# Security National Financial Corp: Form 10-K for the period ended Dec 31, 2021 - Company: [Security National Financial Corp](/companies/snfca.md) (CIK 318673) - Form: 10-K - Filed: 2022-03-31 - Accepted by EDGAR: Mar 31, 2022, 10:11 ET - Period: 2021-12-31 - Accession: 0001493152-22-008236 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/318673/000149315222008236/form10-k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/318673/000149315222008236/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2021-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2021-01-01 to 2021-12-31 | $470.7m | us-gaap:Revenues | | Cost of revenue | 12 months, 2021-01-01 to 2021-12-31 | $3.7m | us-gaap:CostOfGoodsAndServicesSold | | Interest expense | 12 months, 2021-01-01 to 2021-12-31 | $7.1m | us-gaap:InterestExpense | | Income tax | 12 months, 2021-01-01 to 2021-12-31 | $12.3m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2021-01-01 to 2021-12-31 | $39.5m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2021-01-01 to 2021-12-31 | $1.89 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2021-01-01 to 2021-12-31 | $1.96 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2021-01-01 to 2021-12-31 | 20,929,084 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2021-01-01 to 2021-12-31 | $144.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2021-01-01 to 2021-12-31 | $5.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Share repurchases | 12 months, 2021-01-01 to 2021-12-31 | $5.8m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2021-12-31 | $131.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Total assets | at 2021-12-31 | $1.55bn | us-gaap:Assets | | Total liabilities | at 2021-12-31 | $1.25bn | us-gaap:Liabilities | | Long-term debt | at 2021-12-31 | $280.3m | us-gaap:LongTermDebt | | Shareholders' equity | at 2021-12-31 | $299.8m | us-gaap:StockholdersEquity | ## Business As filed, 31,043 characters. Security National Financial Corporation (the “Company”) operates in three reportable business segments: life insurance, cemetery and mortuary, and mortgages. The life insurance segment is engaged in the business of selling and servicing selected lines of life insurance, annuity products, and accident and health insurance. These products are marketed in 40 states through a commissioned sales force of independent licensed insurance agents who may also sell insurance products of other companies. The cemetery and mortuary segment consists of eight mortuaries and five cemeteries in the state of Utah, one cemetery in the state of California, and one cemetery and four mortuaries in the state of New Mexico. The Company also engages in pre-need selling of funeral, cemetery, mortuary, and cremation services through its Utah, California and New Mexico operations. Many of the insurance agents also sell pre-need funeral, cemetery, and cremation services. The mortgage segment originates and underwrites or otherwise purchases residential and commercial loans for new construction, existing homes, and other real estate projects. The mortgage segment operates through 113 retail offices in 23 states, and is an approved mortgage lender in several other states. The Company’s design and structure are that each business segment is related to the other business segments and contributes to the profitability of the other segments. The Company’s cemetery and mortuary segment provides a level of public awareness that assists in the sales and marketing of insurance and pre-need cemetery and funeral products. The Company’s insurance segment invests their assets (including, in part, pre-need funeral products and services) in investments authorized by the respective insurance departments of their states of domicile. The Company also pursues growth through acquisitions. The Company’s mortgage segment provides mortgage loans and other real estate investment opportunities. The Company was organized as a holding company in 1979 when Security National Life Insurance Company (“Security National Life”) became a wholly owned subsidiary of the Company and the former stockholders of Security National Life became stockholders of the Company. Security National Life was formed in 1965 and has acquired or purchased significant blocks of business which include Capital Investors Life Insurance Company (1994), Civil Service Employees Life Insurance Company (1995), Southern Security Life Insurance Company (1998), Menlo Life Insurance Company (1999), Acadian Life Insurance Company (2002), Paramount Security Life Insurance Company (2004), Memorial Insurance Company of America (2005), Capital Reserve Life Insurance Company (2007), Southern Security Life Insurance Company, Inc. (2008), North America Life Insurance Company (2011, 2015), Trans-Western Life Insurance Company (2012), Mothe Life Insurance Company (2012), DLE Life Insurance Company (2012), American Republic Insurance Company (2015), First Guaranty Insurance Company (2016), and Kilpatrick Life Insurance Company (2019). In August 2021, the Company sold Memorial Insurance Company of America. The cemetery and mortuary operations have also grown through the acquisition of other cemetery and mortuary companies. The cemetery and mortuary companies that the Company has acquired are Holladay Memorial Park, Inc. (1991), Cottonwood Mortuary, Inc. (1991), Deseret Memorial, Inc. (1991), Probst Family Funerals and Cremations L.L.C. (2019), Heber Valley Funeral Home, Inc. (2019), Rivera Funerals, Cremations and Memorial Gardens (2021), and Holbrook Mortuary (2021). In 1993, the Company formed SecurityNational Mortgage Company (“SecurityNational Mortgage”) to originate and refinance residential mortgage loans. In 2012, the Company formed Green Street Mortgage Services, Inc. (now known as