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Item 8. Financial Statements and Supplementary Data

2021-03-31 compared with 2020-03-30 · 1005 added, 1200 removed, 1552 unchanged (59% of the section changed)

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Notes to Consolidated Financial Statements

Deloitte & Touche LLP

111 South Main Street

Salt Lake City, UT 84111

+1 801 328 4706

+1 801 366 7900

www.deloitte.com

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Security National Financial Corporation:

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, 2019 and 2018, 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, 2019 and 2018, 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.

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.

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.

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.

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.

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.

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.

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.

/s/ Deloitte & Touche LLP

Salt Lake City, UT

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Fixed maturity securities, available for sale, at estimated fair value

Fixed maturity securities, held to maturity, at amortized cost

Equity securities, available for sale, at estimated fair value

$ 294,656,679

$ 355,977,820

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)

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Future policy benefits and unpaid claims

$ 844,790,087

$ 825,600,918

Unearned premium reserve

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1,284,953,425

1,137,733,470

Stockholders’ Equity

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CONSOLIDATED STATEMENTS OF EARNINGS

Years Ended December 31

Mortgage fee income

$ 298,933,110

$ 131,976,082

Insurance premiums and other considerations

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Gains on investments and other assets

Mortgage fee income

Other than temporary impairments on investments

Total revenues

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Depreciation on property and equipment

Provision for loan loss reserve

Costs related to funding mortgage loans

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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)

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)

(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.

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.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

Other comprehensive income:

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Unrealized gains on restricted assets

Unrealized gains on cemetery perpetual care trust investments

Unrealized gains (losses) on cemetery perpetual care trust investments

Foreign currency translation adjustments

Other comprehensive income, before income tax

Income tax benefit (expense)

Other comprehensive income (loss), net of income tax

Income tax expense

Other comprehensive income, net of income tax

Comprehensive income

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Comprehensive

Income (Loss)

Class A Common Stock

Class C Common Stock

Additional Paid-in Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Treasury Stock

Balance at December 31, 2018

Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)

Other comprehensive loss

Other comprehensive income

Stock based compensation expense

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31

Cash flows from operating activities:

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

Adjustments to reconcile net earnings to net cash used in operating activities:

Gains on investments and other assets

Other than temporary impairments on investments

Provision for loan losses and doubtful accounts

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Net gains on sales of loans held for sale

(188,893,379)

Change in assets and liabilities:

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Other operating assets and liabilities

Net cash provided by (used in) operating activities

Net cash used in operating activities

(129,627,207)

Cash flows from investing activities:

Purchases of fixed maturity securities

Calls and maturities of fixed maturity securities

(110,601,438)

Sales, calls and maturities of fixed maturity securities

Purchase of equity securities

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Mortgage loans held for investment, other investments and policy loans made

(682,170,126)

(572,171,590)

Payments received for mortgage loans held for investment, other investments and policy loans

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Sales of property and equipment

Purchases of real estate held for investment

Sales of real estate held for investment

Purchases of real estate

Sales of real estate

Cash received for reinsurance assumed

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31

Cash flows from financing activities:

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Repayment of bank loans

Proceeds from bank borrowings

(174,865,813)

(236,790,722)

Proceeds from bank loans

Net change in warehouse line borrowings for loans held for sale

Net change in line of credit borrowings

Net cash provided by financing activities

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Cash, cash equivalents, restricted cash and restricted cash equivalents at end of year

$ 115,465,086

$ 137,735,673

Supplemental Disclosure of Cash Flow Information:

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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

Transfer of real estate held for investment to property and equipment

Mortgage loans held for investment foreclosed into real estate held for investment

Accrued real estate construction costs and retainage

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 Beta Capital Corporation, Probst Family Funerals and Cremations and Heber Valley Funeral Home and Kilpatrick Life

Insurance Company

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

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:

Years Ended December 31

Cash and cash equivalents

$ 106,219,429

$ 127,754,719

Restricted assets

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Total cash, cash equivalents, restricted cash and restricted cash equivalents

$ 115,465,086

$ 137,735,673

See accompanying notes to consolidated financial statements.

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General Overview of Business

Security National Financial Corporation and its wholly owned subsidiaries (the “Company”) operate in three main business segments:

Security National Financial Corporation and its wholly owned subsidiaries (the “Company”) operate in three reportable business segments:

life insurance, cemetery and mortuary, and mortgages.

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.

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.

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

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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.

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.

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 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 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

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.

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.

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.

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.

instead of amortized cost.

Fixed maturity securities held to maturity are carried at cost, adjusted for amortization of premium or accretion of discount.

Although the Company has the ability and intent to hold these

investments to maturity, infrequent and unusual conditions could occur under which it would sell certain of these securities.

Those conditions include unforeseen changes in asset quality, significant changes in tax laws, and changes in regulatory

capital requirements or permissible investments.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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1) Significant Accounting Policies (Continued)

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.

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.

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.

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.

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.

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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.

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.

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.

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 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.

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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.

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.

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.

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.

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

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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.

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:

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

· Failure to deliver original documents specified by the investor,

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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.

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.

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· 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.

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

Fair value is often difficult to determine, but is based on the following:

· For loans that are committed, the Company uses the commitment price.

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· 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 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.

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.

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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 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 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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

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 r elating

to any guarantee or recourse provisions.

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.

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.

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 more particularly described as follows:

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.

make whole amount is calculated as the difference between the original unpaid principal balance, 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.

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.

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Additional information related to the Loan Loss Reserve is included in Note 3.

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”);

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 elected to fund its medical benefit safe-harbor limit based on the qualified direct costs, and has included this amount as a component of restricted cash.

and a surplus note with Security National Life (which is eliminated in consolidation).

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.

Of the six cemeteries owned by the Company, four cemeteries are endowment care properties.

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.

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 the installation of roads, water lines, landscaping and other costs to establish a marketable cemetery lot.

costs of developing the cemetery are shown as an asset on the balance sheet.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

Deferred Policy Acquisition Costs and Value of Business Acquired

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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.

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.

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.

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.

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.

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;

to borrower inquiries;

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.

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 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.

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 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

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.

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.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

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).

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.

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

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Leasehold improvements paid for by the Company as a lessee are amortized over the lesser of the useful life or remaining lease terms.

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.

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.

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.

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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)

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.

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.

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.

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 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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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1) Significant Accounting Policies (Continued)

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.

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.

banking derivatives are shown in other assets and other liabilities and accrued expenses on the consolidated balance sheets.

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 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 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.

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.

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.

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.

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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.

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.

issues that impact recovery of mortgage loan operations are interest rate risk, loan underwriting, new regulations and the overall economy.

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

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.

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.

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

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 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.

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:

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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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.

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.

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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.

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.

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 the success of the completed project and the ability of the borrower to secure 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

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

Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure 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.

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.

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.

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.

Policy benefit claims are charged to expense in the period the claims are incurred.

Increases in future policy benefits are charged to expense.

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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.

