
liabilities, were transferred to Security National Life, as reinsurer, as of
December 31, 2009. Thus, $3,189,000 in statutory assets and
liabilities were transferred from Security National Life of Louisiana to
Security National Life pursuant to the Assumption Reinsurance
Agreement. In addition, Security National Life of Louisiana entered
into an Assignment dated December 31, 2009 with Security National Life to assign
and transfer to Security National Life all of the assets and liabilities that
remained following the transfer of assets and liabilities pursuant to the
Assumption Reinsurance Agreement.
The
liquidation of Security National Life of Louisiana was completed as of December
31, 2009 in accordance with the terms and conditions of the Agreement and Plan
of Complete Liquidation to liquidate Security National Life of Louisiana into
Security National Life. The Board of Directors of both Security
National Life of Louisiana and Security National Life approved a plan of
liquidation as of September 18, 2009. Under the terms of the Agreement and Plan
of Complete Liquidation, Security National Life of Louisiana was liquidated into
Security National Life in essentially the same manner as the liquidation
described in Private Letter Ruling 9847027 in order to achieve the same tax
treatment and consequences under Section 332 of the Internal Revenue Code of
1986, as amended, and other applicable provisions described in such Letter
Ruling. During 2010, Security National Life plans to take appropriate
legal action to dissolve Security National Life of Louisiana in accordance with
Louisiana law.
Effective
as of December 31, 2009, Security National Life exercised its right of recapture
pursuant to the Reinsurance Agreement effective as of November 30, 2008, between
Capital Reserve Life Insurance Company ("Capital Reserve") and Security National
Life in which Security National Life recaptured all of the previously reinsured
liabilities under the Reinsurance Agreement. As a result of the
recapture, Security National Life is primarily liable for the liabilities on the
insurance contracts and annuities originally issued by Capital Reserve to its
policyholders. The assets transferred by Capital Reserve to Security
National Life pursuant to such recapture have a fair market value of
$4,895,000, which was equal to the assumed liabilities.
In
addition, Capital Reserve entered into an Assignment dated December 31, 2009
with Security National Life to assign and transfer to Security National Life all
of the assets and liabilities that remained following the recapture, except for
Capital Reserve's corporate charter, insurance licenses, and $1,681,000 in
statutory capital and surplus, which will allow Capital Reserve to preserve its
corporate existence in Missouri. During January 2010, Security
National Life entered into a letter of intent to sell its 100% ownership in
Capital Reserve to American Life and Security Corporation (“American Life”), a
Nebraska domiciled insurance company. The consideration to be paid to Security
National Life will be $105,000 and the capital and surplus of Capital Reserve.
This sale is contingent upon American Life obtaining approvals from the Nebraska
and Missouri insurance departments before December 2010. If the sale is not
completed by December 2010, Capital Reserve will be dissolved in accordance with
Missouri law.
The
purpose of Security National Life exercising its right of recapture pursuant to
the 2008 Reinsurance Agreement was so that the $4,895,000 in statutory assets
and liabilities of Capital Reserve could be transferred to Security National
Life by December 31, 2009 in accordance with the terms of the plan of
liquidation between Capital Reserve and Security National Life. On
December 4, 2009, Capital Reserve and Security National Life entered
into an Agreement and Plan of Complete Liquidation to liquidate Capital Reserve
into Security National Life in the same manner as the liquidation described in
Private Letter Ruling 9847027 in order to achieve the same tax treatment and
consequences under Section 332 of the Internal Revenue code of 1986, as amended,
and other applicable provisions described in such Letter
Ruling.
28
Significant
Accounting Policies
The
following is a brief summary of our significant accounting policies and a review
of our most critical accounting estimates. Please also refer to Note 1 of our
consolidated financial statements.
Insurance
Operations
In
accordance with accounting principles generally accepted in the United States of
America (GAAP), premiums and considerations received for interest sensitive
products such as universal life insurance and ordinary annuities are reflected
as increases in liabilities for policyholder account balances and not as
revenues. Revenues reported for these products consist of policy charges for the
cost of insurance, administration charges, amortization of policy initiation
fees and surrender charges assessed against policyholder account balances.
Surrender benefits paid relating to these products are reflected as decreases in
liabilities for policyholder account balances and not as expenses.
The
Company receives investment income earned from the funds deposited into account
balances, a portion of which is passed through to the policyholders in the form
of interest credited. Interest credited to policyholder account balances and
benefit claims in excess of policyholder account balances are reported as
expenses in the consolidated financial statements.
Premium
revenues reported for traditional life insurance products are recognized as
revenues when due. Future policy benefits are recognized as expenses over the
life of the policy by means of the provision for future policy
benefits.
The costs
related to acquiring new business, including certain costs of issuing policies
and other variable selling expenses (principally commissions), defined as
deferred policy acquisition costs, are capitalized and amortized into expense.
For nonparticipating traditional life products, these costs are amortized over
the premium paying period of the related policies, in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally “locked in” at the date
the policies are issued. For interest sensitive products, these costs are
amortized generally in proportion to expected gross profits from surrender
charges and investment, mortality and expense margins. This amortization is
adjusted when the Company revises the estimate of current or future gross
profits or margins. For example, deferred policy acquisition costs are amortized
earlier than originally estimated when policy terminations are higher than
originally estimated or when investments backing the related policyholder
liabilities are sold at a gain prior to their anticipated maturity.
Death and
other policyholder benefits reflect exposure to mortality risk and fluctuate
from year to year on the level of claims incurred under insurance retention
limits. The profitability of the Company is primarily affected by fluctuations
in mortality, other policyholder benefits, expense levels, interest spreads
(i.e., the difference between interest earned on investments and interest
credited to policyholders) and persistency. The Company has the ability to
mitigate adverse experience through sound underwriting, asset/liability duration
matching, sound actuarial practices, adjustments to credited interest rates,
policyholder dividends and cost of insurance charges.
Cemetery and Mortuary
Operations
Pre-need
sales of funeral services and caskets, including revenue and costs associated
with the sales of pre-need funeral services and caskets, are deferred until the
services are performed or the caskets are delivered.
Pre-need
sales of cemetery interment rights (cemetery burial property) - revenue and
costs associated with the sales of pre-need cemetery interment rights are
recognized in accordance with the retail land sales provisions of accounting
principles generally accepted in the United States (GAAP). Under GAAP,
recognition of revenue and associated costs from constructed cemetery property
must be deferred until a minimum percentage of the sales price has been
collected. Revenues related to the pre-need sale of unconstructed cemetery
property will be deferred until such property is constructed and meets the
criteria of SFAS 66 described above.
Pre-need
sales of cemetery merchandise (primarily markers and vaults) - revenue and costs
associated with the sales of pre-need cemetery merchandise are deferred until
the merchandise is delivered.
29
Pre-need
sales of cemetery services (primarily merchandise delivery and installation fees
and burial opening and closing fees) - revenue and costs associated with the
sales of pre-need cemetery services are deferred until the services are
performed.
Prearranged
funeral and pre-need cemetery customer obtaining costs - costs incurred related
to obtaining new pre-need cemetery and prearranged funeral business are
accounted for under the guidance of the provisions of GAAP related to Financial
Services - Insurance. Obtaining costs, which include only costs that vary with
and are primarily related to the acquisition of new pre-need cemetery and
prearranged funeral business, are deferred until the merchandise is delivered or
services are performed.
Revenues
and costs for at-need sales are recorded when a valid contract exists, the
services are performed, collection is reasonably assured and there are no
significant obligations remaining.
Mortgage
Operations
Mortgage
fee income is generated through the origination and refinancing of mortgage
loans and is realized in accordance with GAAP related to sales of financial
assets.
The
majority of loans originated are sold to third party investors. The amounts sold
to investors are shown on the balance sheet as mortgage loans sold to investors,
and include the fees due from the investors.
Use
of Significant Accounting Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect reported amounts and disclosures.
It is reasonably possible that actual experience could differ from the estimates
and assumptions utilized which could have a material impact on the financial
statements. The following is a summary of our significant accounting estimates,
and critical issues that impact them:
Fixed Maturities and Equity
Securities Available for Sale
Securities
available-for-sale are carried at estimated fair value, with unrealized holding
gains and losses reported in accumulated other comprehensive income, which is
included in stockholders’ equity after adjustment for deferred income taxes and
deferred acquisition costs related to universal life products.
The
Company is required to exercise judgment to determine when a decline in the
value of a security is other than temporary. When the value of a security
declines and the decline is determined to be other than temporary, the carrying
value of the investment is reduced to its fair value and a realized loss is
recorded to the extent of the decline.
Deferred Acquisition
Costs
Amortization
of deferred policy acquisition costs for interest sensitive products is
dependent upon estimates of current and future gross profits or margins on this
business. Key assumptions used include the following: yield on investments
supporting the liabilities, amount of interest or dividends credited to the
policies, amount of policy fees and charges, amount of expenses necessary to
maintain the policies, amount of death and surrender benefits, and the length of
time the policies will stay in force.
For
nonparticipating traditional life products, these costs are amortized over the
premium paying period of the related policies in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally “locked in” at the date
the policies are issued.
Value of Business
Acquired
Value of
business acquired is the present value of estimated future profits of the
acquired business and is amortized similar to deferred acquisition costs. The
critical issues explained for deferred acquisition costs would also apply for
value of business acquired.
30
Allowance
for Doubtful Accounts
The
Company accrues an estimate of potential losses for the collection of
receivables. The significant receivables are the result of receivables due on
mortgage loans sold to investors, cemetery and mortuary operations, mortgage
loan operations and other receivables. The allowance is based upon the Company’s
experience. The critical issue that would impact recovery of the cemetery and
mortuary receivables is the overall economy. The critical issues that would
impact recovery of mortgage loan operations would be interest rate risk and loan
underwriting.
Future Policy
Benefits
Reserves
for future policy benefits for traditional life insurance products requires the
use of many assumptions, including the duration of the policies, mortality
experience, expenses, investment yield, lapse rates, surrender rates, and
dividend crediting rates.
These
assumptions are made based upon historical experience, industry standards and a
best estimate of future results and, for traditional life products, include a
provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.
Unearned
Revenue
The
universal life products the Company sells have significant policy initiation
fees (front-end load) that are deferred and amortized into revenues over the
estimated expected gross profits from surrender charges and investment,
mortality and expense margins. The same issues that impact deferred acquisition
costs would apply to unearned revenue.
Deferred Pre-need Cemetery
and Funeral Contracts Revenues and Estimated Future Cost of Pre-need
Sales
The
revenue and cost associated with the sales of pre-need cemetery merchandise and
funeral services are deferred until the merchandise is delivered or the service
is performed.
The
Company, through its cemetery and mortuary operations, provides a guaranteed
funeral arrangement wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company’s
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy.
Mortgage Allowance for Loan
Loss and Loan Loss Reserve
The
Company provides allowances for losses on its mortgage loans through an
allowance for loan losses (a contra-asset account) and through the mortgage loan
loss reserve (a liability account). The allowance for loan losses and doubtful
accounts is an allowance for losses on the Company’s mortgage loans held for
investment. When a mortgage loan is past due more than 90 days, the Company,
where appropriate, sets up an allowance to approximate the excess of the
carrying value of the mortgage loan over the estimated fair value of the
underlying real estate collateral. Once a loan is past due more than 90 days the
Company does not accrue any interest income and proceeds to foreclose on the
real estate. All expenses for foreclosure are expensed as incurred. Once
foreclosed the carrying value will approximate its fair value and the amount
will be classified as real estate. The Company carries the foreclosed property
in Security National Life, Memorial Estates and SecurityNational Mortgage, its
life, cemeteries and mortuaries and mortgage subsidiaries, and will rent the
properties until it is deemed desirable to sell them. The Company is currently
able to rent properties at a 3% to 6% gross return.
The
mortgage loan loss reserve is an estimate of probable losses at the balance
sheet date that the Company will realize in the future on mortgage loans sold to
third party investors. The Company may be required to reimburse third party
investors for costs associated with early payoff of loans within the first six
months of such loans and to repurchase loans where there is a default in any of
the first four monthly payments to the investors or, in lieu of repurchase, to
pay a negotiated fee to the investors. The Company’s estimates are based upon
historical loss experience and the best estimate of the probable loan loss
liabilities.
Upon
completion of a transfer that satisfies the conditions to be accounted for as a
sale, the Company initially measures at fair value liabilities incurred in a
sale relating to any guarantee or recourse provisions. The Company accrues a
monthly allowance for indemnification losses to investors based on total
production. This estimate is based on the Company’s historical experience. The
amount accrued for and the charge to expense is included in selling, general and
administrative expenses. The estimated liability for indemnification losses is
included in other liabilities and accrued expenses. The Company believes the
Allowance for Loan Losses and Doubtful Accounts and the Loan Loss Reserve
represent probable loan losses incurred as of the balance sheet
date.
31
Deferred
Compensation
The
Company has deferred compensation agreements with several of its current and
past executive officers. The deferred compensation is payable upon retirement or
death of these individuals either in annual installments (ten years) or lump sum
settlement, if approved by the Board of Directors. The Company has accrued the
present value of these benefits based upon their future retirement dates and
other factors, on its consolidated financial statements.
Depreciation
Depreciation
is calculated principally on the straight-line-method over the estimated useful
lives of the assets, which range from 3 to 40 years. Leasehold improvements are
amortized over the lesser of the useful life or remaining lease
terms.
Self-Insurance
The
Company is self insured for certain casualty insurance, workers
compensation and liability programs. Self–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
coverages. When estimating the self-insurance liabilities and related reserves,
management considers a number of factors, which include historical claims
experience, demographic factors, severity factors and valuations provided
independent third-party actuaries. Management reviews its assumptions with its
independent third-party administrators and actuaries to evaluate whether the
self-insurance reserves are adequate. 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 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.
Results
of Operations
2009
Compared to 2008
Total
revenues decreased by $909,000, or 0.4%, to $218,595,000 for fiscal year 2009
from $219,504,000 for the fiscal year 2008. Contributing to this decrease in
total revenues was a decrease of $7,068,000 in investment income and a $752,000
decrease in net cemetery and mortuary sales. This decrease in total
revenues was partially offset by a $2,631,000 increase in realized gains
(losses) on investments and other assets, a $2,432,000 increase in insurance
premiums and other consideration, a $1,449,000 increase in mortgage fee income,
and an $399,000 increase in other revenue.
Insurance
premiums and other consideration increased by $2,432,000, or 6.8%, to
$38,413,000 for 2009, from $35,981,000 for the comparable period in 2008. This
increase was primarily the result of additional premiums realized from new
insurance sales, and the acquisition of Southern Security Life Insurance Company
on December 18, 2008, which contributed additional insurance
premiums.
Net
investment income decreased by $7,068,000, or 25.2%, to $21,035,000 for 2009,
from $28,103,000 for the comparable period in 2008. This reduction was primarily
attributable to reduced interest income due to lower interest rates from
mortgage loans on real estate (mortgages held for long-term and mortgages sold
to investors) and construction lending.
Net
cemetery and mortuary sales decreased by $752,000, or 5.9%, to $11,974,000 for
2009, from $12,726,000 for the comparable period in 2008. This reduction was
primarily due to a decline in pre-need land sales of burial spaces in the
cemetery and mortuary operations and a decline in at-need sales of mortuary
operations.
Realized
gains (losses) on investments and other assets increased by $2,631,000 to a
$897,000 realized gain for 2009, from a $1,734,000 realized loss for the
comparable period in 2008. This increase in realized gains on investments was
due to gains from the sale of equity securities.
32
Mortgage
fee income increased by $1,449,000, or 1.0%, to $144,861,000 for 2009, from
$143,412,000 for the comparable period in 2008. This increase was primarily
attributable to an increase in secondary gains on mortgage loans sold to
investors.
Other
revenues increased by $399,000, or 39.3%, to $1,415,000 for 2009 from $1,016,000
for the comparable period in 2008. This increase was due to additional
miscellaneous revenues throughout the Company's operations.
Total
benefits and expenses were $212,247,000, or 97.1% of total revenues, for 2009,
as compared to $218,773,000, or 99.7% of total revenues, for the comparable
period in 2008.
Death
benefits, surrenders and other policy benefits, and increase in future policy
benefits increased by an aggregate of $3,016,000, or 9.2%, to $35,920,000 for
2009, from $32,904,000 for the comparable period in 2008. This increase was
primarily the result of increased insurance business, and increased death
benefits that were partially offset by decreases in surrender and other policy
benefits.
Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $1,151,000, or 19.2%, to $7,161,000 for 2009, from $6,010,000 for
the comparable period in 2008. This increase was primarily due to an increase in
business in force, which was partially a result of the purchase of Southern
Security Life Insurance Company on December 18, 2008.
Selling,
general and administrative expenses decreased by $6,481,000, or 3.8%, to
$163,492,000 for 2009, from $169,973,000 for the comparable period in 2008. This
decrease was the result of a reduction in commission expenses of $19,453,000,
from $98,963,000 in 2008 to $79,510,000 in 2009, due to reduced mortgage loan
origination costs made by SecurityNational Mortgage, a decrease in sales at the
cemetery operations, and a decrease in life insurance renewal commissions during
2009. This decrease was partially offset by an increase in salaries of
$1,864,000 from $26,206,000 in 2008 to $28,070,000 in 2009, primarily due to
merit increases in salaries of existing employees. Provision for loan losses
increased by $8,995,000 from $10,552,000 in 2008 to $19,547,000 in 2009 due
primarily to increased loan loss reserve and loan allowance balances at
SecurityNational Mortgage Company. Other expenses increased by $2,113,000 from
$34,251,000 in 2008 to $36,364,000 in 2009 due to increased processing fees,
loan costs and foreclosure expenses.
Interest
expense decreased by $4,122,000, or 55.3%, to $3,326,000 for 2009, from
$7,448,000 for the comparable period in 2008. This reduction was primarily due
to decreased borrowing rates on warehouse lines.
Cost of
goods and services sold of the cemeteries and mortuaries decreased by $88,000,
or 3.6%, to $2,349,000 for 2009, from $2,437,000 for the comparable period in
2008. This increase was primarily due to decreased at-need cemetery sales and
mortuary sales.
Comprehensive
income for the years ended December 31, 2009 and December 31, 2008 amounted to
$4,950,000 and a loss of $605,000, respectively. This increase of $5,555,000 was
primarily the result of a $3,199,000 increase in net income and a $1,288,000
increase in unrealized gains in securities available for sale, and a gain of
$1,068,000 in derivatives related to mortgage loans.
2008
Compared to 2007
Total
revenues increased by $9,756,000, or 4.7%, to $219,504,000 for fiscal year
2008 from $209,748,000 for the fiscal year 2007. Contributing to this increase
in total revenues was a $12,939,000 increase in mortgage fee income, a
$3,719,000 increase in insurance premiums and other consideration, and a
$155,000 increase in other revenues. This increase in total revenues was
partially offset by a $3,853,000 decrease in net investment income, a $463,000
decrease in net cemetery and mortuary sales, and a $2,741,000 decrease in
realized gains (losses) on investments and other assets.
Insurance
premiums and other consideration increased by
$3,719,000, or 11.5%, to $35,981,000 for 2008, from
$32,262,000 for the comparable period in 2007. This increase was primarily the
result of additional premiums realized from new insurance sales, the acquisition
of Capital Reserve Life Insurance Company on December 20, 2007, and the
reinsurance agreement with Southern Security Life Insurance Company, effective
September 1, 2008.
Net
investment income decreased by $3,853,000, or
12.1%, to 28,104,000 for 2008, from $31,957,000 for the comparable period in
2007. This reduction was primarily attributable to decreased interest income
from mortgage loans on
real estate but partially offset by an increase in investment income from the
purchases of C&J Financial and Capital Reserve Life, and the reinsurance
agreement with Southern Security Life Insurance Company on September 1,
2008.
33
Net
cemetery and mortuary sales decreased by $463,000, or 3.5%, to $12,726,000 for
2008, from $13,189,000 for the comparable period in 2007. This reduction was due
to a decrease in at-need sales in the cemetery and mortuary operations and a
decrease in pre-need land sales of burial spaces in the cemetery
operations.
Realized
gains (losses) on investments and other assets decreased by $2,741,000 to a
$1,734,000 realized loss for 2008, from a $1,007,000 realized gain for the
comparable period in 2007. This increase in realized losses on investments was
due to $2,253,000 in realized losses from fixed maturity securities deemed to be
other than temporarily impaired and $651,000 in realized gain from equity
securities sales. During 2007 there was a $516,000 net gain from the sale of
Colonial Funeral Home, which was partially offset by a $91,000 loss on the
foreclosure and subsequent sale of the funeral home in 2008.
Mortgage
fee income increased by $12,939,000, or 9.9%, to $143,411,000 for 2008, from
$130,472,000 for the comparable period in 2007. This increase was primarily
attributable to an increase in loan fees charged to originate loans, and
secondary gains during 2008 on loan production at existing offices.
Other
revenues increased by $155,000, or 18.0%, to $1,015,000 for 2008 from $860,000
for the comparable period in 2007. This increase was due to increases in several
small income items throughout the Company's operations.
Total
benefits and expenses were $218,773,000, or 99.7% of total revenues, for 2008,
as compared to $206,625,000, or 98.5% of total revenues, for the comparable
period in 2007.
Death
benefits, surrenders and other policy benefits, and increase in future policy
benefits increased by an aggregate of $3,162,000, or 10.6%, to $32,904,000 for
2008, from $29,742,000 for the comparable period in 2007. This increase was
primarily the result of increased insurance business, increased reserves for
policyholder benefits and death claims, the acquisition of Capital Reserve Life
on December 20, 2007, and the reinsurance agreement with Southern Security Life
Insurance Company, effective September 1, 2008.
Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $439,000, or 7.9%, to $6,010,000 for 2008, from $5,571,000 for the
comparable period in 2007. This increase was primarily due to an increase in new
business and higher policy terminations from the previous year.
Selling,
general and administrative expenses increased by $14,469,000, or 9.3%, to
$169,973,000 for 2008, from $155,504,000 for the comparable period in 2007.
Salaries increased by $2,261,000 from $23,945,000 in 2007 to $26,206,000 in
2008, primarily due to merit increases in salaries of existing employees, and an
increase in the number of employees necessitated by the Company's expanding
business operations. Other expenses increased by $10,202,000 from $34,602,000 in
2007 to $44,804,000 in 2008. The increase in other expenses primarily resulted
from increased costs at SecurityNational Mortgage Company, increases in the loan
reserve and loan allowances balance. Commission expenses increased by
$2,006,000, from $96,957,000 in 2007 to $98,963,000 in 2008, due to increased
mortgage loan origination costs made by SecurityNational Mortgage.
Interest
expense decreased by $5,823,000, or 43.9%, to $7,448,000 for 2008, from
$13,271,000 for the comparable period in 2007. This reduction was primarily due
to decreased warehouse lines of credit required, and lower interest
rates.
Cost of
goods and services sold of the cemetery and mortuaries decreased by
$100,000, or 3.9%, to $2,437,000 for 2008, from $2,537,000 for the comparable
period in 2007. This increase was primarily due to decreased at-need cemetery
sales and mortuary sales.
34
Risks
The
following is a description of the most significant risks facing the Company and
how it mitigates those risks:
Legal and Regulatory
Risks - The risk that changes in the legal or regulatory environment in
which the Company operates will create additional expenses and/or risks not
anticipated by the Company in developing and pricing its products. That is,
regulatory initiatives designed to reduce insurer profits, new legal theories or
insurance company insolvencies through guaranty fund assessments may create
costs for the insurer beyond those recorded in the consolidated financial
statements. In addition, changes in tax law with respect to mortgage interest
deductions or other public policy or legislative changes may affect the
Company’s mortgage sales. Also, the Company may be subject to further
regulations in the cemetery/mortuary business. The Company mitigates these risks
by offering a wide range of products and by diversifying its operations, thus
reducing its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the adverse impact
of such risks.
Mortgage Industry
Risk - Developments in the mortgage industry and credit markets adversely
affected the Company’s ability to sell certain of its mortgage loans to
investors, which impacted the Company’s financial results by requiring it to
assume the risk of holding and servicing many of these loans.
The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans and traditional and non-traditional
products. The market for new subprime loans has been substantially reduced and
several mortgage companies whose primary product consisted of subprime mortgage
originations have ceased operations. The Company funded $5,505,000 (0.14% of the
Company’s loan production) in subprime loans during the twelve months ending
December 31, 2007 and eliminated subprime loans from its product offerings in
August 2007. The Company believes that its potential losses from subprime loans
are minimal.
The
industry problem with subprime mortgages created a volatile secondary market for
other products, especially alternative documentation (Alt A) loans. Alt A loans
were typically offered to qualified borrowers who had relatively high credit
scores but were not required to provide full documentation to support disclosure
in the loan application of personal income and assets owned. Alt A loans could
have a loan to value ratio as high as 100%. As a result of these changes,
the Company discontinued offering these loans in September 2007.
As a
result of the volatile secondary market, for mortgage loans, the Company sold
mortgage loans in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of such loans was $52,556,000, of which $36,499,000 were loans in
which the secondary market no longer exists. Due to these changes in
circumstances, the Company regained control of the mortgages and, in accordance
with generally accepted accounting principles, accounted for the loans retained
in the same manner as a purchase of assets from the former transferee(s) in
exchange for liabilities assumed. At the time of repurchase, the loans were
determined to be held for investment purposes, and the fair value of the loans
was determined to approximate the unpaid principal balances adjusted for
chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans. The 2008 and 2009 financial statements reflect the
transfer of the mortgage loans from “Mortgage Loans Sold to Investors” to
“Mortgage Loans on Real Estate”. The loan sale revenue recorded on the sale of
the mortgage loans was reversed on the date the loans were
repurchased.
As a
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
During this period the Company will service these loans through Security
National Life, its life insurance subsidiary.
The
Company provides allowances for losses on its mortgage loans held for investment
through an allowance for loan losses (a contra-asset account) and for mortgage
loans sold to investors through the mortgage loan loss reserve (a liability
account). The allowance for loan losses and doubtful accounts is an allowance
for losses on the Company’s mortgage loans held for investment. When a mortgage
loan is past due more than 90 days, the Company, where appropriate, sets up an
allowance to approximate the excess of the carrying value of the mortgage loan
over the estimated fair value of the underlying real estate collateral. Once a
loan is past due more than 90 days the Company does not accrue any interest
income and proceeds to foreclose on the real estate. All expenses for
foreclosure are expensed as incurred. Once foreclosed, the carrying value will
approximate its fair value and the amount is classified as real estate. The
Company carries the foreclosed properties in Security National
Life, Memorial Estates, and SecurityNational Mortgage, its life, cemeteries and
mortuaries and mortgage subsidiaries, and will rent the properties until it is
deemed desirable to sell them.
35
See
footnote 1 in the consolidated financial statements for the schedule of the
allowance for loan losses as a contra-asset account.
The
mortgage loan loss reserve is an estimate of probable losses at the balance
sheet date that the Company will realize in the future on mortgage loans sold to
third party investors. The Company may be required to reimburse third party
investors for costs associated with early payoff of loans within the first six
months of such loans and to repurchase loans where there is a default in any of
the first four monthly payments to the investors or, in lieu of repurchase, to
pay a negotiated fee to the investors. The Company’s estimates are based upon
historical loss experience and the best estimate of the probable loan loss
liabilities.
Upon
completion of a transfer that satisfies the conditions to be accounted for as a
sale, the Company initially measures at fair value liabilities incurred in a
sale relating to any guarantee or recourse provisions. The Company accrues a
monthly allowance for indemnification losses to investors based on the Company’s
historical experience. The amount accrued for the years ended December 31, 2009,
2008 and 2007 was $17,306,471, $7,140,270 and $4,129,301, respectively and the
charge to expense has been included in selling, general and administrative
expenses. The estimated liability for indemnification losses is included in
other liabilities and accrued expenses, and, as of December 31, 2009, 2008 and
2007 the balance was $11,662,897, $2,775,452 and $2,356,308,
respectively.
See
footnote 1 in the consolidated financial statement for schedule of mortgage loan
loss reserves.
The
Company believes the allowance for loan losses and the loan loss reserve
represent probable loan losses incurred as of the balance sheet
date.
As of
December 31, 2009, the Company’s long term mortgage loan portfolio contained
mortgage loans of $19,538,000 in unpaid principal with delinquencies more than
90 days. Of this amount $12,108,000 was in foreclosure proceedings. The Company
has not received or recognized any interest income on the $19,538,000 in
mortgage loans with delinquencies more than 90 days. During the years ended
December 31, 2009 and 2008, the Company has increased its allowance for mortgage
loan losses by $3,166,000 and $4,339,000, respectively, which allowance was
charged to loan loss expense and is included in other selling, general and
administrative expenses for the period. The allowance for mortgage loan losses
as of December 31, 2009 and 2008 was $6,809,000 and $4,780,000,
respectively.
Also, at
December 31, 2009, the Company had foreclosed on a total of $44,251,000 in long
term mortgage loans, of which $24,441,000 in loans were foreclosed on and
reclassified as real estate during 2009. The foreclosed property is shown in
real estate. The Company carries the foreclosed properties in Security National
Life, Memorial Estates, and SecurityNational Mortgage, its life, cemeteries and
mortuaries, and mortgage subsidiaries, and will rent the properties until it is
deemed desirable to sell them.
The
Company is exposed to the risk that certain third party purchasers could have
claims against the Company requiring it to repurchase alleged defective mortgage
loans or to indemnify such purchasers against any losses related to such
loans. In particular, there have been assertions in third party
purchaser correspondence that SecurityNational Mortgage sold mortgage loans that
contained alleged misrepresentations or that experienced early payment defaults,
or that were otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of America –
Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made demands
that SecurityNational Mortgage repurchase certain alleged defective mortgage
loans that were sold to such investors or indemnify them against any losses
related to such loans. The Company has been reviewing these demands
and has reserved what it believes to be an adequate amount to cover potential
losses. Although the Company believes that it has reserved adequate
provisions for losses, from an industry wide perspective the number of
repurchase demands and the loss per loan have shown sharp increases during the
last several months as compared to historical amounts. It is unclear
whether such increases represent a trend that will continue in the
future.
In
addition to the allowance for mortgage loan losses, the Company also accrues a
monthly allowance for indemnification losses to investors based on the Company’s
historical experience. The amount accrued for the twelve months ended December
31, 2009 was $17,306,000 and included in other general and administrative expenses.
The reserve for indemnification losses is included in other liabilities and, as
of December 31, 2009, the balance was $11,663,000.
36
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at December 31, 2009 was
$230,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of December 31, 2009, there were $152,560,000
in mortgage loans in which settlements with third party investors were still
pending. Generally, when mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on September 30, 2009 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement. In addition, the Company
has been successful in obtaining a loan purchase agreement with another
warehouse bank.
Florida Insurance
Business - After several months of discussions with the Florida Office of
Insurance Regulation concerning the categorization of certain admitted assets,
Security National Life received a letter dated June 17, 2009, in which Florida
indicated its rejection of Security National Life's position and requested that
Security National Life either infuse additional capital or cease writing new
business in the State of Florida. Florida’s decision was based upon
excess investments in subsidiaries by Security National Life and Florida’s
determination to classify as property acquired and held for the purposes of
investment, certain real property that Security National Life acquired in
satisfaction of creditor rights and subsequently rented to
tenants. These determinations resulted in Security National Life
exceeding certain investment limitations under Florida law and in a
corresponding capital and surplus deficiency as of March 31,
2009. Florida has acknowledged that the deficiency may be cured by
the infusion of additional capital in the amount of the excess
investments.
Security
National Life strongly disagrees with Florida’s interpretation of the Florida
statutes, including Florida’s opinion that $21,672,000 of real property that
Security National Life acquired in satisfaction of creditor rights as of March
31, 2009 must be included in an investment category that is subject to a
limitation of only 5% of admitted assets (which category consists of real estate
acquired and held for investment purposes) rather than in the investment
category that is subject to a limitation of 15% of admitted assets (which
category includes real estate acquired in satisfaction of loans, mortgages, or
debts). In rendering its opinion, Florida did not suggest that the
real property assets of Security National Life are not fairly stated. The letter
further stated that Security National Life may not resume writing insurance in
Florida until such time as it regains full compliance with Florida law and
receives written approval from Florida authorizing it to resume writing
insurance.
On June
18, 2009, Security National Life responded by letter to Florida and expressed
its disagreement with Florida’s interpretation of the Florida statutes but, for
practical purposes, agreed, beginning as of June 30, 2009 and continuing until
Florida determines that Security National Life has attained full compliance with
the Florida statutes, to cease originating new insurance policies in Florida and
not to enter into any new reinsurance agreements with any Florida domiciled
insurance company. The State of Utah, Security National Life’s state
of domicile, has not determined Security National Life to have a capital and
surplus deficiency, nor is Security National Life aware of any state, other than
Florida, in which Security National Life is determined to have a capital and
surplus deficiency.
During
2008, the annualized premiums for new insurance policies written by Security
National Life in Florida were $464,000, or 4.7% of the total amount of
$9,901,000 in annualized premiums for new insurance policies written by Security
National Life during the same period. Security National Life is in
the process of preparing an application to be submitted to Florida for approval
of a Florida only subsidiary for all new insurance business written in
Florida. Security National Life believes that if Florida were to
approve a Florida only subsidiary, Security National Life would be able to
resume writing new insurance policies in Florida in full compliance with the
Florida statutes relating to investments in real estate and
subsidiaries.
Interest Rate Risk -
the risk that interest rates will change which may cause a decrease in the value
of the Company’s investments or impair the ability of the Company to market its
mortgage and cemetery/mortuary products. This change in rates may cause certain
interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
non-conformance with certain policy provisions,
by offering products that transfer this risk to the purchaser, and/or by
attempting to match the maturity schedule of its assets with the expected
payouts of its liabilities. To the extent that liabilities come due more quickly
than assets mature, the Company might have to borrow funds or sell assets prior
to maturity and potentially recognize a loss on the
sale.
37
Mortality/Morbidity
Risk - the risk that the Company’s actuarial assumptions may differ from
actual mortality/morbidity experience may cause the Company’s products to be
underpriced, may cause the Company to liquidate insurance or other claims
earlier than anticipated and other potentially adverse consequences to the
business. The Company minimizes this risk through sound underwriting practices,
asset/liability duration matching, and sound actuarial practices.
Estimates - The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
The
estimates susceptible to significant change are those used in determining the
liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, construction loans,
estimate of probable loan loss reserve, and other receivables, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
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 of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. 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 on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.
During
the twelve months ended December 31, 2009, the Company's operations provided
cash of $17,172,000, while cash totaling $57,119,000 was provided by operations
during the twelve months ended December 31, 2008. This was due primarily to a
$19,384,000 increase in 2009 and a decrease of $35,367,000 in 2008 in the
balance of mortgage loans sold to investors, which was attributed to a transfer
of loans totaling $5,028,000 and $36,291,000 to long term mortgages in 2009 and
2008, respectively.
The
Company’s liability for future life, annuity and other benefits is expected to
be paid out over 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 liquidating these long-term investments as a result of any sudden
changes in market 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; however, to
date, that has not been necessary. 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, which
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, 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 amounted to $116,982,000 as of December 31, 2009 compared to
$126,583,000 as of December 31, 2008. This represents 39.1% and 41.6% of the
total investments as of December 31, 2009, and December 31, 2008, 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 December 31, 2009, 6.9% (or
$7,930,000) and at December 31, 2008, 2.8% (or $3,485,000) of the Company’s
total bond investments
were invested in bonds in rating categories three through six, which are
considered non-investment grade.
38
The
Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may develop in the future which may
indicate a need for a higher level of liquidity in the investment portfolio. In
that event the Company believes it could sell short-term investment grade
securities before liquidating higher-yielding longer-term
securities.
See
footnote 3 in the consolidated financial statement for the schedule of the
maturity of fixed maturity securities.
The
amortized cost and contractual payments on mortgage loans on real estate and
construction loans held for investment by category as of December 31, 2009 are
shown below. Expected principal payments may differ from contractual obligations
because certain borrowers may elect to pay off mortgage obligations with or
without early payment penalties.
|
Principal
|
Principal
|
Principal
|
||||||||||||||
|
Amounts
|
Amounts
|
Amounts
|
||||||||||||||
|
Due
in
|
Due
in
|
Due
|
||||||||||||||
|
Total
|
2010
|
2011-2014 |
Thereafter
|
|||||||||||||
|
Residential
|
$ | 60,863,841 | $ | 790,171 | $ | 2,343,334 | $ | 57,730,336 | ||||||||
|
Residential
Construction
|
25,028,081 | 25,028,081 | - | - | ||||||||||||
|
Commercial
|
24,206,957 | 11,020,707 | 7,510,632 | 5,675,618 | ||||||||||||
|
Total
|
$ | 110,098,879 | $ | 36,838,959 | $ | 9,853,966 | $ | 63,405,954 | ||||||||
Generally
accepted accounting principles (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
we 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 our estimates of the assumptions that market participants would
use in valuing the financial assets and financial
liabilities.
|
We utilize a combination of
third party valuation service providers, brokers, and internal valuation models
to determine fair value.
39
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 consolidated balance sheet at December 31, 2009.