EverLEND Mortgage Company) (“EverLEND Mortgage”) also to originate and refinance residential mortgage loans. In December 2021, the Company ceased operations in EverLEND Mortgage and merged its operations into SecurityNational Mortgage. See Note 15 of the Notes to Consolidated Financial Statements for additional information regarding business segments of the Company. ### Life Insurance #### Products The Company, through Security National Life, First Guaranty Insurance Company (“First Guaranty”), and Kilpatrick Life Insurance Company (“Kilpatrick”), issues and distributes selected lines of life insurance and annuities. The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident, and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning. The Company’s insurance subsidiaries, Southern Security Life Insurance Company, Inc. (“Southern Security”) and Trans-Western Life Insurance Company (“Trans-Western”), do not actively write policies, but service and maintain policies that were purchased prior to their acquisition by Security National Life. A funeral plan is a small face value life insurance policy that generally has face coverage of up to $30,000. The Company believes that funeral plans represent a marketing niche that has lower competition because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs. #### Markets and Distribution The Company is licensed to sell insurance in 40 states. The Company, in marketing its life insurance products, seeks to locate, develop and service specific niche markets. The Company’s funeral plan policies are sold primarily to persons who range in age from 45 to 85 and have low to moderate income. A majority of the Company’s funeral plan premiums come from the states of Arkansas, California, Florida, Georgia, Louisiana, Mississippi, Texas, and Utah. The Company sells its life insurance products through direct agents, brokers, and independent licensed agents who may also sell insurance products of other companies. The commissions on life insurance products range from approximately 50% to 120% of first year premiums. In those cases, where the Company utilizes its direct agents in selling such policies, those agents customarily receive advances against future commissions. In some instances, funeral plan insurance is marketed in conjunction with the Company’s cemetery and mortuary sales force. When it is marketed by that group, the beneficiary is usually the Company’s cemeteries and mortuaries. Thus, death benefits that become payable under the policy are paid to the Company’s cemetery and mortuary subsidiaries to the extent of services performed and products purchased. In marketing funeral plan insurance, the Company also seeks and obtains third-party endorsements from other cemeteries and mortuaries within its marketing areas. Typically, these cemeteries and mortuaries will provide letters of endorsement and may share in mailing and other lead-generating costs since these businesses are usually made the beneficiary of the policy. The following table summarizes the life insurance business for the five years ended December 31, 2021: | Life Insurance | 2021 | 2020 | 2019 | | 2018 | 2017 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Policy/Cert Count as of December 31 | 653,450 | 659,237 | 669,064 | (1) | 531,831 | 533,065 | | Insurance in force as of December 31 (omitted 000) | $2,863,759 | $2,890,791 | $2,877,402 | (1) | $1,838,488 | $1,759,148 | | Premiums Collected (omitted 000) | $99,006 | $92,058 | $78,253 | (1) | $74,965 | $69,565 | (1) Includes the acquisition of Kilpatrick Underwriting The factors considered in evaluating an application for ordinary life insurance coverage can include the applicant’s age, occupation, general health, and medical history. Upon receipt of a satisfactory (non-funeral plan insurance) application, which contains pertinent medical questions, the Company issues insurance based upon its medical limits and requirements subject to the following general non-medical limits: | Age Nearest Birthday | Non-Medical Limits | | --- | --- | | 0-50 | $100,000 | | 51-up | Medical information | | | required (APS or exam) | When underwriting life insurance, the Company will sometimes issue policies with higher premium rates for substandard risks. The Company’s funeral plan insurance is written on a simplified medical application with underwriting requirements being a completed application, a phone interview of the applicant, and an intelliscript prescription history inquiry. There are several underwriting classes in which an applicant can be placed. ### Annuities Products The Company’s annuity business includes single premium deferred annuities, flexible premium deferred annuities, and immediate annuities. A single premium deferred annuity is a contract where the individual remits a sum of money to the Company, which is retained on deposit until such time as the individual may wish to annuitize or surrender the contract for cash. A flexible premium deferred annuity gives the contract holder the right to make premium payments of varying amounts or to make no further premium payments after his initial payment. These single and flexible premium deferred annuities can have initial surrender charges. The surrender charges act as a deterrent to individuals who may wish to prematurely surrender their annuity contracts. An immediate annuity is a contract in which the individual remits a sum of money to the Company in return for the Company’s obligation to pay a series of payments on a periodic basis over a designated period of time, such as an individual’s life, or for such other period as may be designated. Annuities have guaranteed interest rates that range from 1% to 6.5% per annum. Rates above the guaranteed interest rate credited are periodically