Quarterly Report



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

FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2017, or

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

Commission file number:   000-09341

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

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


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [  ]

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.

 
Large accelerated filer [  ]
Accelerated filer [  ]
 
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No[X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class A Common Stock, $2.00 par value
13,820,079
Title of Class
Number of Shares Outstanding as of
 
August 25, 2017
   
Class C Common Stock, $2.00 par value
2,005,026
Title of Class
Number of Shares Outstanding as of
 
August 25, 2017
   
 

 
 
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q

QUARTER ENDED JUNE 30, 2017

Table of Contents
   
Page No.
 
Part I  - Financial Information
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (unaudited)
3-4
     
 
Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
5
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (unaudited)
6
     
 
Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2017 and  June 30, 2016 (unaudited)
7
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)
8
     
 
Notes to Condensed Consolidated Financial Statements (unaudited)
9
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
43
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
49
     
Item 4.
Controls and Procedures
49
     
 
Part II - Other Information
 
     
Item 1.
Legal Proceedings
50
     
Item 1A.
Risk Factors
51
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
     
Item 3.
Defaults Upon Senior Securities
52
     
Item 4.
Mine Safety Disclosures
52
     
Item 5.
Other Information
52
     
Item 6.
Exhibits
53
     
 
Signature Page
56


2

SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

Part I - Financial Information

Item 1.  Financial Statements.

Assets
 
June 30
2017
(Unaudited)
   
December 31
2016
(As Restated)
 
Investments:
           
Fixed maturity securities, held to maturity, at amortized cost
 
$
193,208,660
   
$
184,979,644
 
Equity securities, available for sale, at estimated fair value
   
6,499,100
     
10,573,356
 
Mortgage loans on real estate and construction loans, held for investment (net of allowances for loan losses of $1,921,028 and $1,748,783 for 2017 and 2016)
   
134,999,264
     
149,181,578
 
Real estate held for investment (net of accumulated depreciation of $17,064,559 and $16,138,439 for 2017 and 2016)
   
151,355,029
     
145,165,921
 
Policy loans and other investments (net of allowances for doubtful accounts of $1,072,529 and $1,119,630 for 2017 and 2016)
   
40,987,994
     
40,937,146
 
Short-term investments
   
23,448,480
     
27,560,040
 
Accrued investment income
   
3,300,540
     
3,163,775
 
Total investments
   
553,799,067
     
561,561,460
 
Cash and cash equivalents
   
82,258,418
     
38,987,430
 
Loans held for sale
   
172,772,535
     
189,139,832
 
Receivables (net of allowances for doubtful accounts of $2,609,643
and $2,355,482 for 2017 and 2016)
   
5,919,706
     
7,050,283
 
Restricted assets
   
10,152,550
     
10,391,394
 
Cemetery perpetual care trust investments
   
4,322,060
     
4,131,885
 
Receivable from reinsurers
   
13,280,043
     
13,079,668
 
Cemetery land and improvements
   
10,561,992
     
10,672,836
 
Deferred policy and pre-need contract acquisition costs
   
75,286,393
     
69,118,745
 
Mortgage servicing rights, net
   
20,096,965
     
18,872,362
 
Property and equipment, net
   
7,965,086
     
8,791,522
 
Value of business acquired
   
7,079,387
     
7,570,300
 
Goodwill
   
2,765,570
     
2,765,570
 
Other
   
10,254,418
     
9,545,296
 
                 
Total Assets
 
$
976,514,190
   
$
951,678,583
 

See accompanying notes to condensed consolidated financial statements (unaudited).
3

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

   
June 30
2017
(Unaudited)
   
December 31
2016
(As Restated)
 
Liabilities and Stockholders' Equity
           
Liabilities
           
Future policy benefits and unpaid claims
 
$
592,762,559
   
$
584,067,692
 
Unearned premium reserve
   
4,340,622
     
4,469,771
 
Bank and other loans payable
   
163,582,661
     
152,140,679
 
Deferred pre-need cemetery and mortuary contract revenues
   
12,477,400
     
12,360,249
 
Cemetery perpetual care obligation
   
3,662,070
     
3,598,580
 
Accounts payable
   
3,338,457
     
4,213,109
 
Other liabilities and accrued expenses
   
31,068,330
     
33,950,503
 
Income taxes
   
27,657,321
     
24,318,869
 
Total liabilities
   
838,889,420
     
819,119,452
 
                 
Stockholders' Equity
               
Preferred Stock - non-voting - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 13,820,079 shares in 2017 and 13,819,006 shares in 2016
   
27,640,158
     
27,638,012
 
Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding
   
-
     
-
 
Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,005,026 shares in 2017 and 1,902,229 shares in 2016
   