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
Significant
|
||||||||||||||
|
Markets
for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
|
Assets
accounted for at fair value on a
|
||||||||||||||||
|
recurring
basis
|
||||||||||||||||
|
Investment
in securities available for sale
|
$ | 6,936,137 | $ | 6,936,137 | $ | - | $ | - | ||||||||
|
Short-term
investments
|
7,144,349 | 7,144,349 | - | - | ||||||||||||
|
Restricted
assets of cemeteries and mortuaries
|
1,677,273 | 1,677,273 | - | - | ||||||||||||
|
Cemetery
perpetual care trust investments
|
1,104,046 | 1,104,046 | - | - | ||||||||||||
|
Derivatives
- interest rate lock commitments
|
1,770,193 | - | - | 1,770,193 | ||||||||||||
|
Total
assets accounted for at fair value on a
|
||||||||||||||||
|
recurring
basis
|
$ | 18,631,998 | $ | 16,861,805 | $ | - | $ | 1,770,193 | ||||||||
|
Liabilities
accounted for at fair value
|
||||||||||||||||
|
on
a recurring basis
|
||||||||||||||||
|
Investment-type
insurance contracts
|
$ | (115,763,748 | ) | $ | - | $ | - | $ | (115,763,748 | ) | ||||||
|
Derivatives -
bank loan interest rate swaps
|
$ | (101,251 | ) | - | - | (101,251 | ) | |||||||||
|
-
call options
|
(134,492 | ) | (134,492 | ) | ||||||||||||
|
-
interest rate lock commitments
|
(215,481 | ) | - | - | (215,481 | ) | ||||||||||
|
Total
liabilities accounted for at fair value
|
||||||||||||||||
|
on
a recurring basis
|
$ | (116,214,972 | ) | $ | - | $ | - | $ | (116,214,972 | ) | ||||||
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
Investment
Type Insurance Contracts
|
Interest
Rate Lock Commitments
|
Bank
Loan Interest Rate Swaps
|
Call
Options
|
|||||||||||||
|
Balance
- December 31, 2008
|
$ | (112,351,916 | ) | $ | 362,231 | $ | (167,483 | ) | $ | - | ||||||
|
Options
sold
|
- | - | - | (613,541 | ) | |||||||||||
|
Total
Losses (Gains):
|
||||||||||||||||
|
Included
in earnings
|
(3,411,832 | ) | - | - | 479,049 | |||||||||||
|
Included
in other
|
||||||||||||||||
|
comprehensive
income (loss)
|
- | 1,192,480 | 66,277 | - | ||||||||||||
|
Balance
- December 31, 2009
|
$ | (115,763,748 | ) | $ | 1,554,711 | $ | (101,206 | ) | $ | (134,492 | ) | |||||
40
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 consolidated balance sheet at December 31, 2008.
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
Significant
|
||||||||||||||
|
Markets
for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||||||||||||
|
Assets
accounted for at fair value on a
|
||||||||||||||||
|
recurring
basis
|
||||||||||||||||
|
Investment
in securities available for sale
|
$ | 5,854,237 | $ | 5,854,237 | $ | - | $ | - | ||||||||
|
Short-term
investments
|
5,282,986 | 5,282,986 | - | - | ||||||||||||
|
Restricted
assets of cemeteries and mortuaries
|
1,241,038 | 1,241,038 | - | - | ||||||||||||
|
Cemetery
perpetual care trust investments
|
1,840,119 | 1,840,119 | - | - | ||||||||||||
|
Derivative-interest
rate lock commitments
|
2,372,452 | - | 2,372,452 | |||||||||||||
|
Total
assets accounted for at fair value on a
|
||||||||||||||||
|
recurring
basis
|
$ | 16,590,832 | $ | 14,218,380 | $ | - | $ | 2,372,452 | ||||||||
|
Liabilities
accounted for at fair value
|
||||||||||||||||
|
on
a recurring basis
|
||||||||||||||||
|
Investment-type
insurance contracts
|
$ | (112,351,916 | ) | $ | - | $ | - | $ | (112,351,916 | ) | ||||||
|
Derivative
- bank loan interest rate swaps
|
(167,483 | ) | (167,483 | ) | ||||||||||||
|
-
interest rate lock commitments
|
(2,010,221 | ) | - | - | (2,010,221 | ) | ||||||||||
|
Total
liabilities accounted for at fair value
|
||||||||||||||||
|
on
a recurring basis
|
$ | (114,529,620 | ) | $ | - | $ | - | $ | (114,529,620 | ) | ||||||
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
Investment
Type Insurance Contracts
|
Interest
Rate Lock Commitments
|
Bank
Loan Interest Rate Swaps
|
||||||||||
|
Balance
- December 31, 2007
|
$ | (106,939,120 | ) | $ | 627,116 | $ | (26,951 | ) | ||||
|
Total
Losses:
|
||||||||||||
|
Included
in earnings
|
(5,412,796 | ) | - | - | ||||||||
|
Included
in other
|
||||||||||||
|
comprehensive
income
|
- | (264,885 | ) | (140,532 | ) | |||||||
|
Balance
- December 31, 2008
|
$ | (112,351,916 | ) | $ | 362,231 | $ | (167,483 | ) | ||||
The items
shown under Level 1 are valued as follows:
On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely
that the investment will recover from the loss position, the loss is considered
to be other than temporary, the security is written down to the impaired value
and an impairment loss is recognized.
41
The items
shown under level three are valued as follows:
Investment type insurance
contracts. 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 4% to
6.5%.
Interest rate lock
commitments. The Company’s mortgage banking activities enters into
interest rate lock commitments with potential borrowers and forward commitments
to sell loans to third-party investors. The Company also implements a hedging
strategy for these transactions. A mortgage 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 inception of the
mortgage loan commitment. Mortgage loan commitments are defined to be
derivatives under generally accepted accounting principles and are recognized at
fair value on the consolidated balance sheet with changes in their fair values
recorded as part of other comprehensive income from mortgage banking
operations.
Bank loan interest rate
swaps. Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate swap mirrors the term of the note payable and expires on
the maturity date of the bank loan it hedges. The interest rate swaps are
derivative financial instruments carried at its fair value.
If market
conditions were to cause interest rates to change, the market value of the fixed
income portfolio (of approximately $227,478,000) could change by the following
amounts based on the respective basis point swing (the change in the market
values were calculated using a modeling technique):
|
-200
bps
|
-100
bps
|
+100
bps
|
+200
bps
|
|
|
Change
in Market Value
|
$21,918
|
$11,511
|
$(12,673)
|
$(23,948)
|
|
(in
thousands)
|
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 December 31, 2009,
and December 31, 2008, the life insurance subsidiary exceeded the regulatory
criteria.
The Company’s total capitalization of
stockholders’ equity, and bank debt and notes payable were $68,745,000 as of December 31, 2009, as compared to $60,552,000 as of
December 31, 2008. Stockholders’ equity as a percent of total capitalization was
87.0% and 89.0% as of December 31, 2009 and December 31, 2008,
respectively. Bank debt
and notes payable increased $2,300,000 for the twelve months ended December
31, 2009 when compared to December 31, 2008, thus decreasing the stockholders
equity percentage.
Lapse
rates measure the amount of insurance terminated during a particular period. The
Company’s lapse rate for life insurance in 2009 was 8.4% as compared to a rate
of 9.0% for 2008.
At
December 31, 2009, $21,359,000 of the Company’s consolidated stockholders’
equity represents the statutory stockholders’ equity of the Company’s life
insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to
its parent company without the approval of insurance regulatory
authorities.
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements to encourage companies to provide prospective
information about their businesses without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in such statements. The
Company desires to take advantage of the “safe harbor” provisions of the
act.
This
Annual Report of Form 10-K contains forward-looking statements, together with
related data and projections, about the Company’s projected financial results
and its future plans and strategies. However, actual results and needs of the
Company may vary materially from forward-looking statements and projections made
from time to time by the
Company on the basis of management’s then-current expectations. The business in
which the Company is engaged involves changing and competitive markets, which
may involve a high degree of risk, and there can be no assurance that
forward-looking statements and projections will prove
accurate.
42
Factors
that may cause the Company’s actual results to differ materially from those
contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customers, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expense due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company’s liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials and (xiii) adverse trends in mortality and
morbidity; (xiv) deterioration of real estate markets and (xv) lawsuits in the
ordinary course of business.
Off-Balance
Sheet Agreements
At
December 31, 2009, the Company was contingently liable under a standby
letter of credit aggregating $369,356, to be used as collateral to
cover any contingency related to additional risk assessments pertaining to the
Company's self-insurance casualty program. The Company does not expect any
material losses to result from the issuance of the standby letter of credit
because claims are not expected to exceed premiums paid. Accordingly, the
estimated fair value of these instruments is zero.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at December 31, 2009 was
$230,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of December 31, 2009, there were $152,560,000
in mortgage loans in which settlements with third party investors were still
pending. Generally, when certain mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on September 30, 2009 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement. In addition, the Company
has been successful in obtaining a loan purchase agreement with another
warehouse bank.
The total
of the Company unfunded residential construction loan commitments as of December
31, 2009 was $2,176,000.
Contractual
Obligations
The
Company’s contractual obligations as of December 31, 2009 and the payments due
by period are shown in the following table:
|
Less
than
1
year
|
1-3
years
|
4-5
years
|
over
5
years
|
Total
|
||||||||||||||||
|
Non-cancelable
operating leases
|
$ | 1,154,280 | $ | 1,181,188 | $ | 163,544 | $ | - | $ | 2,499,012 | ||||||||||
|
Notes
and contracts payable
|
2,404,185 | 1,975,925 | 4,040,927 | 518,952 | 8,939,989 | |||||||||||||||
| $ | 3,558,465 | $ | 3,157,113 | $ | 4,204,471 | $ | 518,952 | $ | 11,439,001 | |||||||||||
43
Variable
Interest Entities
In
conjunction with the Company’s casualty insurance program, limited equity
interests are held in a captive insurance entity. This program permits the
Company to self-insure a portion of losses, to gain access to a wide array of
safety-related services, to pool insurance risks and resources in order to
obtain more competitive pricing for administration and reinsurance and to limit
its risk of loss in any particular year. This entity meets the definition of a
variable interest entity (VIE); however, based on the criteria set forth in FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51, “there is not a
requirement to include this entity in the consolidated financial statements. The
maximum exposure to loss related to the Company’s involvement with this entity
is limited to approximately $369,356, a majority of which is collateralized
under a standby letter of credit issued on the insurance entity’s behalf. See
Note 11, “Reinsurance, Commitments and Contingencies,” for additional discussion
of commitments associated with the insurance program and Note 1, “Significant
Accounting Policies”, for further information on a standby letter of credit. As
of December 31, 2009, there are no other entities that met the definition of a
variable interest entity.
Recent
Accounting Pronouncements
Subsequent
Events – In May 2009, the FASB issued guidance which establishes the
period after the balance sheet date during which management shall evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements and the circumstances under which an entity shall
recognize events or transactions that occur after the balance sheet date. This
guidance also requires disclosure of the date through which subsequent events
have been evaluated. The Company adopted this standard for the interim period
ended June 30, 2009. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial position or results of
operations. We have evaluated subsequent events after the balance sheet date of
December 31, 2009 through the time of filing with the Securities and Exchange
Commission (SEC) on March 31, 2010 which is the date the financial statements
were issued.
Accounting for
Transfers of Financial Assets and Consolidation of Variable Interest
Entities - In June 2009, the FASB issued accounting guidance which
revises existing sale accounting criteria for transfers of financial assets,
including securitization transactions, and eliminates the concept of a
“qualifying special-purpose entity.” Simultaneously, the FASB issued accounting
guidance which revises previous guidance for variable-interest entities (VIE) by
establishing a new approach for determining who should consolidate a VIE and by
changing when it is necessary to reassess who should consolidate a
VIE. These new accounting standards updates will be effective at the
beginning of the first fiscal year beginning after November 15, 2009. Early
application is not permitted. Because the revised sales accounting
criteria do not change the Company’s revenue recognition and because all
mortgage loans originated by the Company are sold to outside third party
investors, the adoption of these two accounting standards will not change the
Company’s accounting for the mortgage loans it originates.
Disclosures about
Fair Value Measurements – In January 2010, the FASB issued guidance
requiring an entity to disclose the following:
|
|
·
|
Separately
disclose the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe reasons for the
transfers.
|
|
|
·
|
Present
separately information about purchases, sales, issuances and settlements,
on a gross basis, rather than on one net number, in the reconciliation for
fair value measurements using significant unobservable inputs (Level
3).
|
|
|
·
|
Provide
fair value measurement disclosures for each class of assets and
liabilities.
|
|
|
·
|
Provide
disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements for fair
value measurements that fall in either Level 2 or Level
3.
|
This
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010. The Company will include the new required
disclosures in its Form 10-Q for the quarter ended March 31,
2010.
44
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
The
Company has no activities in derivative financial or commodity instruments other
than those recorded and disclosed in the financial statements. See note 20 of
the consolidated financial statements included elsewhere in this Form 10-K. The
Company’s exposure to market risks (i.e., interest rate risk, foreign currency
exchange rate risk and equity price risk) through other financial instruments,
including cash equivalents, accounts receivable and lines of credit, is not
material.
45
Item 8. Financial Statements
and Supplementary Data
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
Page
No.
|
|
|
Financial
Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
Consolidated
Balance Sheets, December 31, 2009 and 2008
|
48
|
|
Consolidated
Statements of Earnings for the Years Ended December 31, 2009, 2008 and
2007
|
50
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
2008 and 2009
|
51
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
52
|
|
Notes
to Consolidated Financial Statements
|
54
|
Financial
Statement Schedules:
|
II
|
Condensed
Financial Information of Registrant
|
133
|
|
IV
|
Reinsurance
|
139
|
|
V
|
Valuation
and Qualifying Accounts
|
140
|
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.
46
|
HANSEN, BARNETT & MAXWELL,
P.C.
|
||
|
A
Professional Corporation
|
Registered
with the Public Company
|
|
|
CERTIFIED
PUBLIC ACCOUNTANTS
|
Accounting
Oversight Board
|
|
|
5
Triad Center, Suite 750
|
||
|
Salt
Lake City, UT 84180-1128
|
||
|
Phone:
(801) 532-2200
Fax:
(801) 532-7944
|
 |
|
|
www.hbmcpas.com
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and the Stockholders
Security
National Financial Corporation
We have
audited the accompanying consolidated balance sheets of Security National
Financial Corporation and subsidiaries as of December 31, 2009 and 2008 and the
related consolidated statements of earnings, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Security
National Financial Corporation and subsidiaries as of December 31, 2009 and 2008
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
Our
audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Supplemental Schedules II, IV and V, are
presented for purpose of additional analysis and are not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
|
HANSEN,
BARNETT & MAXWELL, P.C.
|
Salt Lake
City, Utah
March 31,
2010
47
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
December
31,
|
||||||||
|
Assets
|
2009
|
2008
|
||||||
|
Investments:
|
||||||||
|
Fixed
maturity securities, held to maturity, at amortized cost
|
$ | 115,832,300 | $ | 125,346,194 | ||||
|
Fixed
maturity securities, available for sale, at estimated fair
value
|
1,149,523 | 1,236,562 | ||||||
|
Equity
securities, available for sale, at estimated fair value
|
5,786,614 | 4,617,675 | ||||||
|
Mortgage
loans on real estate and construction loans held for
|
||||||||
|
investment,
net of allowances for losses of $6,808,803 and
|
||||||||
|
$4,780,467
for 2009 and 2008
|
103,290,076 | 124,592,678 | ||||||
|
Real
estate held for investment, net of accumulated depreciation
and
|
||||||||
|
allowances
for losses of $4,046,272 and $5,009,571 for 2009 and 2008
|
46,069,638 | 22,417,639 | ||||||
|
Policy,
student and other loans net of allowance
|
||||||||
|
for
doubtful accounts of $652,498 and $555,146 for 2009 and
2008
|
18,145,029 | 18,493,751 | ||||||
|
Short-term
investments
|
7,144,319 | 5,282,986 | ||||||
|
Accrued
investment income
|
2,072,495 | 2,245,201 | ||||||
|
Total
investments
|
299,489,994 | 304,232,686 | ||||||
|
Cash
and cash equivalents
|
39,463,803 | 19,914,110 | ||||||
|
Mortgage
loans sold to investors
|
39,269,598 | 19,885,994 | ||||||
|
Receivables,
net
|
10,873,207 | 13,135,080 | ||||||
|
Restricted
assets of cemeteries and mortuaries
|
2,593,413 | 4,077,076 | ||||||
|
Cemetery
perpetual care trust investments
|
1,104,046 | 1,840,119 | ||||||
|
Receivable
from reinsurers
|
5,776,780 | 5,823,379 | ||||||
|
Cemetery
land and improvements
|
10,987,833 | 10,626,296 | ||||||
|
Deferred
policy and pre-need contract acquisition costs
|
34,087,951 | 32,424,512 | ||||||
|
Property
and equipment, net
|
12,826,478 | 14,049,232 | ||||||
|
Value
of business acquired
|
10,252,670 | 11,377,276 | ||||||
|
Goodwill
|
1,075,039 | 1,075,039 | ||||||
|
Other
|
2,776,086 | 3,343,726 | ||||||
|
Total
Assets
|
$ | 470,576,898 | $ | 441,804,525 | ||||
See
accompanying notes to consolidated financial statements.
48
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (Continued)
|
December
31,
|
||||||||
|
Liabilities
and Stockholders' Equity
|
2009
|
2008
|
||||||
|
Liabilities
|
||||||||
|
Future
life, annuity, and other benefits
|
$ | 336,343,433 | $ | 325,668,454 | ||||
|
Unearned
premium reserve
|
4,780,645 | 4,863,919 | ||||||
|
Bank
loans payable
|
8,656,245 | 6,138,202 | ||||||
|
Notes
and contracts payable
|
283,744 | 501,778 | ||||||
|
Deferred
pre-need cemetery and mortuary contract revenues
|
13,381,662 | 13,467,132 | ||||||
|
Cemetery
perpetual care obligation
|
2,756,174 | 2,647,984 | ||||||
|
Accounts
payable
|
2,601,149 | 1,941,777 | ||||||
|
Other
liabilities and accrued expenses
|
24,623,535 | 17,688,756 | ||||||
|
Income
taxes
|
17,344,869 | 14,974,244 | ||||||
|
Total
liabilities
|
410,771,456 | 387,892,246 | ||||||
|
Commitments
and Contingencies
|
-- | -- | ||||||
|
Stockholders’
Equity
|
||||||||
|
Common
Stock:
|
||||||||
|
Class
A: common stock - $2.00 par value; 20,000,000 shares
authorized;
|
||||||||
|
issued
8,730,227 shares in 2009 and 8,284,109 shares in 2008
|
17,460,454 | 16,568,218 | ||||||
|
Class
B: non-voting common stock - $1.00 par value; 5,000,000
|
||||||||
|
shares
authorized; none issued or outstanding
|
-- | -- | ||||||
|
Class
C: convertible common stock - $0.20 par value; 15,000,000
shares
|
||||||||
|
authorized;
issued 9,214,211 shares in 2009 and 8,912,315 shares in
2008
|
1,842,842 | 1,782,463 | ||||||
|
Additional
paid-in capital
|
19,191,606 | 17,985,848 | ||||||
|
Accumulated
other comprehensive income, net of taxes
|
1,593,327 | 417,101 | ||||||
|
Retained
earnings
|
23,178,944 | 21,023,179 | ||||||
|
Treasury
stock, at cost - 1,454,974 Class A shares and -0- Class C
shares
|
||||||||
|
in
2009; 1,598,568 Class A shares and -0- Class C shares in
2008
|
(3,461,731 | ) | (3,864,530 | ) | ||||
|
Total
stockholders’ equity
|
59,805,442 | 53,912,279 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 470,576,898 | $ | 441,804,525 | ||||
See
accompanying notes to consolidated financial statements.
49
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EARNINGS
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues:
|
||||||||||||
|
Insurance
premiums and other consideration
|
$ | 38,413,329 | $ | 35,981,297 | $ | 32,262,837 | ||||||
|
Net
investment income
|
21,035,159 | 28,103,509 | 31,956,444 | |||||||||
|
Net
mortuary and cemetery sales
|
11,973,676 | 12,725,930 | 13,188,655 | |||||||||
|
Realized
gains (losses) on investments and other assets
|
897,312 | (1,733,715 | ) | 1,007,574 | ||||||||
|
Mortgage
fee income
|
144,860,399 | 143,411,459 | 130,472,166 | |||||||||
|
Other
|
1,414,680 | 1,015,370 | 860,406 | |||||||||
|
Total
revenues
|
218,594,555 | 219,503,850 | 209,748,082 | |||||||||
|
Benefits
and expenses:
|
||||||||||||
|
Death
benefits
|
19,003,933 | 17,100,688 | 16,274,813 | |||||||||
|
Surrenders
and other policy benefits
|
1,677,335 | 2,094,482 | 2,078,415 | |||||||||
|
Increase
in future policy benefits
|
15,238,380 | 13,709,135 | 11,389,019 | |||||||||
|
Amortization
of deferred policy and pre-need acquisition
|
||||||||||||
|
costs
and value of business acquired
|
7,160,488 | 6,010,273 | 5,570,799 | |||||||||
|
Selling,
general and administrative expenses:
|
||||||||||||
|
Commissions
|
79,509,946 | 98,962,941 | 96,957,340 | |||||||||
|
Salaries
|
28,069,907 | 26,206,331 | 23,944,999 | |||||||||
|
Provision
for loan losses and loss reserve
|
19,547,162 | 10,552,074 | 4,640,092 | |||||||||
|
Other
|
36,364,355 | 34,251,508 | 29,961,459 | |||||||||
|
Interest
expense
|
3,326,161 | 7,448,454 | 13,270,871 | |||||||||
|
Cost
of goods and services sold – mortuaries and cemeteries
|
2,349,230 | 2,437,453 | 2,537,244 | |||||||||
|
Total
benefits and expenses
|
212,246,897 | 218,773,339 | 206,625,051 | |||||||||
|
Earnings
before income taxes
|
6,347,658 | 730,511 | 3,123,031 | |||||||||
|
Income
tax expense
|
(2,573,778 | ) | (155,658 | ) | (857,635 | ) | ||||||
|
Net
earnings
|
$ | 3,773,880 | $ | 574,853 | $ | 2,265,396 | ||||||
|
Net
earnings per Class A equivalent common share (1)
|
$ | 0.46 | $ | 0.07 | $ | 0.27 | ||||||
|
Net
earnings per Class A equivalent common share -
|
||||||||||||
|
assuming
dilution(1)
|
$ | 0.46 | $ | 0.07 | $ | 0.26 | ||||||
|
Weighted
average Class A equivalent common shares
|
||||||||||||
|
outstanding
(1)
|
8,214,128 | 8,620,024 | 8,470,237 | |||||||||
|
Weighted
average Class A equivalent common shares
|
||||||||||||
|
outstanding-assuming
dilution (1)
|
8,216,383 | 8,620,024 | 8,669,061 | |||||||||
(1)
Earnings per share amounts have been adjusted retroactively for the effect of
annual stock dividends. The weighted-average shares outstanding includes the
weighted-average Class A common shares and the weighted-average Class C common
shares determined on an equivalent Class A common stock basis. Net earnings per
common share represent net earnings per equivalent Class A common share. Net
earnings per Class C common share is equal to one-tenth (1/10) of such amount or
$0.05, $0.01 and $0.03 per share for 2009, 2008 and 2007, respectively, and
$0.05, $0.01 and $0.03 per share-assuming dilution for 2009, 2008 and 2007,
respectively.
See
accompanying notes to consolidated financial statements.
50
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the
Years Ended December 31, 2007, 2008 and 2009
|
Class
A Common
Stock
|
Class
C Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Other Comprehensive Income
(loss)
|
Retained
Earnings
|
Treasury
Stock
|
Total
|
|||||||||||||||||||||
|
Balance
at January 1, 2007
|
$ | 15,066,460 | $ | 1,423,518 | $ | 17,064,488 | $ | 1,703,155 | $ | 20,495,063 | $ | (2,781,988 | ) | $ | 52,970,696 | ||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | 2,265,396 | — | 2,265,396 | ||||||||||||||||||||
|
Unrealized
gains (losses)
|
— | — | — | (106,364 | ) | — | — | (106,364 | ) | ||||||||||||||||||
|
Total
comprehensive income
|
2,159,032 | ||||||||||||||||||||||||||
|
Exercise
of stock options
|
(76,974 | ) | 231,525 | (55,261 | ) | — | (96,289 | ) | — | 3,001 | |||||||||||||||||
|
Sale
of Treasury stock
|
— | — | — | — | — | 651,423 | 651,423 | ||||||||||||||||||||
|
Stock
dividends
|
750,826 | 81,244 | 727,944 | — | (1,560,014 | ) | — | - | |||||||||||||||||||
|
Conversion
Class C to Class A
|
30,146 | (30,147 | ) | 1 | — | — | — | - | |||||||||||||||||||
|
Balance
at December 31, 2007
|
15,770,458 | 1,706,140 | 17,737,172 | 1,596,791 | 21,104,156 | (2,130,565 | ) | 55,784,152 | |||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | 574,853 | — | 574,853 | ||||||||||||||||||||
|
Unrealized
gains (losses)
|
— | — | — | (3,162,279 | ) | — | — | (3,162,279 | ) | ||||||||||||||||||
|
Reclass
of Treasury Stock
|
— | — | — | 1,982,589 | — | (1,982,589 | ) |
|
|||||||||||||||||||
|
Total
comprehensive income
|
— | — | — | — | — | — | (2,587,426 | ) | |||||||||||||||||||
|
Grant
of stock options
|
— | — | 466,929 | — | — | — | 466,929 | ||||||||||||||||||||
|
Sale
of Treasury stock
|
— | — | — | — | — | 248,624 | 248,624 | ||||||||||||||||||||
|
Stock
dividends
|
789,354 | 84,727 | (218,251 | ) | — | (655,830 | ) | — | — | ||||||||||||||||||
|
Conversion
Class C to Class A
|
8,406 | (8,404 | ) | (2 | ) | — | — | — | — | ||||||||||||||||||
|
Balance
at December 31, 2008
|
16,568,218 | 1,782,463 | 17,985,848 | 417,101 | 21,023,179 | (3,864,530 | ) | 53,912,279 | |||||||||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||||||||
|
Net
earnings
|
— | — | — | — | 3,773,880 | — | 3,773,880 | ||||||||||||||||||||
|
Unrealized
gains (losses)
|
— | — | — | 1,176,226 | — | — | 1,176,226 | ||||||||||||||||||||
|
Total
comprehensive income
|
— | — | — | — | — | — | 4,950,106 | ||||||||||||||||||||
|
Grant
of stock options
|
— | — | 485,986 | — | — | — | 485,986 | ||||||||||||||||||||
|
Exercise
stock options
|
32,962 | — | (32,962 | ) | — | — | — | - | |||||||||||||||||||
|
Sale
of Treasury stock
|
— | — | 54,271 | — | — | 402,799 | 457,070 | ||||||||||||||||||||
|
Stock
dividends
|
831,736 | 87,755 | 698,524 | — | (1,618,015 | ) | — | - | |||||||||||||||||||
|
Odd
lot purchase
|
160 | — | (60 | ) | — | (100 | ) | — | - | ||||||||||||||||||
|
Conversion
Class C to Class A
|
27,377 | (27,376 | ) | (1 | ) | — | — | — | - | ||||||||||||||||||
|
Balance
as of December 31, 2009
|
$ | 17,460,454 | $ | 1,842,842 | $ | 19,191,606 | $ | 1,593,327 | $ | 23,178,944 | $ | (3,461,731 | ) | $ | 59,805,442 | ||||||||||||
See
accompanying notes to consolidated financial statements.
51
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
earnings
|
$ | 3,773,880 | $ | 574,853 | $ | 2,265,396 | ||||||
|
Adjustments
to reconcile net earnings to
net cash provided by (used in) operating
activities:
|
||||||||||||
|
Realized
(gains) losses on investments and other assets
|
(897,312 | ) | 1,733,715 | (1,007,574 | ) | |||||||
|
Depreciation
|
2,801,417 | 2,471,201 | 2,398,330 | |||||||||
|
Provision
for losses on real estate accounts and loans
receivable
|
2,804,620 | 4,586,501 | 741,974 | |||||||||
|
Amortization
of premiums and discounts
|
(740,124 | ) | (65,224 | ) | 8,411 | |||||||
|
Provision
for deferred and other income taxes
|
1,570,989 | (59,230 | ) | 481,810 | ||||||||
|
Policy
and pre-need acquisition costs deferred
|
(7,754,706 | ) | (6,946,317 | ) | (6,974,054 | ) | ||||||
|
Policy
and pre-need acquisition costs amortized
|
6,035,882 | 5,110,519 | 4,609,045 | |||||||||
|
Value
of business acquired amortized
|
1,124,606 | 899,754 | 951,639 | |||||||||
|
Change
in assets and liabilities net of effects from land
and improvements held for sale:
|
(361,537 | ) | (866,255 | ) | (781,617 | ) | ||||||
|
Future
life and other benefits
|
15,423,587 | 9,508,769 | 13,131,652 | |||||||||
|
Receivables
for mortgage loans held for sale
|
(19,383,604 | ) | 35,366,791 | (6,883,446 | ) | |||||||
|
Stock
based compensation expense
|
485,986 | 466,929 | 3,000 | |||||||||
|
Benefit
plans funded with treasury stock
|
457,070 | 248,624 | 651,423 | |||||||||
|
Other
operating assets and liabilities
|
11,831,350 | 4,088,477 | 1,067,072 | |||||||||
|
Net
cash provided by operating activities
|
17,172,104 | 57,119,107 | 10,663,061 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Securities
held to maturity:
|
||||||||||||
|
Purchase
- fixed maturity securities
|
(12,897,225 | ) | (15,667,595 | ) | (2,206,067 | ) | ||||||
|
Calls
and maturities - fixed maturity securities
|
22,610,141 | 25,384,510 | 6,630,227 | |||||||||
|
Securities
available for sale:
|
||||||||||||
|
Purchase
- equity securities
|
(5,640,738 | ) | (1,740,077 | ) | (179,630 | ) | ||||||
|
Sales
- equity securities
|
5,788,996 | 3,600,641 | 868,371 | |||||||||
|
Purchases
of short-term investments
|
(20,784,977 | ) | (30,339,562 | ) | (16,946,889 | ) | ||||||
|
Sales
of short-term investments
|
18,923,574 | 32,012,283 | 16,196,350 | |||||||||
|
Sales
(Purchases) of restricted assets
|
1,552,830 | 1,528,071 | (302,114 | ) | ||||||||
|
Change
in assets for perpetual care trusts
|
(230,498 | ) | (291,870 | ) | (276,437 | ) | ||||||
|
Amount
received for perpetual care trusts
|
108,190 | 174,226 | 195,248 | |||||||||
|
Mortgage,
policy, and other loans made
|
(27,691,403 | ) | (79,563,741 | ) | (114,782,049 | ) | ||||||
|
Payments
received for mortgage, policy, and other loans
|
21,705,282 | 39,926,795 | 101,422,270 | |||||||||
|
Purchases
of property and equipment
|
(736,210 | ) | (1,323,849 | ) | (3,009,279 | ) | ||||||
|
Disposal
of property and equipment
|
2,749 | 81,352 | 880,818 | |||||||||
|
Purchases
of real estate
|
(801,297 | ) | (379,738 | ) | (265,668 | ) | ||||||
|
Cash
(paid) received for purchase of subsidiaries, net
of cash acquired
|
- | (2,928,022 | ) | (1,702,762 | ) | |||||||
|
Sale
of real estate
|
1,965,740 | 1,438,796 | 1,375,183 | |||||||||
|
Net
cash used in investing activities
|
3,875,154 | (28,087,780 | ) | (12,102,428 | ) | |||||||
See
accompanying notes to the consolidated financial statements
52
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
Years
Ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Annuity
contract receipts
|
$ | 9,101,675 | $ | 10,578,845 | $ | 6,039,988 | ||||||
|
Annuity
contract withdrawals
|
(13,920,526 | ) | (18,006,929 | ) | (12,961,804 | ) | ||||||
|
Repayment
of bank loans and notes and contracts payable
|
(3,685,330 | ) | (11,276,120 | ) | (47,751,447 | ) | ||||||
|
Proceeds
from borrowing on notes and contracts
|
7,006,616 | 4,383,927 | 50,939,105 | |||||||||
|
Net
cash used in financing activities
|
(1,497,565 | ) | (14,320,277 | ) | (3,734,158 | ) | ||||||
|
Net
change in cash and cash equivalents
|
19,549,693 | 14,711,050 | (5,173,525 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
19,914,110 | 5,203,060 | 10,376,585 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 39,463,803 | $ | 19,914,110 | $ | 5,203,060 | ||||||
|
Non
Cash Investing and Financing Activities
|
||||||||||||
|
Mortgage
loans foreclosed into real estate
|
$ | 24,441,490 | $ | 16,449,451 | $ | 4,368,646 | ||||||
Supplemental
Schedule of Cash Flow Information:
The
following information shows the non-cash items in connection with the purchase
of Southern Security Life Insurance Company, a Mississippi domiciled corporation
effective September 1, 2008.
|
Year
ended December 31, 2008
|
||||
|
Fair
value of assets acquired
|
$ | (26,193,020 | ) | |
|
Fair
value of liabilities assumed
|
23,264,998 | |||
|
Cash
paid
|
$ | (2,928,022 | ) | |
See
accompanying notes to the consolidated financial statements.
53
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies
General
Overview of Business
Security
National Financial Corporation and its wholly owned subsidiaries (the “Company”)
operate in three main business segments: life insurance, cemetery and mortuary,
and mortgage loans. The life insurance segment is engaged in the business of
selling and servicing selected lines of life insurance, annuity products and
accident and health insurance marketed primarily in the intermountain west,
California and eleven southern states. The cemetery and mortuary segment of the
Company consists of five cemeteries in Utah, one cemetery in California, seven
mortuaries in Utah and three mortuaries in Arizona. The mortgage loan segment is
an approved government and conventional lender that originates and underwrites
residential and commercial loans for new construction, existing homes and real
estate projects primarily in Arizona, California, Florida, Hawaii, Indiana,
Kansas, Oklahoma, Oregon, Texas, Utah, and Washington.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The presentation of certain amounts in prior years has been reclassified to
conform to the 2009 presentation.
Principles
of Consolidation
These
consolidated financial statements include the financial statements of Security
National Financial Corporation and its majority owned subsidiaries. All
intercompany transactions and accounts have been eliminated in
consolidation.
Investments
The
Company’s management determines the appropriate classifications of investments
in fixed maturity securities and equity securities at the acquisition date and
re-evaluates the classifications at each balance sheet date.
Fixed maturity securities
held to maturity are carried at cost, adjusted for amortization of
premium or accretion of discount. Although the Company has the ability and
intent to hold these investments to maturity, infrequent and unusual conditions
could occur under which it would sell certain of these securities. Those
conditions include unforeseen changes in asset quality, significant changes in
tax laws, and changes in regulatory capital requirements or permissible
investments.
Fixed maturity and equity
securities available for sale are carried at estimated fair value, which
is based upon quoted trading prices. Changes in fair values net of income taxes
are reported as unrealized appreciation or depreciation and recorded as an
adjustment directly to stockholders’ equity and, accordingly, have no effect on
net income.
Mortgage loans on real
estate, and construction loans are originated and held for investment and
carried at their principal balances adjusted for chargeoffs, the related
allowance for loan losses, and net deferred fees or costs on originated loans.
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.
Mortgage loans sold to
investors are carried at the amount due from third party investors, which
is the estimated fair value at the balance sheet date since these amounts are
generally collected within a short period of time.
Real estate is
carried at cost, less accumulated depreciation provided on a straight-line basis
over the estimated useful lives of the properties, or is adjusted to a new basis
from impairment in value, if any.
Policy, student, and other
loans are carried at the aggregate unpaid balances, less allowances for
possible losses.
54
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Short-term
investments are carried at cost and consist of certificates of deposit
and commercial paper with maturities of up to one year.
Restricted assets of
cemeteries and mortuaries are assets held in a trust account for future
mortuary services and merchandise and consist of cash; participations in
mortgage loans with Security National Life; mutual funds carried at cost; equity
securities carried at fair market value; and a surplus note with Security
National Life.
Cemetery and mortuary
perpetual care trust business segment contains six wholly owned
cemeteries. Of the six cemeteries owned by the Company, four cemeteries are
endowment care properties. Under endowment care arrangements a portion of the
price for each lot sold is withheld and invested in a portfolio of investments
similar to those described in the prior paragraph. The earnings stream from the
investments is designed to fund future maintenance and upkeep of the
cemetery.
Realized gains and losses on
investments arise when investments are sold (as determined on a specific
identification basis) or are other-than-temporarily impaired. If in management’s
judgment a decline in the value of an investment below cost is other than
temporary, the cost of the investment is written down to fair value with a
corresponding charge to earnings. Factors considered in judging whether an
impairment is other than temporary include: the financial condition, business
prospects and credit worthiness of the issuer, the length of time that fair
value has been less than cost, the relative amount of the decline, and the
Company’s ability and intent to hold the investment until the fair value
recovers, which is not assured.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents.
