UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934


For
the quarter ended June 30, 2009, or





[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


For the Transition Period from
_____ to
______





Commission file number: 0-9341





SECURITY
NATIONAL FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)





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








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 shell company (as defined in Rule 12b-2 of the Exchange
Act).   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
              
              8,296,604Title
      of Class
              
              Number
      of Shares Outstanding as ofAugust
      12, 2009Class
      C Common Stock, $.20 par value
              
              8,789,596Title
      of Class
              
              Number
      of Shares Outstanding as ofAugust
      12, 2009








Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):


Large accelerated filer
___   Accelerated filer ___   Non-accelerated
filer  X   Smaller reporting company ___


(Do not
check if a smaller reporting company).








1





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


FORM
10-Q





QUARTER
ENDED JUNE 30, 2009





TABLE
OF CONTENTS








PART
      I - FINANCIAL INFORMATIONItem
      1.
                            Financial
      Statements
                            Page
      No.Condensed
      Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
      (unaudited)
                            3-4Condensed
      Consolidated Statements of Earnings for the Three and Six Months Ended
      June 30, 2009 and 2008 (unaudited)
                            5Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2009 and 2008 (unaudited)
                            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                            7-22Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            23-32Item
      3.
                            Quantitative
      and Qualitative Disclosures about Market Risk
                            32Item
      4.
                            Controls
      and Procedures
                            32PART
      II - OTHER INFORMATIONOther
      Information
                            33-39Signature
      Page
                            40Certifications
                            41-44











2





SECURITY
NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





Assets
                          
                          June
      30, 2009
                          
                          
                          December
      31, 2008Investments:Fixed
      maturity securities, held to maturity, at amortized cost
                          
                          $
                          116,084,872
                          
                          
                          $
                          125,346,194Fixed
      maturity securities, available for sale, at estimated fair
      value
                          
                          
                          1,176,709
                          
                          
                          
                          1,236,562Equity
      securities, available for sale, at estimated fair value
                          
                          
                          5,465,657
                          
                          
                          
                          4,617,675Mortgage
      loans on real estate and construction loans, held for investment net of
      allowances for losses of $5,621,573 and $4,780,467 for 2009 and 2008,
      respectively.
                          
                          
                          113,564,164
                          
                          
                          
                          124,592,678Real
      estate, net of accumulated depreciation
                          
                          
                          39,203,342
                          
                          
                          
                          22,417,639Policy,
      student and other loans net, of allowances for doubtful
      accounts
                          
                          
                          15,920,093
                          
                          
                          
                          18,493,751Short-term
      investments
                          
                          
                          6,225,891
                          
                          
                          
                          5,282,986Accrued
      investment income
                          
                          
                          2,084,600
                          
                          
                          
                          2,245,201Total
      investments
                          
                          
                          299,725,328
                          
                          
                          
                          304,232,686Cash
      and cash equivalents
                          
                          
                          45,330,815
                          
                          
                          
                          19,914,110Mortgage
      loans sold to investors
                          
                          
                          23,443,840
                          
                          
                          
                          19,885,994Receivables,
      net
                          
                          
                          11,391,167
                          
                          
                          
                          13,135,080Restricted
      assets of cemeteries and mortuaries
                          
                          
                          2,462,196
                          
                          
                          
                          4,077,076Cemetery
      perpetual care trust investments
                          
                          
                          1,924,592
                          
                          
                          
                          1,840,119Receivable
      from reinsurers
                          
                          
                          5,877,778
                          
                          
                          
                          5,823,379Cemetery
      land and improvements
                          
                          
                          10,601,156
                          
                          
                          
                          10,626,296Deferred
      policy and pre-need contract acquisition costs
                          
                          
                          33,147,383
                          
                          
                          
                          32,424,512Property
      and equipment, net
                          
                          
                          13,424,092
                          
                          
                          
                          14,049,232Value
      of business acquired
                          
                          
                          10,709,696
                          
                          
                          
                          11,377,276Goodwill
                          
                          
                          1,075,039
                          
                          
                          
                          1,075,039Other
                          
                          
                          3,032,166
                          
                          
                          
                          3,343,726Total
      Assets
                          
                          $
                          462,145,248
                          
                          
                          $
                          441,804,525








See
accompanying notes to condensed consolidated financial statements.





3





SECURITY
NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)


(Unaudited)








June
      30, 2009
                                  
                                  
                                  December
      31, 2008Liabilities
      and Stockholders' EquityLiabilitiesFuture
      life, annuity, and other benefits
                                  
                                  $
                                  330,991,633
                                  
                                  
                                  $
                                  325,668,454Unearned
      premium reserve
                                  
                                  
                                  4,808,867
                                  
                                  
                                  
                                  4,863,919Bank
      loans payable
                                  
                                  
                                  7,378,115
                                  
                                  
                                  
                                  6,138,202Notes
      and contracts payable
                                  
                                  
                                  340,199
                                  
                                  
                                  
                                  501,778Deferred
      pre-need cemetery and mortuary contract revenues
                                  
                                  
                                  13,345,380
                                  
                                  
                                  
                                  13,467,132Cemetery
      perpetual care obligation
                                  
                                  
                                  2,715,534
                                  
                                  
                                  
                                  2,647,984Accounts
      payable
                                  
                                  
                                  2,220,271
                                  
                                  
                                  
                                  1,941,777Other
      liabilities and accrued expenses
                                  
                                  
                                  20,175,233
                                  
                                  
                                  
                                  17,688,756Income
      taxes
                                  
                                  
                                  18,249,789
                                  
                                  
                                  
                                  14,974,244Total
      liabilities
                                  
                                  
                                  400,225,021
                                  
                                  
                                  
                                  387,892,246Stockholders'
      EquityCommon
      Stock:Class
      A: common stock - $2.00 par value; 20,000,000 shares authorized; issued
      8,295,238 shares in 2009 and 8,284,109 shares in 2008
                                  
                                  
                                  16,590,476
                                  
                                  
                                  
                                  16,568,218Class
      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 8,803,257 shares in 2009 and 8,912,315 in
      2008
                                  
                                  
                                  1,760,651
                                  
                                  
                                  
                                  1,782,463Additional
      paid-in capital
                                  
                                  
                                  18,239,831
                                  
                                  
                                  
                                  17,985,848Accumulated
      other comprehensive income and other items, net of taxes
                                  
                                  
                                  1,556,468
                                  
                                  
                                  
                                  417,101Retained
      earnings
                                  
                                  
                                  27,346,263
                                  
                                  
                                  
                                  21,023,179Treasury
      stock at cost; 1,455,511 Class A shares in 2009 and 1,598,568 Class A
      shares in 2008
                                  
                                  
                                  (3,573,462
                                  )
                                  
                                  
                                  (3,864,530
                                  )Total
      stockholders' equity
                                  
                                  
                                  61,920,227
                                  
                                  
                                  
                                  53,912,279Total
      Liabilities and Stockholders' Equity
                                  
                                  $
                                  462,145,248
                                  
                                  
                                  $
                                  441,804,525








See
accompanying notes to condensed consolidated financial statements.





4





SECURITY
NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS


(Unaudited)





Three
      Months Ended June 30,
                                                
                                                
                                                Six
      Months ended June 30,2009
                                                
                                                
                                                2008
                                                
                                                
                                                2009
                                                
                                                
                                                2008Revenues:Insurance
      premiums and other considerations
                                                
                                                $
                                                9,309,971
                                                
                                                
                                                $
                                                9,114,934
                                                
                                                
                                                $
                                                19,093,689
                                                
                                                
                                                $
                                                17,850,532Net
      investment income
                                                
                                                
                                                5,255,832
                                                
                                                
                                                
                                                7,548,332
                                                
                                                
                                                
                                                11,303,834
                                                
                                                
                                                
                                                14,752,582Net
      mortuary and cemetery sales
                                                
                                                
                                                3,402,250
                                                
                                                
                                                
                                                3,391,243
                                                
                                                
                                                
                                                6,373,246
                                                
                                                
                                                
                                                6,981,238Realized
      gains on investments and other assets
                                                
                                                
                                                226,723
                                                
                                                
                                                
                                                17,252
                                                
                                                
                                                
                                                292,769
                                                
                                                
                                                
                                                40,169Mortgage
      fee income
                                                
                                                
                                                39,545,590
                                                
                                                
                                                
                                                40,106,305
                                                
                                                
                                                
                                                79,799,784
                                                
                                                
                                                
                                                73,595,595Other
                                                
                                                
                                                269,566
                                                
                                                
                                                
                                                224,129
                                                
                                                
                                                
                                                638,707
                                                
                                                
                                                
                                                403,579Total
      revenues
                                                
                                                
                                                58,009,932
                                                
                                                
                                                
                                                60,402,195
                                                
                                                
                                                
                                                117,502,029
                                                
                                                
                                                
                                                113,623,695Benefits
      and expenses:Death
      benefits
                                                
                                                
                                                4,876,923
                                                
                                                
                                                
                                                4,341,123
                                                
                                                
                                                
                                                9,409,148
                                                
                                                
                                                
                                                9,137,986Surrenders
      and other policy benefits
                                                
                                                
                                                360,905
                                                
                                                
                                                
                                                350,874
                                                
                                                
                                                
                                                875,910
                                                
                                                
                                                
                                                972,145Increase
      in future policy benefits
                                                
                                                
                                                3,240,931
                                                
                                                
                                                
                                                3,686,400
                                                
                                                
                                                
                                                7,022,183
                                                
                                                
                                                
                                                6,763,257Amortization
      of deferred policy and pre-need acquisition costs and value of business
      acquired
                                                
                                                
                                                1,694,015
                                                
                                                
                                                
                                                1,264,612
                                                
                                                
                                                
                                                3,679,320
                                                
                                                
                                                
                                                2,412,983Selling
      general and administrative expenses:Commissions
                                                
                                                
                                                20,778,365
                                                
                                                
                                                
                                                26,926,585
                                                
                                                
                                                
                                                41,446,178
                                                
                                                
                                                
                                                49,662,971Salaries
                                                
                                                
                                                6,740,660
                                                
                                                
                                                
                                                6,649,609
                                                
                                                
                                                
                                                13,626,477
                                                
                                                
                                                
                                                12,915,438Provision
      for loan losses
                                                
                                                
                                                4,269,104
                                                
                                                
                                                
                                                2,876,452
                                                
                                                
                                                
                                                10,434,622
                                                
                                                
                                                
                                                5,028,409Other
                                                
                                                
                                                10,280,145
                                                
                                                
                                                
                                                8,638,618
                                                
                                                
                                                
                                                18,592,324
                                                
                                                
                                                
                                                16,249,351Interest
      expense
                                                
                                                
                                                662,867
                                                
                                                
                                                
                                                1,952,591
                                                
                                                
                                                
                                                1,762,994
                                                
                                                
                                                
                                                4,144,076Cost
      of goods and services sold-mortuaries and cemeteries
                                                
                                                
                                                621,648
                                                
                                                
                                                
                                                628,083
                                                
                                                
                                                
                                                1,228,601
                                                
                                                
                                                
                                                1,304,896Total
      benefits and expenses
                                                
                                                
                                                53,525,563
                                                
                                                
                                                
                                                57,314,947
                                                
                                                
                                                
                                                108,077,757
                                                
                                                
                                                
                                                108,591,512Earning
      before income taxes
                                                
                                                
                                                4,484,369
                                                
                                                
                                                
                                                3,087,248
                                                
                                                
                                                
                                                9,424,272
                                                
                                                
                                                
                                                5,032,183Income
      tax expense
                                                
                                                
                                                (1,393,980
                                                )
                                                
                                                
                                                (986,615
                                                )
                                                
                                                
                                                (3,100,873
                                                )
                                                
                                                
                                                (1,556,094
                                                )Net
      earnings
                                                
                                                $
                                                3,090,389
                                                
                                                
                                                $
                                                2,100,633
                                                
                                                
                                                $
                                                6,323,399
                                                
                                                
                                                $
                                                3,476,089Net
      earnings per Class A Equivalent common share (1)
                                                
                                                $
                                                0.40
                                                
                                                
                                                $
                                                0.26
                                                
                                                
                                                $
                                                0.82
                                                
                                                
                                                $
                                                0.43Net
      earnings per Class A Equivalent common share-assuming dilution
      (1)
                                                
                                                $
                                                0.40
                                                
                                                
                                                $
                                                0.26
                                                
                                                
                                                $
                                                0.82
                                                
                                                
                                                $
                                                0.43Weighted-average
      Class A equivalent common share outstanding (1)
                                                
                                                
                                                7,696,838
                                                
                                                
                                                
                                                8,095,864
                                                
                                                
                                                
                                                7,666,819
                                                
                                                
                                                
                                                8,089,582Weighted-average
      Class A equivalent common shares outstanding assuming-dilution
      (1)
                                                
                                                
                                                7,696,838
                                                
                                                
                                                
                                                8,171,511
                                                
                                                
                                                
                                                7,666,819
                                                
                                                
                                                
                                                8,176,668





(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 share
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.





