Security National Financial Corporation
Annual Report 2020

Plain-text annual report

Who We Are... The roots of our company were planted deep in 1965 with the founding of Security National Life Insurance Company. Starting with only $543,000 in assets, in a small rented house in Salt Lake City, Utah, Security National has grown into a strong industry leader in several fields of service. Over the past five decades we have grown consistently through new sales and investment opportunities, and through the acquisition of life insurance companies, funeral homes and cemeteries, as well as the formation and growth of our mortgage operations. Profile Our company operates three main business segments: life insurance, funeral service and mortgage loans. Our company is designed and structured so each segment relates to the others, and contributes to the profitability of the whole. For example, our cemetery and mortuary operations enjoy a high level of public awareness, assisting in the sales and marketing of our insurance and preneed cemetery and funeral products. Security National Life Insurance Company in turn invests its assets in high quality mortgage loans. Thus, while each segment is a stand-alone profit center, this horizontal integration is strategically planned to improve profitability. Additionally, our company actively pursues growth through acquisitions of life insurance companies and mortuaries, and through expanding our mortgage operations. faced with unforeseen obstacles and challenging situations, our team was able to assess these challenges, determine a course correction, and turn them into new opportunities. With due consideration for those who experienced significant hardships during this period, we nevertheless attempted to perceive opportunity where it could be found and to take advantage. For example, when the stock market dropped precipitously in March we tried to buy stock opportunistically as we felt the economy would rebound over time. Similarly the value of Mortgage Servicing Rights basically dropped to zero which we viewed as an opportunity to acquire. With the precipitous interest rate declines refinance transactions ballooned effectively doubling our mortgage volume, and our existing staff while still many times working from home, met the challenge. Despite interest rates that went negative as measured by the 10-year treasury bond, we consistently improved our investment income by opportunistically looking for and investing in disjointed markets where we assessed the existence of a reasonable degree of safety. Perhaps our share price appropriately characterizes the year – in January 2020 our stock price was $6.10, later fell to $3.67, then finished at $8.91. In the first quarter of 2020 our Net Income dropped 39% YOY. For the full year, our Net Income grew 410% YOY to $56 million dollars, our best year ever. That represents $2.95 Earnings Per Share (giving a Price/Earnings ratio barely above 3) and a 34% Return on Equity. All of our operating segments, Life Insurance, Mortgage Banking, and Memorial Services notched best-ever financial performances. I think we can take extraordinary pride in the performance of our Company in such a tumultuous year. While it is hazardous to guess how long such conditions will linger, it is nevertheless our job to understand and react to the present environment and continue to provide our needed services and products on a profitable basis. I thank you for your continued support and I hope to see you at our Annual Meeting on June 25, 2021. Very truly yours, Scott M. Quist Chairman, President and Chief Executive Officer Scott M. Quist Chairman of the Board President Chief Executive Officer My Fellow Shareholders: I am pleased to report on the affairs of our Company for the year ended December 31, 2020 and invite you to attend the annual Stockholders Meeting to be held June 25, 2021, in Salt Lake City, Utah. Our Company achieved exceptional performance in 2020. I am sure that all things pandemic have been hashed and rehashed over the last year, but it would be negligent to not give due regard to one of the most, if not the most, disruptive circumstance in the last 75 years. Without question the pandemic caused significant social, environmental, capital market, staffing disruptions, and turmoil. Our offices went 85% remote work over the course of a single week–and have yet to return to the office. In person meetings essentially disappeared, including face to face sales which for much of our company is the preferred modus operandi. Government offices were closed, and regulated activities, to include such things as sales licensing renewals, became difficult. Group gatherings were prohibited, yet loved ones still passed on and families ached for the funeral rite. Life Insurance proceeds were desperately needed by families, but death certificates were issued by regulatory authorities somewhat randomly. Mortgage interest rates first rose, then dropped- but housing inventory dropped at the same time. Potential buyers did not want to tour available houses, nor did homeowners want them in their homes. Even when SNFC Board of Directors and Officers Scott M. Quist Chairman of the Board President Chief Executive Officer Director Executive Committee H. Craig Moody President, Moody & Associates Director Executive Committee Audit Committee Compensation Committee Nominating and Corporate Governance Committee Norman G. Wilbur Former Manager of Planning and Reporting, J.C. Penney Co., Inc. Director Audit Committee Compensation Committee Nominating and Corporate Governance Committee Robert G. Hunter M.D. Past Medical Staff President Department Head-Otolaryngology, Head and Neck Surgery Intermountain Medical Center Director Compensation Committee Nominating and Corporate Governance Committee Gilbert A. Fuller Former Executive Vice President, Chief Financial Officer and Secretary, USANA Health Sciences, Inc. Director Executive Committee Audit Committee Compensation Committee Nominating and Corporate Governance Committee John L. Cook Co-Owner & Operator Cook Brothers Painting, Inc. Director Audit Committee Compensation Committee Nominating and Corporate Governance Committee S. Andrew Quist Vice President General Counsel Director Executive Committee Jason G. Overbaugh Vice President National Marketing Director of Life Insurance Director Jeffrey R. Stephens Secretary Senior General Counsel Garrett S. Sill Chief Financial Officer Treasurer Adam G. Quist Vice President Memorial Services Assistant Secretary General Counsel Diana C. Olson Vice President Finance Stephen C. Johnson Vice President Mortgage Operations Thayne D. Atkinson Vice President Chief Information Officer John W. VanValkenburg Vice President Actuarial Services Matthew G. Bagley General Counsel Nominated for Election to Board of Directors Alexandra Mysoor Founder and Chairwoman of Mysoor Industries Executive Producer and Host of The Alexandra Mysoor Show Mia B. Love Former Member - United States House of Representatives Former Mayor of Saratoga Springs, UT Former Member - Saratoga Springs City Council Senior Fellow - United States Study Center for Politics (Sydney, Australia) Regular Political Commentator - CNN Cable News Network Adam G. Quist Vice President-Memorial Services Assistant Secretary General Counsel A History of Growth 1995 - The acquisition of Greer Wilson Funeral Home, Tolleson Funeral Home and Civil Service Employees Life 1996 - The dedication of Singing Hills Memorial Park 1997 - The acquisition of Crystal Rose Funeral Home and the formation of Adobe Funeral Home 1998 - The acquisition of Southern Security Life (FL) 1999 - The acquisition of Menlo Life policy block 2000 2000 - The organization of Southern Security Mortgage Company 2002 - The acquisition of Gulf National Life policy block and Acadian Life policy block 2004 - The acquisition of Paramount Security Life 2005 - The acquisition of Memorial Insurance Company of America 2007 - The acquisition of C&J Financial and Capital Reserve Life Insurance Company 2008 - The acquisition of Southern Security Life (MS) 2010 2011 - The acquisition of North America Life policy block 2012 - The acquisition of Trans-Western Life 2012 - The formation of EverLEND Mortgage Company 2014 - The acquisition of American Funeral Financial 2016 - The acquisition of First Guaranty Insurance Company 2018 - The acquisition of Beta Capital Corporation 2019 - The acquisition of Probst Family Funeral Homes 2019 - The acquisition of Kilpatrick Life Insurance Company 2020 1965 1965 - The founding of Security National Life Insurance Company 1966 - The acquisition of Grand Canyon Life 1967 - The acquisition of Bankers Trust Life 1969 - The acquisition of American Alliance Life 1970 1970 - The acquisition of Charter Oak Life & Washington Life Assurance 1972 - The acquisition of Columbia Life 1973 - The acquisition of National Capital Life and Memorial Estates Companies 1979 - The organization of Security National Financial Corporation 1980 1981 -The acquisition of American Home Security Life 1984 - The acquisition of Western Investors policy block 1985 - The acquisition of Del Pueblo Life policy block and Cibola Life policy block 1986 - The acquisition of Investors Equity Life 1987 - IPO of Security National Financial Corporation and the acquisition of Southwest American policy block 1989 - The acquisition of Paradise Chapel Funeral Home 1990 1991 - The sale of Investors Equity Life and the acquisition of Deseret Memorial Group 1993 - The formation of SecurityNational Mortgage Company 1994 - The acquisition of Camelback Sunset Funeral Home and Capital Investors Life LEADERSHIP TEAM Scott Quist Chief Executive Officer and President Jason Overbaugh Vice President National Sales Director Guy Winstead Vice President of Sales Preneed & Final Expense Divisions We specialize in affordable and convenient products that “make sense” for you and your family. Let SNL show you a better way. If 2020 has taught us anything, it’s that life carries no certainty except that one day life will end. It is an event that none of us can avoid. We can either prepare or leave the responsibility to our loved ones we’ve left behind. Security National Life provides avenues to alleviate the burden on your loved ones. With unexpected hurtles of social distancing and additional precautions, funerals and memorial services looked very different in 2020. Many of our sales agents and funeral home partners were impacted in ways that required a drastic pivot in the way they did business. Through a newly implemented telesales process, we were able to forge connection in a world stretched apart. We remain dedicated to the families we serve. Todd Clendennen Regional Vice President of Sales Preneed Division What is Preneed? A celebration of life. A tribute to family. A treasured memory for loved ones. Your funeral is an expression of your life and a gift to the friends and family you leave behind. By pre-funding this tribute with life insurance from Security National Life you are assured your wishes will be honored. Preneed is the pre-planning and funding of a funeral before one's passing. What is Final Expense? It is an act of caring, and of preparation; ultimately it is an expression of compassion and responsibility for those you leave behind. New responsibilities arise when a life ends. Final Expense insurance provides an affordable and convenient solution for those responsibilities. The passing of a loved one can be a traumatic event for those left behind, Final Expense insurance provides a way to manage the financial Jason Richardson Vice President of Sales Home Service Division Tommy Overton National Sales Director Final Expense Division LEADERSHIP TEAM Jeremy Cox Director of Sales Development Marty Rich Director of Sales Operations aspects of the end of life. Even if you have fully prepared, Final Expense Insurance can provide the safety net to take care of those unexpected items that will allow you to tell your loved ones “It is all taken care of.” Jon Meredith Director of Policy Administration What is Home Service? Home Service is a family-oriented organization that cares for and is committed to serving our clients with integrity and respect. We offer a combination of sales and on-going service within the home, including insurance review and premium collections, to provide peace of mind to individuals and families through an affordable funeral plan. The Home Service Division partners with almost 1,000 agents and funeral homes—together serving over 320,000 policyholders. With coverage amounts starting at $1,000 in most states and going up to $50,000, our plans assure that our customers will have the dignity to bury their loved ones without worrying about the costs. Kilpatrick Life Insurance Company Security National Life acquired Kilpatrick Life Insurance Company in 2019. Kilpatrick is based in Shreveport, LA with roots dating back to 1932. Through three generations, the Kilpatrick family has overseen tremendous company growth and expansion. The addition of Kilpatrick Life Insurance to Security National Life was an easy fit with its priority and focus on family. With award winning service, we are proud to join in one mission to serve families across the nation. Wendi Beauchaine Chief Underwriter Sara McCulley Marketing Program Manager Mike Varanakis Marketing Director LEADERSHIP TEAM LEADERSHIP TEAM We’re Turning Houses into Homes® Scott Quist Chief Executive Officer Steve Johnson President J. Paul Christensen Sr. Vice President, National Sales Director Cory Taylor Vice President, Production Joel Harward Vice President, Production Eric Bergstrom Chief Strategy Officer Jacob Banks Chief Financial Officer We’re SecurityNational Mortgage — More than a mortgage. 2020 was a watershed year for SecurityNational Mortgage Company. Conditions born from the spread of COVID-19 tested our commitment in nearly every way to make sure that each transaction is more than just a mortgage, for our customers, our co-workers, and our community. We succeeded brilliantly, turning in record setting financial results while keeping our staff safe and our customers happy. Demand for new home loans and refinancing of existing loans spiked exponentially as interest rates settled at all-time lows. Concurrently, government mandated social distancing required accommodations be made for over 1,000 SNMC employees in 98 branch locations across the nation in order to find suitable and safe places to originate mortgage loans. Technology and processes already in place allowed business to continue flowing in safe remote work environments. In spite of these unexpected challenging conditions, double the number of customers compared to the prior year were provided with mortgage loans suited to their individual needs. The productivity of our skilled employees reached new highs while service times and loan quality standards were among the best in the industry. An additional reward for this outstanding 2020 performance was the best financial result for the company in its 27-year history. The 2020 performance was no fluke. The leadership, with deep industry experience, individually has worked together as a management team at SecurityNational Mortgage for over a decade. This strategic maturity allows us to combine world-class technology with process in crafting an exceptional customer experience from point-of-contact through loan closing. In fact, for many of our customers, that individual care extends beyond the closing table to the long-term servicing of those loans. Strong relationships with Fannie Mae, Freddie Mac, FHA, VA, USDA, many other secondary market investors, and tailored portfolio products provided by our sister companies, ensures a full compliment of mortgage products at competitive prices. An unparalleled marketing and business support group help keep our sales team front and center in a very competitive marketplace. These company qualities are just a few of the reasons that new mortgage professionals are joining SNMC each month to help sustain our growth into the future. Even though our reach is nationwide, each of our branches are part of the local community. Our suite of products offered covers just about every mortgage loan need, but we take extra satisfaction helping our customers buy a home, especially their first home. Home ownership is one of the most important financial decisions most people will make in their lifetime. The process to finance a home purchase may be unfamiliar and complicated for most people. We are experts at originating mortgages for low-to-moderate income buyers and can match qualifications with mortgage programs and resources specifically designed for each applicant’s needs. Beyond loans, many of our co-workers are actively engaged in their cities, towns, and neighborhoods to feed the hungry, shelter the needy and add a splash of color along with a kind word while cleaning up after a disaster. While we have all the tools, tactics, and financial strength to be a consistent leader in the mortgage industry, for SecurityNational Mortgage the end result is more than just a mortgage. Jeff Orme Chief Compliance Officer Michael Muirbrook Vice President, Servicing & Audits Dave Bennett Vice President, Market Execution Karie Wakefield Vice President, Fulfillment Heather Street Executive Director, Business Services Wes Schueneman Director, Marketing Warren Little Director, Mortgage Solutions LEADERSHIP TEAM LEADERSHIP TEAM We’re Turning Houses into Homes® Scott Quist Chief Executive Officer Steve Johnson President Cory Taylor Vice President, Production Joel Harward Vice President, Production Eric Bergstrom Chief Strategy Officer Jacob Banks Chief Financial Officer J. Paul Christensen Sr. Vice President, National Sales Director We’re SecurityNational Mortgage — More than a mortgage. 2020 was a watershed year for SecurityNational Mortgage Company. Conditions born from the spread of COVID-19 tested our commitment in nearly every way to make sure that each transaction is more than just a mortgage, for our customers, our co-workers, and our community. We succeeded brilliantly, turning in record setting financial results while keeping our staff safe and our customers happy. Demand for new home loans and refinancing of existing loans spiked exponentially as interest rates settled at all-time lows. Concurrently, government mandated social distancing required accommodations be made for over 1,000 SNMC employees in 98 branch locations across the nation in order to find suitable and safe places to originate mortgage loans. Technology and processes already in place allowed business to continue flowing in safe remote work environments. In spite of these unexpected challenging conditions, double the number of customers compared to the prior year were provided with mortgage loans suited to their individual needs. The productivity of our skilled employees reached new highs while service times and loan quality standards were among the best in the industry. An additional reward for this outstanding 2020 performance was the best financial result for the company in its 27-year history. The 2020 performance was no fluke. The leadership, with deep industry experience, individually has worked together as a management team at SecurityNational Mortgage for over a decade. This strategic maturity allows us to combine world-class technology with process in crafting an exceptional customer experience from point-of-contact through loan closing. In fact, for many of our customers, that individual care extends beyond the closing table to the long-term servicing of those loans. Strong relationships with Fannie Mae, Freddie Mac, FHA, VA, USDA, many other secondary market investors, and tailored portfolio products provided by our sister companies, ensures a full compliment of mortgage products at competitive prices. An unparalleled marketing and business support group help keep our sales team front and center in a very competitive marketplace. These company qualities are just a few of the reasons that new mortgage professionals are joining SNMC each month to help sustain our growth into the future. Even though our reach is nationwide, each of our branches are part of the local community. Our suite of products offered covers just about every mortgage loan need, but we take extra satisfaction helping our customers buy a home, especially their first home. Home ownership is one of the most important financial decisions most people will make in their lifetime. The process to finance a home purchase may be unfamiliar and complicated for most people. We are experts at originating mortgages for low-to-moderate income buyers and can match qualifications with mortgage programs and resources specifically designed for each applicant’s needs. Beyond loans, many of our co-workers are actively engaged in their cities, towns, and neighborhoods to feed the hungry, shelter the needy and add a splash of color along with a kind word while cleaning up after a disaster. While we have all the tools, tactics, and financial strength to be a consistent leader in the mortgage industry, for SecurityNational Mortgage the end result is more than just a mortgage. Jeff Orme Chief Compliance Officer Michael Muirbrook Vice President, Servicing & Audits Dave Bennett Vice President, Market Execution Karie Wakefield Vice President, Fulfillment Heather Street Executive Director, Business Services Wes Schueneman Director, Marketing Warren Little Director, Mortgage Solutions REGIONAL MANAGERS 2020 STATISTICS REGIONAL MANAGERS J. Paul Christensen Executive Regional Manager, Midvale Region David Christensen Executive Regional Manager, Las Vegas Region Sean Christensen Executive Regional Manager, Las Vegas Region Troy Mannella Executive Regional Manager, Texas Region 401 Loan Officers SNMC Funding Comparison Year-Over-Year 61% INCREASE 274% INCREASE $3.0B $2.5B $2.0B $1.5B $1.0B $500M $0 Refinance Purchase 2019 2020 98 Branch Offices 11,312 traditional 21,215 LOANS FUNDED 9,903 refinances $165M Joel Harward Executive Regional Manager, Salt Lake Region Lisa Newman Executive Regional Manager, East Coast Region Scott Shelton Executive Regional Manager, Mid-Atlantic Region Jon Reed Executive Regional Manager, Midwest Region *Estimated savings of 0.75% over 9 years. Approximately $165,000,000* in interest savings back into our customers wallets. Turning Houses into Homes® REGIONAL MANAGERS 2020 STATISTICS REGIONAL MANAGERS J. Paul Christensen Executive Regional Manager, Midvale Region 401 Loan Officers SNMC Funding Comparison Year-Over-Year David Christensen Executive Regional Manager, Las Vegas Region 61% INCREASE 274% INCREASE $3.0B $2.5B $2.0B $1.5B $1.0B $500M $0 Sean Christensen Executive Regional Manager, Las Vegas Region Troy Mannella Executive Regional Manager, Texas Region Refinance Purchase 2019 2020 98 Branch Offices 11,312 traditional 21,215 LOANS FUNDED 9,903 refinances $165M Joel Harward Executive Regional Manager, Salt Lake Region Lisa Newman Executive Regional Manager, East Coast Region Scott Shelton Executive Regional Manager, Mid-Atlantic Region Jon Reed Executive Regional Manager, Midwest Region *Estimated savings of 0.75% over 9 years. Approximately $165,000,000* in interest savings back into our customers wallets. Turning Houses into Homes® We have a robust portfolio of loan products to serve our clients. Our professional loan specialists match your needs by filtering over 250 different products, to find the one that will best meet your needs. Every home. Every loan. EverLEND is a locally focused mortgage lender that values client satisfaction and long-term relationships over production volumes and becoming the largest lender in the area. We have a philosophy of using technology where appropriate to enhance the personal relationships and customer experience. Being locally focused, we can avoid many of the regulatory and systemic challenges that a national company faces. Our focus also allows us to pursue local opportunities to support our partners, which might be overlooked by national lenders. We like to think that we are the right size for great personal service. 104% Purchase Volume Increased 104% from 2019 to 2020 Our Foundation Our parent company was founded in 1965, so we have the strength and business experience to ensure a stable offering for our clients. Our team is comprised of seasoned veterans with an impressive depth of knowledge to help you select and secure the best possible mortgage loan product to meet our client’s goals. Passion is what drives our company to stand out amongst the sea of lenders. We are a team of unique individuals that give our best efforts to over-deliver for our clients and maintain a fun, rewarding work environment. Finding solutions that are the right fit for our clients, no matter how complex, gets us up in the morning. 