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 2019 and 2018.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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1) Significant Accounting Policies (Continued)

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.

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.

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.

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.

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.

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.

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.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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1) Significant Accounting Policies (Continued)

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

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.

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.

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.

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.

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 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.

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.

Estimated interest and penalties related to uncertain tax penalties are included as a component of other expenses.

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 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 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.

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 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

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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.

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

SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

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.

The Company expenses advertising costs as incurred.

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Accounting Standards Adopted in 2020

“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.

“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

“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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

1) Significant Accounting Policies (Continued)

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.

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 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.

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 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.

Company recognized a right-of-use asset and related lease liability for approximately $12,076,000 on January 1, 2019.

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

“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.

“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.

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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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

1) Significant Accounting Policies (Continued)

“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.

This new authoritative guidance will be effective for the Company on January 1, 2020.

The adoption of this standard will not materially impact the Company’s financial statements.

“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

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.

“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.

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.

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Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

December 31, 2020 :

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Total fixed maturity securities available for sale

$ 265,150,484

$ 294,656,679

Equity securities at estimated fair value:

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Total mortgage loans held for investment

$ 249,343,936

Real estate held for investment - net of accumulated depreciation:

Total real estate held for investment

$ 131,684,453

Real estate held for sale:

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Total investments

$ 773,945,298

(1) Includes $866,900 of Membership stock and $1,639,700 of Activity stock due to short-term borrowings.

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Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

December 31, 2019 :

Fixed maturity securities held to maturity at amortized cost:

Fixed maturity securities, available for sale, at estimated fair value:

Treasury securities and obligations of U.S.

Government agencies

$ 142,740,641

$ 143,347,611

Obligations of states and political subdivisions

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Redeemable preferred stock

Total fixed maturity securities held to maturity

Total fixed maturity securities available for sale

$ 338,629,810

$ 355,977,820

Equity securities at estimated fair value:

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Mortgage loans held for investment at amortized cost:

$ 113,043,965

Residential construction

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Allowance for loan losses

Net discounts

Total mortgage loans held for investment

$ 236,694,546

Real estate held for investment - net of accumulated depreciation:

Total real estate held for investment

$ 102,756,946

Real estate held for sale:

Total real estate held for sale

Other investments and policy loans at amortized cost:

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Total investments

$ 781,876,605

(1) Includes $894,300 of Membership stock and $-0- of Activity stock due to short-term borrowings.

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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, 2019 and carried at amortized cost at December 31, 2018.

unrealized losses were primarily related to interest rate fluctuations.

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:

Twelve Months

Unrealized Losses for Less than Twelve Months

Unrealized Losses for More than Twelve Months

Total Unrealized Loss

At December 31, 2020

Treasury Securities and Obligations of U.S.

Government Agencies

Obligations of States and Political Subdivisions

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At December 31, 2019

Treasury Securities and Obligations of U.S.

Treasury Securities and Obligations

Government Agencies

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Mortgage and other asset-backed securities

Redeemable preferred stock

Total unrealized losses

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There were 93 securities with fair value of 98.9% of amortized cost at December 31, 2019.

No credit losses

have been recognized for the years ended December 31, 2019 and 2018.

On a quarterly basis, the Company evaluates its fixed maturity securities classified as available for sale or held to maturity.

This evaluation includes a review of

current ratings by the National Association of Insurance Commissions (“NAIC”).

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.

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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

Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment.

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.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

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2) Investments (Continued)

The amortized cost and estimated fair value of fixed maturity securities at December 31, 2019, 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.

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

Balance of credit-related OTTI at December 31

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.

Estimated Fair

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Redeemable preferred stock

Total held to maturity

$ 265,150,484

$ 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 $60,000,000, par value, of United States Treasury

fixed maturity securities with the FHLB at December 31, 2019.

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, 2019, the Company did not have any outstanding amounts owed to the FHLB and its estimated

maximum borrowing capacity was $57,727,738.

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.

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, and other than temporary impairments from investments and other assets for the years ended December 31 are summarized as follows:

Fixed maturity securities held to maturity:

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:

Gains (losses) on securities sold

Unrealized gains (losses) on securities held at the end of the period

Gains on securities sold

Unrealized gains on securities held at the

end of the period

Other assets:

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Gross realized losses

Includes a one-time gain of $22,252,000 from the sale of Dry Creek at East Village Apartments.

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.

The carrying amount of held to maturity securities sold was $4,950,041 and $5,808,244, for the years ended December 31, 2019 and 2018, respectively.

The net realized gain related to these sales was

$43,039, for the year ended December 31, 2019, and the net realized loss related to these sales was $268,823, for the year ended December 31, 2018.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

2) Investments (Continued)

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

Fixed maturity securities available for sale

Equity securities

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Net investment income

Net investment income includes net investment income earned by the restricted assets of the cemeteries and mortuaries of $448,754 and $386,659 for the years ended December 31, 2019 and 2018,

respectively.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2020 and 2019

2) Investments (Continued)

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 on equity securities) at December 31, 2019, other than investments issued or guaranteed by

the United States Government.

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.

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.

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

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

2) Investments (Continued)

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 industrial warehouses, office buildings, retail centers, and includes the redevelopment and

expansion of its corporate campus (“Center53”) in Salt Lake City, Utah.

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.

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 borrowings was approximately $87,815,000 and $84,880,000 as of December 31, 2019 and 2018, respectively.

The associated bank loan carrying values totaled approximately $54,917,000 and $52,237,000 as of December 31, 2019 and 2018, respectively.

During the years ended December 31, 2019 and 2018, the Company recorded impairment losses on commercial real estate held for investment of $2,768,979 and $-0-, respectively.

The impairment loss of

$2,768,979 recognized relates to an office building in Kansas held by the life insurance segment for which the Company received an unsolicited bid from a potential buyer that was significantly below the building’s carrying value.

Although management

did not consider the offer as representative of fair value, the Company evaluated the unsolicited bid as a potential impairment indicator.

The Company performed an impairment analysis internally and obtained an independent appraisal from an outside

commercial real estate valuation firm, concluding that the fair value of the building was less than its carrying value.

This office building was recently listed for sale and is included in commercial real estate held for sale.

This impairment loss is

included in gains (losses) on investments and other assets on the consolidated statements of earnings.

The Company’s commercial real estate held for investment for the years ended December 31, is summarized as follows:

Net Ending Balance

Total Square Footage

Undeveloped Land

Improved commercial pad

Includes Center53 phase 1 completed in July 2017

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.

SECURITY NATIONAL FINANCIAL CORPORATION

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2) Investments (Continued)

The Company’s commercial real estate held for investment for the years ended December 31, is summarized as follows:

Net Ending Balance

Total Square Footage

$ 106,840,710

(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:

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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.

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 portfolio of residential homes primarily as a result of loan foreclosures.

The strategy has been to lease these homes to produce cash flow, and allow time for the economic

fundamentals to return to the various markets.

As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns.

The Company also invests in residential

subdivision developments.

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.