5





SECURITY
NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six
      Months Ended June 30,2009
                                                      
                                                      
                                                      2008Cash
      flows from operating activities:Net
      cash provided by operating activities
                                                      
                                                      $
                                                      22,049,881
                                                      
                                                      
                                                      $
                                                      69,217,329Cash
      flows from investing activities:Securities
      held to maturity:Purchase-fixed
      maturity securities
                                                      
                                                      
                                                      (6,081,944
                                                      )
                                                      
                                                      
                                                      (2,174,222
                                                      )Calls
      and maturities - fixed maturity securities
                                                      
                                                      
                                                      15,414,024
                                                      
                                                      
                                                      
                                                      15,027,422Securities
      available for sale:Purchase
      of equity securities
                                                      
                                                      
                                                      (1,400,080
                                                      )
                                                      
                                                      
                                                      (14,699
                                                      )Sales-equity
      securities
                                                      
                                                      
                                                      826,586
                                                      
                                                      
                                                      
                                                      605,059Purchase
      of short-term investments
                                                      
                                                      
                                                      (14,296,660
                                                      )
                                                      
                                                      
                                                      (21,403,313
                                                      )Proceeds
      from sale of short-term investments
                                                      
                                                      
                                                      13,353,755
                                                      
                                                      
                                                      
                                                      17,838,341Sales
      (Purchase) of restricted assets
                                                      
                                                      
                                                      1,639,358
                                                      
                                                      
                                                      
                                                      (203,619
                                                      )Changes
      in assets for perpetual care trusts
                                                      
                                                      
                                                      (115,980
                                                      )
                                                      
                                                      
                                                      (107,256
                                                      )Amount
      received for perpetual care trusts
                                                      
                                                      
                                                      67,550
                                                      
                                                      
                                                      
                                                      68,531Mortgage,
      policy, and other loans made
                                                      
                                                      
                                                      (12,141,761
                                                      )
                                                      
                                                      
                                                      (68,267,113
                                                      )Payments
      received for mortgage, policy and other loans
                                                      
                                                      
                                                      8,200,013
                                                      
                                                      
                                                      
                                                      23,154,837Purchase
      of property and equipment
                                                      
                                                      
                                                      (365,552
                                                      )
                                                      
                                                      
                                                      (737,074
                                                      )Disposal
      of property and equipment
                                                      
                                                      
                                                      845
                                                      
                                                      
                                                      
                                                      81,352Purchase
      of real estate
                                                      
                                                      
                                                      (3,178,555
                                                      )
                                                      
                                                      
                                                      (3,682,210
                                                      )Sale
      of real estate
                                                      
                                                      
                                                      2,620,953
                                                      
                                                      
                                                      
                                                      446,596Net
      cash (used in) provided by investing activities
                                                      
                                                      
                                                      4,542,552
                                                      
                                                      
                                                      
                                                      (39,367,368
                                                      )Cash
      flows from financing activities:Annuity
      contract receipts
                                                      
                                                      
                                                      4,565,274
                                                      
                                                      
                                                      
                                                      6,627,935Annuity
      contract withdrawals
                                                      
                                                      
                                                      (7,130,158
                                                      )
                                                      
                                                      
                                                      (10,812,757
                                                      )Sale
      of treasury stock
                                                      
                                                      
                                                      253,571
                                                      
                                                      
                                                      
                                                      23,376Repayment
      of bank loans on notes and contracts
                                                      
                                                      
                                                      (896,367
                                                      )
                                                      
                                                      
                                                      (10,447,759
                                                      )Proceeds
      from borrowing on bank loans
                                                      
                                                      
                                                      2,031,952
                                                      
                                                      
                                                      
                                                      2,548,060Net
      cash used in financing activities
                                                      
                                                      
                                                      (1,175,728
                                                      )
                                                      
                                                      
                                                      (12,061,145
                                                      )Net
      change in cash and cash equivalents
                                                      
                                                      
                                                      25,416,705
                                                      
                                                      
                                                      
                                                      17,788,816Cash
      and cash equivalents at beginning of period
                                                      
                                                      
                                                      19,914,110
                                                      
                                                      
                                                      
                                                      5,203,060Cash
      and cash equivalents at end of period
                                                      
                                                      $
                                                      45,330,815
                                                      
                                                      
                                                      $
                                                      22,991,876Non
      Cash Investing and Financing ActivitiesMortgage
      loans sold to investors reclassified as mortgage loans on real estate and
      construction loans, held for investment
                                                      
                                                      $
                                                      16,616,672
                                                      
                                                      
                                                      $
                                                      36,290,744








See
accompanying notes to condensed consolidated financial statements.





6





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (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, 2008, 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 six months ended June 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009.





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, those used in determining loan loss reserve, 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
2008 amounts have been reclassified to bring them into conformity with the 2009
presentation.





2) Recent Accounting
Pronouncements





On April
1, 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS
141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies.  FSP 141(R)-1 amends and clarifies FASB
Statement No. 141 (revised 2007) Business Combinations, to
provide guidance related to the initial recognition and measurement of an asset
acquired or a liability assumed that arises from a contingency in a business
combination.  This FSP is effective for assets or liabilities arising
from contingencies in business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  The adoption of FSP FAS 141(R)-1 did not
have a material impact on the Company’s consolidated financial
statements.





InApril 2009, the FASB
issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments(FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and
APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amendsAPB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in summarized financial information at interim
reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009.The adoption of FSP FAS 107-1 and APB 28-1
did not have a material impact on the Company’s consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments(FSP FAS 115-2 and FAS 124-2). FSP FAS
115-2 and FAS 124-2 amends
other-than-temporary impairment guidance in U.S. GAAP for debt securities to
make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending before
March 15, 2009, is not permitted. The adoption of FSP FAS 115-2 and FAS
124-2 did not have a material impact on the Company’s consolidated financial
statements.





7





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions that Are Not Orderly(FSP FAS
157-4). FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with FASB Statement
No. 157,Fair Value
Measurements, when the
volume and level of activity for the asset or liability have significantly
decreased. FSP FAS 157-4 also includes guidance on identifying circumstances
that indicate a transaction is not orderly.FSP FAS 157-4 emphasizes that even if
there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the
objective of a fair value measurement remains the same. FSP FAS 157-4 is
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively. Early adoption is permitted for periods
ending after March 15, 2009. Earlier adoption for periods ending before March
15, 2009is not permitted.The adoption
of FSP FAS 157-4 did not have a material impact on the Company’s consolidated
financial statements.





In May
2009, the FASB issued SFAS No. 165,Subsequent Eventswhich
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  SFAS No. 165 is effective for interim
financial periods ending after June 15, 2009.  The adoption of SFAS
No. 165 did not have a material impact on the Company’s consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of
Financial Assets.  SFAS No. 166 revises SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities.  SFAS No. 166 requires more disclosure about sales
of securitized financial assets and similar transactions, particularly if the
seller retains some risk to the assets. The statement eliminates the concept of
a qualifying special-purpose entity, changes the requirements for the
derecognition of financial assets, and calls upon sellers of the assets to make
additional disclosures about them.  SFAS No. 166 is effective for
fiscal years beginning after November 15, 2009. Earlier application is
prohibited.  This statement must be applied to transfers occurring on
or after the effective date.  The Company has not yet determined the
effect on its consolidated financial statements, if any, upon adoption of SFAS
No. 166.





3)      Comprehensive
Income





For the
three months ended June 30, 2009 and 2008, total comprehensive income amounted
to $2,900,185 and $738,984, respectively.





For the
six months ended June 30, 2009 and 2008, total comprehensive income amounted to
$7,462,766 and $3,530,690, respectively.





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 expense for options issued of $89,100
and $118,113 has been recognized for these plans for the quarters ended June 30,
2009 and 2008, respectively, and $291,611 and $118,113 for the six months ended
June 30, 2009 and 2008, respectively. Deferred tax has been recognized related
to the compensation expense for $30,294 and $40,158 for the quarters ended June
30, 2009 and 2008, respectively and $99,148 and $40,158 for the six months ended
June 30, 2009 and 2008, 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 was
expensed as options became available to exercise at the rate of 25% at the end
of each quarter over the twelve months ended March 31, 2009.





Options
to purchase 324,000 shares of the Company’s common stock were granted December
5, 2008. The fair value relating to stock-based compensation is $356,400 and
will be expensed as options become available to exercise at the rate of 25% at
the end of each quarter over twelve months ended December 31, 2009.





8





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





The weighted-average fair value of each
option granted during 2008 under the 2003 Plan and 2006 Plan is estimated at
$2.15 for the March 31, 2008 options and $1.10 for the December 31, 2008 options
as of the grant date using the Black-Scholes Option Pricing Model with the
following assumptions: dividend yield of 5%, volatility of 63%, risk-free
interest of 3.4%, and an expected life of five to 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.





5)      Earnings Per
Share





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





Three
      Months Ended June 30,2009
                                                            
                                                            
                                                            2008Numerator:Net
      earnings
                                                            
                                                            $
                                                            3,090,389
                                                            
                                                            
                                                            $
                                                            2,100,633Denominator:Basic
      weighted-average shares outstanding
                                                            
                                                            
                                                            7,696,838
                                                            
                                                            
                                                            
                                                            8,095,864Effect
      of dilutive securities:Employee
      stock options
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            75,647Dilutive
      potential common shares
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            75,647Diluted
      weighted-average shares outstanding
                                                            
                                                            
                                                            7,696,838
                                                            
                                                            
                                                            
                                                            8,171,511Basic
      gain per share
                                                            
                                                            $
                                                            0.40
                                                            
                                                            
                                                            $
                                                            0.26Diluted
      gain per share
                                                            
                                                            $
                                                            0.40
                                                            
                                                            
                                                            $
                                                            0.26Six
      Months Ended June 30,2009
                                                            
                                                            
                                                            2008Numerator:Net
      earnings
                                                            
                                                            $
                                                            6,323,399
                                                            
                                                            
                                                            $
                                                            3,476,089Denominator:Basic
      weighted-average shares outstanding
                                                            
                                                            
                                                            7,666,819
                                                            
                                                            
                                                            
                                                            8,089,582Effect
      of dilutive securities:Employee
      stock options
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            87,086Dilutive
      potential common shares
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            87,086Diluted
      weighted-average shares outstanding
                                                            
                                                            
                                                            7,666,819
                                                            
                                                            
                                                            
                                                            8,176,668Basic
      gain per share
                                                            
                                                            $
                                                            0.82
                                                            
                                                            
                                                            $
                                                            0.43Diluted
      gain per share
                                                            
                                                            $
                                                            0.82
                                                            
                                                            
                                                            $
                                                            0.43








Earnings
per share amounts have been adjusted for the effect of annual stock dividends.
For the three months ended June 30, 2009 and 2008 the antidilutive employee
stock options were 303,225 and 41,307, respectively. For the six months ended
the June 30, 2009 and 2008 antidilutive employee stock options were 303,225 and
33,064, respectively.





9





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





6)      Business
Segment








Life
      Insurance
                                          
                                          
                                          Cemetery/
                                            Mortuary
                                          
                                          
                                          Mortgage
                                          
                                          
                                          Reconciling
      Items
                                          
                                          
                                          ConsolidatedFor
      the Three Months EndedJune 30,
      2009Revenues
      fromexternal
      customers
                                          
                                          $
                                          13,218,812
                                          
                                          
                                          $
                                          3,803,062
                                          
                                          
                                          $
                                          40,988,058
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          58,009,932Intersegment
      revenues
                                          
                                          
                                          1,366,732
                                          
                                          
                                          
                                          95,303
                                          
                                          
                                          
                                          50,810
                                          
                                          
                                          
                                          (1,512,845
                                          )
                                          
                                          
                                          -Segment
      profit (loss)before
      income taxes
                                          
                                          
                                          363,661
                                          
                                          
                                          
                                          151,353
                                          
                                          
                                          
                                          3,969,355
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4,484,369For
      the Three Months EndedJune 30,
      2008Revenues
      fromexternal
      customers
                                          
                                          $
                                          13,115,350
                                          
                                          
                                          $
                                          3,724,913
                                          
                                          
                                          $
                                          43,561,932
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          60,402,195Intersegment
      revenues
                                          
                                          
                                          1,349,995
                                          
                                          
                                          
                                          23,001
                                          
                                          
                                          
                                          91,197
                                          
                                          
                                          
                                          (1,464,193
                                          )
                                          
                                          
                                          -Segment
      profitbefore
      income taxes
                                          
                                          
                                          547,131
                                          
                                          
                                          
                                          (15,299
                                          )
                                          
                                          
                                          2,555,416
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          3,087,248For
      the Six Months EndedJune 30,
      2009Revenues
      fromexternal
      customers
                                          
                                          $
                                          27,177,230
                                          
                                          
                                          $
                                          6,984,157
                                          
                                          
                                          $
                                          83,340,642
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          117,502,029Intersegment
      revenues
                                          
                                          
                                          2,429,986
                                          
                                          
                                          
                                          177,894
                                          
                                          
                                          
                                          102,596
                                          
                                          
                                          
                                          (2,710,476
                                          )
                                          
                                          
                                          -Segment
      profit (loss)before
      income taxes
                                          
                                          
                                          51,461
                                          
                                          
                                          
                                          396,914
                                          
                                          
                                          
                                          8,975,897
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          9,424,272Identifiable
      Assets
                                          
                                          
                                          425,588,966
                                          
                                          
                                          
                                          87,315,916
                                          
                                          
                                          
                                          39,402,323
                                          
                                          
                                          
                                          (90,161,957
                                          )
                                          
                                          
                                          462,145,248For
      the Six Months EndedJune 30,
      2008Revenues
      fromexternal
      customers
                                          
                                          $
                                          25,944,742
                                          
                                          
                                          $
                                          7,592,785
                                          
                                          
                                          $
                                          80,086,168
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          113,623,695Intersegment
      revenues
                                          
                                          
                                          2,977,824
                                          
                                          
                                          
                                          46,002
                                          
                                          
                                          
                                          189,187
                                          
                                          
                                          
                                          (3,213,013
                                          )
                                          
                                          
                                          -Segment
      profitbefore
      income taxes
                                          
                                          
                                          962,353
                                          
                                          
                                          
                                          364,108
                                          
                                          
                                          
                                          3,705,722
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,032,183Identifiable
      Assets
                                          
                                          
                                          393,089,113
                                          
                                          
                                          
                                          63,266,862
                                          
                                          
                                          
                                          27,116,283
                                          
                                          
                                          
                                          (65,849,015
                                          )
                                          
                                          
                                          417,623,243








10





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





7)     Fair Value of Financial
Assets and Financial Liabilities





SFAS
No. 157 measures certain investments at fair value, in accordance with SFAS
No. 157, Fair Value
Measurements:





·
            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
consolidated condensed 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
pricesforidentical assets or liabilities in an
active market that we can access.