123% Total Funded Volume Increased 123% from 2019 to 2020 LEADERSHIP TEAM Andrew Quist Chairman of the Board and President Mark McDonald Chief Executive Officer Chris Sleater Operations Manager Jack Helgesen Support Services Manager Long Term Relationships Tracy Anderson Senior Graphic Designer We recognize how important it is to create a low-stress and empowering process so that you remain in communication with your loan team, and they help you become a better-educated client along the way. Our professional loan officers keep you updated throughout the loan process. We want to be your lender for life! LEADERSHIP TEAM Scott Quist Chief Executive Officer Adam Quist Vice President and Chief Operating Officer Memorial provides excellent customer service, peace of mind, and personalized funeral and cemetery services to families in Utah and San Diego. Memorial Mortuaries & Cemeteries is Utah’s pre-eminent funeral and cemetery service provider. Memorial operates three different brands of funeral homes, totaling 10 different locations; Memorial Mortuaries & Cemeteries, Probst Family Funerals & Cremations, and Affordable Funerals & Cremations. Memorial also operates 5 cemeteries in Utah along with one cemetery in San Diego, California. Jordan Buckner Vice President of Marketing and Funeral Home Operations Our Mission Josh Atkinson General Sales Director Utah Cemeteries Scott Prine Manager Singing Hills Memorial Park Memorial’s mission is to provide customers with peace of mind and comfort while planning for and while experiencing end of life events. This is accomplished through Memorial’s internal commitment to treat each family we serve as if they were one of their own and holding each other accountable as the best funeral and cemetery professionals. Memorial excels at providing unique and special experiences for each of the families they serve and at providing families the tools and resources to help personalize their funeral and/or cemetery service. Memorial’s goal is growth. Growth will allow the company to continue providing excellent services to families in Utah, California and beyond. Growth also provides increased opportunities and improved livelihood for Memorial’s employees. With growth in mind, Memorial opened a new location in St. George, Utah under its “Affordable Funerals & Cremations” brand in 2017. Affordable now operates two locations, one in Salt Lake City and the second in St. George. Over the past several years, Memorial has realized double digit net income growth, averaging over 25% operational income growth each year since 2014. Most recently in 2020, Memorial became the largest funeral services provider in Salt Lake County through market share growth. Winner: Best of State Four Years in a Row Memorial Mortuaries and Cemeteries has been awarded the Best of State award in the state of Utah four years in a row. Affordable Funerals and Cremations has also been awarded Best of State for Budget Funerals two years in a row. Criteria for the awards are based on overall excellence, superiority and quality of a nominee’s products, services or performance, differentiating themselves from their competitors and improving the quality of life for their neighbors. The Best of State Awards were created to recognize outstanding individuals, organizations, and businesses in Utah. By recognizing excellence in the community and sharing examples of success for many worthy endeavors the awards motivate and reward those who have strived for excellence in their respective fields. Acquisition of Probst Family Funerals & Cremations During the first quarter of 2019, Memorial acquired Probst Family Funerals & Cremations, a Utah based funeral services provider with two locations in the Heber Valley, a community 45 minutes southeast of Salt Lake City. Probst Family Funerals was established in 2013, and began its operations in Midway, Utah. In 2016, the owners also acquired Olpin Hoopes Funeral Home located in Heber City, Utah, which it operated under the name of Heber Valley Funeral Home. These businesses have grown to serve hundreds of families each year in the Heber Valley area. With this acquisition, Memorial Mortuaries and Cemeteries is now one of Utah’s largest funeral providers, with ten funeral homes and five cemeteries located throughout the state. LEADERSHIP TEAM Brandon Federico Manager of Corporate Real Estate Gina Carter Property Manager Seth Anderson Facilities Manager Security National Real Estate manages both commercial and residential properties through wise investment strategies. Security National Real Estate is a wholly owned subsidiary of Security National Life and offers property management and leasing services. Each of our commercial properties is a fine example of the wise investment strategy of our management team. The team consists of an eight member staff handling sales, maintenance, and remodeling to suit the needs of new and existing tenants. Our rental properties consist of 3 residential and 17 commercial leases. All properties have the potential for development or raw land with plans for future improvements. Security National Corporate Headquarters Security National Financial has broken ground on Security National's own corporate headquarters. Featuring a similar design to Building 1 in the Center 53 Campus, the new building will house employees for all Salt Lake City based divisions. • 6-story Office Building • Approximately 217,000 sf • Scheduled to open Fall of 2021 Wasatch 16 • 78,000 sf class A building located in Draper, Utah • Key tenants include T-Mobile, Credit Corp Services, Journey Team – Microsoft Partner. Center 53 Campus Security National Real Estate is developing approximately 1,000,000 square feet of commercial real estate at the center of the Wasatch Front. The project, Center 53, encompasses over 20 acres in the central valley of Salt Lake City which is only 30 minutes from anywhere along the Wasatch Front. The first building was completed in 2018 and includes an on-site fitness center with cardio and weight stations. Building 1 is fully leased and its current full floor tenants include: R1, Finicity, and SoFi. Each of the buildings in the campus will have the following features: • Large floor plates with great views of the Salt Lake Valley • Exterior features include natural stone, glass curtain walls and terraneo finish • Large modern lobby with wood walls and large format tile feature walls • Structured parking • Easy access to freeway Cabela’s • Purchased in 2018 • 70,000 sf of retail • Located in Farmington, Utah at Station Park • 25 year lease with Cabela’s Our passion is commercial and residential real estate finance. We are your commercial and residential loan source. Security National Commercial Capital is a wholly owned subsidiary of Security National Life and origi- nates interim/bridge loans to enhance the mor tgage banker’s traditional long-term lender relationships with a faster closing, flexible, interim loan product intended to provide a bridge until a proper ty stabilizes and conventional long-term financing can be obtained. These loans are designed to facilitate the purchase, refinance, leveraging or ownership change of good quality, performing commercial real estate. We lend on investor or owner/occupied real estate, including single or multi-tenant office, retail, office, warehouse, and multifamily proper ties. We also provide construc- tion and land development financing that compli- Our loans are generated using relationships... ments SecurityNational Mor tgage on approved new residential construction and on select Commercial construction projects throughout the United States. Our target loan size is between $1,000,000 and $4,500,000... Our loans are generated using relationships with mor tgage bankers, other life insurance companies, commercial banks, website requests, referrals from past business relationships, commercial lending institu- tions, Real Estate professionals, Wall Street investors, and through publication adver tising. Our target loan size is between $1,000,000 and $4,500,000, with a maximum term of 3 years (12-month term preferred). We also provide interim bridge financing for SBA-504 loans waiting for debenture funding. We offer flexible fast funding commercial real estate loans, and respect our fiduciary responsibility to Security National Life’s insureds by providing secure, higher yielding investments. We provide competitive products and service to borrowers and the desired return to our shareholders. To learn more, visit www.sncloans.com for a presentation of products offered. Some of our many properties funded: LEADERSHIP TEAM Henry Kesler Vice President Jerred Nelson Construction Loan Manager Brian Nelsen Commercial Loan Manager $16,612,140 Interim SBA 504 Bridge $25,170,000 Commercial Bridge /Construction $13,068,000 Aquisition & Development $14,360,850 Land $202,047,401 Residential Construction 2020 SNCC Originations Where We Are Indiana d n e g e L Sales Office License Held Security National Life SecurityNational Mortgage Kilpatrick Life EverLEND Mortgage No License Held First Guaranty C&J Financial, LLC Office Corporate Headquarters Operations Memorial Mortuaries & Cemeteries American Funeral Financial Office Where We Are SNFC Corporate Offices Security National Financial Corporation 121 Election Road, Suite 100 Draper, UT 84020 P.O. Box 57250 Salt Lake City, UT 84157-0250 Telephone: (801) 264-1060 Toll Free: (800) 574-7117 Fax: (801) 264-8430 Form 10-K Offer If you are a holder or beneficial owner of the company’s stock, the company will send you, upon request and at no charge, a copy of the company’s Annual Report on Form 10-K filed with the Securities & Exchange Commission for the year 2020 (including a list of exhibits). All requests must be made in writing to the Corporate Secretary. Security National Financial Corporation P.O. Box 57250 Salt Lake City, Utah 84057-0220 Stock Transfer Agents Zions First National Bank P.O. Box 30880 Salt Lake City, UT 84130 Former Holders of Preferred Stock and/or Promissory Notes Security National Financial Corporation Attn: Stock Department P.O. Box 57220 Salt Lake City, UT 84057-0220 Certified Public Accountants Deloitte & Touche LLP Salt Lake City, Utah Outside Legal Counsel Mackey Price Law Salt Lake City, Utah Company E-mail Address: contact@securitynational.com Company Internet Address: www.securitynational.com Life Insurance Offices Security National Life Insurance Company 121 Election Road, Suite 100 Draper, UT 84020 Telephone: (800) 574-7117 Security National Life Insurance Company Home Service Division 1044-B River Oaks Drive Flowood, MS 39232 Telephone: (800) 826-6803 Security National Life Insurance Company Preneed Sales Division 1 Sanctuary Blvd Suite 302 Mandeville, LA 70471 Telephone: (800) 574-7117 Kilpatrick Life Insurance Company 1818 Marshall St. Shreveport, LA 71101 Telephone: (800) 235-0555 Fast Funding Offices C&J Financial, LLC 200 Market Way Rainbow City, AL 35906 Telephone: (800) 785-0003 American Funeral Financial 6000 Pelham Road Suite B Greenville, SC 29615 Telephone: (877) 213-4233 Mortuaries & Cemeteries Memorial Group Operations 121 Election Road, Suite 110 Salt Lake City, UT 84020 Telephone: (801) 268-8771 Memorial Holladay-Cottonwood Mortuary 4670 S. Highland Drive Salt Lake City, UT 84117 Telephone: (801) 278-2801 Memorial Lake Hills Mortuary & Cemetery 10055 S. State Street Sandy, UT 84070 Telephone: (801) 566-1249 Memorial Lake View Mortuary & Cemetery 1640 E. Lakeview Drive Bountiful, UT 84010 Telephone: (801) 298-1564 Memorial Murray Mortuary 5850 S. 900 E. Murray, UT 84121 Telephone: (801) 262-4631 Memorial Mountain View Mortuary & Cemetery 3115 E. 7800 S. Cottonwood Heights, UT 84121 Telephone: (801) 943-0831 Memorial Redwood Mortuary & Cemetery 6500 S. Redwood Road West Jordan, UT 84123 Telephone: (801) 969-3456 Memorial Holladay Cemetery 4900 S. Memory Lane Holladay, UT 84117 Telephone: (801) 278-2803 Singing Hills Memorial Park 2800 Dehesa Road El Cajon, CA 92019 Telephone: (619) 444-3000 Affordable Funerals & Cremations 5239 Greenpine Drive Murray, UT 84123 Telephone: (801) 287-8233 Affordable Funerals & Cremations St. George Location 157 E. Riverside Drive #3A St. George, UT 84790 Telephone: (435) 680-7035 Heber Valley Funeral Home 288 N. Main Street Heber City, UT 84032 Telephone: (435) 654-5458 Probst Family Funeral Home 79 E. Main Street Midway, UT 84049 Telephone: (435) 654-5959 EverLEND Mortgage Offices EverLEND–Operations 2455 E. Parleys Way, Ste. 150 Salt Lake City, UT 84109 Telephone: (801) 713-4800 UTAH Layton 1133 North Main Street #150 Layton, UT 84041 Telephone: (801) 926-9925 Pleasant Grove 590 West State Street Pleasant Grove, UT 84062 Telephone: (801) 910-0982 SNMC Mortgage Offices SecurityNational Mortgage Company–Operations 5201Green Street Salt Lake City, UT 84123 Telephone: (801) 264-8111 Where We Are SNMC Sales Offices ARKANSAS Maumelle 199 Deauville Drive Maumelle, AZ 72113 Telephone: (855) 677-6695 ARIZONA Chandler 1490 S. Price Road, Suite 318 Chandler, AZ 85286 Telephone: (844) 820-8699 Glendale 17505 N. 79th Avenue, Suite 213-E Glendale, AZ 85308 Telephone: (844) 820-8699 Mesa 1819 S. Dobson, Suite 202 Mesa, AZ 85202 Telephone: (877) 518-9450 1819 S. Dobson, Suite 203 Mesa, AZ 85202 Telephone: (602) 732-3993 Phoenix 5100 N 99th Ave, Unit 101, 103 & 111 Phoenix, AZ 85037 Telephone: (602) 273-9610 11225 N 28th Dr. Ste C200 Phoenix, AZ 85029 Telephone: (734) 945-5403 1951 West Camelback Road, Ste 200 Phoenix, AZ 85015 Telephone: (844) 820-8699 2828 North Central Ave., Ste 1100A Phoenix, AZ 85004 Telephone: (480) 424-2780 4725 N 19th Ave. Phoenix, AZ 85015 Telephone: (844) 820-8699 Scottsdale 10609 N Hayden Rd, Suite 100 Scottsdale, AZ 85260 Telephone: (480) 237-4670 17015 N Scottsdale Rd #125 Scottsdale, AZ 85255 Telephone: (480) 426-0400 CALIFORNIA Anaheim 1910 Union Street, #2020 Anaheim, CA 92805 Telephone: (877) 518-9450 Claremont 573 Chouinard Circle Claremont, CA 91711 Telephone: (877) 518-9450 Downey 7315 Shady Oak Dr Downey, CA 90240 Telephone: (877)518-9450 Forest Falls 40977 Oak Dr. Forest Falls, CA 92330 Telephone: (866) 607-3863 La Habra Heights 2325 El Empino Dr La Habra Heights, CA 90631 Telephone: (877) 518-9450 Lancaster 1805 W Avenue K, Suite 113 Lancaster, CA 93534 Telephone: (844)820-8699 Long Beach 2324 E. Broadway Long Beach, CA 90803 Telephone: (310) 946-2023 Rowland Heights 18647 Marimba St Rowland Heights, CA 91748 Telephone: (877) 518-9450 San Diego 445 W University Avenue, Apt A San Diego, CA 92103 Telephone: (866) 827-9558 Temecula 43050 Calle Cristal Temecula, CA 92592 Telephone: (877) 518-9450 West Covina 2934 E. Garvey Ave., South, Ste #250-N West Covina, CA 91791 Telephone: (626) 508-3004 Yucca Valley 7398 Fox Trail Unit B Yucca Valley, CA 92284 Telephone: (760) 853-2600 COLORADO Colorado Springs 5475 Tech Center Drive, Suite 100 Colorado Springs, CO 80919 Telephone: (877) 518-9450 Denver 7800 East Union Avenue, Suite 550 Denver, CO 80237 Telephone: (877) 518-9450 Edwards 27 Main Street, Suite C-104B Edwards, CO 81632 Telephone: (844) 820-8699 Larkspur 4501 Mohawk Drive Larkspur, CO 80118 Telephone: (844) 820-8699 CONNECTICUT Vernon 15 Lakeview Dr Vernon, CT 06066 Telephone: (860) 604-1688 FLORIDA Ft. Myers 8191 College Parkway #302 Ft. Myers, FL 33919 Telephone: (888) 550-9221 Lake Mary 1145 Townpark Avenue #2215 Lake Mary, FL 32746 Telephone: (407) 302-8384 136 Parliament Loop #1030 Lake Mary, FL 32746 Telephone: (407) 302-8384 Oldsmar 3180 Curlew Rd, Unit 107 Oldsmar, FL 34677 Telephone: (727) 724-5438 Riverview 6456 Cypressdale Dr. Unit 102 Riverview, FL 33578 Telephone: (866) 827-9558 Seminole 8265 113th St. Seminole, FL 33772 Telephone: (727) 498-3570 GEORGIA Atlanta 900 Circle 75 Parkway, Suite 175 Atlanta, GA 30339 Telephone: (877) 518-9450 Carrollton 106 A. Adamson Square Carrollton, GA 30117 Telephone: (470) 946-6100 HAWAII Kapolei 1001 Kamokila Boulevard, Suite 319 Kapolei, HI 96707 Telephone: (808) 427-9960 Lihue 4370 Kukui Grove Street Suite #201 Lihue, HI 96766 Telephone: (808) 823-8050 IDAHO McCall 116 N. 3rd Street #12 McCall, ID 83638 Telephone: (208) 634-2767 INDIANA Indianapolis 9963 Crosspoint Blvd. Suite 101 &102 Indianapolis, IN 46256 Telephone: (317) 572-6271 LOUISIANA Covington 568 Greenluster Drive Covington, LA 70433 Telephone: (985) 400-5787 MARYLAND Millersville 8530 Veterans Highway, Suite 100 Millersville, MD 21108 Telephone: (443) 494-2810 MISSOURI Branson 4987 Fall Creek Rd #1 Branson, MO 65616 Telephone: (417) 616-3341 NORTH CAROLINA Charlotte 330 Camp Road Suite B-39 Charlotte, NC 28206 Telephone: (888) 312-1140 NEVADA Henderson 2546 Findlater St Henderson, NV 89044 2635 St. Rose Parkway Suites D-100, 110 & 120 Henderson, NV 89052 Telephone: 702)487-5626 Las Vegas 1980 Festival Plaza Drive, Suite 850 Las Vegas, NV 89135 Telephone: (702) 562-8733 Mesquite 840 Pinnacle Court, #3, Suite B Mesquite, NV 89027 (866) 607-3863 OHIO Columbus 8720 Orion Place Suite 160 Columbus, OH 43240 Telephone: (614) 441-9978 OREGON Beaverton 8285 SW Nimbus #160 Beaverton, OR 97008 Telephone: (844) 820-8699 Clackamas 10365 SE Sunnyside Road #310 Clackamas, OR 97015 Telephone: (971) 544-7192 Portland 11104 SE Stark Street, Ste S Portland, OR 97214 Telephone: (503) 251-5482 3311 NE MLK Jr Blvd #203 Portland, OR 97212 Telephone: (503) 308-6127 Tilamook 709 Pacific Ave. Tillamook, OR 97141 Telephone: (503) 880-4018 TENNESSEE Franklin 6640 Carothers Parkway, Ste 110 Franklin, TN 37067 Telephone: (615) 721-2934 347 Main St, Suite 200 Franklin, TN 37064 Telephone: (615) 721-2934 Johnson City 144 Alf Taylor Rd Johnson City, TN 37601 Telephone: (423) 741-0008 Memphis 6263 Poplar Ave, Suite 1150 Memphis, TN 38119 Telephone: (407) 302-8384 TEXAS Austin 9737 Great Hills Trail #200 & 220 Austin, TX 78759 Telephone: (512) 795-5596 Where We Are Brownsville 1213 E. Alton Gloor Blvd Suite H & I Brownsville, TX 78526 Telephone: (956) 554-0792 Dallas 10000 N. Central Expressway Ste. 400, Office 424 Dallas, TX 75231 Telephone: (469) 374-9700 7920 Belt Line Road, Suite 158 Dallas, TX 75254 Telephone: (214) 730-0021 Eagle Pass 240 N. Adams St, Suite 4 & 5 Eagle Pass, TX 78852 Telephone: (830) 776-4323 El Paso 1626 Lee Trevino, Ste A El Paso, TX 79936 Telephone: (915) 307-7212 Fort Worth 5020 Collinwood Ave. Suite100 Fort Worth, TX 76107 Telephone: (817) 945-2551 Houston 17347 Village Green Dr. Ste. 102 Houston, TX 77040 Telephone: (832) 615-5400 11550 Fuqua, Suite 200 Houston, TX 77034 Telephone: (832) 786-6697 Hurst 1848 Norwood Plaza #213 Hurst, TX 76054 Telephone: (214) 444-9250 Katy 2102 Jitterbug Lane Katy, TX 77494 Telephone: (855) 203-1300 23227 Red River Drive Katy, TX 77494 Telephone: (832) 786-6699 Laredo 2408 Jacaman Rd. Suite F Laredo, TX 78041 Telephone: (956) 284-0888 League City 3027 Marina Bay Dr. #200 League City, TX 77573 Telephone: (281) 549-7194 Trevor 27903 99th Street Trevor, WI 53179 Telephone: (262) 997-9444 WEST VIRGINIA Charles Town 219 West Washington Street Charles Town, WV 25414 Telephone: (304) 885-1068 Where We Are Mansfield 124 North Main Street Mansfield, TX 76063 Telephone: (855) 203-1300 1900 Country Club Drive, Suite 150 Mansfield, TX 76063 Telephone: (855) 203-1300 Mesquite 3220 Gus Thomasson Rd, Ste 111-B Mequite, TX 75150 Telephone: (855) 203-1300 Midland 4411 West Illinois Suite B-4 Midland, TX 79703 Telephone: (432) 897-2299 UTAH Cottonwood Heights 6965 S. Union Park Center Suite 300 Cottonwood Heights, UT 84047 Telephone: (801) 838-9808 6965 Union Park Center #470 Cottonwood Heights, UT 84047 Telephone: (801) 545-7270 Ephraim 497 S Main, Suite E. Ephraim, UT 84627 Telephone: (435) 283-3000 Lehi 1350 E. 300 S. 3rd Floor, Lehi, UT 84043 Telephone: (801) 901-6200 Orem 833 North 900 West Orem, UT 840%7 Telephone: (801) 724-6425 Sandy 75 West Towne Ridge Parkway Ste 100 Sandy, UT 84070 Telephone: (801) 262-6033 126 West Sego Lily Drive #260 Sandy, UT 84070 Telephone: (801) 571-1313 9815 S Monroe St #203 Sandy, UT 84070 Telephone: (801) 262-6033 South Jordan 11240 So. River Heights Drive Suite 100 South Jordan, UT 84095 Telephone: (801) 508-6300 859 W South Jordan Pkwy Bldg A, Ste 1 South Jordan, UT 84095 St. George 558 E. Riverside Drive St. George, UT 84790 Telephone: (866) 607-3863 Stansbury Park 500 East Village Blvd., Unit #110 Stansbury Park, UT 84074 Telephone: (435) 843-5340 Taylorsville 5965 South Redwood Rd Taylorsville, UT 84123 Telephone: (385) 474-6293 6575 S. Redwood Rd #225 Taylorsville, UT 84123 Telephone: (801) 727-7600 VIRGINIA Sterling 21430 Cedar Dr, Unit 200-202 Sterling, VA 20164 Telephone: (703) 880-1841 WASHINGTON Lynden 2107 Currant Street Lynden, WA 98264 Telephone: (844) 820-8699 Vancouver 15640 NE Fourth Plain Blvd #220 & 221 Vancouver, WA 98682 Telephone: (360) 869-7265 WISCONSIN Kenosha 1508 24th Avenue #23 Kenosha, WI 53140 Deloitte & Touche LLP 111 South Main Street Suite 1500 Salt Lake City, UT 84111 USA Tel: +1 801 328 4706 Fax: +1 801 366 7900 www.deloitte.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Security National Financial Corporation: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Security National Financial Corporation and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 1 Future Policy Benefits and Amortization of Deferred Policy Acquisition Costs for Insurance Contracts and Value of Business Acquired - Refer to Notes 1 and 22 to the financial statements Critical Audit Matter Description The Company’s management sets assumptions in (1) recording a liability for policy benefit payments that will be made in the future (future policy benefits) and (2) determining amortization of deferred policy acquisition costs for insurance contracts and value of business acquired. The most significant assumptions include mortality, lapse, and projected investment yield. Assumptions are determined based upon published studies and analysis of Company specific experience, adjusted for changes in exposure and other relevant factors. Given the inherent uncertainty of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s judgments regarding the assumptions used in the development of future policy benefits and the amortization of deferred policy acquisition costs for insurance contracts and value of business acquired, included the following, among others: • • • • • We tested the design and implementation of controls over the assumption development process, the valuation of future policy benefits, and the amortization of deferred policy acquisition costs for insurance contracts and value of business acquired. With the assistance of our actuarial specialists, we: evaluated management’s selected actuarial assumptions, including testing the accuracy and completeness of the supporting experience studies, evaluated management’s judgments regarding the assumptions used in the development of future policy benefits and the amortization of deferred policy acquisition costs and value of business acquired, evaluated the results of the Company’s annual premium deficiency tests. Salt Lake City, UT March 31, 2021 We have served as the Company's auditor since 2017. 2 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets Investments: Fixed maturity securities, available for sale, at estimated fair value Equity securities at estimated fair value Mortgage loans held for investment (net of allowances for loan losses of $2,005,127 and $1,453,037 for 2020 and 2019) Real estate held for investment (net of accumulated depreciation of $13,800,973 and $12,788,739 for 2020 and 2019) Real estate held for sale Other investments and policy loans (net of allowances for doubtful accounts of $1,645,475 and $1,448,026 for 2020 and 2019) Accrued investment income Total investments Cash and cash equivalents Loans held for sale at estimated fair value Receivables (net of allowances for doubtful accounts of $1,685,382 and $1,724,156 for 2020 and 2019) Restricted assets (including $3,989,415 and $2,985,347 for 2020 and 2019 at estimated fair value) Cemetery perpetual care trust investments (including $2,810,070 and $2,581,124 for 2020 and 2019 at estimated fair value) Receivable from reinsurers Cemetery land and improvements Deferred policy and pre-need contract acquisition costs Mortgage servicing rights, net Property and equipment, net Value of business acquired Goodwill Other Total Assets See accompanying notes to consolidated financial statements. December 31 2020 2019 $ 294,656,679 11,324,239 $ 355,977,820 7,271,165 249,343,936 236,694,546 131,684,453 7,878,807 102,756,946 14,097,627 73,696,661 5,360,523 773,945,298 106,219,429 422,772,418 60,245,269 4,833,232 781,876,605 127,754,719 213,457,632 10,899,207 9,236,330 16,150,036 13,935,317 6,413,167 15,569,156 8,761,436 100,075,276 35,210,516 12,473,345 8,955,249 3,519,588 27,976,357 $1,548,940,478 4,411,864 15,747,768 9,519,950 94,701,920 17,155,529 14,600,394 9,876,647 3,519,588 18,649,812 $ 1,334,444,075 3 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) Liabilities and Stockholders' Equity Liabilities Future policy benefits and unpaid claims Unearned premium reserve Bank and other loans payable Deferred pre-need cemetery and mortuary contract revenues Cemetery perpetual care obligation Accounts payable Other liabilities and accrued expenses Income taxes Total liabilities Stockholders’ Equity Preferred Stock: Preferred stock - non-voting-$1.00 par value; 5,000,000 shares authorized; none issued or outstanding Common Stock: Class A: common stock - $2.00 par value; 20,000,000 shares authorized; issued 16,595,783 shares in 2020 and 16,107,779 shares in 2019 Class B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized; none issued or outstanding Class C: convertible common stock - $2.00 par value; 3,000,000 shares authorized; issued 2,679,603 shares in 2020 and 2,500,887 shares in 2019 Additional paid-in capital Accumulated other comprehensive income, net of taxes Retained earnings Treasury stock, at cost - 227,852 Class A shares and 10,985 Class C shares in 2020; 490,823 Class A shares and -0- Class C shares in 2019 Total stockholders’ equity Total Liabilities and Stockholders’ Equity See accompanying notes to consolidated financial statements. December 31 2020 2019 $ 844,790,087 3,328,623 297,824,368 13,080,179 4,087,704 8,932,683 87,650,981 25,258,800 1,284,953,425 $ 825,600,918 3,621,697 217,572,612 12,607,978 3,933,719 5,056,983 50,652,591 18,686,972 1,137,733,470 - - 33,191,566 32,215,558 - - 5,359,206 50,287,253 23,243,133 153,739,167 5,001,774 46,091,112 13,726,514 101,256,229 (1,833,272) 263,987,053 1,548,940,478 $ (1,580,582) 196,710,605 1,334,444,075 $ 4 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Revenues: Mortgage fee income Insurance premiums and other considerations Net investment income Net mortuary and cemetery sales Gains on investments and other assets Other than temporary impairments on investments Other Total revenues Benefits and expenses: Death benefits Surrenders and other policy benefits Increase in future policy benefits Amortization of deferred policy and pre-need acquisition costs and value of business acquired Selling, general and administrative expenses: Commissions Personnel Advertising Rent and rent related Depreciation on property and equipment Provision for loan loss reserve Costs related to funding mortgage loans Other Interest expense Cost of goods and services sold – cemeteries and mortuaries Total benefits and expenses Earnings before income taxes Income tax expense Net earnings Net earnings per Class A equivalent common share (1) Net earnings per Class A equivalent common share - assuming dilution (1) Weighted average Class A equivalent common shares outstanding (1) Weighted average Class A equivalent common shares outstanding-assuming dilution (1) Years Ended December 31 2020 2019 $ 298,933,110 93,020,617 56,329,803 20,307,435 1,925,850 (370,975) 11,317,482 481,463,322 $ 131,976,082 81,860,610 43,019,473 15,296,235 728,367 - 10,180,163 283,060,930 59,040,130 3,801,230 23,568,650 41,591,057 3,320,748 23,568,497 14,307,425 14,634,577 124,426,297 84,989,971 5,380,896 6,873,561 2,078,738 16,506,030 9,877,700 47,331,102 8,578,810 3,252,655 410,013,195 56,762,891 64,221,270 4,784,558 7,055,456 1,711,369 - 6,278,954 34,922,761 7,386,688 2,878,169 269,116,995 71,450,127 (15,853,514) 55,596,613 $ 13,943,935 (3,050,416) 10,893,519 $ $2.95 $2.88 $0.59 $0.58 18,831,991 18,562,056 19,275,251 18,689,602 (1) Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. The weighted- average shares outstanding includes the weighted-average Class A common shares and the weighted-average Class C common shares determined on an equivalent Class A common stock basis. Net earnings per common share represent net earnings per equivalent Class A common share. See accompanying notes to consolidated financial statements. 