4,010,052
     
3,804,458
 
Additional paid-in capital
   
35,185,487
     
34,813,246
 
Accumulated other comprehensive income, net of taxes
   
242,213
     
264,822
 
Retained earnings
   
71,751,784
     
67,409,204
 
Treasury stock at cost - 625,871 Class A shares in 2017 and 704,122 Class A shares in 2016
   
(1,204,924
)
   
(1,370,611
)
                 
Total stockholders' equity
   
137,624,770
     
132,559,131
 
                 
Total Liabilities and Stockholders' Equity
 
$
976,514,190
   
$
951,678,583
 

See accompanying notes to condensed consolidated financial statements (unaudited).
4


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

   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2017
   
2016
   
2017
   
2016
 
Revenues:
                       
Insurance premiums and other considerations
 
$
17,498,500
   
$
15,899,526
   
$
34,855,624
   
$
30,351,101
 
Net investment income
   
9,747,475
     
9,135,820
     
19,310,757
     
18,128,011
 
Net mortuary and cemetery sales
   
3,280,375
     
3,520,071
     
6,639,348
     
6,765,927
 
Realized gains on investments and other assets
   
887,402
     
120,543
     
1,032,732
     
218,465
 
Other than temporary impairments on investments
   
(266,227
)
   
(30,000
)
   
(318,366
)
   
(103,630
)
Mortgage fee income
   
39,948,197
     
49,825,887
     
78,376,051
     
91,037,895
 
Other
   
2,075,836
     
1,615,380
     
4,104,709
     
3,145,806
 
Total revenues
   
73,171,558
     
80,087,227
     
144,000,855
     
149,543,575
 
                                 
Benefits and expenses:
                               
Death benefits
   
8,547,019
     
7,336,129
     
17,341,617
     
15,160,130
 
Surrenders and other policy benefits
   
680,117
     
560,859
     
1,537,648
     
1,079,180
 
Increase in future policy benefits
   
5,366,096
     
5,272,358
     
10,934,138
     
9,394,059
 
Amortization of deferred policy and pre-need acquisition costs and value of business acquired
   
1,768,769
     
1,707,552
     
4,032,808
     
3,920,388
 
Selling, general and administrative expenses:
                               
Commissions
   
18,522,758
     
24,608,753
     
34,877,806
     
43,819,721
 
Personnel
   
17,964,918
     
17,582,835
     
36,554,605
     
34,780,207
 
Advertising
   
1,485,604
     
1,969,945
     
2,796,278
     
3,047,955
 
Rent and rent related
   
2,296,495
     
2,048,397
     
4,436,033
     
4,112,722
 
Depreciation on property and equipment
   
581,026
     
536,489
     
1,206,838
     
1,057,944
 
Costs related to funding mortgage loans
   
2,286,107
     
1,958,625
     
4,505,756
     
4,591,379
 
Other
   
7,760,849
     
6,832,076
     
15,191,800
     
13,312,787
 
Interest expense
   
1,385,354
     
1,235,151
     
2,639,393
     
2,299,346
 
Cost of goods and services sold-mortuaries and cemeteries
   
532,147
     
452,172
     
1,054,066
     
910,791
 
Total benefits and expenses
   
69,177,259
     
72,101,341
     
137,108,786
     
137,486,609
 
                                 
Earnings before income taxes
   
3,994,299
     
7,985,886
     
6,892,069
     
12,056,966
 
Income tax expense
   
(1,508,435
)
   
(2,968,880
)
   
(2,546,205
)
   
(4,502,019
)
                                 
Net earnings
 
$
2,485,864
   
$
5,017,006
   
$
4,345,864
   
$
7,554,947
 
                                 
Net earnings per Class A Equivalent common share (1)
 
$
0.16
   
$
0.34
   
$
0.29
   
$
0.51
 
                                 
Net earnings per Class A Equivalent common share-assuming dilution (1)
 
$
0.16
   
$
0.33
   
$
0.28
   
$
0.50
 
                                 
Weighted-average Class A equivalent common share outstanding (1)
   
15,161,689
     
14,747,976
     
15,110,119
     
14,702,187
 
                                 
Weighted-average Class A equivalent common shares outstanding-assuming dilution (1)
   
15,492,277
     
15,111,324
     
15,454,507
     
15,114,535
 

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

See accompanying notes to condensed consolidated financial statements (unaudited).
5

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

   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2017
   
2016
   
2017
   
2016
 
Net earnings
 
$
2,485,864
   
$
5,017,006
   
$
4,345,864
   
$
7,554,947
 
Other comprehensive income:
                               
  Unrealized gains on derivative instruments
   
1,021
     
2,804
     
2,616
     
5,541
 
  Unrealized gains (losses) on available for sale securities
   
(67,708
)
   
38,582
     
(37,838
)
   
471,589
 
Other comprehensive income (loss) before income tax
   
(66,687
)
   