Level
2:Financial
assets and financial liabilities whose values are based on the
following:




a)
            Quoted prices for similar assets or
      liabilities in active
markets;


b)
            Quoted prices for identical or
      similar assets or liabilities in non-active markets;
    or


c)
            Valuation models whose inputs are
      observable, directly or indirectly, for substantially the fulltermof 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.





11





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





7)     Fair Value of Financial
Assets and Financial Liabilities (Continued)








The following tables summarize Level 1,
2 and 3 financial assets and financial liabilitiesmeasured at fair value on a recurring
basisby their
classification in thecondensed consolidatedbalance sheetatJune 30, 2009.








Total
                              
                              
                              Quoted
      Prices
                                in
      Active
                                Marketsfor
                                Identical
      Assets
                                (Level
      1)
                              
                              
                              Significant
                                Observable
                                Inputs
                                (Level
      2)
                              
                              
                              Significant
                                Unobservable
                                Inputs
                                (Level
      3)Assets
      accounted for at fair value on a recurring basisInvestment
      in securities available for sale
                              
                              $
                              6,642,366
                              
                              
                              $
                              6,642,366
                              
                              
                              $
                              -
                              
                              
                              $
                              -Short-term
      investments
                              
                              
                              6,225,891
                              
                              
                              
                              6,225,891
                              
                              
                              
                              -
                              
                              
                              
                              -Restricted
      assets of cemeteries and mortuaries
                              
                              
                              1,580,839
                              
                              
                              
                              1,580,839
                              
                              
                              
                              -
                              
                              
                              
                              -Cemetery
      perpetual care trust investments
                              
                              
                              1,924,592
                              
                              
                              
                              1,924,592
                              
                              
                              
                              -
                              
                              
                              
                              -Derivatives
      - interest rate lock commitments
                              
                              
                              2,025,206
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,025,206Total
      assets accounted for at fair value on a recurring basis
                              
                              $
                              18,398,894
                              
                              
                              $
                              16,373,688
                              
                              
                              $
                              -
                              
                              
                              $
                              2,025,206Liabilities
      accounted for at fair value on a  recurring
basisInvestment-type
      insurance contracts
                              
                              $
                              (110,738,686
                              )
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (110,738,686
                              )Derivatives:
      Bank loan interest rate swaps
                              
                              
                              (110,232
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (110,232
                              )Total
      liabilities accounted for at fair value on a recurring
    basis
                              
                              $
                              (110,848,918
                              )
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              (110,848,918
                              )







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








Investment
      Type
                              Insurance
      Contracts
                            
                            
                            Interest
      Rate
                              Lock
      Commitments
                            
                            
                            Bank
      Loan
                              Interest
      Rate SwapsBalance
      - December 31, 2008
                            
                            $
                            (112,351,916
                            )
                            
                            $
                            362,231
                            
                            
                            $
                            (167,483
                            )Total
      Gains (Losses):Included
      in earnings
                            
                            
                            1,613,230
                            
                            
                            
                            -
                            
                            
                            
                            -Included
      in othercomprehensive
      income
                            
                            
                            
                            
                            
                            
                            1,662,975
                            
                            
                            
                            57,251Balance
      - June 30, 2009
                            
                            $
                            (110,738,686
                            )
                            
                            $
                            2,025,206
                            
                            
                            $
                            (110,232
                            )





The items
shown under level one are valued as follows:





On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.





On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.





12





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





7)     Fair Value of Financial
Assets and Financial Liabilities (Continued)





The items
shown under level three are valued as follows:





Investment type insurance
contracts.Future policy benefit
reserves for interest-sensitive insurance products are computed under a
retrospective deposit method and represent policy account balances before
applicable surrender charges. Policy benefits and claims that are charged to
expense include benefit claims incurred in the period in excess of related
policy account balances. Interest credit rates for interest-sensitive insurance
products ranged from 4% to 6.5%.





Interest rate lock
commitments. The Company’s mortgage banking activities enters into
interest rate lock commitments with potential borrowers and forward commitments
to sell loans to third-party investors. The Company also implements a hedging
strategy for these transactions. A mortgage loan commitment binds the Company to
lend funds to a qualified borrower at a specified interest rate and within a
specified period of time, generally up to 30 days after inception of the
mortgage loan commitment. Mortgage loan commitments are derivatives under
Statement of Financial Accounting Standards No. 133 (“SFAS 133”), Accounting for Derivative
Instruments and Hedging Activities, as amended and are recognized at fair
value on the consolidated balance sheet with changes in their fair values
recorded as part of other comprehensive income from mortgage banking
operations.





Bank loan interest rate
swaps: Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate swaps mirror the term of the note payable and expire on
the maturity date of the bank loans they hedge. The interest rate swaps are
derivative financial instruments carried at their fair value.





8)    
Other Business
Activity





Mortgage
Operations





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 retail offices.
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 six months
ended June 30, 2009, and 2008, SecurityNational Mortgage originated and sold
9,781 loans ($1,824,623,109 total volume) and 9,790 loans ($1,889,004,323 total
volume), respectively.





SecurityNational
Mortgage has loan purchase agreements to originate and sell loans to
unaffiliated warehouse banks. The total amount available to originate loans
under these loan purchase agreements at June 30, 2009 was $250,000,000.
SecurityNational Mortgage originates the loans and immediately sells them to the
warehouse bank as more fully described below. As of June 30, 2009, mortgage
loans totaling $126,071,979 have been sold to warehouse banks and settlement
with the third party investor was still pending. Since the mortgage loans have
been sold to the warehouse banks, SecurityNational Mortgage is not obligated,
except in the circumstances mentioned below, to pay the amounts outstanding on
the mortgage loans, but does pay a fee in the form of interest on a portion of
the mortgage loans between the date of the sale of the loans to the warehouse
bank and the date of the settlement with the third party investor. The terms of
the loan purchase agreements are typically for one year, with interest rates on
a portion of the mortgage loans ranging from 1.5% to 2.25% over the 30 days
LIBOR rate (from 1.81% to 2.55% as of June 30, 2009). SecurityNational Mortgage
renewed one of its loan purchase agreements that expired on September 30, 2008
for another one year term. The other loan purchase agreement was terminated in
March 2009. The Company is actively pursuing purchase agreements with other
warehouse banks.


13





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





Mortgage
fee income consists of origination fees, processing fees and certain other
income related to the origination and sale of mortgage loans. For mortgage loans
sold to third party investors, mortgage fee income and related expenses are
recognized pursuant to SFAS 140 at the time the sales of mortgage loans meet the
sales criteria for the transfer of financial assets which are: (1) the
transferred assets have been isolated from the Company and its creditors, (2)
the transferee has the right to pledge or exchange the mortgage, and (3) the
Company does not maintain effective control over the transferred mortgage. The
Company has determined that all three criteria are met at the time the loan is
funded. All rights and title to the mortgage loans are assigned to unrelated
financial institution investors, including any investor commitments for these
loans prior to warehouse banks purchasing these loans under the purchase
commitments.







The
Company sells all loans to third party investors without recourse. However, the
Company may be required to repurchase loans or pay a fee instead of repurchase
under certain events such as the following:





·
            Failure
      to deliver original documents specified by the
  investor.


·
            The
      existence of misrepresentation or fraud in the origination of the
      loan.


·
            The
      loan becomes delinquent due to nonpayment during the first several months
      after it is sold.


·
            Early
      pay-off of a loan, as defined by the
agreements.


·
            Excessive
      time to settle a loan.


·
            Investor
      declines purchase.


·
            Discontinued
      product and expired commitment.





Purchase
commitments generally specify a date 30 to 45 days after delivery upon which the
underlying loans should be settled. Depending on market conditions, these
commitment settlement dates can be extended at a cost to the Company. Generally,
a ten day extension will cost .125% (12.5 basis points) of the loan amount. The
Company’s historical data shows that 99% of all loans originated by the Company
are generally settled by the investors as agreed within 16 days after delivery.
There are situations when the Company determines that it is unable to enforce
the settlement of loans rejected by the third-party investors and that it is in
the Company’s best interest to repurchase those loans from the warehouse banks.
It is the Company's policy to cure any documentation problems with respect to
such loans at a minimal cost for up to a six-month time period and to pursue
efforts to enforce purchase commitments from third-party investors concerning
mortgage loans. The Company believes that six months allows adequate time to
remedy any documentation issues, to enforce purchase commitments, and to exhaust
other alternatives. Remedy methods include, but are not limited to:





·
            Research
      reasons for rejection


·
            Provide
      additional documents


·
            Request
      investor exceptions


·
            Appeal
      rejection decision to purchase
committee


·
            Commit
      to secondary investors





Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the loans are
repurchased and transferred to the long term investment portfolio at the lower
of cost or market value and previously recorded sales revenue is reversed. Any
loan that subsequently becomes delinquent is evaluated by the Company at that
time and any allowances for impairment are adjusted accordingly.





Determining lower of cost or
market: Cost is equal to the amount paid to the warehouse bank and the
amount originally funded by the Company. Market value is often difficult to
determine, but is based on the following:





·
            For
      loans that have an active market we use the market price on the
      repurchased date.


·
            For
      loans where there is no market but there is a similar product, we use the
      market value for the similar product on the repurchased
    date.


·
            For
      loans where no active market exists on the repurchased date, we determine
      that the unpaid principal balance best approximates the market value on
      the repurchased date, after considering the fair value of the underlying
      real estate collateral and estimated future cash
  flows.





The
appraised value of the real estate underlying the original loan adds
significance to the Company’s determination of fair value since, if the loan
becomes delinquent, the Company has sufficient value to collect the unpaid
principal balance or the carrying value of the loan. In determining the market
value on the date of repurchase, the Company considers the total value of all
the loans since any sale of loans would be made as a pool.





14





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.





The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans. The market for new subprime loans
has been substantially reduced and several mortgage companies whose primary
product was subprime mortgage originations have ceased operations. The Company
funded approximately $5,505,000 (0.14% of the Company’s production) in subprime
loans during the twelve months ended 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%. 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 in 2007 and 2008 that
experienced financial difficulties and were not able to settle the loans. The
total amount of these loans was approximately $52,556,000, of which
approximately $36,499,000 were in loans where the secondary market no longer
exists. 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 approximate the unpaid principal balances adjusted for
chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans. The 2008 financial statements reflect the transfer of
the mortgage loans from “Mortgage Loans Sold to Investors” to “Mortgage Loans on
Real Estate”. The loan sale revenue recorded on the sale of the mortgage loans
was reversed on the date the loans were repurchased.





As is
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
During this period, the Company services these loans through Security National
Life, its life insurance subsidiary.





As of
June 30, 2009, the Company’s long term mortgage loan portfolio had $18,068,088
in unpaid principal with delinquencies more than 90 days. Of this amount
$13,362,897 was in foreclosure proceedings. The Company has not received or
recognized any interest income on the $18,068,088 in mortgage loans with
delinquencies more than 90 days. During the three and six months ended June 30,
2009, the Company increased its allowance for mortgage losses by $61,383 and
$842,337, respectively, which was charged to loan loss expense and included in
selling, general and administrative expenses for the period. The allowance for
mortgage loan losses as of June 30, 2009 was $5,621,573.





Also at
June 30, 2009, the cumulative total the Company has foreclosed on is $35,919,370
in long term mortgage loans. The foreclosed property was shown in real estate.
The Company is able to carry the foreclosed properties in Security National Life
and SecurityNational Mortgage, its life and mortgage subsidiaries, and will rent
the properties until it is deemed desirable to sell them.





Southern
Security Life Insurance Company





On
December 18, 2008, the Company acquired all of the outstanding common stock of
Southern Security Life Insurance Company. The results of Southern Security’s
operations have been included in the consolidated financial statements from
December 23, 2008. Southern Security sells and services life insurance, annuity
products, accident and health insurance, and funeral plan insurance, all of
which are consistent with and will expand the Company’s insurance
business.





The
Company placed $443,500 of funds in an escrow account with the Company’s law
firm which funds have been included in the accompanying condensed consolidated
balance sheets at June 30, 2009 and December 31, 2008 in receivables with the
liability payable to the selling shareholders of an equal amount included in
other liabilities and accrued expenses.