Cemetery
Land and Improvements Held for Sale
The
development of a cemetery involves not only the initial acquisition of raw land
but the installation of roads, water lines, landscaping and other costs to
establish a marketable cemetery lot. The costs of developing the cemetery are
shown as an asset on the balance sheet. The amount on the balance sheet is
reduced by the total cost assigned to the development of a particular lot, when
the criteria for recognizing a sale of that lot is met.
Property
and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is calculated principally
on the straight-line method over the estimated useful lives of the assets which
range from three to forty years. Leasehold improvements are amortized over the
lesser of the useful life or remaining lease terms.
Recognition
of Insurance Premiums and Other Considerations
Premiums
for traditional life insurance products (which include those products with fixed
and guaranteed premiums and benefits and consist principally of whole life
insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies) are recognized as revenues when due from
policyholders. Revenues for interest-sensitive insurance policies (which include
universal life policies, interest-sensitive life policies, deferred annuities,
and annuities without life contingencies) are recognized when earned and consist
of policy charges for the policy administration charges, and surrender charges
assessed against policyholder account balances during the period.
Deferred
Policy Acquisition Costs and Value of Business Acquired
Commissions
and other costs, net of commission and expense allowances for reinsurance ceded,
that vary with and are primarily related to the production of new insurance
business have been deferred. Deferred policy acquisition costs
(“DAC”) for traditional life insurance are amortized over the premium-paying
period of the related policies using assumptions consistent with those used in
computing policy benefit reserves. For interest-sensitive insurance products,
deferred policy acquisition costs are amortized generally in proportion to the
present value of expected gross profits from surrender charges, investment,
mortality and expense margins. This amortization is adjusted when estimates of
current or future gross profits to be realized from a group of products are
reevaluated. Deferred acquisition costs are written off when policies lapse or
are surrendered.
55
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
The
Company follows accounting principles generally accepted in the United States of
America when accounting for DAC on internal replacements of insurance and
investment contracts. An internal replacement is a modification in product
benefits, features, rights or coverage that occurs by the exchange of a contract
for a new contract, or by amendment, endorsement, or rider to contract, or by
the election of a feature or coverage within a contract. Modifications that
result in a replacement contract that is substantially changed from the replaced
contract are accounted for as an extinguishment of the replaced contract.
Unamortized DAC, unearned revenue liabilities and deferred sales inducements
from the replaced contract are written-off. Modifications that result in a
contract that is substantially unchanged from the replaced contract are
accounted for as a continuation of the replaced contract.
Value of
business acquired is the present value of estimated future profits of the
acquired business and is amortized similar to deferred policy acquisition
costs.
Allowance
for Loan Losses and Doubtful Accounts and Loan Loss Reserve
The
Company records an estimate of the expense for potential losses from not
collecting mortgage loans, other loans and receivables. Mortgage loans sold to
investors and significant receivables are the result of cemetery and mortuary
operations, mortgage loan operations and life insurance operations. The
allowance is based upon the Company’s experience. The critical issue that
impacts recovery of the cemetery and mortuary receivables is the overall
economy. The critical issues that impact recovery of mortgage loan operations
are interest rate risk and loan underwriting, new regulations and the overall
economy.
The
Company provides allowances for losses on its mortgage loans held for investment
through an allowance for loan losses (a contra-asset account) and for mortgage
loans sold to investors through the mortgage loan loss reserve (a liability
account). The allowance for loan losses and doubtful accounts is an allowance
for losses on the Company’s mortgage loans held for investment. When a mortgage
loan is past due more than 90 days, the Company, where appropriate, sets up an
allowance to approximate the excess of the carrying value of the mortgage loan
over the estimated fair value of the underlying real estate collateral. Once a
loan is past due more than 90 days the Company does not accrue any interest
income and proceeds to foreclose on the real estate. All expenses for
foreclosure are expensed as incurred. Once foreclosed, the carrying value will
approximate its fair value and the amount is classified as real estate. The
Company carries the foreclosed properties in Security National Life, Memorial
Estates, and SecurityNational Mortgage, its life, cemeteries and mortuaries and
mortgage subsidiaries, and will rent the properties until it is deemed desirable
to sell them.
The
following is a summary of the allowance for loan losses as a contra-asset
account for the periods presented:
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance,
beginning of period
|
$ | 4,780,467 | $ | 1,435,131 | $ | 1,027,564 | ||||||
|
Provisions
for losses
|
3,166,043 | 4,338,553 | 420,000 | |||||||||
|
Charge-offs
|
(1,137,707 | ) | (993,217 | ) | (12,433 | ) | ||||||
|
Balance,
at December 31
|
$ | 6,808,803 | $ | 4,780,467 | $ | 1,435,131 | ||||||
56
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
The
mortgage loan loss reserve is an estimate of probable losses at the balance
sheet date that the Company will realize in the future on mortgage loans sold to
third party investors. The Company may be required to reimburse third party
investors for costs associated with early payoff of loans within the first six
months of such loans and to repurchase loans where there is a default in any of
the first four monthly payments to the investors or, in lieu of repurchase, to
pay a negotiated fee to the investors. The Company’s estimates are based upon
historical loss experience and the best estimate of the probable loan loss
liabilities.
Upon
completion of a transfer that satisfies the conditions to be accounted for as a
sale, the Company initially measures at fair value liabilities incurred in a
sale relating to any guarantee or recourse provisions. The Company accrues a
monthly allowance for indemnification losses to investors based on the Company’s
historical experience. The amount accrued for the years ended December 31, 2009,
2008 and 2007 was $17,306,471, $7,140,270 and $4,129,301, respectively and the
charge to expense has been included in selling, general and administrative
expenses. The estimated liability for indemnification losses is included in
other liabilities and accrued expenses, and, as of December 31, 2009, 2008 and
2007 the balance was $11,662,897, $2,775,452 and $2,356,308,
respectively.
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance,
beginning of period
|
$ | 2,775,452 | $ | 2,356,308 | $ | 2,712,997 | ||||||
|
Provisions
for losses
|
17,306,471 | 7,140,270 | 4,129,301 | |||||||||
|
Charge-offs
|
(8,419,026 | ) | (6,721,126 | ) | (4,485,990 | ) | ||||||
|
Balance,
at December 31
|
$ | 11,662,897 | $ | 2,775,452 | $ | 2,356,308 | ||||||
The
Company believes the allowance for loan losses and the loan loss reserve
represent probable loan losses incurred as of the balance sheet
date.
Future
Life, Annuity and Other Policy Benefits
Future
policy benefit reserves for traditional life insurance are computed using a net
level method, including assumptions as to investment yields, mortality,
morbidity, withdrawals, and other assumptions based on the life insurance
subsidiaries experience, modified as necessary to give effect to anticipated
trends and to include provisions for possible unfavorable deviations. Such
liabilities are, for some plans, graded to equal statutory values or cash values
at or prior to maturity. The range of assumed interest rates for all traditional
life insurance policy reserves was 4.5% to 10%. Benefit reserves for traditional
limited-payment life insurance policies include the deferred portion of the
premiums received during the premium-paying period. Deferred premiums are
recognized as income over the life of the policies. Policy benefit claims are
charged to expense in the period the claims are incurred. Increases in future
policy benefits are charged to expense.
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 4% to 6.5%.
Participating
Insurance
Participating
business constituted 2%, 2%, and 2% of insurance in force for 2009, 2008 and
2007, respectively. The provision for policyholders’ dividends included in
policyholder obligations is based on dividend scales anticipated by management.
Amounts to be paid are determined by the Board of Directors.
57
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Reinsurance
The
Company follows the procedure of reinsuring risks in excess of $75,000 to
provide for greater diversification of business to allow management to control
exposure to potential losses arising from large risks, and provide additional
capacity for growth. The Company remains liable for amounts ceded in the event
the reinsurers are unable to meet their obligations.
The
Company entered into coinsurance agreements with unaffiliated insurance
companies under which the Company assumed 100% of the risk for certain life
insurance policies and certain other policy-related liabilities of the insurance
company.
Reinsurance
premiums, commissions, expense reimbursements, and reserves related to reinsured
business are accounted for on a basis consistent with those used in accounting
for the original policies issued and the terms of the reinsurance contracts.
Expense allowances received in connection with reinsurance ceded are accounted
for as a reduction of the related policy acquisition costs and are deferred and
amortized accordingly.
Cemetery
and Mortuary Operations
Pre-need
contract sales of funeral services and caskets - revenue and costs associated
with the sales of pre-need funeral services and caskets are deferred until the
services are performed or the caskets are delivered.
Sales of
cemetery interment rights (cemetery burial property) - revenue and costs
associated with the sale of cemetery interment rights are recognized in
accordance with the retail land sales provisions based on accounting principles
generally accepted in the United States of America. Under accounting principles
generally accepted in the United States of America, recognition of revenue and
associated costs from constructed cemetery property must be deferred until a
minimum percentage of the sales price has been collected.
Pre-need
contract sales of cemetery merchandise (primarily markers and vaults) - revenue
and costs associated with the sale of pre-need cemetery merchandise is deferred
until the merchandise is delivered. Pre-need contract sales of cemetery services
(primarily merchandise delivery, installation fees and burial opening and
closing fees) - revenue and costs associated with the sales of pre-need cemetery
services are deferred until the services are performed.
Prearranged
funeral and pre-need cemetery customer acquisition costs - costs incurred
related to obtaining new pre-need contract cemetery and prearranged funeral
services are accounted for under the guidance of the provisions based on
accounting principles generally accepted in the United States of America.
Obtaining costs, which include only costs that vary with and are primarily
related to the acquisition of new pre-need cemetery and prearranged funeral
services, are deferred until the merchandise is delivered or services are
performed.
Revenues
and costs for at-need sales are recorded when a valid contract exists, the
services are performed, collection is reasonably assured and there are no
significant obligations remaining.
The
Company, through its mortuary and cemetery operations, provides guaranteed
funeral arrangements wherein a prospective customer can receive future goods and
services at guaranteed prices. To accomplish this, the Company, through its life
insurance operations, sells to the customer an increasing benefit life insurance
policy that is assigned to the mortuaries. If, at the time of need, the
policyholder/potential mortuary customer utilizes one of the Company’s
facilities, the guaranteed funeral arrangement contract that has been assigned
will provide the funeral goods and services at the contracted price. The
increasing life insurance policy will cover the difference between the original
contract prices and current prices. Risks may arise if the difference cannot be
fully met by the life insurance policy. However, management believes that given
current inflation rates and related price increases of goods and services, the
risk of exposure is minimal.
58
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Mortgage
Operations
Over
fifty percent of revenue and expenses of the Company are through its wholly
owned subsidiary, SecurityNational Mortgage. SecurityNational Mortgage is a
mortgage lender incorporated under the laws of the State of Utah.
SecurityNational Mortgage is approved and regulated by the Federal Housing
Administration (FHA), a department of the U.S. Department of Housing and Urban
Development (HUD), to originate mortgage loans that qualify for government
insurance in the event of default by the borrower. SecurityNational Mortgage
obtains loans primarily from its retail offices and independent brokers.
SecurityNational Mortgage funds the loans from internal cash flows and loan
purchase agreements with unaffiliated financial institutions. SecurityNational
Mortgage receives fees from the borrowers and other secondary fees from third
party investors that purchase its loans. SecurityNational Mortgage sells its
loans to third party investors and does not retain servicing of these loans.
SecurityNational Mortgage pays the brokers and retail loan officers a commission
for loans that are brokered through SecurityNational Mortgage. For the twelve
months ended December 31, 2009, 2008, and 2007, SecurityNational Mortgage
originated and sold 17,797 loans ($3,243,734,000 total volume),
19,321 loans ($3,680,015,000 total volume), and 20,656 loans ($3,852,801,000
total volume), respectively.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at December 31, 2009 was
$230,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of December 31, 2009, there were $152,560,000
in mortgage loans in which settlements with third party investors were still
pending. Generally when certain mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on September 30, 2009 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement. In addition, the Company
has been successful in obtaining a loan purchase agreement with another
warehouse bank.
Mortgage
fee income consists of origination fees, processing fees and certain other
income related to the origination and sale of mortgage loans. For mortgage loans
sold to third party investors, mortgage fee income and related expenses are
recognized pursuant to generally accepted accounting principles at the time the
sales of mortgage loans meet the sales criteria for the transfer of financial
assets which are: (i) the transferred assets have been isolated from the Company
and its creditors, (ii) the transferee has the right to pledge or exchange the
mortgage, and (iii) the Company does not maintain effective control over the
transferred mortgage. The Company must determine that all three criteria are met
at the time the loan is funded. All rights and title to the mortgage loans are
assigned to unrelated financial institution investors, including any investor
commitments for these loans, prior to warehouse banks purchasing the loans under
the purchase commitments.
The
Company, through SecurityNational Mortgage, sells all mortgage loans to third
party investors without recourse. However, it may be required to repurchase a
loan or pay a fee instead of repurchase under certain events such as the
following:
|
|
·
|
Failure
to deliver original documents specified by the
investor.
|
|
|
·
|
The
existence of misrepresentation or fraud in the origination of the
loan.
|
|
|
·
|
The
loan becomes delinquent due to nonpayment during the first several months
after it is sold.
|
|
|
·
|
Early
pay-off of a loan, as defined by the
agreements.
|
|
|
·
|
Excessive
time to settle a loan.
|
|
|
·
|
Investor
declines purchase.
|
|
|
·
|
Discontinued
product and expired
commitment.
|
59
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Loan
purchase commitments generally specify a date 30 to 45 days after delivery upon
which the underlying loans should be settled. Depending on market conditions,
these commitment settlement dates can be extended at a cost to the Company.
Generally, a ten day extension will cost .125% (12.5 basis points) of the loan
amount. The Company’s historical data shows that 99% of all loans originated by
the Company are generally settled by the investors as agreed within 16 days
after delivery. There are situations, however, when the Company determines that
it is unable to enforce the settlement of loans rejected by the third-party
investors and that it is in the Company’s best interest to repurchase those
loans from the warehouse banks. It is the Company's policy to cure any
documentation problems with respect to such loans at a minimal cost for up to a
six-month time period and to pursue efforts to enforce loan purchase commitments
from third-party investors concerning the loans. The Company believes that six
months allows adequate time to remedy any documentation issues, to enforce
purchase commitments, and to exhaust other alternatives. Remedy methods include,
but are not limited to:
|
|
·
|
Research
reasons for rejection.
|
|
|
·
|
Provide
additional documents.
|
|
|
·
|
Request
investor exceptions.
|
|
|
·
|
Appeal
rejection decision to purchase
committee.
|
|
|
·
|
Commit
to secondary investors.
|
Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the loans are
repurchased and transferred to the long term investment portfolio at the lower
of cost or market value and previously recorded sales revenue is reversed. Any
loan that later becomes delinquent is evaluated by the Company at that time and
any impairment is adjusted accordingly.
Determining lower of cost or
market: Cost is equal to the amount paid to the warehouse bank and the
amount originally funded by the Company. Market value is often difficult to
determine, but is based on the following:
|
|
·
|
For
loans that have an active market the Company uses the market price on the
repurchased date.
|
|
|
·
|
For
loans where there is no market but there is a similar product, the Company
uses the market value for the similar product on the repurchased
date.
|
|
|
·
|
For
loans where no active market exists on the repurchased date, the Company
determines that the unpaid principal balance best approximates the market
value on the repurchased date, after considering the fair value of the
underlying real estate collateral and estimated future cash
flows.
|
The
appraised value of the real estate underlying the original mortgage loan adds
significance to the Company’s determination of fair value because if the loan
becomes delinquent, the Company has sufficient value to collect the unpaid
principal balance or the carrying value of the loan. In determining the market
value on the date of repurchase, the Company considers the total value of all of
the loans because any sale of loans would be made as a pool.
For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.
As a
result of the volatile secondary market for mortgage loans, the Company sold
mortgage loans in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of such loans was $52,556,000, of which $36,499,000 were loans in
which the secondary market no longer existed. Due to these changes in
circumstances, the Company regained control of the mortgages and, in accordance
with generally accepted accounting principles, accounted for the loans retained
in the same manner as a purchase of assets from the former transferee(s) in
exchange for liabilities assumed. At the time of repurchase, the loans were
determined to be held for investment purposes, and the fair value of the loans
was determined to approximate
the unpaid principal balances adjusted for chargeoffs, the related allowance for
loan losses, and net deferred fees or costs on originated loans. The 2009 and
2008 financial statements reflect the transfer of mortgage loans from “Mortgage
Loans Sold to Investors” to “Mortgage Loans on Real Estate”. The loan sale
revenue recorded on the sale of the mortgage loans was reversed on the date the
loans were repurchased.
60
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
As a
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
During the period the Company will service these loans through Security National
Life, its life insurance subsidiary.
As of
December 31, 2009, the Company’s long term mortgage loan portfolio contained
mortgage loans of $19,538,135 in unpaid principal with delinquencies more than
90 days. Of this amount, $12,107,799 in mortgage loans were in foreclosure
proceedings. The Company has not received any interest income on the $19,538,135
in mortgage loans with delinquencies more than 90 days. During the twelve months
ended December 31, 2009 and 2008, the Company increased its allowance for
mortgage losses by $3,166,043 and $4,338,553, respectively which was charged to
loan loss expense and included in other selling, general and administrative
expenses for the period. The allowance for mortgage loan losses as of December
31, 2009 and December 31, 2008 was $6,808,803 and $4,780,467,
respectively.
Also at
December 31, 2009, the Company has foreclosed on $44,250,819 in long term
mortgage loans, of which $24,441,490 in loans were foreclosed on and
reclassified as real estate during 2009. The foreclosed property was shown in
real estate. The Company carries the foreclosed property in Security National
Life, Memorial Estates and SecurityNational Mortgage, its life, cemeteries and
mortuaries and mortgage subsidiaries, and will rent the properties until it is
deemed desirable to sell them.
Self
Insurance
The
Company is self insured for certain casualty insurance, workers
compensation and liability programs. Self-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
coverages. When estimating the self-insurance liabilities and related reserves,
management considers a number of factors, which include historical claims
experience, demographic factors, severity factors and valuations provided by
independent third-party actuaries. Management reviews its assumptions with its
independent third-party administrators and actuaries to evaluate whether the
self-insurance reserves are adequate. 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 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.
Goodwill
Previous
acquisitions have been accounted for as purchases under which assets acquired
and liabilities assumed were recorded at their fair values with the excess
purchase price recognized as goodwill. The Company evaluates annually or when
changes in circumstances warrant the recoverability of goodwill and if there is
a decrease in value, the related impairment is recognized as a charge against
income. No impairment of goodwill has been recognized in the accompanying
financial statements.
Long-lived
Assets
Long-lived
assets to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset, and long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell. No impairment of long-lived assets has been recognized in the
accompanying financial statements.
61
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Income
Taxes
Income
taxes include taxes currently payable plus deferred taxes. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
the temporary differences in the financial reporting basis and tax basis of
assets and liabilities and operating loss carry-forwards. Deferred tax assets
are measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled.
Liabilities
are established for uncertain tax positions expected to be taken in income tax
returns when such positions are judged to meet the “more-likely-than-not”
threshold based on the technical merits of the positions. Estimated interest and
penalties related to uncertain tax penalties are included as a component of
other expenses.
Earnings
Per Common Share
The
Company computes earnings per share in accordance with accounting principles
generally accepted in the United States of America which requires presentation
of basic and diluted earnings per share. Basic earnings per equivalent Class A
common share are computed by dividing net earnings by the weighted-average
number of Class A common shares outstanding during each year presented, after
the effect of the assumed conversion of Class C common stock to Class A common
stock. Diluted earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding during the year used to
compute basic earnings per share plus dilutive potential incremental shares.
Basic and diluted earnings per share amounts have been adjusted retroactively
for the effect of annual stock dividends.
Stock
Based Compensation
The cost
of employee services received in exchange for an award of equity instruments is
recognized in the financial statements and is measured based on the fair value
on the grant date of the award. The fair value of stock options is calculated
using the Black Scholes method. Stock option compensation expense is recognized
over the period during which an employee is required to provide service in
exchange for the award.
Concentration
of Credit Risk
The
Company maintains its cash in bank deposit accounts, which at times exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Recent
Accounting Pronouncements
Subsequent
Events – In May 2009, the FASB issued guidance which establishes the
period after the balance sheet date during which management shall evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements and the circumstances under which an entity shall
recognize events or transactions that occur after the balance sheet date. This
guidance also requires disclosure of the date through which subsequent events
have been evaluated. The Company adopted this standard for the interim period
ended June 30, 2009. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial position or results of
operations. We have evaluated subsequent events after the balance sheet date of
December 31, 2009 through the time of filing with the Securities and Exchange
Commission (SEC) on March 31, 2010 which is the date the financial statements
were issued.
Accounting for
Transfers of Financial Assets and Consolidation of Variable Interest
Entities - In June 2009, the FASB issued accounting guidance which
revises existing sale accounting criteria for transfers of financial assets,
including securitization transactions, and eliminates the concept of a
“qualifying special-purpose entity.” Simultaneously, the FASB issued accounting
guidance which revises previous guidance for variable-interest entities
(VIE) by establishing a new approach for determining who should consolidate a
VIE and by changing when it is necessary to reassess who should consolidate a
VIE. These new accounting standards updates are effective at the
beginning of the first fiscal year beginning after November 15, 2009. Early
application is not permitted. Because the revised sales accounting
criteria do not change the Company’s revenue recognition and because all
mortgage loans originated by the Company are sold to outside third party
investors, the adoption of these two accounting standards will not have a
material impact on the Company’s financial statements.
62
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
1) Significant Accounting
Policies (Continued)
Disclosures about
Fair Value Measurements – In January 2010, the FASB issued guidance
requiring an entity to disclose the following:
|
|
·
|
Separately
disclose the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe reasons for the
transfers.
|
|
|
·
|
Present
separately information about purchases, sales, issuances and settlements,
on a gross basis, rather than on one net number, in the reconciliation for
fair value measurements using significant unobservable inputs (Level
3).
|
|
|
·
|
Provide
fair value measurement disclosures for each class of assets and
liabilities.
|
|
|
·
|
Provide
disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements for fair
value measurements that fall in either Level 2 or Level
3.
|
This
guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010. The Company does not expect the adoption of
this guidance to have a material impact on its financial
statements.
63
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
2) Acquisitions
C
& J Financial, LLC
On July
16, 2007, the Company acquired all of the membership interests of C & J
Financial, LLC. The results of C & J Financial’s operations have been
included in the consolidated financial statements from July 16, 2007. C & J
Financial provides financing to funeral homes and mortuaries throughout the
United States similar to the Company’s Fast-Funding operations and the
acquisition expanded the Company’s Fast-Funding operations. The aggregate
purchase price was $1,631,500 and consisted of the payment of $1,250,000 of cash
at closing and the issuance of a $381,500 promissory note. The Company further
agreed to cause C & J Financial to pay a $1,971,764 note payable to a bank
that was guaranteed by the sellers. In addition, C & J Financial entered
into an obligation payable to one of the sellers for an operating lease of
office space for three years. The estimated fair values of the assets acquired
and the liabilities assumed at the date of acquisition were as
follows:
| $ | 3,178,901 | |||
|
Other
current assets
|
55,295 | |||
|
Office
furniture and equipment
|
18,078 | |||
|
Goodwill
|
391,847 | |||
|
Total
Assets
|
3,644,121 | |||
|
Note
payable to bank, current
|
(1,971,764 | ) | ||
|
Other
current liabilities
|
(40,857 | ) | ||
|
Net
Assets Acquired
|
$ | 1,631,500 |
The
excess of the purchase price over the fair value of the identifiable assets of
$391,847 was assigned to goodwill.
Capital
Reserve Life Insurance Company
On
December 20, 2007, the Company, through its wholly owned subsidiary, Security
National Life, acquired all of the outstanding common stock of Capital Reserve
Life Insurance Company, a Missouri domiciled insurance company. The results of
Capital Reserve Life’s operations have been included in the consolidated
financial statements from December 17, 2007. Capital Reserve Life sells and
services life insurance, annuity products, accident and health insurance, and
funeral plan insurance, which are consistent with and expanded the Company’s
business. The aggregate original purchase price was $2,419,164, of which
$452,404 was paid in cash at closing to the selling shareholders and $2,100,000
was placed into an escrow account with the Company’s attorney to be disbursed
upon resolution of contingencies.
Capital
Reserve Life was a defendant in a lawsuit for unpaid bonuses allegedly due to a
former employee in the amount of $1,486,045 (the “Russell Litigation”). The
Russell Litigation was resolved during 2008 and resulted in the payment of
$220,926 to the former employee and his attorney from the escrow account. The
Company was refunded $146,225 from the escrow account that was recognized as a
reduction of value of business acquired. The selling shareholders were paid
$1,587,578, including interest, during 2008 from the escrow account. At December
31, 2008, $185,902 remained in the escrow account.
The
$185,902 of funds held in escrow by the Company’s attorney have been included in
the accompanying consolidated balance sheet at December 31, 2009, in receivables
with the liability of $185,902 payable to the shareholders, respectively,
included in other liabilities and accrued expenses. The assets acquired and the
liabilities assumed were recognized at their fair values with the excess of the
purchase price allocated to value of business acquired. Value of business
acquired is being amortized over the estimated term premiums will be received
under the insurance policies of 15 years.
64
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
2) Acquisitions
(Continued)
The
estimated fair values of the assets
acquired and the liabilities assumed, adjusted for the 2008 settlement of the
Russell Litigation, were as follows:
| $ | 23,146,994 | |||
|
Policy
and other loans
|
573,821 | |||
|
Accrued
investment income
|
274,370 | |||
|
Receivables
|
143,183 | |||
|
Furniture
and equipment
|
112,324 | |||
|
Value
of business acquired
|
619,562 | |||
|
Total
assets acquired
|
24,870,254 | |||
|
Future
life, annuity and other benefits
|
(21,888,930 | ) | ||
|
Checks
written in excess of cash in bank
|
(524,528 | ) | ||
|
Other
liabilities and accrued expenses
|
(183,857 | ) | ||
|
Total
Liabilities Assumed
|
(22,597,315 | ) | ||
|
Fair
Value of Net Assets Acquired
|
$ | 2,272,939 |
Southern
Security Life Insurance Company
On
September 1, 2008, the Company, through Security National Life, entered into a
reinsurance agreement with Southern Security Life Insurance Company, a
Mississippi domiciled insurance company (“Southern Security”), whereby the
Company became secondarily liable for $22,788,693 of liability under contracts
for future life, annuity and other benefits in exchange for the transfer from
Southern Security of $22,788,693 of assets, which was short of the required
assets by $1,468,348. This shortage was offset against a $1,500,000 ceding
commission payable to Southern Security on the transaction. Southern Security
remained primarily liable under the contracts and recognized a $22,235,131
receivable from Security National Life. However, if the acquisition described in
the following paragraphs had not occurred, Security National Life would have had
to assume the insurance contracts and become primarily liable thereunder because
Southern Security had ceased operations and the transfer of the insurance
contracts was irreversible.
Then on
December 18, 2008, the Company acquired all of the outstanding common stock of
Southern Security. The results of Southern Security’s operations have been
included in the consolidated financial statements from December 23, 2008.
Southern Security sells and services life insurance, annuity products, accident
and health insurance, and funeral plan insurance, all of which are consistent
with and expanded the Company’s insurance business. The total purchase price was
$2,664,323 and consisted of $1,920,700 paid in cash at closing to the selling
shareholders, $443,500 placed into escrow accounts with the Company’s law firm,
the settlement of an $84,081 receivable from Southern Security and the
incurrence of $216,042 of acquisition costs. In addition, Southern Security
distributed $479,742 of assets to the selling shareholders, including $163,715
of notes receivable from the selling shareholders.
Included
in the escrow accounts is $175,000 that is to be used to pay any adjustments
that may be required under the terms of the purchase agreement and any remaining
portion of the $175,000 is to be distributed to the selling shareholders. The
remaining $268,500 that was placed into the escrow accounts is to be released to
the selling shareholders as the Company collects the principal portion of a loan
in the form of a promissory note that Southern Security had made to an entity
that is related to the selling shareholders. However, no payments will be made
to the selling shareholders if the promissory note is in default.
The
$443,500 of funds held in escrow by the Company’s law firm have been included in
the accompanying consolidated balance sheet at December 31, 2009 and December
31, 2008 in receivables with the liability payable to the
selling shareholders of an equal amount included in other liabilities and
accrued expenses. The assets acquired and the liabilities assumed were
recognized at their fair values with the excess of the purchase price allocated
to value of business acquired. The value of business acquired is being amortized
over the estimated period premiums will be received under the insurance policies
of 14.3 years. The estimated fair values of the assets acquired and the
liabilities assumed at the date of acquisition were as
follows:
65
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
2) Acquisitions
(Continued)
| $ | 1,200,865 | |||
|
Policy
and mortgage loans
|
1,050,028 | |||
|
Cash
|
392,785 | |||
|
Receivable
from reinsurer -
|
||||
|
Security
National Life
|
22,235,131 | |||
|
Other
assets
|
49,369 | |||
|
Deferred
tax asset
|
298,418 | |||
|
Value
of business acquired
|
227,573 | |||
|
Total
assets acquired
|
25,454,169 | |||
|
Future
life, annuity and other benefits
|
(22,789,846 | ) | ||
|
Fair
Value of Net Assets Acquired
|
$ | 2,664,323 |
The
following unaudited pro forma information has been prepared to present the
results of operations of the Company assuming theacquisitions of C & J Financial and Capital
Reserve Life had occurred at the beginning of the year ended December 31, 2007
and the acquisition of Southern Security had occurred at the beginning of the
year ended December 31, 2007. This pro forma information is supplemental and
does not necessarily present the operations of the Company that would have
occurred had the acquisitions occurred on those dates and may not reflect the
operations that will occur in the future:
|
For
the Years Ended
December
31,
(unaudited)
|
||||||||
|
2008
|
2007
|
|||||||
|
Total
revenues
|
$ | 221,348,000 | $ | 216,492,000 | ||||
|
Net
earnings
|
$ | 717,000 | $ | 2,936,000 | ||||
|
Net
earnings per Class A equivalent common share
|
$ | 0.09 | $ | 0.37 | ||||
|
Net
earnings per Class A equivalent common shareassuming
dilution
|
$ | 0.09 | $ | 0.36 | ||||
66
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments
The
Company’s investments in fixed maturity securities held to maturity and equity
securities available for sale as of December 31, 2009 are summarized as
follows:
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
December 31,
2009:
|
||||||||||||||||
|
Fixed
maturity securities held to maturity carried at amortized
cost:
|
||||||||||||||||
|
Bonds:
|
||||||||||||||||
|
U.S.
Treasury securities
|
||||||||||||||||
|
and
obligations of U.S
|
||||||||||||||||
|
Government
agencies
|
$ | 9,477,032 | $ | 430,783 | $ | (6,389 | ) | $ | 9,901,426 | |||||||
|
|
||||||||||||||||
|
Obligations
of states and
|
||||||||||||||||
|
political
subdivisions
|
2,034,784 | 95,333 | (20,722 | ) | 2,109,395 | |||||||||||
|
Corporate
securities including
|
||||||||||||||||
|
public
utilities
|
95,903,129 | 3,927,607 | (2,763,448 | ) | 97,067,288 | |||||||||||
|
Mortgage-backed
securities
|
6,852,072 | 182,932 | (1,338,817 | ) | 5,696,187 | |||||||||||
|
Redeemable
preferred stock
|
1,565,283 | - | (109,832 | ) | 1,455,451 | |||||||||||
|
Total
fixed maturity
|
||||||||||||||||
|
securities
held to maturity
|
$ | 115,832,300 | $ | 4,636,655 | $ | (4,239,208 | ) | $ | 116,229,747 | |||||||
|
Securities
available for sale carried at
|
||||||||||||||||
|
estimated
fair value:
|
||||||||||||||||
|
Fixed
maturity securities available for sale:
|
||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
|
and
obligations of U.S.
|
||||||||||||||||
|
Government
agencies
|
$ | 98,280 | $ | 21,158 | $ | - | $ | 119,438 | ||||||||
|
Corporate
securities including
|
||||||||||||||||
|
public
utilities
|
1,012,458 | 17,627 | - | 1,030,085 | ||||||||||||
|
Total
fixed maturity securities
|
||||||||||||||||
|
available
for sale
|
$ | 1,110,738 | $ | 38,785 | $ | - | $ | 1,149,523 |
67
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments
(Continued)
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
December 31,
2009:
|
||||||||||||||||
|
Equity
securities available for sale
|
||||||||||||||||
|
at
estimated fair value:
|
||||||||||||||||
|
Non-redeemable
preferred stock
|
$ | 20,281 | $ | - | $ | (5,061 | ) | $ | 15,220 | |||||||
|
Common
stock:
|
||||||||||||||||
|
Industrial,
miscellaneous and all other
|
5,398,320 | 682,075 | (309,001 | ) | 5,771,394 | |||||||||||
|
Total
equity securities available for sale
|
||||||||||||||||
|
at
estimated fair value
|
$ | 5,418,601 | $ | 682,075 | $ | (314,062 | ) | $ | 5,786,614 | |||||||
|
Total
securities available for sale
|
||||||||||||||||
|
carried
at estimated fair value
|
$ | 6,529,339 | $ | 720,860 | $ | (314,062 | ) | $ | 6,936,137 | |||||||
|
Mortgage
loans on real estate and construction
loans held for investment at
amortized cost:
|
||||||||||||||||
|
Residential
|
$ | 60,863,842 | ||||||||||||||
|
Residential
construction
|
25,028,081 | |||||||||||||||
|
Commercial
|
24,206,956 | |||||||||||||||
|
Less:
Allowance for loan losses
|
(6,808,803 | ) | ||||||||||||||
|
Total
mortgage loans on real estate and
|
||||||||||||||||
|
construction
loans held for investment
|
$ | 103,290,076 | ||||||||||||||
|
Real
estate at cost – net of depreciation & allowance
|
$ | 46,069,638 | ||||||||||||||
|
Policy,
student and other loans at
|
||||||||||||||||
|
amortized
cost - net of allowance for doubtful accounts
|
$ | 18,145,029 | ||||||||||||||
|
Short-term
investments at amortized cost
|
$ | 7,144,319 | ||||||||||||||
68
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
The
Company’s investments in fixed maturity securities held to maturity and equity
securities available for sale as of December 31, 2008 are summarized as
follows:
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
December 31,
2008:
|
||||||||||||||||
|
Fixed
maturity securities held to maturity carried at amortized
cost:
|
||||||||||||||||
|
Bonds:
|
||||||||||||||||
|
U.S.
