SECURITY NATIONAL FINANCIAL CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company's operations over the last several years generally reflect three
strategies which the Company expects to continue: (i) increased attention to
"niche" insurance products, such as the Company's funeral plan policies and
traditional whole life products; (ii) increased emphasis on cemetery and
mortuary business; and (iii) capitalizing on an improving housing market by
originating mortgage loans. The Company has adjusted its strategies to respond
to the changing economic circumstances resulting from the COVID-19 pandemic.



Insurance Operations

The following table shows the condensed financial results for the Company's
insurance operations for the years ended December 31, 2021 and 2020. See Note 15
of the Notes to Consolidated Financial Statements.

                                                   Years ended December 31
                                                  (in thousands of dollars)
                                                                           2021 vs 2020 %
                                                                              Increase
                                        2021                2020             (Decrease)
Revenues from external
customers:
Insurance premiums                 $       100,255     $       93,021                    8 %
Net investment income                       56,092             54,811                    2 %
Gains (losses) on investments
and other assets                             4,555              2,089                  118 %

Other than temporary impairments               (40 )             (371 )    

           (89 )%
Other                                        2,152              1,492                   44 %
Total                              $       163,014     $      151,042                    8 %
Intersegment revenue               $         7,570     $        8,023                   (6 )%

Earnings before income taxes       $        14,973     $       11,923      

            26 %

Intersegment revenues for the Company's insurance operations were comprised
primarily of interest income from the warehouse lines provided to the Company's
mortgage lending affiliates to fund loans held for sale. Profitability in 2021
increased due to a $7,234,000 increase in insurance premiums, a $2,466,000
increase in gains on investments and other assets, a $1,280,000 increase in net
investment income, a $661,000 increase in other revenues, a $550,000 decrease in
selling, general and administrative expenses, a $331,000 decrease in other than
temporary impairments, and a $44,000 decrease in interest expense. This increase
was partially offset by a $4,377,000 increase in death, surrenders and other
policy benefits ($2,305,000 of which was related to COVID-19 related deaths), a
$2,695,000 increase in future policy benefits, a $1,993,000 increase in
amortization of deferred policy acquisition costs, and a $453,000 decrease

in
intersegment revenue.



In response to the COVID-19 pandemic, the Company's life insurance sales force
began using virtual and tele sales processes to market products. During the
third quarter 2021, the life insurance sales force returned to in person sales,
however, it continues to use virtual and tele sales where needed. As of December
31, 2021, approximately 75% of insurance operations office staff were working in
the office with the flexibility for hybrid-remote or completely remote working
arrangements as needed.



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Cemetery and Mortuary Operations

The following table shows the condensed financial results for the Company's
cemetery and mortuary operations for the years ended December 31, 2021 and 2020.
See Note 15 of the Notes to Consolidated Financial Statements.

                                                          Years ended December 31
                                                         (in thousands of dollars)
                                                                                  2021 vs 2020 %
                                             2021                2020          Increase (Decrease)
Revenues from external customers:
Cemetery revenues                       $        15,626     $       12,454                       25 %
Mortuary revenues                                 8,371              7,854                        7 %
Net investment income                             1,654                808                      105 %

Gains on investments and other assets             1,512               (163

)                   1028 %
Other                                               100                 94                        6 %
Total                                   $        27,263     $       21,047                       30 %
Earnings before income taxes            $         7,925     $        4,399                       80 %




Profitability in 2021 increased due to a $2,682,000 increase in cemetery
pre-need sales, a $1,675,000 increase in gains on investments and other assets
(which, in turn, was primarily attributable to a $1,092,000 increase in gains on
real estate sales) and a $582,000 increase in the fair value of equity
securities classified as restricted assets and cemetery perpetual care trust
investments, an $846,000 increase in net investment income, a $518,000 increase
in mortuary at-need sales, and a $490,000 increase in cemetery at-need sales.
This increase was partially offset by a $2,559,000 increase in selling, general
and administrative expenses, and a $451,000 increase in costs of goods sold.



In response to the COVID-19 pandemic, the cemetery and mortuary's pre-need sales
force began using virtual selling processes to market its products and services
including some in home sales as local regulations permitted. During the third
quarter 2021, the sales force returned mostly to in home sales, however, it
continues to use virtual selling where needed. Currently, the cemetery and
mortuary operations office staff works in the office with the flexibility for
hybrid-remote or completely remote working arrangements as needed.