15





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





The following unaudited pro forma
information has been prepared to present the results of operations of the
Company assuming theacquisitions ofSouthern Securityhad occurred at the beginning of the
year ended December31, 2008. This pro forma information is
supplemental and does not necessarily present the operations of the Company that
would have occurred had the acquisition occurred on thatdate and may not reflect the operations
that will occur in the future:





For
      the Three Months
                          June
      30, 2008
                          (unaudited)
                        
                        
                        For
      the Six Months
                          June
      30, 2008
                          (unaudited)Total
      revenues
                        
                        $
                        61,094,000
                        
                        
                        $
                        115,007,000Net
      earnings
                        
                        $
                        2,154,000
                        
                        
                        $
                        3,583,000Net
      earnings per Class A equivalent common share
                        
                        $
                        0.27
                        
                        
                        $
                        0.44Net
      earnings per Class A equivalent common share assuming
      dilution
                        
                        $
                        0.27
                        
                        
                        $
                        0.44








Letter
Agreement with Florida Office of Insurance Regulation to Cease Writing New
Insurance in Florida




After
several months of discussions with the Florida Office of Insurance Regulation
concerning the categorization of certain admitted assets, Security National Life
received a letter dated June 17, 2009, in which Florida indicated its rejection
of Security National Life's position and requested that Security National Life
either infuse additional capital or cease writing new business in the State of
Florida.  Florida’s decision was based upon excess investments in
subsidiaries by Security National Life and Florida’s determination to classify
as property acquired and held for the purposes of investment, certain real
property that Security National Life acquired in satisfaction of creditor rights
and subsequently rented to tenants.  These determinations resulted in
Security National Life exceeding certain investment limitations under Florida
law and in a corresponding capital and surplus deficiency as of March 31,
2009.  Florida has acknowledged that the deficiency may be cured by
the infusion of additional capital in the amount of the excess
investments.
 
 Security
National Life strongly disagrees with Florida’s interpretation of the Florida
statutes, including Florida’s opinion that $21,672,000 of real property that
Security National Life acquired in satisfaction of creditor rights as of March
31, 2009 must be included in an investment category that is subject to a
limitation of only 5% of admitted assets (which category consists of real estate
acquired and held for investment purposes) rather than in the investment
category that is subject to a limitation of 15% of admitted assets (which
category includes real estate acquired in satisfaction of loans, mortgages, or
debts).  In rendering its opinion, Florida did not suggest that the
real property assets of Security National Life are not fairly stated. The letter
further stated that Security National Life may not resume writing insurance in
Florida until such time as it regains full compliance with Florida law and
receives written approval from Florida authorizing it to resume writing
insurance.
 
 On June
18, 2009, Security National Life responded by letter to Florida and expressed
its disagreement with Florida’s interpretation of the Florida statutes but, for
practical purposes, agreed, beginning as of June 30, 2009 and continuing until
Florida determines that Security National Life has attained full compliance with
the Florida statutes, to cease originating new insurance policies in Florida and
not to enter into any new reinsurance agreements with any Florida domiciled
insurance company.  The State of Utah, Security National Life’s state
of domicile, has not determined Security National Life to have a capital and
surplus deficiency, nor is Security National Life aware of any state, other than
Florida, in which Security National Life is determined to have a capital and
surplus deficiency.
 
 During
2008, the annualized premiums for new insurance policies written by Security
National Life in Florida were $464,000, or 4.7% of the total amount of
$9,901,000 in annualized premiums for new insurance policies written by Security
National Life during the same period.  Security National Life is in
the process of preparing an application to be submitted to Florida for approval
of a Florida only subsidiary for all new insurance business written in
Florida.  Security National Life believes that if Florida were to
approve a Florida only subsidiary, Security National Life would be able to
resume writing new insurance policies in Florida in full compliance with the
Florida statutes relating to investments in real estate and
subsidiaries.


16





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





9)     Allowance for Loan Losses
and Loan Loss Reserve





The
Company provides allowances for losses on its mortgage loans through an
allowance for loan losses (a contra-asset account) and through the mortgage loan
loss reserve (a liability account). The allowance for loan losses and doubtful
accounts is an allowance for losses on the Company’s mortgage loans held for
investment. When a mortgage loan is past due more than 90 days, the Company,
where appropriate, sets up an allowance to approximate the excess of the
carrying value of the mortgage loan over the estimated fair value of the
underlying real estate collateral. Once a loan is past due more than 90 days the
Company does not accrue any interest income and proceeds to foreclose on the
real estate. All expenses for foreclosure are expensed as incurred. Once
foreclosed, the carrying value approximates its fair value and the amount is
classified as real estate. The Company is able to carry the foreclosed
properties and will rent the properties until it is deemed desirable to sell
them.





The
following is a summary of the allowance for loan losses as a contra-asset
account for the periods presented:








Three
      Months Ended June 30,
                          
                          
                          Six
      Months Ended June 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Balance,
      beginning of period
                          
                          $
                          5,561,421
                          
                          
                          $
                          1,797,491
                          
                          
                          $
                          4,780,467
                          
                          
                          $
                          1,435,131Provisions
      for losses
                          
                          
                          61,383
                          
                          
                          
                          1,270,125
                          
                          
                          
                          842,337
                          
                          
                          
                          1,720,125Charge-offs
                          
                          
                          (1,231
                          )
                          
                          
                          (121,307
                          )
                          
                          
                          (1,231
                          )
                          
                          
                          (208,947
                          )Balance,
      June 30, 2009
                          
                          $
                          5,621,573
                          
                          
                          $
                          2,946,309
                          
                          
                          $
                          5,621,573
                          
                          
                          $
                          2,946,309








The
mortgage loan loss reserve is an estimate of probable losses at the balance
sheet date that the Company will realize in the future on mortgage loans sold to
third party investors. The Company may be required to reimburse third party
investors for costs associated with early payoff of loans within the first six
months of such loans and to repurchase loans where there is a default in any of
the first four monthly payments to the investors or, in lieu of repurchase, to
pay a negotiated fee to the investors. The Company’s estimates are based upon
historical loss experience and the best estimate of the probable loan loss
liabilities.





Upon completion of a transfer that
satisfies the conditions to be accounted for as a sale, the Company initially
measures at fair value liabilities incurred in a sale relating to any
guarantee or recourse provisions. The Company accrues a monthly allowance for
indemnification losses to investors of .20% (20 basis points) of total
production. This estimate is based on the Company’s historical experience. The
amount accrued for the three and six months ended June 30, 2009 was $5,052,577
and $9,792,284, respectively and the charge to expense has been included in
selling general and administrative expenses. The estimated liability for
indemnification losses is included in other liabilities and accrued expenses,
and as of June 30, 2009, the balance was $7,833,133.








Three
      Months Ended June 30, 2009
                          
                          
                          Six
      Months Ended June 30, 20092009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Balance,
      beginning of period
                          
                          $
                          5,337,012
                          
                          
                          $
                          3,305,746
                          
                          
                          $
                          2,775,452
                          
                          
                          $
                          2,356,309Provisions
      for losses
                          
                          
                          5,052,577
                          
                          
                          
                          1,782,763
                          
                          
                          
                          9,792,284
                          
                          
                          
                          3,308,283Charge-offs
                          
                          
                          (2,556,456
                          )
                          
                          
                          (2,921,176
                          )
                          
                          
                          (4,734,603
                          )
                          
                          
                          (3,497,259
                          )Balance,
      at June 30, 2009
                          
                          $
                          7,833,133
                          
                          
                          $
                          2,167,333
                          
                          
                          $
                          7,833,133
                          
                          
                          $
                          2,167,333








The
Company believes the allowance for loan losses and the loan loss reserve
represent probable loan losses incurred as of the balance sheet
date.





17





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





10) Derivative
Investments





The Company is exposed to price risk due
to the potential impact of changes in interest rates on the values of mortgage
loan commitments from the time a derivative loan commitment is made to an
applicant to the time the loan that would result from the exercise ofthat loan commitment is
funded.Managing price risk
is complicated by the fact that the ultimate percentage of derivative loan
commitments that will be exercised (i.e., the number of loan commitments
that will be funded)
fluctuates.The probability
that a loan will not be funded within the terms of the commitment is driven by a
number of factors, particularly the change, if any, in mortgage rates following
the inception of the interestrate lock.However, many borrowers continue to
exercise derivative loan commitments even when interest rates have
fallen.





In general, the probability of funding
increases if mortgage rates rise and decreases if mortgage rates fall. 
This is due primarily to the relative attractiveness of current mortgage rates
compared to the applicant’s committed rate.  The probability that a loan
will not be funded within the terms of the mortgage loan commitment also is
influenced by the source of the applications (retail, broker, or correspondent
channels), proximity to rate lock expiration, purpose for the loan (purchase or
refinance); product type and the application approval status. The Company has
developed fallout estimates using historical data that take into account all of
the variables, as well as renegotiations of rate and point commitments that tend
to occur when mortgage rates fall.  These fallout estimates are used to
estimate the number of loans that the Company expects to be funded within the
terms of the mortgage loan commitments and are updated periodically to reflect
the most current data.





The Company estimates the fair value of
a mortgage loan commitment based on the change in estimated fair value of the
underlying mortgage loan and the probability that the mortgage loan will fund
within the terms of the
commitment.The change in
fair value of the underlying mortgage loan is measured from the date the
mortgage loan commitment is issued. Therefore, at the time of the issuance,
theestimated fair value is
zero.Following the
issuance, the value of a mortgage loan commitment can be either positive or
negative depending upon the change in value ofthe 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 derivative loan commitments, thereby reducing
earnings volatility related to the recognition in earnings of changes in the
values of the commitments.A forward loan sales commitment protects
the Company from losses on sales of the loans arising from exercise of the loan
commitments by securing the ultimate sales price and delivery date of the loans.For mortgage loan
commitments not protected by a forward sales commitment, 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.
Treasure futures.The Company takes into account various
factors and strategies in determining the portion of the mortgage loan
commitmentsit wants to
hedge economically.





During
2001, the Company entered into a $2,000,000 note payable to a bank with interest
due at a variable interest rate of the Libor rate plus 1.65%. During 2001, the
Company also entered into an interest rate swap instrument that effectively
fixed the interest rate on the note payable at 6.34% per annum. Management
considers the interest rate swap instrument an effective cash flow hedge against
the variable interest rate on the bank note since the interest rate swap mirrors
the term of the note payable and expires on the maturity date of the bank loan
it hedges. The interest rate swap is a derivative financial instrument carried
at its fair value.





In the
event the swap is terminated, any resulting gain or loss would be deferred and
amortized to interest expense over the remaining life of the bank loan it
hedged. In the event of early extinguishment the hedged bank loan, any realized
or unrealized gain or loss from the hedging swap would be recognized in income
coincident with the extinguishment.





18





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





10)   Derivative
Investments (Continued)





The
following table shows the fair value of derivatives as of  June 30,
2009 and December 31, 2008.








Fair
      Value of Derivative InstrumentsAsset
      Derivatives
                                            
                                            Liability
      DerivativesJune
      30, 2009
                                            
                                            
                                            December
      31, 2008
                                            
                                            June
      30, 2009
                                            
                                            December
      31, 2008Balance
                                              Sheet
                                              Location
                                            
                                            
                                            Fair
      Value
                                            
                                            
                                            Balance
                                              Sheet
                                              Location
                                            
                                            
                                            Fair
      Value
                                            
                                            Balance
                                              Sheet
                                              Location
                                            
                                            Fair
      Value
                                            
                                            Balance
                                              Sheet
                                              Location
                                            
                                            Fair
      ValueDerivatives
      designated as hedging instruments under Statement 133Interest
      rate lock commitments
                                            
                                            other
      assets
                                            
                                            
                                            $
                                            2,128,285
                                            
                                            
                                            other
      assets
                                            
                                            
                                            $
                                            2,372,452
                                            
                                            other
      liabilities
                                            
                                            $
                                            103,079
                                            
                                            other
      liabilities
                                            
                                            $
                                            2,010,221Interest
      rate swaps
                                            
                                            
                                            --
                                            
                                            
                                            
                                            --
                                            
                                            
                                            
                                            --
                                            
                                            
                                            
                                            --
                                            
                                            Bank
      loans payable
                                            
                                            
                                            110,231
                                            
                                            Bank
      loans payable
                                            
                                            
                                            167,483Total
                                            
                                            
                                            
                                            
                                            
                                            $
                                            2,128,285
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            2,372,452
                                            
                                            
                                            
                                            $
                                            213,310
                                            
                                            
                                            
                                            $
                                            2,177,704








The following table shows the gain
(loss) on derivatives for the periods presented. There were no gains or losses
reclassified from accumulated other comprehensive income (OCI) into income or
gains or losses recognized in income on derivatives ineffective portion or any
amounts excluded from effective testing.





Gross
      Amount Gain (Loss) Recognized in OCIThree
      months ended June 30,Derivatives
      in Statement 133 - Cash Flow Hedging Relationships
                                        
                                        2009
                                        
                                        
                                        2008Interest
      Rate Lock Commitments
                                        
                                        $
                                        (1,099,845
                                        )
                                        
                                        $
                                        (1,343,958
                                        )Interest
      Rate Swaps
                                        
                                        
                                        46,789
                                        
                                        
                                        
                                        80,390Total
                                        
                                        $
                                        (1,053,056
                                        )
                                        
                                        $
                                        (1,263,568
                                        )Six
      months ended June 30,2009
                                        
                                        
                                        2008Interest
      Rate Lock Commitments
                                        
                                        $
                                        1,662,975
                                        
                                        
                                        $
                                        1,724,286Interest
      Rate Swaps
                                        
                                        
                                        57,251
                                        
                                        
                                        
                                        (19,108
                                        )Total
                                        
                                        $
                                        1,720,226
                                        
                                        
                                        $
                                        1,705,178




19





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





11) Commitments and
Contingencies





On
December 31, 2008, the Company entered into a Coinsurance Funds Withheld
Reinsurance Agreement with Continental American Insurance Company (“Continental
American”), a South Carolina domiciled insurance company, effective November 30,
2008. The Company ceded to Continental American 100% of a block of deferred
annuities in the amount of $4,828,487 as of December 31, 2008 and retained the
assets and recorded a funds held under coinsurance liability for the same
amount. Continental American has agreed to pay the Company an initial ceding
commission of $60,000 and a quarterly management fee of $16,500 per quarter to
administer the policies. The Company will also receive a 90% experience refund
for any profits on the business. The Company has the right to recapture the
business on any date if mutually agreed and with 90 days written notice to
Continental American.