Treasury securities
|
||||||||||||||||
|
and
obligations of U.S
|
||||||||||||||||
|
Government
agencies
|
$ | 17,138,738 | $ | 1,201,488 | $ | --- | $ | 18,340,226 | ||||||||
|
Obligations
of states and
|
||||||||||||||||
|
political
subdivisions
|
1,474,934 | 59,035 | (16,347 | ) | 1,517,622 | |||||||||||
|
Corporate
securities including
|
||||||||||||||||
|
public
utilities
|
97,610,026 | 1,280,795 | (12,073,677 | ) | 86,817,144 | |||||||||||
|
Mortgage-backed
securities
|
7,586,553 | 68,466 | (1,580,189 | ) | 6,074,830 | |||||||||||
|
Redeemable
preferred stock
|
1,535,943 | 565 | (335,703 | ) | 1,200,805 | |||||||||||
|
Total
fixed maturity
|
||||||||||||||||
|
securities
held to maturity
|
||||||||||||||||
| $ | 125,346,194 | $ | 2,610,349 | $ | (14,005,916 | ) | $ | 113,950,627 | ||||||||
|
Securities
available for sale carried at
|
||||||||||||||||
|
estimated
fair value:
|
||||||||||||||||
|
Fixed
maturity securities available for sale:
|
||||||||||||||||
| U.S. Treasury securities | ||||||||||||||||
|
and
obligations of U.S.
|
||||||||||||||||
|
Government
agencies
|
$ | 98,203 | $ | 38,188 | $ | --- | $ | 136,391 | ||||||||
|
Corporate
securities including
|
||||||||||||||||
|
public
utilities
|
1,045,399 | 54,772 | --- | 1,100,171 | ||||||||||||
|
Total
fixed maturity securities
|
||||||||||||||||
|
available
for sale
|
$ | 1,143,602 | $ | 92,960 | $ | --- | $ | 1,236,562 |
69
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
|
Gross
|
Gross
|
Estimated
|
||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
December 31,
2008:
|
||||||||||||||||
|
Equity
securities available for sale
|
||||||||||||||||
|
at
estimated fair value:
|
||||||||||||||||
|
Non-redeemable
preferred stock
|
$ | 20,281 | $ | --- | $ | (6,092 | ) | $ | 14,189 | |||||||
|
|
||||||||||||||||
|
Common
stock:
|
||||||||||||||||
|
Public
utilities
|
403,249 | 220,045 | (51,105 | ) | 572,189 | |||||||||||
|
Banks,
trusts and insurance companies
|
479,663 | 154,313 | - | 633,976 | ||||||||||||
|
Industrial,
miscellaneous and all other
|
3,755,523 | 44,260 | (402,462 | ) | 3,397,321 | |||||||||||
|
Total
equity securities available for sale
|
||||||||||||||||
|
at
estimated fair value
|
$ | 4,658,716 | $ | 418,618 | $ | (459,659 | ) | $ | 4,617,675 | |||||||
| Total securities available for sale | ||||||||||||||||
| carried at estimated fair value | ||||||||||||||||
| $ | 5,802,318 | $ | 511,578 | $ | (459,659 | ) | $ | 5,854,237 | ||||||||
|
Mortgage
loans on real estate and construction
loans held for investment at
amortized cost:
|
||||||||||||||||
|
Residential
|
$ | 70,082,011 | ||||||||||||||
|
Residential
construction
|
35,742,891 | |||||||||||||||
|
Commercial
|
23,548,243 | |||||||||||||||
|
Less:
Allowance for loan losses
|
(4,780,467 | ) | ||||||||||||||
|
Total
mortgage loans on real estate and
|
||||||||||||||||
|
construction
loans held for investment
|
$ | 124,592,678 | ||||||||||||||
|
Real
estate at cost – net of depreciation
|
$ | 22,417,639 | ||||||||||||||
|
Policy,
student and other loans at
|
||||||||||||||||
|
amortized
cost - net of allowance for doubtful accounts
|
$ | 18,493,751 | ||||||||||||||
|
Short-term
investments at amortized cost
|
$ | 5,282,986 | ||||||||||||||
70
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
Fixed Maturity
Securities
The
following tables summarize unrealized losses on fixed-maturities securities,
which are carried at amortized cost, at December 31, 2009 and 2008. The
unrealized losses were primarily related to interest rate fluctuations or
spread-widening, and mortgage and other asset-backed securities. The tables set
forth unrealized losses by duration and number of investment positions, together
with the fair value of the related fixed-maturity securities:
|
Unrealized
Losses for Less than Twelve Months
|
No.
of Investment Positions
|
Unrealized
Losses for More than Twelve Months
|
No.
of Investment Positions
|
Total
Unrealized Loss
|
||||||||||||||||
|
At December 31,
2009
|
||||||||||||||||||||
|
Interest
rate or spread widening
|
$ | 580,244 | 37 | $ | 2,320,148 | 70 | $ | 2,900,392 | ||||||||||||
|
Mortgage
and other
|
||||||||||||||||||||
|
asset-backed
securities
|
31,337 | 3 | 1,307,479 | 5 | 1,338,816 | |||||||||||||||
|
Total
unrealized losses
|
$ | 611,581 | 40 | $ | 3,627,627 | 75 | $ | 4,239,208 | ||||||||||||
|
Fair
Value
|
$ | 17,777,172 | $ | 22,641,536 | $ | 40,418,708 | ||||||||||||||
|
At December 31,
2008
|
||||||||||||||||||||
|
Interest
rate or spread widening
|
$ | 4,425,497 | 87 | $ | 8,000,230 | 105 | $ | 12,425,727 | ||||||||||||
|
Mortgage
and other
|
||||||||||||||||||||
|
asset-backed
securities
|
- | - | 1,580,189 | 12 | 1,580,189 | |||||||||||||||
|
Total
unrealized losses
|
$ | 4,425,497 | 87 | $ | 9,580,419 | 117 | $ | 14,005,916 | ||||||||||||
|
Fair
Value
|
$ | 30,720,910 | $ | 35,178,465 | $ | 65,899,375 | ||||||||||||||
As of
December 31, 2009, the average market value of the related fixed maturities was
90.5% of amortized cost and the average market value was 82.5% of amortized cost
as of December 31, 2008. During 2009 and 2008, an other-than-temporary decline
in market value resulted in the recognition of an impairment loss on fixed
maturity securities of $326,000 and $2,343,264, respectively. No
other-than-temporary impairment loss was considered to exist for these fixed
maturities as of December 31, 2009.
71
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
Equity
Securities
The
following tables summarize unrealized losses on equity securities, that were
carried at estimated fair value based on quoted trading prices at December 31,
2009 and 2008. The unrealized losses were primarily the result of decreases in
market value due to overall equity market declines. The tables set forth
unrealized losses by duration and number of investment positions, together with
the fair value of the related equity securities available for sale in a loss
position:
|
Unrealized
Losses for Less than Twelve Months
|
No.
of Investment Positions
|
Unrealized
Losses for More than Twelve Months
|
No.
of Investment Positions
|
Total
Unrealized Losses
|
||||||||||||||||
|
At December 31,
2009
|
||||||||||||||||||||
|
Non-redeemable
preferred stock
|
$ | - | - | $ | 5,061 | 2 | $ | 5,061 | ||||||||||||
|
Industrial,
miscellaneous and all other
|
55,287 | 23 | 253,714 | 16 | 309,001 | |||||||||||||||
|
Total
unrealized losses
|
$ | 55,287 | 23 | $ | 258,775 | 18 | $ | 314,062 | ||||||||||||
|
Fair
Value
|
$ | 1,007,525 | $ | 660,809 | $ | 1,668,334 | ||||||||||||||
|
At December 31,
2008
|
||||||||||||||||||||
|
Non-redeemable
preferred stock
|
$ | - | - | $ | 6,092 | 2 | $ | 6,092 | ||||||||||||
|
Banks,
trusts and insurance companies
|
51,105 | 2 | - | - | 51,105 | |||||||||||||||
|
Industrial,
miscellaneous and all other
|
393,666 | 10 | 8,796 | 1 | 402,462 | |||||||||||||||
|
Total
unrealized losses
|
$ | 444,771 | 12 | $ | 14,888 | 3 | $ | 459,659 | ||||||||||||
|
Fair
Value
|
$ | 675,284 | $ | 66,722 | $ | 742,006 | ||||||||||||||
As of
December 31, 2009, the average market value of the equity securities available
for sale was 84.2% of the original investment and the average market value was
68.6% of the original investment as of December 31, 2008. The intent of the
Company is to retain equity securities for a period of time sufficient to allow
for the recovery in fair value. However, the Company may sell equity securities
during a period in which the fair value has declined below the amount of the
original investment. In certain situations, new factors, including changes in
the business environment, can change the Company’s previous intent to continue
holding a security. During 2008, an impairment loss was recognized on certain
equities due to an other-than-temporary decline in market value in the amount of
$408,640. No other-than-temporary impairment loss on equity securities was
determined to exist as of December 31, 2009.
The fair
values of fixed maturity securities are based on quoted market prices, when
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services, or in the
case of private placements, are estimated by discounting expected future cash
flows using a current market value applicable to the coupon rate, credit and
maturity of the investments. The fair values for equity securities are based on
quoted market prices.
72
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
The
amortized cost and estimated fair value of fixed maturity securities at December
31, 2009, 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
|
Estimated
Fair
|
|||||||
|
Cost
|
Value
|
|||||||
|
Held
to Maturity:
|
||||||||
|
Due
in 2010
|
$ | 4,299,795 | $ | 4,339,329 | ||||
|
Due
in 2011 through 2014
|
24,951,300 | 26,294,690 | ||||||
|
Due
in 2015 through 2019
|
33,773,677 | 35,300,644 | ||||||
|
Due
after 2019
|
44,390,173 | 43,143,446 | ||||||
|
Mortgage-backed
securities
|
6,852,072 | 5,696,187 | ||||||
|
Redeemable
preferred stock
|
1,565,283 | 1,455,451 | ||||||
|
Total
held to maturity
|
$ | 115,832,300 | $ | 116,229,747 | ||||
The
amortized cost and estimated fair value of available-for-sale securities at
December 31, 2009, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because certain borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Equities are valued using the specific identification
method.
|
Amortized
|
Estimated
Fair
|
|||||||
|
Cost
|
Value
|
|||||||
|
Available
for Sale:
|
||||||||
|
Due
in 2010
|
$ | 1,012,458 | $ | 1,030,085 | ||||
|
Due
in 2011 through 2014
|
- | - | ||||||
|
Due
in 2015 through 2019
|
- | - | ||||||
|
Due
after 2019
|
98,280 | 119,438 | ||||||
|
Non-redeemable
preferred stock
|
20,281 | 15,220 | ||||||
|
Common
stock
|
5,398,320 | 5,771,394 | ||||||
|
Total
available for sale
|
$ | 6,529,339 | $ | 6,936,137 | ||||
The
Company’s realized gains and losses from investments and other assets are
summarized as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Fixed
maturity securities held
|
||||||||||||
|
to
maturity:
|
||||||||||||
|
Gross
realized gains
|
$ | 500,795 | $ | 90,243 | $ | 94,984 | ||||||
|
Gross
realized losses
|
(151,069 | ) | (2,343,264 | ) | (27,065 | ) | ||||||
|
Securities
available for sale:
|
||||||||||||
|
Gross
realized gains
|
1,018,217 | 1,211,932 | 175,990 | |||||||||
|
Gross
realized losses
|
(478,757 | ) | (560,853 | ) | (860 | ) | ||||||
|
Other
assets
|
8,126 | (131,773 | ) | 764,525 | ||||||||
|
Total
|
$ | 897,312 | $ | (1,733,715 | ) | $ | 1,007,574 | |||||
Generally
gains and losses from held to maturity securities are a result of early calls
and related amortization of premiums or discounts. However, credit losses of
$326,000 and $2,343,264 were recognized during the year ended December 31, 2009
and 2008, respectively, from other-than-temporary declines in market value of
held to maturity securities.
73
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
3. Investments (Continued)
Mortgage
loans consist of first and second mortgages. The mortgage loans bear interest at
rates ranging from 2.0 % to 10.5%, maturity dates range from three months to 30
years and are secured by real estate. Concentrations of credit risk arise when a
number of mortgage loan debtors have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly affected by
changes in economic conditions. Although the Company has a diversified mortgage
loan portfolio consisting of residential mortgages, commercial loans and
residential construction loans and requires collateral on all real estate
exposures, a substantial portion of its debtors’ ability to honor obligations is
reliant on the economic stability of the geographic region in which the debtors
do business. At December 31, 2009, the Company has 29%, 13% and 16% of its
mortgage loans from borrowers located in the states of Utah, Florida and
California, respectively. The mortgage loans on real estate balances on the
consolidated balance sheet are reflected net of an allowance for loan losses of
$6,808,803 and $4,780,467 at December 31, 2009 and 2008,
respectively.
There
were no investments, aggregated by issuer, in excess of 10% of shareholders’
equity (before net unrealized gains and losses on available for sale securities)
at December 31, 2009, other than investments issued or guaranteed by the United
States Government.
Major
categories of net investment income are as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Fixed
maturity securities
|
$ | 7,140,920 | $ | 7,167,007 | $ | 6,045,141 | ||||||
|
Equity
securities
|
794,845 | 266,533 | 161,850 | |||||||||
|
Mortgage
loans on real estate
|
5,462,533 | 6,857,757 | 6,759,943 | |||||||||
|
Real
estate
|
1,561,809 | 1,563,134 | 1,273,652 | |||||||||
|
Policy,
student and other loans
|
811,684 | 699,592 | 707,068 | |||||||||
|
Short-term
investments,
principally
gains on sale of
|
||||||||||||
|
mortgage loans and other
|
7,896,518 | 14,265,269 | 18,898,925 | |||||||||
|
Gross
investment income
|
23,668,309 | 30,819,292 | 33,846,579 | |||||||||
|
Investment
expenses
|
(2,633,150 | ) | (2,715,783 | ) | (1,890,135 | ) | ||||||
|
Net
investment income
|
$ | 21,035,159 | $ | 28,103,509 | $ | 31,956,444 | ||||||
Net
investment income includes net investment income earned by the restricted assets
of the cemeteries and mortuaries of $688,406, $953,284, and $942,627 for 2009,
2008, and 2007, respectively.
Net
investment income on real estate consists primarily of rental revenue received
under short-term leases.
Investment
expenses consist primarily of depreciation, property taxes, operating expenses
of real estate and an estimated portion of administrative expenses relating to
investment activities.
Securities
on deposit for regulatory authorities as required by law amounted to $10,614,292
at December 31, 2009 and $10,210,743 at December 31, 2008. The restricted
securities are included in various assets under investments on the accompanying
consolidated balance sheets.
74
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
4) Receivables
Receivables
consist of the following:
| December 31 | ||||||||
|
2009
|
2008
|
|||||||
|
Trade
contracts
|
$ | 8,039,501 | $ | 10,093,271 | ||||
|
Advances
receivables from sales agents
|
2,282,899 | 2,438,371 | ||||||
|
Held
in Escrow – Capital Reserve Life/Southern Security
|
616,383 | 629,402 | ||||||
|
Other
|
2,117,480 | 1,957,329 | ||||||
|
Total
receivables
|
13,056,263 | 15,118,373 | ||||||
|
Allowance
for doubtful accounts
|
(2,183,056 | ) | (1,983,293 | ) | ||||
|
Net
receivables
|
$ | 10,873,207 | $ | 13,135,080 | ||||
5) Value of Business
Acquired
Information
with regard to value of business acquired is as follows:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
at beginning of year
|
$ | 11,377,276 | $ | 11,686,080 | $ | 11,882,047 | ||||||
|
Value
of business acquired
|
246,838 | 590,950 | 765,787 | |||||||||
|
Imputed
interest at 7%
|
757,048 | 807,217 | 824,502 | |||||||||
|
Amortization
|
(2,128,492 | ) | (1,706,971 | ) | (1,786,256 | ) | ||||||
|
Net
amortization charged to income
|
(1,371,444 | ) | (899,754 | ) | (961,754 | ) | ||||||
|
Balance
at end of year
|
$ | 10,252,670 | $ | 11,377,276 | $ | 11,686,080 | ||||||
Presuming
no additional acquisitions, net amortization charged to income is expected to
approximate $883,000, $857,000, $813,000, $711,000, and $670,000 for the years
2010 through 2014. Actual amortization may vary based on changes in assumptions
or experience. As of December 31, 2009, value of business acquired is being
amortized over a weighted average life of 9.4 years.
6) Property and
Equipment
The cost
of property and equipment is summarized below:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
and buildings
|
$ | 15,901,478 | $ | 15,860,356 | ||||
|
Furniture
and equipment
|
16,058,583 | 15,877,294 | ||||||
| 31,960,061 | 31,737,650 | |||||||
|
Less
accumulated depreciation
|
(19,133,583 | ) | (17,688,418 | ) | ||||
|
Total
|
$ | 12,826,478 | $ | 14,049,232 | ||||
Depreciation
expense for the years ended December 31, 2009 and 2008 was $1,956,215 and
$2,052,019, respectively.
75
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
7) Bank Loans
Payable
Bank
loans payable are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
6%
note payable in monthly installments of $5,693
|
||||||||
|
including
principal and interest, collateralized by real
|
||||||||
|
property,
with a book value of approximately $554,000,
|
||||||||
|
due
September 2010.
|
$ | 457,420 | $ | 496,994 | ||||
|
6.34%
note payable in monthly installments of $13,556
|
||||||||
|
including
principal and interest, collateralized by real
|
||||||||
|
property
with a book value of approximately $553,000,
|
||||||||
|
due
November 2017.
|
1,109,975 | 1,226,975 | ||||||
|
Bank
prime rate less .28% (2.97% at December 31, 2009)
|
||||||||
|
collateralized
by 15,000 shares of Security National Life Insurance
|
||||||||
|
Company
Stock, due June 2011.
|
1,192,820 | 2,003,527 | ||||||
|
5.75%
note payable in monthly installments of $28,271 including
|
||||||||
|
principal
and interest, collateralized by real property with a book
|
||||||||
|
value
of approximately $6,450,000 due December 2014.
|
4,000,000 | - | ||||||
|
Bank
prime rate less .75% (2.50% at December 31, 2009)
|
||||||||
|
revolving
line of credit of $7,800,000, accrued interest
|
||||||||
|
paid
quarterly, extended to June 2011.
|
1,375,000 | 1,675,000 | ||||||
|
Mark
to market of interest rate swaps (discussed below)
adjustment
|
101,251 | 167,528 | ||||||
|
Other
collateralized bank loans payable
|
419,779 | 568,178 | ||||||
|
Total
bank loans
|
8,656,245 | 6,138,202 | ||||||
|
Less
current installments
|
2,319,017 | 2,018,662 | ||||||
|
Bank
loans, excluding current installments
|
$ | 6,337,228 | $ | 4,119,540 | ||||
76
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
7) Bank Loans Payable
(Continued)
During
2001, the Company entered into a $2,000,000 note payable to a bank with interest
due at a variable interest rate of the Libor rate plus 1.65%. During 2001, the
Company also entered into an interest rate swap instrument that effectively
fixed the interest rate on the note payable at 6.34% per annum. Management
considers the interest rate swap instrument an effective cash flow hedge against
the variable interest rate on the bank note since the interest rate swap mirrors
the term of the note payable and expires on the maturity date of the bank loan
it hedges. The interest rate swap is a derivative financial instrument carried
at its fair value.
In the
event the swap is terminated, any resulting gain or loss would be deferred and
amortized to interest expense over the remaining life of the bank loan it
hedged. In the event of early extinguishment the hedged bank loan, any realized
or unrealized gain or loss from the hedging swap would be recognized in income
coincident with the extinguishment.
At
December 31, 2009, the fair value of the interest rate swap was an unrealized
loss of $101,251 and was computed based on the underlying variable Libor rate
plus 1.65%, or 2.65% per annum. The unrealized loss resulted in a derivative
liability of $101,251 and has been reflected in accumulated other comprehensive
income. The change in accumulated other comprehensive income from the interest
rate swap in 2009 was $66,277. The fair value of the interest rate swap was
derived from a proprietary model of the bank from whom the interest rate swap
was purchased and to whom the note is payable.
At
December 31, 2008, the fair value of the interest rate swap was an unrealized
loss of $167,528 and was computed based on the underlying variable Libor rate
plus 1.65%, or 4.03% per annum. The unrealized loss resulted in a derivative
liability of $167,483 and has been reflected in accumulated other comprehensive
income. The change in accumulated other comprehensive income from the interest
rate swap in 2008 was $123,115. The fair value of the interest rate swap was
derived from a proprietary model of the bank from whom the interest rate swap
was purchased and to whom the note is payable.
In
addition, the Company had an interest rate swap that resulted in an unrealized
gain of $17,417 through December 31, 2007. In early 2008, the Company settled
the interest rate swap for $17,417. The carrying value of the related note
payable was adjusted by the balance of the unrealized gain on the date of the
settlement and has adjusted the interest expense that will be recognized over
the remaining term of the note.
See Note
8 for summary of maturities in subsequent years.
77
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
8) Notes and Contracts
Payable
Notes and
contracts payable are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Unsecured
note payable due to former stockholders
|
||||||||
|
of Deseret
Memorial, Inc. resulting from the
|
||||||||
|
acquisition
of such entity. Amount represents
|
||||||||
|
the
present value, discounted at 8%, of monthly
|
||||||||
|
annuity
payments of $5,900, due September 2011.
|
$ | 109,366 | $ | 156,581 | ||||
|
9%
note payable in monthly installments of
|
||||||||
|
$10,000
including principal and
|
||||||||
|
interest,
collateralized by real property,
|
||||||||
|
with
a book value of approximately
|
||||||||
|
$2,908,000,
paid July 2009.
|
- | 57,636 | ||||||
|
5%
note payable to a former owner of C & J Financial
|
||||||||
|
due
in monthly installments of $16,737
|
||||||||
|
including
principal and interest, paid July 2009.
|
- | 94,276 | ||||||
|
Other
notes payable
|
174,378 | 193,285 | ||||||
|
Total
notes and contracts payable
|
283,744 | 501,778 | ||||||
|
Less
current installments
|
85,168 | 230,517 | ||||||
|
Notes
and contracts, excluding
|
||||||||
|
current installments
|
$ | 198,576 | $ | 271,261 | ||||
The
Company has a $2,000,000 revolving line-of-credit with a bank with interest
payable at the bank’s prime rate minus 0.50% (2.75% at December 31, 2009),
secured by the assets of the Company and maturing June 30, 2010. As of December
31, 2009, there were no amounts outstanding under the revolving line-of-credit.
As of December 31, 2009, $30,000 of the available amount was reserved for an
outstanding letter of credit.
78
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
8) Notes and Contracts
Payable (Continued)
The
following tabulation shows the combined maturities of bank loans payable, lines
of credit and notes and contracts payable:
|
2010
|
$ | 2,404,185 | ||
|
2011
|
1,614,141 | |||
|
2012
|
361,784 | |||
|
2013
|
352,827 | |||
|
2014
|
3,688,100 | |||
|
Thereafter
|
518,952 | |||
|
Total
|
$ | 8,939,989 |
Interest
paid approximated interest expense in 2009, 2008 and 2007.
9) Cemetery and Mortuary
Endowment Care and Pre-need Merchandise Funds
The
Company is required by state law to pay into perpetual care trusts a portion of
the proceeds from the sale of cemetery property interment rights. The related
cemetery perpetual care trusts are defined as variable interest entities
pursuant to generally accepted accounting principles. Also, management has
determined that the Company is the primary beneficiary of these trusts, as it
absorbs both a majority of the losses and returns associated with the trusts.
The Company has consolidated cemetery perpetual care trust investments with a
corresponding amount recorded as Cemetery Perpetual Care Obligation in the
accompanying consolidated balance sheets.
The
components of the cemetery perpetual care obligation are as
follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Trust
investments, at market value
|
$ | 1,104,046 | $ | 1,840,119 | ||||
|
Note
receivables from Cottonwood Mortuary
|
||||||||
|
Singing
Hills Cemetery and Memorial Estates - Pinehill
|
||||||||
|
eliminated
in consolidation
|
2,052,331 | 1,120,950 | ||||||
|
Total
trust assets
|
3,156,377 | 2,961,069 | ||||||
|
Cemetery
perpetual care obligation
|
(2,756,174 | ) | (2,647,984 | ) | ||||
|
Fair
value of trust assets in excess of trust obligations
|
$ | 400,203 | $ | 313,085 | ||||
The
Company has established and maintains certain restricted trust investments to
provide for future merchandise and service obligations incurred in connection
with its pre-need sales. Such amounts are reported as pre-need funeral and
cemetery trust investments of cemeteries and mortuaries in the accompanying
consolidated balance sheets.
79
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
9) Cemetery and Mortuary
Endowment Care and Pre-need Merchandise Funds
(Continued)
Assets in
the restricted asset account are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
and cash equivalents
|
$ | 1,175,646 | $ | 911,060 | ||||
|
Mutual
funds
|
416,002 | 245,285 | ||||||
|
Fixed
maturity securities
|
8,775 | 8,775 | ||||||
|
Equity
securities
|
76,850 | 75,918 | ||||||
|
Participating
in Mortgage loans with Security National Life
|
916,141 | 2,836,038 | ||||||
|
Total
|
$ | 2,593,414 | $ | 4,077,076 | ||||
A surplus
note receivable and interest in the amount of $4,000,000 from Security National
Life was eliminated in consolidation.
10) Income
Taxes
The
Company’s income tax liability at December 31 is summarized as
follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Current
|
$ | 608,060 | $ | 276,096 | ||||
|
Deferred
|
16,223,588 | 14,415,582 | ||||||
|
Other
|
513,221 | 282,566 | ||||||
|
Total
|
$ | 17,344,869 | $ | 14,974,244 | ||||
Significant
components of the Company’s deferred tax (assets) and liabilities at December 31
are approximately as follows:
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Future
policy benefits
|
$ | (6,140,507 | ) | $ | (5,693,225 | ) | ||
|
Loan
loss reserve
|
(2,679,449 | ) | (1,478,708 | ) | ||||
|
Unearned
premium
|
(1,768,838 | ) | (1,799,650 | ) | ||||
|
Other
|
(1,296,635 | ) | (1,209,383 | ) | ||||
|
Less:
Valuation allowance
|
6,214,039 | 5,498,477 | ||||||
|
Total
deferred tax assets
|
(5,671,390 | ) | (4,682,489 | ) | ||||
|
Liabilities
|
||||||||
|
Deferred
policy acquisition costs
|
9,146,293 | 8,756,407 | ||||||
|
Basis
difference in fixed assets
|
4,018,057 | 1,944,049 | ||||||
|
Value
of business acquired
|
3,793,488 | 4,210,547 | ||||||
|
Installment
sales
|
2,356,322 | 2,317,015 | ||||||
|
Trusts
|
1,908,905 | 1,674,321 | ||||||
|
Available
for sale securities
|
6,147 | (17,179 | ) | |||||
|
Tax
on unrealized appreciation
|
665,766 | 212,911 | ||||||
|
Total
deferred tax liabilities
|
21,894,978 | 19,098,071 | ||||||
|
Net
deferred tax liability
|
$ | 16,223,588 | $ | 14,415,582 | ||||
80
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
10) Income Taxes
(Continued)
The
increase in the valuation allowance was $715,562 and $500,136 during 2009 and
2008, respectively.
The
Company paid $750,844, $505,962, and $875,825 in income taxes for 2009, 2008 and
2007, respectively. The Company’s income tax expense (benefit) is summarized as
follows for the year ended December 31:
|
2009
|
2008
|
2007
|
||||||||||
|
Current
|
$ | 1,002,789 | $ | 214,888 | $ | 375,825 | ||||||
|
Deferred
|
1,366,336 | (234,338 | ) | 456,245 | ||||||||
|
Other
|
204,653 | 175,108 | 25,565 | |||||||||
|
Total
|
$ | 2,573,778 | $ | 155,658 | $ | 857,635 | ||||||
|
The
reconciliation of income tax expense at the U.S. federal statutory rates
is as follows:
|
||||||||||||
| 2008 | 2008 | 2007 | ||||||||||
|
Computed
expense at statutory rate
|
$ | 2,158,204 | $ | 248,374 | $ | 1,061,831 | ||||||
|
Special
deductions allowed
|
||||||||||||
|
small
life insurance companies
|
(50,983 | ) | (20,918 | ) | (330,804 | ) | ||||||
|
Other,
net
|
466,557 | (71,798 | ) | 126,608 | ||||||||
|
Tax
expense
|
$ | 2,573,778 | $ | 155,658 | $ | 857,635 | ||||||
At
December 31, 2009, the Company had $513,221 of unrecognized tax benefits
principally relating to tax positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such
deductibility. At December 31, 2009, the Company had $26,001 in
interest and penalties related to unrecognized tax benefits. The Company
accounts for interest expense and penalties for unrecognized tax benefits as
part of its income tax provision. Because of the impact of deferred
tax accounting, other than interest and penalties, the disallowance of the
shorter deductibility period would not affect the annual effective tax rate but
would accelerate the payment of cash to the taxing authority to an earlier
period. As of December 31, 2009, the Company does not expect any material
changes to the estimated amount of unrecognized tax benefits in the next twelve
months. Federal and state income tax returns for 2006 through 2009 are open tax
years.
11) Reinsurance, Commitments and
Contingencies
The
Company follows the procedure of reinsuring risks in excess of a specified
limit, which ranged from $25,000 to $75,000 during the years 2009 and 2008. 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 having insurance in force amounting to approximately
$1,346,932,000 (unaudited) at December 31, 2009 and approximately $1,150,687,000
(unaudited) at December 31, 2008.
81
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
On
December 31, 2008, the Company entered into a Coinsurance Funds Withheld
Reinsurance Agreement with Continental American Insurance Company (“Continental
American”), a South Carolina domiciled insurance company. This agreement was
effective November 30, 2008. Under the terms of the agreement, the Company ceded
to Continental American 100% of a block of deferred annuities in the amount of
$4,828,487 as of December 31, 2008 and retained the assets and recorded a funds
held under coinsurance liability for the same amount. Continental American
agreed to pay the Company an initial ceding commission of $60,000 and a
quarterly management fee of $16,500 per quarter to administer the policies. The
Company will also receive a 90% experience refund for any profits on the
business. The Company has the right to recapture the business on January 1
subsequent to December 31, 2008 or any other date if mutually agreed and with 90
days written notice to Continental American. The Company and Continental
American have agreed to terminate this agreement on March 31, 2010.
The
Company has entered into commitments to fund new residential construction loans.
As of December 31, 2009 the Company’s commitments are $27,219,743 for these
loans of which $25,043,623 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% to 80% of appraised value. The Company
receives fees from the borrowers and the interest rate is generally 2% to 6.75%
over the bank prime rate (3.25% as of December 31, 2009). Maturities range
between six and twelve months.
In June
2007, the Company completed the sale of the Colonial Funeral Home property to
the Utopia Station Development Corp. for $730,242, net of selling costs of
$44,758. The Colonial Funeral Home ceased operations in July 2006 and has been
inactive since that date. The carrying amount on the Company's financial
statements on June 20, 2007 was $148,777. As a result of the sale, including
payment of selling expenses, the Company recognized a gain of $581,465. The
Company received an initial payment of $15,242, with the remaining amount due of
$715,000 to be paid in a lump sum within a year from the date of sale. The gain
was included as a part of realized gains on investments and other assets in the
Company's condensed consolidated statement of earnings for the year ended
December 31, 2007. In September of 2008, the Company foreclosed on the Utopia
Development Corp. In October 2008, the Colonial Property was sold to RTTTA, LLC
for $650,000 less selling costs of $26,079. The reduction of the 2007 gain by
$91,079 was recorded as a loss in 2008.
The
Company leases office space and equipment under various non-cancelable
agreements, with remaining terms up to five years. Minimum lease payments under
these non-cancelable operating leases as of December 31, 2009, are approximately
as follows:
|
Years
Ending
|
|||||
|
December 31
|
|||||
|
2010
|
$ | 1,154,000 | |||
|
2011
|
809,000 | ||||
|
2012
|
372,000 | ||||
|
2013
|
106,000 | ||||
|
2014
|
58,000 | ||||
|
Total
|
$ | 2,499,000 | |||
Total
rent expense related to non-cancelable operating leases for the years ended
December 31, 2009, 2008, and 2007 was approximately $2,134,000, $2,074,000 and
$1,957,000, respectively.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at December 31, 2009 was
$230,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of December 31, 2009, there were $152,559,973
in mortgage loans in which settlements with third party investors were still
pending. Generally, when certain mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts
outstanding on the mortgage loans, but is required to pay a fee in the form of
interest on a portion of the mortgage loans between the date that the loans are
sold to warehouse banks and the date of settlement with third party investors.
The terms of the loan purchase agreements are typically for one year, with
interest rates on a portion of the mortgage loans ranging from 2.5% to 2.75%
over the 30 day Libor rate. SecurityNational Mortgage is in the process of
renewing one of its loan purchase agreements that expired on September 30, 2009
for an additional one year term. SecurityNational Mortgage continues to sell
mortgage loans to such warehouse bank while negotiating the renewal of the loan
purchase agreement. In addition, the Company has been successful in obtaining a
loan purchase agreement with another warehouse bank.
82
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
In 1998,
SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman
Brothers Bank and its wholly owned subsidiary, Aurora Loan Services, LLC. Under
the terms of the Loan Purchase Agreement, Lehman Brothers, through its
subsidiary, Aurora Loan Services, agreed to purchase mortgage loans from time to
time from SecurityNational Mortgage. During 2007, Aurora Loan Services purchased
a total of 1,490 mortgage loans in the aggregate amount of $352,774,000 from
SecurityNational Mortgage. On January 17, 2008, Aurora Loan Services announced
it was suspending all wholesale and correspondent mortgage originations. As a
result of this policy change, Aurora Loan Services discontinued purchasing
mortgage loans from all mortgage brokers and lenders, including SecurityNational
Mortgage.
During
2007, Aurora Loan Services maintained that as part of its quality control
efforts it reviewed mortgage loans purchased from SecurityNational Mortgage and
determined that certain of the loans contained alleged misrepresentations and
early payment defaults. Aurora Loan Services further maintained that these
alleged breaches in the purchased mortgage loans provide it with the right to
require SecurityNational Mortgage to immediately repurchase the mortgage loans
containing the alleged breaches in accordance with the terms of the Loan
Purchase Agreement. In order for Lehman Brothers and Aurora Loan Services to
refrain from demanding immediate repurchase of the mortgage loans by
SecurityNational Mortgage, SecurityNational Mortgage was willing to enter into
an agreement to indemnify Lehman Brothers and Aurora Loan Services for any
losses incurred in connection with certain mortgage loans with alleged breaches
that were purchased from SecurityNational Mortgage.
On
December 17, 2007, SecurityNational Mortgage entered into an Indemnification
Agreement with Lehman Brothers and Aurora Loan Services. Under the terms of the
Indemnification Agreement, SecurityNational Mortgage agrees to indemnify Lehman
Brothers and Aurora Loan Services for 75% of all losses that Lehman Brothers and
Aurora Loan Services may have as a result of any current or future defaults by
mortgagors on 54 mortgage loans that were purchased from SecurityNational
Mortgage and listed as an attachment to the Indemnification Agreement.
SecurityNational Mortgage is released from any obligation to pay the remaining
25% of such losses. The Indemnification Agreement also requires SecurityNational
Mortgage to indemnify Lehman Brothers and Aurora Loan Services for 100% of
losses incurred on mortgage loans with alleged breaches that are not listed on
the attachment to the agreement.
Concurrently
with the execution of the Indemnification Agreement, SecurityNational Mortgage
paid $395,000 to Aurora Loan Services as a deposit into a reserve account to
secure the obligations of SecurityNational Mortgage under the Indemnification
Agreement. This deposit is in addition to a $250,000 deposit that
SecurityNational Mortgage made to Aurora Loan Services on December 10, 2007, for
a total of $645,000. Losses from mortgage loans with alleged breaches are
payable by SecurityNational Mortgage from the reserve account. However, Lehman
Brothers and Aurora Loan Services are not to apply any funds from the reserve
account to a particular mortgage loan until an actual loss has
occurred.
The
Indemnification Agreement further provides that SecurityNational Mortgage will
be entitled to have held back 25 basis points on any mortgage loans that Aurora
Loan Services purchases from SecurityNational Mortgage and to add the amount of
the basis point holdbacks to the reserve account. SecurityNational Mortgage
agreed to deliver to Aurora Loan Services at least $300,000,000 in mortgage
loans on an annual basis or at least $600,000,000 in 24 months. These provisions
may not be effective, however, because Aurora Loan Services has discontinued
purchasing mortgage loans from SecurityNational Mortgage. SecurityNational
Mortgage also agrees to pay to Aurora Loan Services the difference between the
reserve account balance and $645,000, but in no event will SecurityNational
Mortgage be required to pay any amount into the reserve account that would
result in a total contribution, including both the basis point holdbacks and
cash payments, in excess of $125,000 for any calendar
month.
83
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
During
2007 and 2008, SecurityNational Mortgage made $1,730,000 in total payments to
Aurora Loan Services pursuant to the Indemnification Agreement. During 2009
SecurityNational Mortgage made payments to Aurora Loan Services of $1,174,082.
When SecurityNational Mortgage entered into the Indemnification Agreement, it
anticipated using basis point holdbacks from loan production credits toward
satisfying the $125,000 monthly obligations. Because Aurora Loan Services
discontinued purchasing mortgage loans from SecurityNational Mortgage shortly
after the Indemnification Agreement was executed, SecurityNational Mortgage has
not had the benefit of using the basis point holdbacks toward payment of the
$125,000 monthly obligations.
During
2008 and 2009, funds were paid out of the reserve account to indemnify
$2,732,000 in losses from 34 mortgage loans that were among the 54 mortgage
loans with alleged breaches which were listed on the attachment to the
Indemnification Agreement. The estimated potential losses from the
remaining 20 mortgage loans listed on the attachments, which would require
indemnification by SecurityNational Mortgage for such losses, is $2,828,000.
During 2008 and 2009, the Company recognized losses related to this matter of
$1,636,082 and $1,032,000, respectively; however, management cannot fully
determine the total losses, if any, nor rights that the Company may have as a
result of Lehman Brothers and Aurora Loan Services refusal to purchase
subsequent loans under the Indemnification Agreement. The Company has estimated
and accrued $1,507,023 for losses under the Indemnification Agreement as of
December 31, 2009.
There
have been assertions in third party purchaser correspondence that
SecurityNational Mortgage sold mortgage loans that contained alleged
misrepresentations or that experienced early payment defaults, or that were
otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of
America – Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made
demands that SecurityNational Mortgage repurchase certain alleged defective
mortgage loans that were sold to such investors or indemnify them against any
losses related to such loans. The Company has been reviewing these
demands and has reserved what it believes to be an adequate amount to cover
potential losses. Although the Company believes that it has reserved adequate
provisions for losses, from an industry wide perspective the number of
repurchase demands and the loss per loan have shown sharp increases during the
last several months as compared to historical amounts. It is unclear whether
such increases represent a trend that will continue in the future.
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claims that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements under certain agreements between CitiMortgage and
SecurityNational Mortgage, the complaint specifically addressing nineteen
mortgage loans. The requirements in the agreements that CitiMortgage claims in
the complaint were not met by SecurityNational Mortgage are more particularly
described in “Item 3. Legal Proceedings” of this Form 10-K.
The
complaint further alleges that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contends that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requests an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including
to repurchase the defective mortgage loans and indemnify CitiMortgage for its
costs and attorneys’ fees in the lawsuit, interest, and such further relief as
the court deems just and proper.