modified by the Board of Directors at its discretion. In order for the Company to realize a profit on an annuity product, the Company must maintain an interest rate spread between its investment income and the interest rate credited to the annuities. Commissions, issuance expenses, and general and administrative expenses are deducted from this interest rate spread. Markets and Distribution The general market for the Company’s annuities is middle to older age individuals. A major source of annuity sales come from direct agents and are sold in conjunction with other insurance sales. If an individual does not qualify for a funeral plan, the agent will often sell that individual an annuity to fund final expenses. The following table summarizes the annuity business for the five years ended December 31, 2021: | | 2021 | 2020 | 2019 | | 2018 | 2017 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Annuities Policy/Cert Count as of December 31 | 24,901 | 25,476 | 26,565 | (1) | 22,313 | 22,729 | | Deposits Collected (omitted 000) | $9,719 | $9,637 | $10,400 | (1) | $9,644 | $10,353 | (1) Includes the acquisition of Kilpatrick ### Accident and Health #### Products Through its various acquisitions, the Company occasionally acquires small blocks of accident and health policies, which it continues to service. The Company offers a low-cost comprehensive diver’s accident policy that provides worldwide coverage for medical expense reimbursement in the event of a diving accident. #### Markets and Distribution The Company currently markets its diver’s accident policies through the internet. The following table summarizes the accident and health insurance business for the five years ended December 31, 2021: | | 2021 | 2020 | 2019 | | 2018 | 2017 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Accident and Health Policy/Cert Count as of December 31 | 12,494 | 13,735 | 15,133 | (1) | 3,763 | 4,069 | | Premiums Collected (omitted 000) | $353 | $296 | $110 | (1) | $98 | $104 | (1) Includes the acquisition of Kilpatrick ### Reinsurance The primary purpose of reinsurance is to enable an insurance company to issue an insurance policy in an amount larger than the risk the insurance company is willing to assume for itself. The insurance company remains obligated for the amounts reinsured (ceded) in the event the reinsurers do not meet their obligations. The Company currently cedes and assumes certain risks with various authorized unaffiliated reinsurers pursuant to reinsurance treaties, which are generally renewed annually. The premiums paid by the Company are based on a number of factors, primarily including the age of the insured and the risk ceded to the reinsurer. It is the Company’s policy to retain no more than $100,000 of ordinary insurance per insured life, with the excess risk being reinsured. The total amount of life insurance reinsured by other companies as of December 31, 2021, was $364,471,000, which represented approximately 12.7% of the Company’s life insurance in force on that date. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding reinsurance. ### Investments The investments that support the Company’s life insurance and annuity obligations are determined by the investment committees of the Company’s subsidiaries and ratified by the full boards of directors of the respective subsidiaries. A significant portion of the Company’s investments must meet statutory requirements governing the nature and quality of permitted investments by its insurance subsidiaries. The Company maintains a diversified investment portfolio consisting of common stocks, preferred stocks, municipal bonds, corporate bonds, mortgage loans, real estate, and other securities and investments. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding investments. ### Cemetery and Mortuary #### Products Through its cemetery and mortuary segment, the Company markets a variety of products and services both on a pre-need basis (prior to death) and an at-need basis (at the time of death). The products include: plots, interment vaults, mausoleum crypts, markers, caskets, urns and other death care related products. These services include: professional services of funeral directors, opening and closing of graves, use of chapels and viewing rooms, and use of automobiles and clothing. The Company has a mortuary at each of its cemeteries, other than Holladay Memorial Park and Singing Hills Memorial Park, and has six separate stand-alone mortuary facilities. #### Markets and Distribution The Company’s pre-need cemetery and mortuary sales are marketed to persons of all ages but are generally purchased by persons 45 years of age and older. The Company is limited in its geographic distribution of these products to areas lying within an approximate 20-mile radius of its mortuaries and cemeteries. The Company’s at-need sales are similarly limited in geographic area. The Company actively seeks to sell its cemetery and funeral products to customers on a pre-need basis. The Company employs cemetery sales representatives on a commission basis to sell these products. Many of these pre-need cemetery and mortuary sales representatives are also licensed insurance salesmen and sell funeral plan insurance. In some instances, the Company’s cemetery and mortuary facilities are the named beneficiaries of the funeral plan policies. Potential customers are located via telephone sales prospecting, responses to letters mailed by the pre-planning consultants, newspaper inserts, referrals, and door-to-door canvassing. The Company trains its sales representatives and helps generate leads for them. ### Mortgage Loans #### Products The Company, through SecurityNational Mortgage is active in the residential real estate market. SecurityNational Mortgage is approved by