41,386
     
(35,222
)
   
477,130
 
  Income tax (expense) benefit
   
22,786
     
(28,779
)
   
12,613
     
(164,956
)
Other comprehensive income (loss) net of income tax
   
(43,901
)
   
12,607
     
(22,609
)
   
312,174
 
Comprehensive income
 
$
2,441,963
   
$
5,029,613
   
$
4,323,255
   
$
7,867,121
 

See accompanying notes to condensed consolidated financial statements (unaudited).
6

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

   
Class A
Common Stock
   
Class C
Common Stock
   
Additional
Paid-in
 Capital
   
Accumulated
 Other Comprehensive Income
   
Retained
 Earnings
   
Treasury
 Stock
   
Total
 
                                           
Balance at December 31, 2015
 
$
26,218,200
   
$
3,419,280
   
$
30,232,582
   
$
(499,358
)
 
$
60,525,404
   
$
(2,179,429
)
 
$
117,716,679
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
7,554,947
     
-
     
7,554,947
 
Other comprehensive income
   
-
     
-
     
-
     
312,174
     
-
     
-
     
312,174
 
Grant of stock options
   
-
     
-
     
168,478
     
-
     
-
     
-
     
168,478
 
Exercise of stock options
   
56,920
     
-
     
4,367
     
-
     
-
     
-
     
61,287
 
Sale of treasury stock
   
-
     
-
     
274,184
     
-
     
-
     
374,472
     
648,656
 
Stock dividends
   
274
     
12,768
     
30,779
     
-
     
(43,821
)
   
-
     
-
 
Conversion Class C to Class A
   
8
     
(8
)
                                       
Balance at June 30, 2016
 
$
26,275,402
   
$
3,432,040
   
$
30,710,390
   
$
(187,184
)
 
$
68,036,530
   
$
(1,804,957
)
 
$
126,462,221
 
                                                         
Balance at December 31, 2016
 
$
27,638,012
   
$
3,804,458
   
$
34,813,246
   
$
264,822
   
$
67,409,204
   
$
(1,370,611
)
 
$
132,559,131
 
                                                         
Net earnings
   
-
     
-
     
-
     
-
     
4,345,864
     
-
     
4,345,864
 
Other comprehensive loss
   
-
     
-
     
-
     
(22,609
)
   
-
     
-
     
(22,609
)
Grant of stock options
   
-
     
-
     
203,312
     
-
     
-
     
-
     
203,312
 
Exercise of stock options
   
2
     
206,804
     
(206,806
)
   
-
     
-
     
-
     
-
 
Sale of treasury stock
   
-
     
-
     
373,385
     
-
     
-
     
351,157
     
724,542
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(185,470
)
   
(185,470
)
Stock dividends
   
930
     
4
     
2,350
     
-
     
(3,284
)
   
-
     
-
 
Conversion Class C to Class A
   
1,214
     
(1,214
)
   
-
     
-
     
-
     
-
     
-
 
Balance at June 30, 2017
 
$
27,640,158
   
$
4,010,052
   
$
35,185,487
   
$
242,213
   
$
71,751,784
   
$
(1,204,924
)
 
$
137,624,770
 

See accompanying notes to condensed consolidated financial statements (unaudited).
7

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

   
Six Months Ended June 30
 
   
2017
   
2016
 
Cash flows from operating activities:
           
     Net cash provided by (used in) operating activities
 
$
20,042,049
   
$
(11,694,122
)
                 
Cash flows from investing activities:
               
Securities held to maturity:
               
        Purchase-fixed maturity securities
   
(14,739,655
)
   
(6,011,449
)
        Calls and maturities - fixed maturity securities
   
5,780,429
     
7,461,029
 
Securities available for sale:
               
       Purchase - equity securities
   
(4,662,660
)
   
(3,092,638
)
       Sales - equity securities
   
8,728,231
     
2,858,859
 
Purchases of short-term investments
   
(10,545,721
)
   
(7,982,751
)
Sales of short-term investments
   
14,657,281
     
4,122,893
 
Net changes in restricted assets
   
234,989
     
(379,488
)
Net changes in perpetual care trusts
   
(138,214
)
   
636,032
 
Mortgage loans, policy loans, and other investments made
   
(225,709,097
)
   
(223,703,013
)
Payments received for mortgage loans, policy loans and other investments
   
243,249,202
     
213,224,702
 
Purchase of property and equipment
   
(396,225
)
   
(796,922
)
Sale of property and equipment
   
9,973
     
33,994
 
Purchase of real estate
   
(9,792,553
)
   
(11,122,083
)
Sale of real estate
   
6,955,785
     
3,559,261
 
      Net cash provided by (used in) investing activities
   
13,631,765
     
(21,191,574
)
                 