84
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
SecurityNational
Mortgage disputes the claims that CitiMortgage asserts in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010,
SecurityNational Mortgage and CitiMortgage entered into a written Settlement
Agreement and Release encompassing the aforesaid settlement. Under the terms of
the Settlement Agreement and Release, SecurityNational Mortgage paid a
settlement amount to CitiMortgage. The Company has reserved a
sufficient amount to cover the settlement payment in its consolidated financial
statements at December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers.
At
December 31, 2009, the Company was contingently liable under a standby
letter of credit aggregating $369,356, to be used as collateral to
cover any contingency related to additional risk assessments pertaining to the
Company's self-insurance casualty program. The Company does not expect any
material losses to result from the issuance of the standby letter of credit
because claims are not expected to exceed premiums paid. Accordingly, the
estimated fair value of these instruments is zero.
The
Company is self insured for certain casualty insurance, worker compensation
and liability programs. Self-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 coverages. When
estimating the self-insurance liabilities and related reserves, management
considers a number of factors, which include historical claims experience,
demographic factors, severity factors and valuations provided by independent
third-party actuaries. Management reviews its assumptions with its independent
third-party administrators and actuaries to evaluate whether the self-insurance
reserves are adequate. 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 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. At December 31, 2009, $694,738 of reserves was established related
to such insurance programs versus $914,365 at December 31, 2008.
On March
5, 2007, the Company received a proposed consent order from the Florida Office
of Insurance Regulation concerning the New Success Life Program, the higher
education product currently marketed and sold by Southern Security Life and now
marketed and sold by Security National Life. The proposed order states that as a
result of the investigation the Florida Office of Insurance Regulation has
determined that Southern Security Life violated Florida law (i) by knowingly
making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making advertisements, announcements, or
statements containing representations that were untrue or
misleading.
The
proposed order would require Security National Life and Southern Security Life
to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required
to send a written notice to Florida consumers who purchased the New Success Life
Program on or after January 1, 1998 stating that the higher education program is
a whole life insurance product, with a term and annuity rider, and not a college
trust fund, savings plan, or other program, and it may not necessarily pay
college expenses in full from the accumulated value.
85
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
Moreover,
the written notice is to provide an opportunity for the Florida consumers who
purchased the New Success Life Program on or after January 1, 1998 to cancel
their policy and be given a full refund, including all premiums paid, together
with interest at the agreed upon rate in the original contract. If each of the
Florida consumers who purchased the New Success Life Program after January 1,
1998 was to cancel his or her policy and receive a refund, the cost to the
Company to refund all premiums paid, including interest, would be approximately
$8,200,000.
The
proposed consent order would also require Security National Life and Southern
Security Life to issue refunds including interest to the eleven policyholders
whose affidavits were taken in connection with the administrative complaint that
the Florida Office of Insurance Regulation had previously filed against Franz
Wallace, the former National Sales Director of Southern Security Life. Security
National Life and Southern Security Life would additionally be required to issue
refunds, including interest, to any Florida policyholder in the New Success Life
Program who had filed a complaint with the Florida Department of Financial
Services or whose coverage had lapsed. Furthermore, Security National Life and
Southern Security Life would be required to notify the state insurance
department in each state in which the New Success Life Program is marketed of
the order and any complaint that Southern Security Life received relating to the
New Success Life Program from policyholders in that state. Finally, Security
National Life and Southern Security Life would be required to pay the Florida
Office of Insurance Regulation a penalty of $100,000 and administrative costs of
$5,000.
The
Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office of Insurance Regulation has
with the New Success Life Program because it has received no specific
administrative complaint from the Florida Office of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company is currently engaged in discussions with the
Florida Office of Insurance Regulation in an effort to settle the dispute
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the Florida Office of Insurance Regulation with respect to the
terms of the proposed consent order and the Florida Office of Insurance
Regulation issues a similar order, the Company intends to take action necessary
to protect its rights and interests, including requesting a hearing before an
administrative law judge to oppose the order.
After
several months of discussions with the Florida Office of Insurance Regulation
concerning the categorization of certain admitted assets, Security National Life
received a letter dated June 17, 2009, in which Florida indicated its rejection
of Security National Life's position and requested that Security National Life
either infuse additional capital or cease writing new business in the State of
Florida. Florida’s decision was based upon excess investments in
subsidiaries by Security National Life and Florida’s determination to classify
as property acquired and held for the purposes of investment, certain real
property that Security National Life acquired in satisfaction of creditor rights
and subsequently rented to tenants. These determinations resulted in
Security National Life exceeding certain investment limitations under Florida
law and in a corresponding capital and surplus deficiency as of March 31,
2009. Florida has acknowledged that the deficiency may be cured by
the infusion of additional capital in the amount of the excess
investments.
Security
National Life strongly disagrees with Florida’s interpretation of the Florida
statutes, including Florida’s opinion that $21,672,000 of real property that
Security National Life acquired in satisfaction of creditor rights as of March
31, 2009 must be included in an investment category that is subject to a
limitation of only 5% of admitted assets (which category consists of real estate
acquired and held for investment purposes) rather than in the investment
category that is subject to a limitation of 15% of admitted assets (which
category includes real estate
acquired in satisfaction of loans, mortgages, or debts). In rendering
its opinion, Florida did not suggest that the real property assets of Security
National Life are not fairly stated. The letter further stated that Security
National Life may not resume writing insurance in Florida until such time as it
regains full compliance with Florida law and receives written approval from
Florida authorizing it to resume writing insurance.
86
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
11) Reinsurance, Commitments and
Contingencies (Continued)
On June
18, 2009, Security National Life responded by letter to Florida and expressed
its disagreement with Florida’s interpretation of the Florida statutes but, for
practical purposes, agreed, beginning as of June 30, 2009 and continuing until
Florida determines that Security National Life has attained full compliance with
the Florida statutes, to cease originating new insurance policies in Florida and
not to enter into any new reinsurance agreements with any Florida domiciled
insurance company. The State of Utah, Security National Life’s state
of domicile, has not determined Security National Life to have a capital and
surplus deficiency, nor is Security National Life aware of any state, other than
Florida, in which Security National Life is determined to have a capital and
surplus deficiency.
During
2008, the annualized premiums for new insurance policies written by Security
National Life in Florida were $464,000, or 4.7% of the total amount of
$9,901,000 in annualized premiums for new insurance policies written by Security
National Life during the same period. Security National Life is in
the process of preparing an application to be submitted to Florida for approval
of a Florida only subsidiary for all new insurance business written in
Florida. Security National Life believes that if Florida were to
approve a Florida only subsidiary, Security National Life would be able to
resume writing new insurance policies in Florida in full compliance with the
Florida statutes relating to investments in real estate and
subsidiaries.
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.
87
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
12) Retirement
Plans
The
Company and its subsidiaries have a noncontributory Employee Stock Ownership
Plan (ESOP) for all eligible employees. Eligible employees are primarily those
with more than one year of service, who work in excess of 1,000 hours per year.
Contributions, which may be in cash or stock of the Company, are determined
annually by the Board of Directors.
The
Company’s contributions are allocated to eligible employees based on the ratio
of each eligible employee’s compensation to total compensation for all eligible
employees during each year. ESOP contribution expense totaled $-0-, $-0- and
$176,061 for 2009, 2008 and 2007, respectively. At December 31, 2009 the ESOP
held 606,071 shares of Class A and 1,887,731 shares of Class C common stock of
the Company. All shares held by the ESOP have been allocated to the
participating employees and all shares held by the ESOP are considered
outstanding for purposes of computing earnings per share.
The
Company has three 401(k) savings plans covering all eligible employees, as
defined above, which includes employer participation in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The plans allow
participants to make pretax contributions up to a maximum of $16,500, $15,500
and $15,500 for the years 2009, 2008 and 2007, respectively or the statutory
limits.
Beginning
January 1, 2008, the Company elected to be a “Safe Harbor” Plan for its matching
401(k) contributions. The Company matched 100% of up to 3% of an employee’s
total annual compensation and matched 50% of 4% to 5% of an employee’s annual
compensation. The match was in Company Stock. The Company contribution for 2009
and 2008 was $341,360 and $365,925, respectively under the “Safe Harbor”
plan.
For the
years prior to 2008 the Company matched up to 50% of each employee’s investment
in Company stock, up to 1/2 of 1% of the employee’s total annual compensation.
The Company’s match was in Company stock and the amount of the match was at the
discretion of the Company’s Board of Directors. The Company’s matching 401(k)
contributions for 2007 was $10,001. Also, the Company contributed, at the
discretion of the Company’s Board of Directors, an Employer Profit Sharing
Contribution to the 401(k) savings plan. The Employer Profit Sharing
Contribution was divided among three different classes of participants in the
plan based upon the participant’s title in the Company. The Company
contributions for 2007 was $198,022. All amounts contributed to the plan are
deposited into a trust fund administered by an independent trustee.
In 2001,
the Company’s Board of Directors adopted a Deferred Compensation Plan. Under the
terms of the Plan, the Company will provide deferred compensation for a select
group of management or highly compensated employees, within the meaning of
Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income
Security Act of 1974, as amended. The Board has appointed a Committee of the
Company to be the Plan Administrator and to determine the employees who are
eligible to participate in the plan. The employees who participate may elect to
defer a portion of their compensation into the plan. The Company may contribute
into the plan at the discretion of the Company’s Board of Directors. The
Company’s contributions for 2009, 2008 and 2007 were $-0-, $-0- and $133,037,
respectively.
The
Company has deferred compensation agreements with its Chief Executive Officer
and its past Senior Vice President. The deferred compensation is payable on the
retirement or death of these individuals either in annual installments over 10
years or in a lump sum settlement, if approved by the Board of Directors. The
amount payable is $75,184 per year with cost of living adjustments each
anniversary. The compensation agreements also provide that any remaining balance
will be payable to their heirs in the event of their death. In addition, the
agreements provide that the Company will pay the Group Health coverages for
these individuals and/or their spouses. In 2009, the Company decreased its
liability for these future obligations by $32,777 and in 2008 increased its
liability by $6,030. The current balance as of December 31, 2009 is
$694,253.
88
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
12) Retirement
Plans (Continued)
On July
16, 2004, the Company entered into an employment agreement with Scott M. Quist,
its President and Chief Operating Officer. The agreement is effective as of
December 4, 2003 and has a five-year term, but the Company has agreed to renew
the agreement on December 4, 2008 and 2013 for additional five-year terms,
provided Mr. Quist performs his duties with usual and customary care and
diligence. Under the terms of the agreement, Mr. Quist is to devote his
full time to the Company serving as its President, and Chief Operating Officer
at not less than his current salary and benefits. The Company also agrees to
maintain a group term life insurance policy of not less than $1,000,000 on
Mr. Quist’s life and a whole life insurance policy in the amount of
$500,000 on Mr. Quist’s life. In the event of disability, Mr. Quist’s
salary would be continued for up to five years at 75% of its current
level.
In the
event of a sale or merger of the Company and Mr. Quist is not retained in his
current position, the Company would be obligated to continue Mr. Quist’s
current compensation and benefits for seven years following the merger or sale.
The agreement further provides that Mr. Quist is entitled to receive annual
retirement benefits beginning (i) one month from the date of his retirement (to
commence no sooner than age 65), (ii) five years following complete disability,
or (iii) upon termination of his employment without cause. These retirement
benefits are to be paid for a period of ten years in annual installments in the
amount equal to 75% of his then current rate of compensation. However, in the
event that Mr. Quist dies prior to receiving all retirement benefits thereunder,
the remaining benefits are to be paid to his heirs. The Company expensed
$127,290 and $116,400 in fiscal 2009 and 2008, respectively, to cover the
present value of anticipated retirement benefits under the employment agreement.
The liability accrued is $831,170 and $703,900 as of December 31, 2009 and 2008,
respectively.
On
December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage
Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice
President of Mortgage Operations and President of SecurityNational Mortgage
Company. The agreement has a five-year term, but the Company has agreed to renew
the agreement on December 4, 2008 and 2013 for additional five-year terms,
provided Mr. Beckstead performs his duties with usual and customary care and
diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full
time to the Company serving as President of SecurityNational Mortgage Company at
not less than his current salary and benefits, and to include $350,000 of life
insurance protection. In the event of disability, Mr. Beckstead’s salary
would be continued for up to five years at 50% of its current
level.
In the
event of a sale or merger of the Company and Mr. Beckstead is not retained in
his current position, the Company would be obligated to continue Mr. Beckstead’s
current compensation and benefits for five years following the merger or sale.
The agreement further provides that Mr. Beckstead is entitled to receive
annual retirement benefits beginning (i) one month from the date of his
retirement (to commence no sooner than age 62½) (ii) five years following
complete disability, or (iii) upon termination of his employment without cause.
These retirement benefits are to be paid for a period of ten years in annual
installments in the amount equal to one-half of his then current annual salary.
However, in the event that Mr. Beckstead dies prior to receiving all retirement
benefits thereunder, the remaining benefits are to be paid to his heirs. The
Company expensed in 2009 and 2008 approximately $52,295 and $46,400,
respectively, to cover the present value of the retirement benefit of the
agreement. The liability accrued is $415,595 and $363,300, as of December 31,
2009 and 2008, respectively.
|
13)
|
Capital
Stock
|
The
Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares vote share for share with the Class A shares on all
matters except election of one-third of the directors who are elected solely by
the Class A shares, but generally are entitled to a lower dividend participation
rate. Class C shares are convertible into Class A shares at any time on a ten to
one ratio.
Stockholders
of both classes of common stock have received 5% stock dividends in the years
1990 through 2009, as authorized by the Company’s Board of
Directors.
89
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
12) Capital
Stock (Continued)
The
Company has Class B Common Stock of $1.00 par value, 5,000,000 shares
authorized, of which none are issued. Class B shares are non-voting stock except
to any proposed amendment to the Articles of Incorporation which would affect
Class B Common Stock.
The
following table summarizes the activity in shares of capital stock for the
three-year period ended December 31, 2009:
|
Class
A
|
Class
C
|
|||||||
|
Balance
at December 31, 2006
|
7,533,230 | 7,117,591 | ||||||
|
Exercise
of stock options
|
(38,487 | ) | 1,157,626 | |||||
|
Stock
dividends
|
375,413 | 406,217 | ||||||
|
Conversion
of Class C to Class A
|
15,073 | (150,735 | ) | |||||
|
Balance
at December 31, 2007
|
7,885,229 | 8,530,699 | ||||||
|
Exercise
of stock options
|
-- | -- | ||||||
|
Stock
dividends
|
394,677 | 423,635 | ||||||
|
Conversion
of Class C to Class A
|
4,203 | (42,019 | ) | |||||
|
Balance
at December 31, 2008
|
8,284,109 | 8,912,315 | ||||||
|
Exercise
of stock options
|
16,481 | -- | ||||||
|
Stock
dividends
|
415,868 | 438,776 | ||||||
|
Conversion
of Class C to Class A
|
13,689 | (136,880 | ) | |||||
|
Reinstatement
|
80 | -- | ||||||
|
Balance
at December 31, 2009
|
8,730,227 | 9,214,211 | ||||||
Earnings
per share amounts have been retroactively adjusted for the effect of annual
stock dividends. In accordance with accounting principles generally accepted in
the United States of America, the basic and diluted earnings per share amounts
were calculated as follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
earnings
|
$ | 3,773,880 | $ | 574,853 | $ | 2,265,396 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic earnings
|
||||||||||||
|
per
share-weighted-average shares
|
8,214,128 | 8,620,024 | 8,470,237 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Employee
stock options
|
2,255 | -- | 198,824 | |||||||||
|
Dilutive
potential common shares
|
2,255 | -- | 198,824 | |||||||||
|
Denominator
for diluted earnings per
|
||||||||||||
|
share-adjusted
weighted-average
|
||||||||||||
|
shares
and assumed conversions
|
8,216,383 | 8,620,024 | 8,669,061 | |||||||||
|
Basic
earnings per share
|
$ | 0.46 | $ | 0.07 | $ | 0.27 | ||||||
|
Diluted
earnings per share
|
$ | 0.46 | $ | 0.07 | $ | 0.26 | ||||||
90
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans
The
Company has four fixed option plans (the “1993 Plan,” the “2000 Plan”, the “2003
Plan” and the “2006 Plan”). Compensation expense for options issued of $485,986
and $375,046 has been recognized under these plans for 2009 and 2008,
respectively, and $20,120 has been recognized for 2007. Deferred tax credit has
been recognized related to compensation expense of $165,235, $127,516 and $6,841
for years 2009, 2008 and 2007, respectively.
The
weighted-average fair value of each option granted during 2009 under the 2003
Plan and the 2006 Plan, is estimated at $1.55 and $1.70 for the December 4, 2009
options as of the grant date using the Black Scholes Option Pricing Model with
the following assumptions: dividend yield of 5%, volatility of 72%, risk-free
interest rate of 3.4%, and an expected life of five to ten years.
The
weighted-average fair value of each option granted in 2008 under the 2003 Plan
and the 2006 Plan, is estimated at $2.15 for the March 31, 2008 options and
$1.10 for the December 5, 2008 options as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
5%, volatility of 63%, risk-free interest rate of 3.4%, and an expected life of
five to ten years.
The
weighted-average fair value of each option granted in 2007 under the 2003 Plan
and the 2006 Plan, is estimated at $2.35 as of the grant date using the Black
Scholes Option Pricing Model with the following assumptions: dividend yield of
5%, volatility of 47%, risk-free interest rate of 3.4%, and an expected life of
ten years.
The
Company generally estimates the expected life of the options based upon the
contractual term of the options. Future volatility is estimated based upon the
historical volatility of the Company’s Class A common stock over a period equal
to the estimated life of the options. Common stock issued upon exercise of stock
options are generally new share issuances rather than from treasury shares.
Future compensation relating to non-vested stock options at December 31, 2009 is
not material.
Description
and activity for each Plan is summarized as follows:
The
Company had a 1987 Incentive Stock Option Plan that was terminated in 1997 and
the last options were cancelled during 2007 as follows:
|
Number
of
|
||||||||
|
Class
A Shares
|
Option
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
3,664 | $ | 2.76 | |||||
|
Cancelled
|
(3,664 | ) | ||||||
|
Outstanding
at December 31, 2007
|
-- | |||||||
On June
21, 1993, the Company adopted the Security National Financial Corporation 1993
Stock Incentive Plan (the “1993 Plan”), which reserved 300,000 shares of Class A
Common Stock for issuance thereunder. The 1993 Plan allows the Company to grant
options and issue shares as a means of providing equity incentives to key
personnel, giving them a proprietary interest in the Company and its success and
progress.
91
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
The 1993
Plan provides for the grant of options and the award or sale of stock to
officers, directors, and employees of the Company. Both “incentive stock
options,” as defined under Section 422A of the Internal Revenue Code of 1986
(the “Code”), and “non-qualified options” may be granted pursuant to the 1993
Plan. Options intended as incentive stock options may be issued only to
employees, and must meet certain conditions imposed by the Code, including a
requirement that the option exercise price be not less than the fair market
value of the option shares on the date of grant. The 1993 Plan provides that the
exercise price for non-qualified options will be not less than at least 50% of
the fair market value of the stock subject to such option as of the date of
grant of such options, as determined by the Company’s Board of
Directors.
The
options were granted to reward certain officers and key employees who have been
employed by the Company for a number of years and to help the Company retain
these officers and key employees by providing them with an additional incentive
to contribute to the success of the Company.
The 1993
Plan is administered by the Board of Directors or by a committee designated by
the Board. The options shall be either fully exercisable on the grant date or
shall become exercisable thereafter in such installments as the Board or the
committee may specify. The 1993 Plan provides that if the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend. No options may be exercised for
a term of more than ten years from the date of grant.
On
November 7, 1996, the Company amended the Plan as follows: (i) to increase the
number of shares of Class A Common Stock reserved for issuance under the plan
from 300,000 Class A shares to 600,000 Class A shares; and (ii) to provide that
the stock subject to options, awards and purchases may include Class C Common
Stock.
On
October 14, 1999, the Company amended the 1993 Plan to increase the number of
shares of Class A Common Stock reserved for issuance under the plan from 600,000
Class A shares to 1,046,126 Class A shares. The Plan had a term of ten years and
was terminated in 2003 and options granted thereunder are
non-transferable.
92
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
|
Number
of Class A Shares
|
Option
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
280,243 | $ | 1.79 - $4.86 | |||||
|
Adjustment
for the effect of stock dividends
|
13,891 | |||||||
|
Exercised --
|
-- | |||||||
|
Cancelled
|
(2,431 | ) | ||||||
|
Outstanding
at December 31, 2007
|
291,703 | $ | 1.71 - $4.62 | |||||
|
Adjustment
for the effect of stock dividends
|
13,466 | |||||||
|
Exercised
|
-- | |||||||
|
Cancelled
|
(22,402 | ) | ||||||
|
Outstanding
at December 31, 2008
|
282,767 | $ | 1.62 - $4.40 | |||||
|
Adjustment
for the effect of stock dividends
|
13,902 | |||||||
|
Exercised
|
-- | |||||||
|
Cancelled
|
(4,719 | ) | ||||||
|
Outstanding
at December 31, 2009
|
291,950 | $ | 1.54 - $4.19 | |||||
|
Exercisable
at end of year
|
291,950 | $ | 1.54 - $4.19 | |||||
|
Available
options for future grant
|
||||||||
|
1993
Stock Incentive Plan
|
-- | |||||||
|
Weighted
average contractual term of options
|
||||||||
|
outstanding
at December 31, 2009
|
2.7
years
|
|||||||
|
Aggregated
intrinsic value of options outstanding
|
||||||||
|
at
December 31, 2009
|
$ | -0- | ||||||
On
October 16, 2000, the Company adopted the Security National Financial
Corporation 2000 Director Stock Option Plan (the “2000 Plan”), which reserved
50,000 shares of Class A Common Stock for issuance thereunder. Effective
November 1, 2000, and on each anniversary date thereof during the term of the
2000 Plan, each outside Director who shall first join the Board after the
effective date shall be granted an option to purchase 1,000 shares upon the date
which such person first becomes an outside Director and an annual grant of an
option to purchase 1,000 shares on each anniversary date thereof during the term
of the 2000 Plan. The options granted to outside Directors shall vest in their
entirety on the first anniversary date of the grant.
The
primary purposes of the 2000 Plan are to enhance the Company’s ability to
attract and retain well-qualified persons for service as directors and to
provide incentives to such directors to continue their association with the
Company.
The 2000
Plan provides that if the shares of Common Stock shall be subdivided or combined
into a greater or smaller number of shares or if the Company shall issue any
shares of Common Stock as a stock dividend on its outstanding Common Stock, the
number of shares of Common Stock deliverable upon the exercise of options shall
be increased or decreased proportionately, and appropriate adjustments shall be
made in the purchase price per share to reflect such subdivisions, combination
or stock dividend.
93
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
The 2000
Plan terminated in 2006 and options granted are non-transferable. Options
granted and outstanding under the 2000 Plan include Stock Appreciation Rights
which permit the holder of the option to elect to receive cash, amounting to the
difference between the option price and the fair market value of the stock at
the time of the exercise, or a lesser amount of stock without payment, upon
exercise of the option.
Activity
of the 2000 Plan is summarized as follows:
|
Number
of
|
||||||||
|
Class
A Shares
|
Option
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
17,733 | $ | 1.90 - $4.94 | |||||
|
Adjustment
for the effect of stock dividends
|
695 | |||||||
|
Granted
|
-- | |||||||
|
Exercised
|
(3,828 | ) | ||||||
|
Outstanding
at December 31, 2007
|
14,600 | $ | 2.70 - $4.71 | |||||
|
Adjustment
for the effect of stock dividends
|
474 | |||||||
|
Granted
|
-- | |||||||
|
Cancelled
|
(5,104 | ) | ||||||
|
Outstanding
at December 31, 2008
|
9,970 | $ | 2.58 - $3.02 | |||||
|
Adjustment
for the effect of stock dividends
|
244 | |||||||
|
Granted
|
-- | |||||||
|
Cancelled
|
(5,110 | ) | ||||||
|
Outstanding
at December 31, 2009
|
5,104 | $ | 2.45 | |||||
|
Exercisable
at end of year
|
5,104 | $ | 2.45 | |||||
|
Available
options for future
|
||||||||
|
grant
2000 Director Plan
|
-0- | |||||||
|
Weighted
average contractual term of options
|
||||||||
|
outstanding
at December 31, 2009
|
.83
years
|
|||||||
|
Aggregated
intrinsic value of options outstanding
|
||||||||
|
at
December 31, 2009
|
$ | 4,934 | ||||||
On July
11, 2003, the Company adopted the Security National Financial Corporation 2003
Stock Option Plan (the “2003 Plan”), which reserved 500,000 shares of Class A
Common Stock and 1,000,000 shares of Class C Common Stock for issuance
thereunder. On July 13, 2007, the Company amended the 2003 Plan to authorize an
additional 400,000 shares of Class A Common Stock and an additional 1,000,000
shares of Class C common stock to be made available for issuance under the Plan.
On July 10, 2009 the Company amended the 2003 Plan to authorize an additional
500,000 shares of Class A common stock and an additional 1,000,000 share of
Class C common stock to be made available for issuance under the Plan. The 2003
Plan allows the Company to grant options and issue shares as a means of
providing equity incentives to key personnel, giving them a proprietary interest
in the Company and its success and progress.
The 2003
Plan provides for the grant of options and the award or sale of stock to
officers, directors, and employees of the Company. Both “incentive stock
options”, as defined under Section 422A of the Internal Revenue Code of 1986
(the “Code”) and “non-qualified options” may be granted under the 2003
Plan.
94
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
The 2003
Plan is to be administered by the Board of Directors or by a committee
designated by the Board. The terms of options granted or stock awards or sales
affected under the 2003 Plan are to be determined by the Board of Directors or
its committee. No options may be exercised for a term of more than ten years
from the date of the grant. Options intended as incentive stock options may be
issued only to employees, and must meet certain conditions imposed by the
Internal Revenue Code, including a requirement that the option exercise price be
no less than the fair market value of the option shares on the date of grant.
The 2003 Plan provides that the exercise price for non-qualified options will
not be less than at least 50% of the fair market value of the stock subject to
such option as of the date of grant of such options, as determined by the
Company’s Board of Directors.
The 2003
Plan has a term of ten years. The Board of Directors may amend or terminate the
2003 Plan at any time, from time to time, subject to approval of certain
modifications to the 2003 Plan by the shareholders of the Company as may be
required by law or the 2003 Plan.
Activity
of the 2003 Plan is summarized as follows:
|
Number
of
|
Number
of
|
Option
|
||||
|
Class
A Shares
|
Class
C Shares(1)
|
Price(1)
|
||||
|
Outstanding
at December 31, 2006
|
479,296
|
1,157,625
|
$2.79
- $3.50
|
|||
|
Adjustment
for the effect of stock dividends
|
21,674
|
--
|
||||
|
Granted
|
--
|
--
|
||||
|
Exercised
|
(44,650)
|
(1,157,625)
|
||||
|
Cancelled
|
(1,158)
|
--
|
||||
|
Outstanding
at December 31, 2007
|
455,162
|
--
|
$2.66
- $3.33
|
|||
|
Adjustment
for the effect of stock dividends
|
41,952
|
55,538
|
||||
|
Granted
|
389,923
|
1,110,770
|
||||
|
Exercised
|
--
|
--
|
||||
|
Cancelled
|
(6,032)
|
--
|
||||
|
Outstanding
at December 31, 2008
|
881,005
|
1,166,308
|
$1.43
- $4.03
|
|||
|
Adjustment
for the effect of stock dividends
|
47,994
|
108,316
|
||||
|
Granted
|
206,500
|
1,000,000
|
||||
|
Exercised
|
(63,814)
|
--
|
||||
|
Cancelled
|
(63,814)
|
--
|
||||
|
Outstanding
at December 31, 2009
|
1,007,871
|
2,274,624
|
$1.36
- $3.84
|
|||
|
Exercisable
at end of year
|
791,047
|
1,224,624
|
$1.36
- $3.84
|
|||
|
Available
options for future grant
|
||||||
|
2003
Stock Incentive Plan
|
500,150
|
5
|
||||
|
Weighted
average contractual term of options
|
||||||
|
outstanding
at December 31, 2009
|
5.5
years
|
|||||
|
Aggregated
intrinsic value of options
|
||||||
|
outstanding
at December 31, 2009
|
$777,670
|
|||||
(1) Class
“C” shares are converted to Class “A” shares on a 10 to 1 ratio. The Option
Price is based on Class A Common shares.
Subsequent
to December 31, 2009, two officers of the Company exercised 8,269 and 89,340
options, respectively.
95
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
On
December 7, 2006, the Company adopted the 2006 Director Stock Option Plan (the
“Director Plan”) effective December 7, 2006. The Director Plan provides for the
grant by the Company of options to purchase up to an aggregate of 100,000 shares
of Class A Common Stock for issuance thereunder and adjusted for stock dividends
if any. The Director Plan provides that each member of the Company’s Board of
Directors who is not an employee or paid consultant of the Company automatically
is eligible to receive options to purchase the Company’s Class A Common Stock
under the Director Plan.
Effective
as of December 7, 2006, and on each anniversary date thereof during the term of
the Director Plan, each outside director shall automatically receive an option
to purchase 1,000 shares of Class A Common Stock. In addition, each new outside
director who shall first join the Board after the effective date shall be
granted an option to purchase 1,000 shares upon the date which such person first
becomes an outside director and an annual grant of an option to purchase 1,000
shares on each anniversary date thereof during the term of the Director Plan.
The options granted to outside directors shall vest in four equal quarterly
installments over a one year period from the date of grant, until such shares
are fully vested. The primary purposes of the Director Plan are to
enhance the Company’s ability to attract and retain well-qualified persons for
service as directors and to provide incentives to such directors to continue
their association with the Company.
In the
event of a merger of the Company with or into another company, or a
consolidation, acquisition of stock or assets or other change in control
transaction involving the Company, each option becomes exercisable in full,
unless such option is assumed by the successor corporation. In the event the
transaction is not approved by a majority of the “Continuing Directors” (as
defined in the Director Plan), each option becomes fully vested and exercisable
in full immediately prior to the consummation of such transaction, whether or
not assumed by the successor corporation.
Activity
of the 2006 Plan is summarized as follows:
|
Number
of
|
||||||||
|
Class
A Shares
|
Option
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
4,200 | $ | 5.06 | |||||
|
Granted
|
4,000 | |||||||
|
Adjustment
for the effect of stock dividends
|
410 | |||||||
|
Outstanding
at December 31, 2007
|
8,610 | $ | 3.57 - $4.82 | |||||
|
Granted
|
34,000 | |||||||
|
Adjustment
for the effect of stock dividends
|
2,131 | |||||||
|
Outstanding
at December 31, 2008
|
44,741 | $ | 1.34 - $4.59 | |||||
|
Granted
|
24,000 | |||||||
|
Adjustment
for the effect of stock dividends
|
3,437 | |||||||
|
Outstanding
at December 31, 2009
|
72,178 | $ | 1.28 - $4.37 | |||||
|
Exercisable
at end of year
|
46,978 | $ | 1.28 - $4.37 | |||||
|
Available
options for future grant
|
||||||||
|
2006
Stock Incentive Plan
|
49,373 | |||||||
|
Weighted
average contractual term of options
|
||||||||
|
outstanding
at December 31, 2009
|
8.7
years
|
|||||||
|
Aggregated
intrinsic value of options
|
||||||||
|
outstanding at
December 31, 2009
|
$ | 51,907 | ||||||
96
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
14) Stock Compensation
Plans (Continued)
The
Company's Board of Directors granted stock options in 2004 to Scott M. Quist,
the Company's President and Chief Operating Officer, to purchase up to 1,000,000
shares of Class C common stock at exercise prices of $.323 and $.36 per share.
On May 31, 2007, Mr. Quist made a cashless exercise of such options to purchase
a total of 1,157,625 shares of Class C common stock that he was entitled to
receive, after adjustments for 5% stock dividends issued in 2005, 2006 and
2007.
In
connection with the exercise of such options on a cashless basis, Mr. Quist
delivered and the Company indirectly repurchased a total of 58,376 shares of
Class A common stock from Mr. Quist in exchange for all the Class C shares he
would be entitled to receive for exercising the options. Inasmuch as there were
6,966,849 shares of Class C common stock outstanding as of May 31, 2007 out
of a total of 7,500,000 authorized shares of Class C common stock, the Company
could legally issue only 533,151 shares of Class C common stock to Mr. Quist,
leaving a balance of 624,474 Class C common shares owing to him.
In order
to issue the additional shares of Class C common shares owing to Mr. Quist, the
Board of Directors approved on July 13, 2007 an amendment to the Company's
Articles of Incorporation to increase the number of Class C common shares from
7,500,000 shares to 15,000,000 shares. Because stockholder approval was also
required to amend the Company's Articles of Incorporation, the Company scheduled
a special stockholders meeting on September 21, 2007 to approve the amendment to
the Articles of Incorporation to increase the number of authorized shares of
Class C common stock from 7,500,000 shares to 15,000,000 shares.
On
September 21, 2007 the stockholders approved the amendment to the Articles of
Incorporation at the special stockholders meeting that increased the number of
Class C common shares to 15,000,000 shares, and, as a result, the Company was
able to issue Mr. Quist the additional 624,474 shares of Class C common stock
that were owed pursuant to his exercise of stock options.
15) Statutory Surplus from
Statutory Reserves
Generally,
the net assets of the life insurance subsidiaries available for transfer to the
Company are limited to the amounts of the life insurance subsidiaries net
assets, as determined in accordance with statutory accounting practices, which
were $21,359,342 at December 31, 2009, exceed minimum statutory
capital requirements; however, payments of such amounts as dividends are subject
to approval by regulatory authorities.
The Utah,
Louisiana, Arkansas and Missouri Insurance Departments impose minimum risk-based
capital requirements that were developed by the National Association of
Insurance Commissioners, (“NAIC”) on insurance enterprises. The formulas for
determining the risk-based capital (“RBC”) specify various factors that are
applied to financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio (the
“Ratio”) of the enterprise’s regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level, as defined by the NAIC. Enterprises
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. The life insurance
subsidiaries have a combined weighted Ratio that is greater than 250% of the
first level of regulatory action.
97
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
16) 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 loan segment consists of loan originations fee
income and expenses from the originations of residential and commercial mortgage
loans and interest earned and interest expenses from warehousing pre-sold loans
before the funds are received from financial institutional
investors.
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. Intersegment revenues are recorded at
cost plus an agreed upon intercompany profit.
