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 September 30, 2008, 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)
 
 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 office)
              (Zip
      Code)Registrant’s
      telephone number, including area code:
              (801)
      264-1060
 
 Securities
registered pursuant to Section 12(b) of the Act:  None
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition
of  "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Securities Exchange Act of 1934.  (Check one)
 
 Large
accelerate filer  [   ]    
  Accelerated filer  [  
]       Non-accelerated filer [X]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934):YesNo  [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
                7,889,567Title
      of Class
                Number
      of Shares Outstanding as of October 31, 2008Class C Common Stock,
      $.20 par value
                8,488,529Title
      of Class
                Number
      of Shares Outstanding as of October 31,
2008
  1
  SECURITY NATIONAL FINANCIAL CORPORATION AND
SUBSIDIARIES
 FORM
10-Q
 
 QUARTER
ENDED SEPTEMBER 30, 2008
 
 TABLE
OF CONTENTS
 
 
 PART
I - FINANCIAL INFORMATION
  
 Item
      1.
              Financial
      Statements
              Page
      No.Condensed Consolidated Balance Sheets September 30, 2008 and
      December 31, 2007 (unaudited)
              3-4Condensed Consolidated Statements of Earnings for the Three
      and Nine Months ended September 30, 2008 and 2007
      (unaudited)
              5Condensed Consolidated Statements of Cash Flows for the Nine
      Months ended September 30, 2008 and 2007
      (unaudited)
              6Notes to Condensed Consolidated Financial Statements
      (unaudited)
              7-19Item
      2.
              Management’s Discussion and Analysis of Financial Condition
      and
      Results of Operations
              20-29Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              29Item
      4.
              Controls and Procedures
              29-30PART
      II - OTHER INFORMATIONOther Information
              30-36Signature Page
              37Certifications
              38-41
   2
  SECURITY NATIONAL FINANCIAL CORPORATION
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 September
      30,
              
              
              December
      31,Assets
              
              2008
              
              
              2007Investments:Fixed
      maturity securities, held to maturity, at amortized cost
              
              $
              124,180,615
              
              
              $
              116,896,016Fixed
      maturity securities, available for sale, at estimated fair
      value
              
              
              2,227,158
              
              
              
              2,880,920Equity
      securities, available for sale, at estimated fair value
              
              
              6,635,288
              
              
              
              5,900,292Mortgage
      loans on real estate and construction loans, held forinvestment net of allowances for losses of $3,683,000 and$1,435,000 for 2008 and 2007
              
              
              125,821,873
              
              
              
              92,884,055Real
      estate, net of accumulated depreciation
              
              
              18,337,954
              
              
              
              7,946,304Policy,
      student and other loans net, of allowancesfor doubtful accounts
              
              
              17,272,284
              
              
              
              16,860,874Short-term
      investments
              
              
              10,963,235
              
              
              
              5,337,367Accrued
      investment income
              
              
              3,322,180
              
              
              
              3,032,285Total
      investments
              
              
              308,760,587
              
              
              
              251,738,113Cash
      and cash equivalents
              
              
              21,267,896
              
              
              
              5,203,060Mortgage
      loans sold to investors
              
              
              15,470,067
              
              
              
              66,700,694Receivables,
      net
              
              
              15,065,747
              
              
              
              13,743,682Restricted
      assets of cemeteries and mortuaries
              
              
              5,966,453
              
              
              
              5,711,054Cemetery
      perpetual care trust investments
              
              
              1,736,228
              
              
              
              1,604,600Receivable
      from reinsurers
              
              
              825,094
              
              
              
              746,336Cemetery
      land and improvements
              
              
              10,498,961
              
              
              
              9,760,041Deferred
      policy and pre-need contract acquisition costs
              
              
              32,291,896
              
              
              
              30,786,229Property
      and equipment, net
              
              
              14,255,205
              
              
              
              14,828,699Value
      of business acquired
              
              
              11,461,933
              
              
              
              11,686,080Goodwill
              
              
              1,028,026
              
              
              
              1,075,039Other
              
              
              6,101,090
              
              
              
              4,579,018Total
      Assets
              
              $
              444,729,183
              
              
              $
              418,162,645
  See
accompanying notes to condensed consolidated financial statements.
   Return to Table of Contents
 3
  SECURITY
NATIONAL FINANCIAL CORPORATION
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
 (Unaudited)
 September
      30,
                
                
                December
      31,2008
                
                
                2007Liabilities
      and Stockholder's EquityLiabilitiesFuture
      life, annuity, and other benefits
                
                $
                324,942,122
                
                
                $
                296,068,767Unearned
      premium reserve
                
                
                4,952,393
                
                
                
                4,995,664Bank
      loans payable
                
                
                6,350,398
                
                
                
                12,552,666Notes
      and contracts payable
                
                
                495,616
                
                
                
                818,810Deferred
      pre-need cemetery and mortuary contract revenues
                
                
                13,264,513
                
                
                
                12,643,199Accounts
      payable
                
                
                1,781,212
                
                
                
                1,833,188Other
      liabilities and accrued expenses
                
                
                11,628,961
                
                
                
                14,812,845Income
      taxes
                
                
                18,637,659
                
                
                
                16,179,596Total
      liabilities
                
                
                382,052,874
                
                
                
                359,904,735Non-Controlling
      Interest in Perpetual Care Trusts
                
                
                2,616,879
                
                
                
                2,473,758Stockholders'
      EquityCommon
      Stock:Class
      A:  common stock, $2.00 par value; 20,000,000 sharesauthorized;
      issued and outstanding 7,889,567 shares in 2008and 7,885,268 shares in 2007
                
                
                15,779,134
                
                
                
                15,770,458Class
      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 and outstanding 8,488,529shares in 2008 and 8,530,699 in 2007
                
                
                1,697,706
                
                
                
                1,706,140Additional
      paid-in capital
                
                
                17,994,051
                
                
                
                17,737,172Accumulated
      other comprehensive income and other items, net of taxes
                
                
                2,683,625
                
                
                
                1,596,791Retained
      earnings
                
                
                23,811,753
                
                
                
                21,104,156Treasury
      stock at cost; 1,036,559 Class A shares in 2008 and1,104,484 Class A shares in 2007
                
                
                (1,906,839
                )
                
                
                (2,130,565
                )Total
      stockholders' equity
                
                
                60,059,430
                
                
                
                55,784,152Total
      Liability and Stockholders' Equity
                
                $
                444,729,183
                
                
                $
                418,162,645
 See
accompanying notes to condensed consolidated financial statements.
   Return to Table of Contents
 4
  SECURITY NATIONAL FINANCIAL CORPORATION
 AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
 (Unaudited)
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues:Insurance
      premiums and other considerations
              
              $
              9,327,250
              
              
              $
              8,426,016
              
              
              $
              27,177,782
              
              
              $
              24,294,625Net
      investment income
              
              
              6,792,171
              
              
              
              7,637,865
              
              
              
              21,544,753
              
              
              
              24,590,361Net
      mortuary and cemetery sales
              
              
              3,050,721
              
              
              
              3,212,772
              
              
              
              10,031,959
              
              
              
              10,157,891Realized
      gains (losses) on investments and other assets
              
              
              (1,106,721
              )
              
              
              2,053
              
              
              
              (1,066,552
              )
              
              
              738,721Mortgage
      fee income
              
              
              34,756,907
              
              
              
              31,998,895
              
              
              
              108,352,502
              
              
              
              94,600,013Other
              
              
              263,607
              
              
              
              386,340
              
              
              
              667,186
              
              
              
              644,370Total
      revenues
              
              
              53,083,935
              
              
              
              51,663,941
              
              
              
              166,707,630
              
              
              
              155,025,981Benefits
      and expensesDeath
      benefits
              
              
              4,074,703
              
              
              
              3,997,893
              
              
              
              13,212,689
              
              
              
              12,171,871Surrenders
      and other policy benefits
              
              
              736,180
              
              
              
              566,596
              
              
              
              1,708,325
              
              
              
              1,638,798Increase
      in future policy benefits
              
              
              3,498,771
              
              
              
              3,133,326
              
              
              
              10,262,028
              
              
              
              8,807,311Amortization
      of deferred policy and pre-needacquisition costs and value of business acquired
              
              
              1,951,322
              
              
              
              1,456,808
              
              
              
              4,364,305
              
              
              
              4,180,293Selling
      general and administrative expenses:Commissions
              
              
              24,595,430
              
              
              
              24,609,493
              
              
              
              74,258,401
              
              
              
              71,904,695Salaries
              
              
              6,637,600
              
              
              
              6,137,254
              
              
              
              19,553,038
              
              
              
              17,824,099Other
              
              
              10,169,344
              
              
              
              9,186,678
              
              
              
              31,447,104
              
              
              
              24,933,545Interest
      expense
              
              
              1,600,435
              
              
              
              3,075,886
              
              
              
              5,744,511
              
              
              
              10,333,211Cost
      of goods and services sold -mortuaries and cemeteries
              
              
              548,315
              
              
              
              637,520
              
              
              
              1,853,211
              
              
              
              1,952,443Total
      benefits and expenses
              
              
              53,812,100
              
              
              
              52,801,454
              
              
              
              162,403,612
              
              
              
              153,746,266Earning
      (loss) before income taxes
              
              
              (728,165
              )
              
              
              (1,137,513
              )
              
              
              4,304,018
              
              
              
              1,279,715Income
      tax expense
              
              
              (39,877
              )
              
              
              475,069
              
              
              
              (1,595,971
              )
              
              
              (166,590
              )Net
      earnings (loss)
              
              $
              (768,042
              )
              
              $
              (662,444
              )
              
              $
              2,708,047
              
              
              $
              1,113,125Net
      earnings (loss) per Class A Equivalent common
      share (1)
              
              $
              (0.10
              )
              
              $
              (0.09
              )
              
              $
              0.35
              
              
              $
              0.15Net
      earnings (loss) per Class A Equivalent common
      share-assuming dilution (1)
              
              $
              (0.10
              )
              
              $
              (0.09
              )
              
              $
              0.35
              
              
              $
              0.14Weighted-average
      Class A equivalent common share
      outstanding (1)
              
              
              7,690,891
              
              
              
              7,562,234
              
              
              
              7,669,045
              
              
              
              7,511,801Weighted-average
      Class A equivalent common shares
      outstanding assuming-dilution (1)
              
              
              7,690,891
              
              
              
              7,562,234
              
              
              
              7,695,642
              
              
              
              7,721,139




(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.