Cash flows from financing activities:
               
Investment contract receipts
   
6,619,919
     
5,089,479
 
Investment contract withdrawals
   
(8,281,872
)
   
(6,138,482
)
Proceeds from stock options exercised
   
-
     
61,287
 
Purchase of treasury stock
   
(185,470
)
   
-
 
Repayment of bank loans
   
(1,450,283
)
   
(777,883
)
Proceeds from borrowing on bank loans
   
13,785,915
     
2,472,468
 
Net change in warehouse line borrowings
   
(891,035
)
   
28,925,507
 
      Net cash provided by financing activities
   
9,597,174
     
29,632,376
 
                 
Net change in cash and cash equivalents
   
43,270,988
     
(3,253,320
)
                 
Cash and cash equivalents at beginning of period
   
38,987,430
     
40,053,242
 
                 
Cash and cash equivalents at end of period
 
$
82,258,418
   
$
36,799,922
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the year for:
               
Interest (net of amount capitalized)
 
$
2,617,241
   
$
2,315,042
 
Income taxes (net of refunds)
   
(804,859
)
   
981,981
 
                 
Non Cash Operating, Investing and Financing Activities:
               
Transfer of loans held for sale to mortgage loans held for investment
 
$
5,032,147
   
$
7,386,432
 
Accrued real estate construction costs and retainage
   
3,013,225
     
-
 
Mortgage loans foreclosed into real estate
   
1,345,213
     
573,658
 
Benefit plans funded with treasury stock
   
724,542
     
648,656
 

See accompanying notes to condensed consolidated financial statements (unaudited).
8

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)


1)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10‑Q and Articles 8 and 10 of Regulation S‑X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K/A (file number 000-09341). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The presentation of certain amounts in the prior year have been reclassified to conform to the 2017 presentation. See additional discussion regarding correction of errors in Notes 21 and 22 included in the Company's Form 10-K/A for the year ended December 31, 2016.

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

Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits and unearned revenue; those used in determining the estimated future costs for pre-need sales; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans on real estate; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects.
2)   Recent Accounting Pronouncements

ASU No. 2016-13: "Financial Instruments – Credit Losses (Topic 326)" – Issued in June 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current generally accepted accounting principles ("GAAP") and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is in the process of evaluating the potential impact of this standard, which is not expected to be material to the Company's results of operations but will have an effect on the balance sheet presentation.

ASU No. 2016-02: "Leases (Topic 842)" - Issued in February 2016, ASU 2016-02 supersedes the requirements in ASC Topic 840, "Leases", and was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2018. The Company is in the process of evaluating the potential impact of this standard, which is not expected to be material to the Company's results of operations but will have an effect on the balance sheet presentation for leased assets and obligations.

ASU No. 2016-01: "Financial Instruments – Overall (Topic 825-10)" – Issued in January 2016, ASU 2016-01 changes the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of stockholders' equity.  Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. The Company holds equity securities classified as available for sale securities that are currently measured at fair value with changes in fair value recognized through other comprehensive income. Upon adoption of ASU 2016-01 the Company will be required to recognize changes in the fair value of these equity securities through earnings, thus increasing the volatility of the Company's earnings. However, adoption of this standard will not significantly affect the Company's comprehensive income or stockholders' equity. See Note 3 for details regarding the Company's equity securities currently classified as available for sale. This new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017, with the cumulative effect of the adoption made to the balance sheet as of the date of adoption. Thus, the adoption will result in a reclassification of the related accumulated net unrealized gains (losses) currently included in accumulated other comprehensive income to retained earnings. The Company will adopt this standard beginning January 1, 2018.
9

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

2)   Recent Accounting Pronouncements (Continued)
 
ASU No. 2014-09: "Revenue from Contracts with Customers (Topic 606)" - Issued in May 2014, ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, "Revenue Recognition". ASU 2014-09 clarifies the principles for recognizing revenue in order to improve comparability of revenue recognition practices across entities and industries. ASU 2014-09 provides guidance intended to assist in the identification of contracts with customers and separate performance obligations within those contracts, the determination and allocation of the transaction price to those identified performance obligations and the recognition of revenue when a performance obligation has been satisfied. ASU 2014-09 also requires disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers.   Insurance contracts are excluded from the scope of this new guidance.

Upon adoption, ASU 2014-09 provides for transition through either a full retrospective approach requiring the restatement of all presented prior periods or a modified retrospective approach, which allows the new recognition standard to be applied to only those contracts that are not completed at the date of transition. If the modified retrospective approach is adopted, a cumulative effect adjustment to retained earnings is performed with additional disclosures required including the amount by which each line item is affected by the transition as compared to the guidance in effect before adoption and an explanation of the reasons for significant changes in these amounts. The Company intends to adopt ASU 2014-09 using the modified retrospective method. The Company does not expect to record a cumulative effect adjustment to its beginning retained earnings as a result of adoption of ASU 2014-09.