98
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
16) Business Segment
Information (Continued)
Factors
Management Used to Identify the Enterprise’s Reportable Segments
The
Company’s reportable segments are business units that offer different products
and are managed separately due to the different products and the need to report
to the various regulatory jurisdictions.
|
2009
|
||||||||||||||||||||
|
Life
|
Cemetery/
|
Reconciling
|
||||||||||||||||||
|
Insurance
|
Mortuary
|
Mortgage
|
Items
|
Consolidated
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
From
external sources:
|
||||||||||||||||||||
|
Revenue
from customers
|
$ | 38,413,329 | $ | 11,973,676 | $ | 144,860,399 | $ | -- | $ | 195,247,404 | ||||||||||
|
Net
investment income
|
15,040,367 | 688,406 | 5,306,386 | -- | 21,035,159 | |||||||||||||||
|
Realized
gains on
|
||||||||||||||||||||
|
investments
and other assets
|
897,312 | -- | -- | -- | 897,312 | |||||||||||||||
|
Other
revenues
|
778,107 | 174,357 | 462,216 | 1,414,680 | ||||||||||||||||
|
Intersegment
revenues:
|
||||||||||||||||||||
|
Net
investment income
|
5,040,934 | 1,092,056 | 216,110 | (6,349,100 | ) | -- | ||||||||||||||
|
Total
revenues
|
60,170,049 | 13,928,495 | 150,845,111 | (6,349,100 | ) | 218,594,555 | ||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Death
and other policy benefits
|
20,681,268 | -- | -- | -- | 20,681,268 | |||||||||||||||
|
Increase
in future policy benefits
|
15,238,380 | -- | -- | -- | 15,238,380 | |||||||||||||||
|
Amortization
of deferred policy
and
preneed acquisition costs and
|
||||||||||||||||||||
|
value of business acquired
|
6,756,531 | 403,957 | -- | -- | 7,160,488 | |||||||||||||||
|
Depreciation
|
628,783 | 780,253 | 547,179 | -- | 1,956,215 | |||||||||||||||
|
General,
administrative and
|
||||||||||||||||||||
|
other
costs:
|
||||||||||||||||||||
|
Intersegment
|
24,000 | 65,064 | 236,487 | (325,551 | ) | -- | ||||||||||||||
|
Provision
for loan losses
|
-- | -- | 19,547,162 | -- | 19,547,162 | |||||||||||||||
|
Other
|
16,110,335 | 11,539,185 | 116,687,703 | -- | 144,337,223 | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Intersegment
|
764,554 | 1,019,828 | 4,239,167 | (6,023,549 | ) | -- | ||||||||||||||
|
Other
|
400,299 | 247,954 | 2,677,908 | -- | 3,326,161 | |||||||||||||||
|
Total
benefits and expenses
|
60,604,150 | 14,056,241 | 143,935,606 | (6,349,100 | ) | 212,246,897 | ||||||||||||||
|
Earnings
(losses) before income taxes
|
$ | (434,101 | ) | $ | (127,746 | ) | $ | 6,909,505 | $ | -- | $ | 6,347,658 | ||||||||
|
Identifiable
assets
|
$ | 435,412,810 | $ | 101,357,826 | $ | 39,480,787 | $ | (105,674,525 | ) | $ | 470,576,898 | |||||||||
|
Expenditures
for long-lived assets
|
$ | 134,948 | $ | 139,259 | $ | 462,003 | $ | -- | $ | 736,210 | ||||||||||
99
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
16) Business Segment
Information (Continued)
|
2008
|
||||||||||||||||||||
|
Life
|
Cemetery/
|
Reconciling
|
||||||||||||||||||
|
Insurance
|
Mortuary
|
Mortgage
|
Items
|
Consolidated
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
From
external sources:
|
||||||||||||||||||||
|
Revenue
from customers
|
$ | 35,981,297 | $ | 12,725,930 | $ | 143,411,459 | $ | -- | $ | 192,118,686 | ||||||||||
|
Net
investment income
|
15,931,523 | 953,284 | 11,218,702 | -- | 28,103,509 | |||||||||||||||
|
Realized
gains on
|
||||||||||||||||||||
|
investments
and other assets
|
(1,642,636 | ) | (91,079 | ) | -- | -- | (1,733,715 | ) | ||||||||||||
|
Other
revenues
|
386,354 | 177,997 | 451,019 | 1,015,370 | ||||||||||||||||
|
Intersegment
revenues:
|
||||||||||||||||||||
|
Net
investment income
|
4,818,907 | 120,771 | 358,455 | (5,298,133 | ) | -- | ||||||||||||||
|
Total
revenues
|
55,475,445 | 13,886,903 | 155,439,635 | (5,298,133 | ) | 219,503,850 | ||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Death
and other policy benefits
|
19,195,170 | -- | -- | -- | 19,195,170 | |||||||||||||||
|
Increase
in future policy benefits
|
13,709,135 | -- | -- | -- | 13,709,135 | |||||||||||||||
|
Amortization
of deferred policy
and
preneed acquisition costs and
|
||||||||||||||||||||
|
value of business acquired
|
5,586,848 | 423,425 | -- | -- | 6,010,273 | |||||||||||||||
|
Depreciation
|
663,600 | 863,163 | 534,539 | -- | 2,061,302 | |||||||||||||||
|
General,
administrative and
|
||||||||||||||||||||
|
other
costs:
|
||||||||||||||||||||
|
Intersegment
|
24,000 | 65,064 | 257,409 | (346,473 | ) | -- | ||||||||||||||
|
Other
|
17,766,109 | 12,231,653 | 140,351,243 | -- | 170,349,005 | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Intersegment
|
279,489 | 171,057 | 4,501,114 | (4,951,660 | ) | -- | ||||||||||||||
|
Other
|
191,927 | 256,728 | 6,999,799 | -- | 7,448,454 | |||||||||||||||
|
Total
benefits and expenses
|
57,416,278 | 14,011,090 | 152,644,104 | (5,298,133 | ) | 218,773,339 | ||||||||||||||
|
Earnings
(losses) before income taxes
|
$ | (1,940,833 | ) | $ | (124,187 | ) | $ | 2,795,531 | $ | -- | $ | 730,511 | ||||||||
|
Identifiable
assets
|
$ | 421,550,749 | $ | 64,737,730 | $ | 26,145,713 | $ | (70,629,667 | ) | $ | 441,804,525 | |||||||||
|
Expenditures
for long-lived assets
|
$ | 308,226 | $ | 372,511 | $ | 643,112 | $ | -- | $ | 1,323,849 | ||||||||||
100
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
16) Business Segment
Information (Continued)
|
2007
|
||||||||||||||||||||
|
Life
|
Cemetery/
|
Reconciling
|
||||||||||||||||||
|
Revenues:
|
Insurance
|
Mortuary
|
Mortgage
|
Items
|
Consolidated
|
|||||||||||||||
|
From
external sources:
|
||||||||||||||||||||
|
Revenue
from customers
|
$ | 32,262,837 | $ | 13,188,655 | $ | 130,472,166 | $ | -- | $ | 175,923,658 | ||||||||||
|
Net
investment income
|
14,575,311 | 942,637 | 16,438,496 | -- | 31,956,444 | |||||||||||||||
|
Realized
gains on
|
||||||||||||||||||||
|
investments
and other assets
|
193,109 | 814,465 | -- | -- | 1,007,574 | |||||||||||||||
|
Other
revenues
|
157,670 | 349,789 | 352,947 | -- | 860,406 | |||||||||||||||
|
Intersegment
revenues:
|
||||||||||||||||||||
|
Net
investment income
|
6,866,489 | 116,004 | 472,785 | (7,455,278 | ) | -- | ||||||||||||||
|
Total
revenues
|
54,055,416 | 15,411,550 | 147,736,394 | (7,455,278 | ) | 209,748,082 | ||||||||||||||
|
Expenses:
|
||||||||||||||||||||
|
Death
and other policy benefits
|
18,353,228 | -- | -- | -- | 18,353,228 | |||||||||||||||
|
Increase
in future policy benefits
|
11,389,019 | -- | -- | -- | 11,389,019 | |||||||||||||||
|
Amortization
of deferred policy
|
||||||||||||||||||||
|
and
pre-need acquisition costs
and
value of business acquired
|
5,195,549 | 375,250 | -- | -- | 5,570,799 | |||||||||||||||
|
Depreciation
|
715,478 | 829,196 | 537,976 | -- | 2,082,650 | |||||||||||||||
|
General,
administration and other costs:
|
||||||||||||||||||||
|
Intersegment
|
24,000 | 62,869 | 287,864 | (374,733 | ) | -- | ||||||||||||||
|
Other
|
14,136,583 | 12,581,767 | 129,240,135 | -- | 155,958,485 | |||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Intersegment
|
498,272 | 172,683 | 6,409,590 | (7,080,545 | ) | -- | ||||||||||||||
|
Other
|
253,720 | 280,506 | 12,736,644 | -- | 13,270,870 | |||||||||||||||
|
Total
benefits and expenses
|
50,565,849 | 14,302,271 | 149,212,209 | (7,455,278 | ) | 206,625,051 | ||||||||||||||
|
Earnings
(losses) before income taxes
|
$ | 3,489,567 | $ | 1,109,279 | $ | (1,475,815 | ) | $ | -- | $ | 3,123,031 | |||||||||
|
Identifiable
assets
|
$ | 397,295,306 | $ | 61,102,244 | $ | 24,181,819 | $ | (64,416,724 | ) | $ | 418,162,645 | |||||||||
|
Expenditures
for long-lived assets
|
$ | 850,270 | $ | 1,248,701 | $ | 910,308 | $ | -- | $ | 3,009,279 | ||||||||||
101
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
17) Related Party
Transactions
On
November 19, 2007, Security National Life and Scott M. Quist entered into a Use
and Buy Sale Agreement to jointly purchase a condominium located in St. George,
Utah. Mr. Quist is the Company's President and Chief Operating Officer. The
condominium is to be used for the entertainment of Security National Life's
executive officers and employees, outside vendors and prospective customers. The
purchase price of the condominium, including improvements and furnishings, was
$538,962. Mr. Quist paid $286,207 of that amount and Security National Life paid
$252,755.
Under the
terms of the agreement, Security National Life and Mr. Quist have the right to
use the condominium in proportion to their respective contributions towards the
purchase price, including furnishings and fixtures. Mr. Quist is responsible for
the care and maintenance of the condominium. The payment of taxes, insurance,
utilities and homeowners' fees is to be divided between Security National Life
and Mr. Quist according to their respective ownership percentages.
Upon the
death, disability or retirement of Mr. Quist or his separation from employment
with the Company, Mr. Quist or his estate, as the case may be, shall have the
right to purchase Security National Life's interest in the condominium at the
original purchase price or fair market value, whichever is less. Security
National Life's contribution to the purchase price of the condominium was equal
to an amount of accrued but unpaid bonuses owed to Mr. Quist, which he agreed to
continue to defer for the option that would allow him or his estate to purchase
Security National Life's interest in the condominium upon his death, disability
or retirement at the lesser of the original purchase price or fair market
value.
18) Disclosure about Fair Value
of Financial Instruments
The fair
values of investments in fixed maturity and equity securities along with methods
used to estimate such values are disclosed in Note 3. The following methods and
assumptions were used by the Company in estimating the “fair value” disclosures
related to other significant financial instruments:
Cash, Receivables, Short-term
Investments, and Restricted Assets of the Cemeteries and Mortuaries: The
carrying amounts reported in the accompanying consolidated balance sheet for
these financial instruments approximate their fair values.
Mortgage, Policy, Student, and
Collateral Loans: The fair values are estimated using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the
calculations. The carrying amounts reported in the accompanying consolidated
balance sheet for these financial instruments approximate their fair
values.
Investment Contracts: The
fair values for the Company’s liabilities under investment-type insurance
contracts are estimated based on the contracts’ cash surrender
values.
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.
102
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
18) Disclosure about Fair Value
of Financial Instruments (Continued)
Generally
accepted accounting principles (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 we 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 our estimates of the assumptions
that market participants would use in valuing the financial assets and financial
liabilities.
We utilize a combination of
third party valuation service providers, brokers, and internal valuation models
to determine fair value.
103
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
18) Disclosure about Fair Value
of Financial Instruments (Continued)
The
following table summarizes Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the consolidated balance sheet at December 31, 2009.
|
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
|
||||||||||||||||
|
Investment
in securities available for sale
|
$ | 6,936,137 | $ | 6,936,137 | $ | - | $ | - | ||||||||
|
Short-term
investments
|
7,144,349 | 7,144,349 | - | - | ||||||||||||
|
Restricted
assets of cemeteries and mortuaries
|
1,677,273 | 1,677,273 | - | - | ||||||||||||
|
Cemetery
perpetual care trust investments
|
1,104,046 | 1,104,046 | - | - | ||||||||||||
|
Derivatives
- interest rate lock commitments
|
1,770,193 | - | - | 1,770,193 | ||||||||||||
|
Total
assets accounted for at fair value on a recurring basis
|
$ | 18,631,998 | $ | 16,861,805 | $ | - | $ | 1,770,193 | ||||||||
|
Liabilities
accounted for at fair value on a recurring
basis
|
||||||||||||||||
|
Investment
type insurance contracts
|
$ | (115,763,748 | ) | $ | - | $ | - | $ | (115,763,748 | ) | ||||||
|
Derivatives
- bank loan interest rate swaps
|
(101,251 | ) | - | - | (101,251 | ) | ||||||||||
|
-
call options
|
(134,492 | ) | (134,492 | ) | ||||||||||||
|
-
interest rate lock commitments
|
(215,481 | ) | - | - | (215,481 | ) | ||||||||||
|
Total
liabilities accounted for at fair value on a recurring
basis
|
$ | (116,214,972 | ) | $ | - | $ | - | $ | (116,214,972 | ) | ||||||
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
Investment
Type Insurance Contracts
|
Interest
Rate Lock Commitments
|
Bank
Loan Interest Rate Swaps
|
Call
Options
|
|||||||||||||
|
Balance
- December 31, 2008
|
$ | (112,351,916 | ) | $ | 362,231 | $ | (167,483 | ) | $ | - | ||||||
|
Options
sold
|
- | - | - | (613,541 | ) | |||||||||||
|
Total
Losses (Gains):
|
||||||||||||||||
|
Included
in earnings
|
(3,411,832 | ) | - | - | 479,049 | |||||||||||
|
Included
in other
|
||||||||||||||||
|
comprehensive
income (loss)
|
- | 1,192,480 | 66,277 | - | ||||||||||||
|
Balance
- December 31, 2009
|
$ | (115,763,748 | ) | $ | 1,554,711 | $ | (101,206 | ) | $ | (134,492 | ) | |||||
104
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
18) Disclosure about Fair Value
of Financial Instruments (Continued)
The
following table summarizes Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the consolidated balance sheet at December 31, 2008.
|
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
|
||||||||||||||||
|
Investment
in securities available for sale
|
$ | 5,854,237 | $ | 5,854,237 | $ | - | $ | - | ||||||||
|
Short-term
investments
|
5,282,986 | 5,282,986 | - | - | ||||||||||||
|
Restricted
assets of cemeteries and mortuaries
|
1,241,038 | 1,241,038 | - | - | ||||||||||||
|
Cemetery
perpetual care trust investments
|
1,840,119 | 1,840,119 | - | - | ||||||||||||
|
Derivatives
- interest rate lock commitments
|
2,372,452 | - | - | 2,372,452 | ||||||||||||
|
Total
assets accounted for at fair value on a recurring basis
|
$ | 16,590,832 | $ | 14,218,380 | $ | - | $ | 2,372,452 | ||||||||
|
Liabilities
accounted for at fair value on a recurring
basis
|
||||||||||||||||
|
Investment
type insurance contracts
|
$ | (112,351,916 | ) | $ | - | $ | - | $ | (112,351,916 | ) | ||||||
|
Derivatives
- bank loan interest rate swaps
|
(167,483 | ) | - | - | (167,483 | ) | ||||||||||
|
- interest rate lock commitments
|
(2,010,221 | ) | - | - | (2,010,221 | ) | ||||||||||
|
Total
liabilities accounted for at fair value on a recurring
basis
|
$ | (114,529,620 | ) | $ | - | $ | - | $ | (114,529,620 | ) | ||||||
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
Investment
Type Insurance Contracts
|
Interest
Rate Lock Commitments
|
Bank
Loan Interest Rate Swaps
|
||||||||||
|
Balance
- December 31, 2007
|
$ | (106,939,120 | ) | $ | 627,116 | $ | (26,951 | ) | ||||
|
Total
Losses:
|
||||||||||||
|
Included
in earnings
|
(5,412,796 | ) | - | - | ||||||||
|
Included
in other
|
||||||||||||
|
comprehensive
income
|
- | (264,885 | ) | (140,532 | ) | |||||||
|
Balance
- December 31, 2008
|
$ | (112,351,916 | ) | $ | 362,231 | $ | (167,483 | ) | ||||
105
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
18) Disclosure about Fair Value
of Financial Instruments (Continued)
The items
shown under Level 1 are valued as follows:
On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
The items
shown under Level 3 are valued as follows:
Investment type insurance
contracts. 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 4% to 6.5%.
Interest rate lock
commitments. The Company’s mortgage banking activities enters into
interest rate lock commitments with potential borrowers and forward commitments
to sell loans to third-party investors. The Company also implements a hedging
strategy for these transactions. A mortgage 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 inception of the
mortgage loan commitment. Mortgage loan commitments are defined to be
derivatives under generally accepted accounting principles and are recognized at
fair value on the consolidated balance sheet with changes in their fair values
recorded as part of other comprehensive income from mortgage banking
operations.
Bank loan interest rate
swaps. Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate swap mirrors the term of the note payable and expires on
the maturity date of the bank loan it hedges. The interest rate swaps are a
derivative financial instruments carried at its fair value. The fair value of
the interest rate swap was derived from a proprietary model of the bank from
whom the interest rate swap was purchased and to whom the note is
payable.
106
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
19) Accumulated Other
Comprehensive Income
The
following summarizes the changes in accumulated other comprehensive
income:
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Unrealized
gains (losses) on available
|
||||||||||||
|
for-sale
securities
|
$ | (275,211 | ) | $ | (4,125,253 | ) | $ | 245,447 | ||||
|
Reclassification
adjustment for net realized
|
||||||||||||
|
gains
in net income
|
660,354 | 759,870 | 175,130 | |||||||||
|
Net
unrealized gains (losses) before taxes
|
385,143 | (3,365,383 | ) | 420,577 | ||||||||
|
Tax
(expense) benefit
|
(39,697 | ) | 490,790 | (57,046 | ) | |||||||
|
Net
|
345,446 | (2,874,593 | ) | 363,531 | ||||||||
|
Potential
unrealized gains (losses) for
|
||||||||||||
|
derivative
bank loans (interest rate swaps)
|
||||||||||||
|
before
taxes
|
66,277 | (140,577 | ) | (160,021 | ) | |||||||
|
Tax
(expense) benefit
|
(22,534 | ) | 47,804 | 54,407 | ||||||||
|
Net
|
43,743 | (92,773 | ) | (105,614 | ) | |||||||
|
Potential
unrealized gains (losses) for derivative
|
||||||||||||
|
mortgage
loans before taxes
|
1,192,481 | (264,885 | ) | (582,425 | ) | |||||||
|
Tax
(expense) benefit
|
(405,444 | ) | 90,061 | 198,024 | ||||||||
|
Net
|
787,037 | (174,824 | ) | (384,401 | ) | |||||||
|
Other
items:
|
||||||||||||
|
Company
stock held in escrow transferred
|
||||||||||||
|
to
treasury stock
|
- | 1,982,620 | - | |||||||||
|
Other
|
- | (20,120 | ) | 20,120 | ||||||||
| - | 1,962,500 | 20,120 | ||||||||||
|
Other
comprehensive income
|
$ | 1,139,075 | $ | (1,179,690 | ) | $ | (106,364 | ) | ||||
107
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
19) Accumulated Other
Comprehensive Income (Continued)
The
following is the accumulated balances of other comprehensive income as of
December 31, 2009:
|
Beginning
Balance December 31,
2008
|
Change
for the period
|
Ending
Balance December 31,
2009
|
||||||||||
|
Unrealized
net gains on available-
|
||||||||||||
|
for-sale
securities and trust investments
|
$ | 288,583 | $ | 345,446 | $ | 634,029 | ||||||
|
Unrealized
gains on derivative
|
||||||||||||
|
mortgage
loans
|
239,072 | 787,037 | 1,026,109 | |||||||||
|
Unrealized
gains ( losses)
|
||||||||||||
|
on derivative
bank
|
||||||||||||
|
loan
interest rate swaps
|
(110,554 | ) | 43,743 | (66,811 | ) | |||||||
|
Other
comprehensive income
|
$ | 417,101 | $ | 1,176,226 | $ | 1,593,327 | ||||||
The
following is the accumulated balances of other comprehensive income as of
December 31, 2008:
|
Beginning
Balance December 31, 2007
|
Change
for the period
|
Ending
Balance December 31, 2008
|
||||||||||
|
Unrealized
net gains on available-
|
||||||||||||
|
for-sale
securities and trust investments
|
$ | 3,163,176 | $ | (2,874,593 | ) | $ | 288,583 | |||||
|
Unrealized
gains on derivative
|
||||||||||||
|
mortgage
loans
|
413,896 | (174,824 | ) | 239,072 | ||||||||
|
Unrealized
gains ( losses)
|
||||||||||||
|
on derivative
bank
|
||||||||||||
|
loan
interest rate swaps
|
(17,781 | ) | (92,773 | ) | (110,554 | ) | ||||||
|
Other
comprehensive income
|
3,559,291 | (3,142,190 | ) | 417,101 | ||||||||
|
Other
items:
|
||||||||||||
|
Acquisitions
of company stock
|
||||||||||||
|
held
in escrow
|
(1,982,620 | ) | 1,982,620 | -- | ||||||||
|
Other
|
20,120 | (20,120 | ) | -- | ||||||||
|
Total
other comprehensive income
|
||||||||||||
|
and
other items
|
$ | 1,596,791 | $ | (1,179,690 | ) | $ | 417,101 | |||||
108
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
19) Accumulated Other
Comprehensive Income (Continued)
The
following is the accumulated balances of other comprehensive income as of
December 31, 2007:
|
Beginning
Balance December 31, 2006
|
Change
for the period
|
Ending
Balance December 31, 2007
|
||||||||||
|
Unrealized
gains on available-
|
||||||||||||
|
for-sale
securities
|
$ | 2,799,645 | $ | 363,531 | $ | 3,163,176 | ||||||
|
Unrealized
gains on derivative
|
||||||||||||
|
mortgage
loans
|
798,297 | (384,401 | ) | 413,896 | ||||||||
|
Unrealized
gains ( losses)
|
||||||||||||
|
on derivative
bank
|
||||||||||||
|
loan
interest rate swaps
|
87,833 | (105,614 | ) | (17,781 | ) | |||||||
|
Other
comprehensive income
|
3,685,775 | (126,484 | ) | 3,559,291 | ||||||||
|
Other
items:
|
||||||||||||
|
Acquisitions
of company stock
|
||||||||||||
|
held
in escrow
|
(1,982,620 | ) | 20,120 | (1,962,500 | ) | |||||||
|
Total
other comprehensive income
|
||||||||||||
|
and
other items
|
$ | 1,703,155 | $ | (106,364 | ) | $ | 1,596,791 | |||||
During
the year ended December 31, 2008, the Company reclassified $1,982,620 of cost on
557,949 shares of Class A common stock held in escrow by the Company’s law firm
from accumulated other comprehensive income to treasury
stock.
109
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
|
20)
|
Derivative
Commitments
|
The
Company is exposed to price risk due to the potential impact of changes in
interest rates on the values of mortgage loan commitments from the time a
derivative 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 derivative loan
commitments that will be exercised (i.e., the number of loan commitments that
will be funded) fluctuates. The probability that a loan will not be funded
within the terms of the commitment is driven by a number of factors,
particularly the change, if any, in mortgage rates following the inception of
the interest rate lock. However, many borrowers continue to exercise derivative
loan commitments even when interest rates have fallen.
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 mortgage loan commitments and are
updated periodically to reflect the most current data.
The
Company estimates the fair value of a mortgage loan commitment based on the
change in estimated fair value of the underlying mortgage loan and 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 mortgage loan commitment is issued. Therefore, at the time of issuance,
the estimated fair value is zero. 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 derived from the Company’s
recent historical empirical data are used to estimate the quantity of mortgage
loans that will fund within the terms of the commitments.
The
Company utilizes various derivative instruments to economically hedge the price
risk associated with its outstanding mortgage loan commitments. A forward loan
sales commitment protects the Company from losses on sales of the loans arising
from exercise of the loan commitments by securing the ultimate sales price and
delivery date of the loans. Management expects these derivatives will experience
changes in fair value opposite to changes in fair value of the derivative loan
commitments, thereby reducing earnings volatility related to the recognition in
earnings of changes in the values of the commitments.
The
Company has adopted a strategy of selling “out of the money” call options on its
available for sale 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 receives an immediate payment of cash for the
value of the option and establishes a liability for the market value of the
option. The liability for call options is adjusted to market value at
each reporting date. The market value of outstanding call options as of December
31, 2009 was $134,492. In the event an option is exercised, the
Company recognizes a gain on the sale of the equity security and a gain from the
sale of the option. If the option expires unexercised, the Company
recognizes a gain from the sale of the option and retains the underlying equity
security.
110
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
|
20)
|
Derivative
Commitments (Continued)
|
The
following table shows the fair value of derivatives as of December 31, 2009 and
December 31, 2008.
|
Fair
Value of Derivative Instruments
|
|||||||||||||||
|
Asset
Derivatives
|
Liability
Derivatives
|
||||||||||||||
|
December
31, 2009
|
December
31, 2008
|
December
31, 2009
|
December
31, 2008
|
||||||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
||||||||
|
Derivatives
designated as hedging instruments:
|
|||||||||||||||
|
Interest
rate lock and forward sales commitments
|
other
assets
|
$1,770,193
|
other
assets
|
$2,372,452
|
Other
liabilities
|
$215,481
|
Other
liabilities
|
$2,010,221
|
|||||||
|
Call
Options
|
--
|
--
|
--
|
--
|
Other
liabilities
|
134,492
|
Other
liabilities
|
--
|
|||||||
|
Interest
rate swaps
|
--
|
--
|
--
|
--
|
Bank
loans payable
|
101,206
|
Bank
loans payable
|
167,483
|
|||||||
|
Total
|
$1,770,193
|
$2,372,452
|
$451,179
|
$2,177,704
|
|||||||||||
The
following table shows the gain (loss) on derivatives for the periods presented.
There were no gains or losses reclassified from accumulated other comprehensive
income (OCI) into income or gains or losses recognized in income on derivatives
ineffective portion or any amounts excluded from effective
testing.
|
Gross
Amount Gain (Loss) Recognized in OCI
|
||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
Derivative - Cash Flow
Hedging Relationships:
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
Rate Lock Commitments
|
$ | 1,192,481 | $ | (264,885 | ) | $ | (582,425 | ) | ||||
|
Interest
Rate Swaps
|
66,277 | (140,577 | ) | (160,021 | ) | |||||||
|
Call
Options
|
(42,999 | ) | - | - | ||||||||
|
Total
|
$ | 1,215,759 | $ | (405,462 | ) | $ | (742,446 | ) | ||||
111
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
Years
Ended December 31, 2009, 2008, and 2007
21) Quarterly Financial Data
(Unaudited)
|
2009
|
||||||||||||||||
|
Three
Months Ended
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
Revenues
|
$ | 59,492,097 | $ | 58,009,932 | $ | 48,654,667 | $ | 52,437,859 | ||||||||
|
Benefits
and expenses
|
54,552,194 | 53,525,563 | 48,588,181 | 55,580,959 | ||||||||||||
|
Earnings
before income taxes
|
4,939,903 | 4,484,369 | 66,486 | (3,143,100 | ) | |||||||||||
|
Income
tax expense
|
1,706,893 | 1,393,980 | 3,437 | (530,532 | ) | |||||||||||
|
Net
earnings
|
3,233,010 | 3,090,389 | 63,049 | (2,612,568 | ) | |||||||||||
|
Net
earnings per common share
|
$ | 0.40 | $ | 0.38 | $ | 0.01 | $ | (0.33 | ) | |||||||
|
Net
earnings per common share
|
||||||||||||||||
|
assuming
dilution
|
$ | 0.40 | $ | 0.38 | $ | 0.01 | $ | (0.33 | ) | |||||||
|
2008
|
||||||||||||||||
|
Three
Months Ended
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
Revenues
|
$ | 53,221,500 | $ | 60,402,195 | $ | 53,083,935 | $ | 52,796,220 | ||||||||
|
Benefits
and expenses
|
51,276,565 | 57,314,947 | 53,812,100 | 56,369,727 | ||||||||||||
|
Earnings
before income taxes
|
1,944,935 | 3,087,248 | (728,165 | ) | (3,573,507 | ) | ||||||||||
|
Income
tax expense
|
569,479 | 986,615 | 39,877 | (1,440,313 | ) | |||||||||||
|
Net
earnings
|
1,375,456 | 2,100,633 | (768,042 | ) | (2,133,194 | ) | ||||||||||
|
Net
earnings per common share
|
$ | 0.17 | $ | 0.26 | $ | (0.09 | ) | $ | (0.27 | ) | ||||||
|
Net
earnings per common share
|
||||||||||||||||
|
assuming
dilution
|
$ | 0.17 | $ | 0.26 | $ | (0.09 | ) | $ | (0.27 | ) | ||||||
|
2007
|
||||||||||||||||
|
Three
Months Ended
|
||||||||||||||||
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||||||
|
Revenues
|
$ | 49,046,152 | $ | 54,315,888 | $ | 51,663,941 | $ | 54,722,101 | ||||||||
|
Benefits
and expenses
|
47,988,774 | 52,956,038 | 52,801,454 | 52,878,785 | ||||||||||||
|
Earnings
before income taxes
|
1,057,378 | 1,359,850 | (1,137,513 | ) | 1,843,316 | |||||||||||
|
Income
tax expense
|
312,837 | 328,822 | (475,069 | ) | 691,045 | |||||||||||
|
Net
earnings
|
744,541 | 1,031,028 | (662,444 | ) | 1,152,271 | |||||||||||
|
Net
earnings per common share
|
$ | 0.09 | $ | 0.13 | $ | (0.08 | ) | $ | 0.13 | |||||||
|
Net
earnings per common share
|
||||||||||||||||
|
assuming
dilution
|
$ | 0.09 | $ | 0.12 | $ | (0.08 | ) | $ | 0.13 | |||||||
112
Item 9. Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item 9A. Controls and
Procedures
Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are
effective.
(a) Management’s
annual report on internal control over financial reporting.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial reporting is
a process that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
|
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of assets of the
Company,
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made
only in accordance with authorizations of management and the board of
directors of the Company, and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management
performed an assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2009. The objective of this
assessment was to determine whether the Company's internal control over
financial reporting was effective as of December 31, 2009. Based on that
assessment the Company believes that, at December 31, 2009, its internal control
over financial reporting was effective.
(b) Changes
in internal control over financial reporting.
There was
no change in our internal control over financial reporting that occurred in the
fourth quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
113
PART
III
Item 10. Directors and
Executive Officers
The
Company’s Board of Directors consists of seven persons, four of whom are not
employees of the Company. There are no family relationships between or among any
of the directors and executive officers, except that Scott M. Quist is the son,
and Christie Q. Overbaugh is the daughter, of George R. Quist. The following
table sets forth certain information with respect to the directors and executive
officers of the Company.
|
Age
|
Position with the
Company
|
|||
|
George
R. Quist
|
89
|
Chairman
of the Board and Chief Executive Officer
|
||
|
Scott
M. Quist
|
56
|
President,
Chief Operating Officer and Director
|
||
|
Stephen
M. Sill
|
64
|
Vice
President, Treasurer and Chief Financial Officer
|
||
|
J.
Lynn Beckstead, Jr.
|
56
|
Vice
President Mortgage Operations and Director
|
||
|
Christie
Q. Overbaugh
|
61
|
Senior
Vice President of Internal Operations
|
||
|
Jeffrey
R. Stephens
|
56
|
General
Counsel and Corporate Secretary
|
||
|
Charles
L. Crittenden
|
89
|
Director
|
||
|
Robert
G. Hunter
|
50
|
Director
|
||
|
H.
Craig Moody
|
58
|
Director
|
||
|
Norman
G. Wilbur
|
71
|
Director
|
Directors
The
following is a description of the business experience of each of the Company’s
directors.
George R. Quist has been
Chairman of the Board and Chief Executive Officer of the Company since 1979.
Mr. Quist served as President of the Company from 1979 until 2002. From
1960 to 1964, Mr. Quist was Executive Vice President and Treasurer of
Pacific Guardian Life Insurance Company. From 1946 to 1960, he was an agent,
District Manager and Associate General Agent for various insurance companies.
Mr. Quist also served from 1981 to 1982 as the President of The National
Association of Life Companies, a trade association of 642 life insurance
companies, and from 1982 to 1983 as its Chairman of the Board.
Scott M. Quist has been
President of the Company since 2002, its Chief Operating Officer since 2001, and
a director since 1986. Mr. Quist served as First Vice President of the
Company from 1986 to 2002. From 1980 to 1982, Mr. Quist was a tax
specialist with Peat, Marwick, Mitchell, & Co. in Dallas, Texas. From 1986
to 1991, he was Treasurer and a director of The National Association of Life
Companies, a trade association of 642 insurance companies until its merger with
the American Council of Life Companies. Mr. Quist has been a member of the
Board of Governors of the Forum 500 Section (representing small insurance
companies) of the American Council of Life Insurance. He has also served as a
regional director of Key Bank of Utah since November 1993. Mr. Quist is
currently a director and a past president of the National Alliance of Life
Companies, a trade association of over 200 life companies.
J. Lynn Beckstead Jr. has
been Vice President of Mortgage Operations and a director of the Company since
2002. In addition, Mr. Beckstead is President of SecurityNational Mortgage
Company, a wholly owned subsidiary of the Company, having served in this
position since 1993. From 1990 to 1993, Mr. Beckstead was Vice President
and a director of Republic Mortgage Corporation. From 1983 to 1990,
Mr. Beckstead was Vice President and a director of Richards Woodbury
Mortgage Corporation. From 1980 to 1983, he was a principal broker for Boardwalk
Properties. From 1978
to 1980, Mr. Beckstead was a residential loan officer for Medallion
Mortgage Company. From 1977 to 1978, he was a residential construction loan
manager of Citizens Bank.
114
Charles L. Crittenden has
been a director of the Company since 1979. Mr. Crittenden has been sole
stockholder of Crittenden Paint & Glass Company since 1958. He is also an
owner of Crittenden Enterprises, a real estate development company, and Chairman
of the Board of Linco, Inc.
Robert G. Hunter, M.D. has
been a director of the Company since 1998. Dr. Hunter is currently a
practicing physician in private practice. Dr. Hunter created the statewide
E.N.T. Organization (Rocky Mountain E.N.T., Inc.) where he is currently a member
of the Executive Committee. Dr. Hunter is Department Head of Otolaryngology,
Head and Neck Surgery at Intermountain Medical Center and a past President of
the medical staff of the Intermountain Medical Center. He is also a delegate to
the Utah Medical Association and a delegate representing the State of Utah to
the American Medical Association, and a member of several medical advisory
boards.
H. Craig Moody has been a
director of the Company since 1995. Mr. Moody is owner of Moody &
Associates, a political consulting and real estate company. He is a former
Speaker and House Majority Leader of the House of Representatives of the State
of Utah.
Norman G. Wilbur has been a
director of the Company since 1998. Mr. Wilbur worked for J.C. Penney’s
regional offices in budget and analysis. His final position was Manager of
Planning and Reporting for J.C. Penney’s stores. After 36 years with J.C.
Penney’s, Mr. Wilbur opted for early retirement in 1997. Mr. Wilbur is a
past board member of Habitat for Humanity in Plano, Texas.
The
Board of Directors, Board Committees and Meetings
The
Company's Bylaws provide that the Board of Directors shall consist of not less
than three nor more than eleven members. The term of office of each
director is for a period of one year or until the election and qualification of
his successor. A director is not required to be a resident of the
State of Utah but must be a stockholder of the Company. The Board of
Directors held a total of five meetings during the fiscal year ended December
31, 2009. No directors attended fewer than 75% of all meetings of the
Board of Directors during the 2009 fiscal year.
The size
of the Board of Directors of the Company for the coming year is seven
members. A majority of the Board of Directors must qualify as
"independent" as that term is defined in Rule 4200 of the listing standards of
the Nasdaq Stock Market. The Board of Directors has affirmatively
determined that four of the seven members of the Board of Directors, Messrs.
Charles L. Crittenden, Robert G. Hunter, M.D., H. Craig Moody and Norman G.
Wilbur, are independent under the listing standards of the Nasdaq Stock
Market.
There are
four committees of the Board of Directors, which meet periodically during the
year: the Audit Committee, the Compensation Committee, the Executive Committee,
and the Nominating and Corporate Governance Committee.
The Audit
Committee directs the auditing activities of the Company's internal auditors and
outside public accounting firm and approves the services of the outside public
accounting firm. The Audit Committee consists of Messrs. Charles L.
Crittenden, H. Craig Moody and Norman G. Wilbur (Chairman of the
committee). During 2009, the Audit Committee met on three
occasions.
The
Compensation Committee is responsible for recommending to the Board of Directors
for approval the annual compensation of each executive officer of the Company
and the executive officers of the Company's subsidiaries, developing policy in
the areas of compensation and fringe benefits, contributions under the Employee
Stock Ownership Plan, contributions under the 401(k) Retirement Savings Plans,
Deferred Compensation Plan, granting of options under the stock option plans,
and creating other employee compensation plans. The Compensation
Committee consists of Messrs. Charles L. Crittenden (Chairman of the committee),
Robert G. Hunter, M.D., H. Craig Moody and Norman G. Wilbur. During
2009, the Compensation Committee met on one occasion.
The
Executive Committee reviews Company policy, major investment activities and
other pertinent transactions of the Company. The Executive
Committee consists of Messrs. George R. Quist, Scott M. Quist, J. Lynn
Beckstead, Jr., and H. Craig Moody. During 2009, the Executive
Committee met on one occasion.
The
Nominating and Corporate Governance Committee identifies individuals qualified
to become board members consistent with criteria approved by the board,
recommends to the board the persons to be nominated by the board for
election as directors at a meeting of stockholders, and develops and recommends
to the board a set of corporate governance principles. The Nominating
and Corporate Governance Committee consists of Messrs. Charles L. Crittenden,
Robert G. Hunter, M.D., H. Craig Moody (Chairman of the committee), and Norman
G. Wilbur. The Nominating and Corporate Governance Committee is
composed solely of independent directors, as defined in the listing standards of
the Nasdaq Stock Market. During 2009, the Nominating and Corporate
Governance Committee met on one occasion.
115
Director
Nominating Process
The
process for identifying and evaluating nominees for directors include the
following steps: (1) the Nominating and Corporate Governance Committee, Chairman
of the Board or other board members identify a need to fill vacancies or add
newly created directorships; (2) the Chairman of the Nominating and Corporate
Governance Committee initiates a search and seeks input from board members and
senior management and, if necessary, obtains advice from legal or other advisors
(but does not hire an outside search firm); (3) director candidates, including
any candidates properly proposed by stockholders in accordance with the
Company's Bylaws, are identified and presented to the Nominating and Corporate
Governance Committee; (4) initial interviews with candidates are conducted by
the Chairman of the Nominating and Corporate Governance Committee; (5) the
Nominating and Corporate Governance Committee meets to consider and approve
final candidate(s) and conduct further interviews as necessary; and (6) the
Nominating and Corporate Governance Committee makes recommendations to the board
for inclusion in the slate of directors at the annual meeting. The
evaluation process will be the same whether the nominee is recommended by a
stockholder or by a member of the Board of Directors.