the U.S. Department of Housing and Urban Development (HUD), the Federal National Mortgage Association (Fannie Mae), and other secondary market investors, to originate a variety of residential mortgage loan products, which are subsequently sold to investors. EverLEND Mortgage is also approved by the U.S. Department of Housing and Urban Development (HUD), and other secondary market investors, to originate a variety of residential mortgage loan products. The Company uses internal and external funding sources to fund mortgage loans. In December 2021, the Company ceased operations in EverLEND Mortgage and merged its operations into SecurityNational Mortgage. Security National Life originates and funds commercial real estate loans, residential construction loans, and land development loans for internal investment. #### Markets and Distribution The Company’s residential mortgage lending services are marketed primarily to real estate brokers, builders and directly with consumers. The Company has a strong retail origination presence in the Utah, Florida, Texas, Nevada and Arizona markets and is experiencing rapid growth with sales representatives in these and many other states across the country. See “Management’s Discussion and Analysis of Results of Operations and Financial Condition” and “Notes to Consolidated Financial Statements” for additional disclosure and discussion regarding mortgage loans. ### Recent Acquisitions and Other Business Activities #### Acquisitions #### Acquisition of Rivera Funerals, Cremations and Memorial Gardens On December 21, 2021, the Company, through Memorial Estates Inc., completed a business combination transaction with Rivera Funerals, Cremations and Memorial Gardens. The mortuaries and cemetery are located in New Mexico. Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated December 21, 2021, Memorial Estates Inc. paid a net purchase price of $10,693,395 for the business and assets of Rivera Funerals, Cremations and Memorial Gardens, subject to holdback amounts held by Memorial Estates, Inc. in the total amount of $1,120,000. Pursuant to the Asset Purchase Agreement, Memorial Estates, Inc. is to use $70,000 of the holdback amount to pay, perform and discharge when due, trade accounts payable of Rivera Funerals, Cremations and Memorial Gardens to third parties that remained unpaid. Unapplied portions of the remaining $1,050,000 holdback amount are to be released and paid by Memorial Estates Inc. in annual payments of up to $105,000 each, beginning on the first anniversary date of the closing date and continuing thereafter on the anniversary dates of the closing date. #### Acquisition of Holbrook Mortuary On December 28, 2021, the Company, through its wholly-owned subsidiary, Memorial Mortuary Inc., completed a business combination transaction with Holbrook Mortuary located in Salt Lake City, Utah. Under the terms of the transaction, as set forth in the Asset Purchase Agreement, dated December 28, 2021, Memorial Mortuary Inc. paid a net purchase price of $3,051,747 for the business and assets of Holbrook Mortuary. #### Real Estate Development The Company is capitalizing on the opportunity to develop commercial and residential assets on its existing properties. The cost to acquire existing for-sale assets currently exceeds the replacement costs, thus creating the opportunity for development and redevelopment of the land that the Company currently owns. The Company has developed, or is in the process of developing, assets that have an initial development cost exceeding $100,000,000, primarily relating to the Center53 Development. The Company plans to continue its development endeavors as based upon its assessment of the market demand. #### Center53 Development Center53 Development is an office development project comprising nearly 20 acres of land that is currently owned by the Company in the central valley of Salt Lake City. At final completion, the multi-year, phased development will create a campus atmosphere and include nearly one million square-feet of office space in five buildings, ranging from four to eleven stories, and will be serviced by three parking structures with about 4,000 stalls. In 2015, the Company broke ground and commenced development on the first phase which included a six-story building of nearly 200,000 square feet and a parking garage with 748 parking stalls. The first phase of the project was completed in July 2017 and is currently 100% leased. The second phase of the project began in March 2020 and includes a second six story building of nearly 221,000 square feet and a parking garage with approximately 870 stalls. The Company began its occupancy of a portion of the building in October 2021 and the remainder of the building has been leased, with occupancy planned for April 2022. The Company plans to initiate future phases of the Center53 Development for additional Class A office space in the central valley of Salt Lake City. ### Regulation The Company’s insurance subsidiaries are subject to comprehensive regulation in the jurisdictions in which they do business under statutes and regulations administered by state insurance commissioners. Such regulation relates to, among other things, prior approval of the acquisition of a controlling interest in an insurance company; standards of solvency which must be met and maintained; licensing of insurers and their agents; nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; and requirements regarding aggregate reserves for life policies and annuity contracts, policy claims, unearned premiums, and other matters. The Company’s insurance subsidiaries are subject to this type of regulation in any state in which they conduct relevant business. Such regulation may cause unforeseen costs and operational