See
accompanying notes to condensed consolidated financial statements.







Return to Table of Contents
 5





SECURITY NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      Months Ended September 30,2008
            
            
            2007Cash
      flows from operating activities:Net
      cash provided by (used in) operating activities
            
            $
            41,185,519
            
            
            $
            (24,558,802
            )Cash
      flows from investing activities:Securities
      held to maturity:Purchase-fixed
      maturity securities
            
            
            (8,155,171
            )
            
            
            (3,741,486
            )Calls
      and maturities - fixed maturity securities
            
            
            20,187,994
            
            
            
            6,391,892Securities
      available for sale:Purchase-fixed
      maturity securities
            
            
            (22,034
            )
            
            
            (102,849
            )Sales-equity
      securities
            
            
            340,654
            
            
            
            823,063Purchase
      of short-term investments
            
            
            (23,801,291
            )
            
            
            (12,570,340
            )Sales
      of short-term investments
            
            
            20,584,952
            
            
            
            10,699,420Purchase
      of restricted assets
            
            
            (319,336
            )
            
            
            (183,448
            )Changes
      in assets for perpetual care trusts
            
            
            (222,825
            )
            
            
            (145,930
            )Amount
      received for perpetual care trusts
            
            
            143,121
            
            
            
            87,919Mortgage,
      policy, and other loans made
            
            
            (50,018,619
            )
            
            
            (59,027,000
            )Payments
      received for mortgage, policy and other loans
            
            
            27,749,754
            
            
            
            57,240,984Purchase
      of property and equipment
            
            
            (1,054,491
            )
            
            
            (2,486,470
            )Disposal
      of property and equipment
            
            
            81,352
            
            
            
            730,542Purchase
      of real estate
            
            
            -
            
            
            
            (1,223,983
            )Reinsurance
      agreement - SSLIC - Mississippi
            
            
            (1,500,000
            )
            
            
            -Purchase
      of subsidiary
            
            
            -
            
            
            
            (27,971
            )Sale
      of real estate
            
            
            731,596
            
            
            
            1,335,183Net
      cash used in investing activities
            
            
            (15,274,344
            )
            
            
            (2,200,474
            )Cash
      flows from financing activities:Annuity
      contract receipts
            
            
            8,657,859
            
            
            
            4,554,778Annuity
      contract withdrawals
            
            
            (12,411,521
            )
            
            
            (9,755,104
            )Stock
      options excercised
            
            
            242,344
            
            
            
            -Sale
      of treasury stock
            
            
            217,934
            
            
            
            469,901Repayment
      of bank loans on notes and contracts
            
            
            (10,601,015
            )
            
            
            (2,504,778
            )Proceeds
      from borrowing on bank loans
            
            
            4,048,060
            
            
            
            30,506,853Net
      cash used in financing activities
            
            
            (9,846,339
            )
            
            
            23,271,650Net
      cash in cash and cash equivalents
            
            
            16,064,836
            
            
            
            (3,487,626
            )Cash
      and cash equivalents at beginning of period
            
            
            5,203,060
            
            
            
            10,376,585Cash
      and cash equivalents at end of period
            
            $
            21,267,896
            
            
            $
            6,888,959Non
      Cash Investing and Financing Activities:Mortgage
      loans sold to investors reclassified asmortgage loans on real estate and constructionloans, held for investment
            
            $
            24,740,179
            
            
            $
            -




See
accompanying notes to condensed consolidated financial statements.







Return to Table of Contents
 6




SECURITY NATIONAL FINANCIAL CORPORATION AND
SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





1.       Basis of
Presentation





The
accompanying unaudited 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, 2007, included in the Company’s Annual Report on Form 10-K (file
number 0-9341). 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 three and nine months ended September
30, 2008 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2008.





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.





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 and construction loans
held for investment, 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 fairly stated in all material
respects.





Certain
2007 amounts have been reclassified to bring them into conformity with the 2008
presentation.





2.   
   Recent Accounting
Pronouncements





In
December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 141(R), Business
Combinations, and SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements. SFAS No. 141(R) requires an acquirer
to measure the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net identifiable assets
acquired. SAFS No. 160 clarifies that a non-controlling interest in a subsidiary
should be reported as equity in the consolidated financial statements,
consolidated net income should be adjusted to include the net income attributed
to the non-controlling interest and consolidated comprehensive income shall be
adjusted to include the comprehensive income attributed to the non-controlling
interest. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 are
effective for financial statements issued for fiscal years beginning after
December 15, 2008. Early adoption is prohibited. The Company has not yet
determined the effect on our consolidated financial statements upon adoption of
SFAS No. 141(R) or SFAS No. 160.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 amends SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities to require enhanced
disclosures concerning the manner in which an entity uses derivatives (and the
reasons it uses them),  the manner in which derivatives and related
hedged items are accounted for under SFAS No. 133 and interpretations thereof,
and the effects that derivatives and related hedged items have on an entity's
financial position, financial performance, and cash flows.  SFAS No.
161 is effective for financial statements of fiscal years and interim periods
beginning after November 15, 2008.  The Company has not yet determined
the effects on its consolidated financial statements, if any, that may result
upon the adoption of SFAS 161.





Return to Table of Contents
 7





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





2.     
 Recent
Accounting Pronouncements (Continued)





During
2008, the Company determined not to elect the fair value option under SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities, and continues to record
unrealized gains and losses in accumulated other comprehensive
income.





3.       Comprehensive
Income





For the
three months ended September 30, 2008 and 2007, total comprehensive income
(loss) amounted to $264,000 and ($1,380,000), respectively. This increase of
$1,644,000 was primarily the result of a decrease in net income of $106,000, an
increase in derivatives of $2,460,000, and a decrease in unrealized gains in
securities available for sale of $710,000.





For the
nine months ended September 30, 2008 and 2007, total comprehensive income
amounted to $3,795,000 and $1,061,000, respectively. This increase of $2,734,000
was primarily the result of an increase in net income of $1,595,000, an increase
in derivatives of $2,825,000, and a decrease in unrealized gains in securities
available for sale of $1,686,000.





4.       Stock-Based
Compensation





The
Company has four fixed option plans (the “1993 Plan,” the “2000 Plan”, the “2003
Plan” and the “2006 Plan”). Compensation cost of $115,763 and $-0- has been
recognized for these plans for the quarters ended September 30, 2008 and 2007,
respectively.  Compensation cost of $233,876 and $-0- has been
recognized for these plans for nine months ended September 30, 2008 and 2007,
respectively.





Options
to purchase 211,000 shares of the Company’s common stock were granted March 31,
2008.  The fair value relating to stock-based compensation is $453,650
and will be expensed as options become available to exercise at the rate of 25%
at the end of each quarter over the twelve months ended March 31,
2009.





The
weighted-average fair value of each option granted during the nine months ended
September 30, 2008 under the 2003 Plan and 2006 Plan is estimated at $2.15 per
share as of the grant date using the Black-Scholes Option Pricing Model with the
following assumptions: dividend yield of 5%, volatility of 40%, risk-free
interest 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.




Return to Table of Contents
 8





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





5.       Earnings Per
Share





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


Three
      Months Ended September 30,2008
              
              
              2007Numerator:Net
      loss
              
              $
              (768,042
              )
              
              $
              (662,444
              )Denominator:Basic
      weighted-average shares outstanding
              
              
              7,690,891
              
              
              
              7,562,234Effect
      of dilutive securities:Employee
      stock options
              
              
              -
              
              
              
              -Employee
      deferred compensation rights
              
              
              -
              
              
              
              -Dilutive
      potential common shares
              
              
              -
              
              
              
              -Diluted
      weighted-average shares outstanding
              
              
              7,690,891
              
              
              
              7,562,234Basic
      loss per share
              
              $
              (0.10
              )
              
              $
              (0.09
              )Diluted
      loss per share
              
              $
              (0.10
              )
              
              $
              (0.09
              )
  Earnings
per share amounts have been adjusted for the effect of annual stock
dividends.