Meetings
of Non-Management Directors
The
Company's independent directors meet regularly in executive session without
management. The Board of Directors has designated a lead director to
preside at executive sessions of independent directors. Mr. H. Craig
Moody is currently the lead director.
Executive
Officers
Stephen M. Sill has been Vice
President, Treasurer and Chief Financial Officer of the Company since 2002. From
1997 to March 2002, Mr. Sill was Vice President and Controller of the
Company. From 1994 to 1997, Mr. Sill was Vice President and Controller of
Security National Life Insurance Company. From 1989 to 1993, he was Controller
of Flying J. Inc. From 1978 to 1989, Mr. Sill was Senior Vice President and
Controller of Surety Life Insurance Company. From 1975 to 1978, he was Vice
President and Controller of Sambo’s Restaurant, Inc. From 1974 to 1975,
Mr. Sill was Director of Reporting for Northwest Pipeline Corporation. From
1970 to 1974, he was an auditor with Arthur Andersen & Co. Mr. Sill is
a past president and former director of the Insurance Accounting and Systems
Association, a national association of over 1,300 insurance companies and
associate members. In addition Mr. Sill is a certified public accountant and a
member of the Utah Association of CPAs and American Institute of
CPAs.
Christie Q. Overbaugh has
been Senior Vice President of Internal Operations of the Company since June
2006, and a Vice President of the Company from 1998 to June 2006.
Ms. Overbaugh has also served as Vice President of Underwriting for
Security National Life Insurance Company since 1998. From 1986 to 1991, she was
Chief Underwriter for Investors Equity Life Insurance Company of Hawaii and
Security National Life Insurance Company. From 1990 to 1991, Ms. Overbaugh
was President of the Utah Home Office Underwriters Association.
Ms. Overbaugh is currently a member of the Utah Home Office Underwriters
Association and an Associate Member of LOMA (Life Office Management
Association).
Jeffrey R. Stephens was
appointed General Counsel and Corporate Secretary of the Company in December
2008. Mr. Stephens had served as General Counsel for the Company from November
2006 to December 2008. He was in private practice from 1981 to 2006 in the
states of Washington and Utah. Mr. Stephens is a member of the Utah State Bar
and the Washington State Bar Association.
The Board
of Directors of the Company has a written procedure, which requires disclosure
to the board of any material interest or any affiliation on the part of any of
its officers, directors or employees that is in conflict or may be in conflict
with the Company’s interests.
No
director, officer or 5% stockholder of the Company or its subsidiaries or any
affiliate thereof has had any transactions with the Company or its subsidiaries
during 2009 or 2008.
All
directors of the Company hold office until the next Annual Meeting of
Stockholders and until their successors have been elected and
qualified.
116
Corporate
Governance
Corporate Governance
Guidelines. The Board of Directors has adopted the Security National
Financial Corporation Corporate Governance Guidelines. These guidelines outline
the functions of the board, director qualifications and responsibilities, and
various processes and procedures designed to insure effective and responsive
governance. The guidelines are reviewed from time to time in response to
regulatory requirements and best practices and are revised accordingly. The full
text of the guidelines is published on the Company’s website at www.securitynational.com.
A copy of the Corporate Governance Guidelines may also be obtained at no charge
by written request to the attention of Jeffrey R. Stephens, Secretary, Security
National Financial Corporation, 5300 South 360 West, Suite 250, Salt Lake City,
Utah 84123.
Code of Business Conduct. All
of the Company’s officers, employees and directors are required to comply with
the Company’s Code of Business Conduct and Ethics to help insure that the
Company’s business is conducted in accordance with appropriate standards of
ethical behavior. The Company’s Code of Business Conduct and Ethics covers all
areas of professional conduct, including customer relationships, conflicts of
interest, insider trading, financial disclosures, intellectual property and
confidential information, as well as requiring adherence to all laws and
regulations applicable to the Company’s business. Employees are required to
report any violations or suspected violations of the Code. The Code includes an
anti-retaliation statement. The full text of the Code of Business Conduct and
Ethics is published on the Company’s website at www.securitynational.com.
A copy of the Code of Business Conduct and Ethics may also be obtained at no
charge by written request to the attention of Jeffrey R. Stephens, Secretary,
Security National Financial Corporation, 5300 South 360 West, Suite 250, Salt
Lake City, Utah 84123.
117
Item 11. Executive Officer
Compensation
The
following table sets forth, for each of the last three fiscal years, the
compensation received by the named executive officers comprised of all
individuals who served as the Company’s Chief Executive Officer or Chief
Financial Officer at any time during 2009, and the Company’s three other most
highly compensated executive officers who were serving as executive officers at
the end of 2009 (collectively, the “Named Executive Officers”).
SUMMARY
COMPENSATION TABLE
|
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Options
Awards
($)
|
Non-Equity
Incentive Plan Compen-sation
($)
|
Change
in Pension Value Non-qualified Deferred Compensation Earnings
(2)
($)
|
All
Other Compen-sation (3)
($)
|
Total
($)
|
|||||||||||||||||||||||||
|
George
R. Quist(1)
|
2009
|
$ | 252,513 | $ | 51,580 | -- | -- | -- | $ | - | $ | 11,252 | $ | 315,345 | ||||||||||||||||||||
|
Chairman
of the
|
2008
|
236,013 | 50,755 | -- | -- | -- | - | 10,959 | 297,727 | |||||||||||||||||||||||||
|
Board
and Chief
|
2007
|
219,513 | - | -- | -- | -- | 24,200 | 10,760 | 254,473 | |||||||||||||||||||||||||
|
Executive
Officer
|
||||||||||||||||||||||||||||||||||
|
Scott
M. Quist(1)
|
2009
|
$ | 357,317 | $ | 92,650 | -- | -- | -- | $ | - | $ | 32,846 | $ | 482,813 | ||||||||||||||||||||
|
President
and Chief
|
2008
|
332,400 | 91,350 | -- | -- | -- | - | 32,791 | 456,541 | |||||||||||||||||||||||||
|
Operating
Officer
|
2007
|
303,900 | - | -- | -- | -- | 25,300 | 33,172 | 362,372 | |||||||||||||||||||||||||
|
Stephen
M. Sill
|
2009
|
$ | 138,000 | $ | 11,413 | -- | -- | -- | $ | - | $ | 17,035 | $ | 166,448 | ||||||||||||||||||||
|
Vice
President,
|
2008
|
131,969 | 11,113 | -- | -- | -- | - | 17,074 | 160,156 | |||||||||||||||||||||||||
|
Treasurer
and Chief
|
2007
|
125,292 | 6,000 | -- | -- | -- | 14,179 | 15,878 | 161,349 | |||||||||||||||||||||||||
|
Financial
Officer
|
||||||||||||||||||||||||||||||||||
|
J.
Lynn Beckstead, Jr.
|
2009
|
$ | 227,583 | $ | 137,221 | -- | -- | -- | $ | - | $ | 21,667 | $ | 386,471 | ||||||||||||||||||||
|
Vice
President of
|
2008
|
217,583 | 119,741 | -- | -- | -- | - | 21,528 | 358,852 | |||||||||||||||||||||||||
|
Mortgage
Operations
|
2007
|
207,500 | 46,888 | -- | -- | -- | 21,166 | 21,140 | 296,694 | |||||||||||||||||||||||||
|
Jeffrey
R. Stephens
|
2009
|
$ | 140,708 | $ | 8,000 | -- | -- | -- | $ | - | $ | 11,235 | $ | 159,943 | ||||||||||||||||||||
|
General
Counsel
|
2008
|
133,417 | 8,000 | -- | -- | -- | - | 11,335 | 152,752 | |||||||||||||||||||||||||
|
and
Corporate Secretary
|
2007
|
120,000 | - | -- | -- | -- | - | 10,202 | 130,202 | |||||||||||||||||||||||||
|
(1)
|
George
R. Quist is the father of Scott M.
Quist.
|
|
(2)
|
The
amounts indicated under “Change in Pension Value and Non-qualified
Deferred Compensation Earnings” consist of amounts contributed by the
Company into a trust for the benefit of the Named Executive Officers under
the Company’s Deferred Compensation
Plan
|
|
(3)
|
The
amounts indicated under “All Other Annual Compensation” consist of the
following amounts paid by the Company for the benefit of the named
executive officers:
|
|
|
a)
|
payments
related to the operation of automobiles were for George R. Quist
($2,400 for each of the years 2009, 2008 and 2007); Scott M.
Quist ($7,200 for each of the years 2009, 2008 and 2007); Stephen M. Sill
($5,700 for 2009 and 2008, and $4,275 for 2007); and Jeffrey R. Stephens
($-0- for 2009). However, such payments do not include the furnishing of
an automobile by the Company to George R. Quist, Scott M. Quist and J.
Lynn Beckstead Jr., nor the payment of insurance and property taxes with
respect to the automobiles operated by the such executive
officers;
|
|
|
b)
|
group
life insurance premiums paid by the Company to a group life insurance plan
for George R. Quist ($125, 154 and $9 for 2009, 2008 and 2007,
respectively); Scott M. Quist, Stephen M. Sill, and J. Lynn Beckstead Jr.
($211, $218 and $250 each for 2009, 2008 and 2007, respectively); and
Jeffrey R. Stephens ($109, $99 and $42 for 2009, 2008 and 2007,
respectively);
|
|
|
c)
|
life
insurance premiums paid by the Company for the benefit of George R. Quist
($4,644 for each of the years 2009, 2008 and 2007); Scott M. Quist
($14,056 for 2009 and 2008, and $14,340 for 2007); Stephen M. Sill ($2,976
for each of the years 2009, 2008 and 2007); J. Lynn Beckstead Jr. ($4,200
for each of the years 2009, 2008 and 2007); and Jeffrey R. Stephens ($-0-
for each of the years 2009, 2008 and
2007);
|
|
|
d)
|
medical
insurance premiums paid by the Company to a medical insurance plan; George
R. Quist ($3,795 for 2009, $3,491 for 2008, and $3,419 for 2007); Scott M.
Quist and J. Lynn Beckstead Jr. ($11,091 each for 2009, $11,047 each for
2008, and $11,094 each for 2007); Stephen M. Sill ($7,860 for 2009, $7,910
for 2008 and $8,089 for 2007); and Jeffrey R. Stephens ($10,838 for 2009,
$11,047 for 2008, and $10,199 for
2007);
|
|
|
e)
|
long
term disability insurance paid by the Company to a provider of such
insurance; George R. Quist, Scott M. Quist, Stephen M, Sill, J. Lynn
Beckstead Jr., and Jeffrey R. Stephens ($288 for each of years 2009, 2008
and 2007);
|
|
|
f)
|
membership
dues paid by the Company to Alpine Country Club for the benefit of J. Lynn
Beckstead Jr. ($5,877 for 2009, $5,793 for 2008, and $5,308 for
2007);
|
118
SUPPLEMENTAL
ALL OTHER COMPENSATION TABLE
The
following table sets forth all other compensation provided the Named Executive
Officers for fiscal years 2009, 2008 and 2007.
|
Registrant
|
||||||||||||||||||||||||||||||||||
|
Contribu-
|
Dividends
|
|||||||||||||||||||||||||||||||||
|
Perks
|
tions
to
|
or
|
||||||||||||||||||||||||||||||||
|
and
|
Payments/
|
Defined
|
Earnings
|
|||||||||||||||||||||||||||||||
|
Other
|
Tax
|
Discounted
|
Accruals
|
Contribu-
|
on
Stock
|
|||||||||||||||||||||||||||||
| Name of |
Personal
|
Reimburse-
|
Securities
|
on
Termin-
|
tion
|
Insurance
|
or
Option
|
|||||||||||||||||||||||||||
|
Executive Officer
|
Year
|
Benefits
|
ments
|
Purchases
|
ation Plans
|
Plans
|
Premiums
|
Awards
|
Other(1)
|
|||||||||||||||||||||||||
|
George
R. Quist
|
2009
|
$ | 2,400 | -- | -- | -- | -- | $ | 8,852 | -- | -- | |||||||||||||||||||||||
|
2008
|
2,400 | -- | -- | -- | -- | 8,559 | -- | -- | ||||||||||||||||||||||||||
|
2007
|
2,400 | -- | -- | -- | -- | 8,360 | -- | -- | ||||||||||||||||||||||||||
|
Scott
M. Quist
|
2009
|
$ | 7,200 | -- | -- | -- | -- | $ | 25,646 | -- | -- | |||||||||||||||||||||||
|
2008
|
7,200 | -- | -- | -- | -- | 25,591 | -- | -- | ||||||||||||||||||||||||||
|
2007
|
7,200 | -- | -- | -- | -- | 25,972 | -- | -- | ||||||||||||||||||||||||||
|
Stephen
M. Sill
|
2009
|
$ | 5,700 | -- | -- | -- | -- | $ | 11,335 | -- | -- | |||||||||||||||||||||||
|
2008
|
5,700 | -- | -- | -- | -- | 11,374 | -- | -- | ||||||||||||||||||||||||||
|
2007
|
4,275 | -- | -- | -- | -- | 11,603 | -- | -- | ||||||||||||||||||||||||||
|
J.
Lynn Beckstead Jr.
|
2009
|
$ | 5,877 | -- | -- | -- | -- | $ | 15,790 | -- | -- | |||||||||||||||||||||||
|
2008
|
5,793 | -- | -- | -- | -- | 15,735 | -- | -- | ||||||||||||||||||||||||||
|
2007
|
5,308 | -- | -- | -- | -- | 15,832 | -- | -- | ||||||||||||||||||||||||||
|
Jeffrey
R. Stephens
|
2009
|
$ | - | -- | -- | -- | -- | $ | 11,235 | -- | -- | |||||||||||||||||||||||
|
2008
|
- | -- | -- | -- | -- | 11,335 | -- | -- | ||||||||||||||||||||||||||
|
2007
|
- | -- | -- | -- | -- | 10,202 | -- | -- | ||||||||||||||||||||||||||
119
GRANTS
OF PLAN-BASED AWARDS
The
following table sets forth certain information regarding options granted to the
named Executive Officers during the fiscal year ended December 31,
2009.
|
Estimated
Future Payouts
Under
Equity Incentive Plan Awards
|
All Other Awards: Number of Securities Underlying | Exercise or Base Price of Option | Closing Price | Grant Date Fair Value of Stock and Option | ||||||||||||||||||||||||||
| Name of Executive Officer |
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Options
(#)
|
Awards
($/Sh)
|
on Grant Date ($/Sh) | Awards
($)
|
||||||||||||||||||||||
|
George
R. Quist
|
12/4/09
|
-- | -- | -- | 100,000 | $ | 3.872 | $ | 3.520 | $ | 170,000 | |||||||||||||||||||
|
Scott
M. Quist
|
12/4/09
|
-- | -- | -- | 100,000 | (1 | ) | 3.872 | 3.520 | 170,000 | ||||||||||||||||||||
|
Stephen
M. Sill
|
12/4/09
|
-- | -- | -- | 7,500 | 3.520 | 3.520 | 11,625 | ||||||||||||||||||||||
|
J.
Lynn Beckstead, Jr.
|
12/4/09
|
-- | -- | -- | 20,000 | 3.520 | 3.520 | 31,000 | ||||||||||||||||||||||
|
Jeffrey
R. Stephens
|
12/4/09
|
-- | -- | -- | 5,000 | 3.520 | 3.520 | 7,750 | ||||||||||||||||||||||
|
|
(1)
|
This
reflects the equivalent of Class A common shares. On December 4, 2009, Mr.
Quist was granted stock options to purchase 1,000,000 shares of Class C
common stock at an exercise price of $.3872 per share which is equivalent
to options to purchase 100,000 shares of Class A common stock at an
exercise price of $3.782 per
share.
|
120
OUTSTANDING
EQUITY AWARDS AT FISCAL 2009 YEAR END
The
following table sets forth information concerning outstanding equity awards held
by Named Executive Officers at December 31, 2009.
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||
|
Name
of Executive Officer
|
Option
Grant Date
|
Number
of Securities Underlying Unexercised Options Exercisable (1)
(#)
|
Number
of Securities Underlying Unexercised Options Unexercisable
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Stock
Award Grant
Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
($)
|
||||||||||||
|
George
R. Quist
|
03/25/05
|
85,085
|
(4)
|
--
|
$3.18
|
03/25/10
|
03/25/05
|
--
|
--
|
--
|
--
|
|||||||||||
|
03/31/08
|
52,500
|
(5)
|
--
|
4.03
|
03/31/13
|
03/31/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/05/08
|
105,000
|
(6)
|
--
|
1.57
|
12/05/13
|
12/05/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/04/09
|
--
|
100,000
|
(7)
|
3.87
|
12/04/14
|
12/04/09
|
100,000
|
$358,990
|
--
|
--
|
||||||||||||
|
Scott
M. Quist
|
03/21/03
|
94,030
|
(2)
|
--
|
$4.40
|
03/21/13
|
03/21/03
|
--
|
--
|
--
|
--
|
|||||||||||
|
03/25/05
|
85,086
|
(4)
|
--
|
2.89
|
03/25/15
|
03/25/05
|
--
|
--
|
--
|
--
|
||||||||||||
|
03/31/08
|
52,500
|
(8)
|
--
|
4.03
|
03/31/13
|
03/31/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/05/08
|
105,000
|
(6)(9)
|
--
|
1.57
|
12/05/13
|
12/05/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/04/09
|
--
|
100,000
|
(10)
|
3.87
|
12/04/14
|
12/04/09
|
100,000
|
$358,990
|
--
|
--
|
||||||||||||
|
Stephen
M. Sill
|
03/31/08
|
7,875
|
(5)
|
--
|
$3.67
|
03/31/18
|
03/31/08
|
--
|
--
|
--
|
--
|
|||||||||||
|
12/05/08
|
7,875
|
(6)
|
--
|
1.43
|
12/05/18
|
12/05/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/04/09
|
--
|
7,500
|
(7)
|
3.52
|
12/04/19
|
12/04/09
|
7,500
|
$26,924
|
--
|
--
|
||||||||||||
|
J.
Lynn Beckstead Jr.
|
03/21/03
|
20,102
|
(2)
|
--
|
$4.40
|
03/21/13
|
03/21/03
|
--
|
--
|
--
|
--
|
|||||||||||
|
12/10/04
|
6,381
|
(3)
|
--
|
2.53
|
12/10/14
|
12/10/04
|
--
|
--
|
--
|
--
|
||||||||||||
|
03/25/08
|
42,543
|
(4)
|
--
|
2.89
|
03/25/15
|
03/25/05
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/05/08
|
8,400
|
(5)
|
--
|
3.67
|
03/31/18
|
03/31/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
12/04/09
|
21,000
|
(6)
|
--
|
1.43
|
12/05/18
|
12/05/08
|
--
|
--
|
--
|
--
|
||||||||||||
|
--
|
20,000
|
(7)
|
3.52
|
12/04/19
|
12/04/09
|
20,000
|
$71,798
|
--
|
--
|
|||||||||||||
|
Jeffrey
R. Stephens
|
12/05/08
|
1,050
|
(6)
|
--
|
$1.43
|
12/05/18
|
12/05/08
|
--
|
--
|
--
|
--
|
|||||||||||
|
12/04/09
|
--
|
5,000
|
(7)
|
3.52
|
12/04/19
|
12/04/09
|
5,000
|
$17,950
|
--
|
--
|
||||||||||||
|
|
(1)
|
Except
for option granted George R. Quist and options granted to Scott M. Quist
after May 31, 2007, which have a five year term, such grants have ten year
terms. The vesting of any unvested shares is subject to the recipient’s
continuous employment. This reflects the equivalent of Class A common
shares.
|
|
|
(2)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on June 30, 2003 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
|
|
(3)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on March 31, 2005 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
|
|
(4)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on June 30, 2005 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
|
|
(5)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on June 30, 2008 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
121
|
|
(6)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on March 31, 2009 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
|
|
(7)
|
Stock
options vest at the rate of 25% of the total number of shares subject to
the options on March 31, 2010 and 25% of the total number of shares on the
last day of each three month period
thereafter.
|
|
|
(8)
|
On
March 31, 2008, Scott M. Quist was granted stock options to purchase
500,000 shares of Class c common stock at an exercise price of $.424 per
share, which is equivalent to options to purchase 50,000 shares of Class A
common stock at an exercise price of $4.24 per
share.
|
|
|
(9)
|
On
December 5, 2008, Mr. Quist was granted stock options to purchase 610,770
shares of Class C common stock at an exercise price of $.165 per share,
which is equivalent to options to purchase 61,077 shares of Class A common
stock at an exercise price of $1.65 per share, and to purchase 38,923
shares of Class A common stock at an exercise price of $1.65 per
share.
|
|
|
(10)
|
On
December 4, 2009, Mr. Quist was granted stock options to purchase
1,000,000 shares of Class C common stock at an exercise price of $.3872
per share, which is equivalent to options to purchase 100,000 shares of
Class A common stock at an exercise price of $3.872 per
share.
|
OPTION
AWARDS VESTING SCHEDULE
The
following table sets forth the vesting schedule of unexercisable options
reported in the “Number of Securities Underlying Unexercised Options –
Unexercisable” column of the table above.
|
Grant
Date
|
Vesting
|
||
|
03/21/03
|
These
options vested on the grant date.
|
||
|
12/10/04
|
These
options vested on the grant date.
|
||
|
03/25/05
|
These
options vested on the grant date.
|
||
|
03/31/08
|
These
options vested 25% per quarter over a one year period after the grant
date.
|
||
|
12/05/08
|
These
options vested 25% per quarter over a one year period after the grant
date.
|
||
|
12/04/09
|
These
options vest 25% per quarter over a one year period after the grant
date.
|
||
OPTION
EXERCISES AND STOCK VESTED FOR FISCAL 2009
The
following table sets forth all stock options exercised and value received upon
exercise, and all stock awards vested and value realized upon vesting, by the
Named Executive Officers during the year ended December 31,
2009.
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||
|
Number
of
|
Number
of
|
|||||||||||||||
|
Shares
Acquired
|
Value
Realized
|
Shares
Acquired
|
Value
Realized
|
|||||||||||||
|
on
Exercise
|
on
Exercise
|
on
Vesting
|
on
Vesting
|
|||||||||||||
|
Name
of Executive Officer
|
(#) |
($)
|
(#) |
($)
|
||||||||||||
|
George
R. Quist
|
16,481 | $ | 61,804 | -- | -- | |||||||||||
|
Scott
M. Quist
|
-- | -- | -- | -- | ||||||||||||
|
Stephen
M. Sill
|
-- | -- | -- | -- | ||||||||||||
|
J.
Lynn Beckstead, Jr.
|
-- | -- | -- | -- | ||||||||||||
|
Jeffrey
R. Stephens
|
-- | -- | -- | -- | ||||||||||||
122
PENSION
BENEFITS FOR FISCAL 2009
The
following table sets forth the present value as of December 31, 2009 of the
benefit of the Named Executive Officers under the defined benefit pension
plan.
|
Number
of
|
Present
|
Payments
|
||||||||||||
|
Years
|
Value
of
|
During
|
||||||||||||
|
Credited
|
Accumulated
|
Last
Fiscal
|
||||||||||||
|
Service
|
Benefit
|
Year
|
||||||||||||
|
Name
of Executive Officer
|
Plan Name
|
(#) |
($)
|
($)
|
||||||||||
|
George
R. Quist
|
None
|
-- | -- | -- | ||||||||||
|
Scott
M. Quist
|
None
|
-- | -- | -- | ||||||||||
|
Stephen
M. Sill
|
None
|
-- | -- | -- | ||||||||||
|
J.
Lynn Beckstead, Jr.
|
None
|
-- | -- | -- | ||||||||||
|
Jeffrey
R.Stephens
|
None
|
-- | -- | -- | ||||||||||
Retirement
Plans
On
December 8, 1988, the Company entered into a deferred compensation plan with
George R. Quist, the Chairman and Chief Executive Officer of the Company. The
plan was later amended on three occasions with the third amendment effective
February 1, 2001. Under the terms of the plan as amended, upon the retirement of
Mr. Quist, the Company is required to pay him ten annual installments in the
amount of $60,000. Retirement is defined in the plan as the age of 70, or a
later retirement age, as specified by the Board of Directors. The $60,000 annual
payments are to be adjusted for inflation in accordance with the United States
Consumer Price Index for each year after January 1, 2002. If Mr. Quist’s
employment is terminated by reason of disability or death before he reaches
retirement age, the Company is to make the ten annual payments to Mr. Quist, in
the event of disability, or to his designated beneficiary, in the event of
death.
The plan
also provides that the Board of Directors may, in its discretion, pay the
amounts due under the plan in a single, lump-sum payment. In the event that Mr.
Quist dies before the ten annual payments are made, the unpaid balance will
continue to be paid to his designated beneficiary. The plan further requires the
Company to furnish an automobile for Mr. Quist’s use and to pay all reasonable
expenses incurred in connection with its use for a ten year period, and to
provide Mr. Quist with a hospitalization policy with similar benefits to those
provided to him the day before his retirement or disability. However, in the
event Mr. Quist’s employment with the Company is terminated for any reason other
than retirement, death, or disability, the entire amount of deferred
compensation payments under the plan shall be forfeited by him. The Company
accrued $31,300 and $49,000 in fiscal 2009 and 2008, respectively, to cover the
present value of anticipated retirement benefits under the employment agreement
of $536,900 as of December 31, 2009.
Employment
Agreements
On July
16, 2004, the Company entered into an employment agreement with Scott M. Quist,
its President and Chief Operating Officer. The agreement is effective as of
December 4, 2003 and has a five-year term, but the Company has agreed to renew
the agreement on December 4, 2008 and 2013 for additional five-year terms,
provided Mr. Quist performs his duties with usual and customary care and
diligence. Under the terms of the agreement, Mr. Quist is to devote his full
time to the Company serving as its President, and Chief Operating Officer at not
less than his current salary and benefits. The Company also agrees to maintain a
group term life insurance policy of not less than $1,000,000 on Mr. Quist’s life
and a whole life insurance policy in the amount of $500,000 on Mr. Quist’s life.
In the event of disability, Mr. Quist’s salary would be continued for up to five
years at 75% of its current level.
In the
event of a sale or merger of the Company and Mr. Quist is not retained in his
current position, the Company would be obligated to continue paying Mr. Quist’s
current compensation and benefits for seven years following the merger or sale.
The agreement further provides that Mr. Quist is entitled to receive annual
retirement benefits beginning (i) one month from the date of his retirement (to
commence no sooner than age 65), (ii) five years following complete disability,
or (iii) upon termination of his employment without cause. These retirement
benefits are to be paid for a period of ten years in annual installments in the
amount equal to 75% of his then current rate of compensation. However, in the
event that Mr. Quist dies prior to receiving all retirement benefits thereunder,
the remaining benefits are to be paid to his heirs. The Company accrued $127,290
and $116,400 in fiscal 2009 and 2008, respectively, to cover the present value
of anticipated retirement benefits under the employment agreement. The liability
accrued is $831,170 and $703,900 as of December 31, 2009 and 2008,
respectively.
123
On
December 4, 2003, the Company, through its subsidiary SecurityNational Mortgage
Company, entered into an employment agreement with J. Lynn Beckstead, Jr., Vice
President of Mortgage Operations and President of SecurityNational Mortgage
Company. The agreement has a five-year term, but the Company has agreed to renew
the agreement on December 4, 2008 and 2013 for additional five-year terms,
provided Mr. Beckstead performs his duties with usual and customary care and
diligence. Under the terms of the agreement, Mr. Beckstead is to devote his full
time to the Company serving as President of SecurityNational Mortgage Company at
not less than his current salary and benefits, and to include $350,000 of life
insurance protection. In the event of disability, Mr. Beckstead’s salary
would be continued for up to five years at 50% of its current
level.
In the
event of a sale or merger of the Company, and Mr. Beckstead was not retained in
his current position, the Company would be obligated to continue paying Mr.
Beckstead’s current compensation and benefits for five years following the
merger or sale. The agreement further provides that Mr. Beckstead is entitled to
receive annual retirement benefits beginning (i) one month from the date of his
retirement (to commence no sooner than age 62½) (ii) five years following
complete disability, or (iii) upon termination of his employment without cause.
These retirement benefits are to be paid for a period of ten years in annual
installments in the amount equal to one-half of his then current annual salary.
However, in the event that Mr. Beckstead dies prior to receiving all retirement
benefits thereunder, the remaining benefits are to be paid to his heirs. The
Company accrued $52,295 and $46,400 in 2009 and 2008, respectively, to cover the
present value of the retirement benefit of the employment agreement, which was
$415,595 at December 31, 2009.
Director
Compensation
Directors
of the Company (but not including directors who are employees) are currently
paid a director’s fee of $16,800 per year by the Company for their services and
are reimbursed for their expenses in attending board and committee meetings. An
additional fee of $750 is paid to each audit committee member for each audit
committee meeting attended. Each director is provided with an annual grant of
stock options to purchase 1,000 shares of Class A Common Stock, which occurred
under the 2000 Director Stock Option Plan for years 2000 to 2005 and under the
2006 Director Stock Option Plan for years 2006 to 2009. During 2009 and 2008
each director was granted an additional 5,000 and 7,500, respectively, stock
options to purchase Class A Common Stock.
DIRECTOR
COMPENSATION
The
following table sets forth the compensation of the Company’s non-employee
directors for fiscal 2009.
|
Change
in
|
||||||||||||||||||||||||||||
|
Pension
Value
|
||||||||||||||||||||||||||||
|
Fees
|
and
|
|||||||||||||||||||||||||||
|
Earned
or
|
Non-Equity
|
Nonqualified
|
||||||||||||||||||||||||||
|
Paid
In
|
Stock
|
Option
|
Incentive
Plan
|
Deferred
|
All
Other
|
|||||||||||||||||||||||
|
Cash
|
Awards
|
Awards
|
Compensation
|
Compensation
|
Compensation
|
Total
|
||||||||||||||||||||||
|
Name
|
($)
|
($)
|
($)
|
($)
|
Earnings
|
($)
|
($)
|
|||||||||||||||||||||
|
Charles
L. Crittenden
|
$ | 19,050 | -- | $ | 8,148 | -- | -- | -- | $ | 27,198 | ||||||||||||||||||
|
Robert
G. Hunter
|
16,800 | -- | 8,148 | -- | -- | -- | 24,948 | |||||||||||||||||||||
|
H.
Craig Moody
|
19,050 | -- | 8,148 | -- | -- | -- | 27,198 | |||||||||||||||||||||
|
Norman
G. Wilbur
|
19,050 | -- | 8,148 | -- | -- | -- | 27,198 | |||||||||||||||||||||
Employee
401(k) Retirement Savings Plan
In 1995,
the Company’s Board of Directors adopted a 401(k) Retirement Savings Plan. Under
the terms of the 401(k) plan, effective as of January 1, 1995, the Company made
discretionary employer matching contributions to its employees who choose to
participate in the plan. The plan allowed the board to determine the amount of
the contribution at the end of each year. During the period from January 1, 1995
to December 31, 2007 the Board had adopted a contribution formula specifying
that such discretionary employer matching contributions would equal 50% of the
participating employee’s contribution to the plan to purchase Company’s stock up
to a maximum discretionary employee contribution of 1/2 of 1% of participating
employees’ compensation, as defined by the plan.
124
All
persons who have completed at least one year’s service with the Company and
satisfy other plan requirements are eligible to participate in the 401(k) plan.
All Company matching contributions are invested in the Company’s Class A common
stock. The Company’s matching contributions for 2007 was $10,001. Also, the
Company may contribute at the discretion of the Company’s Board of Directors an
Employer Profit Sharing Contribution to the 401(k) plan. The Employer Profit
Sharing Contribution is to be divided among three different classes of
participants in the plan based upon the participant’s title in the Company. All
amounts contributed to the plan are deposited into a trust fund administered by
an independent trustee. The Company’s contribution to the plan for 2007 was
$198,022.
Beginning
January 1, 2008, the Company elected to be a “Safe Harbor” Plan for its matching
401(k) contributions. The Company will match 100% of up to 3% of an employee’s
total annual compensation and 50% of 4% to 5% of an employee’s annual
compensation. The match is in shares of the Company’s Class A Common Stock. The
Company’s contribution for 2009 and 2008 was $341,360 and $365,925,
respectively, under the “Safe Harbor” Plan.
Employee
Stock Ownership Plan
Effective
January 1, 1980, the Company adopted an employee stock ownership plan (the
“Ownership Plan”) for the benefit of career employees of the Company and its
subsidiaries. The following is a description of the Ownership Plan, and is
qualified in its entirety by the Ownership Plan, a copy of which is available
for inspection at the Company’s offices.
Under the
Ownership Plan, the Company has discretionary power to make contributions on
behalf of all eligible employees into a trust created under the Ownership Plan.
Employees become eligible to participate in the Ownership Plan when they have
attained the age of 19 and have completed one year of service (a twelve-month
period in which the Employee completes at least 1,040 hours of service). The
Company’s contributions under the Ownership Plan are allocated to eligible
employees on the same ratio that each eligible employee’s compensation bears to
total compensation for all eligible employees during each year. To date, the
Ownership Plan has approximately 376 participants and had $-0-
contributions payable to the Plan in 2009. Benefits under the Ownership Plan
vest as follows: 20% after the third year of eligible service by an employee, an
additional 20% in the fourth, fifth, sixth and seventh years of eligible service
by an employee.
Benefits
under the Ownership Plan will be paid out in one lump sum or in installments in
the event the employee becomes disabled, reaches the age of 65, or is terminated
by the Company and demonstrates financial hardship. The Ownership Plan
Committee, however, retains discretion to determine the final method of payment.
Finally, the Company reserves the right to amend or terminate the Ownership Plan
at any time. The trustees of the trust fund under the Ownership Plan are George
R. Quist, Scott M. Quist and Robert G. Hunter, who each serve as a director of
the Company.
Deferred
Compensation Plan
In 2001,
the Company’s Board of Directors adopted a Deferred Compensation Plan. Under the
terms of the Deferred Compensation Plan, the Company will provide deferred
compensation for a select group of management or highly compensated employees,
within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended. The board has appointed a
committee of the Company to be the plan administrator and to determine the
employees who are eligible to participate in the plan. The employees who
participate may elect to defer a portion of their compensation into the plan.
The Company may contribute into the plan at the discretion of the Company’s
Board of Directors. The Company’s contributions for 2009, 2008 and 2007 were
$-0-, $-0-, and $133,037, respectively.
NONQUALIFIED
DEFERRED COMPENSATION FOR FISCAL 2009
The
following table sets forth contributions to the deferred compensation account of
the Name Executive Officers in fiscal 2009 and the aggregate balance of deferred
compensation of the Name Executive Officers at December 31,
2009.
125
|
Executive
|
Registrant
|
Aggregate
|
Aggregate
|
Aggregate
|
||||||||||||||||
|
Contributions
|
Contributions
|
Earnings
in Last
|
Withdrawals
|
Balance
at Last
|
||||||||||||||||
|
In
Last FY
|
In
Last FY
|
FY
|
Distributions
|
FYE
|
||||||||||||||||
|
Name
|
($)
|
($)
|
($)
|
($)
|
($)
|
|||||||||||||||
|
George
R. Quist
|
-- | -- | -- | -- | $ | 192,819 | ||||||||||||||
|
Scott
M. Quist
|
-- | -- | -- | -- | 213,379 | |||||||||||||||
|
Stephen
M. Sill
|
-- | -- | -- | -- | 67,470 | |||||||||||||||
|
J.
Lynn Beckstead, Jr.
|
-- | -- | -- | -- | 107,987 | |||||||||||||||
|
Jeffrey
R. Stephens
|
-- | -- | -- | -- | - | |||||||||||||||
2003
Stock Option Plan
On July
11, 2003, the Company adopted the Security National Financial Corporation 2003
Stock Incentive Plan (the “2003 Plan”), which reserved 500,000 shares of Class A
common stock and 1,000,000 shares of Class C common stock for issuance
thereunder. The 2003 Plan was approved by the Board of Directors on May 9, 2003,
and by the stockholders at the annual meeting of the stockholders held on July
11, 2003. The 2003 Plan allows the Company to grant options and issue shares as
a means of providing equity incentives to key personnel, giving them a
proprietary interest in the Company and its success and progress. On July 13,
2007, the stockholders approved an amendment to the 2003 Plan to increase the
number of shares of Class A and Class C common stock reserved for issuance
thereunder to 978,528 shares of Class A common stock and 2,110,775 shares of
Class C common stock. On July 10, 2009, the stockholders approved an amendment
to the 2003 plan to increase the number of shares of Class A and Class C common
stock reserved for issuance thereunder to 1,478,528 shares of Class A common
stock and 3,110,775 shares of Class C common stock.