The Company's revenues from contracts with customers that are subject to ASU 2014-09 include mortgage servicing fees and revenues on mortuary and cemetery contracts. The recognition and measurement of these items is not expected to change as a result of the Company's adoption of ASU 2014-09 and thus the Company does not expect that the adoption of ASU 2014-09 will significantly impact the Company's results of operations or financial position but is still in the process of evaluating the final impact. The new authoritative guidance is effective for interim and annual periods beginning after December 15, 2017. The Company will adopt this standard beginning January 1, 2018.

The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company's results of operations or financial position.
10

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)



3)   Investments

The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of June 30, 2017 are summarized as follows:

 
   

Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
June 30, 2017
                       
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
14,420,200
   
$
248,373
   
$
(59,763
)
 
$
14,608,810
 
Obligations of states and political subdivisions
   
5,973,209
     
130,535
     
(89,335
)
   
6,014,409
 
Corporate securities including public utilities
   
161,579,151
     
13,657,535
     
(2,170,322
)
   
173,066,364
 
Mortgage-backed securities
   
10,612,465
     
238,013
     
(159,091
)
   
10,691,387
 
Redeemable preferred stock
   
623,635
     
39,838
     
-
     
663,473
 
Total fixed maturity securities held to maturity
 
$
193,208,660
   
$
14,314,294
   
$
(2,478,511
)
 
$
205,044,443
 
                                 
Equity securities available for sale at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
6,969,968
   
$
388,504
   
$
(859,372
)
 
$
6,499,100
 
                                 
Total equity securities available for sale at estimated fair value
 
$
6,969,968
   
$
388,504
   
$
(859,372
)
 
$
6,499,100
 
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
 
$
63,031,000
                         
Residential construction
   
34,512,524
                         
Commercial
   
39,763,788
                         
Less: Unamortized deferred loan fees, net
   
(387,020
)
                       
Less: Allowance for loan losses
   
(1,921,028
)
                       
Total mortgage loans on real estate and construction loans held for investment
 
$
134,999,264
                         
                                 
Real estate held for investment - net of depreciation
 
$
151,355,029
                         
                                 
Policy loans and other investments are shown at amortized cost:
                               
Policy loans
 
$
6,685,452
                         
Insurance assignments
   
32,450,071
                         
Other investments
   
2,925,000
                         
Less: Allowance for doubtful accounts
   
(1,072,529
)
                       
                                 
Total policy loans and other investments
 
$
40,987,994
                         
                                 
Short-term investments at amortized cost
 
$
23,448,480
                         


11

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)

The Company's investments in fixed maturity securities held to maturity and equity securities available for sale as of December 31, 2016 are summarized as follows:

   
Cost
   
Gross
Unrealized
 Gains
   
Gross
 Unrealized
Losses
   
Estimated
Fair
Value
 
December 31, 2016:
                       
                         
Fixed maturity securities held to maturity carried at amortized cost:
                       
Bonds:
                       
U.S. Treasury securities and obligations of U.S. Government agencies
 
$
4,475,065
   
$
249,028
   
$
(66,111
)
 
$
4,657,982
 
Obligations of states and political subdivisions
   
6,017,225
     
153,514
     
(133,249
)
   
6,037,490
 
Corporate securities including public utilities
   
164,375,636
     
10,440,989
     
(3,727,013
)
   
171,089,612
 
Mortgage-backed securities
   
9,488,083
     
221,400
     
(280,871
)
   
9,428,612
 
Redeemable preferred stock
   
623,635
     
13,418
     
-
     
637,053
 
Total fixed maturity securities held to maturity
 
$
184,979,644
   
$
11,078,349
   
$
(4,207,244
)
 
$
191,850,749
 
                                 
Equity securities available for sale at estimated fair value:
                               
                                 
Common stock:
                               
                                 
Industrial, miscellaneous and all other
 
$
10,985,338
   
$
447,110
   
$
(859,092
)
 
$
10,573,356
 
                                 
Total securities available for sale carried at estimated fair value
 
$
10,985,338
   
$
447,110
   
$
(859,092
)
 
$
10,573,356
 
                                 
Mortgage loans on real estate and construction loans held for investment at amortized cost:
                               
Residential
 
$
58,593,622
                         
Residential construction
   
40,800,117
                         
Commercial
   
51,536,622
                         
Less: Allowance for loan losses
   
(1,748,783
)
                       
                                 
Total mortgage loans on real estate and construction loans held for investment
 
$
149,181,578
                         
                                 
Real estate held for investment - net of depreciation
 
$
145,165,921
                         
                                 
Policy loans and other investments are shown at amortized cost:
                               