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, 2019 and 2018, the Company recorded impairment losses on residential real estate held for investment of $700,134 and $486,457, respectively.

These impairment

losses are included in gains (losses) on investments and other assets on the consolidated statements of earnings.

The net ending balance of foreclosed residential real estate included in residential real estate held for investment is approximately $12,434,000 and $23,532,000 as of December 31, 2019 and 2018,

respectively.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

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Net Ending Balance

Includes subdivision developments

Washington (2)

(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)

(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:

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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

The Company expects these properties to sell within the coming 12 months.

SECURITY NATIONAL FINANCIAL CORPORATION

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The primary business units of the Company occupy a portion of the commercial real estate owned by the Company.

As of December 31, 2019, real estate owned and occupied by the Company is summarized as

As of December 31, 2020, real estate owned and occupied by the Company is summarized as follows:

Business Segment

Square Footage

Approximate Square Footage

Square Footage Occupied by the Company

Election Rd., Draper, UT

17 unchanged sentences

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

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.

ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business.

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

7 unchanged sentences

Years Ended December 31

Residential Construction

Allowance for credit losses:

7 unchanged sentences

Ending balance

$ 111,111,777

$ 253,771,091

Ending balance:

2 unchanged sentences

collectively evaluated for impairment

$ 103,179,097

$ 243,488,621

Allowance for credit losses:

7 unchanged sentences

Ending balance

$ 113,043,965

$ 241,192,422

Ending balance:

2 unchanged sentences

collectively evaluated for impairment

$ 109,291,758

$ 232,296,496

SECURITY NATIONAL FINANCIAL CORPORATION

6 unchanged sentences

Years Ended December 31

Foreclosure (1)

Unamortized deferred

30-59 Days Past Due

60-89 Days Past Due

Greater Than 90 Days (1)

In Process of Foreclosure (1)

Total Past Due

Total Mortgage Loans

Allowance for Loan Losses

Unamortized deferred loan fees, net

Unamortized discounts, net

Net Mortgage Loans

Residential Construction

$ 234,400,797

$ 253,771,091

$ (2,005,127)

$ (1,161,132)

$ (1,260,896)

$ 249,343,936

Residential Construction

$ 215,729,433

$ 241,192,422

$ (1,453,037)

$ (2,391,567)

$ 236,694,546

(1) There was not any interest income recognized on loans past due greater than 90 days or in foreclosure.

5 unchanged sentences

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 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

Recorded Investment

Unpaid Principal Balance

Related Allowance

Average Recorded Investment

Interest Income Recognized

With no related allowance recorded:

10 unchanged sentences

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.

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.

9 unchanged sentences

Residential Construction

$ 110,910,814

$ 243,488,621

$ 232,296,496

Non-performing

$ 111,111,777

$ 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.

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 $203,000 and $151,000 as of December 31, 2019 and 2018, respectively.

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

Ended December 31

Mortgage Loans on Non-accrual Status

Years Ended December 31

Residential construction

1 unchanged sentence

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.

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 Construction

$ 103,391,044

$ 253,771,091

$ 141,705,268

SECURITY NATIONAL FINANCIAL CORPORATION

4 unchanged sentences

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 five loans with an aggregate unpaid principal balance of $1,130,028 that are 90 or more days past due

and on a nonaccrual status as of December 31, 2019.

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

$ 422,772,418

$ 213,457,632

Unpaid principal balance

1 unchanged sentence

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

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:

5 unchanged sentences

Mortgage fee income

$ 298,933,110

$ 131,976,082

Loan Loss Reserve

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.

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.

(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

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.

7 unchanged sentences

Provision for current loan originations (1)

Additional provision for loan loss reserve

Charge-offs, net of recaptured amounts

2 unchanged sentences

The Company maintains reserves for estimated losses on current production volumes.

The Company also retains loss reserves for loans that the Company originated between 2005 and 2007, in which the

possibility of an investor claim or potential settlement may still exist.

During 2019, 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.

During 2018, reserves were added

at an average rate of 5.0 basis points per loan originated.

Based on the Company’s best estimate for potential loan losses and considering published industry data, loss reserve basis points are established to create an adequate reserve.

The reserve is

intended to cover both expected losses on recent period loan production and possible losses on earlier loans that were sold.

The strong housing market over the last several years has reduced the Company’s exposure to losses on more recent loan

production, but exposure still remains on older loans.

During the period from 2006 to 2019, over $60 million has been reserved for loan losses.

A large majority of that reserve has been used to settle investor claims or potential claims on alternative

documentation loans originated between 2005 to 2007.

As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim

becomes more difficult.

However, because some loans remain from the original 2005 to 2007 time period that have not been settled, the Company still includes a reserve for the potential of future loan demands and potential settlements of such loans.

As of December 31, 2019, the loan loss reserve includes an estimate of approximately $3,000,000 for remaining losses still to be settled on loans from this time period with a general reserve for more recent loan production.

Thus, the Company believes

that the final loan loss reserve as of December 31, 2019, represents its best estimate for adequate loss reserves on loans sold.

The Company believes that actual loan loss experience could change in the near-term from the established reserve based upon claims that could be asserted by a third-party investor.

believes there is potential to resolve any alleged claims by a third-party investor on acceptable terms.

If the Company is unable to resolve such claims on acceptable terms, legal action may ensue.

In the event of legal action by any third-party

investor, the Company believes it has significant defenses to any such action and intends to vigorously defend itself against such action.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

15 unchanged sentences

Amortization included in earnings

Shadow amortization included in other comprehensive income

Shadow amortization included in other

comprehensive income

Net amortization

2 unchanged sentences

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 .

amortization may vary based on changes in assumptions or experience.

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:

The carrying value of the Company’s intangible assets were as follows which is included in other assets:

Intangible asset - customer lists

2 unchanged sentences

Balance at end of year

See Note 20 regarding the acquisition of Beta Capital Corp.

(1) See Note 20 regarding the acquisition of Kilpatrick Life Insurance Company

25 unchanged sentences

Depreciation expense for the years ended December 31, 2020 and 2019 was $2,078,738 and $1,711,369, respectively.

During 2019, the Company transferred $3,261,259 from real estate held for investment

to property and equipment.

This transfer is shown as a non cash item on the consolidated statements of cash flows.

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.

5 unchanged sentences

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 with a book value

of approximately $4,244,000, due September 2021.

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.

4.40% fixed note payable in monthly installments of $46,825 including principal and interest, collateralized by real property with a book value of approximately $12,923,000, due January 2026.

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 $3,261,000, due September

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 $49,378,000, due August 2020.

4.7865% fixed interest only note payable in monthly installments, collateralized by real property with a book value of approximately $18,009,000, due June 2028.

1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of $100,000,000, matures June 2020.

1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of $100,000,000, matures September 2020.

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.

4.40% fixed note payable in monthly installments of $46,825 including principal and interest,

collateralized by real property, paid in full April 2020.

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.

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.