Nine
      Months Ended September 30,2008
              
              
              2007Numerator:Net
      earnings
              
              $
              2,708,047
              
              
              $
              1,113,125Denominator:Basic
      weighted-average shares outstanding
              
              
              7,669,045
              
              
              
              7,511,801Effect
      of dilutive securities:Employee
      stock options
              
              
              26,597
              
              
              
              174,856Employee
      deferred compensation rights
              
              
              -
              
              
              
              34,482Dilutive
      potential common shares
              
              
              26,597
              
              
              
              209,338Diluted
      weighted-average shares outstanding
              
              
              7,695,642
              
              
              
              7,721,139Basic
      earnings per share
              
              $
              0.35
              
              
              $
              0.15Diluted
      earnings per share
              
              $
              0.35
              
              
              $
              0.14
  Earnings
per share amounts have been adjusted for the effect of annual stock
dividends.





Return to Table of Contents
 9





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





6.        Business
Segment





Cemetery/
            
            
            
            
            
            ReconcilingLife
      Insurance
            
            
            Mortuary
            
            
            Mortgage
            
            
            Items
            
            
            ConsolidatedFor the Three Months Ended September 30,
      2008Revenues
      fromexternal customers
            
            $
            12,098,925
            
            
            $
            3,298,469
            
            
            $
            37,686,541
            
            
            $
            -
            
            
            $
            53,083,935Intersegment
      revenues
            
            
            1,417,423
            
            
            
            23,001
            
            
            
            92,090
            
            
            
            (1,532,514
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            (1,008,033
            )
            
            
            (147,673
            )
            
            
            427,541
            
            
            
            -
            
            
            
            (728,165
            )For the Three Months Ended September 30,
      2007Revenues
      fromexternal customers
            
            $
            11,796,377
            
            
            $
            3,696,222
            
            
            $
            36,171,342
            
            
            $
            -
            
            
            $
            51,663,941Intersegment
      revenues
            
            
            2,189,160
            
            
            
            23,001
            
            
            
            120,753
            
            
            
            (2,332,914
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            974,792
            
            
            
            267,801
            
            
            
            (2,380,106
            )
            
            
            -
            
            
            
            (1,137,513
            )For the Nine Months Ended September 30,
      2008Revenues
      fromexternal customers
            
            $
            38,043,667
            
            
            $
            10,891,254
            
            
            $
            117,772,709
            
            
            $
            -
            
            
            $
            166,707,630Intersegment
      revenues
            
            
            4,395,247
            
            
            
            69,003
            
            
            
            281,277
            
            
            
            (4,745,527
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            (45,680
            )
            
            
            216,435
            
            
            
            4,133,263
            
            
            
            -
            
            
            
            4,304,018Identifiable
      Assets
            
            
            419,417,351
            
            
            
            63,894,447
            
            
            
            28,607,260
            
            
            
            (67,189,875
            )
            
            
            444,729,183For the Nine Months Ended September 30,
      2007Revenues
      fromexternal customers
            
            $
            35,023,638
            
            
            $
            11,823,233
            
            
            $
            108,179,110
            
            
            $
            -
            
            
            $
            155,025,981Intersegment
      revenues
            
            
            5,294,222
            
            
            
            69,003
            
            
            
            363,097
            
            
            
            (5,726,322
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            2,619,906
            
            
            
            1,286,531
            
            
            
            (2,626,722
            )
            
            
            -
            
            
            
            1,279,715Identifiable
      Assets
            
            
            393,303,995
            
            
            
            60,185,223
            
            
            
            20,647,581
            
            
            
            (60,542,681
            )
            
            
            413,594,118




Return to Table of Contents
 10




SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008, (Unaudited)








7.   
   Fair
Value of Financial Assets and Financial Liabilities





Financial
Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements(“SFAS No. 157”) is effective for fiscal years beginning after
November 15, 2007. The Company adopted the provisions of SFAS No. 157
as of January 1, 2008 for financial assets and financial liabilities that
are measured at fair value. SFAS No. 157:




·
            Defines
      fair value as the price that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market participants
      at the measurement date, and establishes a framework for measuring fair
      value;





·
            Establishes
      a three-level hierarchy for fair value measurements based upon the
      transparency of inputs to the valuation as of the measurement
      date;





·
            Expands
      disclosures about financial instruments measured at fair
      value.





Financial
assets and financial liabilities recorded on the Condensed Consolidated Balance
Sheet at fair value are categorized based on the reliability of inputs to the
valuation techniques as follows:










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; orc)
            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.




The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities by their classification in the Condensed Consolidated Statement of
Balance Sheet at September 30, 2008.




Return to Table of Contents
 11





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





7.    
  Fair Value
of Financial Assets and FinancialLiabilities
(Continued)





Valued
      at
            
            
            Balance
      as ofamortized
            
            
            September
      30,Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            cost
            
            
            2008Financial
      AssetsFixed
      maturity securities
            
            $
            2,227,158
            
            
            $
            -
            
            
            $
            738,502
            
            
            $
            123,442,113
            
            
            $
            126,407,773Equity
      securities
            
            
            6,635,288
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,635,288Mortgage
      loans or realestate and constructionloans, held for investment
            
            
            -
            
            
            
            -
            
            
            
            7,978,550
            
            
            
            117,843,323
            
            
            
            125,821,873Short-term
      investments
            
            
            10,963,235
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,963,235Total
      Investment in Financial Assets
            
            
            19,825,681
            
            
            
            -
            
            
            
            8,717,052
            
            
            
            241,285,436
            
            
            
            269,828,169Mortgage
      loans sold toinvestors
            
            
            -
            
            
            
            -
            
            
            
            17,334,355
            
            
            
            -
            
            
            
            17,334,355Other
      assets
            
            
            -
            
            
            
            -
            
            
            
            4,461,885
            
            
            
            1,639,205
            
            
            
            6,101,090Total
      Financial Assets
            
            $
            19,825,681
            
            
            $
            -
            
            
            $
            30,513,292
            
            
            $
            242,924,641
            
            
            $
            293,263,614Financial
      LiabilitiesOther
      liabilities
            
            $
            -
            
            
            $
            -
            
            
            $
            (358,809
            )
            
            $
            (11,270,152
            )
            
            $
            (11,628,961
            )Total
      Financial Liabilities
            
            $
            -
            
            
            $
            -
            
            
            $
            (358,809
            )
            
            $
            (11,270,152
            )
            
            $
            (11,628,961
            )





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




MortgageFixed
              
              
              
              
              
              LoansMaturity
              
              
              Mortgage
              
              
              Sold
      to
              
              
              Other
              
              
              OtherSecurities
              
              
              Loans
              
              
              Investors
              
              
              Assets
              
              
              LiabilitiesBalance
      - December 31, 2007
              
              $
              1,473,154
              
              
              $
              4,152,985
              
              
              $
              66,700,694
              
              
              $
              2,809,225
              
              
              $
              (2,182,109
              )Total
      Gains (Losses):Included
      in earnings
              
              
              (734,652
              )
              
              
              (2,248,311
              )
              
              
              -
              
              
              
              -
              
              
              
              -Included
      in other comprehensive
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,652,660
              
              
              
              1,823,300Purchases,
      issuances, and settlements
              
              
              -
              
              
              
              6,073,876
              
              
              
              (24,626,160
              )
              
              
              -
              
              
              
              -Transfers
              
              
              
              
              
              
              -
              
              
              
              (24,740,179
              )
              
              
              -
              
              
              
              -Balance
      - September 30, 2008
              
              $
              738,502
              
              
              $
              7,978,550
              
              
              $
              17,334,355
              
              
              $
              4,461,885
              
              
              $
              (358,809
              )


Return to Table of Contents
 12





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





7.    
  Fair Value
of Financial Assets and FinancialLiabilities
(Continued)





The items
shown under level one are valued as follows:





On a
quarterly basis, the Company reviews its 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, price earnings ratios 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.





Mortgage
backed securities are included in investments in fixed maturity securities,
typically held to maturity, and carried at amortized cost in the balance sheet.
Because the investments are to be held to maturity, the investments are only
written down to their fair value if the investments have a rating of as low as
six by the National Association of Insurance Commissioners (NAIC), which rating
is equivalent to a C or lower rating by Moody’s or Standard &
Poor’s.





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 three are valued as follows:





Mortgage loans on real
estate and construction loans are carried at unpaid principal balances,
adjusted for amortization of premium or accretion of discount, less allowances
for possible losses.





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 will be able to carry the foreclosed
property in Security National Life and SecurityNational Mortgage , its life and
mortgage subsidiaries, and will rent the properties until it is feasible to
sell.  The Company is currently able to rent properties for a 5.5%
return.





Commercial
mortgage loans and residential construction loans that are originated and held
for investment are 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.




As of
September 30, 2008, the Company's long term mortgage
loan portfolio had $27,589,000 in unpaid principal with delinquencies
of more than 90 days.  Of this amount $22,331,000 was in foreclosure
proceedings.  The Company has not received any interest income on
the $27,589,000 in mortgage loans with delinquencies of more than 90
days.  During the nine months ending September 30, 2008, the Company
increased its allowance for mortgage loan losses by $2,248,000, which was
charged to loan loss expense and included in other general and administrative
expenses for the period.  The allowance for mortgage loan losses as of
September 30, 2008 was $3,683,000.