Policy loans
 
$
6,694,148
                         
Insurance assignments
   
33,548,079
                         
Promissory notes
   
48,797
                         
Other investments
   
1,765,752
                         
Less: Allowance for doubtful accounts
   
(1,119,630
)
                       
                                 
Total policy loans and other investments
 
$
40,937,146
                         
                                 
Short-term investments at amortized cost
 
$
27,560,040
                         

12

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)
 
Fixed Maturity Securities

The following tables summarize unrealized losses on fixed maturity securities, which are carried at amortized cost, at June 30, 2017 and December 31, 2016. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:

   
Unrealized
Losses for
 Less than
Twelve
Months
   
Fair Value
   
Unrealized
 Losses for
 More than
Twelve
 Months
   
Fair Value
   
Total
 Unrealized
 Loss
   
Fair Value
 
At June 30, 2017
                                   
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
59,763
   
$
12,614,366
   
$
-
   
$
-
   
$
59,763
   
$
12,614,366
 
Obligations of states and political subdivisions
   
89,335
     
2,964,864
     
-
     
-
     
89,335
     
2,964,864
 
Corporate securities
   
696,803
     
19,580,014
     
1,473,519
     
11,365,599
     
2,170,322
     
30,945,613
 
Mortgage-backed securities
   
99,586
     
2,845,871
     
59,505
     
1,097,380
     
159,091
     
3,943,251
 
Total unrealized losses
 
$
945,487
   
$
38,005,115
   
$
1,533,024
   
$
12,462,979
   
$
2,478,511
   
$
50,468,094
 
                                                 
At December 31, 2016
                                               
U.S. Treasury Securities and Obligations of U.S. Government Agencies
 
$
66,111
   
$
1,342,088
   
$
-
   
$
-
   
$
66,111
   
$
1,342,088
 
Obligations of states and political subdivisions
   
133,249
     
3,686,856
     
-
     
-
     
133,249
     
3,686,856
 
Corporate securities
   
1,728,312
     
41,796,016
     
1,998,701
     
12,969,135
     
3,727,013
     
54,765,151
 
Mortgage-backed securities
   
176,715
     
4,176,089
     
104,156
     
940,278
     
280,871
     
5,116,367
 
Total unrealized losses
 
$
2,104,387
   
$
51,001,049
   
$
2,102,857
   
$
13,909,413
   
$
4,207,244
   
$
64,910,462
 

There were 151 securities with an average fair value of 95.3% of amortized cost at June 30, 2017. There were 250 securities with an average fair value of 93.9% of amortized cost at December 31, 2016. During the three months ended June 30, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $266,227 and $30,000, respectively, and for the six months ended June 30, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $318,366 and $60,000, respectively.

On a quarterly basis, the Company reviews its available for sale and held to maturity 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.
13

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)
   
The amortized cost and estimated fair value of fixed maturity securities at June 30, 2017, 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 2017
 
$
2,711,324
   
$
2,725,318
 
Due in 2018 through 2021
   
50,865,992
     
52,437,835
 
Due in 2022 through 2026
   
43,504,148
     
45,811,635
 
Due after 2026
   
84,891,096
     
92,714,795
 
Mortgage-backed securities
   
10,612,465
     
10,691,387
 
Redeemable preferred stock
   
623,635
     
663,473
 
Total held to maturity
 
$
193,208,660
   
$
205,044,443
 

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, 2017 and December 31, 2016. 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, 2017
                             
Industrial, miscellaneous and all other
 
$
175,601
     
137
   
$
683,771
     
84
   
$
859,372
 
Total unrealized losses
 
$
175,601
     
137
   
$
683,771
     
84
   
$
859,372
 
Fair Value
 
$
1,275,336
           
$
1,298,109
           
$
2,573,445
 
                                         
At December 31, 2016
                                       
Industrial, miscellaneous and all other
 
$
215,563
     
124
   
$
643,529
     
104
   
$
859,092
 
Total unrealized losses
 
$
215,563
     
124
   
$
643,529
     
104
   
$
859,092
 
Fair Value
 
$
2,063,144
           
$
1,685,874
           
$
3,749,018
 
 
The average fair value of the equity securities available for sale was 75.0% and 81.4% of the original investment as of June 30, 2017 and December 31, 2016, respectively. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security. During the three months ended June 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of no impairment loss on equity securities and for the six months ended June 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $-0- and $43,630, respectively.
14

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)

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

   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2017
   
2016
   
2017
   
2016
 
Fixed maturity securities held to maturity:
                       
Gross realized gains
 
$
50,987
   
$
194,456
   
$
53,422
   
$
194,456
 
Gross realized losses
   
(35,066
)
   
-
     
(35,066
)
   
(2,878
)
Other than temporary impairments
   
(266,227
)
   