5 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net earnings Other comprehensive income: Unrealized gains on fixed maturity securities available for sale Unrealized gains on restricted assets Unrealized gains (losses) on cemetery perpetual care trust investments Foreign currency translation adjustments Other comprehensive income, before income tax Income tax expense Other comprehensive income, net of income tax Comprehensive income See accompanying notes to consolidated financial statements. Years Ended December 31 2020 $ 55,596,613 2019 10,893,519 $ 12,013,692 41,225 (6,817) (46) 12,048,054 (2,531,435) 9,516,619 65,113,232 $ 17,315,770 35,550 29,904 972 17,382,196 (3,652,859) 13,729,337 24,622,856 $ 6 - - - - - - - - - - - - - - - 9,516,619 - - - - - - SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Cla s s A Co mmo n S to c k Cla s s C Co mmo n S to c k Ad d itio n a l P a id - in Ca p ita l Ac c u mu la te d O th e r Co mp re h e n s ive In c o me (Lo s s ) Re ta in e d Ea rn in g s Tre a s u ry S to c k To ta l B a la n c e a t De c e mb e r 3 1, 2 0 18 30,609,596 4,387,286 41,821,778 (2,823) 95,201,732 (206,396) 171,811,173 Ne t e a rnings Othe r c ompre he ns ive inc ome S toc k ba s e d c ompe ns a tion e xpe ns e Exe rc is e of s toc k options S a le of tre a s ury s toc k P urc ha s e of tre a s ury s toc k - - - - - - 65,034 382,886 - - - - 256,996 415,990 529,858 - - - - 13,729,337 10,893,519 - - - - - 165,702 10,893,519 13,729,337 256,996 863,910 695,560 (1,539,888) (1,539,888) S toc k divide nds 1,534,356 238,174 3,066,490 Conve rs ion Cla s s C to Cla s s A 6,572 (6,572) - (4,839,022) - - - (2) - B a la n c e a t De c e mb e r 3 1, 2 0 19 32,215,558 5,001,774 46,091,112 13,726,514 101,256,229 (1,580,582) 196,710,605 Ne t e a rnings Othe r c ompre he ns ive inc ome S toc k ba s e d c ompe ns a tion e xpe ns e Exe rc is e of s toc k options S a le of tre a s ury s toc k P urc ha s e of tre a s ury s toc k - - - - - - 137,940 261,640 - - - - - - 358,878 432,572 1,224,877 - S toc k divide nds 810,420 123,440 2,179,814 Conve rs ion Cla s s C to Cla s s A 27,648 (27,648) - - 55,596,613 - - - - 55,596,613 9,516,619 358,878 832,152 2,715,071 3,939,948 (2,967,761) (2,967,761) (3,113,675) - - - (1) - B a la n c e a t De c e mb e r 3 1, 2 0 2 0 $ 33,191,566 $ 5,359,206 $50,287,253 $ 23,243,133 $ 153,739,167 $ (1,833,272) $263,987,053 See accompanying notes to consolidated financial statements. 7 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash used in operating activities: Gains on investments and other assets Other than temporary impairments on investments Depreciation Provision for loan losses and doubtful accounts Net amortization of deferred fees and costs, premiums and discounts Provision for deferred income taxes Policy and pre-need acquisition costs deferred Policy and pre-need acquisition costs amortized Value of business acquired amortized Mortgage servicing rights, additions Amortization of mortgage servicing rights Stock based compensation expense Benefit plans funded with treasury stock Net change in fair value of loans held for sale Originations of loans held for sale Proceeds from sales of loans held for sale Net gains on sales of loans held for sale Change in assets and liabilities: Land and improvements held for sale Future policy benefits and unpaid claims Other operating assets and liabilities Net cash used in operating activities Cash flows from investing activities: Purchases of fixed maturity securities Sales, calls and maturities of fixed maturity securities Purchase of equity securities Sales of equity securities Net changes in restricted assets Net changes in cemetery perpetual care trust investments Mortgage loans held for investment, other investments and policy loans made Payments received for mortgage loans held for investment, other investments and policy loans Purchases of property and equipment Sales of property and equipment Purchases of real estate Sales of real estate Cash received for reinsurance assumed Cash paid for purchase of subsidiaries, net of cash acquired Net cash provided by investing activities Years Ended December 31 2020 2019 $ 55,596,613 $ 10,893,519 (1,925,850) (728,367) - 370,975 5,183,658 5,447,363 1,202,688 1,577,370 (887,605) (1,227,773) (1,857,897) 2,854,669 (19,176,531) (18,909,921) 13,787,037 13,520,600 786,825 847,540 (4,194,502) (29,896,465) 7,055,795 11,841,478 256,996 358,878 3,939,948 695,560 (2,498,097) (10,413,492) (2,606,839,175) (5,627,013,749) 2,580,875,055 5,600,045,285 (80,666,413) (188,893,379) 758,514 25,804,740 25,750,164 (129,627,207) (58,493,147) 131,269,730 (6,991,832) 3,902,835 (1,954,437) (2,755,856) (682,170,126) 672,544,708 (1,630,734) 194,955 (40,190,471) 22,418,816 - - 36,144,441 358,477 18,394,928 1,695,259 (75,602,075) (110,601,438) 26,624,182 (3,264,028) 2,639,729 (1,254,991) 299,897 (572,171,590) 556,352,676 (1,839,293) 54,496 (8,572,556) 11,614,927 158,358,594 (20,141,074) 38,099,531 8 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Cash flows from financing activities: Investment contract receipts Investment contract withdrawals Proceeds from stock options exercised Purchase of treasury stock Repayment of bank loans Proceeds from bank loans Net change in warehouse line borrowings for loans held for sale Net cash provided by financing activities Net change in cash, cash equivalents, restricted cash and restricted cash equivalents Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year Cash, cash equivalents, restricted cash and restricted cash equivalents at end of year Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest (net of amount capitalized) Income taxes Non Cash Investing and Financing Activities: Transfer of loans held for sale to mortgage loans held for investment Accrued real estate construction costs and retainage Right-of-use assets obtained in exchange for operating lease liabilities Mortgage loans held for investment foreclosed into real estate held for investment Right-of-use assets obtained in exchange for finance lease liabilities Transfer of real estate held for investment to property and equipment Transfer of property and equipment to real estate held for investment Mortgage loans held for investment foreclosed into receivables See Note 20 regarding non cash transactions included in the acquisitions of Probst Family Funerals and Cremations and Heber Valley Funeral Home and Kilpatrick Life Insurance Company Years Ended December 31 2020 2019 $ 11,511,118 (18,235,107) 832,152 (2,967,761) (174,865,813) 164,586,365 90,351,225 71,212,179 $ 12,141,627 (16,911,841) 863,910 (1,539,888) (236,790,722) 196,610,127 69,928,331 24,301,544 (22,270,587) (13,201,000) 137,735,673 150,936,673 $ 115,465,086 $ 137,735,673 $ 8,385,270 11,813,120 $ 7,284,078 4,861,318 $ 16,960,549 6,365,534 5,631,193 $ 31,881,851 590,256 16,544,406 686,124 8,494 - 1,516,700 - 1,704,015 252,763 3,261,259 - 155,347 Reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as shown in the consolidated statements of cash flows is presented in the table below: Cash and cash equivalents Restricted assets Cemetery perpetual care trust investments Total cash, cash equivalents, restricted cash and restricted cash equivalents See accompanying notes to consolidated financial statements. 9 Years Ended December 31 2020 2019 127,754,719 106,219,429 8,674,214 8,842,744 1,306,740 402,913 137,735,673 115,465,086 $ $ $ $ SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies General Overview of Business Security National Financial Corporation and its wholly owned subsidiaries (the “Company”) operate in three reportable business segments: life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products and accident and health insurance marketed primarily in the Intermountain West, California and eleven southern states. The cemetery and mortuary segment of the Company consists of eight mortuaries and five cemeteries in Utah and one cemetery in California. The mortgage segment is an approved government and conventional lender that originates and underwrites residential and commercial loans for new construction, existing homes and real estate projects primarily in Florida, Nevada, Texas, and Utah. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). Principles of Consolidation These consolidated financial statements include the financial statements of the Company and its majority owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates Management of the Company has made a number of estimates and assumptions related to the reported amounts of assets and liabilities, reported amounts of revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with GAAP. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects. Investments The Company’s management determines the appropriate classifications of investments in fixed maturity securities and equity securities at the acquisition date and re-evaluates the classifications at each balance sheet date. Fixed maturity securities available for sale are carried at estimated fair value. Changes in fair values are reported as unrealized gains or losses and are recorded in accumulated other comprehensive income. On December 31, 2019, the Company changed the classification of its bond and preferred stock investments to available for sale from held to maturity. As a result, securities available for sale are carried at estimated fair value. 10 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Equity securities are carried at estimated fair value. Changes in fair values are reported as unrealized gains or losses and are recorded through net earnings. Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, net discounts, charge-offs and the related allowance for loan losses. Interest income is included in net investment income on the consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the consolidated statements of earnings. Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value. Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer. Real estate held for investment is carried at cost, less accumulated depreciation provided on a straight-line basis over the estimated useful lives of the properties, or is adjusted to a new basis for impairment in value, if any. Included are foreclosed properties which the Company intends to hold for investment purposes. These properties are recorded at the lower of cost or fair value upon foreclosure. Also, included are residential subdivision land developments which are carried at cost. Real estate held for sale is carried at lower of cost or fair value. Depreciation is not recognized on real estate classified as held for sale. Other investments and policy loans are carried at the aggregate unpaid balances, less allowances for losses. Gains and losses on investments (except for equity securities carried at fair value through net earnings) arise when investments are sold (as determined on a specific identification basis) or are other than temporarily impaired. If in management’s judgment a decline in the value of an investment below cost is other than temporary, the cost of the investment is written down to fair value with a corresponding charge to earnings. Factors considered in judging whether an impairment is other than temporary include: the financial condition, business prospects and credit worthiness of the issuer, the length of time that fair value has been less than cost, the relative amount of the decline, and the Company’s ability and intent to hold the investment until the fair value recovers, which is not assured. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Loans Held for Sale Accounting Standards Codification (“ASC”) No. 825, “Financial Instruments”, allows for the option to report certain financial assets and liabilities at fair value initially and at subsequent measurement dates with changes in fair value included in earnings. The option may be applied instrument by instrument, but it is irrevocable. The Company elected the fair value option for loans held for sale. The Company believes the fair value option most closely aligns the timing of the recognition of gains and costs. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Electing fair value also reduces certain timing differences and better matches changes in the fair value of these assets with changes in the fair value of the related derivatives used for these assets. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding loans held for sale. 11 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Mortgage Fee Income Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination of mortgage loans held for sale. All revenues and costs are recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income. See Note 3 and Note 17 to Consolidated Financial Statements for additional disclosures regarding loans held for sale. The Company, through its mortgage subsidiaries, sells mortgage loans to third-party investors without recourse unless defects are identified in the representations and warranties made at loan sale. It may be required, however, to repurchase a loan or pay a fee instead of repurchase under certain events, which include 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, and • 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. It is the Company's policy to cure any documentation problems regarding 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. Remedial methods include the following: • Research reasons for rejection, • Provide additional documents, • Request investor exceptions, • Appeal rejection decision to purchase committee, and • Commit to secondary investors. Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period, the loans are repurchased and transferred to the long-term investment portfolio at the lower of cost or fair value and previously recorded mortgage fee income that was to be received from a third- party investor is written off against the loan loss reserve. Determining Lower of Cost or Fair Value Cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Fair value is often difficult to determine, but is based on the following: • For loans that are committed, the Company uses the commitment price. • For loans that are non-committed that have an active market, the Company uses the market price. • For loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar product. 12 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) • For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and the loan interest rate. The appraised value of the real estate underlying the original mortgage loan adds support 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, thus minimizing credit losses. The majority of loans originated are sold to third-party investors. The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans held for sale. Loan Loss Reserve The loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on loans sold. The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination 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 based on total production. This estimate is based on the Company’s historical experience and is included as a component of mortgage fee income. Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and administrative expenses as a component of provision for loan loss reserve. The estimated liability for indemnification losses is included in other liabilities and accrued expenses. The loan loss reserve analysis involves mortgage loans that have been sold to third-party investors, which were believed to have met investor underwriting guidelines at the time of sale, where the Company has received a demand from the investor. There are generally three types of demands: make whole, repurchase, or indemnification. These types of demands are further described as follows: Make whole demand – A make whole demand occurs when an investor forecloses on a property and then sells the property. The make whole amount is calculated as the difference between the original unpaid principal balance, payments received, accrued interest and fees, less the sale proceeds. Repurchase demand – A repurchase demand usually occurs when there is a significant payment default, error in underwriting or detected loan fraud. Indemnification demand – On certain loans the Company has negotiated a set fee that is to be paid in lieu of repurchase. The fee varies by investor and by loan product type. The Company believes the allowance for loan losses and the loan loss reserve represent probable loan losses incurred as of the balance sheet date. Additional information related to the Loan Loss Reserve is included in Note 3. 13 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Restricted Assets Restricted assets are assets held in a trust account for future mortuary services and merchandise and consist of cash and cash equivalents; participations in mortgage loans held for investment with Security National Life Insurance Company (“Security National Life”); mutual funds carried at estimated fair value; equity securities carried at estimated fair value; and a surplus note with Security National Life (which is eliminated in consolidation). Restricted assets also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development projects. Additionally, the Company funded its medical benefit safe- harbor limit based on the qualified direct costs, and has included this amount as a component of restricted cash. Cemetery Perpetual Care Trust Investments Cemetery endowment care trusts have been set up for four of the six cemeteries owned by the Company. Under endowment care arrangements a portion of the price for each lot sold is withheld and invested in a portfolio of investments similar to those described in the prior paragraph. The earnings stream from the investments is designed to fund future maintenance and upkeep of the cemetery. Cemetery Land and Improvements The development of a cemetery involves not only the initial acquisition of raw land but also the installation of roads, water lines, landscaping and other costs to establish a marketable cemetery lot. The costs of developing the cemetery are shown as an asset on the balance sheet. The amount on the balance sheet is reduced by the total cost assigned to the development of a particular lot when the criterion for recognizing a sale of that lot is met. Deferred Policy Acquisition Costs and Value of Business Acquired Commissions and other costs, net of commission and expense allowances for reinsurance ceded, that vary with and are primarily related to the production of new insurance business have been deferred. Deferred policy acquisition costs (“DAC”) for traditional life insurance are amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For interest-sensitive insurance products, deferred policy acquisition costs are amortized generally in proportion to the present value of expected gross profits from surrender charges, investment, mortality and expense margins. This amortization is adjusted when estimates of current or future gross profits to be realized from a group of products are reevaluated. Deferred acquisition costs are written off when policies lapse or are surrendered. When accounting for DAC, the Company considers internal replacements of insurance and investment contracts. An internal replacement is a modification in product benefits, features, rights or coverage that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to contract, or by the election of a feature or coverage within a contract. Modifications that result in a replacement contract that is substantially changed from the replaced contract are accounted for as an extinguishment of the replaced contract. Unamortized DAC, unearned revenue liabilities and deferred sales inducements from the replaced contract are written-off. Modifications that result in a contract that is substantially unchanged from the replaced contract are accounted for as a continuation of the replaced contract. Value of business acquired is the present value of estimated future profits of the acquired business and is amortized similar to deferred policy acquisition costs. 14 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Mortgage Servicing Rights Mortgage Servicing Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents) when mortgage loans are sold. Under these contracts, the Company is obligated to retain and provide loan servicing functions on loans sold, in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest, holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition of real estate owned and property dispositions. The total residential mortgage loans serviced for others consist primarily of agency conforming fixed-rate mortgage loans. The value of MSRs is derived from the net cash flows associated with the servicing contracts. The Company receives a servicing fee of generally about 0.250% annually on the remaining outstanding principal balances of the loans. Based on the result of the cash flow analysis, an asset or liability is recorded for mortgage servicing rights. The servicing fees are collected from the monthly payments made by the mortgagors. The Company generally receives other remuneration including rights to various mortgagor-contracted fees such as late charges, and collateral reconveyance charges and the Company is generally entitled to retain the interest earned on funds held pending remittance of mortgagor principal, interest, tax and insurance payments. Contractual servicing fees and late fees are included in other revenues on the consolidated statements of earnings. The Company’s subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market. After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. Amortization expense is included in other expenses on the consolidated statements of earnings. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. Interest rate risk, prepayment risk, and default risk are inherent risks in MSR valuation. Interest rate changes largely drive prepayment rates. Refinance activity generally increases as rates decline. A significant decrease in rates beyond expectation could cause a decline in the value of the MSR. On the contrary, if rates increase borrowers are less likely to refinance or prepay their mortgage, which extends the duration of the loan and MSR values are likely to rise. Because of these risks, discount rates and prepayment speeds are used to estimate the fair value. The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current period earnings and the carrying value of the MSRs is adjusted through a valuation allowance. Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. Property and Equipment Property and equipment are recorded at cost. Depreciation is calculated principally on the straight-line method over the estimated useful lives of the assets which range from three to forty years. Leasehold improvements paid for by the Company as a lessee are amortized over the lesser of the useful life or remaining lease terms. 15 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Long-lived Assets Long-lived assets to be held and used, including property and equipment and real estate held for investment, are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset, and long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. No impairment of long-lived assets has been recognized in the accompanying financial statements except for certain impairments of real estate held for investment as disclosed in Note 2. Derivative Instruments Mortgage Banking Derivatives Loan Commitments The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a 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 loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment. 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 loan commitments and are updated periodically to reflect the most current data. The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of 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 loan commitment is issued and is shown net of expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Forward Sale Commitments The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. 16 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the consolidated balance sheets. Call and Put Option Derivatives The Company uses a strategy of selling “out of the money” call options on its equity securities as a source of revenue. The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre- determined date in the future. The Company uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices. The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option. The liability for options is adjusted to fair value at each reporting date. In the event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the consolidated balance sheets. Allowance for Doubtful Accounts and Loan Losses and Impaired Loans The Company records an allowance and recognizes an expense for potential losses from mortgage loans held for investment, other investments and receivables in accordance with GAAP. Receivables are the result of cemetery and mortuary operations, mortgage loan operations and life insurance operations. The allowance is based upon the Company’s historical experience for collectively evaluated impairment. Other allowances are based upon receivables individually evaluated for impairment. Collectability of the cemetery and mortuary receivables is significantly influenced by current economic conditions. The critical issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the overall economy. The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. See the schedules in Note 2 for additional information. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them. The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events. For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows: 17 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay. Residential – Secured by family dwelling units. These loans are secured by first and second mortgages on the unit. The borrower’s ability to repay is sensitive to the life events and general economic condition of the region. Where loan to values exceed 80%, the loan is generally guaranteed by private mortgage insurance, FHA or VA. Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon long-term financing. Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity. the completed project and the success of the ability of the borrower to secure Future Policy Benefits and Unpaid Claims Future policy benefit reserves for traditional life insurance are computed using a net level method, including assumptions as to investment yields, mortality, morbidity, withdrawals, and other assumptions based on the life insurance subsidiaries’ experience, modified as necessary to give effect to anticipated trends and to include provisions for possible unfavorable deviations. Such liabilities are, for some plans, graded to equal statutory values or cash values at or prior to maturity, which are deemed a reasonable equivalent for GAAP. The range of assumed interest rates for all traditional life insurance policy reserves was 4% to 10%. Benefit reserves for traditional limited-payment life insurance policies include the deferred portion of the premiums received during the premium-paying period. Deferred premiums are recognized as income over the life of the policies. Policy benefit claims are charged to expense in the period the claims are incurred. Increases in future policy benefits are charged to expense. 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 crediting rates for interest-sensitive insurance products ranged from 3% to 6.5%. The Company records an unpaid claims liability for claims in the course of settlement equal to the death benefit amount less any reinsurance recoverable amount for claims reported. There is also an unpaid claims liability for claims incurred but not reported. This liability is based on the historical experience of the net amount of claims that were reported in reporting periods subsequent to the reporting period when claims were incurred. Participating Insurance Participating business constituted 2% of insurance in force for the years ended 2020 and 2019. The provision for policyholders’ dividends included in policyholder obligations is based on dividend scales anticipated by management. Amounts to be paid are determined by the Board of Directors. (cid:3)(cid:3) 18 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Recognition of Insurance Premiums and Other Considerations Premiums and other consideration for traditional life insurance products (which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies) are recognized as revenues when due from policyholders. Premiums and other consideration for interest-sensitive insurance policies (which include universal life policies, interest-sensitive life policies, deferred annuities, and annuities without life contingencies) are recognized when earned and consist of amounts assessed against policyholder account balances during the period for policy administration charges and surrender charges. Reinsurance The Company follows the procedure of reinsuring risks in excess of $100,000 to provide for greater diversification of business to allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. The Company remains liable for amounts ceded in the event the reinsurers are unable to meet their obligations. The Company entered into coinsurance agreements with unaffiliated insurance companies under which the Company assumed 100% of the risk for certain life insurance policies and certain other policy-related liabilities of the insurance company. Reinsurance premiums, commissions, expense reimbursements, and reserves related to reinsured business are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Expense allowances received in connection with reinsurance ceded are accounted for as a reduction of the related policy acquisition costs and are deferred and amortized accordingly. Pre-need Sales and Costs Pre-need contract sales of funeral services and caskets - revenue and costs associated with the sales of pre-need funeral services and caskets are deferred until the performance obligations are fulfilled (services are performed or the caskets are delivered). Sales of cemetery interment rights (cemetery burial property) - revenue and costs associated with the sale of cemetery interment rights are recognized in accordance with the retail land sales provisions based on GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until 10% of the sales price has been collected. Pre-need contract sales of cemetery merchandise (primarily markers and vaults) - revenue and costs associated with the sale of pre-need cemetery merchandise is deferred until the merchandise is delivered. Pre-need contract sales of cemetery services (primarily merchandise delivery, installation fees and burial opening and closing fees) - revenue and costs associated with the sales of pre-need cemetery services are deferred until the services are performed. Prearranged funeral and pre-need cemetery customer acquisition costs - costs incurred related to obtaining new pre- need contract cemetery and prearranged funeral services are accounted for under the guidance of the provisions based on GAAP. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral services, are deferred until the merchandise is delivered or services are performed. 19 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured and there are no significant obligations remaining. The Company, through its cemetery and mortuary operations, provides guaranteed funeral arrangements wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder/potential mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. However, management believes that given current inflation rates and related price increases of goods and services, the risk of exposure is minimal. Goodwill Previous acquisitions have been accounted for as purchases under which assets acquired and liabilities assumed were recorded at their fair values with the excess purchase price recognized as goodwill. The Company evaluates annually or when changes in circumstances warrant the recoverability of goodwill and if there is a decrease in value, the related impairment is recognized as a charge against income. No impairment of goodwill has been recognized in the accompanying financial statements. Other Intangibles (trade name and customer lists) Other intangibles are recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or liability. The Company engaged a valuation firm to analyze the value of the Kilpatrick Life name in conjunction with its acquisition. The value of the trade name is included in Other Assets and was determined using the income approach, relying on a relief from the royalty method. Income Taxes Income taxes include taxes currently payable plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the temporary differences in the financial reporting basis and tax basis of assets and liabilities and operating loss carry-forwards. Deferred tax assets are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Liabilities are established for uncertain tax positions expected to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based on the technical merits of the positions. Estimated interest and penalties related to uncertain tax penalties are included as a component of other expenses. Earnings Per Common Share The Company computes earnings per share which requires presentation of basic and diluted earnings per share. Basic earnings per equivalent Class A common share are computed by dividing net earnings by the weighted-average number of Class A common shares outstanding during each year presented, after the effect of the assumed conversion of Class C common stock to Class A common stock. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the year used to compute basic 20 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) earnings per share plus dilutive potential incremental shares. Basic and diluted earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends. Stock Based Compensation The cost of employee services received in exchange for an award of equity instruments is recognized in the financial statements and is measured based on the fair value on the grant date of the award. The fair value of stock options is calculated using the Black Scholes Option Pricing Model. Stock option compensation expense is recognized over the period during which an employee is required to provide service in exchange for the award and is included in personnel expenses on the consolidated statements of earnings. Concentration of Credit Risk For a description of the geographic concentration risk regarding mortgage loans held for investment and real estate held for investment, refer to Note 2 of the Notes to Consolidated Financial Statements. Advertising The Company expenses advertising costs as incurred. Recent Accounting Pronouncements Accounting Standards Adopted in 2020 ASU No. 2018-13: “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” – Issued in August 2018, ASU 2018-13 modifies the disclosure requirements of Topic 820 by removing, modifying or adding certain disclosures. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 does not change the fair value measurements already required or permitted by existing standards. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s financial statements. See Note 8 for the Company’s fair value disclosures. Accounting Standards Adopted in 2019 ASU No. 2016-02: “Leases (Topic 842)” - Issued in February 2016, ASU 2016-02 supersedes the requirements in Accounting Standards Codification (“ASC”) Topic 840, “Leases”, and was issued to increase transparency and comparability among organizations. The new standard sets forth the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record on the balance sheet right-of-use assets and lease liabilities, equal to the present value of the remaining lease payments. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or a straight-line basis over the term of the leases. The FASB further clarified ASU 2016-02 and provided targeted improvements by issuing ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20. The Company adopted this standard on January 1, 2019 using the modified retrospective transition method with no cumulative-effect adjustment to the opening balance of retained earnings. Under this transition method, the application date was the beginning of the reporting period, January 1, 2019, in which the Company first applied the standard. Under this transition option, the Company will apply the legacy guidance in ASC 840, “Leases”, including its 21 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 1) Significant Accounting Policies (Continued) disclosure requirements, in the comparative periods presented in the year of adoption. The Company has made an accounting policy election not to apply the recognition requirements to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. The new authoritative guidance allows for certain practical expedients to be utilized to assist with the implementation of the new standard. The Company has elected the transition package of practical expedients which allows the Company to not reassess whether any expired or existing contracts are or contain leases, to not reassess the lease classification for any expired or existing leases and to not reassess initial direct costs for any existing leases. The Company implemented a third-party lease accounting system to assist with the measurement of the lease liabilities and the related right-of-use assets. The Company compiled an inventory of its leases, determined the appropriate discount rates and has determined the impact of this standard which is not material to the Company’s results of operations, but has an effect on the balance sheet presentation for leased assets and obligations. The Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019. This standard did not impact the Company’s accounting for leases where the Company is the lessor. Accounting Standards Issued But Not Yet Adopted ASU No. 2016-13: “Financial Instruments – Credit Losses (Topic 326)” – Issued in September 2016, ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis (such as mortgage loans and held to maturity debt securities) and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. In October 2019, the FASB proposed an update to ASU No. 2016-13 that would make the ASU effective for the Company on January 1, 2023. The Company is in the process of evaluating the potential impact of this standard, especially as it relates to mortgage loans held for investment. ASU No. 2018-12: “Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long- Duration Contracts” – Issued in August 2018, ASU 2018-12 is intended to improve the timeliness of recognizing changes in the liability for future policy benefits on traditional long-duration contracts by requiring that assumptions be updated after contract inception and by modifying the rate used to discount future cash flows. The ASU will simplify and improve the accounting for certain market-based options or guarantees associated with deposit or account balance contracts, simplify amortization of deferred acquisition costs while improving and expanding required disclosures. In November 2020, the FASB issued an update to ASU No. 2018-12 that made the ASU effective for the Company on January 1, 2025. The Company is in the process of evaluating the potential impact of this standard. The Company has reviewed other recent accounting pronouncements and has determined that they will not significantly impact the Company’s results of operations or financial position. 22 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments The Company’s investments as of December 31, 2020 are summarized as follows: December 31, 2020: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 42,381,805 $ 1,358,562 $ - $ 43,740,367 Obligations of states and political subdivisions 5,383,762 312,214 (1,261) 5,694,715 Corporate securities including public utilities 186,067,912 27,216,496 (681,478) 212,602,930 Mortgage-backed securities Redeemable preferred stock 31,047,791 1,565,377 (267,106) 32,346,062 269,214 3,391 - 272,605 Total fixed maturity securities available for sale $ 265,150,484 $ 30,456,040 $ (949,845) $ 294,656,679 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 9,698,490 $ 2,376,156 $ (750,407) $ 11,324,239 Total equity securities at estimated fair value $ 9,698,490 $ 2,376,156 $ (750,407) $ 11,324,239 Mortgage loans held for investment at amortized cost: Residential Residential construction Commercial Less: Unamortized deferred loan fees, net Less: Allowance for loan losses Less: Net discounts Total mortgage loans held for investment Real estate held for investment - net of accumulated depreciation: Residential Commercial Total real estate held for investment Real estate held for sale: Residential Commercial Total real estate held for sale Other investments and policy loans at amortized cost: Policy loans Insurance assignments Federal Home Loan Bank stock (1) Other investments Less: Allowance for doubtful accounts Total policy loans and other investments Accrued investment income Total investments $ 95,822,448 111,111,777 46,836,866 (1,161,132) (2,005,127) (1,260,896) $ 249,343,936 $ 24,843,743 106,840,710 $ 131,684,453 $ 3,478,254 4,400,553 $ 7,878,807 $ 14,171,589 53,231,131 2,506,600 5,432,816 (1,645,475) $ 73,696,661 $ 5,360,523 $ 773,945,298 (1) Includes $866,900 of Membership stock and $1,639,700 of Activity stock due to short-term borrowings. 23 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The Company’s investments as of December 31, 2019 are summarized as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2019: Fixed maturity securities, available for sale, at estimated fair value: U.S. Treasury securities and obligations of U.S. Government agencies $ 142,740,641 $ 632,185 $ (25,215) $ 143,347,611 Obligations of states and political subdivisions 7,450,366 87,812 (9,026) 7,529,152 Corporate securities including public utilities 156,599,184 16,768,449 (463,413) 172,904,220 Mortgage-backed securities Redeemable preferred stock 31,475,280 597,395 (240,177) 31,832,498 364,339 - - 364,339 Total fixed maturity securities available for sale $ 338,629,810 $ 18,085,841 $ (737,831) $ 355,977,820 Equity securities at estimated fair value: Common stock: Industrial, miscellaneous and all other $ 6,900,537 $ 1,139,799 $ (769,171) $ 7,271,165 Total equity securities at estimated fair value $ 6,900,537 $ 1,139,799 $ (769,171) $ 7,271,165 Mortgage loans held for investment at amortized cost: Residential Residential construction Commercial Less: Unamortized deferred loan fees, net Less: Allowance for loan losses Less: Net discounts Total mortgage loans held for investment Real estate held for investment - net of accumulated depreciation: Residential Commercial Total real estate held for investment Real estate held for sale: Residential Commercial Total real estate held for sale Other investments and policy loans at amortized cost: Policy loans Insurance assignments Federal Home Loan Bank stock (1) Other investments Less: Allowance for doubtful accounts Total policy loans and other investments Accrued investment income Total investments $ 113,043,965 89,430,237 38,718,220 (2,391,567) (1,453,037) (653,272) $ 236,694,546 $ 12,530,306 90,226,640 $ 102,756,946 $ 8,021,306 6,076,321 $ 14,097,627 $ 14,762,805 41,062,965 894,300 4,973,225 (1,448,026) $ 60,245,269 $ 4,833,232 $ 781,876,605 (1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings. 24 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) Fixed Maturity Securities On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Such investments are carried at fair value with any unrealized gains and losses reported as a component of other accumulated comprehensive income or loss. At the date of the transfer, the carrying value of the Company’s held to maturity securities was $338,629,810, and net unrealized gains of $17,315,770 were recognized in accumulated other comprehensive income. The following tables summarize unrealized losses on fixed maturities securities that were carried at estimated fair value at December 31, 2020 and at December 31, 2019. The unrealized losses were primarily related to interest rate fluctuations and uncertainties relating to COVID-19. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities: At December 31, 2020 Obligations of States and Political Subdivisions Corporate Securities Mortgage and other asset-backed securities Total unrealized losses At December 31, 2019 U.S. Treasury Securities and Obligations of U.S. Government Agencies Obligations of States and Political Subdivisions Corporate Securities Mortgage and other asset-backed securities Total unrealized losses Unrealized Losses for Less than Twelve Months Fair Value Unrealized Losses for More than Twelve Months Total Unrealized Loss Fair Value Fair Value $ 1,261 242,596 266,522 $ 510,379 $ 206,812 9,919,298 3,455,574 $ 13,581,684 $ - 438,882 584 $ 439,466 $ - 2,593,026 51,961 $ 2,644,987 $ 1,261 681,478 267,106 $ 949,845 $ 206,812 12,512,324 3,507,535 $ 16,226,671 $ 20,211 9,026 118,746 205,470 $ 353,453 $ 30,629,288 3,062,889 7,184,311 13,266,443 $ 54,142,931 $ 5,004 - 344,667 34,707 $ 384,378 $ 10,000,400 - 3,950,509 502,769 $ 14,453,678 $ 25,215 9,026 463,413 240,177 $ 737,831 $ 40,629,688 3,062,889 11,134,820 13,769,212 $ 68,596,609 There were 63 securities with fair value of 94.7% of amortized cost at December 31, 2020. There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019. Credit losses of $370,975 and $-0- have been recognized for the years ended December 31, 2020 and 2019, respectively. On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. 25 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The following table presents a rollforward of the Company's cumulative other than temporary credit impairments (“OTTI”) recognized in earnings on fixed maturity securities available for sale for the years ended December 31: Balance of credit-related OTTI at January 1 Additions for credit impairments recognized on: Securities not previously impaired Securities previously impaired Reductions for credit impairments previously recognized on: Securities that matured or were sold during the period (realized) Securities due to an increase in expected cash flows 2020 2019 $ - $ - 370,975 - - - - - - - Balance of credit-related OTTI at December 31 $ 370,975 $ - The amortized cost and estimated fair value of fixed maturity securities available for sale at December 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Estimated Fair Value Due in 1 year Due in 2-5 years Due in 5-10 years Due in more than 10 years Mortgage-backed securities Redeemable preferred stock Total $ $ 28,634,042 66,183,907 70,162,166 68,853,364 31,047,791 269,214 265,150,484 28,831,983 70,910,775 78,592,046 83,703,208 32,346,062 272,605 294,656,679 $ $ The Company is a member of the Federal Home Loan Bank of Des Moines and Dallas (“FHLB”). The Company pledged a total of $40,000,000, par value, of United States Treasury fixed maturity securities with the FHLB at December 31, 2020. These securities are used as collateral on any cash borrowings from the FHLB. As of December 31, 2020, the Company did not have any outstanding amounts owed to the FHLB and its estimated maximum borrowing capacity was $39,102,336. 26 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) Investment Related Earnings The Company’s net realized gains and losses from sales, calls, and maturities, unrealized gains and losses on equity securities, and other than temporary impairments from investments and other assets for the years ended December 31 are summarized as follows: Fixed maturity securities available for sale: Gross realized gains Gross realized losses Other than temporary impairments Equity securities: 2020 2019 $ 445,749 (77,546) (370,975) $ 459,286 (162,649) - Gains on securities sold Unrealized gains on securities held at the end of the period 74,836 256,520 1,125,304 1,086,116 Other assets: Gross realized gains Gross realized losses Total 2,342,418 (1,984,911) 1,554,875 $ 2,844,673 (3,755,579) 728,367 $ The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method. On December 31, 2019, the Company changed the classification of its bond and preferred stock investments from held to maturity to available for sale based on the Company’s need to be able to respond proactively to market risks in managing its portfolio. Proceeds received from the sale of fixed maturity securities available for sale securities for the year ended December 31, 2020, were $5,477,438, and resulted in gross realized gains and gross realized losses of $358,236 and $21,137, respectively. The carrying amount of held to maturity securities sold for the year ended December 31, 2019 was $4,950,041 and the net realized gain related to these sales was $43,039. Major categories of net investment income for the years ended December 31, were as follows: Fixed maturity securities available for sale Equity securities Mortgage loans held for investment Real estate held for investment and sale Policy loans Insurance assignments Other investments Cash and cash equivalents Gross investment income Investment expenses Net investment income $ 2020 12,233,394 642,433 25,672,746 11,945,401 1,025,179 17,837,578 126,013 426,623 69,909,367 (13,579,564) $ 56,329,803 $ 2019 10,372,559 309,918 18,405,010 8,782,959 554,969 16,086,059 184,439 1,824,443 56,520,356 (13,500,883) $ 43,019,473 Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $676,313 and $448,754 for the years ended December 31, 2020 and 2019, respectively. 27 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) Net investment income on real estate consists primarily of rental revenue. Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities. Securities on deposit for regulatory authorities as required by law amounted to $9,684,409 and $9,633,818 at December 31, 2020 and 2019, respectively. The restricted securities are included in various assets under investments on the accompanying consolidated balance sheets. There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses) at December 31, 2020, other than investments issued or guaranteed by the United States Government. Real Estate Held for Investment and Held for Sale The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business segments in the form of acquisition, development and mortgage foreclosures. The Company reports real estate held for investment and held for sale pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements. Commercial Real Estate Held for Investment and Held for Sale The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors. The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third-party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and assets that provide operational efficiencies. The Company currently owns and operates 11 commercial properties in 5 states. These properties include office buildings, a funeral home, flex office space, and includes the redevelopment and expansion of its corporate campus (“Center53”) in Salt Lake City, Utah. The Company also holds undeveloped land that may be used for future commercial developments. The Company does use debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset. See Note 20 regarding commercial real estate held for investment in Louisiana acquired with the acquisition of Kilpatrick Life Insurance Company. The aggregated net ending balance of commercial real estate that serves as collateral for bank loans was $71,517,902 and $87,814,860 as of December 31, 2020 and 2019, respectively. The associated bank loan carrying values totaled $46,153,283 and $54,917,279 as of December 31, 2020 and 2019, respectively. During the years ended December 31, 2020 and 2019, the Company recorded impairment losses on commercial real estate held for sale of $897,980 and $2,768,979, respectively. Impairment losses of $846,980 and of $2,768,979 for the years ended December 31, 2020 and 2019, respectively, relate to an office building located in Kansas held by the life insurance segment. An impairment loss of $51,000 for the year ended December 31, 2020 relates to the improved commercial pad located in Texas held by the life insurance segment. Impairment loss are included in gains (losses) on investments and other assets on the consolidated statements of earnings. 