UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934


For
the quarter ended September 30, 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
            
            8,297,315Title
      of Class
            
            Number
      of Shares Outstanding as ofNovember
      12, 2009Class
      C Common Stock, $.20 par value
            
            8,782,494Title
      of Class
            
            Number
      of Shares Outstanding as ofNovember
      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 SEPTEMBER 30, 2009





TABLE
OF CONTENTS








PART
      I - FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements
            Page
      No.Condensed
      Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
      (unaudited)
            3-4Condensed
      Consolidated Statements of Earnings for the Three and Nine months Ended
      September 30, 2009 and 2008 (unaudited)
            5Condensed
      Consolidated Statements of Cash Flows for the Nine months Ended September
      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
            
            September
      30,
              2009
            
            December
      31,
              2008Investments:Fixed
      maturity securities, held to maturity, at amortized cost
            
            $
            115,471,124
            
            
            $
            125,346,194Fixed
      maturity securities, available for sale, at estimated fair
      value
            
            
            1,169,902
            
            
            
            1,236,562Equity
      securities, available for sale, at estimated fair value
            
            
            5,376,796
            
            
            
            4,617,675Mortgage
      loans on real estate and construction loans, held for investment net of
      allowances for losses of $6,248,956 and $4,780,467 for 2009 and 2008,
      respectively
            
            
            108,655,763
            
            
            
            124,592,678Real
      estate, net of accumulated depreciation
            
            
            43,221,022
            
            
            
            22,417,639Policy,
      student and other loans net, of allowances for doubtful
      accounts
            
            
            16,572,360
            
            
            
            18,493,751Short-term
      investments
            
            
            4,780,548
            
            
            
            5,282,986Accrued
      investment income
            
            
            2,220,817
            
            
            
            2,245,201Total
      investments
            
            
            297,468,332
            
            
            
            304,232,686Cash
      and cash equivalents
            
            
            35,156,703
            
            
            
            19,914,110Mortgage
      loans sold to investors
            
            
            38,969,406
            
            
            
            19,885,994Receivables,
      net
            
            
            10,621,866
            
            
            
            13,135,080Restricted
      assets of cemeteries and mortuaries
            
            
            2,524,766
            
            
            
            4,077,076Cemetery
      perpetual care trust investments
            
            
            2,000,915
            
            
            
            1,840,119Receivable
      from reinsurers
            
            
            5,873,768
            
            
            
            5,823,379Cemetery
      land and improvements
            
            
            10,783,382
            
            
            
            10,626,296Property
      and equipment, net
            
            
            13,157,666
            
            
            
            14,049,232Deferred
      policy and pre-need contract acquisition costs
            
            
            33,935,414
            
            
            
            32,424,512Value
      of business acquired
            
            
            10,481,183
            
            
            
            11,377,276Goodwill
            
            
            1,075,039
            
            
            
            1,075,039Other
            
            
            3,004,786
            
            
            
            3,343,726Total
      Assets
            
            $
            465,053,226
            
            
            $
            441,804,525




See
accompanying notes to condensed consolidated financial
statements.


3


SECURITY
NATIONAL FINANCIAL CORPORATION


AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)


(Unaudited)





September
      30,
              2009
            
            December
      31,
              2008Liabilities
      and Stockholders' EquityLiabilitiesFuture
      life, annuity, and other benefits
            
            $
            334,100,232
            
            
            $
            325,668,454Unearned
      premium reserve
            
            
            4,789,833
            
            
            
            4,863,919Bank
      loans payable
            
            
            5,043,777
            
            
            
            6,138,202Notes
      and contracts payable
            
            
            297,243
            
            
            
            501,778Deferred
      pre-need cemetery and mortuary contract revenues
            
            
            13,421,353
            
            
            
            13,467,132Cemetery
      perpetual care obligation
            
            
            2,737,437
            
            
            
            2,647,984Accounts
      payable
            
            
            2,356,004
            
            
            
            1,941,777Other
      liabilities and accrued expenses
            
            
            21,938,671
            
            
            
            17,688,756Income
      taxes
            
            
            18,179,371
            
            
            
            14,974,244Total
      liabilities
            
            
            402,863,921
            
            
            
            387,892,246Stockholders'
      EquityCommon
      Stock:Class
      A: common stock - $2.00 par value; 20,000,000 shares authorized; issued
      8,297,194 shares in 2009 and 8,284,109 shares in 2008
            
            
            16,594,388
            
            
            
            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 8,783,699 shares in 2009 and 8,912,315 in
      2008
            
            
            1,756,740
            
            
            
            1,782,463Additional
      paid-in capital
            
            
            18,359,156
            
            
            
            17,985,848Accumulated
      other comprehensive income, net of taxes
            
            
            1,587,882
            
            
            
            417,101Retained
      earnings
            
            
            27,409,312
            
            
            
            21,023,179Treasury
      stock at cost; 1,414,637 Class A shares in 2009 and 1,598,568 Class A
      shares in 2008
            
            
            (3,518,173
            )
            
            
            (3,864,530
            )Total
      stockholders' equity
            
            
            62,189,305
            
            
            
            53,912,279Total
      Liabilities and Stockholders' Equity
            
            $
            465,053,226
            
            
            $
            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 September 30,
            
            Nine
      Months ended September 30,2009
            
            2008
            
            2009
            
            2008Revenues:Insurance
      premiums and other considerations
            
            $
            9,622,381
            
            
            $
            9,327,250
            
            
            $
            28,716,070
            
            
            $
            27,177,782Net
      investment income
            
            
            4,803,809
            
            
            
            6,792,171
            
            
            
            16,107,643
            
            
            
            21,544,753Net
      mortuary and cemetery sales
            
            
            2,584,846
            
            
            
            3,050,721
            
            
            
            8,958,092
            
            
            
            10,031,959Realized
      gains on investments and other assets
            
            
            459,363
            
            
            
            (1,106,721
            )
            
            
            752,132
            
            
            
            (1,066,552
            )Mortgage
      fee income
            
            
            30,734,493
            
            
            
            34,756,907
            
            
            
            110,534,277
            
            
            
            108,352,502Other
            
            
            449,775
            
            
            
            263,607
            
            
            
            1,088,482
            
            
            
            667,186Total
      revenues
            
            
            48,654,667
            
            
            
            53,083,935
            
            
            
            166,156,696
            
            
            
            166,707,630Benefits
      and expenses:Death
      benefits
            
            
            4,417,986
            
            
            
            4,074,703
            
            
            
            13,827,134
            
            
            
            13,212,689Surrenders
      and other policy benefits
            
            
            362,894
            
            
            
            736,180
            
            
            
            1,238,804
            
            
            
            1,708,325Increase
      in future policy benefits
            
            
            4,134,055
            
            
            
            3,498,771
            
            
            
            11,156,238
            
            
            
            10,262,028Amortization
      of deferred policy and pre-need acquisition costs and value of business
      acquired
            
            
            1,452,899
            
            
            
            1,951,322
            
            
            
            5,132,219
            
            
            
            4,364,305Selling,
      general and administrative expenses:Commissions
            
            
            17,702,231
            
            
            
            24,595,430
            
            
            
            59,148,409
            
            
            
            74,258,401Salaries
            
            
            7,029,507
            
            
            
            6,637,600
            
            
            
            20,655,984
            
            
            
