3) Investments | 3) Investments The CompanyÂ’s investments in fixed maturity securities held to maturity and equity securities available for sale as of June 30, 2015 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2015 Fixed maturity securities held to maturity carried at amortized cost: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 1,862,291 $ 305,024 $ (3,620) $ 2,163,695 Obligations of states and political subdivisions 1,858,861 201,771 (3,726) 2,056,906 Corporate securities including public utilities 124,811,868 12,115,612 (1,207,359) 135,720,121 Mortgage-backed securities 3,255,965 232,136 (1,147) 3,486,954 Redeemable preferred stock 612,023 23,838 - 635,861 Total fixed maturity securities held to maturity $ 132,401,008 $ 12,878,381 $ (1,215,852) $ 144,063,537 Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value June 30, 2015 Equity securities available for sale at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 7,972,306 $ 150,184 $ (1,097,080) $ 7,025,410 Total equity securities available for sale at estimated fair value $ 7,972,306 $ 150,184 $ (1,097,080) $ 7,025,410 Mortgage loans on real estate and construction loans held for investment at amortized cost: Residential $ 49,704,426 Residential construction 28,342,809 Commercial 34,576,436 Less: Allowance for loan losses (1,875,775) Total mortgage loans on real estate and construction loans held for investment $ 110,747,896 Real estate held for investment - net of depreciation $ 114,724,603 Policy and other loans at amortized cost: Policy loans $ 7,095,642 Other loans 29,268,405 Less: Allowance for doubtful accounts (876,318) Total policy and other loans at amortized cost $ 35,487,729 Short-term investments at amortized cost $ 21,326,531 The CompanyÂ’s investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2014 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2014 Fixed maturity securities held to maturity carried at amortized cost: Bonds: U.S. Treasury securities and obligations of U.S. Government agencies $ 1,873,146 $ 345,715 $ - $ 2,218,861 Obligations of states and political subdivisions 1,736,489 221,893 (5,278) 1,953,104 Corporate securities including public utilities 126,533,483 15,841,536 (980,357) 141,394,662 Mortgage-backed securities 4,263,206 305,381 (11,894) 4,556,693 Redeemable preferred stock 612,023 22,032 - 634,055 Total fixed maturity securities held to maturity $ 135,018,347 $ 16,736,557 $ (997,529) $ 150,757,375 Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2014 Equity securities available for sale at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 7,179,010 $ 393,873 $ (820,133) $ 6,752,750 Total securities available for sale carried at estimated fair value $ 7,179,010 $ 393,873 $ (820,133) $ 6,752,750 Mortgage loans on real estate and construction loans held for investment at amortized cost: Residential $ 53,592,433 Residential construction 33,071,938 Commercial 35,388,756 Less: Allowance for loan losses (2,003,055) Total mortgage loans on real estate and construction loans held for investment $ 120,050,072 Real estate held for investment - net of depreciation $ 111,411,351 Policy and other loans at amortized cost: Policy loans $ 7,011,012 Other loans 27,807,829 Less: Allowance for doubtful accounts (693,413) Total policy and other loans at amortized cost $ 34,125,428 Short-term investments at amortized cost $ 27,059,495 Fixed Maturity Securities The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at June 30, 2015 and December 31, 2014. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related fixed maturity securities: Unrealized Losses for Less than Twelve Months No. of Investment Positions Unrealized Losses for More than Twelve Months No. of Investment Positions Total Unrealized Loss At June 30, 2015 U.S. treasury securities and obligations of U.S. government agencies $ 3,620 1 $ - 0 $ 3,620 Obligations of states and political subdivisions - 3,726 1 3,726 Corporate securities including public utilities 947,259 63 252,472 8 1,199,731 Mortgage-backed securities 1,147 1 7,628 2 8,775 Total unrealized losses $ 952,026 65 $ 263,826 11 $ 1,215,852 Fair Value $ 18,942,023 $ 2,519,794 $ 21,461,817 At December 31, 2014 Obligations of states and political subdivisions $ - 0 $ 5,278 1 $ 5,278 Corporate securities including public utilities 548,310 21 432,047 11 980,357 Mortgage-backed securities 3,966 1 7,928 1 11,894 Total unrealized losses $ 552,276 22 $ 445,253 13 $ 