The
Company has commitments to fund residential construction loans. As of June 30,
2009, the Company had commitments of $31,932,992 for these loans, of which
$30,431,880 had been funded. These loans are for new construction. The Company
will advance funds once the work has been completed and an independent
inspection is made. The maximum loan commitment ranges between 50% to 80% of
appraised value. The Company receives fees from the borrowers and the interest
rate is generally 1% to 4.75% over the bank prime rate (3.25% as of June 30,
2009). Maturities range between six and twelve months.





In 1998,
SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman
Brothers Bank and its wholly owned subsidiary, Aurora Loan Services, LLC. Under
the terms of the Loan Purchase Agreement, Lehman Brothers, through its
subsidiary, Aurora Loan Services, agreed to purchase mortgage loans from time to
time from SecurityNational Mortgage. During 2007, Aurora Loan Services purchased
a total of 1,490 mortgage loans in the aggregate amount of $352,774,000 from
SecurityNational Mortgage. On January 17, 2008, Aurora Loan Services announced
it was suspending all wholesale and correspondent mortgage originations. As a
result of this policy change, Aurora Loan Services discontinued purchasing
mortgage loans from all mortgage brokers and lenders, including SecurityNational
Mortgage.




During
2007, Aurora Loan Services maintained that as part of its quality control
efforts it reviewed mortgage loans purchased from SecurityNational Mortgage and
determined that certain of the loans contained alleged misrepresentations and
early payment defaults. Aurora Loan Services further maintained that these
alleged breaches in the purchased mortgage loans provide it with the right to
require SecurityNational Mortgage to immediately repurchase the mortgage loans
containing the alleged breaches in accordance with the terms of the Loan
Purchase Agreement. In order for Lehman Brothers and Aurora Loan Services to
refrain from demanding immediate repurchase of the mortgage loans by
SecurityNational Mortgage, SecurityNational Mortgage was willing to enter into
an agreement to indemnify Lehman Brothers and Aurora Loan Services for any
losses incurred in connection with the mortgage loans with alleged breaches that
were purchased from SecurityNational Mortgage.





On
December 17, 2007, SecurityNational Mortgage entered into an Indemnification
Agreement with Lehman Brothers and Aurora Loan Services. Under the terms of the
Indemnification Agreement, SecurityNational Mortgage agrees to indemnify Lehman
Brothers and Aurora Loan Services for 75% of all losses that Lehman Brothers and
Aurora Loan Services may have as a result of any current or future defaults by
mortgagors on 54 mortgage loans that were purchased from SecurityNational
Mortgage and listed as an attachment to the Indemnification Agreement.
SecurityNational Mortgage is released from any obligation to pay the remaining
25% of such losses. The Indemnification Agreement also requires SecurityNational
Mortgage to indemnify Lehman Brothers and Aurora Loan Services for 100% of
losses incurred on mortgage loans with alleged breaches that are not listed on
the attachment to the agreement.





Concurrently
with the execution of the Indemnification Agreement, SecurityNational Mortgage
paid $395,000 to Aurora Loan Services as a deposit into a reserve account to
secure the obligations of SecurityNational Mortgage under the Indemnification
Agreement. This deposit is in addition to a $250,000 deposit that
SecurityNational Mortgage made to Aurora Loan Services on December 10, 2007, for
a total of $645,000. Losses from mortgage loans with alleged breaches are
payable by SecurityNational Mortgage from the reserve account. However, Lehman
Brothers and Aurora Loan Services are not to apply any funds from the reserve
account to a particular mortgage loan until an actual loss has
occurred.





20





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





11) Commitments and
Contingencies (Continued)










The
Indemnification Agreement further provides that SecurityNational Mortgage will
be entitled to have held back 25 basis points on any mortgage loans that Aurora
Loan Services purchases from SecurityNational Mortgage and to add the amount of
the basis point holdbacks to the reserve account. SecurityNational Mortgage
agreed to deliver to Aurora Loan Services at least $300,000,000 in mortgage
loans on an annual basis or at least $600,000,000 in 24 months. These provisions
may not be effective, however, because Aurora Loan Services has discontinued
purchasing mortgage loans from SecurityNational Mortgage. SecurityNational
Mortgage also agrees to pay to Aurora Loan Services the difference between the
reserve account balance and $645,000, but in no event will SecurityNational
Mortgage be required to pay any amount into the reserve account that would
result in a total contribution, including both the basis point holdbacks and
cash payments, in excess of $125,000 for any calendar month.





During
2007 and 2008, SecurityNational Mortgage made $1,730,000 in total payments to
Aurora Loan Services pursuant to the Indemnification Agreement. During the three
and six months ended June 30, 2009, SecurityNational Mortgage made payments to
Aurora Loan Services, of $625,000 and $625,000, respectively. When
SecurityNational Mortgage entered into the Indemnification Agreement, it
anticipated using basis point holdbacks from loan production credits toward
satisfying the $125,000 monthly obligations. Because Aurora Loan Services
discontinued purchasing mortgage loans from SecurityNational Mortgage shortly
after the Indemnification Agreement was executed, SecurityNational Mortgage has
not had the benefit of using the basis point holdbacks toward payment of the
$125,000 monthly obligations.





During
2008, funds were paid out of the reserve account to indemnify $1,700,000 in
losses from 22 mortgage loans that were among the 54 mortgage loans with alleged
breaches which were listed on the attachment to the Indemnification Agreement.
The estimated potential losses from the remaining 32 mortgage loans listed on
the attachments, which would require indemnification by SecurityNational
Mortgage for such losses, is $3,357,000. Moreover, Aurora Loan Services has made
a request to be indemnified for losses related to ten mortgage loans not listed
on the attachment to the Indemnification Agreement. Aurora Loan Services claims
the total amount of such potential losses is $2,746,000.  During 2008,
the Company recognized losses related to this matter of $1,636,000; however,
management cannot fully determine the total losses, if any, nor the rights that
the Company may have as a result of Lehman Brothers’ and Aurora Loan Services’
refusal to purchase subsequent loans under the Indemnification Agreement. The
Company has accrued an additional $1,073,018 for losses under the
Indemnification Agreement during the six months ended June 30,
2009.





On March
5, 2007, the Company received a proposed consent order from the Florida Office
of Insurance Regulation concerning the New Success Life Program, the higher
education product currently marketed and sold by Southern Security Life. The
proposed order states that as a result of the investigation the Florida Office
of Insurance Regulation has determined that Southern Security Life violated
Florida law (i) by knowingly making statements, sales presentations, omissions
or comparisons that misrepresented the benefits, advantages, or terms of the New
Success Life Program, and (ii) by knowingly making advertisements,
announcements, or statements containing representations that were untrue or
misleading.





The
proposed order would require Security National Life and Southern Security Life
to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated
value.





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.





21





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


June 30,
2009 (Unaudited)





11) Commitments and
Contingencies (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 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 administrative
complaint from the Florida Office of Insurance Regulation nor is it aware of any
recent market conduct examination that the Florida Office has conducted relative
to the program. The Company intends to vigorously oppose the proposed consent
order. The Company is currently engaged in discussions with the Florida Office
of Insurance Regulation in an effort to settle the dispute concerning the
proposed order. If the Company is unable to reach a satisfactory resolution with
the Florida Office of Insurance Regulation with respect to the terms of the
proposed consent order and the Florida Office 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.





The
Company is a defendant in various other legal actions arising from the normal
conduct of business. Management believes that none of the actions will have a
material effect on the Company’s financial position or results of operations.
Based on management’s assessment and legal counsel’s representations concerning
the likelihood of unfavorable outcomes, no amounts have been accrued for the
above claims in the consolidated financial statements.





The
Company is not a party to any other material legal proceedings outside the
ordinary course of business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on its financial
condition or results of operations.





22





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





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 retail offices. 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 six months ended June 30,
2009 and 2008, SecurityNational Mortgage originated and sold 9,781 loans
($1,824,623,109total volume) and 9,790
loans ($1,889,004,000 total volume), respectively.




SecurityNational Mortgage
has loan purchase agreements to originate and sell loans to unaffiliated
warehouse banks. The total amount available to originate loans under these loan
purchase agreements at June 30, 2009 was $250,000,000. SecurityNational Mortgage
originates the loans and immediately sells them to the warehouse bank as more
fully described below. As of June 30, 2009, mortgage loans totaling $126,071,979
have been sold to warehouse banks and settlement with the third party investor
was still pending. Since the mortgage loans have been sold to the warehouse
banks, SecurityNational Mortgage is not obligated, except in the circumstances
mentioned below, to pay the amounts outstanding on the mortgage loans, but does
pay a fee in the form of interest on a portion of the mortgage loans between the
date of the sale of the loans to the warehouse bank and the date of the
settlement with the third party investor. The terms of the loan purchase
agreements are typically for one year, with interest rates on a portion of the
mortgage loans ranging from 1.5% to 2.25% over the 30 days LIBOR rate (from
1.81% to 2.55% as of June 30, 2009). SecurityNational Mortgage renewed one of
its loan purchase agreements that expired on September 30, 2008 for another one
year term. The other loan purchase agreement was terminated in March 2009. The
Company is actively pursuing purchase agreements with other warehouse
banks.





Mortgage
fee income consists of origination fees, processing fees and certain other
income related to the origination and sale of mortgage loans. For mortgage loans
sold to third party investors, mortgage fee income and related expenses are
recognized pursuant to SFAS 140 at the time the sales of mortgage loans meet the
sales criteria for the transfer of financial assets which are: (1) the
transferred assets have been isolated from the Company and its creditors, (2)
the transferee has the right to pledge or exchange the mortgage, and (3) the
Company does not maintain effective control over the transferred mortgage. The
Company has determined that all three criteria are met at the time the loan is
funded. All rights and title to the mortgage loans are assigned to unrelated
financial institution investors, including any investor commitments for these
loans prior to warehouse banks purchasing these loans under the purchase
commitments.







The
Company sells all loans to third party investors without recourse. However, the
Company may be required to repurchase loans or pay a fee instead of repurchase
under certain events such as the following:





·
            Failure
      to deliver original documents specified by the
  investor.


·
            The
      existence of misrepresentation or fraud in the origination of the
      loan.


·
            The
      loan becomes delinquent due to nonpayment during the first several months
      after it is sold.


·
            Early
      pay-off of a loan, as defined by the
agreements.


·
            Excessive
      time to settle a loan.


·
            Investor
      declines purchase.


·
            Discontinued
      product and expired commitment.





Purchase
commitments generally specify a date 30 to 45 days after delivery upon which the
underlying loans should be settled. Depending on market conditions, these
commitment settlement dates can be extended at a cost to the Company. Generally,
a ten day extension will cost .125% (12.5 basis points) of the loan amount. The
Company’s historical data shows that 99% of all loans originated by the Company
are generally settled by the investors as agreed within 16 days after delivery.
There are situations when the Company determines that it is unable to enforce
the settlement of loans rejected by the third-party investors and that it is in
the Company’s best interest to repurchase those loans from the warehouse banks.
It is the Company's policy to cure any documentation problems with respect to
such loans at a minimal cost for up to a six-month time period and to pursue
efforts to enforce purchase commitments from third-party investors concerning
mortgage loans. The Company believes that six months allows adequate time to
remedy any documentation issues, to enforce purchase commitments, and to exhaust
other alternatives. Remedy methods include, but are not limited to:





23





·
            Research
      reasons for rejection


·
            Provide
      additional documents


·
            Request
      investor exceptions


·
            Appeal
      rejection decision to purchase
committee


·
            Commit
      to secondary investors




Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the loans are
repurchased and transferred to the long term investment portfolio at the lower
of cost or market value and previously recorded sales revenue is reversed. Any
loan that subsequently becomes delinquent is evaluated by the Company at that
time and any allowances for impairment are adjusted accordingly.





Determining lower of cost or
market: Cost is equal to the amount paid to the warehouse bank and the
amount originally funded by the Company. Market value is often difficult to
determine, but is based on the following:





·
            For
      loans that have an active market, we use the market price on the
      repurchased date.


·
            For
      loans where there is no market but there is a similar product, we use the
      market value for the similar product on the repurchased
    date.


·
            For
      loans where no active market exists on the repurchased date, we determine
      that the unpaid principal balance best approximates the market value on
      the repurchased date, after considering the fair value of the underlying
      real estate collateral and estimated future cash
  flows.





The
appraised value of the real estate underlying the original loan adds
significance to the Company’s determination of fair value since, if the loan
becomes delinquent, the Company has sufficient value to collect the unpaid
principal balance or the carrying value of the loan. In determining the market
value on the date of repurchase, the Company considers the total value of all
the loans since any sale of loans would be made as a pool.