            19,553,038Provision
      for loan losses and loss reserve
            
            
            3,489,830
            
            
            
            2,258,208
            
            
            
            13,924,452
            
            
            
            7,286,617Other
            
            
            8,953,745
            
            
            
            7,911,137
            
            
            
            27,546,069
            
            
            
            24,160,487Interest
      expense
            
            
            483,051
            
            
            
            1,600,435
            
            
            
            2,246,045
            
            
            
            5,744,511Cost
      of goods and services sold-mortuaries and cemeteries
            
            
            561,983
            
            
            
            548,315
            
            
            
            1,790,584
            
            
            
            1,853,211Total
      benefits and expenses
            
            
            48,588,181
            
            
            
            53,812,101
            
            
            
            156,665,938
            
            
            
            162,403,612Earning
      before income taxes
            
            
            66,486
            
            
            
            (728,166
            )
            
            
            9,490,758
            
            
            
            4,304,018Income
      tax expense
            
            
            (3,437
            )
            
            
            (39,877
            )
            
            
            (3,104,310
            )
            
            
            (1,595,971
            )Net
      earnings
            
            $
            63,049
            
            
            $
            (768,043
            )
            
            $
            6,386,448
            
            
            $
            2,708,047Net
      earnings per Class A Equivalent common share (1)
            
            $
            0.01
            
            
            $
            (0.09
            )
            
            $
            0.83
            
            
            $
            0.33Net
      earnings per Class A Equivalent common share-assuming dilution
      (1)
            
            $
            0.01
            
            
            $
            (0.09
            )
            
            $
            0.83
            
            
            $
            0.33Weighted-average
      Class A equivalent common share outstanding (1)
            
            
            7,747,304
            
            
            
            8,127,812
            
            
            
            7,698,171
            
            
            
            8,105,966Weighted-average
      Class A equivalent common shares outstanding assuming-dilution
      (1)
            
            
            7,864,147
            
            
            
            8,127,812
            
            
            
            7,698,171
            
            
            
            8,132,563





(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)




Nine
      Months Ended September 30,2009
            
            2008Cash
      flows from operating activities:Net cash provided by operating
activities
            
            $
            13,264,621
            
            
            $
            41,185,519Cash
      flows from investing activities:Securities
      held to maturity:Purchase-fixed
      maturity securities
            
            
            (9,263,264
            )
            
            
            (8,155,171
            )Calls
      and maturities - fixed maturity securities
            
            
            18,894,983
            
            
            
            20,187,994Securities
      available for sale:Purchase
      of equity securities
            
            
            (3,337,640
            )
            
            
            (22,034
            )Sales-equity
      securities
            
            
            3,620,935
            
            
            
            340,654Purchase
      of short-term investments
            
            
            (16,732,142
            )
            
            
            (23,801,291
            )Proceeds
      from sale of short-term investments
            
            
            17,234,580
            
            
            
            20,584,952Sales
      (Purchase) of restricted assets
            
            
            1,615,632
            
            
            
            (319,336
            )Changes
      in assets for perpetual care trusts
            
            
            (182,023
            )
            
            
            (222,825
            )Amount
      received for perpetual care trusts
            
            
            89,453
            
            
            
            143,121Mortgage,
      policy, and other loans made
            
            
            (20,413,355
            )
            
            
            (50,018,619
            )Payments
      received for mortgage, policy and other loans
            
            
            14,703,088
            
            
            
            27,749,754Purchase
      of property and equipment
            
            
            (579,740
            )
            
            
            (1,054,491
            )Disposal
      of property and equipment
            
            
            845
            
            
            
            81,352Purchase
      of real estate
            
            
            (2,301,340
            )
            
            
            -Reinsurance
      agreement-SSLIC-Mississippi
            
            
            -
            
            
            
            (1,500,000
            )Sale
      of real estate
            
            
            2,847,495
            
            
            
            731,596Net cash (used in) provided by investing
      activities
            
            
            6,197,507
            
            
            
            (15,274,344
            )Cash
      flows from financing activities:Annuity
      contract receipts
            
            
            6,839,117
            
            
            
            8,657,859Annuity
      contract withdrawals
            
            
            (10,525,938
            )
            
            
            (12,411,521
            )Stock
      options granted
            
            
            380,711
            
            
            
            242,344Sale
      of treasury stock
            
            
            339,086
            
            
            
            217,934Repayment
      of bank loans on notes and contracts
            
            
            (3,304,053
            )
            
            
            (10,601,015
            )Proceeds
      from borrowing on bank loans
            
            
            2,051,542
            
            
            
            4,048,060Net cash used in financing activities
            
            
            (4,219,535
            )
            
            
            (9,846,339
            )Net
      change in cash and cash equivalents
            
            
            15,242,593
            
            
            
            16,064,836Cash
      and cash equivalents at beginning of period
            
            
            19,914,110
            
            
            
            5,203,060Cash
      and cash equivalents at end of period
            
            $
            35,156,703
            
            
            $
            21,267,896Non
      Cash Investing and Financing ActivitiesMortgage
      loans foreclosed into real estate
            
            $
            22,000,875
            
            
            $
            5,615,533




See
accompanying notes to condensed consolidated financial
statements.


6





SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
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 nine months ended September
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





Subsequent Events. In
May 2009, the FASB issued guidance which establishes the period after the
balance sheet date during which management shall evaluate events or transactions
that may occur for potential recognition or disclosure in the financial
statements and the circumstances under which an entity shall recognize events or
transactions that occur after the balance sheet date.  This guidance
also requires disclosure of the date through which subsequent events have been
evaluated.  The Company adopted this standard for the interim period
ended June 30, 2009.  The adoption of this guidance did not have a
material impact on the Company’s consolidated financial position or results of
operations.  We have evaluated subsequent events after the balance
sheet date of September 30, 2009 through the time of filing with the Securities
and Exchange Commission (SEC) on November 13, 2009 which is the date the
financial statements were issued.





Accounting for transfers of
financial assets. In June 2009, the FASB issued accounting guidance which
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity”, changes the requirements for derecognizing
financial assets, and requires additional disclosures.  This guidance
will be effective at the beginning of the first fiscal year beginning after
November 15, 2009. Early application is not permitted.  The Company
has not yet determined the effect, if any, the adoption of this guidance will
have on its consolidated financial statements.





Consolidation of variable
interest entities. In June 2009, the FASB issued accounting guidance
on the consolidation of variable interest entities (VIEs). This new guidance
eliminates the exemption for qualifying special purpose entities, eliminates
quantitative-based assessments used to determine whether or not a VIE is
required to be consolidated, requires ongoing qualitative assessments to
determine whether or not a VIE should be consolidated and requires enhanced
disclosures. This guidance will be effective for the Company on January 1, 2010.
Early application is not permitted.  The Company has not yet
determined the effect, if any, the adoption of this guidance will have on its
consolidated financial statements.





Fair Value Measurement of
Liabilities. In August 2009, the FASB issued accounting guidance
which provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided
for in this guidance.  This guidance also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustments to other inputs relating to the
existence of a restriction that prevents the transfer of the
liability.  This guidance became effective for the Company for the
reporting period ended September 30, 2009 and did not have a material impact on
the Company’s consolidated financial position or results of
operations.