Return to Table of Contents
 13





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





Also at
September 30, 2008, the Company had foreclosed on $11,514,000 in long term
mortgage loans.  The foreclosed property was shown in real
estate.  The Company will be able to carry the foreclosed property in
Security National Life and SecurityNational Mortgage, its life and mortgage
subsidiaries, and will rent the properties until it is feasible to
sell.





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.





For
long-term residential mortgages originated and sold to third-party investors,
mortgage fee income and related expenses are recognized when such loans are
sold.





In
addition to the allowance for mortgage loan losses, the Company also accrues a
monthly allowance for indemnification losses to investors of 17.5 basis points
of total production.  The amount accrued for the nine months ended
September 30, 2008 was $4,829,000 and included in other general and
administrative expenses.  The reserve for indemnification losses is
included in other liabilities and, as of September 30, 2008, the balance was
$1,734,000.





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.  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.





The
Company, through its wholly owned subsidiary, SecurityNational Mortgage Company
(“SecurityNational Mortgage”), has entered into loan purchase agreements with
non affiliated warehouse banks.  The total amount available under
these loan purchase agreements is $400,000,000.  The terms of the loan
purchase agreements are typically for one year, with interest rates ranging from
1.5% to 2.25% over the 30 day LIBOR rate (5.48% to 6.23% as of September 30,
2008).  SecurityNational Mortgage is currently in the process of
renewing one of its loan purchase agreements that expired on September 30,
2008.  SecurityNational Mortgage has received a 90 day extension
through the end of the year 2008.  The other loan purchase agreement
is a non-committed line with no expiration date.





Other assets and other
liabilities, derivative loan commitments.  During 2005, the
Company’s mortgage banking activities implemented new practices relating to
mortgage loan commitments, including interest rate lock commitments and forward
commitments to sell loans to third-party investors. The Company also implemented
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 derivatives under Statement of Financial Accounting Standards No. 133 (“SFAS
133”), Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 149 (“SFAS 149”), Amendment of Statement
133 on Derivative Instruments and Hedging Activities 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.





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
mortgage  loan commitment is made until the loan commitment is
exercised at the time the loan is closed and funded. Managing price risk is
complicated by the fact that the ultimate percentage of mortgage 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 commitments. However, many borrowers continue to exercise
mortgage loan commitments even when interest rates have fallen.





Return to Table of Contents
 14





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





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
observed data that takes 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. Once
a loan is closed, it is classified as a receivable- mortgage loans sold to
investors.





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. Management
expects these derivatives will experience changes in fair value opposite to
changes in fair value of the mortgage loan commitments, thereby reducing
earnings volatility related to the recognition in earnings of changes in the
values of these commitments. Forward commitments and best effort locks protect
the Company from losses on sales of the loans arising from the exercise of the
loan commitments by securing the ultimate sales price and delivery date of the
loans. For mortgage loan commitments not protected by a forward commitment or
best effort locks, the instruments used to economically hedge the fair value of
the mortgage loan commitments include other freestanding derivatives such as
mortgage backed securities, options and U.S. Treasury futures. The Company takes
into account various factors and strategies in determining the portion of the
mortgage loan commitments it wants to hedge economically.





Return to Table of Contents
 15





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





8.     
 Other Business
Activity





On
December 29, 2006, the Company, through its wholly owned subsidiary, Security
National Life Insurance Company (“Security National Life”), entered into an
agreement to sell Southern Security Life Insurance Company (“Southern Security
Life”) to American Network Insurance Company, a Pennsylvania corporation and
wholly owned subsidiary of Penn Treaty America Corporation, a Pennsylvania
corporation. The transaction was subject to and conditioned upon the subsequent
approval of the transaction by the Florida Office of Insurance Regulation, the
Florida Department of Financial Services, and the Pennsylvania Department of
Insurance by an agreed upon date.





The
transaction to sell Southern Security Life was rescinded because the regulatory
authorities did not approve the transaction as required. As a result of the
rescission of the transaction, Articles of Dissolution of Security National Life
were filed with the Florida Division of Corporations on December 24, 2007. The
filing of the Articles of Dissolution completed the liquidation of Southern
Security Life in accordance with the terms of the Agreement and Plan of Complete
Liquidation of Southern Security Life into Security National Life, which had
been approved on December 12, 2005.





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 being 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.





Return to Table of Contents
 16





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





8.
            Other Business
      Activity (Continued)





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 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.





In
September 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 September 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.  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.  The reduction of the 2007 gain by $65,000
was recorded as a loss in 2008.





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.





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.





$2,100,000
of funds were held in escrow by the Company’s law firm and have been included in
the accompanying consolidated balance sheet at December 31, 2007 in receivables
with the $1,966,760 liability payable to the shareholders included in other
liabilities and accrued expenses.




Return to Table of Contents
 17





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





8.     
       Other
      Business Activity
(Continued)





On August
13, 2008, the Company, through its wholly owned subsidiary, Security National
Life Insurance Company (“Security National Life”), entered into a stock purchase
agreement (the "Stock Purchase Agreement") 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, Security National Life agrees to pay to the shareholders of
Southern Security purchase consideration equal to the capital and surplus of
Southern Security as of the date that Security National Life assumed
administrative control over Southern Security, which was on September 1, 2008,
plusthe interest
maintenance reserve and the asset valuation reserve of Southern Security as of
the administrative control date, plusan allowance
not to exceed $100,000 for the actual losses experienced by Southern Security in
the second quarter ended June 30, 2008, lesscertain
adjustments.





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.





As
adjustments to the purchase consideration, the shareholders of Southern Security
agree at closing to deposit $175,000 of the purchase consideration into an
interest bearing escrow account to pay the amount of any adjustments required
under the terms of the agreement.  The shareholders additionally agree
to deposit $537,000 of the purchase consideration into an interest bearing
escrow account, representing about 50% of the total outstanding balances on two
loans that Southern Security had made in the form of promissory notes, which
notes are secured by funeral home properties in Senatobia, Mississippi and
Collins, Mississippi.  The escrow agent will be instructed to release
to the shareholders on a pro rata basis an amount equal to the combined
principal reduction of the promissory notes that has occurred during the
preceding August 1 through July 31 period, until such time as the $537,000
deposit, including any accrued interest, has been paid to the
shareholders.  However, no payments will be made to the shareholders
from the deposit if either of the notes is in default.





As
further adjustments, Southern Security agrees to transfer its interest in a
certain trust, known as the Nowell Legacy Trust, to the shareholders at closing
and the purchase consideration to be paid to the shareholders will be reduced by
the admitted value of the trust as reflected in the financial statements of
Southern Security on September 1, 2008, the date that Security National Life
assumed administrative control over Southern Security under the terms of the
Stock Purchase Agreement.  Finally, the shareholders have represented
in the Stock Purchase Agreement that the properties shown on the annual
statement are owned free and clear of any liens and encumbrances and that the
loans disclosed in the annual statement conform with the rules and regulations
in Mississippi for admissibility.  The purchase consideration will be
adjusted to the extent that the shareholder representations are not completely
accurate.





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.





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 18





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2008 (Unaudited)





Administrative
control over the insurance related operations of Southern Security is to include
control over day–to-day business expenses, trade, debt, locations of business
operations, employees, employee compensation, compensation to offices and
directors, cash flow, deposits and bank accounts.  Upon assuming
administrative control, Security National Life will be given access to the
records, files and computer systems of Southern Security and will have the right
to transfer or move such records, files and computer systems to other offices
and locations in which Security National transacts business.  Security
National Life notified Southern Security in writing that it would assume
administrative control over the insurance related operations of Southern
Security as of 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 was 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.  It is estimated that 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 Securities, LLC
of Oxford, Mississippi, as custodian for Security National Life pursuant to the
Reinsurance Agreement and the Custodial Agreement among Southern Security,
Security National Life, and Wachovia Securities, LLC.  Following the
completion of the stock purchase transaction, Southern Security will continue to
sell and service life insurance, annuity products, and funeral plan
insurance.





Security
National Life anticipates completing the stock purchase transaction within seven
days from the date the required regulatory approvals are
obtained.  The obligations of Security National Life and Southern
Security to complete the transaction are contingent upon satisfaction of the
following conditions: (i) a complete and satisfactory review by Security
National Life of the books, records and business of Southern Security; and (ii)
approval of the transaction by any regulatory authorities having jurisdiction
over Security National Life and Southern Security, including the insurance
departments of the states of Mississippi and Utah.





The
following unaudited pro forma information has been prepared to present the
results of operations of the Company assuming the acquisitions of C & J
Financial and Capital Reserve Life 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 that date and may not reflect the
operations that will occur in the future:




Unaudited
      Pro FormaThree
      Months Ended
              
              
              Nine
      Months endedSeptember
      30, 2007
              
              
              September
      30, 2007Total
      revenues
              
              $
              52,332,000
              
              
              $
              157,678,000Net
      earnings
              
              $
              (620,000
              )
              
              $
              1,401,000Net
      earnings per Class A equivalent common share
              
              $
              (0.08
              )
              
              $
              0.19Net
      earnings per Class A equivalent common shareassuming dilution
              
              $
              (0.08
              )
              
              $
              0.18


Return to Table of Contents
 19





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





Overview





The
Company’s operations over the last several years generally reflect three trends
or events which the Company expects to continue:  (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 lower interest rates by originating
and refinancing mortgage loans.