Mortgage Operations



The Company's wholly owned subsidiaries, SecurityNational Mortgage and EverLEND
Mortgage Company, are mortgage lenders incorporated under the laws of the State
of Utah and approved and regulated by the Federal Housing Administration (FHA),
a department of the U.S. Department of Housing and Urban Development (HUD),
which originate mortgage loans that qualify for government insurance in the
event of default by the borrower, in addition to various conventional mortgage
loan products. SecurityNational Mortgage and EverLEND Mortgage originate and
refinance mortgage loans on a retail basis. Mortgage loans originated or
refinanced by the Company's mortgage subsidiaries are funded through loan
purchase agreements with Security National Life, Kilpatrick Life and
unaffiliated financial institutions.



The Company's mortgage subsidiaries receive fees from borrowers that are
involved in mortgage loan originations and refinancings, and secondary fees
earned from third party investors that purchase the mortgage loans originated by
the mortgage subsidiaries. Mortgage loans originated by the mortgage
subsidiaries are generally sold with mortgage servicing rights released to
third-party investors or retained by SecurityNational Mortgage. SecurityNational
Mortgage currently retains the mortgage servicing rights on approximately 54% of
its loan origination volume. These mortgage loans are serviced by either
SecurityNational Mortgage or an approved third-party sub-servicer. In December
2021, the Company ceased operations in EverLEND Mortgage and merged its
operations into SecurityNational Mortgage.



For the twelve months ended December 31, 2021 and 2020, SecurityNational
Mortgage originated 19,342 loans ($5,502,894,000 total volume) and 21,206 loans
($5,472,503,000 total volume), respectively. For the twelve months ended
December 31, 2021 and 2020, EverLEND Mortgage originated 323 loans ($108,295,000
total volume) and 511 loans ($154,511,000 total volume), respectively.



Record low mortgage interest rates that prevailed during the third quarter of
2020 and into the first quarter of 2021 trended higher through the second, third
and fourth quarters of 2021. Production volumes remained strong in the second,
third and fourth quarters of 2021, particularly for purchase mortgage
transactions but were below those experienced during the earlier low interest
rate period.



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The following table shows the condensed financial results for the Company's
mortgage operations for the years ended December 31, 2021 and 2020. See Note 15
of the Notes to Consolidated Financial Statements.

                                                    Years ended December 31
                                                   (in thousands of dollars)
                                                                            2021 vs 2020 %
                                        2021               2020          Increase (Decrease)
Revenues from external
customers:

Secondary gains from investors     $      230,417     $      231,759                       (1 )%
Income from loan originations              44,897             49,124                       (9 )%
Change in fair value of loans
held for sale                              (8,783 )           10,413                     (184 )%
Change in fair value of loan
commitments                                (3,113 )            7,637                     (141 )%
Net investment income                         519                711                      (27 )%
Gains on investments and other
assets                                        199                  0                      100 %
Other                                      16,282              9,732                       67 %
Total                              $      280,418     $      309,376                       (9 )%

Earnings before income taxes       $       28,903     $       55,128       

              (48 )%

Included in other revenues is service fee income. Profitability in 2021 has
decreased due to a $19,197,000 decrease in the fair value of loans held for
sale, a $15,009,000 increase in personnel expenses, a $10,750,000 decrease in
the fair value of loan commitments, a $4,662,000 increase in other expenses, a
$4,225,000 decrease in income from loan originations, a $1,342,000 decrease in
secondary gains from investors, a $664,000 increase in costs related to funding
mortgage loans, a $520,000 increase in advertising expenses, a $477,000 increase
in rent and rent related expenses, a $192,000 decrease in net investment income,
a $117,000 decrease in intersegment revenues, and a $90,000 increase in other
intersegment expenses. These decreases were partially offset by a $16,506,000
decrease in the provision for loan loss reserve, a $6,551,000 increase in other
revenues, a $5,917,000 decrease in commissions, a $1,281,000 decrease in
interest expense, a $470,000 decrease in intersegment interest expense, a
$199,000 increase in gains on investments and other assets, and a $97,000
decrease in depreciation on property and equipment.



In response to the COVID-19 pandemic, the mortgage operations has integrated
employee work from home accommodations into its standard operating procedures. A
large percentage of fulfillment employees are in office in 2021 compared to
2020, however the flexibility remains to accommodate in office or work from

home
functionality.

Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate. However, management
believes that the Company's reserve methodology and its current practice of
property preservation allow it to make reasonable estimates of potential losses
on mortgage loans sold. The estimated liability for indemnification losses is
included in other liabilities and accrued expenses and, as of December 31, 2021
and 2020, the balances were $2,447,000 and $20,584,000, respectively.



Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and
Lehman Brothers Holdings, see Part I, Item 3. Legal Proceedings.