7


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)




2) Recent Accounting
Pronouncements (Continued)





Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent). In September 2009, the FASB issued accounting guidance
which permits a reporting entity to measure the fair value of certain
investments on the basis of the net asset value per share of the investment (or
its equivalent). This guidance also requires new disclosures, by major category
of investments, about the attributes of investments, such as the nature of any
restriction on the ability to redeem an investment on the measurement
date.  This guidance is effective for interim and annual periods
ending after December 15, 2009. Early application is permitted in financial
statements for earlier interim and annual periods that have not been
issued.  The Company has not yet determined the effect, if any, the
adoption of this guidance will have on its consolidated financial
statements.





Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance. In
October 2009, the FASB issued accounting guidance on share-lending arrangements
entered into on an entity's own shares in contemplation of a convertible debt
offering or other financing.  This guidance is effective for fiscal
years beginning on or after December 15, 2009, and interim periods within those
fiscal years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. This guidance is
effective for arrangements entered into on (not outstanding) or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Certain transition disclosures are also required. Early application is not
permitted.  The Company has not yet determined the effect, if any, the
adoption of this guidance will have on its consolidated financial
statements.





3)      Comprehensive
Income





For the
three months ended September 30, 2009 and 2008, total comprehensive income
amounted to $94,463 and $264,190, respectively.





For the
nine months ended September 30, 2009 and 2008, total comprehensive income
amounted to $7,557,229 and $3,794,880, 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 $115,763 has been recognized for these plans for the quarters ended
September 30, 2009 and 2008, respectively, and $380,713 and $233,876 for the
nine months ended September 30, 2009 and 2008, respectively. Deferred tax credit
has been recognized related to the compensation expense for $30,294 and $39,359
for the quarters ended September 30, 2009 and 2008, respectively and $129,442
and $79,518 for the nine months ended September 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 ending December 31,
2009.





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.


8


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)




5)  
  Capital
Stock





The
Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares are convertible into Class A shares at any time on a ten
to one ratio. The year to date September 31, 2009 decrease in outstanding Class
C shares and the corresponding increase in Class A shares was due to conversion
of Class C to Class A common stock. The decrease in treasury stock was the
result of treasury stock being used to fund the Company’s 401-K and Deferred
Compensation plans.





6)      Earnings Per
Share





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





Three
      Months Ended September 30,2009
            
            2008Numerator:Net
      earnings
            
            $
            63,049
            
            
            $
            (768,043
            )Denominator:Basic
      weighted-average shares outstanding
            
            
            7,747,304
            
            
            
            8,127,812Effect
      of dilutive securities:Employee
      stock options
            
            
            116,843
            
            
            
            -Dilutive
      potential common shares
            
            
            116,843
            
            
            
            -Diluted
      weighted-average shares outstanding
            
            
            7,864,147
            
            
            
            8,127,812Basic
      gain per share
            
            $
            0.01
            
            
            $
            (0.09
            )Diluted
      gain per share
            
            $
            0.01
            
            
            $
            (0.09
            )Nine
      Months Ended September 30,2009
            
            
            
            2008Numerator:Net
      earnings
            
            $
            6,386,448
            
            
            $
            2,708,047Denominator:Basic
      weighted-average shares outstanding
            
            
            7,698,171
            
            
            
            8,105,966Effect
      of dilutive securities:Employee
      stock options
            
            
            -
            
            
            
            26,597Dilutive
      potential common shares
            
            
            -
            
            
            
            26,597Diluted
      weighted-average shares outstanding
            
            
            7,698,171
            
            
            
            8,132,563Basic
      gain per share
            
            $
            0.83
            
            
            $
            0.33Diluted
      gain per share
            
            $
            0.83
            
            
            $
            0.33




Earnings
per share amounts have been adjusted for the effect of annual stock dividends.
For the three months ended September 30, 2009 and 2008, the antidilutive
employee stock option shares were 90,286 and 117,210, respectively. For the nine
months ended the September 30, 2009 and 2008, the antidilutive employee stock
option shares were 214,962 and 71,890, respectively.


9


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)





7)      Business
Segment




Life
      Insurance
            
            Cemetery/
              Mortuary
            
            Mortgage
            
            Reconciling
              Items
            
            ConsolidatedFor
      the Three Months EndedSeptember 30, 2009Revenues
      fromexternal customers
            
            $
            13,472,268
            
            
            $
            3,339,113
            
            
            $
            31,843,286
            
            
            $
            -
            
            
            $
            48,654,667Intersegment
      revenues
            
            
            945,610
            
            
            
            539,355
            
            
            
            52,741
            
            
            
            (1,537,706
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            130,013
            
            
            
            (420,148
            )
            
            
            356,621
            
            
            
            -
            
            
            
            66,486For
      the Three Months EndedSeptember 30, 2008Revenues
      fromexternal customers
            
            $
            12,098,925
            
            
            $
            3,298,469
            
            
            $
            37,686,541
            
            
            $
            -
            
            
            $
            53,083,935Intersegment
      revenues
            
            
            1,417,423
            
            
            
            23,001
            
            
            
            92,090
            
            
            
            (1,532,514
            )
            
            
            -Segment
      profitbefore income taxes
            
            
            (1,008,034
            )
            
            
            (147,673
            )
            
            
            427,541
            
            
            
            -
            
            
            
            (728,166
            )For
      the Nine Months EndedSeptember 30, 2009Revenues
      fromexternal customers
            
            $
            40,649,498
            
            
            $
            10,323,270
            
            
            $
            115,183,928
            
            
            $
            -
            
            
            $
            166,156,696Intersegment
      revenues
            
            
            3,375,596
            
            
            
            717,249
            
            
            
            155,337
            
            
            
            (4,248,182
            )
            
            
            -Segment
      profit (loss)before income taxes
            
            
            181,474
            
            
            
            (23,234
            )
            
            
            9,332,518
            
            
            
            -
            
            
            
            9,490,758Identifiable
      Assets
            
            
            427,576,275
            
            
            
            91,763,283
            
            
            
            40,498,799
            
            
            
            (94,785,131
            )
            
            
            465,053,226For
      the Nine Months EndedSeptember 30, 2008Revenues
      fromexternal customers
            
            $
            38,043,667
            
            
            $
            10,891,254
            
            
            $
            117,772,709
            
            
            $
            -
            
            
            $
            166,707,630Intersegment
      revenues
            
            
            4,395,247
            
            
            
            69,003
            
            
            
            281,277
            
            
            
            (4,745,527
            )
            
            
            -Segment
      profitbefore income taxes
            
            
            (45,680
            )
            
            
            216,435
            
            
            
            4,133,263
            
            
            
            -
            
            
            
            4,304,018Identifiable
      Assets
            
            
            419,417,351
            
            
            
            63,894,447
            
            
            
            28,607,260
            
            
            
            (67,189,875
            )
            
            
            444,729,183




10


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)





8)     Fair Value of Financial
Assets and Financial Liabilities





Generally
accepted accounting principles (GAAP) defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants. GAAP also specifies a
fair value hierarchy based upon the observability of inputs used in valuation
techniques. Observable inputs (highest level) reflect market data obtained from
independent sources, while unobservable inputs (lowest level) reflect internally
developed market assumptions. Fair value measurements are classified under the
following hierarchy:





Level
1:   Financial assets and financial liabilities whose
values are based on unadjusted quoted prices for identical assets or liabilities
in an active market that we can access.