997,529 Fair Value $ 7,081,352 $ 2,777,587 $ 9,858,939 As of June 30, 2015, the average market value of the related fixed maturities was 94.6% of amortized cost and the average market value was 90.8% of amortized cost as of December 31, 2014. During the three months ended June 30, 2015 and 2014 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $30,000 and $30,000, respectively, and for the six months ended June 30, 2015 and 2014 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $60,000 and $60,000, respectively. On a quarterly basis, the Company reviews its fixed maturity 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. Equity Securities The following tables summarize unrealized losses on equity securities that were carried at estimated fair value based on quoted trading prices at June 30, 2015 and December 31, 2014. The unrealized losses were primarily the result of decreases in fair value due to overall equity market declines. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available-for-sale in a loss position: Unrealized Losses for Less than Twelve Months No. of Investment Positions Unrealized Losses for More than Twelve Months No. of Investment Positions Total Unrealized Losses At June 30, 2015 Industrial, miscellaneous and all other $ 501,595 208 $ 595,485 36 $ 1,097,080 Total unrealized losses $ 501,595 208 $ 595,485 36 $ 1,097,080 Fair Value $ 3,789,136 $ 687,502 $ 4,476,638 At December 31, 2014 Industrial, miscellaneous and all other $ 327,389 138 $ 492,744 27 $ 820,133 Total unrealized losses $ 327,389 138 $ 492,744 27 $ 820,133 Fair Value $ 2,162,425 $ 676,706 $ 2,839,131 As of June 30, 2015, the average market value of the equity securities available for sale was 80.3% of the original investment and the average market value was 77.6% of the original investment as of December 31, 2014. 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 CompanyÂ’s previous intent to continue holding a security. During the three months ended June 30, 2015 and 2014, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $25,311 and $-0-, respectively, and for the six months ended June 30, 2015 and 2014, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $51,207 and $-0-, respectively. 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 fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. The fair values for equity securities are based on quoted market prices. The amortized cost and estimated fair value of fixed maturity securities at June 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Estimated Fair Value Held to Maturity: Due in 2015 $ 1,498,127 $ 1,519,903 Due in 2016 through 2019 31,328,324 34,364,866 Due in 2020 through 2024 28,140,265 30,502,468 Due after 2024 67,566,304 73,553,485 Mortgage-backed securities 3,255,965 3,486,954 Redeemable preferred stock 612,023 635,861 Total held to maturity $ 132,401,008 $ 144,063,537 The amortized cost and estimated fair value of available for sale securities at June 30, 2015, 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. Cost Estimated Fair Value Available for Sale: Common stock $ 7,972,306 $ 7,025,410 Total available for sale $ 7,972,306 $ 7,025,410 The CompanyÂ’s realized gains and losses, other than temporary impairments from investments and other assets, are summarized as follows: Three Months Ended June 30 Six Months Ended June 30 2015 2014 2015 2014 Fixed maturity securities held to maturity: Gross realized gains $ 273,061 $ 47,548 $ 359,057 $ 47,548 Gross realized losses (49,594) (2,284) (59,370) (2,284) Other than temporary impairments (30,000) (30,000) (60,000) (60,000) Securities available for sale: Gross realized gains 42,289 72,397 130,009 125,650 Gross realized losses - - (1,016) - Other than temporary impairments (25,311) - (51,207) - Other assets: Gross realized gains 267,097 222,191 524,237 367,931 Gross realized losses (32,077) - (32,077) - Other than temporary impairments - - - - Total $ 445,465 $ 309,852 $ 809,633 $ 478,845 The net carrying amount of held to maturity securities sold was $2,543,312 and $872,882 for the six months ended June 30, 2015 and 2014, respectively. The net realized gain related to these sales was $330,373 and $42,118 for the six months ended June 30, 2015 and 2014, respectively. There were no investments, aggregated by issuer, in excess of 10% of shareholdersÂ’ equity (before net unrealized gains and losses on available for sale securities) at June 30, 2015, other than investments