28 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The Company’s commercial real estate held for investment for the years ended December 31, is summarized as follows: Louisiana Mississippi Utah (1) $ Net Ending Balance 2020 2,998,684 2,914,498 100,927,528 2019 $ 6,009,079 2,951,478 81,266,083 Total Square Footage 2020 2019 125,114 84,841 21,521 21,521 465,230 379,066 $ 106,840,710 $ 90,226,640 485,428 611,865 (1) Includes Center53 phase 1 and phase 2 which is under construction. The Company’s commercial real estate held for sale for the years ended December 31, is summarized as follows: Arizona (1) Kansas Mississippi Nevada Texas (2) Net Ending Balance 2020 2019 $ - 4,000,000 151,553 - 249,000 $ 2,500 4,800,000 318,322 655,499 300,000 Total Square Footage 2020 - 222,679 12,300 - - 2019 - 222,679 12,300 4,800 - $ 4,400,553 $ 6,076,321 234,979 239,779 (1) Undeveloped land (2) Improved commercial pad These properties are all actively being marketed with the assistance of commercial real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months. Residential Real Estate Held for Investment and Held for Sale The Company owns a small portfolio of residential homes primarily as a result of loan foreclosures. The Company has the option to sell them or to continue to hold them for cash flow and acceptable returns. The Company also invests in residential subdivision land developments. The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country. As of December 31, 2020, SNRE manages 11 residential properties in 5 states across the United States. During the years ended December 31, 2020 and 2019, the Company recorded impairment losses on residential real estate held for sale of $43,394 and $700,134, respectively. These impairment losses are included in gains (losses) on investments and other assets on the consolidated statements of earnings. 29 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The net ending balance of foreclosed residential real estate included in residential real estate held for investment or sale is $4,327,079 and $12,433,986 as of December 31, 2020 and 2019, respectively. The Company’s residential real estate held for investment for the years ended December 31, is summarized as follows: Florida Nevada Utah (1) Washington (2) Net Ending Balance 2020 - - 24,557,562 286,181 $ 24,843,743 2019 2,487,723 293,516 9,462,886 286,181 $ 12,530,306 (1) Including subdivision land developments (2) Improved residential lots Additional information regarding the Company’s subdivision land developments in Utah for the years ended December 31, is summarized as follows: Lots available for sale Lots to be developed Ending Balance (1) 2020 36 350 $ 23,777,478 2019 48 174 $ 7,889,576 (1) The estimated remaining cost to complete the undeveloped lots is $17,354,000 and $1,900,000 as of December 31, 2020 and 2019, respectively. The Company’s residential real estate held for sale for the years ended December 31, is summarized as follows: California Florida Nevada Ohio Utah Washington Net Ending Balance 2020 2019 - 744,322 979,640 10,000 1,744,292 - 3,478,254 $ 640,452 1,300,641 - 10,000 5,880,213 190,000 $ 8,021,306 These properties are all actively being marketed with the assistance of residential real estate brokers in the markets where the properties are located. The Company expects these properties to sell within the coming 12 months. 30 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) Real Estate Owned and Occupied by the Company The primary business units of the Company occupy a portion of the commercial real estate owned by the Company. As of December 31, 2020, real estate owned and occupied by the Company is summarized as follows: Location 121 W. Election Rd., Draper, UT 5201 Green Street, Salt Lake City, UT (1) 1044 River Oaks Dr., Flowood, MS 1818 Marshall Street, Shreveport, LA (1)(2) 909 Foisy Street, Alexandria, LA (1)(2) 812 Sheppard Street, Minden, LA (1)(2) 1550 N 3rd Street, Jena, LA (1)(2) Business Segment Corporate Offices, Life Insurance and Cemetery/Mortuary Operations Life Insurance and Mortgage Operations Life Insurance Operations Life Insurance Operations Life Insurance Sales Life Insurance Sales Life Insurance Sales (1) Included in property and equipment on the consolidated balance sheets (2) See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company Mortgage Loans Held for Investment Square Footage Occupied by the Company 18% 73% 28% 100% 100% 100% 100% Approximate Square Footage 78,979 39,157 19,694 12,274 8,059 1,560 1,737 The Company reports mortgage loans held for investment pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements. Mortgage loans consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0 % to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At December 31, 2020, the Company had 57%, 13%, 9%, 4%, 3% and 3% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively. At December 31, 2019, the Company had 48%, 16%, 10%, 6%, 6% and 5% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada and Arizona, respectively. 31 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The Company establishes a valuation allowance for credit losses in its portfolio. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented: Allowance for Credit Losses and Recorded Investment in Mortgage Loans Held for Investment Years Ended December 31 Commercial Residential Residential Construction T otal 2020 Allowance for credit losses: Beginning balance Charge-offs Provision Ending balance $ $ $ $ 187,129 - - 187,129 1,222,706 - 552,090 1,774,796 43,202 - - 43,202 1,453,037 - 552,090 2,005,127 $ $ $ $ Ending balance: individually evaluated for impairment $ - $ 219,905 $ - $ 219,905 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,554,891 $ 43,202 $ 1,785,222 Mortgage loans: Ending balance $ 46,836,866 $ 111,111,777 $ 95,822,448 $ 253,771,091 Ending balance: individually evaluated for impairment $ 2,148,827 $ 7,932,680 $ 200,963 $ 10,282,470 Ending balance: collectively evaluated for impairment $ 44,688,039 $ 103,179,097 $ 95,621,485 $ 243,488,621 2019 Allowance for credit losses: Beginning balance Charge-offs Provision Ending balance $ $ $ $ 187,129 - - 187,129 1,125,623 (32,692) 129,775 1,222,706 35,220 - 7,982 43,202 $ $ $ $ 1,347,972 (32,692) 137,757 1,453,037 Ending balance: individually evaluated for impairment $ - $ 195,993 $ - $ 195,993 Ending balance: collectively evaluated for impairment $ 187,129 $ 1,026,713 $ 43,202 $ 1,257,044 Mortgage loans: Ending balance $ 38,718,220 $ 113,043,965 $ 89,430,237 $ 241,192,422 Ending balance: individually evaluated for impairment $ 4,488,719 $ 3,752,207 $ 655,000 $ 8,895,926 Ending balance: collectively evaluated for impairment $ 34,229,501 $ 109,291,758 $ 88,775,237 $ 232,296,496 32 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The following is a summary of the aging of mortgage loans held for investment for the periods presented. Age Ana lys is o f P a s t Due M o rtga ge Lo a ns He ld fo r Inve s tm e nt Ye a rs Ende d De c e m be r 31 30-59 Da ys P a s t Due 60-89 Da ys P a s t Due Gre a te r Tha n 90 Da ys (1) In P ro c e s s o f F o re c lo s ure (1) To ta l P a s t Due C urre nt To ta l M o rtga ge Lo a ns Allo wa nc e fo r Lo a n Lo s s e s Una m o rtize d de fe rre d lo a n fe e s , ne t Una m o rtize d dis c o unts , ne t Ne t M o rtga ge Lo a ns $ 233,200 $ 812,780 $ 2,148,827 $ - $ 3,194,807 $ 43,642,059 $ 46,836,866 $ (187,129) $ (32,557) $ (880,721) $ 45,736,459 5,866,505 2,048,148 5,669,583 2,263,097 15,847,333 79,975,115 95,822,448 (1,774,796) (909,864) (380,175) 92,757,613 127,191 - - 200,963 328,154 110,783,623 111,111,777 (43,202) (218,711) - 110,849,864 $ 6,226,896 $ 2,860,928 $ 7,818,410 $ 2,464,060 $ 19,370,294 $ 234,400,797 $ 253,771,091 $ (2,005,127) $ (1,161,132) $ (1,260,896) $ 249,343,936 $ 1,872,000 $ - $ 4,488,719 $ - $ 6,360,719 $ 32,357,501 $ 38,718,220 $ (187,129) $ (88,918) $ (653,272) $ 37,788,901 10,609,296 4,085,767 2,100,742 1,651,465 18,447,270 94,596,695 113,043,965 (1,222,706) (1,567,581) - - 655,000 - 655,000 88,775,237 89,430,237 (43,202) (735,068) - - 110,253,678 88,651,967 $ 12,481,296 $ 4,085,767 $ 7,244,461 $ 1,651,465 $ 25,462,989 $ 215,729,433 $ 241,192,422 $ (1,453,037) $ (2,391,567) $ (653,272) $ 236,694,546 2 0 2 0 C o m m e rc ia l R e s ide ntia l R e s ide ntia l C o ns truc tio n To ta l 2 0 19 C o m m e rc ia l R e s ide ntia l R e s ide ntia l C o ns truc tio n To ta l (1) The re wa s no t a ny inte re s t inc o m e re c o gnize d o n lo a ns pa s t due gre a te r tha n 90 da ys o r in fo re c lo s ure . 33 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) Impaired Mortgage Loans Held for Investment Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows: Impaired Loans Years Ended December 31 Unpaid Principal Balance Related Allowance Recorded Investment Average Recorded Investment Interest Income Recognized $ 2,148,827 6,415,419 200,963 $ 2,148,827 6,415,419 200,963 - $ - - $ 1,866,819 5,010,078 555,278 - $ - - - $ 1,517,261 - $ - 1,517,261 - $ - 219,905 - - $ 1,182,368 - - $ - - $ 2,148,827 7,932,680 200,963 $ 2,148,827 7,932,680 200,963 $ - 219,905 - $ 1,866,819 6,192,446 555,278 - $ - - $ 4,488,719 2,254,189 655,000 $ 4,488,719 2,254,189 655,000 - $ - - $ 1,499,043 3,367,151 1,457,278 - $ - - - $ 1,498,018 - $ - 1,498,018 - $ - 195,993 - - $ 665,270 - - $ - - $ 4,488,719 3,752,207 655,000 $ 4,488,719 3,752,207 655,000 $ - 195,993 - $ 1,499,043 4,032,421 1,457,278 - $ - - 2020 With no related allowance recorded: Commercial Residential Residential construction With an allowance recorded: Commercial Residential Residential construction T otal: Commercial Residential Residential construction 2019 With no related allowance recorded: Commercial Residential Residential construction With an allowance recorded: Commercial Residential Residential construction T otal: Commercial Residential Residential construction Credit Risk Profile Based on Performance Status The Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status. 34 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 2) Investments (Continued) The Company’s performing and non-performing mortgage loans held for investment were as follows: M o rtga ge Lo a ns He ld fo r Inve s tm e nt C re dit Expo s ure C re dit R is k P ro file B a s e d o n P a ym e nt Ac tivity Ye a rs Ende d De c e m be r 31 C o m m e rc ia l R e s ide ntia l R e s ide ntia l C o ns truc tio n To ta l 2020 2019 2020 2019 2020 2019 2020 2019 P e rfo rm ing $ 44,688,039 $ 34,229,501 $ 87,889,768 $ 109,291,758 $ 110,910,814 $ 88,775,237 $ 243,488,621 $ 232,296,496 No n-pe rfo rm ing 2,148,827 4,488,719 7,932,680 3,752,207 200,963 655,000 10,282,470 8,895,926 To ta l $ 46,836,866 $ 38,718,220 $ 95,822,448 $ 113,043,965 $ 111,111,777 $ 89,430,237 $ 253,771,091 $ 241,192,422 Non-Accrual Mortgage Loans Held for Investment Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $491,000 and $203,000 as of December 31, 2020 and 2019, respectively. The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented. Mortgage Loans on Non-accrual Status Years Ended December 31 2020 2019 Commercial Residential Residential construction Total Principal Amounts Due $ $ 2,148,827 7,932,680 200,963 10,282,470 4,488,719 3,752,207 655,000 8,895,926 $ $ The amortized cost and contractual payments on mortgage loans held for investment by category as of December 31, 2020 are shown below. Expected principal payments may differ from contractual obligations because certain borrowers may elect to pay off mortgage obligations with or without early payment penalties. Residential Residential Construction Commercial Total Total 95,822,448 111,111,777 46,836,866 253,771,091 $ $ Principal Amounts Due in 1 Year 11,202,899 103,391,044 27,111,325 141,705,268 $ $ $ Principal Amounts Due in 2-5 Years $ 17,774,238 7,720,733 $ 11,101,138 36,596,109 $ Principal Amounts Due Thereafter $ 66,845,311 - 8,624,403 75,469,714 $ 35 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 3) Loans Held for Sale The Company has elected the fair value option for loans held for sale as disclosed in Note 1. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on mortgage loans held for investment and is included in mortgage fee income on the consolidated statement of earnings. There are three loans with an aggregate unpaid principal balance of $208,636 that are 90 or more days past due and on a nonaccrual status as of December 31, 2020. See Note 17 of the Notes to Consolidated Financial Statements for additional disclosures regarding loans held for sale. The following is a summary of the aggregate fair value and the aggregate unpaid principal balance of loans held for sale for the periods presented: As of December 31 2020 As of December 31 2019 Aggregate fair value Unpaid principal balance Unrealized gain $ 422,772,418 406,407,323 16,365,095 $ 213,457,632 206,417,122 7,040,510 Mortgage Fee Income Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans held for sale. Major categories of mortgage fee income for loans held for sale for the years ended December 31, were as follows: Loan fees Interest income Secondary gains Change in fair value of loan commitments Change in fair value of loans held for sale Provision for loan loss reserve Mortgage fee income Loan Loss Reserve $ $ 2020 43,432,532 10,628,581 231,759,342 7,637,377 10,413,492 (4,938,214) 298,933,110 2019 28,660,966 6,978,930 93,581,956 899,417 2,498,097 (643,284) 131,976,082 $ $ When a repurchase demand corresponding to a mortgage loan previously held for sale and sold to a third-party investor is received from a third-party investor, the relevant data is reviewed and captured so that an estimated future loss can be calculated. The key factors that are used in the estimated loss calculation are as follows: (i) lien position, (ii) payment status, (iii) claim type, (iv) unpaid principal balance, (v) interest rate, and (vi) validity of the demand. Other data is captured and is useful for management purposes; the actual estimated loss is generally based on these key factors. The Company conducts its own review upon the receipt of a repurchase demand. In many instances, the Company is able to resolve the issues relating to the repurchase demand by the third-party investor without having to make any payments to the investor. 36 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 3) Loans Held for Sale (Continued) The following is a summary of the loan loss reserve which is included in other liabilities and accrued expenses: December 31 Balance, beginning of period Provision for current loan originations (1) Additional provision for loan loss reserve Charge-offs, net of recaptured amounts Balance, at December 31 (1) Included in Mortgage fee income $ $ 2020 4,046,288 4,938,214 16,506,030 (4,906,914) 20,583,618 2019 3,604,869 643,284 - (201,865) 4,046,288 $ $ The Company maintains reserves for estimated losses on current production volumes. For the year ended December 31, 2020, $4,938,214 in reserves were added at a rate of 8.9 basis points per loan, the equivalent of $890 per $1,000,000 in loans originated. This is an increase over the year ended December 31, 2019, when $643,284 in reserves were added at a rate of 2.5 basis points per loan originated, the equivalent of $250 per $1,000,000 in loans originated. The Company also increased its loan loss reserve for the year ended December 31, 2020 by an additional $16,506,030 to account for changes in estimates specific to settlements of loan losses. See Note 10 for additional information regarding mortgage loan loss settlements. The economic impact of COVID-19 and subsequent government action has increased the potential for losses due to early payoff penalties and potential for losses due to increased delinquency. The unique nature of these current events creates significant difficulty for forecasting potential future losses. The Company will continue to monitor data and economic conditions in order to maintain adequate loss reserves on current production. Thus, the Company believes that the final loan loss reserve as of December 31, 2020, represents its best estimate for adequate loss reserves on loans sold. 37 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 4) Receivables Receivables consist of the following: Trade contracts Receivables from sales agents Other Total receivables Allowance for doubtful accounts December 31 2020 2019 $ 4,119,988 $ 2,795,471 2,677,774 5,786,827 12,584,589 (1,685,382) 2,962,571 5,202,444 10,960,486 (1,724,156) Net receivables $ 10,899,207 $ 9,236,330 5) Value of Business Acquired, Intangible Assets and Goodwill Information with regard to value of business acquired was as follows: Balance at beginning of year Value of business acquired Imputed interest at 7% included in earnings Amortization included in earnings Shadow amortization included in other comprehensive income Net amortization Balance at end of year December 31 $ 2020 9,876,647 - 670,565 (1,457,390) $ 2019 5,765,190 4,962,831 472,916 (1,320,456) (1) (134,573) (921,398) 8,955,249 $ (3,834) (851,374) 9,876,647 $ (1) See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company Presuming no additional acquisitions, net amortization charged to income is expected to approximate $1,019,000, $918,000, $854,000, $784,000, and $707,000 for the years 2021 through 2026. Actual amortization may vary based on changes in assumptions or experience. As of December 31, 2020, value of business acquired is being amortized over a weighted average life of 6.9 years. The carrying value of the Company’s intangible assets were as follows which is included in other assets: Intangible asset - customer lists Intangible asset - trade name (1) Less accumulated amortization Balance at end of year Useful Life 15 years 15 years December 31 2020 2019 $ $ 890,000 610,000 (197,334) 1,302,666 $ $ $ 890,000 610,000 (98,222) 1,401,778 $ (1) See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company 38 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 5) Value of Business Acquired, Intangible Assets and Goodwill (Continued) Information regarding goodwill by segment was as follows: Balance at January 1, 2019: Goodwill Accumulated impairment Total goodwill, net Life Insurance Cemetery/ Mortuary 2,765,570 $ - 2,765,570 - $ - - Total 2,765,570 $ - 2,765,570 Acquisition - 754,018 (1) 754,018 Balance at December 31, 2019: Goodwill Accumulated impairment Total goodwill, net 2,765,570 - 2,765,570 754,018 - 754,018 3,519,588 - 3,519,588 Acquisition - - - Balance at December 31, 2020: Goodwill Accumulated impairment Total goodwill, net 2,765,570 - $ 2,765,570 754,018 - $ 754,018 3,519,588 - $ 3,519,588 (1) See Note 20 regarding the acquisition of Probst Family Funerals and Cremations and Heber Valley Funeral Home Goodwill of $3,519,588 is not amortized but is tested annually for impairment. The annual impairment tests resulted in no impairment of goodwill for the years ended December 31, 2020 and 2019. 6) Property and Equipment The cost of property and equipment is summarized below: December 31 Land and buildings Furniture and equipment Less accumulated depreciation Total $ $ 2020 11,972,802 19,679,682 31,652,484 (19,179,139) 12,473,345 2019 15,131,301 18,987,984 34,119,285 (19,518,891) 14,600,394 $ $ Depreciation expense for the years ended December 31, 2020 and 2019 was $2,078,738 and $1,711,369, respectively. During 2020, the Company demolished a building with a gross building cost of $1,723,000 with its associated accumulated depreciation (net book value of $-0-) and transferred land with a cost of $1,516,700 to real estate held for investment to make way for phase 2 of the redevelopment and expansion of Center53. During 2019, the Company transferred $3,261,259 from real estate held for investment to property and equipment. The transfers are shown as a non cash items on the consolidated statements of cash flows. See Note 20 for additional information regarding property and equipment acquired through acquisitions. 39 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 7) Bank and Other Loans Payable Bank and other loans payable are summarized as follows: 2.25% above the monthly LIBOR rate plus 1/16th of the monthly LIBOR rate note payable in monthly principal payments of $13,167 plus interest, collateralized by real property, paid in full November 2020. 4.27% fixed note payable in monthly installments of $53,881 including principal and interest, collateralized by shares of Security National Life Insurance Company stock, due December 2021. Prime rate note payable in monthly installments of $75,108 including principal and interest, collateralized by shares of Security National Life Insurance Company stock, due December 2024. December 31 2020 2019 $ - $ 2,659,769 633,890 1,238,619 3,257,113 4,000,000 4.40% fixed note payable in monthly installments of $46,825 including principal and interest, collateralized by real property, paid in full April 2020. - 7,247,651 4.329% fixed note payable in monthly installments of $9,775 including principal and interest, collateralized by real property with a book value of approximately $3,174,000, due September 2025. 2.5% above the monthly LIBOR rate plus 1/16th of the monthly LIBOR rate construction loan payable in monthly principal payments of $113,000 plus interest, collateralized by real property with a book value of approximately $50,689,000, due March 2021. 1,861,920 1,896,450 35,091,364 33,811,559 4.7865% fixed interest only note payable in monthly installments, collateralized by real property with a book value of approximately $17,655,000, due June 2028. 9,200,000 9,200,000 1 month LIBOR rate plus 2.1% loan purchase agreement with a warehouse line availability of $150,000,000, matures June 2021. 116,598,834 88,509,536 1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of $175,000,000, matures November 2021. 68,766,572 67,537,600 1 month LIBOR rate plus 2.5% loan purchase agreement with a warehouse line availability of $90,000,000, matures May 2021. 1 month LIBOR rate plus 2.5% loan purchase agreement with a warehouse line availability of $5,000,000, matures August 2021. Other short-term borrowings (1) Finance lease liabilities Other loans payable Total bank and other loans Less current installments Bank and other loans, excluding current installments (1) Revolving Line of Credit 60,715,374 317,582 1,250,000 104,951 - - 1,250,000 153,439 26,768 297,824,368 67,989 217,572,612 284,250,996 13,573,372 $ 192,985,602 24,587,010 $ 40 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 7) Bank and Other Loans Payable (Continued) Sources of Liquidity Federal Home Loan Bank Membership The Federal Home Loan Banks (“the FHLBs”) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. The Company is a member of the FHLB based in Des Moines, Iowa and based in Dallas, Texas. As a member of the FHLB, the Company is required to maintain a minimum investment in capital stock of the FHLB and may pledge collateral to the bank for advances of funds to be used in its operations. Federal Home Loan Bank of Des Moines At December 31, 2020, the amount available for borrowings from the FHLB of Des Moines was approximately $39,102,336, compared with $57,727,738 at December 31, 2019. United States Treasury fixed maturity securities with an estimated fair value of $40,729,400 at December 31, 2020 have been pledged at the FHLB of Des Moines as collateral for current and potential borrowings compared with $59,877,900 at December 31, 2019. At December 31, 2020 and 2019, the Company had no outstanding FHLB borrowings. At December 31, 2020, the Company’s total investment in FHLB stock was $786,300 compared with $806,500 at December 31, 2019. The Company’s decreased investment in FHLB stock was a result of its decrease in short-term FHLB borrowings during 2020. Federal Home Loan Bank of Dallas The membership of the FHLB of Dallas was acquired with the acquisition of Kilpatrick Life Insurance Company. See Note 20 regarding this acquisition. At December 31, 2020, the Company’s total investment in FHLB stock was $1,720,300 compared with $87,800 at December 31, 2019. The Company does not have any collateral pledged at the FHLB of Dallas or any outstanding borrowings. Revolving Lines of Credit The Company has a $2,000,000 revolving line-of-credit with a bank with interest payable at the prime rate minus .75%, secured by the capital stock of Security National Life and maturing September 30, 2021, renewable annually. At December 31, 2020, the Company was contingently liable under a standby letter of credit aggregating $348,183, to be used as collateral to cover any contingency related to additional risk assessments pertaining to the Company's captive insurance program and was contingently liable under standby letters of credit aggregating $1,585,063, to be used as collateral for residential subdivision land developments. The standby letters of credit will draw on the line of credit if necessary. The Company does not expect any material losses to result from the issuance of the standby letters of credit. As of December 31, 2020, there were no amounts outstanding under the revolving line-of-credit. The Company also has a $2,500,000 revolving line-of-credit with a bank with interest payable at the overnight LIBOR rate plus 2.25% maturing September 30, 2021. As of December 31, 2020, there was $1,250,000 outstanding under the revolving line-of-credit. Debt Covenants for Mortgage Warehouse Lines of Credit The Company, through its subsidiary SecurityNational Mortgage, has a $150,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 2.1% and matures on June 24, 2021. SecurityNational Mortgage is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, the ratio of indebtedness to adjusted tangible net worth, and the liquidity overhead coverage ratio, and a quarterly gross profit of at least $1.00. 41 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 7) Bank and Other Loans Payable (Continued) The Company, through its subsidiary SecurityNational Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $175,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on November 15, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis. The Company through its subsidiary SecurityNational Mortgage, has a line of credit with Comerica Bank. This agreement with the bank allows SecurityNational Mortgage to borrow up to $90,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on May 27, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling twelve months. The Company, through its subsidiary EverLEND Mortgage, has a line of credit with Texas Capital Bank N.A. This agreement with the bank allows EverLEND Mortgage to borrow up to $5,000,000 for the sole purpose of funding mortgage loans. The agreement charges interest at the 1-Month LIBOR rate plus 2.5% and matures on August 1, 2021. The Company is required to comply with covenants for adjusted tangible net worth, unrestricted cash balance, and minimum combined pre-tax income (excluding any changes in the fair value of mortgage servicing rights) of at least $1.00 on a rolling four-quarter basis. The agreements for warehouse lines include cross default provisions in that a covenant violation under one agreement constitutes a covenant violation under the other agreement. As of December 31, 2020, the Company believes that it was in compliance with all debt covenants. The following tabulation shows the combined maturities of bank and other loans payable: 2021 2022 2023 2024 2025 Thereafter Total $ 284,242,327 884,383 926,186 937,315 1,634,157 9,200,000 297,824,368 $ Interest expense in 2020 and 2019 was $8,578,810 and $7,386,688, respectively. Interest paid in 2020 and 2019 was $8,385,270 and $7,284,078, respectively. 