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


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


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


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





Level
3:   Financial assets and financial liabilities whose
values are based on prices or valuation techniques that require inputs that are
both unobservable and significant to the overall fair value measurement. These
inputs may reflect our estimates of the assumptions that market participants
would use in valuing the financial assets and financial
liabilities.




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




11


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)








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





The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the condensed consolidated balance sheet at September 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
            
            $
            6,546,698
            
            
            $
            6,546,698
            
            
            $
            -
            
            
            $
            -Short-term
      investments
            
            
            4,780,548
            
            
            
            4,780,548
            
            
            
            -
            
            
            
            -Restricted
      assets of cemeteries and mortuaries
            
            
            1,626,184
            
            
            
            1,626,184
            
            
            
            -
            
            
            
            -Cemetery
      perpetual care trust investments
            
            
            2,000,915
            
            
            
            2,000,915
            
            
            
            -
            
            
            
            -Derivatives
      - interest rate lock commitments
            
            
            1,642,130
            
            
            
            -
            
            
            
            -
            
            
            
            1,642,130Total
      assets accounted for at fair value on a recurring basis
            
            $
            16,596,475
            
            
            $
            14,954,345
            
            
            $
            -
            
            
            $
            1,642,130Liabilities
      accounted for at fair value on a  recurring
basisInvestment-type
      insurance contracts
            
            $
            (110,888,713
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (110,888,713
            )Derivatives:
      Bank loan interest rate swaps
            
            
            (121,034
            )
            
            
            -
            
            
            
            -
            
            
            
            (121,034
            )Total
      liabilities accounted for at fair value on a recurring
    basis
            
            $
            (111,009,747
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (111,009,747
            )





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
            
            
            1,463,203
            
            
            
            -
            
            
            
            -Included
      in othercomprehensive income
            
            
            -
            
            
            
            1,279,899
            
            
            
            46,449Balance
      - September 30, 2009
            
            $
            (110,888,713
            )
            
            $
            1,642,130
            
            
            $
            (121,034
            )





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


September
30, 2009 (Unaudited)




8)     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 defined to be
derivatives under generally accepted accounting principles and are recognized at
fair value on the consolidated balance sheet with changes in their fair values
recorded as part of other comprehensive income from mortgage banking
operations.





Bank loan interest rate
swaps. Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate 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.





9)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 its retail offices and independent brokers.
SecurityNational Mortgage funds the loans from internal cash flows and loan
purchase agreements with unaffiliated financial institutions. SecurityNational
Mortgage receives fees from the borrowers and other secondary fees from third
party investors that purchase its loans. SecurityNational Mortgage sells its
loans to third party investors and does not retain servicing of these loans.
SecurityNational Mortgage pays the brokers and correspondents a commission for
loans that are brokered through SecurityNational Mortgage. For the nine months
ended September 30, 2009, and 2008, SecurityNational Mortgage originated and
sold 13,629 loans ($2,497,422,858 total volume) and 14,409 loans ($2,758,592,000
total volume), respectively.





SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at September 30, 2009 was
$255,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of September 30, 2009, mortgage loans totaling
$108,293,996 had been sold to warehouse banks in which settlements with third
party investors were still pending. When certain mortgage loans are sold to
warehouse banks, SecurityNational Mortgage is no longer obligated, except in
certain circumstances, to pay the amounts outstanding on the mortgage loans, but
is required to pay a fee in the form of interest on a portion of the mortgage
loans between the date that the loans are sold to warehouse banks and the date
of settlement with third party investors. The terms of the loan purchase
agreements are typically for one year, with interest rates on a portion of the
mortgage loans ranging from 1.5% to 2.5% over the 30 day Libor rate.
SecurityNational Mortgage is in the process of renewing one of its loan purchase
agreements that expired on September 30, 2009 for an additional one year term.
In addition, the Company has been successful in obtaining a loan purchase
agreement with another warehouse bank.


13


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)





9)Other Business Activity
(Continued)





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





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





·
            Failure
      to deliver original documents specified by the
  investor.


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


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


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


·
            Excessive
      time to settle a loan.


·
            Investor
      declines purchase.


·
            Discontinued
      product and expired commitment.





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





·
            Research
      reasons for rejection


·
            Provide
      additional documents


·
            Request
      investor exceptions


·
            Appeal
      rejection decision to purchase
committee


·
            Commit
      to secondary investors





Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the mortgage
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 impairment is adjusted accordingly.





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





·
            For
      loans that have an active market the Company uses the market price on the
      repurchase date.


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


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


14


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)





9)Other Business Activity
(Continued)





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





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





As a
result of the volatile secondary market for mortgage loans, the Company sold
mortgage loans in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of such loans was approximately $52,556,000, of which approximately
$36,499,000 were  loans in which the secondary market no longer
exists. Due to these changes in circumstances, the Company regained control of
the mortgages and, in accordance with generally accepted accounting principles,
accounted for the loans retained in the same manner as a purchase of assets from
the former transferee(s) in exchange for liabilities assumed. At the time of
repurchase, the loans were determined to be held for investment purposes, and
the fair value of the loans was determined to approximate the unpaid principal
balances adjusted for chargeoffs, the related allowance for loan losses, and net
deferred fees or costs on originated loans. The 2008 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 receives 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
September 30, 2009, the Company’s long term mortgage loan portfolio contained
mortgage loans of $18,295,015 in unpaid principal with delinquencies more than
90 days. Of this amount $11,105,398 was in foreclosure proceedings. The Company
has not received or recognized any interest income on the $18,295,015 in
mortgage loans with delinquencies more than 90 days. During the three and nine
months ended September 30, 2009, the Company increased its allowance for
mortgage losses by $1,066,136 and $1,908,473, 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 September 30, 2009
was $6,248,956.





Also at
September 30, 2009, the Company had foreclosed on a total of $39,536,861 in long
term mortgage loans, of which $22,001,875 was foreclosed on and reclassified as
real estate during the nine months ended September 30, 2009. The foreclosed
properties were shown in real estate. The Company carries the foreclosed
properties in Security National Life, Memorial Estates and SecurityNational
Mortgage, its life, cemeteries and mortuaries and mortgage subsidiaries, and
will rent the properties until it is deemed desirable to sell them.





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 September 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


September
30, 2009 (Unaudited)





9)Other Business Activity
(Continued)




The
following unaudited pro forma information has been prepared to present the
results of operations of the Company assuming theacquisitions of Southern Security had occurred
at the beginning of the year ended December 31, 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 that date and may not
reflect the operations that will occur in the future:





For
      the Three Months
              September
      30, 2008
              (unaudited)
            
            
            For
      the Nine Months
              September
      30, 2008
              (unaudited)Total
      revenues
            
            $
            53,545,000
            
            
            $
            168,552,000Net
      earnings
            
            $
            (732,000
            )
            
            $
            2,851,000Net
      earnings per Class A equivalent common share
            
            $
            (0.09
            )
            
            $
            0.35Net
      earnings per Class A equivalent common share assuming
      dilution
            
            $
            (0.09
            )
            
            $
            0.35




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 September 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


September
30, 2009 (Unaudited)




10)   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 will approximate its fair value and the amount is
classified as real estate. The Company is able to carry the foreclosed
properties in Security National Life, Memorial Estates, and SecurityNational
Mortgage, its life, cemeteries and mortuaries and mortgage subsidiaries, and
will rent the properties until it is deemed desirable to sell them.