Mortgage
Operations





During
the three and nine months ended September 30, 2008, SecurityNational Mortgage
experienced an increase in revenues and expenses due to the increase in
mortgage loan revenue.  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
independent brokers and correspondents. 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 correspondents a commission for loans that are
brokered through SecurityNational Mortgage.  For the nine months ended
September 30, 2008 and 2007, SecurityNational Mortgage originated and sold
14,409 loans ($2,758,592,000 total volume) and 15,843 loans ($2,932,656,000
total volume), respectively.





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 the Company’s
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 to certain third party investors that experienced financial
difficulties and were not able to settle the loans.  The total amount
of these loans was $36,291,000, of which $14,727,000 were in Alt A
loans.  Due to these changes in circumstances, the Company regained
control of the mortgages and, in accordance with SFAS No. 140, accounted for the
loans retained in the same manner as a purchase of the 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, and the fair
value of the loans was determined to be the unpaid principal balances adjusted
for chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans.  The financial statements reflect the
transfer of the mortgage loans from “Mortgage Loans Sold to Investors” to
“Mortgage Loans on Real Estate” during June 2008.  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.  The Company will service these loans through Security National
Life, its life insurance subsidiary.





The
Company expects further significant industry challenges to continue through the
remainder of 2008 and into 2009.  Under these circumstances it is
difficult to predict profitability, if any.  Profitability may be
impacted by volume reduction, changes in margins, increased borrowing costs, and
future loan losses.  Management has taken, and will continue to take,
a number of actions in response to the changing market
conditions.  These include eliminating high risk products,
modifying underwriting guidelines, closing unprofitable branch offices,
obtaining new warehousing agreements at lower interest rates, and implementing
expense reduction initiatives.




Return to Table of Contents
 20





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 will be able to carry the foreclosed
property in Security National Life and SecurityNational Mortgage , its life and
mortgage subsidiaries, and will rent the properties until it is feasible to
sell.  The Company is currently able to rent properties for a 5.5%
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 loan duration 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.  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.





As of
September 30, 2008, the Company's long term mortgage portfolio had
$27,589,000 in unpaid principal with delinquencies more than 90
days.  Of this amount $22,331,000 was in foreclosure
proceedings.  The Company has not received any interest income on the
$27,589,000 in mortgage loans with delinquencies of more than 90
days.  During the nine months ending September 30, 2008, the Company
increased its allowance for mortgage losses by $2,248,000, which was charged to
loan loss expense and included in other general and administrative expenses for
the period.  The allowance for mortgage loan losses as of September
30, 2008 was $3,683,000.





Also at
September 30, 2008, the Company has foreclosed on $11,514,000 in long term
mortgage loans.  The foreclosed property was shown in real
estate.  The Company will be able to carry the foreclosed property in
Security National Life and SecurityNational Mortgage, its life and mortgage
subsidiaries, and will rent the properties until it is feasible to
sell.





In
addition to the allowance for mortgage loans losses, the Company also accrues a
monthly allowance for indemnification losses to investors of 17.5 basis points
of total production.  The amount accrued for the nine months ended
September 30, 2008 was $4,829,000 and included in other general and
administrative expenses.  The reserve for indemnification losses is
included in other liabilities and as of September 30, 2008 the balance was
$1,734,000.





SecurityNational
Mortgage has loan purchase agreements with unaffiliated warehouse
banks.  The total amount available under these loan purchase
agreements is $400,000,000.  The terms of the loan purchase agreements
are typically for one year, with interest rates ranging from 1.5% to 2.25% over
the 30 days LIBOR rate (5.48% to 6.23% as of September 30,
2008).  SecurityNational Mortgage is currently in the process of
renewing one of its loan purchase agreements that expired on September 30,
2008.  SecurityNational Mortgage has received a 90 day extension
through the end of the year 2008.  The other loan purchase agreements
is a non-committed line with no expiration date.





Results
of Operations





Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007





Total
revenues increased by $1,420,000, or 2.7%, to $53,084,000 for the three months
ended September 30, 2008, from $51,664,000 for the three months ended September
30, 2007.  Contributing to this increase in total revenues was a
$2,758,000 increase in mortgage fee income, a $901,000 increase in insurance
premiums and other considerations.  This increase in total revenues
was partially offset by a $846,000 decrease in investment income, a $162,000
decrease in net mortuary and cemetery sales, a $1,109,000 decrease in realized
gains (losses) on investments and other assets, and a $122,000 decrease in other
revenues.





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 21





Insurance
premiums and other considerations increased by $901,000, or 10.7%, to $9,327,000
for the three months ended September 30, 2008, from $8,426,000 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 on September 1,
2008.





Net
investment income decreased by $846,000, or 11.1%, to $6,792,000 for the three
months ended September 30, 2008, from $7,638,000 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.





Net
mortuary and cemetery sales decreased by $162,000, or 5.0%, to $3,051,000 for
the three months ended September 30, 2008, from $3,213,000 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 and (losses) on investments and other assets decreased by $1,109,000 to a
$1,107,000 realized loss for the three months ended September 30, 2008, from a
$2,000 realized gain for the comparable period in 2007.  This increase
in realized losses on investments was due to $739,000 in realized losses from
fixed maturity securities impairments and $303,000 in realized losses from
equity securities impairments.  During 2007 there was a net gain of
$516,000 from the sale of Colonial Funeral Home, which was partially offset by a
loss of $65,000 on the foreclosure and subsequent sale of the funeral home in
the third quarter of 2008.





Mortgage
fee income increased by $2,758,000, or 8.6%, to $34,757,000 for the three months
ended September 30, 2008, from $31,999,000 for the comparable period in
2007.  This increase was primarily attributable to an increase in loan
fees charged to originate loans, and secondary gain during the third quarter of
2008 on loan production at existing offices.





Other
revenues decreased by $122,000, or 31.8%, to $264,000 for the three months ended
September 30, 2008 from $386,000 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 $53,812,000, or 101.4% of total revenues, for the
three months ended September 30, 2008, as compared to $52,801,000, or 102.2% of
total revenues, for the comparable period in 2007.  These ratios
exceeded revenues primarily due to increased loan costs at SecurityNational
Mortgage Company and increases in the loan loss reserve and loan allowance
balances in 2007 and impairment losses in securities in 2008.





Death
benefits, surrenders and other policy benefits, and increase in future policy
benefits increased by an aggregate of $612,000, or 8.0%, to $8,310,000 for the
three months ended September 30, 2008, from $7,698,000 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 on September
1, 2008.





Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $495,000, or 34.0%, to $1,952,000 for the three months ended
September 30, 2008, from $1,457,000 for the comparable period in 2007. This
increase was primarily due to an increase in new business and higher
terminations from the previous year.





General
and administrative expenses increased by $1,469,000, or 3.7%, to $41,402,000 for
the three months ended September 30, 2008, from $39,933,000 for the comparable
period in 2007.  Salaries increased by $500,000 from $6,138,000 in
2007 to $6,638,000 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 $983,000 from $9,186,000 in 2007 to $10,169,000 in 2008.  The
increase in other expenses primarily resulted from increased costs at
SecurityNational Mortgage Company and increases in the loan reserve and loan
allowances balance.  This increase was partially offset by a decrease
in commission expenses of $14,000, from $24,609,000 in the third quarter of 2007
to $24,595,000 in the third quarter of 2008, due to decreased mortgage loan
origination costs made by SecurityNational Mortgage which were partially offset
by increased life insurance sales during the third quarter of 2008.




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 22





Interest
expense decreased by $1,476,000, or 48.0%, to $1,600,000 for the three months
ended September 30, 2008, from $3,076,000 for the comparable period in
2007.  This reduction was primarily due to decreased warehouse lines
of credit required for a reduced number of warehoused mortgage loans by
SecurityNational Mortgage.





Cost of
goods and services sold of the mortuaries and cemeteries decreased by $89,000,
or 14.0%, to $548,000 for the three months ended September 30, 2008, from
$637,000 for the comparable period in 2007.  This increase was
primarily due to decreased at-need cemetery sales and mortuary
sales.





Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007





Total
revenues increased by $11,682,000, or 7.5%, to $166,708,000 for the nine months
ended September 30, 2008, from $155,026,000 for the nine months ended September
30, 2007. Contributing to this increase in total revenues was a $13,752,000
increase in mortgage fee income, a $2,883,000 increase in insurance premiums and
other considerations, and a $23,000 increase in other revenues.  This
increase in total revenues was partially offset by a $3,045,000 decrease in
investment income, a $1,805,000 decrease in realized gains (losses) on
investments and other assets, and a $126,000 decrease in net mortuary and
cemetery sales.





Insurance
premiums and other considerations increased by $2,883,000, or 11.9%, to
$27,178,000 for the nine months ended September 30, 2008, from $24,295,000 for
the comparable period in 2007. This increase was primarily the result of
additional insurance 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 on September
1, 2008.





Net
investment income decreased by $3,045,000, or 12.4%, to $21,545,000 for the nine
months ended September 30, 2008, from $24,590,000 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 purchase of C & J Financial and Capital Reserve
Life, and the reinsurance agreement with Southern Security Life Insurance
Company on September 1, 2008.