(30,000
)
   
(318,366
)
   
(60,000
)
                                 
Equity securities available for sale:
                               
Gross realized gains
   
45,474
     
76,085
     
106,452
     
139,580
 
Gross realized losses
   
(53,881
)
   
(8,724
)
   
(58,437
)
   
(32,602
)
Other than temporary impairments
           
-
     
-
     
(43,630
)
                                 
Other assets:
                               
Gross realized gains
   
1,325,424
     
583,688
     
1,781,698
     
866,283
 
Gross realized losses
   
(445,536
)
   
(724,962
)
   
(815,337
)
   
(946,374
)
Total
 
$
621,175
   
$
90,543
   
$
714,366
   
$
114,835
 

The carrying amount of held to maturity securities sold was $255,509 and $1,789,159 for the six months ended June 30, 2017 and 2016, respectively.  The net realized gain related to these sales was $39,374 and $156,171 for the six months ended June 30, 2017 and 2016, respectively. Although the intent is to buy and hold a bond to maturity the Company will sell a bond prior to maturity if conditions have changed within the entity that issued the bond to increase the risk of default to an unacceptable level.
There were no investments, aggregated by issuer, in excess of 10% of shareholders' equity (before net unrealized gains and losses on available for sale equity securities) at June 30, 2017, other than investments issued or guaranteed by the United States Government.
15

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)

Major categories of net investment income are as follows:
   
Three Months Ended
June 30
   
Six Months Ended
June 30
 
   
2017
   
2016
   
2017
   
2016
 
Fixed maturity securities
 
$
2,433,404
   
$
2,011,637
   
$
4,792,364
   
$
4,062,206
 
Equity securities
   
68,868
     
59,252
     
133,403
     
130,293
 
Mortgage loans on real estate
   
2,128,345
     
2,295,531
     
4,340,521
     
4,306,506
 
Real estate
   
2,834,022
     
2,587,789
     
5,722,084
     
5,426,272
 
Policy loans
   
233,021
     
171,035
     
426,755
     
353,241
 
Insurance assignments
   
3,100,721
     
2,946,375
     
6,382,333
     
5,963,484
 
Other investments
   
12,448
     
13,962
     
19,990
     
13,962
 
Short-term investments,  principally interest on sale of mortgage loans and other
   
1,988,945
     
2,001,301
     
3,804,548
     
3,879,983
 
Gross investment income
   
12,799,774
     
12,086,882
     
25,621,998
     
24,135,947
 
Investment expenses
   
(3,052,299
)
   
(2,951,062
)
   
(6,311,241
)
   
(6,007,936
)
Net investment income
 
$
9,747,475
   
$
9,135,820
   
$
19,310,757
   
$
18,128,011
 
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $124,983 and $74,365 for the three months ended June 30, 2017 and 2016, respectively, and $240,485 and $162,341 for the six months ended June 30, 2017 and 2016, 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 $9,267,402 at June 30, 2017 and $9,269,121 at December 31, 2016. The restricted securities are included in various assets under investments on the accompanying condensed consolidated balance sheets.
Real Estate
The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development mortgage foreclosures.
16

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)   Investments (Continued)
 
Commercial Real Estate Held for Investment
The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company's goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors.
The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets.  The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies.
The Company currently owns and operates 12 commercial properties in 7 states. These properties include industrial warehouses, office buildings, retail centers, undeveloped land and includes the redevelopment and expansion of its corporate campus in Salt Lake City, Utah. The assets are primarily held without debt; however, the Company does use debt in strategic cases to leverage established yields or to acquire higher quality or different class of asset.
The following is a summary of the Company's investment in commercial real estate for the periods presented:
   
Net Ending Balance
     
Total Square Footage
 
   
June 30
     
December 31
     
June 30
   
December 31
 
   
2017
     
2016
     
2017
   
2016
 
Arizona
 
$
4,000
 
(1
)
 
$
450,538
 
(1
)
   
-
     
16,270
 
Arkansas
   
98,269
         
100,369
         
3,200
     
3,200
 
Kansas
   
12,101,659
         
12,450,297
         
222,679
     
222,679
 
Louisiana
   
505,948
         
518,700
         
7,063
     
7,063
 
Mississippi
   
3,771,725
         
3,818,985
         
33,821
     
33,821
 
New Mexico
   
7,000
 
(1
)
   
7,000
 
(1
)
   
-
     
-
 
Texas
   
3,744,730
         
3,734,974
         
23,470
     
23,470
 
Utah
   
59,851,183
 
(2
)
   
47,893,073
 
(2
)
   
433,244
     
433,244
 
                                         
   
$
80,084,514
       
$
68,973,936
         
723,477
     
739,747
 
                                         
                                         