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            2009
            
            2008Balance,
      beginning of period
            
            $
            5,621,573
            
            
            $
            2,946,309
            
            
            $
            4,780,467
            
            
            $
            1,435,131Provisions
      for losses
            
            
            1,066,136
            
            
            
            737,134
            
            
            
            1,908,473
            
            
            
            2,457,259Charge-offs
            
            
            (438,753
            )
            
            
            -
            
            
            
            (439,984
            )
            
            
            (208,947
            )Balance,
      at September 30
            
            $
            6,248,956
            
            
            $
            3,683,443
            
            
            $
            6,248,956
            
            
            $
            3,683,443




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 nine months ended September 30,
2009 was $3,501,940 and $14,617,599, 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 September 30, 2009, the balance was $8,972,737.


Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            2009
            
            2008Balance,
      beginning of period
            
            $
            7,833,133
            
            
            $
            2,167,333
            
            
            $
            2,775,452
            
            
            $
            2,356,309Provisions
      for losses
            
            
            3,501,940
            
            
            
            2,198,181
            
            
            
            14,617,599
            
            
            
            5,850,271Charge-offs
            
            
            (2,362,336
            )
            
            
            (2,631,665
            )
            
            
            (8,420,314
            )
            
            
            (6,472,731
            )Balance,
      at September 30
            
            $
            8,972,737
            
            
            $
            1,733,849
            
            
            $
            8,972,737
            
            
            $
            1,733,849




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


September
30, 2009 (Unaudited)





11)
            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 of that loan commitment is funded. Managing price
risk is complicated by the fact that the ultimate percentage of derivative loan
commitments that will be exercised (i.e., the number of loan commitments that
will be funded) fluctuates. The probability that a loan will not be funded
within the terms of the commitment is driven by a number of factors,
particularly the change, if any, in mortgage rates following the inception of
the interest rate lock. However, many borrowers continue to exercise derivative
loan commitments even when interest rates have fallen.





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





The
Company estimates the fair value of a mortgage loan commitment based on the
change in estimated fair value of the underlying mortgage loan and the
probability that the mortgage loan will fund within the terms of the commitment.
The change in fair value of the underlying mortgage loan is measured from the
date the mortgage loan commitment is issued. Therefore, at the time of the
issuance, the estimated 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 of the underlying mortgage loans. Fallout rates derived from the
Company’s recent historical empirical data are used to estimate the quantity of
mortgage loans that will fund within the terms of the commitments.





The
Company utilizes derivative instruments to economically hedge the price risk
associated with its outstanding mortgage loan commitments. Forward loan sales
commitments protect the Company from losses on sales of the loans arising from
exercise of the loan commitments by securing the ultimate sales price and
delivery date of the loans. 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.





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


September
30, 2009 (Unaudited)





11)   Derivative
Investments (Continued)





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





Fair
      Value of Derivative InstrumentsAsset
      Derivatives
            
            Liability
      DerivativesSeptember
      30, 2009
            
            December
      31, 2008
            
            September
      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
            
            $
            1,958,849
            
            
            other
              assets
            
            $
            2,372,452
            
            other
              liabilities
            
            $
            316,719
            
            other
              liabilities
            
            $
            2,010,221Interest
      rate swaps
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            Bank
      loans
              payable
            
            
            121,034
            
            Bank
      loans
              payable
            
            
            167,483Total
            
            
            
            
            
            $
            1,958,849
            
            
            
            
            
            
            $
            2,372,452
            
            
            
            $
            437,753
            
            
            
            $
            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 September 30,Derivatives
      in Statement 133 - Cash Flow Hedging Relationships
            
            2009
            
            2008Interest
      Rate Lock Commitments
            
            $
            (383,076
            )
            
            $
            2,077,870Interest
      Rate Swaps
            
            
            (10,802
            )
            
            
            (8,375
            )Total
            
            $
            (393,878
            )
            
            $
            2,069,495Nine
      months ended September 30,2009
            
            
            2008Interest
      Rate Lock Commitments
            
            $
            1,279,889
            
            
            $
            4,195,960Interest
      Rate Swaps
            
            
            46,449
            
            
            
            (27,493
            )Total
            
            $
            1,326,338
            
            
            $
            4,168,467






19


SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES


Notes to
Condensed Consolidated Financial Statements


September
30, 2009 (Unaudited)





12) 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 September
30, 2009, the Company had commitments of $29,779,697 for these loans, of which
$27,710,470 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 September
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 realized 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


September
30, 2009 (Unaudited)





12) 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 nine months ended September 30, 2009, SecurityNational Mortgage made
payments to Aurora Loan Services of $301,082 and $926,082, 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 $31,347 for losses under the Indemnification
Agreement during the nine months ended September 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 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 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


September
30, 2009 (Unaudited)





12) 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 of Insurance Regulation a penalty of $100,000 and administrative costs of
$5,000.





The
Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office of Insurance Regulation has
with the New Success Life Program because it has received no specific
administrative complaint from the Florida Office of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company has engaged in discussions with the Florida
Office of Insurance Regulation in an effort to settle the dispute concerning the
proposed order. If the Company is unable to reach a satisfactory resolution with
the Florida Office of Insurance Regulation with respect to the terms of the
proposed consent order and the Florida Office 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
its retail offices and independent brokers. SecurityNational Mortgage funds the
loans from internal cash flows and loan purchase agreements with unaffiliated
financial institutions. SecurityNational Mortgage receives fees from the
borrowers and other secondary fees from third party investors that purchase its
loans. SecurityNational
Mortgage sells its loans to third party investors and does not retain servicing
of these loans. SecurityNational Mortgage pays the brokers and correspondents a
commission for loans that are brokered through SecurityNational Mortgage.
For the nine months ended
September 30, 2009 and 2008, SecurityNational Mortgage originated and sold
13,629  loans ($2,497,423,000total volume) and 14,409 loans
($2,758,592,000 total volume), respectively.





SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at September 30, 2009 was
$255,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of September 30, 2009, mortgage loans totaling
approximately $108,294,000 had been sold to warehouse banks in which settlements
with third party investors were still pending. When the mortgage loans are sold
to warehouse banks, SecurityNational Mortgage is no longer obligated, except in
certain circumstances, to pay the amounts outstanding on the mortgage loans, but
is required to pay a fee in the form of interest on a portion of the mortgage
loans between the date that the loans are sold to warehouse banks and the date
of settlement with third party investors. The terms of the loan purchase
agreements are typically for one year, with interest rates on a portion of
mortgage loans ranging from 1.5% to 2.5% over the 30 day Libor rate.
SecurityNational Mortgage is in the process of renewing one of its loan purchase
agreements that expired on September 30, 2009 for an additional one year term.
In addition, the Company has been successful in obtaining a loan purchase
agreement with another warehouse bank.





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




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





·
            Failure
      to deliver original documents specified by the
  investor.


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


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


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


·
            Excessive
      time to settle a loan.


·
            Investor
      declines purchase.


·
            Discontinued
      product and expired commitment.


23




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





·
            Research
      reasons for rejection


·
            Provide
      additional documents


·
            Request
      investor exceptions


·
            Appeal
      rejection decision to purchase
committee


·
            Commit
      to secondary investors




Once
purchase commitments have expired and other alternatives to remedy are
exhausted, which could be earlier than the six month time period, the mortgage
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 impairment is adjusted accordingly.