issued or guaranteed by the United States Government. Major categories of net investment income are as follows: Three Months Ended June 30 Six Months Ended June 30 2015 2014 2015 2014 Fixed maturity securities $ 2,144,989 $ 2,067,324 $ 4,125,684 $ 4,176,445 Equity securities 55,298 50,752 114,716 89,999 Mortgage loans on real estate 1,790,538 1,837,060 3,641,164 3,389,171 Real estate 2,233,781 2,126,566 4,354,352 4,291,565 Policy and other loans 188,639 181,687 377,185 379,255 Short-term investments, principally gains on sale of mortgage loans and other 4,738,607 2,781,988 8,964,392 4,681,101 Gross investment income 11,151,852 9,045,377 21,577,493 17,007,536 Investment expenses (2,561,179) (2,338,090) (5,163,976) (4,657,749) Net investment income $ 8,590,673 $ 6,707,287 $ 16,413,517 $ 12,349,787 Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $93,564 and $77,254 for the three months ended June 30, 2015 and 2014, respectively, and $186,486 and $171,999 for the six months ended June 30, 2015 and 2014, respectively. Net investment income on real estate consists primarily of rental revenue. Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities. Securities on deposit for regulatory authorities as required by law amounted to $9,070,319 at June 30, 2015 and $8,886,001 at December 31, 2014. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets. Mortgage Loans Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from six 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 debtorsÂ’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At , the Company had , of its mortgage loans from borrowers located in the states of Utah, California Florida respectively. The mortgage loans on real estate balances on the consolidated balance sheet are reflected net of an allowance for loan losses of and $ at and December 31, 2014, respectively. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented: Allowance for Credit Losses and Recorded Investment in Mortgage Loans Commercial Residential Residential Construction Total June 30, 2015 Allowance for credit losses: Beginning balance - January 1, 2015 $ 187,129 $ 1,715,812 $ 100,114 $ 2,003,055 Charge-offs - - - - Provision - (127,280) - (127,280) Ending balance -June 30, 2015 $ 187,129 $ 1,588,532 $ 100,114 $ 1,875,775 Ending balance: individually evaluated for impairment $ - $ 217,192 $ - $ 217,192 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,371,340 $ 100,114 $ 1,658,583 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $ - Mortgage loans: Ending balance $ 34,576,436 $ 49,704,426 $ 28,342,809 $ 112,623,671 Ending balance: individually evaluated for impairment $ - $ 2,320,452 $ - $ 2,320,452 Ending balance: collectively evaluated for impairment $ 34,576,436 $ 47,383,974 $ 28,342,809 $ 110,303,219 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $ - December 31, 2014 Allowance for credit losses: Beginning balance - January 1, 2014 $ 187,129 $ 1,364,847 $ 100,114 $ 1,652,090 Charge-offs - (38,444) - (38,444) Provision - 389,409 - 389,409 Ending balance - December 31, 2014 $ 187,129 $ 1,715,812 $ 100,114 $ 2,003,055 Ending balance: individually evaluated for impairment $ - $ 153,446 $ - $ 153,446 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,562,366 $ 100,114 $ 1,849,609 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $ - Mortgage loans: Ending balance $ 35,388,756 $ 53,592,433 $ 33,071,938 $ 122,053,127 Ending balance: individually evaluated for impairment $ - $ 1,556,182 $ 414,499 $ 1,970,681 Ending balance: collectively evaluated for impairment $ 35,388,756 $ 52,036,251 $ 32,657,439 $ 120,082,446 Ending balance: loans acquired with deteriorated credit quality $ - $ - $ - $ - The following is a summary of the aging of mortgage loans for the periods presented Age Analysis of Past Due Mortgage Loans 30-59 Days Past Due 60-89 Days Past Due Greater Than 90 Days (1) In Foreclosure (1) Total Past Due Current Total Mortgage Loans Allowance for Loan Losses Net Mortgage Loans June 30, 2015 Commercial $ - $ - $ - $ - $ - $ 34,576,436 $ 34,576,436 $ (187,129) $ 34,389,307 Residential 756,115 624,651 4,278,185 2,320,452 7,979,403 41,725,023 49,704,426 (1,588,532) 48,115,894 Residential Construction - - 64,895 - 64,895 28,277,914 28,342,809 (100,114) 28,242,695 Total $ 756,115 $ 624,651 $ 4,343,080 $ 2,320,452 $ 8,044,298 $ 104,579,373 $ 112,623,671 $ (1,875,775) $110,747,896 December 31, 2014 Commercial $ - $ - $ - $ - $ - $ 35,388,756 $ 