1 month LIBOR rate plus 2.1% loan purchase agreement with a warehouse line availability of

$150,000,000, matures June 2021.

1 month LIBOR rate plus 3% loan purchase agreement with a warehouse line availability of

$175,000,000, matures November 2021.

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)

4 unchanged sentences

Bank and other loans, excluding current installments

Federal Home Loan Bank and Revolving Lines of Credit

(1) Revolving Line of Credit

SECURITY NATIONAL FINANCIAL CORPORATION

6 unchanged sentences

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

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 $59,877,900 at December 31, 2019 have been pledged at the FHLB of Des Moines as collateral for current and potential borrowings compared with $49,342,210 at December 31, 2018.

At December 31, 2019, the

Company had no outstanding FHLB borrowings.

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 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

1 unchanged sentence

See Note 20 regarding this acquisition.

At December 31, 2019, the Company’s total

investment in FHLB stock was $87,800.

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,

2020, renewable annually.

At December 31, 2019, the Company was contingently liable under a standby letter of credit aggregating $625,405, to be used as collateral to cover any contingency related to additional risk assessments pertaining to the

Company's captive insurance program.

The Company does not expect any material losses to result from the issuance of the standby letter of credit.

The standby letter 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 letter of credit because claims are not expected to exceed premiums paid.

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, 2019, there was

$1,250,000 outstanding under the revolving line-of-credit.

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 16, 2020.

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.

The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A.

This agreement with the bank allows SecurityNational Mortgage to borrow up to

$100,000,000 for the sole purpose of funding mortgage loans.

SecurityNational Mortgage is currently approved to borrow $30,000,000 of the $100,000,000 available.

The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on

September 9, 2020.

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

on a rolling four-quarter basis.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

7) Bank and Other Loans Payable (Continued)

The agreements for both 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, 2019, the Company had approximately $67,538,000 and $88,510,000 outstanding on the Texas Capital Bank and Wells Fargo warehouse lines, respectively, and was in compliance with all debt covenants.

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 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, 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 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:

$ 284,242,327

$ 297,824,368

Interest expense in 2020 and 2019 was $8,578,810 and $7,386,688, respectively.

Interest paid in 2019 and 2018 was $7,284,078 and $6,878,048,

respectively.

Interest paid in 2020 and 2019 was $8,385,270 and $7,284,078, respectively.

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.

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.

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 .

4 unchanged sentences

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

8 unchanged sentences

Years Ended December 31, 2020 and 2019

8) Cemetery Perpetual Care Trust Investments and Obligation and Restricted Assets

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 fund its medical benefit safe-harbor limit based on 35% of the qualified direct costs for the preceding year,

and has included this amount as a component of restricted cash.

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.

1 unchanged sentence

Cash and cash equivalents (1)

Mutual funds, at estimated fair value

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

Participating interests in mortgage loans held for investment

with Security National Life

(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.

9 unchanged sentences

Future policy benefits

$ (12,657,045)

$ (12,450,229)

Loan loss reserve

Unearned premium

Available for sale securities

Net operating loss

4 unchanged sentences

Deferred policy acquisition costs

Basis difference in property and equipment

Basis difference in property, equipment and real estate

Value of business acquired

4 unchanged sentences

The valuation allowance relates to differences between recorded deferred tax assets and liabilities and ultimate anticipated realization.

For the year ended December 31, 2019, the Company has

recorded a valuation allowance related to Kilpatrick Life Insurance Company that was acquired in December 2019.

See Note 20 regarding the acquisition.

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.

13 unchanged sentences

The Company’s effective tax rates differ from the U.S.

federal statutory

corporate income tax rate of 21% partially due to its provision for state income taxes and an increase to the valuation allowance related to Kilpatrick Life Insurance Company that increased the effective income tax rate when compared to the prior

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, 2019, the Company does not expect any material changes to the estimated amount of unrecognized tax

benefits in the next twelve months.

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.

8 unchanged sentences

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 $99,000,000 and approximately $103,000,000 at December 31, 2019

and 2018, respectively.

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.

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.

During the period from 2006 to 2019, over $60 million has been reserved for loan losses.

A large majority of that reserve has been used to settle investor claims or potential claims on alternative

documentation loans originated between 2005 to 2007.

As the time since the origination of these loans has increased, estimating the potential of a claim being made, when it might be made, the validity of the claim, and the amount of such claim

becomes more difficult.

Thus, the Company believes

that the final loan loss reserve as of December 31, 2019, represents its best estimate for adequate loss reserves on loans sold.

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

Lehman Brothers Holdings Litigation – Delaware and New York

In January 2014, Lehman Brothers Holdings Inc.

(“Lehman Holdings”) entered into a settlement with the Federal National Mortgage Association (Fannie Mae) concerning the mortgage loan claims that

Fannie Mae had asserted against Lehman Holdings, which were based on alleged breaches of certain representations and warranties by Lehman Holdings in the mortgage loans it had sold to Fannie Mae.

Lehman Holdings had acquired these loans from Aurora

Bank, FSB, formerly known as Lehman Brothers Bank, FSB, which in turn purchased the loans from residential mortgage loan originators, including SecurityNational Mortgage Company (“SecurityNational Mortgage”).

A settlement based on similar

circumstances was entered into between Lehman Holdings and the Federal Home Loan Mortgage Corporation (Freddie Mac) in February 2014.

Lehman Holdings filed a motion in May 2014 with the U.S.

Bankruptcy Court of the Southern District of New York to require the mortgage loan originators, including SecurityNational Mortgage, to engage

in non-binding mediations of the alleged indemnification claims against the mortgage loan originators relative to the Fannie Mae and Freddie Mac settlements with Lehman Holdings.

The mediation was not successful in resolving any issues between

SecurityNational Mortgage and Lehman Holdings.

On January 26, 2016, SecurityNational Mortgage filed a declaratory judgment action against Lehman Holdings in the Superior Court for the State of Delaware.

In the Delaware action, SecurityNational

Mortgage asserted its right to obtain a declaration of rights in that there are allegedly millions of dollars in dispute with Lehman Holdings pertaining to approximately 136 mortgage loans.

SecurityNational Mortgage sought a declaratory judgment as

to its rights as it contends that it has no liability to Lehman Holdings as a result of Lehman Holdings’ settlements with Fannie Mae and Freddie Mac.

Lehman Holdings filed a motion in the Delaware court seeking to stay or dismiss the declaratory

judgment action.

On August 24, 2016, the Court ruled that it would exercise its discretion to decline jurisdiction over the action and granted Lehman Holdings’ motion to dismiss.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

10) Reinsurance, Commitments and Contingencies (Continued)

On February 3, 2016, Lehman Holdings filed an adversary proceeding against approximately 150 mortgage loan originators, including SecurityNational Mortgage, in the U.S.

Bankruptcy Court of the

Southern District of New York seeking a declaration of rights similar in nature to the declaration that SecurityNational Mortgage sought in its Delaware lawsuit, and for damages relating to the alleged obligations of the defendants under

indemnification provisions of the 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.