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





·
            For
      loans that have an active market, the Company uses the market price on the
      repurchase date.


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


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





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





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





The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans. The market for new subprime loans
has been substantially reduced and several mortgage companies whose primary
product consisted of subprime mortgage originations have ceased operations. The
Company funded $5,505,000 (0.14% of the Company’s loan production) in subprime
loans during the twelve months 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
disclosure in the loan application of 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 in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of such loans was $52,556,000, of which $36,499,000 were loans in
which the secondary market no longer exists. Due to these changes in
circumstances, the Company regained control of the mortgages and, in accordance
with generally accepted accounting principles, accounted for the loans retained
in the same manner as a purchase of assets from the former transferee(s) in
exchange for liabilities assumed. At the time of repurchase, the loans were
determined to be held for investment purposes, and the fair value of the loans
was determined to approximate the unpaid principal balances adjusted for
chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans. The 2008 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 receives payments on the mortgage loans
during the time period between the sale date and settlement or repurchase
date. The Company services these loans through Security National Life, its
life insurance subsidiary.





As of
September 30, 2009, the Company’s long term mortgage loan portfolio had
$18,295,000 in unpaid principal with delinquencies more than 90 days. Of this
amount, $11,105,000 was in foreclosure proceedings. The Company has not received
any interest income on the $18,295,000 in mortgage loans with delinquencies more
than 90 days. During the three and nine months ended September 30, 2009, the
Company increased its allowance for mortgage losses by $1,066,136 and
$1,908,473, respectively, which allowance 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 September 30, 2009 was
$6,249,000.





Also at
September 30, 2009, the Company had foreclosed on a total of $39,537,000 in long
term mortgage loans of which $22,002,000 was foreclosed on and reclassified as
real estate during the nine months ended September 30, 2009. The foreclosed
property was shown in real estate. The Company carries the foreclosed properties
in Security National Life, Memorial Estates, and SecurityNational Mortgage, its
life, cemeteries and mortuaries,and mortgage subsidiaries, and will rent the
properties until it is deemed desirable to sell them.





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 realized 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 nine months ended September 30, 2009, SecurityNational Mortgage made
payments to Aurora Loan Services of $301,082 and $926,082, 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 $31,347 for losses under the Indemnification
Agreement during the nine months ended September 30, 2009.





Results
of Operations





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





Total revenues decreased by$4,429,000, or 8.3%, to$48,655,000for the three months ended September
30, 2009, from$53,084,000for the three months ended
September 30, 2008. Contributing to this decrease in total
revenues was a$4,022,000decrease in mortgage fee
income, a$1,988,000decrease in investment
income, and a$466,000decrease in net mortuary
and cemetery sales. This decrease in total revenues was partially offset by a$295,000increase in insurance premiums and
other considerations, a$1,566,000 increasein realized gains on investments and
other assets, and a $186,000 increase in other revenues.





Insurance premiums and other
considerations increased by$295,000, or 3.2%, to$9,622,000for the three months ended September
30, 2009, from $9,327,000 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, which contributed additional insurance premiums.





Net
investment income decreased by $1,988,000, or 29.3%, to $4,804,000 for the three
months ended September 30, 2009, from $6,792,000 for the comparable period in
2008.This reduction
was primarily attributable to reduced interest income due to lower interest
rates from mortgage loans on real estate (mortgages held for long term and
mortgages sold to investors) and construction lending.




Net
mortuary and cemetery sales decreased by $466,000, or 15.3%, to $2,585,000 for
the three months ended September 30, 2009, from $3,051,000 for the comparable
period in 2008. This decrease was due to a decline in at-need sales and by a
decline in pre-need land sales of burial spaces in the cemetery
operations.


26





Realized gains on investments and other
assets increased by$1,566,000to$459,000in realized gains for the three months
ended September 30, 2009, from $1,107,000 in realized losses 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 decreased by$4,022,000, or 11.6%, to$30,734,000for the three months ended September
30, 2009, from $34,756,000 for the comparable period in 2008. This decrease was primarily
attributable to an decrease in the number of mortgage loans
originated.





Other revenues increased by$186,000, or 70.5%, to$450,000 for the three months ended September 30,
2009 from$264,000for the comparable period
in 2008. This increase was
due to additional miscellaneous income throughout the Company's
operations.





Total
benefits and expenses were $48,588,000, or 99.9% of total revenues, for the
three months ended September 30, 2009, as compared to $53,812,000, or 101.4% of
total revenues, for the comparable period in 2008. This decrease resulted
primarily 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$605,000, or 7.3%, to$8,915,000for the three months ended September
30, 2009, from$8,310,000for the comparable period in
2008. This increase was
primarily the result of increased death benefits and future policy benefits that
were partially offset by decreases in surrenders and other policy
benefits.





Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
decreased by $498,000, or 25.5%, to $1,453,000 for the three months ended
September 30, 2009, from $1,951,000 for the comparable period in 2008. This
decrease was due to an increase in new business, better persistency of business
in force, and a lower yield on invested assets.





Selling, general and administrative
expenses decreased by$4,227,000, or 10.2%, to$37,175,000for the three months ended September
30, 2009, from $41,402,000 for the comparable period in 2008. Salaries increased by$391,000from $6,638,000 in 2008 to$7,029 000in 2009, primarily due to merit
increases in salaries of existing employees. Other expenses increased by$1,043,000from $7,911,000 in 2008 to$8,954,000in 2009 due to increased processing
fees, loan costs, and foreclosure expenses. Provision for loan losses increased
by $1,232,000 from $2,258,000 in 2008 to $3,490,000 in 2009 due primarily to
increased loan loss reserve and loan allowance balances at SecurityNational
Mortgage Company. Commission expenses decreased by$6,893,000, from$24,595,000in the third quarter of 2008 to$17,702,000in the third quarter of 2009, due to a
reduction in mortgage loan origination costs made by SecurityNational Mortgage,
a decrease in sales at the cemetery operations, and a decrease in life insurance
renewal commissions during the third quarter of 2009.





Interest expense decreased by$1,117,000, or 69.8%, to$483,000for the three months ended September
30, 2009, from $1,600,000 for the comparable period in 2008. This reduction was primarily due to
decreased borrowing rates on warehouse lines.





Cost of
goods and services sold of the mortuaries and cemeteries decreased by $14,000,
or 2.6%, to $562,000 for the three months ended September 30, 2009, from
$548,000 for the comparable period in 2008.This decrease was
primarily due to decreased at-need mortuary sales.





For the
three months ended September 30, 2009 and 2008, total comprehensive income
amounted to $94,000 and $264,000, respectively. This decrease of $170,000 was
primarily the result of a $1,884,000 increase in derivative losses related to
mortgage loans, which was partially offset by an $831,000 increase in net
income, and an $883,000 increase in unrealized gains in securities available for
sale.





Nine
months Ended September 30, 2009 Compared to Nine months Ended September 30,
2008





Total revenues decreased by$551,000, or 0.3%, to$166,157,000for the nine months ended September 30,
2009, from$166,708,000for the nine months ended
September 30, 2008. Contributing to this decrease in total
revenues was a decrease of$5,437,000in investment income and a$1,074,000decrease in net mortuary and cemetery
sales. This decrease in total revenues was partially offset by a$2,182,000increase in mortgage fee income, a$1,538,000increase in insurance premiums and
other considerations, a$1,819,000 increasein realized gains on investments and
other assets, and a $421,000 increase in other revenues.