35,388,756 $ (187,129) $ 35,201,627 Residential 1,631,142 1,174,516 5,464,901 1,556,182 9,826,741 43,765,692 53,592,433 (1,715,812) 51,876,621 Residential Construction - - 64,895 414,499 479,394 32,592,544 33,071,938 (100,114) 32,971,824 Total $ 1,631,142 $ 1,174,516 $ 5,529,796 $ 1,970,681 $ 10,306,135 $ 111,746,992 $ 122,053,127 $ (2,003,055) $120,050,072 (1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure. Impaired Mortgage Loans Impaired mortgage loans include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows: Impaired Loans Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized June 30, 2015 With no related allowance recorded: Commercial $ - $ - $ - $ - $ - Residential - - - - - Residential construction - - - - - With an allowance recorded: Commercial $ - $ - $ - $ - $ - Residential 2,320,452 2,320,452 217,192 2,320,452 - Residential construction - - - - - Total: Commercial $ - $ - $ - $ - $ - Residential 2,320,452 2,320,452 217,192 2,320,452 - Residential construction - - - - - December 31, 2014 With no related allowance recorded: Commercial $ - $ - $ - $ - $ - Residential - - - - - Residential construction 414,499 414,499 - 414,499 - With an allowance recorded: Commercial $ - $ - $ - $ - $ - Residential 1,556,182 1,556,182 153,446 1,556,182 - Residential construction - - - - - Total: Commercial $ - $ - $ - $ - $ - Residential 1,556,182 1,556,182 153,446 1,556,182 - Residential construction 414,499 414,499 - 414,499 - Credit Risk Profile Based on Performance Status The CompanyÂ’s mortgage loan portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days past due or on non-accrual status. The CompanyÂ’s performing and non-performing mortgage loans were as follows: Mortgage Loan Credit Exposure Credit Risk Profile Based on Payment Activity Commercial Residential Residential Construction Total June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 June 30, 2015 December 31, 2014 Performing $34,576,436 $ 35,388,756 $43,105,790 $ 46,571,350 $ 28,277,914 $ 32,592,544 $ 105,960,140 $114,552,650 Nonperforming - - 6,598,636 7,021,083 64,895 479,394 6,663,531 7,500,477 Total $34,576,436 $ 35,388,756 $ 49,704,426 $ 53,592,433 $ 28,342,809 $ 33,071,938 $ 112,623,671 $122,053,127 Non-Accrual Mortgage Loans Once a loan is past due 90 days, it is the CompanyÂ’s policy to end the accrual of interest income on the loan and write off any income that had been accrued. Interest not accrued on these loans totals $595,000 and $535,000 as of June 30, 2015 and December 31, 2014, respectively. The following is a summary of mortgage loans on a nonaccrual status for the periods presented. Mortgage Loans on Nonaccrual Status As of June 30 2015 As of December 31 2014 Residential $ 6,598,636 $ 7,021,083 Residential construction 64,895 479,394 Total $ 6,663,531 $ 7,500,477 Loan Loss Reserve 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 loan loss reserve analysis involves mortgage loans that have been sold to third party investors where the Company has received a demand from the investor. There are generally three types of demands: make whole, repurchase, or indemnification. These types of demands are more particularly described as follows: Make whole demand Repurchase demand Indemnification demand When a repurchase demand is received from a third party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third party investor without having to make any payments to the investor. The following is a summary of the loan loss reserve that is included in other liabilities and accrued expenses: As of June 30 2015 As of December 31 2014 Balance, beginning of period $ 1,718,150 $ 5,506,532 Provisions for losses 2,919,210 3,053,403 Charge-offs (384,540) (6,841,785) Balance, end of period $ 4,252,820 $ 1,718,150 The Company believes the loan loss reserve represents probable loan losses incurred as of the balance sheet date. Actual loan loss experience could change, in the near-term, from the established reserve based upon claims that could be asserted by third party investors. SecurityNational Mortgage believes there is potential to resolve any alleged claims by third party investors on acceptable terms. If SecurityNational Mortgage is unable to resolve such claims on acceptable terms, legal action may ensue. In the event of legal action by any third party investor, SecurityNational Mortgage believes it has significant defenses to any such action and intends to vigorously defend itself against such action. |