No response was required to be filed

relative to the Complaint or the Amended Complaint dated March 7, 2016.

A Case Management Order was entered on November 1, 2016.

On December 27, 2016, pursuant to the Case Management Order, Lehman Holdings filed a Second Amended Complaint against SecurityNational Mortgage, which eliminates the declaratory judgment claim but

retains a similar claim for damages as in the Complaint.

Many of the defendants, including SecurityNational Mortgage, filed a joint motion in the case asserting that the Bankruptcy Court does not have subject matter jurisdiction concerning the matter

and that venue is improper.

Lehman Holdings’ response memorandum was filed on May 31, 2017 and a reply memorandum of the defendants filing the motion was filed on July 14, 2017.

A hearing on the motion was held on June 12, 2018.

On August 13, 2018, the Court issued its Memorandum Decision and Order (“Decision”) denying the motion.

On August 27, 2018, a number of the defendants, including SecurityNational Mortgage, filed a

joint motion with the United States District Court (Case No.

18-mc-00392(VEC)) requesting that the Bankruptcy Court’s Decision be treated as findings of fact and conclusions of law, and for the District Court to review the Decision de novo as to jurisdiction.

Included with the motion were proposed objections to the Bankruptcy Court’s Decision.

On September 18, 2018, Lehman Holdings filed its response to the joint motion, and defendants’

reply was filed on October 2, 2018.

On September 17, 2018, certain defendants, including SecurityNational Mortgage, also filed a notice of appeal, and thereafter a motion for leave to file an interlocutory appeal as to the Bankruptcy

Court’s Decision pertaining to jurisdiction and improper venue as a “protective” appeal should the District Court decide not to treat the Decision as findings of fact and conclusions of law.

Separately, certain other defendants also filed a notice of

appeal and motion for leave to file an interlocutory appeal with respect to the Bankruptcy Court’s Decision concerning improper venue.

Lehman Holdings filed its response on October 22, 2018, and defendants filed a joint reply to Lehman Holdings’

response on November 26, 2018.

The motions to file appeals were consolidated before Valerie Caproni, U.S.

District Court Judge, Case No.

18-cv-08986 (VEC).

18-mc-00392 (VEC) was also before Judge Caproni.

On October 1, 2018, Lehman Holdings filed a motion for leave to file Third Amended Complaints against numerous defendants including SecurityNational Mortgage.

In addition to the Fannie Mae and

Freddie Mac related loans, the amendments and supplements include additional mortgage loans sold to Lehman Holdings that were packaged for securitization (“RMBS loans”).

The RMBS loans had allegedly been sold by defendants to Lehman Bank that, in

turn, sold them to Lehman Holdings.

The allegations pertaining to the RMBS loans include, e.g., purported breaches of representations and warranties made to the securitization trusts by Lehman Holdings.

Lehman Holdings asserts that it made

representations and warranties purportedly based in part by representations and warranties made to Lehman Bank by loan originators, including SecurityNational Mortgage.

On May 8, 2019, Judge Caproni issued her Opinion and Order denying the motion for an interlocutory appeal of the bankruptcy court’s ruling relative to jurisdiction and venue.

Further, the judge

denied the motion for immediate de novo review of the bankruptcy court’s ruling indicating that de novo review can be left for the future.

The alleged RMBS loans in dispute with SecurityNational Mortgage allegedly involve millions of dollars pertaining to approximately 577 mortgage loans in addition to the Fannie Mae and Freddie Mac

related loans.

Lehman Holdings also moved the Court to simultaneously allow alternative dispute resolution procedures to take place including potential mediation.

Over objections, at a hearing on October 29, 2018, the Court granted Lehman Holdings’

motion to amend or supplement its complaints adding the RMBS loans, and also to mandate alternative dispute resolution procedures affecting many defendants, including SecurityNational Mortgage.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

10) Reinsurance, Commitments and Contingencies (Continued)

Instead of filing a Third Amended Complaint to include the RMBS loans referenced above, Lehman Holdings filed the matter against SecurityNational Mortgage as a new complaint ("RMBS Complaint")

(United States Bankruptcy Court, Southern District of New York, Adversary Proceeding 18-01819) pertaining to the approximately 577 RMBS loans, in addition to the Second Amended Complaint already on file.

The RMBS Complaint seeks alleged damages

relating to obligations under alleged contractual indemnification provisions in an amount to be determined at trial, interest, costs and expenses incurred by LBHI in enforcing alleged obligations, including attorneys' fees and costs and any expert

witness fees incurred in litigation;

and such other relief as the Court deems just and proper.

SecurityNational Mortgage denies any liability to Lehman Holdings and intends to vigorously protect and defend its position.

In response to a Court order, certain defendants referenced in the Second Amended Complaint and the RMBS Complaints negotiated with Lehman Holdings concerning an amended case management order

pertaining to certain case procedures and management for both lawsuits including, but not limited to, timing for filing motions and answering the complaints, and provisions concerning discovery such as document production, taking depositions, and use

At a hearing held on March 7, 2019, the Court considered differences of the parties as to the content of an amended case management order, and thereafter signed an amended case management order dated March 13, 2019.

SecurityNational

Mortgage filed an answer and amended answer in the Fannie Mae and Freddie Mac case, and in the RMBS case.

Discovery is in process.

Lehman Holdings sent an Indemnification Alternative Dispute Resolution Notice to SecurityNational Mortgage dated August 1, 2019.

SecurityNational Mortgage sent its Statement of Position to Lehman

Brothers Holdings dated September 3, 2019 in response to the notice.

Thereafter, Lehman Holdings sent its Reply dated October 2, 2019 to SecurityNational Mortgage.

On January 9, 2020, SecurityNational Mortgage submitted further information to the

Mediation was set to take place on January 23, 2020 in New York.

On January 15, 2020, SecurityNational Mortgage filed a motion to dismiss Lehman Holdings’ RMBS action in the Bankruptcy Court for lack of subject matter jurisdiction and standing.

It was not filed in

the Bankruptcy Court but in the United States District Court for the Southern District of New York.

The District Court referred the matter to a magistrate judge for general pretrial, which “includes scheduling, discovery, non-dispositive pretrial

motions, and settlement,” as well as for “a Report and Recommendation” as to the pending motion.

The final disposition of the motion will be with the District Court judge.

Lehman Holdings has asked the District Court to transfer the case to one of

two other judges allegedly due to related matters.

No action has been taken by the District Court on the request.

However, a briefing schedule is in place before the original assigned magistrate judge.

Lehman Holdings’ response brief to SecurityNational Mortgage’s motion is due March 6, 2020, and

SecurityNational Mortgage’s reply brief is due April 6, 2020.

In view of SecurityNational Mortgage’s motion to dismiss, Lehman Holdings requested that the mediation set for January 23, 2020 be adjourned “pending resolution of your [SecurityNational

Mortgage] motion by the court.” On January 17, 2020, the mediator adjourned the scheduled mediation without a date.