27





Insurance premiums and other
considerations increased by$1,538,000, or 5.7%, to$28,716,000for the nine months ended September
30, 2009, from $27,178,000 for the comparable period in 2008. This increase was primarily the result
of additional premiums realized from new insurance sales, and the acquisition of
Southern Security Life Insurance Company on December 18, 2008, which contributed
additional insurance premiums.





Net
investment income decreased by $5,437,000, or 25.2%, to $16,108,000 for the nine
months ended September 30, 2009, from $21,545,000 for the comparable period in
2008.This reduction
was primarily attributable to reduced interest income due to lower interest
rates from mortgage loans on real estate (mortgages held for long term and
mortgages sold to investors) and construction lending.




Net
mortuary and cemetery sales decreased by $1,074,000, or 10.7%, to $8,958,000 for
the nine months ended September 30, 2009, from $10,032,000 for the comparable
period in 2008.This
reduction was primarily due to a decline in pre-need land sales of burial spaces
in the cemetery operations and a decline in at need sales of mortuary
operations.





Realized gains on investments and other
assets increased by$1,819,000to$752,000in realized gains for the nine months
ended September 30, 2009, from $1,067,000 in realized losses 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$2,182,000, or 2.0%, to$110,534,000for the nine months ended September
30, 2009, from $108,352,000 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$421,000, or 63.1%, to$1,088,000 for the nine months ended September 30,
2009 from$667,000for the comparable period
in 2008. This increase was
due to additional miscellaneous income throughout the Company's
operations.





Total
benefits and expenses were $156,666,000, or 94.3% of total revenues, for the
nine months ended September 30, 2009, as compared to $162,404,000, or 97.4% of
total revenues, for the comparable period in 2008. This decrease resulted
primarily 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$1,039,000, or 4.1%, to$26,222,000for the nine months ended September
30, 2009, from$25,183,000for the comparable period in
2008. This increase was
primarily the result of increased insurance business and increased death
benefits that were partially offset by decreases in surrender and other policy
benefits.





Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
increased by $768,000, or 17.6%, to $5,132,000 for the nine months ended
September 30, 2009, from $4,364,000 for the comparable period in 2008. This
increase was primarily due to an increase in business in force, which was
partially a result of the purchase of Southern Security Life Insurance Company
on December 18, 2008.





Selling,
general and administrative expenses decreased by $3,984,000, or 3.2%, to
$121,275,000 for the nine months ended September 30, 2009, from $125,259,000 for
the comparable period in 2008. This decrease was the result of a reduction in
commission expenses of $15,110,000, from $74,258,000 in the first nine months of
2008 to $59,148,000 in the first nine months of 2009, due to reduced mortgage
loan origination costs made by SecurityNational Mortgage, a decrease in sales at
the cemetery operations, and a decrease in life insurance renewal commissions
during the first nine months of 2009. This decrease was partially offset by an
increase in salaries of $1,103,000 from $19,553,000 in 2008 to $20,656,000 in
2009, primarily due to merit increases in salaries of existing employees. Other
expenses increased by $3,385,000 from $24,161,000 in 2008 to $27,546,000 in 2009
due to increased processing fees, loan costs and foreclosure expenses. Provision
for loan losses increased by $6,638,000 from $7,287,000 in 2008 to $13,925,000
in 2009 due primarily to increased loan loss reserve and loan allowance balances
at SecurityNational Mortgage Company.





Interest
expense decreased by $3,498,000, or 60.9%, to $2,246,000 for the nine months
ended September 30, 2009, from $5,744,000 for the comparable period in
2008.This reduction
was primarily due to decreased borrowing rates on warehouse
lines.


28





Cost of goods and services sold of the
mortuaries and cemeteries decreased by$63,000, or 3.4%, to$1,791,000for the nine months ended September
30, 2009, from $1,854,000 for the comparable period in 2008. This decrease was primarily due to
decreased cemetery sales and mortuary sales.





For the
nine months ended September 30, 2009 and 2008, total comprehensive income
amounted to $7,557,000 and $3,795,000, respectively. This increase of $3,762,000
was primarily the result of a $3,678,000 increase in net income and a $1,515,000
increase in unrealized gains in securities available for sale, which was
partially offset by a $1,431,000 decrease in derivative gains related to
mortgage loans.





Liquidity
and Capital Resources





The
Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and to meet operating expenses.





During the nine months ended September
30, 2009 and September 30, 2008, the Company's operations provided cash of
$13,265,000 and $41,186,000, respectively. This was due primarily to a
$19,083,000 increase in 2009 and a $51,231,000 decrease 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 $116,641,000 as of September 30, 2009 compared to
$126,583,000 as of December 31, 2008. This represents 39.2% and 41.6% of the
total investments as of September 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 September 30, 2009, 6.1% (or
$7,032,000) 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.


29





Generally
accepted accounting principles (GAAP) defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants. GAAP also specifies a
fair value hierarchy based upon the observability of inputs used in valuation
techniques. Observable inputs (highest level) reflect market data obtained from
independent sources, while unobservable inputs (lowest level) reflect internally
developed market assumptions. Fair value measurements are classified under the
following hierarchy:





Level 1:  Financial
assets and financial liabilities whose values are based on unadjusted quoted
prices for identical assets or liabilities in an active market that we can
access.





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


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


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


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





Level 3:  Financial
assets and financial liabilities whose values are based on prices or valuation
techniques that require inputs that are both unobservable and significant to the
overall fair value measurement. These inputs may reflect our estimates of the
assumptions that market participants would use in valuing the financial assets
and financial liabilities.





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





The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the condensed consolidated balance sheet at September 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
            
            $
            6,546,698
            
            
            $
            6,546,698
            
            
            $
            -
            
            
            $
            -Short-term
      investments
            
            
            4,780,548
            
            
            
            4,780,548
            
            
            
            -
            
            
            
            -Restricted
      assets of cemeteries and mortuaries
            
            
            1,626,184
            
            
            
            1,626,184
            
            
            
            -Cemetery
      perpetual care trust investments
            
            
            2,000,915
            
            
            
            2,000,915
            
            
            
            -
            
            
            
            -Derivatives
      - interest rate lock commitments
            
            
            1,642,130
            
            
            
            -
            
            
            
            -
            
            
            
            1,642,130Total
      assets accounted for at fair value on a recurring basis
            
            $
            16,596,475
            
            
            $
            14,954,345
            
            
            $
            -
            
            
            $
            1,642,130Liabilities
      accounted for at fair value on a recurring basisInvestment-type
      insurance contracts
            
            $
            (110,888,713
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (110,888,713
            )Dervatives:
      Bank loan interest rate swaps
            
            
            (121,034
            )
            
            
            -
            
            
            
            -
            
            
            
            (121,034
            )Total
      liabilities accounted for at fair value on a recurring
    basis
            
            $
            (111,009,747
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (111,009,747
            )




30





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
            
            
            1,463,203
            
            
            
            -
            
            
            
            -Included
      in othercomprehensive income
            
            
            -
            
            
            
            1,279,899
            
            
            
            46,449Balance
      - September 30, 2009
            
            $
            (110,888,713
            )
            
            $
            1,642,130
            
            
            $
            (121,034
            )




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
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
generally accepted accounting principles and are recognized at fair value on the
consolidated balance sheet with changes in their fair values recorded as part of
other comprehensive income from mortgage banking operations.