Net
mortuary and cemetery sales decreased by $126,000, or ­1.2%, to $10,032,000
for the nine months ended September 30, 2008, from $10,158,000 for the
comparable period in 2007. This decrease was due to decreased at-need sales in
the cemetery and mortuary operations and decreased pre-need land sales of burial
spaces in cemetery operations.





Realized
gains and (losses) on investments and other assets decreased by $1,805,000 to a
$1,067,000 realized loss for the nine months ended September 30, 2008, from a
$738,000 realized gain for the comparable period in 2007.  This
increase in realized losses on investments was due to $739,000 in realized
losses from fixed maturity securities impairments and $303,000 in realized
losses from equity securities impairments.  During 2007 there was a
net gain of $516,000 from the sale of Colonial Funeral Home, which was partially
offset by a loss of $65,000 on the foreclosure and subsequent sale of the
funeral home in third quarter of 2008.





Mortgage
fee income increased by $13,752,000, or 14.5%, to $108,352,000 for the nine
months ended September 30, 2008, from $94,600,000 for the comparable period in
2007. This increase was primarily attributable to an increase in the loan fees
charged to originate loans, and secondary gain during the first nine months of
2008 on loan production at existing offices.





Other
revenues increased by $23,000, or 3.6%, to $667,000 for the nine months ended
September 30, 2008 from $644,000 for the comparable period in 2007. This
increase was due to increases in several small income items throughout the
Company’s operations.




Return to Table of Contents
 23


Total
benefits and expenses were $162,404,000, or 97.4% of total revenues, for the
nine months ended September 30, 2008, as compared to $153,746,000, or 99.2% of
total revenues, for the comparable period in 2007. This decreased primarily
resulted from improved profitability of SecurityNational Mortgage
Company.
 
 Death
benefits, surrenders and other policy benefits, and increase in future policy
benefits increased by an aggregate of $2,565,000, or 11.3%, to $25,183,000 for
the nine months ended September 30, 2008, from $22,618,000 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 on September 1,
2008.


Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $184,000, or 4.4%, to $4,364,000 for the nine months ended
September 30, 2008, from $4,180,000 for the comparable period in 2007. This
increase was primarily due to an increase in new business.





General
and administrative expenses increased by $10,596,000, or 9.2%, to $125,259,000
for the nine months ended September 30, 2008, from $114,663,000 for the
comparable period in 2007. This increase primarily resulted from an increase in
commission expenses by $2,354,000 from $71,904,000 in 2007 to $74,258,000 in
2008, due to increased loan origination costs incurred by SecurityNational
Mortgage and increased life insurance sales made during the first nine months of
2008. Salaries increased by $1,729,000 from $17,824,000 in 2007 to $19,553,000
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 $6,513,000 from $24,934,000 in
2007 to $31,447,000 in 2008. The increase in other expenses primarily resulted
from increased costs at SecurityNational Mortgage Company and increases in the
loan reserve and loan allowance balances.





Interest
expense decreased by $4,589,000, or 44.4%, to $5,744,000 for the nine months
ended September 30, 2008, from $10,333,000 for the comparable period in 2007.
This reduction was primarily from decreased warehouse lines of credit required
for a reduced number of warehoused mortgage loans by SecurityNational Mortgage
Company.





Cost of
goods and services sold by the mortuaries and cemeteries decreased by $99,000,
or 5.1%, to $1,853,000 for the nine months ended September 30, 2008, from
$1,952,000 for the comparable period in 2007. This decrease was primarily due to
decreased cemetery and mortuary sales.





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 nine months ended September 30, 2008, the Company's operations provided cash
of $41,186,000, while cash totaling $24,559,000 was used by operations during
the nine months ended September 30, 2007. This was due primarily to a decrease
of $26,490,000 in 2008 and an increase of $33,186,000 in 2007 in the balance of
mortgage loans sold to investors.





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.




Return to Table of Contents
 24


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 $126,408,000 as of September 30, 2008, compared to
$119,777,000 as of December 31, 2007. This represents 40.9% and 47.6% of the
total investments as of September 30, 2008 and December 31, 2007, respectively.
Generally, all bonds owned by the life insurance subsidiaries are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are six categories used for rating bonds. At September 30, 2008, 3.9% (or
$4,908,000) and at December 31, 2007, 3.1% (or $3,708,000) of the Company’s
total bond investments were invested in bonds in rating categories three through
six, which are considered non-investment grade.


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.





Financial
Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements(“SFAS No. 157”) is effective for fiscal years beginning after
November 15, 2007. The Company adopted the provisions of SFAS No. 157
as of January 1, 2008 for financial assets and financial liabilities that
are measured at fair value. SFAS No. 157:




·
            Defines
      fair value as the price that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market participants
      at the measurement date, and establishes a framework for measuring fair
      value;





·
            Establishes
      a three-level hierarchy for fair value measurements based upon the
      transparency of inputs to the valuation as of the measurement
      date;





·
            Expands
      disclosures about financial instruments measured at fair
      value.





Financial
assets and financial liabilities recorded on the Condensed Consolidated Balance
Sheet at fair value are categorized based on the reliability of inputs to the
valuation techniques as follows:





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; orc)
            Valuation
      models whose inputs are observable, directly or indirectly, for
      substantially the
      full  term      of the asset or
      liability





Level
3:





We utilize a combination of
third party valuation service providers, brokers, and internal valuation models
to determine fair value.




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 25




The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities by their classification in the Condensed Consolidated Statement of
Balance Sheet at September 30, 2008.


Valued
      at
              
              
              Balance
      as ofamortized
              
              
              September
      30,Level
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              cost
              
              
              2008Financial
      AssetsFixed
      maturity securities
              
              $
              2,227,158
              
              
              $
              -
              
              
              $
              738,502
              
              
              $
              123,442,113
              
              
              $
              126,407,773Equity
      securities
              
              
              6,635,288
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,635,288Mortgage
      loans or realestate and constructionloans, held for investment
              
              
              -
              
              
              
              -
              
              
              
              7,978,550
              
              
              
              117,843,323
              
              
              
              125,821,873Short-term
      investments
              
              
              10,963,235
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,963,235Total
      Investment in Financial Assets
              
              
              19,825,681
              
              
              
              -
              
              
              
              8,717,052
              
              
              
              241,285,436
              
              
              
              269,828,169Mortgage
      loans sold to investors
              
              
              -
              
              
              
              -
              
              
              
              17,334,355
              
              
              
              -
              
              
              
              17,334,355Other
      assets
              
              
              -
              
              
              
              -
              
              
              
              4,461,885
              
              
              
              1,639,205
              
              
              
              6,101,090Total
      Financial Assets
              
              $
              19,825,681
              
              
              $
              -
              
              
              $
              30,513,292
              
              
              $
              242,924,641
              
              
              $
              293,263,614Financial
      LiabilitiesOther
      liabilities
              
              $
              -
              
              
              $
              -
              
              
              $
              (358,809
              )
              
              $
              (11,270,152
              )
              
              $
              (11,628,961
              )Total
      Financial Liabilities
              
              $
              -
              
              
              $
              -
              
              
              $
              (358,809
              )
              
              $
              (11,270,152
              )
              
              $
              (11,628,961
              )
 
 Following
is a summary of changes in the condensed consolidated balance sheet line items
measured using level 3 inputs:
 MortgageFixed
                
                
                
                
                
                LoansMaturity
                
                
                Mortgage
                
                
                Sold
      to
                
                
                Other
                
                
                OtherSecurities
                
                
                Loans
                
                
                Investors
                
                
                Assets
                
                
                LiabilitiesBalance
      - December 31, 2007
                
                $
                1,473,154
                
                
                $
                4,152,985
                
                
                $
                66,700,694
                
                
                $
                2,809,225
                
                
                $
                (2,182,109
                )Total
      Gains (Losses):Included
      in earnings
                
                
                (734,652
                )
                
                
                (2,248,311
                )
                
                
                -
                
                
                
                -
                
                
                
                -Included
      in other comprehensive
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,652,660
                
                
                
                1,823,300Purchases,
      issuances, and settlements
                
                
                -
                
                
                
                6,073,876
                
                
                
                (24,626,160
                )
                
                
                -
                
                
                
                -Transfers
                
                
                
                
                
                
                -
                
                
                
                (24,740,179
                )
                
                
                -
                
                
                
                -Balance
      - September 30, 2008
                
                $
                738,502
                
                
                $
                7,978,550
                
                
                $
                17,334,355
                
                
                $
                4,461,885
                
                
                $
                (358,809
                )


The items
shown under level one are valued as follows:





On a
quarterly basis, the Company reviews its 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, price earnings ratios 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.





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 26





Mortgage
backed securities are included in investments in fixed maturity securities,
typically held to maturity, and carried at amortized cost in the balance sheet.
Because the investments are to be held to maturity, the investments are only
written down to their fair value if the investments have a rating of as low as
six by the National Association of Insurance Commissioners (NAIC), which rating
is equivalent to a C or lower rating by Moody’s or Standard &
Poor’s.





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 three are valued as follows:





Mortgage loans on real
estate and construction loans are carried at unpaid principal balances,
adjusted for amortization of premium or accretion of discount, less allowances
for possible losses.





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 will be able to carry the foreclosed
property in Security National Life and SecurityNational Mortgage , its life and
mortgage subsidiaries, and will rent the properties until it is feasible to sell
them.  The Company is currently able to rent properties for a 5.5%
return.