For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.





The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans. The market for new subprime loans
has been substantially reduced and several mortgage companies whose primary
product was subprime mortgage originations have ceased operations. The Company
funded $5,505,000 (0.14% of the Company’s production) in subprime loans during
the twelve months ended 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%. 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 in 2007 and 2008 that
experienced financial difficulties and were not able to settle the loans. The
total amount of these loans was $52,556,000, of which $36,499,000 were in loans
where the secondary market no longer exists. 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 approximate the
unpaid principal balances adjusted for chargeoffs, the related allowance for
loan losses, and net deferred fees or costs on originated loans. The 2008
financial statements reflect the transfer of the mortgage loans from “Mortgage
Loans Sold to Investors” to “Mortgage Loans on Real Estate”. The loan sale
revenue recorded on the sale of the mortgage loans was reversed on the date the
loans were repurchased.





24





As is
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
During this period the Company services these loans through Security National
Life, its life insurance subsidiary.





As of
June 30, 2009, the Company’s long term mortgage loan portfolio had $18,068,000
in unpaid principal with delinquencies more than 90 days. Of this amount
$13,363,000 was in foreclosure proceedings. The Company has not received or
recognized any interest income on the $18,068,000 in mortgage loans with
delinquencies more than 90 days. During the three and six months ended June 30,
2009, the Company increased its allowance for mortgage losses by $61,000 and
$842,000, respectively, which was charged to loan loss expense and included in
selling general and administrative expenses for the period. The allowance for
mortgage loan losses as of June 30, 2009 was $5,622,000.





Also at
June 30, 2009, the cumulative total the Company has foreclosed on is $35,919,000
in long term mortgage loans. The foreclosed property was shown in real estate.
The Company is able to carry the foreclosed properties in Security National Life
and SecurityNational Mortgage, its life and mortgage subsidiaries, and will rent
the properties until it is deemed desirable to sell them.





In 1998,
SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman
Brothers Bank and its wholly owned subsidiary, Aurora Loan Services, LLC. Under
the terms of the Loan Purchase Agreement, Lehman Brothers, through its
subsidiary, Aurora Loan Services, agreed to purchase mortgage loans from time to
time from SecurityNational Mortgage. During 2007, Aurora Loan Services purchased
a total of 1,490 mortgage loans in the aggregate amount of $352,774,000 from
SecurityNational Mortgage. On January 17, 2008, Aurora Loan Services announced
it was suspending all wholesale and correspondent mortgage originations. As a
result of this policy change, Aurora Loan Services discontinued purchasing
mortgage loans from all mortgage brokers and lenders, including SecurityNational
Mortgage.




During
2007, Aurora Loan Services maintained that as part of its quality control
efforts it reviewed mortgage loans purchased from SecurityNational Mortgage and
determined that certain of the loans contained alleged misrepresentations and
early payment defaults. Aurora Loan Services further maintained that these
alleged breaches in the purchased mortgage loans provide it with the right to
require SecurityNational Mortgage to immediately repurchase the mortgage loans
containing the alleged breaches in accordance with the terms of the Loan
Purchase Agreement. In order for Lehman Brothers and Aurora Loan Services to
refrain from demanding immediate repurchase of the mortgage loans by
SecurityNational Mortgage, SecurityNational Mortgage was willing to enter into
an agreement to indemnify Lehman Brothers and Aurora Loan Services for any
losses incurred in connection with the mortgage loans with alleged breaches that
were purchased from SecurityNational Mortgage.





On
December 17, 2007, SecurityNational Mortgage entered into an Indemnification
Agreement with Lehman Brothers and Aurora Loan Services. Under the terms of the
Indemnification Agreement, SecurityNational Mortgage agrees to indemnify Lehman
Brothers and Aurora Loan Services for 75% of all losses that Lehman Brothers and
Aurora Loan Services may have as a result of any current or future defaults by
mortgagors on 54 mortgage loans that were purchased from SecurityNational
Mortgage and listed as an attachment to the Indemnification Agreement.
SecurityNational Mortgage is released from any obligation to pay the remaining
25% of such losses. The Indemnification Agreement also requires SecurityNational
Mortgage to indemnify Lehman Brothers and Aurora Loan Services for 100% of
losses incurred on mortgage loans with alleged breaches that are not listed on
the attachment to the agreement.





Concurrently
with the execution of the Indemnification Agreement, SecurityNational Mortgage
paid $395,000 to Aurora Loan Services as a deposit into a reserve account to
secure the obligations of SecurityNational Mortgage under the Indemnification
Agreement. This deposit is in addition to a $250,000 deposit that
SecurityNational Mortgage made to Aurora Loan Services on December 10, 2007, for
a total of $645,000. Losses from mortgage loans with alleged breaches are
payable by SecurityNational Mortgage from the reserve account. However, Lehman
Brothers and Aurora Loan Services are not to apply any funds from the reserve
account to a particular mortgage loan until an actual loss has
occurred.





25





The
Indemnification Agreement further provides that SecurityNational Mortgage will
be entitled to have held back 25 basis points on any mortgage loans that Aurora
Loan Services purchases from SecurityNational Mortgage and to add the amount of
the basis point holdbacks to the reserve account. SecurityNational Mortgage
agreed to deliver to Aurora Loan Services at least $300,000,000 in mortgage
loans on an annual basis or at least $600,000,000 in 24 months. These provisions
may not be effective, however, because Aurora Loan Services has discontinued
purchasing mortgage loans from SecurityNational Mortgage. SecurityNational
Mortgage also agrees to pay to Aurora Loan Services the difference between the
reserve account balance and $645,000, but in no event will SecurityNational
Mortgage be required to pay any amount into the reserve account that would
result in a total contribution, including both the basis point holdbacks and
cash payments, in excess of $125,000 for any calendar month.





During
2007 and 2008, SecurityNational Mortgage made $1,730,000 in total payments to
Aurora Loan Services pursuant to the Indemnification Agreement. During the three
and six months ended June 30, 2009, SecurityNational Mortgage made payments to
Aurora Loan Services, of $625,000 and $625,000, respectively. When
SecurityNational Mortgage entered into the Indemnification Agreement, it
anticipated using basis point holdbacks from loan production credits toward
satisfying the $125,000 monthly obligations. Because Aurora Loan Services
discontinued purchasing mortgage loans from SecurityNational Mortgage shortly
after the Indemnification Agreement was executed, SecurityNational Mortgage has
not had the benefit of using the basis point holdbacks toward payment of the
$125,000 monthly obligations.





During
2008, funds were paid out of the reserve account to indemnify $1,700,000 in
losses from 22 mortgage loans that were among the 54 mortgage loans with alleged
breaches which were listed on the attachment to the Indemnification Agreement.
The estimated potential losses from the remaining 32 mortgage loans listed on
the attachment, which would require indemnification by SecurityNational Mortgage
for such losses, is $3,357,000. Moreover, Aurora Loan Services has made a
request to be indemnified for losses related to ten mortgage loans not listed on
the attachment to the Indemnification Agreement. Aurora Loan Services claims the
total amount of such potential losses is $2,746,000.  During 2008, the
Company recognized losses related to this matter of $1,636,000; however,
management cannot fully determine the total losses, if any, nor the rights that
the Company may have as a result of Lehman Brothers’ and Aurora Loan Services’
refusal to purchase subsequent loans under the Indemnification Agreement. The
Company has accrued an additional $1,073,018 for losses under the
Indemnification Agreement during the six months ended June 30,
2009.





Results
of Operations





Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008





Total revenues decreased by$2,392,000, or 4.0%, to$58,010,000for the three months ended June 30,
2009, from$60,402,000for the three months ended
June 30, 2008. Contributing to this decrease in total
revenues was a$561,000decrease in mortgage fee
income and a$2,292,000decrease in investment
income. This decrease in total revenues was partially offset by a$195,000increase in insurance premiums and
other considerations, a$210,000 increasein realized gains on investments and
other assets, a $45,000 increase in other revenues and a$11,000increase in net mortuary and cemetery
sales.





Insurance premiums and other
considerations increased by$195,000, or 2.1%, to$9,310,000for the three months ended June 30,
2009, from $9,115,000 for the comparable period in 2008. This increase was primarily the result
of the acquisition of Southern Security Life Insurance Company on December 18,
2008.





Net
investment income decreased by $2,292,000, or 30.4%, to $5,256,000 for the three
months ended June 30, 2009, from $7,548,000 for the comparable period in
2008.This reduction
was primarily attributable to decreased interest income from mortgage loans on
real estate (mortgages held for long term and mortgages sold to investors) and
construction lending.





Net
mortuary and cemetery sales increased by $11,000, or .3%, to $3,402,000 for the
three months ended June 30, 2009, from $3,391,000 for the comparable period in
2008. This increase was due to an increase in at-need sales offset by a decrease
in pre-need land sales of burial spaces in the cemetery operations.





Realized gains on investments and other
assets increased by$210,000 or 1,235.3%to$227,000in realized gains for the three months
ended June 30, 2009, from $17,000 in realized gains for the comparable period in
2008. This increase in
realized gains on investments was due to gains from the sale of equity
securities.





26





Mortgage fee income decreased by$561,000, or 1.4%, to$39,545,000for the three months ended June 30,
2009, from $40,106,000 for the comparable period in 2008. This decrease was primarily
attributable to an decrease in loan fees charged to originate
loans.





Other revenues increased by$45,000, or 20.1%, to$269,000 for the three months ended June 30, 2009
from$224,000for the comparable period in
2008. This increase was
due to additional miscellaneous income throughout the Company's
operations.





Total
benefits and expenses were $53,526,000, or 92.3% of total revenues, for the
three months ended June 30, 2009, as compared to $57,315,000, or 94.9% of total
revenues, for the comparable period in 2008. This decrease primarily resulted
from the improved profitability of SecurityNational Mortgage
Company.





Death benefits, surrenders and other
policy benefits, and increase in future policy benefits increased by an
aggregate of$100,000, or 1.2%, to$8,479,000for the three months ended June 30,
2009, from$8,379,000for the comparable period in
2008. This increase was
primarily the result of increased death benefits that were partially offset by
decreases in future policy benefits.





Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $429,000, or 33.9%, to $1,694,000 for the three months ended June
30, 2009, from $1,265,000 for the comparable period in 2008. This increase was
primarily due to an increase in new business and the purchase of Southern
Security Life Insurance Company on December 18, 2008.





General and administrative expenses
decreased by$3,023,000, or 6.7%, to$42,068,000for the three months ended June 30,
2009, from $45,091,000 for the comparable period in 2008. Salaries increased by$91,000from $6,650,000 in 2008 to$6,741,000in 2009, primarily due to merit
increases in salaries of existing employees. Other expenses increased by$1,642,000from $8,638,000 in 2008 to$10,280,000in 2009 due to increased investor
fees, loan costs, and foreclosure expenses. Provision for loan losses increased
by $1,393,000 from $2,876,000 in 2008 to $4,269,000 in 2009 due primarily to
increased loan reserve and loan allowance balances at SecurityNational Mortgage
Company. Commission expenses decreased by$6,148,000, from$26,926,000in the second quarter of 2008 to$20,778,000in the second quarter of 2009, due to
decreased mortgage loan origination costs made by SecurityNational Mortgage, a
decrease in sales at the cemetery operations, and a decrease in life insurance
sales during the second quarter of 2009.





Interest expense decreased by$1,290,000, or 66.3%, to$663,000for the three months ended June 30,
2009, from $1,953,000 for the comparable period in 2008. 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 $6,000, or
1.0%, to $622,000 for the three months ended June 30, 2009, from $628,000 for
the comparable period in 2008.This decrease was
primarily due to decreased at-need mortuary sales.





For the
three months ended June 30, 2009 and 2008, total comprehensive income amounted
to $2,900,185 and $738,984, respectively. This increase of $2,161,201 was
primarily the result of an increase in net income of $989,756, an increase
primarily in derivative gains related to mortgage loans of $583,817, and an
increase in unrealized gains in securities available for sale of
$587,628.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008





Total revenues increased by$3,878,000, or 3.4%, to$117,502,000for the six months ended June 30, 2009,
from$113,624,000for the six months ended
June 30, 2008. Contributing to this increase in total
revenues was a$6,204,000increase in mortgage fee
income, a$1,243,000increase in insurance
premiums and other considerations, a$253,000 increasein realized gains on investments and
other assets, and a $235,000 increase in other revenues. This increase in total revenues was
partially offset by a$3,449,000decrease in investment income, and a$608,000decrease in net mortuary and cemetery
sales.





Insurance
premiums and other considerations increased by $1,243,000, or 7.0%, to
$19,094,000 for the six months ended June 30, 2009, from $17,851,000 for the
comparable period in 2008.This increase was
primarily the result of additional premiums realized from new insurance sales,
and the acquisition of Southern Security Life Insurance Company on December 18,
2008.





27





Net
investment income decreased by $3,449,000, or 23.4%, to $11,304,000 for the six
months ended June 30, 2009, from $14,753,000 for the comparable period in
2008.This reduction
was primarily attributable to decreased interest income from mortgage loans on
real estate (mortgages held for long term and mortgages sold to investors) and
construction lending.





Net
mortuary and cemetery sales decreased by $608,000, or 8.7%, to $6,373,000 for
the six months ended June 30, 2009, from $6,981,000 for the comparable period in
2008.This reduction
was primarily due to a decrease in pre-need land sales of burial spaces in the
cemetery operations and at need sales of mortuary operations.