Bank loan interest rate
swaps. Management considers the interest rate swap instruments to be an
effective cash flow hedge against the variable interest rate on bank borrowings
since the interest rate 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 September 30,
2009, and December 31, 2008, the life insurance subsidiary exceeded the
regulatory criteria.





The
Company’s total capitalization of stockholders’ equity, and bank debt and notes
payable were $67,530,000 as of September 30, 2009, as compared to $60,552,000 as
of December 31, 2008. Stockholders’ equity as a percent of total capitalization
was 92.1% and 89.0% as of September 30, 2009 and December 31, 2008,
respectively.Bank
debt and notes payable decreased $1,299,000 for the nine months ended September
30, 2009 when compared to December 31, 2008, thus increasing the stockholders
equity percentage.


31





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
September 30, 2009, $20,320,000 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 September 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 September 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 September 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 September 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 September 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 of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company has engaged in discussions with the Florida
Office of Insurance Regulation in an effort to settle the dispute concerning the
proposed order. If the Company is unable to reach a satisfactory resolution with
the Florida Office of Insurance Regulation with respect to the terms of the
proposed consent order and the Florida Office of 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 consisted of subprime mortgage originations have ceased operations. The
Company funded $5.4 million (0.2% of the Company’s loan production) in subprime
loans during the twelve months ending December 31, 2007 and eliminated subprime
loans from its product offerings in August 2007. The Company believes that its
potential losses from subprime loans are minimal.





The
industry problem with subprime mortgages 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
disclosure in the loan application of 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 in 2007 and 2008 to certain third party investors that
experienced financial difficulties and were not able to settle the loans. The
total amount of these loans was $52,556,000, of which $36,499,000 were loans in
which the secondary market no longer exists. Due to these changes in
circumstances, the Company regained control of the mortgages and, in accordance
with generally accepted accounting principles, accounted for the loans retained
in the same manner as a purchase of assets from the former transferee(s) in
exchange for liabilities assumed. At the time of repurchase, the loans were
determined to be held for investment purposes, and the fair value of the loans
was determined to approximate the unpaid principal balances adjusted for
chargeoffs, the related allowance for loan losses, and net deferred fees or
costs on originated loans. The 2008 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 receives 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 carries the foreclosed properties
in Security National Life, Memorial Estates and SecurityNational Mortgage, its
life, cemeteries and mortuaries and mortgage subsidiaries, and will rent
the properties until it is deemed desirable to sell them.





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





As of
September 30, 2009, the Company’s long term mortgage loan portfolio had
$18,295,000 in unpaid principal with delinquencies more than 90 days. Of this
amount $11,105,000 was in foreclosure proceedings. The Company has not received
any interest income on the $18,295,000 in mortgage loans with delinquencies more
than 90 days. During the three and nine months ended September 30, 2009, the
Company has increased its allowance for mortgage loan losses by $1,066,000 and
$1,908,000, 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 September 30, 2009 was
$6,249,000.


34





Also, at
September 30, 2009, the Company had foreclosed on a total of $39,537,000 in long
term mortgage loans of which $22,002,000 was foreclosed on and reclassified as
real estate during the nine months ended September 30, 2009. The foreclosed
property is shown in real estate. The Company carries the foreclosed properties
in Security National Life, Memorial Estates and SecurityNational Mortgage, its
life, cemeteries and mortuaries and mortgage subsidiaries, and will rent
the properties until it is deemed desirable to sell them.





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 nine months
ended September 30, 2009 was $3,502,000 and $14,618,000, 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, as of September 30, 2009, the balance was
$8,973,000.





SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreements at September 30, 2009 was
$255,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of September 30, 2009, mortgage loans totaling
approximately $108,294,000 had been sold to warehouse banks in which settlements
with third party investors were still pending. When certain mortgage loans are
sold to warehouse banks, SecurityNational Mortgage is no longer obligated,
except in certain circumstances, to pay the amounts outstanding on the mortgage
loans, but it is required to pay a fee in the form of interest on a portion of
the mortgage loans between the date the loans are sold to warehouse banks and
the date of settlement with the third party investors. The terms of the loan
purchase agreements are typically for one year, with interest rates on a portion
of the mortgage loans ranging from 1.5% to 2.5% over the 30 days Libor rate.
SecurityNational Mortgage is in the process of renewing one of its loan purchase
agreements that expired on September 30, 2009 for an additional one year term.
In addition, the Company was successful in obtaining another loan purchase
agreement with another warehouse bank.





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.





At the
Annual Meeting of Stockholders held on July 10, 2009, the following matters were
acted upon: (i) seven directors consisting of George R. Quist, Scott M. Quist,
J. Lynn Beckstead, Jr., Charles L. Crittenden, Dr. Robert G. Hunter, H. Craig
Moody and Norman G. Wilbur were elected to serve until the next annual
stockholders meeting or until their respective successors are elected and
qualified (for George R. Quist, with Class A and Class C shares voting,
12,762,987 votes were cast in favor of election, no votes were cast against
election, and there were 142,692 abstentions; for Scott M. Quist, with Class A
and Class C shares voting, 12,764,333 votes were cast in favor of election, no
votes were cast against election, and there were 141,346 abstentions; for J.
Lynn Beckstead, Jr., with Class  A shares voting, 4,530,587 votes were
cast in favor of election, no votes were cast against election, and there were
138,657 abstentions; for Charles L. Crittenden, with Class A and Class C shares,
12,764,114 votes were cast in favor of election, no votes were cast against
election, and there were 141,565 abstentions; for Dr. Robert G. Hunter, with
Class A and Class C shares voting, 12,765,358 votes were cast in favor of
election, no votes cast against election, and there were 140,321 abstentions;
for H. Craig Moody, with Class A shares voting, 4,530,338 votes were cast in
favor of election, no votes cast against election, and there were 138,906
abstentions; and for Norman G. Wilbur, with Class A and Class C shares voting,
12,764,042 votes were cast in favor of election, no votes were cast against
election, and there were 141,637 abstentions); (ii) the appointment of
Hansen,  Barnett & Maxwell, P.C. as the Company's registered pubic
independent accountants for the fiscal year ending December 31, 2009 was
ratified (with 12,439,679 votes cast for appointment, 38,093 votes against
appointment, and there were -0- abstentions); and (iii) to amend the Company’s
2003 Stock Option Plan to authorize an additional 500,000 shares of Class A
common stock and an additional 1,000,000 shares of Class C common stock to be
made available for issuance thereunder was ratified (with 11,496,347 for and
226,940 against).





Item
5.               Other
Information.




36




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 September 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 investment purposes,
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 or 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
September 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 September 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 that Security National
Life has 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.


37




(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)


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 Registrant


31.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
      Sarbanes-Oxley Act of 2002


31.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
      Sarbanes-Oxley Act of 2002


32.1
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


32.2
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002




38





(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 September 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:
      November 13, 2009
            /s/ George R.
      QuistGeorge
      R. QuistChairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)





Dated:
      November 13, 2009
            /s/ Stephen M.
      SillStephen
      M. SillVice
      President, Treasurer and Chief Financial Officer(Principal
      Financial Officer and Principal Accounting Officer)




40


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