Commercial
mortgage loans and residential construction loans that are originated and held
for investment are 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.




As of
September 30, 2008, the Company's long term mortgage loan portfolio had
$27,589,000 in unpaid principal with delinquencies more than 90
days.  Of this amount $22,331,000 was in foreclosure
proceedings.  The Company has not received any interest income on the
$27,589,000 in mortgage loans with delinquencies of more than 90
days.  During the nine months ending September 30, 2008, the Company
increased its allowance for mortgage loan losses by $2,248,000, which was
charged to loan loss expense and included in other general and administrative
expenses for the period.  The allowance for mortgage loan losses as of
September 30, 2008 was $3,683,000.





Also at
September 30, 2008, the Company had foreclosed on $11,514,000 in long term
mortgage loans.  The foreclosed property was shown in real
estate.  The Company will be able to carry the foreclosed property in
Security National Life and SecurityNational Mortgage, its life and mortgage
subsidiaries, and will rent the properties until it is feasible to
sell.





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.





For
long-term residential mortgages originated and sold to third-party investors,
mortgage fee income and related expenses are recognized when such loans are
sold.




Return to Table of Contents
 27





In
addition to the allowance for mortgage loan losses, the Company also accrues a
monthly allowance for indemnification losses to investors of 17.5 basis points
of total production.  The amount accrued for the nine months ended
September 30, 2008 was $4,829,000 and included in other general and
administrative expenses.  The reserve for indemnification
losses was included in other liabilities and, as of September 30, 2008, the
balance was $1,734,000.





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.  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.





The
Company, through its wholly owned subsidiary, SecurityNational Mortgage, has
entered into loan purchase agreements with non affiliated warehouse
banks.  The total amount available under these loan purchase
agreements is $400,000,000.  The terms of the loan purchase agreements
are typically for one year, with interest rates ranging from 1.5% to 2.25% over
the 30 day LIBOR rate (5.48% to 6.23% as of September 30,
2008).  SecurityNational Mortgage is currently in the process of
renewing one of its loan purchase agreements that expired on September 30,
2008.  SecurityNational Mortgage has received a 90 day extension
through the end of the year 2008.  The other loan purchase agreement
is a non-committed line with no expiration date.





Other assets and other
liabilities, derivative loan commitments.  During 2005, the
Company’s mortgage banking activities implemented new practices relating to
mortgage loan commitments, including interest rate lock commitments and forward
commitments to sell loans to third-party investors. The Company also implemented
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 derivatives under Statement of Financial Accounting Standards No. 133 (“SFAS
133”), Accounting for
Derivative Instruments and Hedging Activities, as amended by Statement of
Financial Accounting Standards No. 149 (“SFAS 149”), Amendment of Statement
133 on Derivative Instruments and Hedging Activities 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.





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
mortgage 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 mortgage 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 commitments. However, many borrowers continue to exercise
mortgage 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
observed 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. Once
a loan is closed, it is classified as a receivable-mortgage loans sold to
investors.




Return to Table of Contents
 28





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 mortgage instruments to economically hedge the price
risk associated with its outstanding mortgage loan commitments. Management
expects these derivatives will experience changes in fair value opposite to
changes in fair value of the mortgage loan commitments, thereby reducing
earnings volatility related to the recognition in earnings of changes in the
values of these commitments. A forward loan sales commitments and best effort
locks protect 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. For mortgage loan commitments not protected by a
forward commitment or best effort locks, the instruments used to economically
hedge the fair value of the mortgage loan commitments include other freestanding
derivatives such as mortgage backed securities, options and U.S. Treasury
futures. The Company takes into account various factors and strategies in
determining the portion of the mortgage loan commitments it wants to hedge
economically.





The
Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At September 30,
2008, and December 31, 2007, the life insurance subsidiary exceeded the
regulatory criteria.





The
Company’s total capitalization of stockholders’ equity, and bank debt and notes
payable were $66,905,000 as of September 30, 2008, as compared to $69,156,000 as
of December 31, 2007. Stockholders’ equity as a percent of total capitalization
was 90% and 81% as of September 30, 2008 and December 31, 2007,
respectively.  Bank debt and notes payable decreased $6,525,000 for
the nine months ended September 30, 2008 when compared to December 31, 2007,
thus increasing 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 2007 was 7.9% as compared to a rate
of 8.4% for 2006. The 2008 lapse rate to date has been approximately the same as
2007.





At
September 30, 2008, $19,355,000 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.








Item 3.     Quantitative and Qualitative Disclosures
About Market Risk.





There
have been no significant changes since the annual report on Form 10-K filed for
the year ended December 31, 2007.





Item 4.     Controls and
Procedures.





Evaluation of Disclosure Controls
and Procedures.  Under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and the Chief Financial Officer, the Company conducted an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of September 30,
2008.  Based upon the evaluation, the Company's Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures were effective as of September 30, 2008.  Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in the Company's reports filed under the
Exchange Act, such as this report, are recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.  Disclosure controls include controls
and procedures designed to reasonably ensure that such information is
accumulated and communicated to management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure as of September 30, 2008.





Return to Table of Contents
 29





Management's Report on Internal
Control Over Financial Reporting.  The Company's management is
responsible for establishing and maintaining a comprehensive system of internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f), to provide reasonable assurance of the proper authorization of
transactions, the safeguarding of assets, and the reliability of the financial
records.  The internal control system was designed to provide
reasonable assurance to management and the Company's Board of Directors
regarding the preparation and fair presentation of published financial
statements.  The system of internal control over financial reporting
provides for appropriate division of responsibility and is documented by written
policies and procedures that are communicated to employees.  The
criteria or framework upon which management relied in evaluating the
effectiveness of the Company’s internal control over financial reporting was set
forth in Internal Controls --
Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Based on the results
of the Company's evaluation, management concluded that the internal control over
financial reporting was effective as of September 30, 2008.





Inherent Limitations of Disclosure
Controls and Procedures and Internal Control over Financial
Reporting.  It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met.  In
addition, the design of any control system is based in part upon certain
assumptions about the likelihood of future events.





Changes in Internal Control over
Financial Reporting.  There were no changes in the Company's
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f)) during the quarter ended September 30, 2008 that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.





Part II  Other Information





Item
1.     Legal Proceedings.





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.




Return to Table of Contents
 30





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 the 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 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 with respect to the terms of the proposed consent order
and the Florida Office of InsuranceRegulation
issues a similar order, the Company intends totake
actionnecessary
to protect its rights and interests, including requesting a hearing before an
administrative law judge to oppose the order.





Except
for the proposed consent order from the Florida Office of Insurance Regulation,
the Company is not a party to any 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
1A.    Risk Factors.





The
recent adverse developments in the mortgage industry and credit markets have
adversely affected the Company’s ability to sell certain of its mortgage loans
to investors, which has 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.  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 $5.4 million (0.2% of the Company’s
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 to certain third party investors that experienced financial
difficulties and were not able to settle the loans.  The total amount
of these loans was $36,291,000, of which $14,727,000 were in Alt A
loans.  Due to these changes in circumstances, the Company regained
control of the mortgages and, in accordance with SFAS No. 140, accounted for the
loans retained in the same manner as a purchase of the 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, and the fair
value of the loans was determined to be the unpaid principal balances adjusted
for chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans.  The financial statements reflect the
transfer of the mortgage loans from “Mortgage Loans Sold to Investors” to
“Mortgage Loans on Real Estate” during June 2008.  The loan sale
revenue recorded on the sale of the mortgage loans was reversed on the date the
loans were repurchased.







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 31




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 will be able to carry the foreclosed
property in Security National Life and SecurityNational Mortgage , its life and
mortgage subsidiaries, and will rent the properties until it is feasible to
sell.  The Company is currently able to rent properties for a 5.5%
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.  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.





As of
September 30, 2008, the Company's long term mortgage loan
portfolio had $27,589,000 in unpaid principal with delinquencies more
than 90 days.  Of this amount $22,331,000 was in foreclosure
proceedings.  The Company has not received any interest income on
the $27,589,000 in mortgage loans with delinquencies of more than 90
days.  During the nine months ending September 30, 2008, the Company
has increased its allowance for mortgage loan losses by $2,248,000 which
allowance was charged to loan loss expense and is included in other general and
administrative expenses for the period.  The allowance for mortgage
loan losses as of September 30, 2008 was $3,683,000.





Also, at
September 30, 2008, the Company had foreclosed on $11,514,000 in long term
mortgage loans.  The foreclosed property is shown in real
estate.  The Company will be able to carry the foreclosed property in
Security National Life and SecurityNational Mortgage, its life and mortgage
subsidiaries, and will rent the properties until it is feasible to
sell.





In
addition to the allowance for mortgage loan losses, the Company also accrues a
monthly allowance for indemnification losses to investors of 17.5 basis points
of total production.  The amount accrued for the nine months ended
September 30, 2008 was $4,829,000 and included in other general and
administrative expenses.  The reserve for indemnification losses is
included in other liabilities, and as of September 30, 2008, the balance was
$1,734,000.