Critical Accounting Policies and Estimates

The following is a brief summary of the Company's significant accounting
policies and a review of the Company's most critical accounting estimates. See
Note 1 of the Notes to Consolidated Financial Statements.

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Insurance Operations



In accordance with generally accepted accounting principles in the United States
of America ("GAAP"), premiums and other considerations received for interest
sensitive products are reflected as increases in liabilities for policyholder
account balances and not as revenues. Revenues reported for these products
consist of policy charges for the cost of insurance, administration charges,
amortization of policy initiation fees and surrender charges assessed against
policyholder account balances. Surrender benefits paid relating to these
products are reflected as decreases in liabilities for policyholder account
balances and not as expenses.

The Company receives investment income earned from the funds deposited into
account balances, a portion of which is passed through to the policyholders in
the form of interest credited. Interest credited to policyholder account
balances and benefit claims in excess of policyholder account balances are
reported as expenses in the consolidated financial statements.

Premiums and other considerations received for traditional life insurance
products are recognized as revenues when due. Future policy benefits are
recognized as expenses over the life of the policy by means of the provision for
future policy benefits.

The costs related to acquiring new business, including certain costs of issuing
policies and other variable selling expenses (principally commissions), defined
as deferred policy acquisition costs, are capitalized and amortized into
expense. For nonparticipating traditional life products, these costs are
amortized over the premium paying period of the related policies, in proportion
to the ratio of annual premium revenues to total anticipated premium revenues.
Such anticipated premium revenues are estimated using the same assumptions used
for computing liabilities for future policy benefits and are generally "locked
in" at the date the policies are issued. For interest sensitive products, these
costs are amortized generally in proportion to expected gross profits from
surrender charges and investment, mortality and expense margins. This
amortization is adjusted when the Company revises the estimate of current or
future gross profits or margins. For example, deferred policy acquisition costs
are amortized earlier than originally estimated when policy terminations are
higher than originally estimated or when investments backing the related
policyholder liabilities are sold at a gain prior to their anticipated maturity.



Death and other policyholder benefits reflect exposure to mortality risk and
fluctuate from year to year on the level of claims incurred under insurance
retention limits. The profitability of the Company is primarily affected by
fluctuations in mortality, other policyholder benefits, expense levels, interest
spreads (i.e., the difference between interest earned on investments and
interest credited to policyholders) and persistency. The Company has the ability
to mitigate adverse experience through sound underwriting, asset and liability
duration matching, sound actuarial practices, adjustments to credited interest
rates, policyholder dividends and cost of insurance charges.

Cemetery and Mortuary Operations

Pre-need sales of funeral services and caskets, including revenue and costs
associated with the sales of pre-need funeral services and caskets, are deferred
until the services are performed or the caskets are delivered.

Pre-need sales of cemetery interment rights (cemetery burial property),
including revenue and costs associated with the sales of pre-need cemetery
interment rights, are recognized in accordance with the retail land sales
provisions of GAAP. Under GAAP, recognition of revenue and associated costs from
constructed cemetery property must be deferred until a minimum percentage of the
sales price has been collected. Revenues related to the pre-need sale of
unconstructed cemetery property will be deferred until such property is
constructed and meets the criteria of GAAP, described above.



Pre-need sales of cemetery merchandise (primarily markers and vaults), including
revenue and costs associated with the sales of pre-need cemetery merchandise,
are deferred until the merchandise is delivered, fulfilling the performance
obligation.

Pre-need sales of cemetery services (primarily merchandise delivery and
installation fees and burial opening and closing fees), including 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 obtaining costs, including
costs incurred related to obtaining new pre-need cemetery and prearranged
funeral business are accounted for under the guidance of the provisions of 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
business, are deferred until the merchandise is delivered or services are
performed.



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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 company obligations remaining.



Mortgage Operations

Mortgage fee income consists of origination fees, processing fees, interest
income and certain other income related to the origination and sale of mortgage
loans. The Company has elected to use fair value accounting for all mortgage
loans that are held for sale. Accordingly, all revenues and costs are now
recognized when the mortgage loan is funded and any changes in fair value are
shown as a component of mortgage fee income.



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 mortgage loans held for investment at the lower
of cost or fair value and the previously recorded sales revenue that was to be
received from a third-party investor is written off against the loan loss
reserve. Any loan that later becomes delinquent is evaluated by the Company at
that time and any impairment is adjusted accordingly.



Determining 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. Market
value, while often difficult to determine and may contain significant
unobservable inputs, is based on the following guidelines:

? 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.

? 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 loan interest rate.