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

3 unchanged sentences

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, 2019, the Company’s

commitments were approximately $123,601,000, for these loans of which $90,566,000 had been funded.

The Company will advance 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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

2 unchanged sentences

Years Ended December 31, 2020 and 2019

10) Reinsurance, Commitments and Contingencies (Continued)

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.

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.

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.

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.

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.

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.

Company did not make any contributions for the years ended December 31, 2019 and 2018.

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.

Company also filed Form 5310 “Application for Determination for Terminating Plan”, with the IRS on December 6, 2019.

The Company is awaiting approval of its application from the IRS prior to its final distribution of the ESOP Plan assets to the

participants.

The Company also filed Form 5310 “Application for Determination for Terminating Plan”, with the IRS on December 6, 2019.

Beginning in the 4 th 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.

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 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.

1 unchanged sentence

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.

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 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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

11) Retirement Plans (Continued)

Effective December 4, 2018, the Board members approved a motion to extend Mr.

Quist’s employment agreement, dated December 4, 2012, for an additional four-year term ending December 2022.

of disability, Mr.

Quist’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 Mr.

Quist is not retained in his current position, the Company would be obligated to continue paying Mr.

Quist’s current compensation and benefits

for seven years following the merger or sale.

The agreement further provides that Mr.

Quist 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 Mr.

Quist dies prior to receiving all retirement benefits thereunder, the remaining benefits are to be paid to his heirs.

The Company expensed $660,000 and $660,000 during the years ended December 31, 2019 and 2018,

respectively, to cover the present value of anticipated retirement benefits under the employment agreement.

The liability accrued was $5,722,837 and $5,191,670 as of December 31, 2019 and 2018, respectively.

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.

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.

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.

liability accrued was $803,055 and $841,591 as of December 31, 2019 and 2018, respectively and is included in Other liabilities and accrued expenses on the consolidated balance sheets.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

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

2 unchanged sentences

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 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, as authorized by the Company’s Board of Directors.

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.

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:

14 unchanged sentences

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

Denominator for basic earnings per share-weighted-average shares

In accordance with GAAP, the basic and diluted earnings per share amounts were calculated as follows:

Denominator for basic earnings

per share-weighted-average shares

Effect of dilutive securities

1 unchanged sentence

Dilutive potential common shares

Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions

Denominator for diluted earnings

per share-adjusted weighted-average

shares and assumed conversions

Basic earnings per share

Diluted earnings per share

For the years ended December 31, 2019 and 2018, there were 382,289 and 862,915 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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

4 unchanged sentences

The Company has two fixed option plans (the “2013 Plan” and the “2014 Director Plan”).

Compensation expense for options issued of $256,996 and $237,123 has been recognized under these plans for the

years ended December 31, 2019 and 2018, respectively, and is included in personnel expenses on the consolidated statements of earnings.

As of December 31, 2019, the total unrecognized compensation expense related to the options issued in December

2019 was $230,446, which is expected to be recognized over the vesting period of one year.

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

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 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:

Weighted-Average

of Each Option

Dividend Yield

Weighted-Average

Interest Rate

Weighted-Average

Expected Life

Weighted-Average Fair Value of Each Option

Expected Dividend Yield

Underlying stock FMV

Weighted-Average Volatility

Weighted-Average Risk-Free Interest Rate

Weighted-Average Expected Life (years)

March 27, 2020

December 6, 2019

January 17, 2019

November 30, 2018

SECURITY NATIONAL FINANCIAL CORPORATION

5 unchanged sentences

Class A Shares

Exercise Price

Weighted Average Exercise Price

Class C Shares

Exercise Price

Weighted Average Exercise Price

Outstanding at January 1, 2019

5 unchanged sentences

Available options for future grant

Weighted average contractual term of options outstanding at December 31, 2019

Weighted average contractual term of options exercisable at December 31, 2019

Aggregated intrinsic value of options outstanding at December 31, 2019 (1)

Aggregated intrinsic value of options exercisable at December 31, 2019 (1)

Weighted average contractual term of options

outstanding at December 31, 2020

Weighted average contractual term of options

exercisable at December 31, 2020

Aggregated intrinsic value of options outstanding

at December 31, 2020 (1)

Aggregated intrinsic value of options exercisable

at December 31, 2020 (1)

(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, 2019 and 2018 was $271,220 and $123,154, respectively.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

2 unchanged sentences

Years Ended December 31, 2020 and 2019

14) Statutory Financial Information and Dividend

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.

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:

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

9 unchanged sentences

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.

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.

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.

life insurance subsidiaries each have a ratio that is greater than the first level of regulatory action as of December 31, 2019.

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 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 $4,795,000.

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

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

14) Statutory Financial Information and Dividend Limitations (Continued)

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 2018, 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, 2019 totaled approximately $2,453,000 for First Guaranty Insurance Company and totaled

approximately $11,508,000 for Kilpatrick Life Insurance Company.

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

2 unchanged sentences

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.

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.

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.

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.

Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.

The Company regularly reviews the quantitative thresholds and other criteria to determine when other business segments may need to be reported.

SECURITY NATIONAL FINANCIAL CORPORATION

5 unchanged sentences

Revenue from customers

$ 298,933,110

$ 412,261,162

Net investment income

Gains on investments and other assets

Other than temporary impairments

Other revenues

8 unchanged sentences

Depreciation on property and equipment

Provision for loan loss reserve

Cost related to funding mortgage loans

7 unchanged sentences

$ 408,325,196

$ (90,398,039)

$ 1,545,420,890

SECURITY NATIONAL FINANCIAL CORPORATION

5 unchanged sentences

Revenue from customers

$ 131,976,082

$ 229,132,927

Net investment income

18 unchanged sentences

$ 1,110,641,526

$ 249,970,323

$ (110,701,544)

$ 1,330,924,487

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

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 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.

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:

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.

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.

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

Quoted prices for similar assets or liabilities in active markets;

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

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

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.

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;

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

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.

2 unchanged sentences

Fixed Maturity Securities Available for Sale :

The fair values of fixed maturity securities are based on

quoted market prices, when available.

estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments.

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 :

1 unchanged sentence

Loans Held for Sale :

The Company elected the fair value option for loans held

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

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.

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

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.

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.

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 :

2 unchanged sentences

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 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.

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 value of the net rental income over seven years.

The Company also considers area comparables

and property condition when determining fair value.

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

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.

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 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.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

Assets accounted for at fair value on a

recurring basis

Fixed maturity securities available for sale

$ 294,656,679

$ 292,455,504

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

$ 748,145,493

$ 294,676,908

$ 437,566,265

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

$ (2,507,159)

$ (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

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

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.