Realized gains on investments and other
assets increased by$253,000 or 632.5%to$293,000in realized gains for the six months
ended June 30, 2009, from $40,000 in realized gains for the comparable period in
2008. This increase in
realized gains on investments was due to gains from the sale of equity
securities.





Mortgage fee income increased by$6,204,000, or 8.4%, to$79,800,000for the six months ended June 30,
2009, from $73,596,000 for the comparable period in 2008. This increase was primarily
attributable to an increase in secondary gains on mortgage loan
production.





Other revenues increased by$235,000, or 58.2%, to$639,000 for the six months ended June 30, 2009
from$404,000for the comparable period in
2008. This increase was
due to additional miscellaneous income throughout the Company's
operations.





Total
benefits and expenses were $108,078,000, or 92.0% of total revenues, for the six
months ended June 30, 2009, as compared to $108,592,000, or 95.6% of total
revenues, for the comparable period in 2008. This decrease primarily resulted
from the improved profitability of SecurityNational Mortgage
Company.





Death benefits, surrenders and other
policy benefits, and increase in future policy benefits increased by an
aggregate of$434,000, or 2.6%, to$17,307,000for the six months ended June 30,
2009, from$16,873,000for the comparable period in
2008. This increase was
primarily the result of increased insurance business, increased reserves for
policyholder benefits and increased death benefits.





Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $1,266,000, or 52.5%, to $3,679,000 for the six months ended June
30, 2009, from $2,413,000 for the comparable period in 2008. This increase was
primarily due to an increase in new business and the purchase of Southern
Security Life Insurance Company on December 18, 2008.





General and administrative expenses
increased by$243,000, or 0.3%, to$84,099,000for the six months ended June 30,
2009, from $83,856,000 for the comparable period in 2008. Salaries increased by$711,000from $12,915,000 in 2008 to$13,626,000in 2009, primarily due to merit
increases in salaries of existing employees. Other expenses increased by$2,343,000from $18,592,000 in 2008 to$16,249,000in 2009 due to increased investor
fees, loan costs and foreclosure expenses. Provision for loan losses increased
by $5,406,000 from $5,029,000 in 2008 to $10,435,000 in 2009 due primarily to
increased loan reserve and loan allowance balances at SecurityNational Mortgage
Company. This increase was
partially offset by a decrease in commission expenses of$8,217,000, from$49,663,000in the first six months of 2008 to$41,446,000in the first six months of 2009, due to
decreased mortgage loan origination costs made by SecurityNational Mortgage, a
decrease in sales at the cemetery operations, and a decrease in life insurance
sales during the second quarter of 2009.





Interest expense decreased by$2,381,000, or 57.5%, to$1,763,000for the six months ended June 30, 2009,
from $4,144,000 for the comparable period in 2008. 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$76,000, or 5.8%, to$1,229,000for the six months ended June 30,
2009, from $1,305,000 for the comparable period in 2008. This decrease was primarily due to
decreased cemetery sales and mortuary sales.





For the
six months ended June 30, 2009 and 2008, total comprehensive income amounted to
$7,462,766 and $3,530,690, respectively. This increase of $3,932,076 was
primarily the result of an increase in net income of $2,847,310, an increase
primarily in derivative gains related to mortgage loans of $452,016, and an
increase in unrealized gains in securities available for sale of
$632,750.





28





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 six months ended June 30,
2009 and June 30, 2008, the Company's operations provided cash of $22,050,000,
and $69,217,000, respectively. This was due primarily to an increase of
$3,558,000 in 2009 and a decrease of $57,041,000 in 2008 in the balance of
mortgage loans sold to investors, which was attributed to a transfer of loans
totaling $36,291,000 to long term mortgages in 2008.





The
Company’s liability for future life, annuity and other benefits is expected to
be paid out over long-term due to the Company’s market niche of selling funeral
plans. Funeral plans are small face value life insurance that will pay the costs
and expenses incurred at the time of a person’s death. A person generally will
keep these policies in force and will not surrender them prior to a person’s
death. Because of the long-term nature of these liabilities the Company is able
to hold to maturity its bonds and mortgage loans thus reducing the risk of
liquidating these long-term investments as a result of any sudden changes in
market values.





The
Company attempts to match the duration of invested assets with its policyholder
and cemetery and mortuary liabilities. The Company may sell investments other
than those held-to-maturity in the portfolio to help in this timing; however, to
date, that has not been necessary. The Company purchases short-term investments
on a temporary basis to meet the expectations of short-term requirements of the
Company’s products.





The
Company’s investment philosophy is intended to provide a rate of return, which
will persist during the expected duration of policyholder and cemetery and
mortuary liabilities regardless of future interest rate movements.





The
Company’s investment policy is to invest predominantly in fixed maturity
securities, mortgage loans, and warehousing of mortgage loans on a short-term
basis before selling the loans to investors in accordance with the requirements
and laws governing the life insurance subsidiaries. Bonds owned by the insurance
subsidiaries amounted to $117,262,000 as of June 30, 2009 compared to
$126,583,000 as of December 31, 2008. This represents 39.1% and 41.6% of the
total investments as of June 30, 2009, and December 31, 2008, respectively.
Generally, all bonds owned by the life insurance subsidiaries are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are six categories used for rating bonds. At June 30, 2009, 6.5% (or $7,661,000)
and at December 31, 2008, 2.8% (or $3,485,000) of the Company’s total bond
investments were invested in bonds in rating categories three through six, which
are considered non-investment grade.





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.





The Company measures certain investments
at fair value, in accordance with SFAS No. 157,Fair Value
Measurements:





·
            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.





29





Financial assets and financial
liabilities recorded on theconsolidatedbalance 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 pricesforidentical assets or liabilities in an
active market that we can access.





Level 2:Financial assets and
financial liabilities whose values are based on the
following:





a)
            Quoted prices for similar assets or
      liabilities in active
markets;


b)
            Quoted prices for identical or
      similar assets or liabilities in non-active markets;
    or


c)
            Valuation models whose inputs are
      observable, directly or indirectly, for substantially the fulltermofthe 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 liabilitiesmeasured at fair value on a recurring
basis by their classification in the condensed consolidatedbalance sheetatJune 30, 2009.








Total
                                                    
                                                    
                                                    Quoted
      Prices in
                                                      Active
      Markets
                                                      for
      Identical
                                                      Assets
      (Level 1)
                                                    
                                                    
                                                    Significant
                                                      Observable
                                                      Inputs
                                                      (Level
      2)
                                                    
                                                    
                                                    Significant
                                                      Unobservable
                                                      Inputs
                                                      (Level
      3)Assets
      accounted for at fair value on a recurring
      basisInvestment
      in securities available for sale
                                                    
                                                    $
                                                    6,642,366
                                                    
                                                    
                                                    $
                                                    6,642,366
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -Short-term
      investments
                                                    
                                                    
                                                    6,225,891
                                                    
                                                    
                                                    
                                                    6,225,891
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Restricted
      assets of cemeteries and mortuaries
                                                    
                                                    
                                                    1,580,839
                                                    
                                                    
                                                    
                                                    1,580,839
                                                    
                                                    
                                                    
                                                    -Cemetery
      perpetual care trust investments
                                                    
                                                    
                                                    1,924,592
                                                    
                                                    
                                                    
                                                    1,924,592
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Derivatives
      - interest rate lock commitments
                                                    
                                                    
                                                    2,025,206
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    2,025,206Total
      assets accounted for at fair value on arecurring basis
                                                    
                                                    $
                                                    18,398,894
                                                    
                                                    
                                                    $
                                                    16,373,688
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    2,025,206Liabilities
      accounted for at fair valueon a recurring basisInvestment-type
      insurance contracts
                                                    
                                                    $
                                                    (110,738,686
                                                    )
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    (110,738,686
                                                    )Dervatives:
      Bank loan interest rate swaps
                                                    
                                                    
                                                    (110,232
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (110,232
                                                    )Total
      liabilities accounted for at fair value on a recurring
      basis
                                                    
                                                    $
                                                    (110,848,918
                                                    )
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    (110,848,918
                                                    )








30





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








InvestmentType
                                        Insurance
      Contracts
                                      
                                      
                                      Interest
      Rate
                                        Lock
      Commitments
                                      
                                      
                                      Bank
      Loan
                                        Interest
      Rate SwapsBalance
      - December 31, 2008
                                      
                                      $
                                      (112,351,916
                                      )
                                      
                                      $
                                      362,231
                                      
                                      
                                      $
                                      (167,483
                                      )Total
      Losses:Included
      in earnings
                                      
                                      
                                      1,613,230
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Included
      in othercomprehensive income
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,662,975
                                      
                                      
                                      
                                      57,251Balance
      - June 30, 2009
                                      
                                      $
                                      (110,738,686
                                      )
                                      
                                      $
                                      2,025,206
                                      
                                      
                                      $
                                      (110,232
                                      )








The items
shown under level one are valued as follows:





On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.





On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.





The items
shown under level three are valued as follows:





Investment type insurance
contracts. Future policy benefit reserves for interest-sensitive
insurance products are computed under a retrospective deposit method and
represent policy account balances before applicable surrender charges. Policy
benefits and claims that are charged to expense include benefit claims incurred
in the period in excess of related policy account balances. Interest credit
rates for interest-sensitive insurance products ranged from 4% to
6.5%.





Interest rate lock
commitments. The Company’s mortgage banking activities enters into new
practices relating to mortgage loan commitments, including interest rate lock
commitments with potential borrowers 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 and are recognized at fair
value on the consolidated balance sheet with changes in their fair values
recorded as part of other comprehensive income from mortgage banking
operations.





Bank loan interest rate
swaps. Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate swaps mirror the term of the note payable and expire on
the maturity date of the bank loans they hedge. The interest rate swaps are a
derivative financial instruments carried at their fair value.





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 June 30, 2009, and
December 31, 2008, the life insurance subsidiary exceeded the regulatory
criteria.





31





The Company’s total capitalization of
stockholders’ equity, and bank debt and notes payable were$69,639,000as of June 30, 2009, as compared to $60,552,000 as of
December 31, 2008. Stockholders’ equity as a percent of total capitalization was
88.9% and 89.0% as of June 30, 2009and December 31, 2008,
respectively. Bank debt
and notes payable increased$1,078,000for the six months ended June 30, 2009
when compared to December 31, 2008, thus decreasing the stockholders equity
percentage.





Lapse
rates measure the amount of insurance terminated during a particular period. The
Company’s lapse rate for life insurance in 2008 was 9.0% as compared to a rate
of 7.9% for 2007. The 2009 lapse rate to date has been approximately the same as
2008.





At June
30, 2009, $20,882,000 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, 2008.





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 June 30,
2009. 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 June 30, 2009. 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 June 30, 2009.





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 inInternal Controls
-- Integrated Frameworkpublished 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 June 30,
2009.





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 June 30, 2009 that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.





32





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.





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.





33





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 $52,556,000, of which $36,499,000 were in loans where the secondary
market no longer exists. 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 approximate the unpaid principal balances
adjusted for chargeoffs, the related allowance for loan losses, and net deferred
fees or costs on originated loans. The 2008 financial statements reflect the
transfer of the mortgage loans from “Mortgage Loans Sold to Investors” to
“Mortgage Loans on Real Estate”. The loan sale revenue recorded on the sale of
the mortgage loans was reversed on the date the loans were
repurchased.





As a
standard in the industry, the Company received payments on the mortgage loans
during the time period between the sale date and settlement or repurchase date.
The Company will service these loans through Security National Life, its life
insurance subsidiary.





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 properties in Security National Life and SecurityNational Mortgage,
its life and mortgage subsidiaries, and will rent the properties until it is
deemed desirable to sell them.





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
June 30, 2009, the Company’s long term mortgage loan portfolio had $18,068,000
in unpaid principal with delinquencies more than 90 days. Of this amount
$13,363,000 was in foreclosure proceedings. The Company has not received any
interest income on the $18,068,000 in mortgage loans with delinquencies more
than 90 days. During the three and six months ended June 30, 2009, the Company
has increased its allowance for mortgage loan losses by $61,000 and $842,000,
respectively, which allowance was charged to loan loss expense and is included
in selling, general and administrative expenses for the period. The allowance
for mortgage loan losses as of June 30, 2009 was $5,622,000.





34





Also, at
June 30, 2009, the Company had foreclosed on $35,919,000 in long term mortgage
loans. The foreclosed property is shown in real estate. The Company will be able
to carry the foreclosed properties in Security National Life and
SecurityNational Mortgage, its life and mortgage subsidiaries, and will rent the
properties until it is deemed desirable to sell them.





In
addition to the allowance for mortgage loan losses, the Company also accrues a
monthly allowance for indemnification losses to investors of .20% (20 basis
points) of total production. The amount accrued for the three and
six  months ended June 30, 2009 was $5,053,000 and $9,792,000,
respectively, and included in other general and administrative expenses. The
reserve for indemnification losses is included in other liabilities and, as of
June 30, 2009, the balance was $7,833,000.