The 2003
Plan provides for the grant of options and the award or sale of stock to
officers, directors, and employees of the Company. Both “incentive stock
options”, as defined under Section 422A of the Internal Revenue Code of 1986
(the “Code”) and “non-qualified options” may be granted under the 2003 Plan. The
exercise prices for the options granted are equal to or greater than the fair
market value of the stock subject to such options as of the date of grant, as
determined by the Company’s Board of Directors. The options granted under the
2003 Plan are to reward certain officers and key employees who have been
employed by the Company for a number of years and to help the Company retain
these officers by providing them with an additional incentive to contribute to
the success of the Company.
The 2003
Plan is to be administered by the Board of Directors or by a committee
designated by the board. The terms of options granted or stock awards or sales
affected under the 2003 Plan are to be determined by the Board of Directors or
its committee. The options shall be either fully exercisable on the date of
grant or shall become exercisable thereafter in such installments as the board
of the committee may specify. The Plan provides that if the shares of common
stock shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of common stock as a stock dividend on
its outstanding common stock, the number of shares of common stock deliverable
upon the exercise of options shall be increased or decreased proportionately,
and appropriate adjustments shall be made in the purchase price to reflect such
subdivision, combination or stock dividend. In addition, the number of shares of
common stock reserved for purposes of the plan shall be adjusted by the same
proportion. No options may be exercised for a term of more than ten years from
the date of grant.
Options
intended as incentive stock options may be issued only to employees, and must
meet certain conditions imposed by the code, including a requirement that the
option exercise price be no less than then fair market value of the option
shares on the date of grant. The 2003 Plan provides that the exercise price for
non-qualified options will not be less than at least 50% of the fair market
value of the stock subject to such option as of the date of grant of such
options, as determined by the Company’s Board of Directors.
The 2003
Plan has a term of ten years. The Board of Directors may amend or terminate the
2003 Plan at any time, subject to approval of certain modifications to the 2003
Plan by the shareholders of the Company as may be required by law or the 2003
Plan.
2006
Director Stock Option Plan
On
December 7, 2006, the Company adopted the 2006 Director Stock Option Plan (the
“Director Plan”) effective December 7, 2006. The Director Plan provides for the
grant by the Company of options to purchase up to an aggregate of 100,000 shares
of Class A common stock for issuance thereunder. The Director Plan provides that
each member of
the Company’s Board of Directors who is not an employee or paid consultant of
the Company is automatically eligible to receive options to purchase the
Company’s Class A common stock under the Director Plan.
126
Effective
as of December 7, 2006, and on each anniversary date thereof during the term of
the Director Plan, each outside director shall automatically receive an option
to purchase 1,000 shares of Class A common stock. In addition, each new outside
director who shall first join the Board after the effective date shall be
granted an option to purchase 1,000 shares upon the date which such person first
becomes an outside director and an annual grant of an option to purchase 1,000
shares on each anniversary date thereof during the term of the Director Plan.
The options granted to outside directors shall vest in four equal quarterly
installments over a one year period from the date of grant, until such shares
are fully vested. The primary purposes of the Director Plan are to enhance the
Company’s ability to attract and retain well-qualified persons for service as
directors and to provide incentives to such directors to continue their
association with the Company.
In the
event of a merger of the Company with or into another company, or a
consolidation, acquisition of stock or assets or other change in control
transaction involving the Company, each option becomes exercisable in full,
unless such option is assumed by the successor corporation. In the event the
transaction is not approved by a majority of the “Continuing Directors” (as
defined in the Director Plan), each option becomes fully vested and exercisable
in full immediately prior to the consummation of such transaction, whether or
not assumed by the successor corporation.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers, directors and persons who own more than 10% of a registered
class of the Company’s equity securities to file reports of ownership and
periodic changes in ownership of the Company’s common stock with the Securities
and Exchange Commission. Such persons are also required to furnish the Company
with copies of all Section 16(a) reports they file.
Based
solely on its review of the copies of stock reports received by it with respect
to fiscal 2009, or written representations from certain reporting persons, the
Company believes that its directors, executive officers and greater than 10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them, except George R. Quist, Chairman and Chief Executive Officer, through
an oversight, filed one late Form 4 report reporting three transactions
involving the purchase of shares of Class A common stock.
127
Item 12 - Security Ownership
of Certain Beneficial Owners and Management
The
following table sets forth security ownership information of the Company’s Class
A and Class C common stock as of March 26, 2010, (i) for persons who own
beneficially more than 5% of the Company’s outstanding Class A or Class C common
stock, (ii) each director of the Company, and (iii) for all executive officers,
and directors of the Company as a group.
|
Class
A
Common
Stock
|
Class
C
Common
Stock
|
Class
A and
Class
C
Common
Stock
|
||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||
|
Beneficially
|
of
|
Beneficially
|
of
|
Beneficially
|
of
|
|||||||
|
Name and Address
(1)
|
Owned
|
Class
|
Owned
|
Class
|
Owned
|
Class
|
||||||
|
George
R. and Shirley C. Quist
|
||||||||||||
|
Family
Partnership, Ltd. (2)
|
614,556
|
8.1%
|
4,286,632
|
50.2%
|
4,901,188
|
30.5%
|
||||||
|
Employee
Stock
|
||||||||||||
|
Ownership
Plan (3)
|
636,375
|
8.4%
|
1,982,118
|
23.2%
|
2,618,492
|
16.3%
|
||||||
|
George
R. Quist (4)(5)(7)(8)
|
671,739
|
8.9%
|
598,834
|
7.0%
|
1,270,574
|
7.9%
|
||||||
|
Scott
M. Quist (4)(7)(9)
|
564,315
|
7.5%
|
3,192,522
|
37.4%
|
3,756,837
|
23.4%
|
||||||
|
Associated
Investors (10)
|
90,362
|
1.2%
|
836,746
|
9.8%
|
927,108
|
5.8%
|
||||||
|
J.
Lynn Beckstead, Jr., (6)(12)
|
268,940
|
3.6%
|
-
|
-
|
268,940
|
1.7%
|
||||||
|
Stephen
M. Sill (6)(13)
|
97,732
|
1.3%
|
-
|
-
|
97,732
|
*
|
||||||
|
Christie
Q. Overbaugh (14)
|
147,598
|
2.0%
|
144,080
|
1.7%
|
291,678
|
1.8%
|
||||||
|
Jeffrey
R. Stephens (11)
|
13,599
|
*
|
-
|
-
|
13,599
|
*
|
||||||
|
Robert
G. Hunter, M.D., (4)(15)
|
20,986
|
*
|
-
|
-
|
20,986
|
*
|
||||||
|
Norman
G. Wilbur (16)
|
18,457
|
*
|
-
|
-
|
18,457
|
*
|
||||||
|
Charles
L. Crittenden (17)
|
20,747
|
*
|
-
|
-
|
20,747
|
*
|
||||||
|
H.
Craig Moody (18)
|
19,681
|
*
|
-
|
-
|
19,681
|
*
|
||||||
|
All
directors and executive officers
|
||||||||||||
|
(10
persons)
(4)(5)(6)(7)
|
2,458,350
|
29.3%
|
8,222,069
|
76.8%
|
10,680,418
|
56.0%
|
||||||
* Less than 1%
|
(1)
|
Unless
otherwise indicated, the address of each listed stockholder is c/o
Security National Financial Corporation, 5300 South 360 West, Suite 250,
Salt Lake City, Utah 84123.
|
|
(2)
|
This
stock is owned by the George R. and Shirley C. Quist Family Partnership,
Ltd., of which Scott M. Quist is the managing general
partner.
|
|
(3)
|
The
trustees of the Employee Stock Ownership Plan (ESOP) are George R. Quist,
Scott M. Quist, and Robert G. Hunter who exercise shared voting and
investment powers.
|
|
(4)
|
Does
not include 636,375 shares of Class A common stock and 1,982,118 shares of
Class C common stock owned by the Company’s Employee Stock Ownership Plan
(ESOP), of which George R Quist, Scott M. Quist and Robert G. Hunter are
the trustees and accordingly, exercise shared voting and investment powers
with respect to such shares.
|
|
(5)
|
Does
not include 90,362 shares of Class A common stock and 836,746 shares of
Class C common stock owned by Associated Investors, a Utah general
partnership, of which George R. Quist is the managing partner and,
accordingly, exercises sole voting and investment powers with respect to
such shares.
|
|
(6)
|
Does
not include 763,747 shares of Class A common stock owned by the Company’s
401(k) Retirement Savings Plan, of which Scott M. Quist, J. Lynn
Beckstead, and Stephen M. Sill are members of the Investment Committee
and, accordingly, exercise shared voting and investment powers with
respect to such shares.
|
|
(7)
|
Does
not include 424,655 shares of Class A common stock owned by the Company’s
Deferred Compensation Plan, of which George R. Quist and Scott M. Quist
are members of the Investment Committee and, accordingly, exercise shared
voting and investment powers with respect to such
shares.
|
|
(8)
|
Includes
options to purchase 191,625 shares of Class A common stock granted to
George R. Quist that are currently exercisable or will become exercisable
within 60 days of March 31, 2010.
|
|
(9)
|
Includes
options to purchase 230,750 shares of Class A common stock and 1,487,124
shares of Class C common stock granted to Scott M. Quist that are
currently exercisable or will become exercisable within 60 days of March
31, 2010.
|
|
(10)
|
The
managing partner of Associated Investors is George R. Quist, who exercises
sole voting and investment
powers.
|
128
|
(11)
|
Includes
options to purchase 2,486 shares of Class A common stock granted to
Jeffrey R. Stephens that are currently exercisable or will become
exercisable within 60 days of March 31, 2010.
|
|
(12)
|
Includes
options to purchase 108,597 shares of Class A common stock granted to Mr.
Beckstead that are currently exercisable or will become exercisable within
60 days of March 31, 2010.
|
|
(13)
|
Includes
options to purchase 10,238 shares of Class A common stock grant to Mr.
Sill that are currently exercisable or will become exercisable within 60
days of March 31, 2010.
|
|
(14)
|
Includes
options to purchase 60,252 shares of Class A common stock granted to Ms.
Overbaugh that are currently exercisable or will become exercisable within
60 days of March 31, 2010.
|
|
(15)
|
Includes
options to purchase 14,597 shares of Class A common stock granted to Mr.
Hunter that are currently exercisable or will become exercisable within 60
days of March 31, 2010.
|
|
(16)
|
Includes
options to purchase 14,597 shares of Class A common stock granted to Mr.
Wilbur that are currently exercisable or will become exercisable within 60
days of March 31, 2010.
|
|
(17)
|
Includes
options to purchase 14,597 shares of Class A common stock granted to Mr.
Crittenden that are currently exercisable or will become exercisable
within 60 days of March 31, 2010.
|
|
(18)
|
Includes
options to purchase 14,597 shares of Class A common stock granted to Mr.
Moody that are currently exercisable or will become exercisable within 60
days of March 31, 2010.
|
The
Company’s executive officers and directors, as a group, own beneficially
approximately 56.2% of the outstanding shares of the Company’s Class A and Class
C common stock.
Item 13. Certain
Relationships and Related Transactions
On
November 19, 2007, Security National Life and Scott M. Quist entered into a Use
and Buy Sale Agreement to jointly purchase a condominium located in St. George,
Utah. Mr. Quist is the Company's President and Chief Operating Officer. The
condominium is to be used for the entertainment of Security National Life's
executive officers and employees, outside vendors and prospective customers. The
purchase price of the condominium, including improvements and furnishings, was
$538,962. Mr. Quist paid $286,207 of that amount and Security National Life paid
$252,755.
Under the
terms of the agreement, Security National Life and Mr. Quist have the right to
use the condominium in proportion to their respective contributions towards the
purchase price, including furnishings and fixtures. Mr. Quist is responsible for
the care and maintenance of the condominium. The payment of taxes, insurance,
utilities and homeowners' fees is to be divided between Security National Life
and Mr. Quist according to their respective ownership percentages.
Upon the
death, disability or retirement of Mr. Quist or his separation from employment
with the Company, Mr. Quist or his estate, as the case may be, shall have the
right to purchase Security National Life's interest in the condominium at the
original purchase price or fair market value, whichever is less. Security
National Life's contribution to the purchase price of the condominium was equal
to an amount of accrued but unpaid bonuses owed to Mr. Quist, which he agreed to
continue to defer for the option that would allow him or his estate to purchase
Security National Life's interest in the condominium upon his death, disability
or retirement at the lesser of the original purchase price or fair market
value.
The
Company’s Board of Directors has a written procedure, which requires disclosure
to the Board of any material interest or any affiliation on the part of any of
its officers, directors or employees that is in conflict or may be in conflict
with the interests of the Company.
129
Item 14. Principal
Accounting Fees and Services
The
following table summarizes the fees of the Company’s
current independent auditors, billed to the Company for each of the
last two fiscal years and for audit and other services:
|
Fee
Category
|
2009
|
2008
|
||||||
|
Audit
Fees (1)
|
$ | 373,300 | $ | 364,000 | ||||
|
Audit-Related
Fees (2)
|
53,700 | 44,700 | ||||||
|
Tax
Fees (3)
|
80,400 | 93,100 | ||||||
|
All
Other Fees (4)
|
24,000 | 2,800 | ||||||
| $ | 531,400 | $ | 504,600 | |||||
|
|
(1)
|
Audit
fees consist of aggregate fees billed for professional services rendered
for the audit of the Company’s annual financial statements and review of
the interim financial statements included in quarterly reports or services
that are normally provided by the independent auditor in connection with
statutory and regulatory filings for the years ended December 31, 2009 and
2008.
|
|
|
(2)
|
Audit
related fees consist of aggregate fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of the Company’s financial statements and are not reported under
“Audit Fees”. These fees include review of registration statements, and
audits of the Company’s ESOP and 401(k)
Plans.
|
|
|
(3)
|
Tax
fees consist of aggregate fees billed for professional services for tax
compliance, tax advice, and tax
planning.
|
|
|
(4)
|
All
other fees consist of aggregate fees billed for products and services by
the independent auditor, other than those disclosed
above.
|
PART
IV
Item 15. Exhibits, Financial
Statement Schedules and Reports on Form 8-K
(a)(1)
Financial
Statements
See “Index to Consolidated Financial
Statements” under Item 8 above.
(a)(2) Financial Statement
Schedules
II. Condensed
Balance Sheets as of December 31, 2009 and 2008 and Condensed Statement
of Earnings and Cash Flows for the years ended 2009, 2008 and 2007
IV. Reinsurance
V.
Valuation and Qualifying Accounts
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
|
Articles
of Restatement of Articles of Incorporation (4)
|
|
3.2
|
Amended
Bylaws (6)
|
|
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
|
Restated
and Amended Employee Stock Ownership Plan and Trust Agreement
(1)
|
|
10.2
|
2003
Stock Option Plan (5)
|
|
10.3
|
2006
Director Stock Option Plan (12)
|
|
10.4
|
Deferred
Compensation Agreement with George R. Quist (2)
|
|
10.5
|
Deferred
Compensation Plan (3)
|
130
|
10.6
|
Employment
agreement with J. Lynn Beckstead, Jr. (7)
|
|
10.7
|
Employment
agreement with Scott M. Quist (8)
|
|
10.8
|
Indemnification
Agreement among Security National Life Insurance Company, Capital Reserve
Life Insurance Company, and the shareholders of Capital Reserve Life
Insurance Company (9)
|
|
10.9
|
Escrow
Agreement among Security National Insurance Company, Capital Reserve Life
Insurance Company, the shareholders of Capital Reserve Life Insurance
Company, and Mackey Price Thompson & Ostler as Escrow Agent
(9)
|
|
10.10
|
Reinsurance
Agreement between Security National Life Insurance Company and Capital
Reserve Life Insurance Company (9)
|
|
10.11
|
Stock
Purchase Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company, and the shareholders of Southern
Security Life Insurance Company (10)
|
|
10.12
|
Reinsurance
Agreement among Security National Life Insurance Company, Southern
Security Life Insurance Company, and the shareholders of Southern Security
Life Insurance Company (11)
|
|
10.13
|
Escrow
Agreement among Security National Life Insurance Company, Southern
Security Life Insurance Company, the shareholders of Southern Security
Life Insurance Company, and Mackey Price Thompson & Ostler, as escrow
agent (12)
|
|
10.14
|
Indemnification
Agreement among SecurityNational Mortgage Company, Lehman Brothers Bank,
and Aurora Loan Services (13)
|
|
10.15
|
Agreement
and Plan of Complete Liquidation of Security National Life Insurance
Company of Louisiana into Security National Life Insurance Company
(14)
|
|
10.16
|
Assumption
Reinsurance Agreement between Security National Life Insurance Company of
Louisiana and Security National Life Insurance Company
(14)
|
|
10.17
|
Assignment
between Security National Life Insurance Company of Louisiana and Security
National Life Insurance Company (14)
|
|
10.18
|
Agreement
and Plan of Complete Liquidation of Capital Reserve Life Insurance Company
into Security National Life Insurance Company (14)
|
|
10.19
|
Assignment
between Capital Reserve Life Insurance Company and Security National Life
Insurance Company (14)
|
|
21
|
Subsidiaries
of the Registrant
|
|
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
|
|
(1)
|
Incorporated
by reference from Registration Statement on Form S-1, as filed on
September 29, 1987
|
|
|
(2)
|
Incorporated
by reference from Annual Report on Form 10-K, as filed on March 31,
1989
|
|
|
(3)
|
Incorporated
by reference from Annual Report on Form 10-K, as filed on April 3,
2002
|
|
|
(4)
|
Incorporated
by reference from Report on Form 8-K/A as filed on January 8,
2003
|
|
|
(5)
|
Incorporated
by reference from Schedule 14A Definitive Proxy Statement, Filed
on
|
|
|
(6)
|
September
5, 2003, relating to the Company’s Annual Meeting of
Shareholders
|
|
|
Incorporated
by reference from Report on Form 10-Q, as filed on November 14,
2003
|
||
|
(7)
|
Incorporated
by reference from Report on Form 10-K, as filed on March 30,
2004
|
|
|
(8)
|
Incorporated
by reference from Report on Form 10-Q, as filed on August 13,
2004
|
|
|
(9)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 14,
2008
|
|
|
(10)
|
Incorporated
by reference from Report on Form 8-K, as filed on August 25,
2008
|
|
|
(11)
|
Incorporated
by reference from Report on Form 8-K/A, as filed on September 17,
2008
|
|
|
(12)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 7,
2009
|
|
|
(13)
|
Incorporated
by reference from Report on Form 10-K, as filed on March 31,
2009
|
|
|
(14)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 12,
2010
|
|
|
(b)
|
Reports
on Form 8-K:
|
Current
report on Form 8-K, as filed on January 12, 2010
131
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
SECURITY
NATIONAL FINANCIAL CORPORATION
|
Dated:
March 31, 2010
|
By:
|
s/s George R.
Quist
|
|
|
|
George
R. Quist
|
||
|
|
Chairman
of the Board and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
s/s George R.
Quist
|
Chairman
of the Board and
|
|||
|
George
R. Quist
|
Chief
Executive Officer
|
|||
|
(Principal
Executive Officer)
|
March
31, 2010
|
|||
|
s/s Scott M.
Quist
|
President,
Chief Operating
|
|||
|
Scott
M. Quist
|
Officer
and Director
|
March
31, 2010
|
||
|
s/s Stephen M.
Sill
|
|
Vice
President, Treasurer
|
||
|
Stephen
M. Sill
|
and
Chief Financial Officer
|
|||
|
(Principal
Financial and
|
||||
|
Accounting
Officer)
|
March
31, 2010
|
|||
|
s/s J. Lynn Beckstead,
Jr.
|
Vice
President and Director
|
March
31, 2010
|
||
|
J.
Lynn Beckstead, Jr.
|
||||
|
s/s Charles L.
Crittenden
|
Director
|
March
31, 2010
|
||
|
Charles
L. Crittenden
|
||||
|
s/s H. Craig
Moody
|
Director
|
March
31, 2010
|
||
|
H.
Craig Moody
|
||||
|
s/s Norman G.
Wilbur
|
Director
|
March
31, 2010
|
||
|
Norman
G. Wilbur
|
||||
|
s/s Robert G.
Hunter
|
|
Director
|
March
31, 2010
|
|
|
Robert
G. Hunter
|
132
Schedule
II
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Condensed
Balance Sheets
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Cash
|
$ | 1,712,983 | $ | 768,630 | ||||
|
Real
estate net of accumulated depreciation
of
$-0- for 2009 and $1,439 for 2008
|
-- | 31,599 | ||||||
|
Investment
in subsidiaries (equity method)
|
73,617,659 | 68,282,943 | ||||||
|
Receivables:
|
||||||||
|
Receivable
from affiliates
|
5,548,649 | 6,694,918 | ||||||
|
Other
|
93,597 | 338,678 | ||||||
|
Allowance
for doubtful accounts
|
-- | -- | ||||||
|
Total
receivables
|
5,642,246 | 7,033,596 | ||||||
|
Property
and equipment, at cost,
|
||||||||
|
net
of accumulated depreciation
|
||||||||
|
of
$1,571,658 for 2009 and
|
||||||||
|
$1,425,822
for 2008
|
245,449 | 381,729 | ||||||
|
Other
assets
|
48,122 | 53,166 | ||||||
|
Total
assets
|
$ | 81,266,459 | $ | 76,551,663 | ||||
See
accompanying notes to condensed financial statements.
133
Schedule
II (Continued)
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Condensed
Balance Sheets (Continued)
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Liabilities
and Stockholders’ Equity Liabilities
|
||||||||
|
Bank
loans payable:
|
||||||||
|
Current
installments
|
$ | 1,385,698 | $ | 1,361,182 | ||||
|
Long-term
|
1,182,122 | 2,317,345 | ||||||
|
Notes
and contracts payable:
|
||||||||
|
Current
installments
|
961 | 95,237 | ||||||
|
Long-term
|
-- | -- | ||||||
|
Advances
from affiliated companies
|
9,006,276 | 8,974,568 | ||||||
|
Other
liabilities and accrued expenses
|
1,438,175 | 1,696,934 | ||||||
|
Income
taxes
|
8,447,785 | 8,194,118 | ||||||
|
Total
liabilities
|
21,461,017 | 22,639,384 | ||||||
|
Stockholders’
Equity
|
||||||||
|
Class
A common stock $2.00 par value;
|
||||||||
|
20,000,000
shares authorized;
|
||||||||
|
issued
8,730,227 shares in 2009
|
||||||||
|
8,284,109
shares in 2008
|
17,460,454 | 16,568,218 | ||||||
|
Class
B non-voting common stock-$1.00 par value;
|
||||||||
|
5,000,000
shares authorized; none issued or
|
||||||||
|
outstanding
|
-- | -- | ||||||
|
Class
C convertible common stock, $0.20 par value;
|
||||||||
|
15,000,000
shares authorized; issued 9,214,211
|
||||||||
|
shares
in 2009 and 8,912,315 shares in 2008
|
1,842,842 | 1,782,463 | ||||||
|
Additional
paid-in capital
|
19,191,606 | 17,985,848 | ||||||
|
Accumulated
other comprehensive income
|
1,593,327 | 417,101 | ||||||
|
Retained
earnings
|
23,178,944 | 21,023,179 | ||||||
|
Treasury
stock at cost- (1,454,974 Class A shares
|
||||||||
|
and
-0- Class C shares in 2009; 1,598,568
|
||||||||
|
Class
A shares and -0- Class C shares
|
||||||||
|
in
2008, held by affiliated companies)
|
(3,461,731 | ) | (3,864,530 | ) | ||||
|
Total
stockholders’ equity
|
59,805,442 | 53,912,279 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 81,266,459 | $ | 76,551,663 | ||||
134
Schedule
II (Continued)
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Condensed
Statements of Earnings
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
||||||||||||
|
Net
investment income
|
$ | 89,466 | $ | 161 | $ | 772 | ||||||
|
Fees
from affiliates
|
867,859 | 2,543,907 | 4,098,718 | |||||||||
|
Other
Income
|
81,912 | - | - | |||||||||
|
Net
realized gains and losses
|
5,615 | - | - | |||||||||
|
Total
revenue
|
1,044,852 | 2,544,068 | 4,099,490 | |||||||||
|
Benefits
and Expenses:
|
||||||||||||
|
General
and administrative expenses
|
946,476 | 2,253,673 | 2,007,974 | |||||||||
|
Interest
expense
|
105,144 | 149,355 | 234,743 | |||||||||
|
Expenses
to affiliates
|
- | 61,204 | 131,133 | |||||||||
|
Total
benefits and expenses
|
1,051,620 | 2,464,232 | 2,373,850 | |||||||||
| Earnings
before income taxes, and
earnings
of subsidiaries
|
(6,768 | ) | 79,836 | 1,725,640 | ||||||||
|
Income
tax expense
|
(253,667 | ) | 78,595 | (605,099 | ) | |||||||
|
Equity
in earnings of subsidiaries
|
4,034,315 | 416,422 | 1,144,855 | |||||||||
|
Net
earnings
|
$ | 3,773,880 | $ | 574,853 | $ | 2,265,396 | ||||||
See
accompanying notes to condensed financial statements.
135
Schedule
II (Continued)
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Condensed
Statements of Cash Flow
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
earnings
|
$ | 3,773,880 | $ | 574,853 | $ | 2,265,396 | ||||||
|
Adjustments
to reconcile net earningsto net cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
150,009 | 194,116 | 268,942 | |||||||||
|
Undistributed
earnings of affiliates
|
(4,034,315 | ) | (1,406,214 | ) | (1,144,855 | ) | ||||||
|
Provision
for income taxes
|
253,667 | 918,044 | 605,099 | |||||||||
|
Provision
for losses on loans & real estate
|
-- | 500,000 | -- | |||||||||
|
Stock
based compensation expense
|
485,986 | 378,227 | 3,000 | |||||||||
|
Benefit
plans funded with treasury stock
|
457,070 | 204,990 | -- | |||||||||
|
Change
in assets and liabilities:
|
||||||||||||
|
Accrued
Investment Income from Affiliates
|
(655 | ) | 287,135 | (286,480 | ) | |||||||
|
Accounts
receivable
|
-- | (187,000 | ) | 16,586 | ||||||||
|
Other
assets
|
5,699 | (14,821 | ) | -- | ||||||||
|
Other
liabilities
|
(340,600 | ) | 158,568 | 265,675 | ||||||||
|
Net
cash provided by operating activities
|
750,741 | 1,607,898 | 1,993,363 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase
of real estate
|
(186,271 | ) | -- | -- | ||||||||
|
Sale
of Real Estate
|
463,695 | -- | -- | |||||||||
|
Purchase
of equipment
|
(9,554 | ) | (2,685 | ) | (349,215 | ) | ||||||
|
Mortgage,
policy loans made
|
(2,506,913 | ) | (715,606 | ) | -- | |||||||
|
Payments,
mortgage loans
|
2,501,994 | 30,889 | -- | |||||||||
|
Dividend
received from subidiary
|
1,125,000 | -- | -- | |||||||||
|
Investment
in subsidiaries
|
(1,167,333 | ) | -- | -- | ||||||||
|
Net
cash (used in) provided by investing activities
|
220,618 | (687,402 | ) | (349,215 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Checks
written in excess of cash in bank
|
-- | -- | -- | |||||||||
|
Advances
from (to) affiliates
|
1,177,977 | (187,341 | ) | 78,001 | ||||||||
|
Payments
of notes and contracts payable
|
(1,204,983 | ) | (1,662,223 | ) | (1,515,590 | ) | ||||||
|
Proceeds
from borrowings on notes and contracts payable
|
-- | 1,500,000 | 631,500 | |||||||||
|
Purchase
of treasury stock
|
-- | -- | (800,000 | ) | ||||||||
|
Net
cash used in financing activities
|
(27,006 | ) | (349,564 | ) | (1,606,089 | ) | ||||||
|
Net
change in cash
|
944,353 | 570,932 | 38,059 | |||||||||
|
Cash
at beginning of year
|
768,630 | 197,698 | 159,639 | |||||||||
|
Cash
at end of year
|
$ | 1,712,983 | $ | 768,630 | $ | 197,698 | ||||||
See
accompanying notes to condensed financial statements.
136
Schedule
II (Continued)
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Notes to
Condensed Financial Statements
1) Bank Loans
Payable
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Bank
prime rate less .28% (2.97% at December 31, 2009),
|
||||||||
|
collateralized
by 15,000 shares of
|
||||||||
|
Security
National Life Insurance Company
|
||||||||
|
stock,
due June 2011.
|
$ | 1,192,820 | $ | 2,003,527 | ||||
|
Bank
prime rate less .75% (2.50% at December 31, 2009)
|
||||||||
|
revolving
line of credit of $7,800,000, accrued interest
|
||||||||
|
paid
quarterly, extended to June 2011
|
1,375,000 | 1,675,000 | ||||||
|
Total
bank loans
|
2,567,820 | 3,678,527 | ||||||
|
Less
current installments
|
1,385,698 | 1,361,182 | ||||||
|
Bank
loans, excluding current installments
|
$ | 1,182,122 | $ | 2,317,345 | ||||
The
Company had an interest rate swap that resulted in an unrealized gain of $17,417
through December 31, 2007. In early 2008, the Company settled the interest rate
swap for $17,417. The carrying value of the related note payable was adjusted by
the balance of the unrealized gain on the date of the settlement and has
adjusted the interest expense that will be recognized over the remaining term of
the note.
2) Notes and Contracts
Payable
Notes and
contracts are summarized as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
5%
note payable to a former owner of C & J Financial
|
||||||||
|
due in
monthly installments of $16,737
|
||||||||
|
including principal
and interest, paid July 2009
|
$ | - | $ | 94,276 | ||||
|
Other
|
961 | 961 | ||||||
|
Total
notes and contracts
|
961 | 95,237 | ||||||
|
Less
current installments
|
961 | 95,237 | ||||||
|
Notes
and contracts, excluding current installments
|
$ | -0- | $ | -0- | ||||
The
Company has a $2,000,000 revolving line-of-credit with a bank with interest
payable at the bank’s prime rate minus 0.50% (2.75% at December 31, 2009),
secured by the assets of the Company and maturing June 30, 2010. As of December
31, 2009, there were no amounts outstanding under the revolving line-of-credit.
As of December 31, 2009, $30,000 of the available amount was reserved for an
outstanding letter of credit.
The
following tabulation shows the combined maturities of bank loans payable and
notes and contracts payable:
|
2010
|
$ | 1,386,659 | ||
|
2011
|
1,182,122 | |||
|
2012
|
- | |||
|
2013
|
- | |||
|
2014
|
- | |||
|
Thereafter
|
- | |||
|
Total
|
$ | 2,568,781 |
137
Schedule
II (Continued)
SECURITY
NATIONAL FINANCIAL CORPORATION
(Parent
Company Only)
Condensed
Financial Information
Notes to
Condensed Financial Statements
3) Advances from Affiliated
Companies
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Non-interest
bearing advances from affiliates:
|
||||||||
|
Cemetery
and Mortuary
|
||||||||
|
subsidiary
|
$ | 1,459,841 | $ | 1,459,841 | ||||
|
Life
insurance subsidiaries
|
7,502,452 | 7,470,744 | ||||||
|
Mortgage
subsidiary
|
43,983 | 43,983 | ||||||
| $ | 9,006,276 | $ | 8,974,568 | |||||
4) Dividends and Capital
Contributions
In 2009,
2008 and 2007, SecurityNational Mortgage Company, a wholly owned subsidiary of
the Registrant, paid to the registrant cash dividends of $1,125,000, $- 0-, and
$-0-, respectively.
In 2009,
2008 and 2007 the Registrant made a capital contribution to Security National
Life Insurance Company, a wholly owned subsidiary of the Registrant, in the
amount of $1,125,000, $-0-, and $-0-, respectively.
138
Schedule
IV
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Reinsurance
|
Percentage
|
||||||||||||||||||||
|
Ceded
to
|
Assumed
|
of
Amount
|
||||||||||||||||||
|
Direct
|
Other
|
from
Other
|
Net
|
Assumed
|
||||||||||||||||
|
Amount
|
Companies
|
Companies
|
Amount
|
to
Net
|
||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Life
Insurance in force ($000)
|
$ | 1,271,014 | $ | 93,603 | $ | 1,346,932 | $ | 2,524,343 | 53.4 | % | ||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life
Insurance
|
$ | 37,410,889 | $ | 646,318 | $ | 1,418,707 | $ | 38,183,278 | 3.7 | % | ||||||||||
|
Accident
and Health Insurance
|
231,386 | 1,335 | - | 230,051 | - | |||||||||||||||
|
Total
premiums
|
$ | 37,642,275 | $ | 647,653 | $ | 1,418,707 | $ | 38,413,329 | 3.7 | % | ||||||||||
|
2008
|
||||||||||||||||||||
|
Life
Insurance in force ($000)
|
$ | 1,303,722 | $ | 125,065 | $ | 1,150,687 | $ | 2,329,344 | 49.4 | % | ||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life
Insurance
|
$ | 35,133,624 | $ | 649,964 | $ | 1,269,658 | $ | 35,753,318 | 3.6 | % | ||||||||||
|
Accident
and Health Insurance
|
227,908 | 162 | 233 | 227,979 | 0.1 | % | ||||||||||||||
|
Total
premiums
|
$ | 35,361,532 | $ | 650,126 | $ | 1,269,891 | $ | 35,981,297 | 3.5 | % | ||||||||||
|
2007
|
||||||||||||||||||||
|
Life
Insurance in force ($000)
|
$ | 1,243,906 | $ | 114,155 | $ | 1,190,843 | $ | 2,320,594 | 51.3 | % | ||||||||||
|
Premiums:
|
||||||||||||||||||||
|
Life
Insurance
|
$ | 30,886,927 | $ | 586,877 | $ | 1,713,765 | $ | 32,013,815 | 5.4 | % | ||||||||||
|
Accident
and Health Insurance
|
248,702 | 189 | 509 | 249,022 | 0.2 | % | ||||||||||||||
|
Total
premiums
|
$ | 31,135,629 | $ | 587,066 | $ | 1,714,274 | $ | 32,262,837 | 5.3 | % | ||||||||||
139
Schedule
V
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
Valuation
and Qualifying Accounts
|
Additions
|
Deductions
|
|||||||||||||||
|
Balance
at
|
Charged
to
|
Disposals
|
Balance
|
|||||||||||||
|
Beginning
|
Costs
and
|
and
|
at
End of
|
|||||||||||||
|
of
Year
|
Expenses
|
Write-offs
|
Year
|
|||||||||||||
|
For the Year Ended
December 31, 2009
|
||||||||||||||||
|
Accumulated
depreciation on real estate
|
$ | 5,009,571 | $ | 1,076,412 | $ | (2,146,711 | ) | $ | 3,939,272 | |||||||
|
Allowance
for losses on mortgage loans
|
||||||||||||||||
|
on
real estate and construction loans
|
||||||||||||||||
|
held
for investment.
|
4,780,467 | 3,166,043 | (1,137,707 | ) | 6,808,803 | |||||||||||
|
Accumulated
depreciation
|
||||||||||||||||
|
on
property and equipment
|
17,688,418 | 1,722,446 | (277,281 | ) | 19,133,583 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
receivables
|
1,983,293 | 1,229,668 | (1,029,905 | ) | 2,183,056 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
real estate
|
- | 107,000 | - | 107,000 | ||||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
collateral loans
|
555,146 | 128,778 | (31,426 | ) | 652,498 | |||||||||||
|
For the Year Ended
December 31, 2008
|
||||||||||||||||
|
Accumulated
depreciation on real estate
|
$ | 4,340,390 | $ | 672,721 | $ | (3,540 | ) | $ | 5,009,571 | |||||||
|
Allowance
for losses on mortgage loans
|
||||||||||||||||
|
on
real estate and construction loans
|
||||||||||||||||
|
held
for investment.
|
1,435,131 | 4,338,553 | (993,217 | ) | 4,780,467 | |||||||||||
|
Accumulated
depreciation
|
||||||||||||||||
|
on
property and equipment
|
15,664,046 | 2,052,019 | (27,647 | ) | 17,688,418 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
receivables
|
1,293,185 | 1,034,202 | (344,094 | ) | 1,983,293 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
collateral loans
|
492,089 | 166,000 | (102,943 | ) | 555,146 | |||||||||||
|
For the Year Ended
December 31, 2007
|
||||||||||||||||
|
Accumulated
depreciation on real estate
|
$ | 4,024,710 | $ | 315,680 | $ | -- | $ | 4,340,390 | ||||||||
|
Allowance
for losses on mortgage loans
|
||||||||||||||||
|
on
real estate and construction loans
|
1,026,576 | 420,000 | (11,445 | ) | 1,435,131 | |||||||||||
|
Accumulated
depreciation
|
||||||||||||||||
|
on
property and equipment
|
13,522,715 | 2,232,928 | (91,597 | ) | 15,664,046 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
receivables
|
866,392 | 653,905 | (227,112 | ) | 1,293,185 | |||||||||||
|
Allowance
for doubtful accounts
|
||||||||||||||||
|
on
collateral loans
|
435,726 | 57,070 | (707 | ) | 492,089 | |||||||||||
140
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Year
Ended December 31, 2009
SECURITY
NATIONAL FINANCIAL CORPORATION
Commission
File No. 0-9341
E X H I B
I T S
Exhibit
Index
Exhibit
No. Document
Name
|
|
21
|
Subsidiaries
of the Registrant
|
|
|
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
|
141