22

The appraised value of the real estate underlying the original mortgage loan
adds significance to the Company's determination of fair value because, if the
loan becomes delinquent, the Company has sufficient value to collect the unpaid
principal balance or the carrying value of the loan, thus minimizing credit
risk.



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.

Use of Significant Accounting Estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect reported amounts and
disclosures. It is reasonably possible that actual experience could differ from
the estimates and assumptions utilized which could have a material impact on the
financial statements. The following is a summary of our significant accounting
estimates, and critical issues that impact them:



Loan Commitments

The Company estimates the fair value of a mortgage loan commitment based on the
change in estimated fair value of the underlying mortgage loan, quoted
mortgage-backed security ("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 net of estimated commission expense. The
change in fair value of the underlying mortgage loan is measured from the date
the mortgage loan commitment is issued and is shown net of related 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.
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.



Deferred Acquisition Costs



Amortization of deferred policy acquisition costs ("DAC") for interest sensitive
products is dependent upon estimates of current and future gross profits or
margins on this business. Key assumptions used include the following: yield on
investments supporting the liabilities, amount of interest or dividends credited
to the policies, amount of policy fees and charges, amount of expenses necessary
to maintain the policies, amount of death and surrender benefits, and the length
of time the policies will stay in force.



For nonparticipating traditional life products, these costs are amortized over
the premium paying period of the related policies in proportion to the ratio of
annual premium revenues to total anticipated premium revenues. Such anticipated
premium revenues are estimated using the same assumption used for computing
liabilities for future policy benefits and are generally "locked in" at the

date
the policies are issued.



Value of Business Acquired



Value of business acquired ("VOBA") is the present value of estimated future
profits of the acquired business and is amortized similar to deferred
acquisition costs. The critical issues explained for deferred acquisition costs
would also apply for value of business acquired.

Mortgage Loans Foreclosed to Real Estate Held for Investment or Sale

These properties are recorded at the lower of cost or fair value upon
foreclosure. The Company believes that in an orderly market, fair value
approximates 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
estimated future policy benefits. Accordingly, the fair value determination is
generally weighted more heavily toward the rental analysis. The fair value is
also estimated by obtaining an independent appraisal, which typically considers
area comparable properties and property condition.



23






Future Policy Benefits

Reserves for future policy benefits for traditional life insurance products
requires the use of many assumptions, including the duration of the policies,
mortality experience, expenses, investment yield, lapse rates, surrender rates,
and dividend crediting rates.



These assumptions are made based upon historical experience, industry standards
and a best estimate of future results and, for traditional life products,
include a provision for adverse deviation. For traditional life insurance, once
established for a particular series of products, these assumptions are generally
held constant.



Unearned Premium Reserve



The universal life products the Company sells have significant policy initiation
fees (front-end load) that are deferred and amortized into revenues over the
estimated expected gross profits from surrender charges and investment,
mortality and expense margins. The same issues that impact deferred acquisition
costs would apply to unearned revenue.

Premium Deficiency and Loss Recognition Testing

At least annually, the Company tests the adequacy of the net benefit reserves
(liability for future policy benefits, net of DAC and VOBA) recorded for life
insurance and annuity products. The Company tests for recoverability by using
the Company's current best-estimate assumptions as to policyholder mortality,
persistency, maintenance expenses and invested asset returns. These tests
evaluate whether the present value of future contract-related cash flows will
support the capitalized DAC and VOBA assets. These cash flows consist primarily
of premium income, less benefits and expenses. If the current contract
liabilities plus the present value of future premiums is greater than the sum of
the present values of future policy benefits, commissions, and expenses plus the
current DAC and VOBA less unearned premium reserve balances, then the
capitalized assets are deemed recoverable. The present values are calculated
using the best estimate of the after tax net investment earned rate.

Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future
Cost of Pre-need Sales

The revenue and cost associated with the sales of pre-need cemetery merchandise
and funeral services are deferred until the merchandise is delivered or the
service is performed.

The Company, through its cemetery and mortuary operations, provides a guaranteed
funeral arrangement 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 or 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.



Mortgage Servicing Rights



Mortgage Service 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 the 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 Company initially accounts for MSRs at fair value and
subsequently accounts for them using the amortization method. 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. The Company periodically assesses MSRs accounted for using the
amortization method for impairment.

Mortgage Allowance for Loan Losses and Loan Loss Reserve

The Company provides for losses on its mortgage loans held for investment
through an allowance for loan losses (a contra-asset account) and through the
mortgage loan loss reserve (a liability account). The allowance for loan losses
is an allowance for losses on the Company's mortgage loans held for investment.
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. 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.