SecurityNational Mortgage
has loan purchase agreements to originate and sell loans to unaffiliated
warehouse banks. The total amount available to originate loans under these loan
purchase agreements at June 30, 2009 was $250,000,000. SecurityNational Mortgage
originates the loans and immediately sells them to the warehouse bank as more
fully described below. As of June 30, 2009, mortgage loans totaling $126,071,979
have been sold to warehouse banks and settlement with the third party investor
was still pending. Since the mortgage loans have been sold to the warehouse
banks, SecurityNational Mortgage is not obligated, except in the circumstances
mentioned below, to pay the amounts outstanding on the mortgage loans, but does
pay a fee in the form of interest on a portion of the mortgage loans between the
date of the sale of the loans to the warehouse bank and the date of the
settlement with the third party investor. The terms of the loan purchase
agreements are typically for one year, with interest rates on a portion of the
mortgage loans ranging from 1.5% to 2.25% over the 30 days LIBOR rate (from
1.81% to 2.55% as of June 30, 2009). SecurityNational Mortgage renewed one of
its loan purchase agreements that expired on September 30, 2008 for another one
year term. The other loan purchase agreement was terminated in March 2009. The
Company is actively pursuing purchase agreements with other warehouse
banks.




The
following is a description of the most significant additional risks facing the
Company and how it mitigates those risks:





Legal/Regulatory Risk
- the risk that changes in the legal or regulatory environment in which the
Company operates will create additional expenses and/or risks not anticipated by
the Company in developing and pricing its products. That is, regulatory
initiatives designed to reduce insurer profits, new legal theories or insurance
company insolvencies through guaranty fund assessments may create costs for the
insurer beyond those recorded in the consolidated financial statements. In
addition, changes in tax law with respect to mortgage interest deductions or
other public policy or legislative changes may affect the Company’s mortgage
sales. Also, the Company may be subject to further regulations in the
cemetery/mortuary business. The Company mitigates these risks by offering a wide
range of products and by diversifying its operations, thus reducing its exposure
to any single product or jurisdiction, and also by employing underwriting
practices which identify and minimize the adverse impact of such
risks.





Interest Rate Risk -
the risk that interest rates will change which may cause a decrease in the value
of the Company’s investments or impair the ability of the Company to market its
mortgage and cemetery/mortuary products. This change in rates may cause certain
interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
non-conformance with certain policy provisions, by offering products that
transfer this risk to the purchaser, and/or by attempting to match the maturity
schedule of its assets with the expected payouts of its liabilities. To the
extent that liabilities come due more quickly than assets mature, the Company
might have to borrow funds or sell assets prior to maturity and potentially
recognize a loss on the sale.





Mortality/Morbidity
Risk - the risk that the Company’s actuarial assumptions may differ from
actual mortality/morbidity experience may cause the Company’s products to be
underpriced, may cause the Company to liquidate insurance or other claims
earlier than anticipated and other potentially adverse consequences to the
business. The Company minimizes this risk through sound underwriting practices,
asset/liability duration matching, and sound actuarial practices.





35





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





The
estimates susceptible to significant change are those used in determining the
liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, construction loans and
other receivables, and those used in determining the estimated future costs for
pre-need sales. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.





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





None





Item
3.               Defaults
Upon Senior Securities.





None





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





None





Item
5.               Other
Information.





Acquisition of Southern Security
Life Insurance Company, a Mississippi Insurance Company





On
December 18, 2008, Security National Financial Corporation, through its wholly
owned subsidiary, Security National Life, completed a stock purchase transaction
with Southern Security Life Insurance Company, a Mississippi domiciled insurance
company ("Southern Security"), and its shareholders to purchase all of the
outstanding shares of common stock of Southern Security from its shareholders.
Under the terms of the transaction as set forth in the Stock Purchase Agreement
among Security National Life, Southern Security and the shareholders of Southern
Security, Security National Life paid to the shareholders of Southern Security
purchase consideration equal to $1,352,000, representing the capital and
surplus, interest maintenance reserve, and asset valuation reserve of Southern
Security as of September 1, 2008, the date that Security National Life assumed
administrative control over Southern Security, plus $1,500,000, representing the
ceding commission that had been paid on August 29, 2008, plus $75,883,
representing an allowance for the actual losses experienced by Southern Security
in the second quarter ended June 30, 2008, less certain adjustments. Thus, the
total purchase price before adjustments was $2,928,000.





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
deposited at closing $175,000 of the purchase consideration into an interest
bearing escrow account as the deposit amount (the "Deposit Amount"). This
Deposit Amount is to be held for a period of six months from the closing date
("the Holdback Period") and used to pay the amount of any adjustments required
under the terms of the Stock Purchase Agreement. At the end of the Holdback
Period, the escrow agent agrees to transfer the remaining amounts of the Deposit
Amount, following the payment of any adjustments, into a real estate deposit
account to be held and distributed in accordance with the items of the escrow
agreement. The shareholders additionally deposited at closing $268,500 of the
purchase consideration into an interest bearing escrow account as the real
estate deposit amount (the "Real Estate Deposit Amount"). This Real Estate
Deposit Amount represents about 50% of the total outstanding balance on a loan
that Southern Security made to Wade Nowell Funeral Homes, Inc. in the form of a
promissory note, which note is secured by a funeral home property in Collins,
Mississippi. The Real Estate Deposit Amount will be increased by the amount of
funds transferred from the Deposit Amount at the end of the Holdback
Period.





36





The
shareholders have granted to Security National Life a security interest in the
Real Estate Deposit Amount to secure payment of the promissory note also secured
by the funeral home in Collins, Mississippi. Beginning on September 1, 2009, the
escrow agent agrees to release to the shareholders on a pro rata basis an amount
equal to the principal reduction of the promissory note that has occurred during
the preceding August 1 through July 31 period, until such time as the Real
Estate Deposit Amount (including funds transferred from the Deposit Amount) and
any accrued interest, have been paid to the shareholders. However, no payments
will be made to the shareholders from the Real Estate Deposit Amount if the note
is in default. In the event there is a default in the payment of the note,
Security National Life has the right to receive payment from the Real Estate
Deposit Amount for the amount of such default or to foreclose on the note
pursuant to the terms thereunder and to receive payment from the Real Estate
Deposit Amount in an amount equal to the full amount of any losses and expenses
incurred by Security National Life as a result of such default and enforcement
of its rights pursuant thereto. The shareholders have the right to refinance the
existing debt on the note.





As
further adjustments, Southern Security transferred 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 was reduced by $316,026,
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 purchase consideration was reduced by
$84,081 for payments that Security National Life made in behalf of the
shareholders for legal and accounting fees and other expenses, and by $163,715
at the instruction of the shareholders to pay off a promissory note with
Ray-Nowell Funeral Home, Inc., which was secured by funeral home properties in
Senatobia, Mississippi.





The Stock
Purchase Agreement further provided that Security National Life and Southern
Security were 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. 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. Security National Life also assumed complete
administrative control of all of the then current and future insurance related
business operations of Southern Security. Pursuant to the terms of the
Reinsurance Agreement, Security National Life paid a ceding commission to
Southern Security in the amount of $1,500,000.





As a
result of the Reinsurance Agreement, certain insurance business and operations
of Southern Security were transferred to Security National Life, including all
policies in force as of the administrative control date. Any future business by
Southern Security would be covered by this Reinsurance Agreement. As of
September 1, 2008, when Security National Life assumed administrative
control over the insurance related business operations of Southern Security,
Southern Security transferred approximately $23,600,000 in assets and
liabilities to Wachovia Bank, N.A. of St. Louis, Missouri, as custodian for
Security National Life pursuant to the Reinsurance Agreement and the Custodial
Agreement among Southern Security, Security National Life, and Wachovia Bank
N.A. Following the completion of the stock purchase transaction, Southern
Security has continued to sell and service life insurance, annuity products, and
funeral plan insurance.





Letter Agreement with Florida Office of
Insurance Regulation to Cease Writing New Insurance in Florida




After
several months of discussions with the Florida Office of Insurance Regulation
concerning the categorization of certain admitted assets, Security National Life
received a letter dated June 17, 2009, in which Florida indicated its rejection
of Security National Life's position and requested that Security National Life
either infuse additional capital or cease writing new business in the State of
Florida.  Florida’s decision was based upon excess investments in
subsidiaries by Security National Life and Florida’s determination to classify
as property acquired and held for the purposes of investment, certain real
property that Security National Life acquired in satisfaction of creditor rights
and subsequently rented to tenants.  These determinations resulted in
Security National Life exceeding certain investment limitations under Florida
law and in a corresponding capital and surplus deficiency as of March 31,
2009.  Florida has acknowledged that the deficiency may be cured by
the infusion of additional capital in the amount of the excess
investments.


37




Security
National Life strongly disagrees with Florida’s interpretation of the Florida
statutes, including Florida’s opinion that $21,672,000 of real property that
Security National Life acquired in satisfaction of creditor rights as of March
31, 2009 must be included in an investment category that is subject to a
limitation of only 5% of admitted assets (which category consists of real estate
acquired and held for investment purposes) rather than in the investment
category that is subject to a limitation of 15% of admitted assets (which
category includes real estate acquired in satisfaction of loans, mortgages, or
debts).  In rendering its opinion, Florida did not suggest that the
real property assets of Security National Life are not fairly stated. The letter
further stated that Security National Life may not resume writing insurance in
Florida until such time as it regains full compliance with Florida law and
receives written approval from Florida authorizing it to resume writing
insurance.
 
 On June
18, 2009, Security National Life responded by letter to Florida and expressed
its disagreement with Florida’s interpretation of the Florida statutes but, for
practical purposes, agreed, beginning as of June 30, 2009 and continuing until
Florida determines that Security National Life has attained full compliance with
the Florida statutes, to cease originating new insurance policies in Florida and
not to enter into any new reinsurance agreements with any Florida domiciled
insurance company.  The State of Utah, Security National Life’s state
of domicile, has not determined Security National Life to have a capital and
surplus deficiency, nor is Security National Life aware of any state, other than
Florida, in which Security National Life is determined to have a capital and
surplus deficiency.
 
 During
2008, the annualized premiums for new insurance policies written by Security
National Life in Florida were $464,000, or 4.7% of the total amount of
$9,901,000 in annualized premiums for new insurance policies written by Security
National Life during the same period.  Security National Life is in
the process of preparing an application to be submitted to Florida for approval
of a Florida only subsidiary for all new insurance business written in
Florida.  Security National Life believes that if Florida were to
approve a Florida only subsidiary, Security National Life would be able to
resume writing new insurance policies in Florida in full compliance with the
Florida statutes relating to investments in real estate and
subsidiaries.





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.





(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
                Unit
      Purchase Agreement among Security National Financial Corporation, C &
      J Financial, LLC, Henry Culp, Jr., and Culp Industries Inc.
      (9)10.9
                Consulting
      Agreement with Henry Culp, Jr., (9)10.10
                Employment
      Agreement with Kevin O. Smith (9)10.11
                Non-Competition
      and Confidentiality Agreement with Henry Culp, Jr. (9)10.12
                Stock
      Purchase Agreement among Security National Life Insurance Company, Capital
      Reserve Life Insurance Company, and the shareholders of Capital Reserve
      Life Insurance Company (10)




38





10.13
                Indemnification
      Agreement among Security National Life Insurance Company, Capital Reserve
      Life Insurance Company, and the shareholders of Capital Reserve Life
      Insurance Company (11)10.14
                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
      (11)10.15
                Reinsurance
      Agreement between Security National Life Insurance Company and Capital
      Reserve Life Insurance Company (11)10.16
                Stock
      Purchase Agreement among Security National Life Insurance Company,
      Southern Security Life Insurance Company, and the shareholders of Southern
      Security Life Insurance Company (12)10.17
                Reinsurance
      Agreement among Security National Life Insurance Company, Southern
      Security Life Insurance Company, and the shareholders of Southern Security
      Life Insurance Company (13)10.18
                Escrow
      Agreement among Security National Life Insurance Company, Southern
      Security Life Insurance Company, the shareholders of Southern Security
      Life Insurance Company, and Mackey Price Thompson & Ostler, as escrow
      agent (14)10.19
                Indemnification
      Agreement among SecurityNational Mortgage Company, Lehman Brothers Bank,
      and Aurora Loan Services, LLC (15)10.20
                Subsidiaries
      of the Registrant31.1
                Certification
      pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                Certification
      pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002










(1)
              Incorporated
      by reference from Registration Statement on Form S-1, as filed on
      September 29, 1987(2)
              Incorporated
      by reference from Annual Report on Form 10-K, as filed on March 31,
      1989(3)
              Incorporated
      by reference from Annual Report on Form 10-K, as filed on April 3,
      2002(4)
              Incorporated
      by reference from Report on Form 8-K/A as filed on January 8,
      2003(5)
              Incorporated
      by reference from Schedule 14A Definitive Proxy Statement, Filed on
      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 August 8,
      2007(10)
              Incorporated
      by reference from Report on Form 8-K, as filed on November 2,
      2007(11)
              Incorporated
      by reference from Report on Form 8-K, as filed on January 14,
      2008(12)
              Incorporated
      by reference from Report on Form 8-K, as filed on August 25,
      2008(13)
              Incorporated
      by reference from Report on Form 8-K/A, as filed on September 17,
      2008(14)
              Incorporated
      by reference from Report on Form 8-K, as filed on January 7,
      2009(15)
              Incorporated
      by reference from Report on Form 10-K, as filed on March 31,
      2009





(b) Reports
on Form 8-K:





No
reports were filed by the Company during the quarter ended June 30,
2009





39








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:
      August 14, 2009
              
              /s/ George R.
      QuistGeorge
      R. QuistChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)





Dated:
      August 14, 2009
              
              /s/ Stephen M.
      SillStephen
      M. SillVice
      President, Treasurer and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting Officer)









40