Quoted Prices in Active Markets for Identical Assets

1 unchanged sentence

Significant Unobservable Inputs

Assets accounted for at fair value on a recurring basis

Assets accounted for at fair value on a

recurring basis

Fixed maturity securities available for sale

$ 355,977,820

$ 352,761,438

Equity securities

5 unchanged sentences

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

Total assets accounted for at fair value on a

recurring basis

$ 584,995,668

$ 354,745,978

$ 219,396,594

Liabilities accounted for at fair value on a

recurring basis

Derivatives - call options (4)

1 unchanged sentence

Derivatives - loan commitments (4)

Total liabilities accounted for at fair value on a recurring basis

Total liabilities accounted for at fair value

on a recurring basis

(1) Fixed maturity securities available for sale

2 unchanged sentences

(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, 2019, the significant unobservable inputs used in the

fair value measurements were as follows:

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:

Range of Inputs

Fair Value at

Loans held for sale

3 unchanged sentences

Market approach

Fall-out factor

Pull-through rate

Initial-Value

7 unchanged sentences

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:

Range of Inputs

Fair Value at

Loans held for sale

Market approach

Investor contract pricing as a percentage of unpaid principal balance

Derivatives - loan commitments (net)

Market approach

Pull-through rate

Initial-Value

Fixed maturity securities available for sale

Broker quotes

Pricing quotes

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

Net Derivatives

Available for

Net Derivatives Loan Commitments

Loans Held for Sale

Fixed Maturity Securities Available for Sale

Balance - December 31, 2019

$ 213,457,632

Originations/purchases

5,627,013,749

Sales, maturities and paydowns

(5,600,045,285)

Transfer to mortgage loans held for investment

Transfer from fixed maturity securities held to maturity

Total gains (losses):

Included in earnings

Included in other comprehensive income

Balance - December 31, 2020

$ 422,772,418

(1) As a component of mortgage fee income on the consolidated statements of earnings

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.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

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

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

17) Fair Value of Financial Instruments (Continued)

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

Assets accounted for at fair value on a recurring basis

Equity securities

Loans held for sale

Restricted assets (1)

Cemetery perpetual care trust investments (1)

Derivatives - loan commitments (2)

Total assets accounted for at fair value on a recurring basis

Liabilities accounted for at fair value on a recurring basis

Derivatives - call options (3)

Derivatives - put options (3)

Derivatives - loan commitments (3)

Total liabilities accounted for at fair value on a recurring basis

Mutual funds and equity securities

Included in other assets on the consolidated balance sheets

Included in other liabilities and accrued expenses on the consolidated balance sheets

(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:

Net Derivatives

Net Derivatives Loan Commitments

Loans Held for Sale

Fixed Maturity Securities Available for Sale

Balance - December 31, 2018

$ 136,210,853

Originations/purchases

2,606,839,175

Sales, maturities and paydowns

(2,580,875,055)

Transfer to mortgage loans held for investment

Transfer from fixed maturity securities held to maturity

Total gains (losses):

1 unchanged sentence

Balance - December 31, 2019

$ 213,457,632

(1) As a component of mortgage fee income on the consolidated statements of earnings

8 unchanged sentences

Significant Unobservable Inputs

Assets accounted for at fair value on a nonrecurring basis

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

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.

Quoted Prices in Active Markets for Identical Assets

Significant Observable Inputs

Significant Unobservable Inputs

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

Total assets accounted for at fair value on

a nonrecurring basis

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

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, 2019 and 2018.

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

Total Estimated Fair Value

Mortgage loans held for investment

$ 100,384,283

Residential construction

Mortgage loans held for investment, net

$ 249,343,936

$ 256,493,572

Insurance assignments, net (1)

3 unchanged sentences

Bank and other loans payable

$(297,824,368)

$ (297,824,368)

Policyholder account balances (3)

Future policy benefits - annuities (3)

(106,522,113)

(112,354,186)

(1) Included in other investments and policy loans on the consolidated balance sheets

6 unchanged sentences

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, 2018:

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

Fixed maturity securities, held to maturity

Total Estimated Fair Value

Mortgage loans held for investment

$ 110,253,678

$ 115,320,638

Residential construction

Mortgage loans held for investment, net

$ 243,262,067

Insurance assignments, net (1)

Restricted assets (2)

Restricted assets (3)

Cemetery perpetual care trust investments (2)

1 unchanged sentence

Bank and other loans payable

$ (217,572,612)

Policyholder account balances (3)

Future policy benefits - annuities (3)

(113,579,830)

(117,304,614)

(1) Included in other investments and policy loans on the consolidated balance sheets

Fixed maturity securities held to maturity

Participation in mortgage loans held for investment

(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:

Fixed Maturity Securities Held to Maturity :

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.

Mortgage Loans Held for Investment :

The estimated fair value of the Company’s mortgage loans held for investment is

determined using various methods.

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 interest payments

and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently.

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 interest payments and discounting them using current interest rates for commercial

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.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

17) Fair Value of Financial Instruments (Continued)

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.

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.

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.

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%.

1 unchanged sentence

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.

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:

Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01) for equity securities

Unrealized gains on fixed maturity securities available for sale

Reclassification adjustment for net realized gains in net income

Amounts reclassified into net earnings

Net unrealized gains before taxes

3 unchanged sentences

Other comprehensive income changes

_______________

(1) Fixed maturity securities available for sale

6 unchanged sentences

Beginning Balance December 31, 2019

Change for the period

Ending Balance December 31,

1 unchanged sentence

Unrealized gains on restricted assets (1)

Unrealized gains on cemetery perpetual care trust investments (1)

Unrealized gains (losses) on cemetery perpetual

care trust investments (1)

Foreign currency translation adjustments

Other comprehensive income (loss)

Other comprehensive income

(1) Fixed maturity securities available for sale

1 unchanged sentence

Beginning Balance December 31, 2018

Change for the period

Ending Balance December 31,

Unrealized gains on equity securities, restricted assets and cemetery perpetual care trust investments

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)

Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-01)

(1) Fixed maturity securities available for sale

SECURITY NATIONAL FINANCIAL CORPORATION

7 unchanged sentences

December 31, 2019

Sheet Location

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:

4 unchanged sentences

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.

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.

Net Amount Gain (Loss)

Years ended December 31

Classification

9 unchanged sentences

Kilpatrick Life Insurance Company

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 Purchase 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, as agreed with the shareholders.

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.

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 Purchase 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,

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.

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.

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.

5 unchanged sentences

Future policy benefits and unpaid claims

(165,404,970)

Other liabilities and accrued expenses

Total liabilities assumed

(170,664,311)

Cash received for reinsurance assumed

Contemporaneous with the stock purchase transaction, both Kilpatrick Life and Security National Life, as coinsurer, agreed 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

$ 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.

SECURITY NATIONAL FINANCIAL CORPORATION

4 unchanged sentences

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.

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

13 unchanged sentences

Future policy benefits and unpaid claims

(189,071,407)

Accounts payable

1 unchanged sentence

Total liabilities assumed

(198,107,612)

Fair value of net assets acquired/consideration paid

1 unchanged sentence

(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 were $1,461,011 and $848,031, respectively.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

20) Acquisitions (Continued)

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.

Family Funerals”) and Heber Valley Funeral Home, Inc.