24






The mortgage loan loss reserve is an estimate of probable losses at the balance
sheet date that the Company will realize in the future on mortgage loans sold to
third-party investors. The Company may be required to reimburse third-party
investors for costs associated with early payoff of loans within 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 in the event of defects
in the representations and warranties made at loan sale. 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. The estimated liability for indemnification losses
is included in other liabilities and accrued expenses.

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

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities require various estimates and judgments and
may be affected favorably or unfavorably by various internal and external
factors. These estimates and judgments occur in the calculation of certain
deferred tax assets and liabilities that arise from temporary differences in the
recognition of revenues and expenses for tax and financial reporting purposes
and in estimating the ultimate amount of deferred tax assets recoverable in
future periods. Factors affecting the deferred tax assets and liabilities
include, but are not limited to, changes in tax laws, regulations and/or rates,
changing interpretations of existing tax laws or regulations, and changes to
overall levels of pre-tax earnings. Changes in these estimates, judgments or
factors may result in an increase or decrease to the Company's deferred tax
assets and liabilities with a related increase or decrease in the Company's
provision for income taxes.

Results of Consolidated Operations

2021 Compared to 2020

Total revenues decreased by $10,768,000, or 2.2%, to $470,695,000 for 2021 from
$481,463,000 for the fiscal year 2020. Contributing to this decrease in total
revenues was a $35,515,000 decrease in mortgage fee income. This decrease in
total revenues was offset by a $7,234,000increase in insurance premiums and
other considerations, a $7,218,000 increase in other revenues, a $4,339,000
increase in gains on investments and other assets, a $3,690,000 increase in net
cemetery and mortuary sales, a $1,935,000 increase in net investment income, and
a $331,000 decrease in other than temporary impairments.



Mortgage fee income decreased by $35,515,000, or 11.9%, to $263,418,000 for
2021, from $298,933,000 for 2020. This decrease was primarily due to a
$29,947,000 decrease in the fair value of loans held for sale and loan
commitments, a $6,951,000 decrease in loan fees and interest income, and a
$1,342,000 decrease in secondary gains from mortgage loans sold to third-party
investors into the secondary market. This decrease in mortgage fee income was
partially offset by a $2,727,000 decrease in the provision for loan loss
reserve.



Insurance premiums and other considerations increased by $7,234,000, or 7.8%, to
$100,255,000 for 2021, from $93,021,000 for 2020. This increase was due to an
increase of $1,859,000 in renewal premiums due to the growth of the Company in
recent years, particularly in whole life products, which resulted in more
premium paying policies in force and an increase of $5,375,000 in first year
premiums as a result of increased preneed insurance sales.



Net investment income increased by $1,935,000, or 3.4%, to $58,265,000 for 2021,
from $56,330,000 for 2020. This increase was primarily attributable to a
$3,086,000 increase in mortgage loan interest, a $1,224,000 increase in
insurance assignment income, and a $389,000 increase in rental income from real
estate held for investment. This increase was partially offset by a $1,463,000
decrease in fixed maturity securities income, a $835,000 increase in investment
expenses, a $196,000 decrease in equity securities income, a $191,000 decrease
in interest on cash and cash equivalents, and an $84,000 decrease in policy

loan
income.



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Net mortuary and cemetery sales increased by $3,690,000, or 18.2%, to
$23,997,000 for 2021, from $20,307,000 for 2020. This increase was primarily due
to a $2,682,000 increase in cemetery pre-need sales, a $518,000 increase in
mortuary at-need sales, and a $490,000 increase in cemetery at-need sales.

Gains on investments and other assets increased by $4,339,000, or 225.3%, to
$6,265,000 for 2021, from $1,926,000 for 2020. This increase in gains on
investments and other assets was primarily due to a $1,940,000 increase in gains
on other assets mostly attributable to gains recognized on the sale of mortgage
loans held for investment, a $1,922,000 increase in gains on equity securities
mostly attributable to increases in the fair value of these equity securities,
and a $477,000 increase in gains on fixed maturity securities.



Other revenues increased by $7,218,000, or 63.8%, to $18,535,000 for 2021 from
$11,317,000 for 2020. This increase was primarily attributable to an increase in
servicing fee revenue.

Total benefits and expenses were $418,895,000, or 89.0% of total revenues for
2021, as compared to $410,013,000, or 85.2% of total revenues for 2020.

Death benefits, surrenders and other policy benefits, and future policy benefits
increased by an aggregate of $7,072,000, or 8.2%, to $93,482,000 for 2021, from
$86,410,000 for 2020. This increase was primarily the result of a $4,207,000
increase in death benefits ($2,305,000 for COVID-19 related deaths), a
$2,695,000 increase in future policy benefits, and a $170,000 increase in
surrender and other policy benefits.