SecurityNational
Mortgage has entered into loan purchase agreements with unaffiliated
warehouse banks.  The total amount available under these loan purchase
agreements is $400,000,000.  The terms of the loan purchase agreements
are typically for one year, with interest rates ranging from 1.5% to 2.25% over
the 30 days LIBOR rate (5.48% to 6.23% as of September 30,
2008).  SecurityNational Mortgage is currently in the process of
renewing one of its loan purchase agreements that expired on September 30,
2008.  SecurityNational Mortgage has received a 90 day extension
through the end of the year 2008.  The other loan purchase agreement
is a non-committed with no expiration date.





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




None





Item
3.     Defaults Upon Senior Securities.




None





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 32





Item
4.     Submission of Matters to a Vote of Security
Holders.





At the
Annual Meeting of Stockholders held on July 11, 2008, the following matters were
acted upon: (i) seven directors consisting of George R. Quist, Scott M. Quist,
J. Lynn Beckstead, Jr., Charles L. Crittenden, Dr. Robert G. Hunter, H. Craig
Moody and Norman G. Wilbur were elected to serve until the next annual
stockholders meeting or until their respective successors are elected and
qualified (for George R. Quist, with Class A and Class C shares voting,
12,270,019 votes were cast in favor of election, no votes were cast against
election, and there were 102,786 abstentions; for Scott M. Quist, with Class A
and Class C shares voting, 12,290,111 votes were cast in favor of election, no
votes were cast against election, and there were 82,694 abstentions; for J. Lynn
Beckstead, Jr., with Class  A shares voting, 5,223,232 votes were cast
in favor of election, no votes were cast against election, and there were 83,588
abstentions; for Charles L. Crittenden, with Class A and Class C shares,
12,272,594 votes were cast in favor of election, no votes were cast against
election, and there were 100,211 abstentions; for Dr. Robert G. Hunter, with
Class A and Class C shares voting, 12,271,238 votes were cast in favor of
election, no votes cast against election, and there were 101,567 abstentions;
for H. Craig Moody, with Class A shares voting, 5,206,865 votes were cast in
favor of election, no votes cast against election, and there were 99,955
abstentions; and for Norman G. Wilbur, with Class A and Class C shares voting,
12,269,243 votes were cast in favor of election, no votes were cast against
election, and there were 103,562 abstentions); and (ii) the appointment of
Hansen,  Barnett & Maxwell, P.C. as the Company's registered pubic
independent accountants for the fiscal year ending December 31, 2008 was
ratified (with 12,282,146 votes cast for appointment, 90,659 votes against
appointment, and there were -0- abstentions),





Item
5.     Other Information.





On August
13, 2008, the Company, through its wholly owned subsidiary, Security National
Life Insurance Company (“Security National Life”), entered into a stock purchase
agreement (the "Stock Purchase Agreement") 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, Security National Life agrees to pay to the shareholders of
Southern Security purchase consideration equal to the capital and surplus of
Southern Security as of the date that Security National Life assumed
administrative control over Southern Security, which was on September 1, 2008,
plusthe interest
maintenance reserve and the asset valuation reserve of Southern Security as of
the administrative control date, plusan allowance
not to exceed $100,000 for the actual losses experienced by Southern Security in
the second quarter ended June 30, 2008, less certain
adjustments.





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.





As
adjustments to the purchase consideration, the shareholders of Southern Security
agree at closing to deposit $175,000 of the purchase consideration into an
interest bearing escrow account to pay the amount of any adjustments required
under the terms of the agreement.  The shareholders additionally agree
to deposit $537,000 of the purchase consideration into an interest bearing
escrow account, representing about 50% of the total outstanding balances on two
loans that Southern Security had made in the form of promissory notes, which
notes are secured by funeral home properties in Senatobia, Mississippi and
Collins, Mississippi.  The escrow agent will be instructed to release
to the shareholders on a pro rata basis an amount equal to the combined
principal reduction of the promissory notes that has occurred during the
preceding August 1 through July 31 period, until such time as the $537,000
deposit, including any accrued interest, has been paid to the
shareholders.  However, no payments will be made to the shareholders
from the deposit if either of the notes is in default.





As
further adjustments, Southern Security agrees to transfer its interest in a
certain trust, known as the Nowell Legacy Trust, to the shareholders at closing
and the purchase consideration to be paid to the shareholders will be reduced by
the admitted value of the trust as reflected in the financial statements of
Southern Security on September 1, 2008, the date that Security National Life
assumed administrative control over Southern Security under the terms of the
Stock Purchase Agreement.  Finally, the shareholders have represented
in the Stock Purchase Agreement that the properties shown on the annual
statement are owned free and clear of any liens and encumbrances and that the
loans disclosed in the annual statement conform with the rules and regulations
in Mississippi for admissibility.  The purchase consideration will be
adjusted to the extent that the shareholder representations are not completely
accurate.





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 33





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.





Administrative
control over the insurance related operations of Southern Security is to include
control over day–to-day business expenses, trade, debt, locations of business
operations, employees, employee compensation, compensation to offices and
directors, cash flow, deposits and bank accounts.  Upon assuming
administrative control, Security National Life will be given access to the
records, files and computer systems of Southern Security and will have the right
to transfer or move such records, files and computer systems to other offices
and locations in which Security National transacts business.  Security
National Life notified Southern Security in writing that it would assume
administrative control over the insurance related operations of Southern
Security as of 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 was 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.  It is estimated that 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 Securities, LLC
of Oxford, Mississippi, as custodian for Security National Life pursuant to the
Reinsurance Agreement and the Custodial Agreement among Southern Security,
Security National Life, and Wachovia Securities, LLC.  Following the
completion of the stock purchase transaction, Southern Security will continue to
sell and service life insurance, annuity products, and funeral plan
insurance.





Security
National Life anticipates completing the stock purchase transaction within seven
days from the date the required regulatory approvals are
obtained.  The obligations of Security National Life and Southern
Security to complete the transaction are contingent upon satisfaction of the
following conditions: (i) a complete and satisfactory review by Security
National Life of the books, records and business of Southern Security; and (ii)
approval of the transaction by any regulatory authorities having jurisdiction
over Security National Life and Southern Security, including the insurance
departments of the states of Mississippi and Utah.





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





(a)(1) Financial
Statements





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





(a)(2)
Financial Statement
Schedules




None





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




Return to Table of Contents
 34





(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)


10.6
            Employment
      agreement with J. Lynn Beckstead, Jr. (7)10.7
            Employment
      agreement with Scott M. Quist (8)




10.8
            Agreement
      and Plan of Complete Liquidation of Southern Security Life Insurance
      Company into Security National Life Insurance Company
  (9)10.9
            Assignment
      between Southern Security Life Insurance Company and Security National
      Life Insurance Company(9)




10.10
            Assignment
      between Southern Security Life Insurance Company and Security National
      Life Insurance Company (10)


10.11
            Unit
      Purchase Agreement among Security National Financial Corporation, C &
      J Financial, LLC, Henry Culp, Jr., and Culp Industries
      Inc.(11)


10.12
            Consulting
      Agreement with Henry Culp, Jr.,
(11)


10.13
            Employment
      Agreement with Kevin O. Smith (11)


10.14
            Non-Competition
      and Confidentiality Agreement with Henry Culp, Jr.
  (11)


10.15
            Stock
      Purchase Agreement among Security National Life Insurance Company, Capital
      Reserve Life Insurance Company, and the shareholders of Capital Reserve
      Life Insurance Company (12)


10.16
            Indemnification
      Agreement among Security National Life Insurance Company, Capital Reserve
      Life Insurance Company, and the shareholders of Capital Reserve Life
      Insurance Company (13)


10.17
            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
      (13)


10.18
            Reinsurance
      Agreement between Security National Life Insurance Company and Capital
      Reserve Life Insurance Company (13)


10.19
            Stock
      Purchase Agreement among Security National Life Insurance Company,
      Southern Security Life Insurance Company, and the shareholders of Southern
      Security Life Insurance Company
(14)


10.20
            Reinsurance
      Agreement among Security National Life Insurance Company, Southern
      Security Life Insurance Company, and the shareholders of Southern Security
      Life Insurance Company (15)10.21
            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










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 35





(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 September
      5, 2003, relating to the Company’s Annual Meeting of
      Shareholders(6)
            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 12,
      2007


(10)
              Incorporated
      by reference from Report on Form 10-K, as filed on March 31,
      2007(11)
              Incorporated
      by reference from Report on Form 8-K, as filed on August 8,
  2007(12)
              Incorporated
      by reference from Report on Form 8-K, as filed on November 2,
    2007(13)
              Incorporated
      by reference from Report on Form 8-K, as filed on January 14,
    2008(14)
              Incorporated
      by reference from Report on Form 8-K, as filed on August 25,
  2008(15)
              Incorporated
      by reference from Report on Form 8-K/A, as filed on September 17,
      2008


(b)
            Reports
      on Form 8-K:
              
              Current report on Form 8-K, as filed on August 25,
      2008
              Current report on Form 8-K/A, as filed on September 17,
      2008
              Current report on Form 8-K, as filed on September 30,
      2008














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 36




SIGNATURES





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








REGISTRANT





SECURITY NATIONAL FINANCIAL
CORPORATION


Registrant








Dated:
      November 14, 2008
            s/s George R.
      QuistGeorge
      R. QuistChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)





Dated:
      November 14, 2008
            s/s Stephen M.
      SillStephen
      M. SillVice
      President, Treasurer and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting Officer)








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Contents


37