(1) Includes undeveloped land
                             
                                         
(2) Includes 53rd Center completed in July 2017
                     

Residential Real Estate Held for Investment

The Company owns a portfolio of residential homes primarily as a result of loan foreclosures.  The strategy has been to lease these homes to produce cash flow, and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.
The Company established Security National Real Estate Services ("SNRE") to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country.
As of June 30, 2017, SNRE manages   112 residential properties in 9 states across the United States which includes a newly constructed apartment complex, Dry Creek at East Village, in Sandy Utah.
17

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)  Investments (Continued)
 
The following is a summary of the Company's investment in residential real estate for the periods presented:

   
Net Ending Balance
 
   
June 30
   
December 31
 
   
2017
   
2016
 
Arizona
 
$
534,381
   
$
742,259
 
California
   
5,621,924
     
5,848,389
 
Colorado
   
-
     
364,489
 
Florida
   
7,462,137
     
8,327,355
 
Hawaii
   
712,286
     
-
 
Ohio
   
46,658
     
46,658
 
Oklahoma
   
17,500
     
-
 
Texas
   
513,962
     
1,091,188
 
Utah
   
56,075,486
     
59,485,466
 
Washington
   
286,181
     
286,181
 
   
$
71,270,515
   
$
76,191,985
 

Real Estate Owned and Occupied by the Company

The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 80,000 square feet, or approximately 10% of the overall commercial real estate holdings.

As of June 30, 2017, real estate owned and occupied by the company is summarized as follows:

Location
Business Segment
 
Approximate
 Square
Footage
   
Square Footage Occupied by the Company
 
5300 South 360 West, Salt Lake City, UT (1)
Corporate Offices, Life Insurance and
     Cemetery/Mortuary Operations
   
36,000
     
100
%
5201 Green Street, Salt Lake City, UT
Mortgage Operations
   
36,899
     
34
%
1044 River Oaks Dr., Flowood, MS
Life Insurance Operations
   
5,522
     
27
%
                   
                   
(1) This asset is included in property and equipment on the Condensed Consolidated Balance Sheet
         


18

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017 (Unaudited)

3)  Investments (Continued)
 
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 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 June 30, 2017, the Company had 42%, 15%, 11%, 8%, 6%, 4% and 3% of its mortgage loans from borrowers located in the states of Utah, California, Texas, Florida, Arizona, Tennessee, and Nevada respectively. The mortgage loans on real estate balances on the Condensed Consolidated Balance Sheet are reflected net of an allowance for loan losses of $1,921,028 and $1,748,783 at June 30, 2017 and December 31, 2016, respectively.

The Company establishes a valuation allowance for credit losses in its portfolio.   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, 2017
                       
Allowance for credit losses:
                       
Beginning balance - January 1, 2017
 
$
187,129
   
$
1,461,540
   
$
100,114
   
$
1,748,783
 
   Charge-offs
   
-
     
(49,775
)
   
(64,894
)
   
(114,669
)
   Provision
   
-
     
286,914
     
-
     
286,914
 
Ending balance - June 30, 2017
 
$
187,129
   
$
1,698,679
   
$
35,220
   
$
1,921,028
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
397,938
   
$
-
   
$
397,938
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,300,741
   
$
35,220
   
$
1,523,090
 
                                 
Mortgage loans:
                               
Ending balance
 
$
39,763,788
   
$
63,031,000
   
$
34,512,524
   
$
137,307,312
 
                                 
Ending balance: individually evaluated for impairment
 
$
1,216,035
   
$
5,092,895
   
$
375,233
   
$
6,684,163
 
                                 
Ending balance: collectively evaluated for impairment
 
$
38,547,753
   
$
57,938,105
   
$
34,137,291
   
$
130,623,149
 
                                 
December 31, 2016
                               
Allowance for credit losses:
                               
Beginning balance - January 1, 2016
 
$
187,129
   
$
1,560,877
   
$
100,114
   
$
1,848,120
 
   Charge-offs
   
-
     
(420,135
)
   
-
     
(420,135
)
   Provision
   
-
     
320,798
     
-
     
320,798
 
Ending balance - December 31, 2016
 
$
187,129
   
$
1,461,540
   
$
100,114
   
$
1,748,783
 
                                 
Ending balance: individually evaluated for impairment
 
$
-
   
$
374,501
   
$
-
   
$
374,501
 
                                 
Ending balance: collectively evaluated for impairment
 
$
187,129
   
$
1,087,039
   
$
100,114
   
$
1,374,282
 
                                 
Mortgage loans:
                               
Ending balance
 
$
51,536,622
   
$
58,593,622
   
$
40,800,117
   
$
150,930,361
 
                                 
Ending balance: individually evaluated for impairment
 
$
202,992
   
$
2,916,538
   
$
64,895
   
$
3,184,425