Amortization of deferred policy and pre-need acquisition costs and value of
business acquired increased by $1,836,000, or 12.8%, to $16,143,000 for 2021,
from $14,307,000 for 2020. This increase was primarily due to an increase in the
average outstanding balance of deferred policy and pre-need acquisition costs.



Selling, general and administrative expenses increased by $974,000, or 0.3%, to
$298,438,000 for 2021, from $297,464,000 for 2020. This increase was primarily
the result of a $15,750,000 increase in personnel expenses, a $5,735,000
increase in other expenses, a $1,245,000 increase in advertising expenses, a
$664,000 increase in costs related to funding mortgage loans, and a $369,000
increase in rent and rent related expenses. This increase was partially offset
by a $16,506,000 decrease in the provision for loan loss reserve, a $6,140,000
decrease in commissions, and a $143,000 decrease in depreciation on property and
equipment.

Interest expense decreased by $1,451,000, or 16.9%, to $7,128,000 for 2021, from
$8,579,000 for 2020. This decrease was primarily due to a decrease of $1,281,000
in interest expense on mortgage warehouse lines for loans held for sale.



Cost of goods and services sold of the cemeteries and mortuaries increased by
$451,000, or 13.9%, to $3,704,000 for 2021, from $3,253,000 for 2020. This
increase was primarily due to a $232,000 increase in cemetery at-need sales, a
$151,000 increase in cemetery pre-need sales, and a $68,000 increase in mortuary
at-need sales.

Income tax expense decreased by $3,572,000, or 22.5%, to $12,282,000 for 2021,
from $15,854,000 for 2020. This decrease was primarily due to a decrease in
earnings before income taxes for 2021 compared to 2020.

Risks

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

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



26






Mortgage Industry Risks. Developments in the mortgage industry and credit
markets can adversely affect the Company's ability to sell its mortgage loans to
investors, which can impact the Company's financial results by requiring it to
assume the risk of holding and servicing any unsold loans.



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



During the twelve months ended December 31, 2021 and 2020 the Company increased
its loan loss reserve by $2,211,000 and $4,938,000, respectively, for loan
originations, and the charges have been included in mortgage fee income. During
the twelve months ended December 31, 2021 and 2020 the Company increased its
loan loss reserve by an additional $-0- and $16,506,000, respectively, to
account for changes in estimates specific to settlements of loan losses. The
estimated liability for indemnification losses is included in other liabilities
and accrued expenses and, as of December 31, 2021 and 2020, the balances were
$2,447,000 and $20,584,000, respectively. The Company believes the loan loss
reserve represent probable loan losses incurred as of December 31, 2021. There
is a risk, however, that future loan losses may exceed the loan loss reserve.



As of December 31, 2021, the Company's mortgage loans held for investment
portfolio consisted of mortgage loans in an aggregate principal amount of
$4,272,000 with delinquencies exceeding 90 days. Of this amount, loans with an
aggregate principal amount of $497,000 were in foreclosure proceedings. The
Company has not received or recognized any interest income on the $4,272,000 in
mortgage loans with delinquencies exceeding 90 days. During the twelve months
ended December 31, 2021 and 2020, the Company decreased and increased its
allowance for loan losses by $305,000 and by $552,000, respectively, which was
charged to bad debt expense and included in selling, general and administrative
expenses for the period. The allowances for loan losses on the Company's held
for investment portfolio as of December 31, 2021 and 2020 were $1,700,000 and
$2,005,000, respectively.

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



Mortality and Morbidity Risks. The Company's actuarial assumptions differing
from actual mortality and morbidity experienced may mean that the Company's
relevant products sold were underpriced, may require the Company to liquidate
insurance or other claims earlier than planned, and have other potentially
adverse consequences to the business. The Company aims to minimize this risk
through sound underwriting practices, asset and liability duration matching, and
sound actuarial practices.



COVID-19. During 2020, the outbreak of COVID-19 had spread worldwide and was
declared a global pandemic by the World Health Organization on March 11, 2020.
COVID-19, and its variants, pose a threat to the health and economic well-being
of the Company's employees, customers, and vendors. The Company continues to
closely monitor developments relating to the ongoing COVID-19 pandemic and
assessing its impact on the Company's business. The continued uncertainty
surrounding the COVID-19 pandemic has had and continues to have a significant
impact on the global economy and financial markets. Governments and businesses
have taken numerous measures to try to contain the virus and its variants, which
include the implementation of travel bans, self-imposed quarantine periods,
social distancing, and various mask and vaccine mandates. These measures have
disrupted and will continue to disrupt businesses globally. Governments and
central banks have reacted with significant monetary and fiscal interventions
designed to stabilize the economic conditions.