42 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets State law requires the Company to pay into endowment care trusts a portion of the proceeds from the sale of certain cemetery property interment rights for cemeteries that have established an endowment care trust. These endowment care trusts are defined as variable interest entities pursuant to GAAP. Also, management has determined that the Company is the primary beneficiary of these trusts, as it absorbs both a majority of the losses and returns associated with the trusts. The Company has consolidated cemetery endowment care trust investments with a corresponding amount recorded as Cemetery Perpetual Care Obligation in the accompanying consolidated balance sheets. The components of the cemetery perpetual care investments and obligation are as follows: Cash and cash equivalents Fixed maturity securities, available for sale, at estimated fair value Equity securities, at estimated fair value Commerical mortgage loans held for investment Participating interests in residential construction mortgage loans held for investment with Security National Life Real estate held for investment Note receivables from Cottonwood Mortuary, Singing Hills Cemetery and Memorial Estates eliminated in consolidation Total cemetery perpetual care trust investments Cemetery perpetual care obligation Trust investments in excess of trust obligations December 31 2020 $ 402,913 747,767 2,062,303 - $ 2019 1,306,740 975,673 1,605,451 524,000 1,468,600 1,731,584 - - - 6,413,167 (4,087,704) 2,325,463 $ 1,541,120 5,952,984 (3,933,719) 2,019,265 $ 43 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets (Continued) The Company has also established certain restricted assets to provide for future merchandise and service obligations incurred in connection with its pre-need sales for its cemetery and mortuary segment. Restricted cash also represents escrows held for borrowers and investors under servicing and appraisal agreements relating to mortgage loans, funds held by warehouse banks in accordance with loan purchase agreements and funds held in escrow for certain real estate construction development projects. Additionally, the Company elected to maintain its medical benefit fund without change from the prior year and has included this amount as a component of restricted cash. These restricted cash items are for the Company’s life insurance and mortgage segments. Restricted assets are summarized as follows: Cash and cash equivalents (1) Fixed maturity securities, available for sale, at estimated fair value Equity securities, at estimated fair value Participating interests in mortgage loans held for investment with Security National Life Total December 31 $ 2020 8,842,744 1,473,637 2,515,778 $ 2019 8,674,214 1,008,867 1,976,480 3,317,877 16,150,036 $ 2,275,756 13,935,317 $ (1) Including cash and cash equivalents of $8,524,999 and $7,170,092 as of December 31, 2020 and 2019, respectively, for the life insurance and mortgage segments. A surplus note receivable in the amount of $4,000,000 at December 31, 2020 and 2019, from Security National Life, was eliminated in consolidation. See Notes 1 and 17 for additional information regarding restricted assets. 44 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 9) Income Taxes The Company’s income tax liability is summarized as follows: December 31 Current Deferred Total 2020 2,595,877 22,662,923 25,258,800 $ $ 2019 1,410,153 17,276,819 18,686,972 $ $ Significant components of the Company’s deferred tax (assets) and liabilities are approximately as follows: Assets Future policy benefits Loan loss reserve Unearned premium Net operating loss Deferred compensation Deposit obligations Other Less: Valuation allowance Total deferred tax assets Liabilities Deferred policy acquisition costs Basis difference in property, equipment and real estate Value of business acquired Deferred gains Trusts Tax on unrealized appreciation Total deferred tax liabilities Net deferred tax liability December 31 2020 2019 $ (12,657,045) (5,352,942) (699,011) (334,085) (2,833,298) (610,041) (1,269,533) 961,920 (22,794,035) 16,430,001 5,312,787 1,880,602 12,124,226 1,064,387 8,644,955 45,456,958 22,662,923 $ $ (12,450,229) (1,053,256) (760,556) (438,420) (1,996,865) (619,633) (1,020,718) 2,439,394 (15,900,283) 15,536,717 3,638,512 2,074,096 5,169,104 1,064,387 5,694,286 33,177,102 17,276,819 $ The valuation allowance relates to differences between recorded deferred tax assets and liabilities and ultimate anticipated realization. The Company has recorded a valuation allowance related to Kilpatrick Life Insurance Company that was acquired in December 2019. The Company paid $11,813,120 and $4,861,318 in income taxes for the years ended December 31, 2020 and 2019, respectively. 45 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 9) Income Taxes (Continued) The Company’s income tax expense is summarized as follows for the years ended December 31: Current Federal State Deferred Federal State Total 2020 2019 $ 10,678,612 2,320,233 12,998,845 $ 4,404,041 504,272 4,908,313 2,677,943 176,726 2,854,669 (1,551,725) (306,172) (1,857,897) $ 15,853,514 $ 3,050,416 The reconciliation of income tax expense at the U.S. federal statutory rates is as follows: Computed expense at statutory rate State tax expense, net of federal tax benefit Change in valuation allowance Other, net Income tax expense 2020 15,004,527 1,972,598 (1,477,474) 353,863 15,853,514 $ $ 2019 2,928,226 156,499 194,364 (228,673) 3,050,416 $ $ The Company’s overall effective tax rate for the years ended December 31, 2020 and 2019 was 22.2% and 21.9% respectively. The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes and a decrease to the valuation allowance related to Kilpatrick Life Insurance Company that decreased the effective income tax rate when compared to the prior year. At December 31, 2020, the Company had no significant unrecognized tax benefits. As of December 31, 2020, the Company does not expect any material changes to the estimated amount of unrecognized tax benefits in the next twelve months. Federal and state income tax returns for 2017 through 2020 are subject to examination by taxing authorities. Net Operating Losses and Tax Credit Carryforwards: Year of Expiration 2021 2022 2023 2024 2025 Thereafter up through 2037 $ 17,100 - - - - 1,405,155 $ 1,422,255 46 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 10) Reinsurance, Commitments and Contingencies Reinsurance The Company follows the procedure of reinsuring risks in excess of a specified limit, which ranged from $25,000 to $100,000 during the years 2020 and 2019. The Company is liable for these amounts in the event such reinsurers are unable to pay their portion of the claims. The Company has also assumed insurance from other companies having insurance in force amounting to approximately $96,000,000 and approximately $99,000,000 at December 31, 2020 and 2019, respectively. Mortgage Loan Loss Settlements Future loan losses can be extremely difficult to estimate. However, the Company believes that its reserve methodology and its current practice of property preservation allow it to estimate potential losses on loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2020 and 2019, the balances were $20,584,000 and $4,046,000, respectively. The Company believes that the final loan loss reserve as of December 31, 2020, represents its best estimate for adequate loss reserves on loans sold. Mortgage Loan Loss Litigation Settlement Agreement and Mutual Release with Lehman Brothers Holdings Inc. From 2004 to early 2008, SecurityNational Mortgage Company (“SecurityNational Mortgage”), a wholly owned subsidiary of the Company, originated “limited documentation” or “reduced documentation” loans which were sold to certain affiliates of Lehman Brothers Holdings Inc. (“Lehman Holdings”). Certain of these loans became the subject of disputes between SecurityNational Mortgage and Lehman Holdings and certain Lehman Holdings affiliates. Lehman Holdings filed a Petition for Relief under Chapter 11 of the United States Bankruptcy Code in 2008. In May of 2011, SecurityNational Mortgage filed a complaint in U.S. District Court against certain Lehman Holdings affiliates. In June of 2011, Lehman Holdings filed a complaint in Federal District Court against SecurityNational Mortgage, both of which were later resolved. In 2016, certain other pending loan disputes between SecurityNational Mortgage and Lehman Holdings became the subject of an unsuccessful, non-binding alternate dispute resolution mediation proceeding. Thereafter, in 2016, Lehman Holdings filed an adversary proceeding complaint against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S. Bankruptcy Court of the Southern District of New York, which included seeking damages relating to the alleged obligations of the defendants under indemnification provisions of alleged agreements, in amounts to be determined at trial, including interest, attorneys’ fees and costs incurred by Lehman Holdings in enforcing the obligations of the defendants. The complaint was later amended with the latest amended complaint filed against SecurityNational Mortgage on December 27, 2016, seeking damages to be determined at trial, including interest, attorneys’ fees and costs. This complaint involved approximately 135 mortgage loans, there being millions of dollars allegedly in dispute. These claims against SecurityNational Mortgage were asserted as a result of Lehman Holdings’ earlier settlements with the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Corporation (“Freddie Mac”). In 2018, Lehman Holdings filed a separate adversary proceeding complaint against SecurityNational Mortgage. This adversary proceeding allegedly involved approximately 577 mortgage loans relative to private securitization trusts (“RMBS Loans”) and millions of dollars in damages. Thereafter, Lehman Holdings made a filing that effectively reduced the number of RMBS Loans to 248. This proceeding was in addition to the above-referenced proceeding involving the Fannie Mae and Freddie Mac mortgage loans. As with the above-referenced proceeding, damages were sought including interest, costs, and attorneys’ fees. 47 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 10) Reinsurance, Commitments and Contingencies (Continued) SecurityNational Mortgage, as well as other defendants, have been involved in written discovery, and production of documents relative to the cases, and the filing of motions. The deposition phase of the cases was yet to begin, as well as the later expert witness phase. Those phases would require substantial expenditures of legal fees and costs. On February 1, 2021, SecurityNational Mortgage executed a settlement agreement with Lehman Holdings in relation to these two adversary proceedings wherein all mortgage loan related claims were resolved, thereby ending all liabilities asserted by Lehman Holdings and conclusively ending all proceedings between SecurityNational Mortgage and Lehman Holdings. In accordance with GAAP, the full amount of SecurityNational Mortgage’s settlement payment has been accounted for in the Company’s loan loss reserve as of December 31, 2020. Non-Cancelable Leases The Company leases office space and equipment under various non-cancelable agreements. See Note 24 regarding leases. Other Contingencies and Commitments The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of December 31, 2020, the Company’s commitments were approximately $185,751,000, for these loans of which $115,898,000 had been funded. The Company advances funds once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities range between six and eighteen months. The Company belongs to a captive insurance group for certain casualty insurance, worker compensation and liability programs. Insurance reserves are maintained relative to these programs. The level of exposure from catastrophic events is limited by the purchase of stop-loss and aggregate liability reinsurance coverage. When estimating the insurance liabilities and related reserves, the captive insurance management considers a number of factors, which include historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. If actual claims or adverse development of loss reserves occurs and exceed these estimates, additional reserves may be required. The estimation process contains uncertainty since captive insurance management must use judgment to estimate the ultimate cost that will be incurred to settle reported claims and unreported claims for incidents incurred but not reported as of the balance sheet date. 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. 48 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 11) Retirement Plans The Company and its subsidiaries have a noncontributory Employee Stock Ownership Plan (“ESOP”) for all eligible employees. Eligible employees are primarily those with more than one year of service, who work in excess of 1,000 hours per year. Contributions, which may be in cash or stock of the Company, are determined annually by the Board of Directors. The Company’s contributions are allocated to eligible employees based on the ratio of each eligible employee’s compensation to total compensation for all eligible employees during each year. The Company did not make any contributions for the years ended December 31, 2020 and 2019. On November 25, 2019, the Company distributed a “Notice of Intent to Terminate” the ESOP Plan to all current plan participants. The Company also filed Form 5310 “Application for Determination for Terminating Plan”, with the IRS on December 6, 2019. Beginning in the 4th quarter of 2020, the Company began to distribute the ESOP Plan assets to participants that had made a distribution election. The Company is awaiting approval of its application from the IRS prior to its final distribution of the ESOP Plan assets to the participants. At December 31, 2020, the ESOP held 231,312 shares of Class A and 118,880 shares of Class C common stock of the Company. All shares held by the ESOP have been allocated to the participating employees and all shares held by the ESOP are considered outstanding for purposes of computing earnings per share. The Company has three 401(k) savings plans covering all eligible employees, as defined above, which includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plans allow participants to make pretax contributions up to a maximum of $19,500 and $19,000 for the years 2020 and 2019, respectively or the statutory limits. Beginning January 1, 2008, the Company elected to be a “Safe Harbor” Plan for its matching 401(k) contributions. The Company matched 100% of up to 3% of an employee’s total annual compensation and matched 50% of 4% to 5% of an employee’s annual compensation. The match was in Company stock. The Company’s contribution for the years ended December 31, 2020 and 2019 was $1,690,568 and $695,560, respectively under the “Safe Harbor” plan. In 2001, the Company’s Board of Directors adopted a Non-Qualified Deferred Compensation Plan, and this plan was amended in 2005. Under the terms of the Plan, the Company will provide deferred compensation for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Board has appointed a Committee of the Company to be the Plan Administrator and to determine the employees who are eligible to participate in the plan. The employees who participate may elect to defer a portion of their compensation into the plan. The Company may contribute into the plan at the discretion of the Company’s Board of Directors. The Company did not make any contributions for 2020 and 2019. Effective December 4, 2018, the Board members approved a motion to extend the Chief Executive Officer’s employment agreement, dated December 4, 2012, for an additional four-year term ending December 2022. In the event of disability, the Chief Executive Officer’s salary would be continued for up to five years at 75% of its current level of compensation. In the event of a sale or merger of the Company and the Chief Executive Officer is not retained in his current position, the Company would be obligated to continue paying the Chief Executive Officer’s current compensation and benefits for seven years following the merger or sale. The agreement further provides that the Chief Executive Officer is entitled to receive annual retirement benefits beginning (i) one month from the date of his retirement (to commence no sooner than age 65), (ii) five years following complete disability, or (iii) upon termination of his employment without cause. These retirement benefits are to be paid for a period of twenty years in annual installments in the amount equal to 75% of his then current level of compensation. In the event that the Chief Executive Officer dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs. The Company expensed $900,000 and $660,000 during the years ended December 31, 2020 and 2019, respectively, to cover the present value of anticipated retirement benefits under the employment agreement. The liability accrued was $6,656,363 and $5,722,837 as of December 31, 2020 and 2019, respectively. 49 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 11) Retirement Plans (Continued) The Company, through its wholly owned subsidiary, SecurityNational Mortgage, also has an employment agreement with its former Vice President of Mortgage Operations and President of SecurityNational Mortgage, who retired from the Company on December 31, 2015. Under the terms of the employment agreement, this individual is entitled to receive retirement benefits from the Company for a period of ten years in an amount equal to 50% of his rate of compensation at the time of his retirement, which was $267,685 for the year ended December 31, 2015. Such retirement payments are paid monthly during the ten-year period. In the event that this individual dies prior to receiving all of his retirement benefits under his employment agreement, the remaining benefits will be made to his heirs. The company paid $133,843 and $133,843 in retirement compensation to this individual during the years ended December 31, 2020 and 2019, respectively. The liability accrued was $669,212 and $803,055 as of December 31, 2020 and 2019, respectively and is included in Other liabilities and accrued expenses on the consolidated balance sheets. 12) Capital Stock The Company has one class of preferred stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. The preferred stock is non-voting. The Company has two classes of common stock with shares outstanding, Class A common shares and Class C common shares. Class C shares have 10 votes per share on all matters except for the election of one third of the directors who are elected solely by the Class A shares. Class C shares are convertible into Class A shares at any time on a one to one ratio. The decrease in treasury stock was the result of treasury stock being used to fund the company’s 401(k) Plans. Stockholders of both Class A and Class C common stock have received 5% stock dividends in the years 1990 through 2019, and a 7.5% stock dividend in the year 2020, as authorized by the Company’s Board of Directors. The Company has Class B common stock of $1.00 par value, 5,000,000 shares authorized, of which none are issued. Class B shares are non-voting stock except to any proposed amendment to the Articles of Incorporation which would affect Class B common stock. The following table summarizes the activity in shares of capital stock for the two-year period ended December 31, 2020: Outstanding shares at December 31, 2018 Exercise of stock options Stock dividends Conversion of Class C to Class A Class A 15,304,798 32,517 767,178 3,286 Class C 2,193,643 191,443 119,087 (3,286) Outstanding shares at December 31, 2019 16,107,779 2,500,887 Exercise of stock options Stock dividends Conversion of Class C to Class A 68,970 405,210 13,824 130,820 61,720 (13,824) Outstanding shares at December 31, 2020 16,595,783 2,679,603 50 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 12) Capital Stock (Continued) Earnings per share amounts have been retroactively adjusted for the effect of annual stock dividends. In accordance with GAAP, the basic and diluted earnings per share amounts were calculated as follows: Numerator: Net earnings Denominator: 2020 2019 $ 55,596,613 $ 10,893,519 Denominator for basic earnings per share-weighted-average shares 18,831,991 18,562,056 Effect of dilutive securities Employee stock options Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 443,260 443,260 127,608 127,608 19,275,251 18,689,664 Basic earnings per share Diluted earnings per share $2.95 $0.59 $0.58 $2.88 For the years ended December 31, 2020 and 2019, there were -0- and 382,289 of anti-dilutive employee stock option shares, respectively, that were not included in the computation of diluted net earnings per common share as their effect would be anti-dilutive. 51 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 13) Stock Compensation Plans The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”). Compensation expense for options issued of $358,878 and $256,996 has been recognized under these plans for the years ended December 31, 2020 and 2019, respectively, and is included in personnel expenses on the consolidated statements of earnings. As of December 31, 2020, the total unrecognized compensation expense related to the options issued was $39,152, which is expected to be recognized over the vesting period of one year. The fair value of each option granted is estimated on the date of grant using the Black Scholes Option Pricing Model. The Company estimates the expected life of the options using the simplified method. Future volatility is estimated based upon the weighted historical volatility of the Company’s Class A common stock over a period equal to the expected life of the options. The risk-free interest rate for the expected life of the options is based upon the Federal Reserve Board’s daily interest rates in effect at the time of the grant. The following table summarizes the assumptions used in estimating the fair value of each option granted along with the weighted-average fair value of the options granted: Assumptions Weighted- Average Fair Value of Each Option $ 0.65 Expected Dividend Yield 5% Underlying stock FMV $ 3.76 Weighted- Average Volatility 32.29% Weighted- Average Risk-Free Interest Rate 1.64% Weighted- Average Expected Life (years) 4.82 Grant Date March 27, 2020 Plan All Plans December 6, 2019 All Plans $ 0.96 January 17, 2019 All Plans $ 1.12 5% 5% $ 5.19 32.79% 1.64% $ 4.98 36.04% 2.56% 4.83 5.31 52 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 13) Stock Compensation Plans (Continued) Activity of the stock option plans is summarized as follows: Outstanding at January 1, 2019 Adjustment for the effect of stock dividends Granted Exercised Cancelled Outstanding at December 31, 2019 Adjustment for the effect of stock dividends Granted Exercised Cancelled Weighted Average Exercise Price $ 5.15 $ 5.36 Weighted Average Exercise Price $ 4.49 $ 4.41 Number of Class A Shares 1,011,274 51,018 81,000 (45,834) (11,405) 1,086,053 27,968 77,000 (116,487) (1,671) Number of Class C Shares 577,280 28,295 180,000 (191,443) - 594,132 19,354 180,000 (130,820) - Outstanding at December 31, 2020 1,072,863 $ 4.33 662,666 $ 4.73 Exercisable at end of year 1,053,903 $ 4.45 616,542 $ 4.91 Available options for future grant 325,372 266,500 Weighted average contractual term of options outstanding at December 31, 2020 5.50 years 6.71 years Weighted average contractual term of options exercisable at December 31, 2020 5.43 years 6.63 years Aggregated intrinsic value of options outstanding at December 31, 2020 (1) $4,311,983 $2,396,954 Aggregated intrinsic value of options exercisable at December 31, 2020 (1) $4,223,251 $2,183,399 (1) The Company used a stock price of $8.35 as of December 31, 2020 to derive intrinsic value. The total intrinsic value (which is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date) of stock options exercised during the years ended December 31, 2020 and 2019 was $663,901 and $271,220, respectively. 53 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 14) Statutory Financial Information and Dividend Limitations The Company’s insurance subsidiaries prepare their statutory-basis financial statements in conformity with accounting practices prescribed or permitted by the insurance department of the applicable state of domicile. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. All states require domiciled insurance companies to prepare statutory-basis financial statements in conformity with the NAIC Accounting Practices and Procedures Manual, subject to any deviations prescribed or permitted by the applicable insurance commissioner and/or director. Statutory accounting practices differ from GAAP primarily since they require charging policy acquisition and certain sales inducement costs to expense as incurred, establishing life insurance reserves based on different actuarial assumptions, and valuing certain investments and establishing deferred taxes on a different basis. Statutory net income and capital and surplus of the Company’s insurance subsidiaries, determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities are as follows: Statutory Net Income 2020 2019 Statutory Capital and Surplus 2020 2019 Amounts by insurance subsidiary: Security National Life Insurance Company Kilpatrick Life Insurance Company First Guaranty Insurance Company Memorial Insurance Company of America Southern Security Life Insurance Company, Inc. Trans-Western Life Insurance Company Total $ 6,054,764 1,574,128 790,221 55 183 (1,527) 8,417,824 $ (1) 3,589,552 $ 12,752,100 1,078,733 (107) 87 3,773 $ 17,424,138 $ $ 53,089,185 15,177,996 7,045,644 1,088,034 1,581,647 510,636 78,493,142 49,390,181 15,208,071 6,352,670 1,088,559 1,588,396 512,163 74,140,040 $ $ (1) Includes 12 months even though Kilpatrick Life Insurance Company wasn't acquired by the Company until December 2019. The Utah, Arkansas, Louisiana, Mississippi and Texas Insurance Departments impose minimum risk-based capital (RBC) requirements that were developed by the NAIC on insurance enterprises. The formulas for determining the RBC specify various factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio (the Ratio) of the enterprise’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level, as defined by the NAIC. Enterprises below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The life insurance subsidiaries each have a ratio that is greater than the first level of regulatory action as of December 31, 2020. Generally, the net assets of the life insurance subsidiaries available for transfer to the Company are limited to the amounts of the life insurance subsidiaries net assets, as determined in accordance with statutory accounting practices, that exceed minimum statutory capital requirements. Additional requirements must be met depending on the state, and payments of such amounts as dividends are subject to approval by regulatory authorities. Under the Utah Insurance Code, Security National Life Insurance Company is permitted to pay a stockholder dividend to the Company as long as the Company provides the Utah Insurance Commissioner (the “Utah Commissioner”) with at least 30 days notice and the aggregate amount of all such dividends in any 12 month period does not exceed the lesser of: (i) 10% of its surplus to policyholders as of the end of the immediately preceding calendar year, or (ii) net gain from operations, not including realized capital gains, for the immediately preceding calendar year, not including 54 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 14) Statutory Financial Information and Dividend Limitations (Continued) pro rata distributions of the Company’s own securities. In determining whether a dividend is extraordinary, the Company may include carryforward net income from the previous two calendar years, excluding realized capital gains less dividends paid in the second and immediately preceding calendar years. Security National Life Insurance Company will be permitted to pay a dividend to the Company in excess of the lesser of such two amounts only if it files notice of its intention to declare such a dividend and the amount thereof with the Utah Commissioner and the Utah Commissioner either approves the distribution of the dividend or does not disapprove the distribution within 30 days of its filing. In all cases, a dividend may not be paid that would reduce the insurer’s total adjusted capital below the insurer’s company action level risk-based capital, as defined for statutory reporting purposes. Amounts available to be paid as dividends in the next 12 months totals approximately $5,309,000. Under the Louisiana Insurance Code, First Guaranty Insurance Company and Kilpatrick Life Insurance Company are permitted to pay a stockholder dividend to Security National Life as long as their capital has been (i) fully paid in cash, (ii) is unimpaired, (iii) has a surplus beyond its capital stock and (iv) has a surplus beyond its minimum required surplus. In 2019, First Guaranty Insurance Company paid to Security National Life a cash dividend of $500,000 and Kilpatrick Life Insurance Company paid a cash dividend of $3,000,000. Amounts available to be paid as dividends at December 31, 2020 totaled approximately $3,146,000 for First Guaranty Insurance Company and totaled approximately $11,478,000 for Kilpatrick Life Insurance Company. 15) Business Segment Information Description of Products and Services by Segment The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing pre-sold loans before the funds are received from financial institutional investors. Measurement of Segment Profit or Loss and Segment Assets The accounting policies of the reportable segments are the same as those described in the Significant Accounting Principles. Intersegment revenues are recorded at cost plus an agreed upon intercompany profit, and are eliminated upon consolidation. Factors Management Used to Identify the Enterprise’s Reportable Segments The Company’s reportable segments are business units that are managed separately due to the different products provided and the need to report separately to the various regulatory jurisdictions. The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported. 55 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 15) Business Segment Information (Continued) Revenues: From external sources: Revenue from customers Net investment income Gains on investments and other assets Other than temporary impairments Other revenues Intersegment revenues: Net investment income Total revenues Expenses: Death, surrenders and other policy benefits Increase in future policy benefits Amortization of deferred policy and pre-need acquisition costs and value of business acquired Selling, general and administrative expenses: Commissions Personnel Advertising Rent and rent related Depreciation on property and equipment Provision for loan loss reserve Cost related to funding mortgage loans Intersegment Other Interest expense: Intersegment Other Costs of goods and services sold-mortuaries and cemeteries Total benefits and expenses Earnings before income taxes Income tax benefit (expense) Net earnings Life Insurance Cemetery/ Mortuary 2020 Mortgage Intercompany Eliminations Consolidated $ 93,020,617 54,811,486 2,088,541 (370,975) 1,491,585 $ 20,307,435 807,695 (162,652) - 94,349 $ 298,933,110 710,622 (39) - 9,731,548 $ - - - - - $ 412,261,162 56,329,803 1,925,850 (370,975) 11,317,482 8,022,503 159,063,757 351,505 21,398,332 716,240 310,091,481 (9,090,248) (9,090,248) - 481,463,322 62,841,360 23,568,650 - - 13,618,204 689,221 4,149,241 25,449,100 614,114 861,602 843,335 - - 621,161 11,808,818 410,024 2,354,760 1,506,320 5,669,367 391,836 89,253 488,570 - - 142,999 4,417,805 152,175 198,968 - - - 118,770,736 53,871,504 4,374,946 5,922,706 746,833 16,506,030 9,877,700 580,976 31,104,479 7,182,913 6,025,082 - - - - - - - - - - (1,345,136) - (7,745,112) - 62,841,360 23,568,650 14,307,425 124,426,297 84,989,971 5,380,896 6,873,561 2,078,738 16,506,030 9,877,700 - 47,331,102 - 8,578,810 - 147,140,369 11,923,388 (1,433,901) 10,489,487 $ $ 3,252,655 16,999,169 4,399,163 (1,009,137) 3,390,026 $ $ - 254,963,905 55,127,576 (13,410,476) 41,717,100 $ $ - (9,090,248) - $ - $ - 3,252,655 410,013,195 71,450,127 (15,853,514) 55,596,613 $ $ Identifiable assets $ 1,171,158,235 $ 56,335,498 $ 408,325,196 $ (90,398,039) $ 1,545,420,890 Goodwill $ 2,765,570 $ 754,018 $ - $ - $ 3,519,588 56 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 15) Business Segment Information (Continued) Revenues: From external sources: Revenue from customers Net investment income Gains on investments and other assets Other revenues Intersegment revenues: Net investment income Total revenues Expenses: Death, surrenders and other policy benefits Increase in future policy benefits Amortization of deferred policy and pre-need acquisition costs and value of business acquired Selling, general and administrative expenses: Commissions Personnel Advertising Rent and rent related Depreciation on property and equipment Cost related to funding mortgage loans Intersegment Other Interest expense: Intersegment Other Costs of goods and services sold-mortuaries and cemeteries Total benefits and expenses Earnings before income taxes Income tax benefit (expense) Net earnings Life Insurance Cemetery/ Mortuary 2019 Mortgage Intercompany Eliminations Consolidated $ 81,860,610 41,610,831 138,330 2,128,961 $ 15,296,235 579,995 530,098 95,197 $ 131,976,082 828,647 59,939 7,956,005 $ - - - - $ 229,132,927 43,019,473 728,367 10,180,163 4,455,034 130,193,766 443,548 16,945,073 508,637 141,329,310 (5,407,219) (5,407,219) - 283,060,930 44,911,805 23,568,497 - - 14,199,152 435,425 3,632,780 20,311,591 595,118 451,380 477,247 - 412,853 11,769,097 490,756 2,808,081 1,084,079 5,177,810 368,173 47,525 428,633 - 180,594 3,241,023 154,615 288,768 - - - 52,046,032 38,731,869 3,821,267 6,556,551 805,489 6,278,954 544,463 19,912,641 3,623,938 4,289,839 - - - - - - - - - (1,137,910) - (4,269,309) - 44,911,805 23,568,497 14,634,577 56,762,891 64,221,270 4,784,558 7,055,456 1,711,369 6,278,954 - 34,922,761 - 7,386,688 - 123,628,357 6,565,409 (1,085,848) 5,479,561 $ $ 2,878,169 14,284,814 2,660,259 (649,144) 2,011,115 $ $ - 136,611,043 4,718,267 (1,315,424) 3,402,843 $ $ - (5,407,219) - $ - $ - 2,878,169 269,116,995 13,943,935 (3,050,416) 10,893,519 $ $ Identifiable assets $ 1,110,641,526 $ 81,014,182 $ 249,970,323 $ (110,701,544) $ 1,330,924,487 Goodwill $ 2,765,570 $ 754,018 $ - $ - $ 3,519,588 57 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 16) Related Party Transactions The Company’s Board of Directors has a written procedure, which requires disclosure to the Board of any material interest or any affiliation on the part of any of its officers, directors or employees that is in conflict or may be in conflict with the interests of the Company. The Company and its Board of Directors is unaware of any related party transactions that require disclosure as of December 31, 2020. 17) Fair Value of Financial Instruments 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 the Company 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 the Company’s estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities. The Company utilizes a combination of third-party valuation service providers, brokers, and internal valuation models to determine fair value. The following methods and assumptions were used by the Company in estimating the fair value disclosures related to significant financial instruments: The items shown under Level 1 and Level 2 are valued as follows: Fixed Maturity Securities Available for Sale: The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements (considered Level 3 investments), are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. Equity Securities: The fair values for equity securities are based on quoted market prices. Loans Held for Sale: The Company elected the fair value option for loans held for sale. The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. 58 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) Restricted Assets: A portion of these assets include mutual funds, equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. Cemetery Perpetual Care Trust Investments: A portion of these assets include equity securities and fixed maturity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature Call and Put Options: The Company uses quoted market prices to value its call and put options. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy. The items shown under Level 3 are valued as follows: Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions. A 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 issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings. The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of 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 loan commitment is issued. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments. Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from a provider of building cost information to the real estate construction. Impaired Real Estate Held for Investment: The Company believes that in an orderly market, fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims. It should be noted that for replacement cost, when determining the fair value of real estate held for investment, the Company uses a provider of building cost information to the real estate construction industry. For the investment analysis, the Company used market data based upon its real estate operation experience and projected the present 59 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) value of the net rental income over seven years. The Company also considers area comparables and property condition when determining fair value. In addition to this analysis performed by the Company, the Company depreciates Real Estate Held for Investment. This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values. Mortgage Servicing Rights: The Company initially recognizes MSRs at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction. The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the consolidated balance sheet at December 31, 2020. Assets accounted for at fair value on a recurring basis Fixed maturity securities available for sale Equity securities Loans held for sale Restricted assets (1) Restricted assets (2) Cemetery perpetual care trust investments (1) Cemetery perpetual care trust investments (2) Derivatives - loan commitments (3) Total assets accounted for at fair value on a recurring basis Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) Derivatives - loan commitments (4) Total liabilities accounted for at fair value on a recurring basis Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ 294,656,679 11,324,239 422,772,418 1,473,637 2,515,778 747,767 2,062,303 12,592,672 - $ 11,324,239 - - 2,515,778 - 2,062,303 - $ 292,455,504 - - 1,473,637 - 747,767 - - $ 2,201,175 - 422,772,418 - - - - 12,592,672 $ 748,145,493 $ 15,902,320 $ 294,676,908 $ 437,566,265 $ (43,097) (2,464,062) $ (43,097) - - $ - - $ (2,464,062) $ (2,507,159) $ (43,097) $ - $ (2,464,062) (1) Fixed maturity securities available for sale (2) Equity securities (3) Included in other assets on the consolidated balance sheets (4) Included in other liabilities and accrued expenses on the consolidated balance sheets 60 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) The following table summarizes Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the consolidated balance sheet at December 31, 2019. Assets accounted for at fair value on a recurring basis Fixed maturity securities available for sale Equity securities Loans held for sale Restricted assets (1) Restricted assets (2) Cemetery perpetual care trust investments (1) Cemetery perpetual care trust investments (2) Derivatives - loan commitments (3) Total assets accounted for at fair value on a recurring basis Liabilities accounted for at fair value on a recurring basis Derivatives - call options (4) Derivatives - put options (4) Derivatives - loan commitments (4) Total liabilities accounted for at fair value on a recurring basis Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ 355,977,820 7,271,165 213,457,632 1,008,867 1,976,480 975,673 1,605,451 2,722,580 - $ 7,271,165 - - 1,976,480 - 1,605,451 - $ 352,761,438 - - 1,008,867 - 975,673 - - $ 3,216,382 - 213,457,632 - - - - 2,722,580 $ 584,995,668 $ 10,853,096 $ 354,745,978 $ 219,396,594 $ (62,265) (22,282) (231,347) $ (62,265) (22,282) - - $ - - - $ - (231,347) $ (315,894) $ (84,547) $ - $ (231,347) (1) Fixed maturity securities available for sale (2) Mutual funds and equity securities (3) Included in other assets on the consolidated balance sheets (4) Included in other liabilities and accrued expenses on the consolidated balance sheets For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows: Loans held for sale Fair Value at 12/31/2020 Valuation Technique Significant Unobservable Input(s) $ 422,772,418 Market approach Investor contract pricing as a percentage of unpaid principal balance Range of Inputs Minimum Maximum Weighted Average Value 104.0% 110.0% Value 99.0% Derivatives - loan commitments (net) 10,128,610 Market approach Pull-through rate Initial-Value Servicing 52.0% N/A 0 bps 92.0% N/A 184 bps 81.0% N/A 58 bps Fixed maturity securities available for sale 2,201,175 Broker quotes Pricing quotes $ 90.83 $ 119.33 $ 113.47 61 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) For Level 3 assets and liabilities measured at fair value on a recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows: Loans held for sale Fair Value at 12/31/2019 Valuation Technique Significant Unobservable Input(s) $ 213,457,632 Market approach Investor contract pricing as a percentage of unpaid principal balance Range of Inputs Minimum Maximum Weighted Average Value 103.0% 109.0% Value 98.0% Derivatives - loan commitments (net) 2,491,233 Market approach Pull-through rate Initial-Value Servicing 1.0% N/A 0 bps 92.0% N/A 318 bps 81.0% N/A 79 bps Fixed maturity securities available for sale 3,216,382 Broker quotes Pricing quotes $ 95.02 $ 115.80 $ 107.98 Following is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs: Balance - December 31, 2019 Originations/purchases Sales, maturities and paydowns Transfer to mortgage loans held for investment Total gains (losses): Included in earnings Included in other comprehensive income Net Derivatives Loan Commitments $ 2,491,233 - - - Loans Held for Sale $ 213,457,632 5,627,013,749 (5,600,045,285) (16,960,549) Fixed Maturity Securities Available for Sale $ 3,216,382 - (1,042,400) - 7,637,377 - (1) 199,306,871 - (1) (2) 3,408 23,785 Balance - December 31, 2020 $ 10,128,610 $ 422,772,418 $ 2,201,175 (1) As a component of mortgage fee income on the consolidated statements of earnings (2) As a component of net investment income on the consolidated statements of earnings Following is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs: Balance - December 31, 2018 Originations/purchases Sales, maturities and paydowns Transfer to mortgage loans held for investment Transfer from fixed maturity securities held to maturity Total gains (losses): Net Derivatives Loan Commitments $ 1,591,816 - - - - Loans Held for Sale $ 136,210,853 2,606,839,175 (2,580,875,055) (31,881,851) Fixed Maturity Securities Available for Sale - $ - - - 3,216,382 Included in earnings (1) Balance - December 31, 2019 899,417 83,164,510 - $ 2,491,233 $ 213,457,632 $ 3,216,382 (1) As a component of mortgage fee income on the consolidated statements of earnings 62 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the consolidated balance sheet at December 31, 2020. Assets accounted for at fair value on a nonrecurring basis Impaired mortgage loans held for investment Impaired real estate held for sale Total assets accounted for at fair value on a nonrecurring basis Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ 1,297,356 4,249,000 $ - - - $ - $ 1,297,356 4,249,000 $ 5,546,356 $ - $ - $ 5,546,356 The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the consolidated balance sheet at December 31, 2019. Assets accounted for at fair value on a nonrecurring basis Impaired mortgage loans held for investment Impaired real estate held for investment Total assets accounted for at fair value on a nonrecurring basis Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total $ 1,302,025 8,375,884 $ - - $ - - $ 1,302,025 8,375,884 $ 9,677,909 $ - $ - $ 9,677,909 63 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) Fair Value of Financial Instruments Carried at Other Than Fair Value ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 2020 and 2019. The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2020: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential Residential construction Commercial Mortgage loans held for investment, net Policy loans Insurance assignments, net (1) Restricted assets (2) Cemetery perpetual care trust investments (2) Mortgage servicing rights, net Liabilities Bank and other loans payable Policyholder account balances (3) Future policy benefits - annuities (3) $ $ 92,757,613 110,849,864 45,736,459 249,343,936 14,171,589 51,585,656 3,317,877 1,468,600 35,210,516 - $ - - - $ - - - - - $ - - - - $ - - - - - $ $ 100,384,283 110,849,864 45,259,425 256,493,572 14,171,589 51,585,656 3,317,877 1,468,600 38,702,358 $ $ 100,384,283 110,849,864 45,259,425 256,493,572 14,171,589 51,585,656 3,317,877 1,468,600 38,702,358 $ (297,824,368) (44,026,809) (106,522,113) - $ - - - $ - - $ (297,824,368) (42,220,725) (112,354,186) $ (297,824,368) (42,220,725) (112,354,186) (1) Included in other investments and policy loans on the consolidated balance sheets (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims on the consolidated balance sheets 64 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2019: Carrying Value Level 1 Level 2 Level 3 Total Estimated Fair Value Assets Mortgage loans held for investment Residential Residential construction Commercial Mortgage loans held for investment, net Policy loans Insurance assignments, net (1) Restricted assets (2) Cemetery perpetual care trust investments (2) Mortgage servicing rights, net Liabilities Bank and other loans payable Policyholder account balances (3) Future policy benefits - annuities (3) $ $ 110,253,678 88,651,967 37,788,901 236,694,546 14,762,805 39,614,939 2,275,756 524,000 17,155,529 - $ - - - $ - - - - - - $ - - - $ - - - - - $ $ 115,320,638 88,651,967 39,289,462 243,262,067 14,762,805 39,614,939 2,289,679 536,553 22,784,571 $ $ 115,320,638 88,651,967 39,289,462 243,262,067 14,762,805 39,614,939 2,289,679 536,553 22,784,571 $ (217,572,612) (45,154,180) (113,579,830) $ - - - $ - - - $ (217,572,612) (41,828,469) (117,304,614) $ (217,572,612) (41,828,469) (117,304,614) (1) Included in other investments and policy loans on the consolidated balance sheets (2) Mortgage loans held for investment (3) Included in future policy benefits and unpaid claims on the consolidated balance sheets The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows: Mortgage Loans Held for Investment: The estimated fair value of the Company’s mortgage loans held for investment is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment. Residential – The estimated fair value of mortgage loans is determined through a combination of discounted cash flows (estimating expected future cash flows of payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently. Residential Construction – These loans are primarily short in maturity. Accordingly, the estimated fair value is determined to be the carrying value. Commercial – The estimated fair value is determined by estimating expected future cash flows of payments and discounting them using current interest rates for commercial mortgages. Policy Loans: The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies. Insurance Assignments, Net: These investments are short in maturity. Accordingly, the carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values. 65 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 17) Fair Value of Financial Instruments (Continued) Bank and Other Loans Payable: The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable interest rates. Policyholder Account Balances and Future Policy Benefits-Annuities: 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 crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows. The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. 18) Accumulated Other Comprehensive Income The following summarizes the changes in accumulated other comprehensive income: December 31 2020 2019 $ $ 12,016,464 (2,772) 12,013,692 (2,522,876) 9,490,816 41,225 (10,269) 30,956 (6,817) 1,698 (5,119) (46) 12 (34) 9,516,619 17,315,770 - 17,315,770 (3,636,311) 13,679,459 35,550 (8,856) 26,694 29,904 (7,449) 22,455 972 (243) 729 13,729,337 $ $ Unrealized gains on fixed maturity securities available for sale Amounts reclassified into net earnings Net unrealized gains before taxes Tax expense Net Unrealized gains on restricted assets (1) Tax expense Net Unrealized gains on cemetery perpetual care trust investments (1) Tax expense Net Unrealized gains for foreign currency translations adjustments Tax expense Net Other comprehensive income changes _______________ (1) Fixed maturity securities available for sale 66 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 18) Accumulated Other Comprehensive Income (Continued) The following is the accumulated balances of other comprehensive income as of December 31, 2020: Unrealized gains on fixed maturity securities available for sale Unrealized gains on restricted assets (1) Unrealized gains (losses) on cemetery perpetual care trust investments (1) Foreign currency translation adjustments Other comprehensive income (1) Fixed maturity securities available for sale Beginning Balance December 31, 2019 $ 13,679,459 26,694 Ending Balance December 31, 2020 $ 23,170,275 57,650 Change for the period $ 9,490,816 30,956 22,455 (2,094) $ 13,726,514 (5,119) (34) $ 9,516,619 17,336 (2,128) $ 23,243,133 The following is the accumulated balances of other comprehensive income as of December 31, 2019: Unrealized gains on fixed maturity securities available for sale Unrealized gains on restricted assets (1) Unrealized gains on cemetery perpetual care trust investments (1) Foreign currency translation adjustments Other comprehensive income (loss) (1) Fixed maturity securities available for sale Beginning Balance December 31, 2018 $ - - - (2,823) $ (2,823) Ending Balance December 31, 2019 $ 13,679,459 26,694 22,455 (2,094) $ 13,726,514 Change for the period $ 13,679,459 26,694 22,455 729 $ 13,729,337 67 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 19) Derivative Instruments The following table shows the fair value and notional amounts of derivative instruments as of December 31, 2020 and 2019. Fair Values and Notional Amounts of Derivative Instruments December 31, 2020 December 31, 2019 Balance Sheet Location Notional Amount Asset Fair Value Liability Fair Value Notional Amount Asset Fair Value Liability Fair Value Derivatives not designated as hedging instruments: Loan commitments Call options Put options T otal Other assets and Other liabilities Other liabilities Other liabilities $659,245,038 $12,592,672 $2,464,062 $224,202,514 $2,722,580 $231,347 1,873,200 -- $661,118,238 -- -- $12,592,672 43,097 -- $2,507,159 1,813,500 1,573,100 $227,589,114 -- -- $2,722,580 62,265 22,282 $315,894 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 into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing. Derivative Loan commitments Classification Mortgage fee income Call and put options Gains on investments and other assets Net Amount Gain (Loss) Years ended December 31 2020 2019 7,637,377 $ 899,417 $ $ 272,758 $ 626,208 68 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 20) Acquisitions Kilpatrick Life Insurance Company On December 13, 2019, the Company, through its wholly owned subsidiary, Security National Life Insurance Company (“Security National Life”) completed a stock purchase transaction with Kilpatrick Life Insurance Company, a Louisiana domiciled life insurance company (“Kilpatrick Life”) and its shareholders, which resulted in the purchase of all the outstanding shares of common stock of Kilpatrick Life. The closing of the transaction was subject to approval by the Louisiana Department of Insurance of the change of control of Kilpatrick Life, which was received on December 12, 2019. Under the terms of the transaction, the total Pur chase Price that Security National Life paid for all the shares held by the Kilpatrick shareholders was $23,779,940 subject to a $1,400,000 holdback deposited into an interest bearing escrow account, as agreed with the shareholders. The current amount that is available to be disbursed to the prior owners is $598,949. Kilpatrick Life has been in operation since 1932 and provides life insurance products and services through insurance plans such as permanent and term life insurance, asset protection plans, graded whole life insurance, and annuities. Additionally, it provides insurance services for emergencies and pre‐arranged funeral services. Kilpatrick Life is based in Shreveport, Louisiana with additional offices in Jena, Alexandria, Minden, and Arcadia, Louisiana. Kilpatrick Life employs a staff of almost 120 associates in four offices in Louisiana and is licensed to operate in Louisiana, Texas, Arkansas, Oklahoma, and Mississippi with the home office located in Shreveport, LA. It is the mission of Kilpatrick Life to continue providing the utmost service and protection for its policyholders for generations to come. Prior to the stock purchase transaction, Security National life and Kilpatrick Life entered into a coinsurance agreement, effective October 1, 2019. After the effective date, Security National Life, as coinsurer, agreed to be responsible for and was obligated with respect to 100% of the contractual liabilities under the Kilpatrick Life’s life insurance policies in accordance with the terms and conditions of the policies and applicable law. Unless otherwise directed by Security National Life, as coinsurer, Kilpatrick Life continued to administer the policies on behalf of Security National Life, as coinsurer, for the duration of the coinsurance agreement. As part of the coinsurance agreement, effective October 1, 2019, Security National Life acquired the following assets and assumed the following contractual liabilities. Other investments and policy loans Real estate held for investment Mortgage loans held for investment Receivables Total assets acquired Future policy benefits and unpaid claims Other liabilities and accrued expenses Total liabilities assumed Cash received for reinsurance assumed $ 9,124,459 2,850,000 200,000 131,258 12,305,717 (165,404,970) (5,259,341) (170,664,311) 158,358,594 $ Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed to terminate the coinsurance agreement, to require the recapture of the life insurance policies by Kilpatrick Life and provided notification to the Louisiana Department of Insurance. The final settlement and transfer of the coinsurance trust assets from Security National Life back to Kilpatrick Life occurred shortly thereafter. 