(“Probst Family Funerals”) and Heber Valley Funeral Home, Inc.

(“Heber Valley Funeral Home”).

1 unchanged sentence

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.

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.

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 were as follows:

4 unchanged sentences

Fair value of net assets acquired/consideration paid

Fair value of net assets acquired/consideration paid, net of cash acquired

Probst Family Funerals and Heber Valley Funeral Home’s revenues and net earnings since the date of acquisition were $796,992 and $97,400, respectively.

Beta Capital Corp.

On June 1, 2018, the Company completed a stock purchase transaction with Beta Capital Corp.

("Beta Capital") and Ronald D.

Maxson ("Maxson"), the sole owner of all the outstanding

shares of common stock of Beta Capital, to purchase all of the outstanding shares of common stock of Beta Capital.

Beta Capital is engaged in the operation of a factoring business with the principal purpose of providing funding for funeral homes and

Under the terms of the transaction, as set forth in the Stock Purchase Agreement, dated June 1, 2018, by and among the Company, Beta Capital and Maxson, the Company paid Maxson the

purchase consideration at the closing of the transaction equal to the sum of (i) $890,000 in cash plus (ii) the accounts receivable value of $2,515,783, representing the total amount of the Company's outstanding receivables as of the closing date of

June 1, 2018, for a total closing payment of $3,405,783.

From the $3,405,783 closing payment, a holdback amount equal to $175,000 was deposited into an interest bearing escrow account.

In November 2019, this escrow account was settled and $169,190

was paid to the prior owner.

The estimated fair values of the assets acquired at the date of acquisition were as follows:

Other investments - insurance assignments

Other - customer list intangible asset

Total assets acquired

Fair value of net assets acquired/consideration paid,

net of cash acquired

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.

SECURITY NATIONAL FINANCIAL CORPORATION

9 unchanged sentences

Amortization (1)

Application of valuation allowance to write down MSRs with other than temporary impairment

Application of valuation allowance to write down MSRs

with other than temporary impairment

Balance before valuation allowance at year end

1 unchanged sentence

Balance at beginning of year

Application of valuation allowance to write down MSRs with other than temporary impairment

Application of valuation allowance to write down MSRs

with other than temporary impairment

Balance at year end

3 unchanged sentences

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, 2019 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.

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.

5 unchanged sentences

21) Mortgage Servicing Rights (Continued)

During the years ended December 31, 2019 and 2018, the Company collected the following contractual servicing fee income and late fee income as reported in other revenues on the consolidated

statements of earnings:

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

The following is a summary of the unpaid principal balances (“UPB”) of the servicing portfolio for the periods presented:

Years Ended December 31

Servicing UPB

9 unchanged sentences

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

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.

$ 674,230,463

Policyholder account balances

4 unchanged sentences

Gross future policy benefits and unpaid claims

$ 844,790,087

Receivable from reinsurers

4 unchanged sentences

Net future policy benefits and unpaid claims

$ 829,220,931

SECURITY NATIONAL FINANCIAL CORPORATION

8 unchanged sentences

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, 2019 and 2018, the balances were $12,607,978 and 12,508,625, respectively.

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.

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.

1 unchanged sentence

At-need Specialty Merchandise Revenue :

At-need specialty merchandise revenue consists of customizable merchandise ordered from a

manufacturer such as markers and bases.

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, 2019 and 2018, the balances were

$282,541 and $327,302, respectively.

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.

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.

1 unchanged sentence

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

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.

cases, the Company will act as an agent in transferring the requested goods and services.

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.

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:

14 unchanged sentences

(1) Included in Receivables, net on the consolidated balance sheets

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

23) Revenues from Contracts with Customers (Continued)

The following table disaggregates the opening and closing balances of the Company’s contract balances.

Contract Balances

Contract Asset

Contract Liability

Pre-need merchandise and services

7 unchanged sentences

Contract Balances

Contract Asset

Contract Liability

Pre-need merchandise and services

6 unchanged sentences

Closing (12/31/2019)

The amount of revenue recognized for the years ended December 31, 2019 and 2018 that was included in the opening contract liability balance was $3,558,103 and $2,623,903,

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.

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

Major goods/service lines

2 unchanged sentences

Services transferred at a point in time

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

23) Revenues from Contracts with Customers (Continued)

Significant Judgments and Estimates

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.

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.

There are no significant judgements, estimations or allocation methods when revenue should be recognized.

Practical Expedients

3 unchanged sentences

Pre - need Merchandise and Service Revenue :

Pre-need merchandise and service revenues are deferred until the goods or services are

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

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.

1 unchanged sentence

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.

Generally, at-need specialty merchandise is ordered and received within 90 days of order.

These orders are also short-term in nature and are deferred until the product is received from the manufacturer and the obligation is satisfied.

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)

Deferred Pre - need Land Revenue :

Revenue is recognized on pre-need land sales when the customer has paid at least 10% toward the land

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

Pre-need merchandise and services

1 unchanged sentence

Pre-need land sales

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

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

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.

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.

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.

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

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.

1 unchanged sentence

The Company does not have any lease agreements with variable lease payments.

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.

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.

Company does not have any restrictions or covenants imposed by leases.

The Company does not have any restrictions or covenants imposed by leases.

Leases that have not Commenced

2 unchanged sentences

The Company does not have any related party lease transactions that require disclosure as of December 31, 2020.

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.

SECURITY NATIONAL FINANCIAL CORPORATION

3 unchanged sentences

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

Finance lease cost:

29 unchanged sentences

The following table presents the maturity analysis of the Company’s lease liabilities.

Finance Leases

Operating Leases

Lease payments due in:

3 unchanged sentences

The following table presents the Company’s right-of-use assets and lease liabilities for the period presented:

Year Ended December 31

Balance Sheet Location

Year Ended December 31 2020

Year Ended December 31 2019

Operating Leases

10 unchanged sentences

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.

SECURITY NATIONAL FINANCIAL CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Years Ended December 31, 2019 and 2018

25) Quarterly Financial Data (Unaudited)

Three Months Ended

Benefits and expenses

Earnings before income taxes

Income tax expense

Net earnings per common share (1)

Net earnings per common share assuming dilution (1)

Three Months Ended

Benefits and expenses

Earnings before income taxes

Income tax expense

Net earnings per common share (1)

Net earnings per common share assuming dilution (1)

Earnings per share amounts have been adjusted retroactively for the effect of annual stock dividends.

26) Subsequent Events

Since December 31, 2019, the outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", has resulted in governments worldwide enacting emergency measures to combat the spread of the virus.

These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown.

Global equity markets have

experienced significant volatility and weakness.

Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.

The duration and impact of the COVID-19 outbreak is

unknown at this time, as is the efficacy of the government and central bank interventions.

It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the

Company and its operating subsidiaries in future periods.

Further, these uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s debt securities and individual borrowers with mortgage

loans held by the Company.

See Note 2 for information about the Company’s real estate held for investment.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data