27






Like most businesses, COVID-19 has impacted the Company, including the adoption
of work from home arrangements and a restructuring of selling techniques for its
products and services. The Company also experienced increased expenses for
cleaning services of its offices. Throughout 2021 the Company continued to adapt
to the impact of COVID-19. The Company cannot, with any certainty predict the
severity or duration with which COVID-19 will impact the Company's business,
financial condition, results of operations, and cash flows. To the extent the
COVID-19 pandemic adversely affects the Company's business, financial condition,
and results of operations, it may also have the effect of heightening many of
the other Company risks. These uncertainties have the potential to negatively
affect the risk of credit default for the issuers of the Company's fixed
maturity debt securities and individual borrowers with mortgage loans held

by
the Company.

The Company has implemented risk management, business continuity plans and has
taken preventive measures and other precautions, including some remote work
arrangements. Such measures and precautions have enabled the Company to continue
to conduct business.

Estimates. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.



Material estimates that are particularly susceptible to significant changes in
the near term are those used in determining the value of derivative assets and
liabilities; those used in determining deferred acquisition costs and the value
of business acquired; those used in determining the value of mortgage loans
foreclosed to real estate held for investment; those used in determining the
liability for future policy benefits and unearned revenue; those used in
determining the estimated future costs for pre-need sales; those used in
determining the value of mortgage servicing rights; those used in determining
allowances for loan losses for mortgage loans 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.

Liquidity and Capital Resources

The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the sale or maturity of
investments. The mortgage subsidiaries realize cash flow from fees generated by
originating and refinancing mortgage loans and fees on mortgage loans held for
sale that are sold to investors. It should be noted that current conditions in
the financial markets and economy caused by the COVID-19 pandemic may affect the
realization of these expected cash flows. The Company considers these sources of
cash flow to be adequate to fund future policyholder and cemetery and mortuary
liabilities, which generally are long-term, and adequate to pay current
policyholder claims, annuity payments, expenses related to the issuance of new
policies, the maintenance of existing policies, debt service, and to meet
current operating expenses.

During the twelve months ended December 31, 2021 and 2020, the Company's
operations provided cash of $144,638,000 and used cash of $129,627,000,
respectively. This change from cash used in operations to cash from operations
was primarily due to the decreased originations of mortgage loans held for sale.

The Company's liability for future policy benefits is expected to be paid out
over the long-term due to the Company's market niche of selling funeral plans.
Funeral plans are small face value life insurance policies that payout upon a
person's death to cover funeral burial costs. Policyholders generally keep these
policies in force and do not surrender them prior to death. Because of the
long-term nature of these liabilities, the Company is able to hold to maturity
its bonds, real estate, and mortgage loans thus reducing the risk of liquidating
these long-term investments as a result of any sudden changes in their fair
values.



The Company attempts to match the duration of invested assets with its
policyholder and cemetery and mortuary liabilities. The Company may sell
investments other than those held to maturity in the portfolio to help in this
timing matching. The Company purchases short-term investments on a temporary
basis to meet the expectations of short-term requirements of the Company's
products. The Company's investment philosophy is intended to provide a rate of
return, which will persist during the expected duration of policyholder and
cemetery and mortuary liabilities regardless of future interest rate movements.



28






The Company's investment policy is also to invest predominantly in fixed
maturity securities, real estate, mortgage loans, and warehousing of mortgage
loans held for sale on a short-term basis before selling the loans to investors
in accordance with the requirements and laws governing the life insurance
subsidiaries. Bonds owned by the insurance subsidiaries amounted to $259,005,000
(at estimated fair value) and $294,384,000 (at estimated fair value) as of
December 31, 2021 and 2020, respectively. This represented 31.5% and 38.0% of
the total investments as of December 31, 2021, and 2020, respectively.
Generally, all bonds owned by the life insurance subsidiaries are rated by the
National Association of Insurance Commissioners. Under this rating system, there
are six categories used for rating bonds. At December 31, 2021, 3.9% (or
$9,991,000) and at December 31, 2020, 4.2% (or $12,418,000) of the Company's
total bond investments were invested in bonds in rating categories three through
six, which are considered non-investment grade.

See Note 2 of the Notes to Consolidated Financial Statements for the schedule of
the maturity of fixed maturity securities available for sale and for the
schedule of principal payments for mortgage loans held for investment.

See Note 7 of the Notes to Consolidated Financial Statements for a description
of the Company's sources of liquidity.