69 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 20) Acquisitions (Continued) The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition, on December 13, 2019, are shown in the following table. At the time of acquisition some of these assets and liabilities became intercompany items, and the Company has eliminated them for consolidation. Fixed maturity securities, available for sale Fixed maturity securities, held to maturity Mortgage loans held for investment Real estate held for investment Other investments Accrued investment income Total investments Cash and cash equivalents Receivables, net Receivables from reinsurers Property and equipment, net Value of business acquired Deferred taxes Other Total assets acquired $ 22,766,520 16,436 8,011,660 2,708,557 446,655 183,527 34,133,355 (1) (1) 6,900,654 5,407,736 168,105,064 1,498,245 4,962,831 167,344 712,323 221,887,552 Future policy benefits and unpaid claims Accounts payable Other liabilities and accrued expenses Income taxes Total liabilities assumed Fair value of net assets acquired/consideration paid (189,071,407) (283,304) (7,870,944) (881,957) (198,107,612) 23,779,940 $ Fair value of net assets acquired/consideration paid, net of cash acquired $ 16,879,286 (1) Receivable from reinsurers of $162,907,008 and receivables, net of $5,000,000 were settled with the recapture of the coinsurance agreement by Kilpatrick Life from Security National Life. Kilpatrick Life’s revenues and net loss since the date of acquisition for the year ended December 31, 2019 were $1,461,011 and $848,031, respectively. Probst Family Funerals and Cremations and Heber Valley Funeral Home On February 15, 2019, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed an asset purchase transaction with Probst Family Funerals and Cremations, LLC. (“Probst Family Funerals”) and Heber Valley Funeral Home, Inc. (“Heber Valley Funeral Home”). These funeral homes are both located in Heber Valley, a community situated about 45 miles southeast of Salt Lake City. 70 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 20) Acquisitions (Continued) Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated February 15, 2019, Memorial Mortuary Inc. paid a net purchase price of $3,315,647 for the business and assets of Probst Family Funerals and Heber Valley Funeral Home, subject to a $150,000 holdback deposited into an escrow account. In August 2019, this escrow account was settled and $137,550 was paid to the prior owners. The estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition were as follows: Cash Property and equipment Receivables Goodwill Other Total assets acquired $ 53,859 2,475,526 13,620 754,018 21,800 3,318,823 Bank and other loans payable Total liabilities assumed Fair value of net assets acquired/consideration paid (3,176) (3,176) 3,315,647 $ Fair value of net assets acquired/consideration paid, net of cash acquired $ 3,261,788 Probst Family Funerals and Heber Valley Funeral Home’s revenues and net earnings since the date of acquisition for the year ended December 31, 2019 were $796,992 and $97,400, respectively. 71 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 21) Mortgage Servicing Rights The Company reports MSRs pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements. The following table presents the MSR activity for the periods presented. Amortized cost: Balance before valuation allowance at beginning of year MSR additions resulting from loan sales Amortization (1) Application of valuation allowance to write down MSRs with other than temporary impairment Balance before valuation allowance at year end Valuation allowance for impairment of MSRs: Balance at beginning of year Additions Application of valuation allowance to write down MSRs with other than temporary impairment Balance at year end Mortgage servicing rights, net December 31 2020 2019 $ 17,155,529 29,896,465 (11,841,478) $ 20,016,822 4,194,502 (7,055,795) - 35,210,516 $ - 17,155,529 $ $ - - $ - - - $ - - $ - $ 35,210,516 $ 17,155,529 Estimated fair value of MSRs at year end $ 38,702,358 $ 22,784,571 (1) Included in other expenses on the consolidated statements of earnings The following table summarizes the Company’s estimate of future amortization of its existing MSRs carried at amortized cost. This projection was developed using the assumptions made by management in its December 31, 2020 valuation of MSRs. The assumptions underlying the following estimate will change as market conditions and portfolio composition and behavior change, causing both actual and projected amortization levels to change over time. Therefore, the following estimates will change in a manner and amount not presently determinable by management. Estimated MSR Amortization 2021 2022 2023 2024 2025 Thereafter Total $ 4,724,439 3,582,811 3,030,850 2,574,323 2,200,840 19,097,253 35,210,516 $ 72 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 21) Mortgage Servicing Rights (Continued) During the years ended December 31, 2020 and 2019, the Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the consolidated statements of earnings: Contractual servicing fees Late fees Total 2020 8,940,612 305,962 9,246,574 $ $ 2019 7,212,164 365,477 7,577,641 $ $ The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented: Years Ended December 31 2020 2019 Servicing UPB $ 5,070,287,864 $ 2,804,139,415 The following key assumptions were used in determining MSR value: Prepayment Average Discount Speeds Life(Years) Rate December 31, 2020 December 31, 2019 15.60 15.30 5.30 5.27 9.50 9.51 73 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 22) Future Policy Benefits and Unpaid Claims The Company reports future policy benefits and unpaid claims pursuant to the accounting policy discussed in Note 1 of the Notes to Consolidated Financial Statements. The following table provides information regarding future policy benefits and unpaid claims and the related receivable from reinsurers. Life Annuities Policyholder account balances Accident and health Other policyholder funds Reported but unpaid claims Incurred but not reported claims Years Ended 2020 $ 674,230,463 109,522,112 44,026,809 651,140 4,354,746 8,689,723 3,315,094 2019 $ 654,585,723 113,579,831 45,154,180 667,428 4,530,227 4,891,922 2,191,607 Gross future policy benefits and unpaid claims $ 844,790,087 $ 825,600,918 Receivable from reinsurers Life Annuities Accident and health Reported but unpaid claims Incurred but not reported claims Total receivable from reinsurers 10,841,567 4,047,301 90,231 571,057 19,000 11,040,398 4,038,007 90,113 569,250 10,000 15,569,156 15,747,768 Net future policy benefits and unpaid claims $ 829,220,931 $ 809,853,150 74 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 23) Revenues from Contracts with Customers The Company reports revenues from contracts with customers pursuant to ASC No. 606, Revenue from Contracts with Customers. Contracts with Customers Information about Performance Obligations and Contract Balances The Company’s cemetery and mortuary segment sells a variety of goods and services to customers in both at-need and pre-need situations. Due to the timing of the fulfillment of the obligation, revenue is deferred until that obligation is fulfilled. The total contract liability for future obligations is included in deferred pre-need cemetery and mortuary contract revenues on the consolidated balance sheets and, as of December 31, 2020 and 2019, the balances were $13,080,179 and 12,607,978, respectively. The Company’s three types of future obligations are as follows: Pre-need Merchandise and Service Revenue: All pre-need merchandise and service revenue is deferred and the funds are placed in trust until the need arises, the merchandise is received or the service is performed. The trust is then relieved, and the revenue and commissions are recognized. As of December 31, 2020 and 2019, the balances were $12,545,753 and $12,325,437, respectively. At-need Specialty Merchandise Revenue: At-need specialty merchandise revenue consists of customizable merchandise ordered from a manufacturer such as markers and bases. When specialty merchandise is ordered, it can take time to manufacture and deliver the product. Revenue is deferred until the at-need merchandise is received. As of December 31, 2020 and 2019, the balances were $534,426 and $282,541, respectively. Deferred revenue for at-need specialty revenue is not placed in trust. Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. As of December 31, 2020 and 2019, the balances were $-0- and $-0-, respectively. Deferred pre-need land revenue is not placed in trust. Complete payment of the contract does not constitute fulfillment of the performance obligation. Goods or services are deferred until such time the service is performed or merchandise is received. Pre-need contracts are required to be paid in full prior to a customer using a good or service from a pre-need contract. Goods and services from pre- need contracts can be transferred when paid in full from one owner to another. In such cases, the Company will act as an agent in transferring the requested goods and services. A transfer of goods and services does not fulfill an obligation and revenue remains deferred. 75 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 23) Revenues from Contracts with Customers (Continued) The opening and closing balances of the Company’s receivables, contract assets and contract liabilities are as follows: Opening (1/1/2020) Closing (12/31/2020) Increase/(decrease) Opening (1/1/2019) Closing (12/31/2019) Increase/(decrease) Contract Balances Receivables (1) $ 2,778,879 4,119,988 1,341,109 Contract Asset $ - - - Contract Liability $ 12,607,978 13,080,179 472,201 Contract Balances Receivables (1) 2,816,225 $ 2,778,879 (37,346) Contract Asset - $ - - Contract Liability $ 12,508,625 12,607,978 99,353 (1) Included in Receivables, net on the consolidated balance sheets The following table disaggregates the opening and closing balances of the Company’s contract balances. Contract Balances Pre-need merchandise and services At-need specialty merchandise Pre-need land sales Opening (1/1/2020) Contract Asset - $ - - $ - Pre-need merchandise and services At-need specialty merchandise Pre-need land sales Closing (12/31/2020) $ - - - $ - Contract Liability $ 12,325,437 282,541 - 12,607,978 12,545,753 534,426 - 13,080,179 $ $ $ Contract Balances Pre-need merchandise and services At-need specialty merchandise Pre-need land sales Opening (1/1/2019) Contract Asset $ - - - $ - Pre-need merchandise and services At-need specialty merchandise Pre-need land sales Closing (12/31/2019) - $ - - $ - 76 Contract Liability $ 12,175,943 327,302 5,380 12,508,625 12,325,437 282,541 - 12,607,978 $ $ $ SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 23) Revenues from Contracts with Customers (Continued) The amount of revenue recognized for the years ended December 31, 2020 and 2019 that was included in the opening contract liability balance was $4,359,709 and $3,558,103, respectively. The difference between the opening and closing balances of the Company’s contract assets and contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment. Disaggregation of Revenue The following table disaggregates revenue for the Company’s cemetery and mortuary contracts. Years Ended December 31 2020 2019 Major goods/service lines At-need Pre-need Timing of Revenue Recognition Goods transferred at a point in time Services transferred at a point in time Significant Judgments and Estimates $ $ 15,212,822 5,094,613 20,307,435 $ $ 12,334,777 2,961,458 15,296,235 $ $ 13,438,592 6,868,843 20,307,435 $ $ 10,133,723 5,162,512 15,296,235 The Company's cemetery and mortuary segment recognizes revenue on future performance obligations when goods are delivered and when services are performed and is not determined by the terms or payments of the contract as long as any good or service is paid in full prior to delivery. Prices are determined based on the market at the time a contract is created. Goods or services are not partially completed. There are no significant judgements, estimations or allocation methods when revenue should be recognized. Practical Expedients The Company has not elected to use any of the practical expedients under ASC 606. Contract Costs The Company's cemetery and mortuary segment defers certain costs associated with obtaining a contract on future obligations. Pre-need Merchandise and Service Revenue: Pre-need merchandise and service revenues are deferred until the goods or services are delivered. Recognition can be years until the obligations are satisfied. Commissions and other costs are capitalized and deferred until the obligation is satisfied. Other costs include rent on pre-need offices and training rooms, and call center costs. Costs that are allocated based on a percentage include family service advisor compensation, bonuses, utilities and supplies that are all used to procure a pre-need sale. At-need Specialty Merchandise Revenue: At-need specialty merchandise is ordered from a third-party manufacturer. Generally, at-need specialty merchandise is ordered and received within 90 days of order. These orders are also 77 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 23) Revenues from Contracts with Customers (Continued) short-term in nature and are deferred until the product is received from the manufacturer and the obligation is satisfied. Deferred Pre-need Land Revenue: Revenue is recognized on pre-need land sales when the customer has paid at least 10% toward the land price. In cases, where customers pay less than 10%, the revenue and associated commissions are deferred until such time when 10% of the contract price is received. The following table disaggregates contract costs that are included in deferred policy and pre-need contract acquisition costs on the consolidated balances sheets. Years Ended December 31 2020 2019 Pre-need merchandise and services At-need specialty merchandise Pre-need land sales 24) Leases $ $ 3,601,638 5,302 - 3,606,940 3,590,266 10,688 - 3,600,954 $ $ On January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02 regarding Leases ASC Topic 842. See Note 1 regarding the adoption of this standard. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines if a contract is a lease at the inception of the contract. At the commencement date of a lease, the Company measures the lease liability at the present value of the lease payments over the lease term, discounted using the discount rate for the lease. The Company uses the rate implicit in the lease, if available, otherwise the Company uses its incremental borrowing rate. Also, at the commencement date of a lease, the Company measures the cost of the related right-of-use asset which consists of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date, minus any lease incentives received and any initial direct costs incurred by the Company. Information about the Nature of Leases and Subleases The Company leases office space and equipment from third-parties under various non-cancelable agreements. The Company has operating leases for office space for its segments in areas where it conducts business. The Company subleases some of this office space. The Company also has finance leases for certain equipment, such as copy machines and postage machines. The Company does not have any lease agreements with variable lease payments. The Company has not included any options to extend or terminate leases in the recognition of the right-of-use assets or lease liabilities because of the uncertainty that they will be exercised. No residual value guarantees have been provided to the Company. The Company does not have any restrictions or covenants imposed by leases. Leases that have not Commenced The Company does not have any leases that have not commenced that create significant rights or obligations for the Company. Related Party Lease Transactions The Company does not have any related party lease transactions that require disclosure as of December 31, 2020. 78 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 24) Leases (Continued) Short-term Leases The Company made an accounting policy election not to apply the recognition requirements of ASC 842 to short-term leases, which are leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying assets that the lessee is reasonably certain to exercise. Significant Judgments and Assumptions The Company does not use any significant judgments or assumptions regarding the determination of whether a contract contains a lease; the allocation of the consideration in a contract between lease and nonlease components; or the determination of the discount rates for the leases. The following table presents the Company’s total lease cost recognized in earnings, amounts capitalized as right-of- use assets and cash flows from lease transactions for the period presented: Year Ended December 31 2020 Year Ended December 31 2019 Lease Cost Finance lease cost: Amortization of right-of-use assets (1) Interest on lease liabilities (2) Operating lease cost (3) Short-term lease cost (3)(4) Sublease income (3) Total lease cost $ $ 58,576 7,341 5,408,737 222,311 (394,758) 5,302,207 38,351 9,001 5,706,490 233,318 (663,242) 5,323,918 $ $ Other Information Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Operating cash flows from finance leases Financing cash flows from finance leases Right-of-use assets obtained in exchange for lease liabilities: Operating leases Finance leases Weighted-average remaining lease term (in years) Finance leases Operating leases Weighted-average discount rate Finance leases Operating leases $ 5,293,901 7,341 56,982 $ 5,567,761 9,001 95,931 $ 5,631,193 8,494 $ 16,544,406 252,763 2.74 5.40 5.59% 4.87% 3.23 4.67 5.47% 5.06% (1) Included in Depreciation on property and equipment on the consolidated statements of earnings (2) Included in Interest expense on the consolidated statements of earnings (3) Included in Rent and rent related expenses on the consolidated statements of earnings (4) Includes leases with a term of 12 months or less 79 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 2020 and 2019 24) Leases (Continued) The following table presents the maturity analysis of the Company’s lease liabilities. Finance Leases Operating Leases Lease payments due in: 2021 2022 2023 2024 2025 Thereafter Total undiscounted lease payments Less: Discount on cash flows Present value of lease liabilities $ $ 46,898 34,458 27,220 4,354 692 - 113,622 (8,671) 104,951 4,344,756 3,004,271 2,088,028 1,567,924 837,526 2,938,906 14,781,411 (2,859,527) 11,921,884 $ $ The following table presents the Company’s right-of-use assets and lease liabilities for the period presented: Balance Sheet Location Year Ended December 31 2020 Year Ended December 31 2019 Operating Leases Right-of-use assets Other assets $ 11,663,245 $ 11,267,247 Lease liabilities Other liabilities and accrued expenses $ 11,921,884 $ 11,405,976 Finance Leases Right-of-use assets Accumulated amortization Right-of-use assets, net Property and equipment, net $ $ 254,276 (154,144) 100,132 248,565 (98,351) 150,214 $ $ Lease liabilities Bank and other loans payable $ 104,951 $ 153,439 The Company is also a lessor and has operating lease agreements with various tenants that lease its commercial and residential properties. See Note 2 for information about the Company’s real estate held for investment. 80 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities The Company’s Class A common stock trades on The Nasdaq Global Select Market under the symbol “SNFCA.” As of March 23, 2021, the closing stock price of the Class A common stock was $9.69 per share. The following were the high and low market closing stock prices for the Class A common stock by quarter as reported by NASDAQ since January 1, 2019: Period (Calendar Year) 2019 First Quarter Second Quarter Third Quarter Fourth Quarter 2020 First Quarter Second Quarter Third Quarter Fourth Quarter 2021 Price Range (1) High Low $5.21 $5.25 $5.07 $5.60 $6.10 $7.32 $6.98 $8.91 $4.39 $4.42 $4.44 $4.47 $3.67 $4.01 $5.55 $6.42 First Quarter (through March 23, 2021) $10.54 $8.48 _____________ (1) Stock prices have been adjusted retroactively for the effect of annual stock dividends. The Class C common stock is not registered or traded on a national exchange. See Note 12 of the Notes to Consolidated Financial Statements. The Company has never paid a cash dividend on its Class A or Class C common stock. The Company currently anticipates that all of its earnings will be retained for use in the operation and expansion of its business and does not intend to pay any cash dividends on its Class A or Class C common stock in the foreseeable future. Any future determination as to cash dividends will depend upon the earnings and financial position of the Company and such other factors as the Board of Directors may deem appropriate. A 5% stock dividend on Class A and Class C common stock has been paid each year from 1990 through 2019 and a 7.5% stock dividend was paid for year 2020. (cid:3) 81 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities (Continued) On September 7, 2018, the Board of Directors of the Company approved a Stock Repurchase Plan that authorized the repurchase of 300,000 shares of the Company's Class A Common Stock in the open market. The Stock Repurchase Plan was amended on December 4, 2020. The amendment authorized the repurchase of a total of 1,000,000 shares of the Company’s Class A Common Stock in the open market. The repurchased shares of Class A common stock will be held as treasury shares to be used as the Company's employer matching contribution to the Employee 401(k) Retirement Savings Plan and for shares held in the Deferred Compensation Plan. The following table shows the Company’s repurchase activity of its common stock during the three months ended December 31, 2020 under its Stock Repurchase Plan. (a) Total Number of Class A Shares Purchased 8,630 9,960 19,551 (b) Average Price Paid per Class A Share $ 6.46 $ 7.55 $ 8.36 (c) Total Number of Class A Shares Purchased as Part of Publicly Announced Plan or Program - - - Period 10/1/2020-10/31/2020 11/1/2020-11/30/2020 12/1/2020-12/31/2020 Total 38,141 $ 7.79 - (d) Maximum Number of Class A Shares that May Yet Be Purchased Under the Plan or Program 80,488 70,528 750,977 750,977 82 SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Market for the Registrant’s Common Stock, Related Stockholder Matters, and Issuer Purchases of Equity Securities (Continued) The graph below compares the cumulative total stockholder return of the Company’s Class A common stock with the cumulative total return on the Standard & Poor’s 500 Stock Index and the Standard & Poor’s Insurance Index for the period from December 31, 2016 through December 31, 2020. The graph assumes that the value of the investment in the Company’s Class A common stock and in each of the indexes was $100 at December 31, 2016 and that all dividends were reinvested. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of the Company’s Class A common stock. $600 $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 SNFC S & P 500 S & P Insurance SNFC S & P 500 S & P Insurance 12/31/16 100 100 100 12/31/17 85 119 114 12/31/18 88 112 99 12/31/19 104 144 125 12/31/20 160 168 121 The stock performance graph set forth above is required by the Securities and Exchange Commission and shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference, and shall not otherwise be deemed soliciting material or filed under such acts. 83 

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