If market conditions were to cause interest rates to change, the fair value of
the Company's fixed income portfolio (of approximately $536,594,000), which
includes bonds, preferred stocks and mortgage loans held for investment, could
change by the following amounts based on the respective basis point swing (the
change in the fair values were calculated using a modeling technique):



                                      -200 bps      -100 bps      +100 bps  

+200 bps
Change in Fair Value (in thousands) $ 33,663 $ 16,294 $ (18,444 ) $ (35,813 )

The Company is subject to risk-based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At December 31, 2021
and 2020, the life insurance subsidiaries were in compliance with the regulatory
criteria.

The Company's total capitalization of stockholders' equity, and bank loans and
other loans payable was $551,054,000 as of December 31, 2021, as compared to
$561,811,000 as of December 31, 2020. Stockholders' equity as a percent of total
capitalization was 54.4% and 47.0% as of December 31, 2021 and December 31,
2020, respectively. Bank loans and other loans payable decreased by $46,537,000
for the twelve months ended December 31, 2021 as compared to December 31, 2020,
and stockholders' equity increased by $35,780,000 for the twelve months ended
December 31, 2021 as compared to December 31, 2020, thus causing the increase in
the stockholders' equity percentage.

Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance was 4.8% in 2021 as compared
to a rate of 5.9% for 2020.

The combined statutory capital and surplus of the Company's life insurance
subsidiaries was $82,823,000 and $78,493,000 as of December 31, 2021 and 2020,
respectively. The life insurance subsidiaries cannot pay a dividend to their
parent company without the approval of state insurance regulatory authorities.



Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements to encourage companies to provide prospective
information about their businesses without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in such statements. The
Company desires to take advantage of the "safe harbor" provisions of the act.



29






This Annual Report on Form 10-K contains forward-looking statements, together
with related data and projections, about the Company's projected financial
results and its future plans and strategies. However, actual results and needs
of the Company may vary materially from forward-looking statements and
projections made from time to time by the Company on the basis of management's
then-current expectations. The business in which the Company is engaged involves
changing and competitive markets, which may involve a high degree of risk, and
there can be no assurance that forward-looking statements and projections will
prove accurate.



Factors that may cause the Company's actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include among others, the following possibilities: (i)
heightened competition, including the intensification of price competition, the
entry of new competitors, and the introduction of new products by new and
existing competitors; (ii) adverse state and federal legislation or regulation,
including decreases in rates, limitations on premium levels, increases in
minimum capital and reserve requirements, benefit mandates and tax treatment of
insurance products; (iii) fluctuations in interest rates causing a reduction of
investment income or increase in interest expense and in the market value of
interest rate sensitive investment; (iv) failure to obtain new customers, retain
existing customers or reductions in policies in force by existing customers; (v)
higher service, administrative, or general expenses due to the need for
additional advertising, marketing, administrative or management information
systems expenditures; (vi) loss or retirement of key executives or employees;
(vii) increases in medical costs; (viii) changes in the Company's liquidity due
to changes in asset and liability matching; (ix) restrictions on insurance
underwriting based on genetic testing and other criteria; (x) adverse changes in
the ratings obtained by independent rating agencies; (xi) failure to maintain
adequate reinsurance; (xii) possible claims relating to sales practices for
insurance products and claim denials; (xiii) adverse trends in mortality and
morbidity; (xiv) deterioration of real estate markets; and (xv) lawsuits in the
ordinary course of business.

Off-Balance Sheet Agreements

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, 2021, the Company's commitments were
approximately $329,903,000 for these loans, of which $179,673,000 had been
funded. The Company advances funds once the work has been completed and an
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 generally
range between six and eighteen months.



Contractual Obligations

In the ordinary course of the Company's operations, the Company enters into
certain contractual obligations. Such obligations include operating leases for
office space, agreements with respect to borrowed funds and future policy
benefits. See Notes 7, 22, 24 of the Notes to Consolidated Financial Statements
for more information about these obligations.



Casualty Insurance Program



In conjunction with the Company's casualty insurance program, limited equity
interests are held in a captive insurance entity. This program permits the
Company to self-insure a portion of losses, to gain access to a wide array of
safety-related services, to pool insurance risks and resources in order to
obtain more competitive pricing for administration and reinsurance and to limit
its risk of loss in any particular year. The maximum exposure to loss related to
the Company's involvement with this entity is limited to approximately $443,758,
which is collateralized under a standby letter of credit issued on the insurance
entity's behalf. See Note 10, "Reinsurance, Commitments and Contingencies," for
additional discussion of commitments associated with the insurance program. The
Company does not expect any material losses to result from the issuance of the
standby letter of credit because claims are not expected to exceed premiums
paid.