restrictions, and delay implementation of the Company’s business plans. The Company’s life insurance subsidiaries are currently subject to regulation in Utah, Louisiana, Mississippi and Texas under insurance holding company legislation, and other states where applicable. Generally, intercompany transfers of assets and dividend payments from insurance subsidiaries are subject to prior notice of approval from the relevant state insurance department where, they are deemed “extraordinary” under relevant state law. The insurance subsidiaries are required, under state insurance laws, to file detailed annual reports with the supervisory agencies in each of the states in which they do business. Their business and accounts are also subject to examination by these agencies. The Company was notified in December 2020, that each of its life insurance subsidiaries had been selected for examination for the year ended December 31, 2020 and the periods since their last examinations. The Company was last examined in 2016 (First Guaranty Insurance), 2017 (Security National Life, Southern Security and Trans-Western) and 2019 (Kilpatrick Life). As of March 2022, the Utah, Mississippi and Texas insurance departments had completed their examination and provided final examination reports to the Company. The Texas Department of Banking also audits pre-need insurance policies that are issued in the state of Texas. Pre-need policies include the life and annuity products sold as the funding mechanism for funeral plans through funeral homes by Security National agents. The Company is required to send the Texas Department of Banking an annual report that summarizes the number of policies in force and the face amount or death benefit for each policy. This annual report is also required to indicate the number of new policies issued for that year, all death claims paid that year, and all premiums received. The Company’s cemetery and mortuary subsidiaries are subject to the Federal Trade Commission’s comprehensive funeral industry rules and to state regulations in the various states where such operations are domiciled. The morticians must be licensed by the respective state in which they provide their services. Similarly, the mortuaries and cemeteries are governed and licensed by state statutes and city ordinances in Utah, California and New Mexico. The subsidiaries are required to keep annual reports on file including financial information concerning the number of spaces sold and, where applicable, funds provided to the Endowment Care Trust Fund. Licenses are issued annually on the basis of such reports. The cemeteries maintain city or county licenses where they conduct business. The Company’s mortgage subsidiaries are subject to the rules and regulations of the U.S. Department of Housing and Urban Development (HUD), and to various state licensing acts and regulations and the Consumer Financial Protection Bureau (CFPB). These regulations, among other things, specify minimum capital requirements and; procedures for loan origination and underwriting, licensing of brokers and loan officers and, quality review audits and specify the fees that can be charged to borrowers. Each year, the Company is required to have an audit completed for each mortgage subsidiary by an independent registered public accounting firm to verify compliance with the relevant regulations. In addition to the government regulations, the Company must meet loan requirements, and underwriting guidelines of various investors who purchase the loans. EverLEND Mortgage is not required to have an audit for 2021 since it ceased operations in December 2021. ### Income Taxes The Company’s insurance subsidiaries, Security National Life, First Guaranty and Kilpatrick, are taxed under the Life Insurance Company Tax Act of 1984. Under the act, life insurance companies are taxed at standard corporate rates on life insurance company taxable income. Life insurance company taxable income is gross income less general business deductions and reserves for future policyholder benefits (with modifications). Under The Tax Cuts and Jobs Act, December 31, 2017 policyholder surplus account balances result in taxable income over a period of eight years. Security National Life, First Guaranty and Kilpatrick calculate their life insurance taxable income after establishing a provision representing a portion of the costs of acquisition of such life insurance business. The effect of the provision is that a certain percentage of the Company’s premium income is characterized as deferred expenses and recognized over a five or ten-year period. The Tax Act changed this recognition period for amounts deferred after December 31, 2017 to a five or fifteen-year period. The Company’s non-life insurance company subsidiaries are taxed in general under the regular corporate tax provisions. The Company’s subsidiaries Southern Security and Trans-Western are regulated as life insurance companies but do not meet the Internal Revenue Code definition of a life insurance company, so they are taxed as insurance companies other than life insurance companies. ### Competition The life insurance industry is highly competitive. There are approximately 800 legal reserve life insurance companies in business in the United States. These insurance companies differentiate themselves through marketing techniques, product features, price, and customer service. The Company’s insurance subsidiaries compete with a large number of insurance companies, many of which have greater financial resources, a longer business history, and more diversified line of insurance products than the Company. In addition, such companies generally have a larger sales force. Further, the Company competes with mutual insurance companies which may have a competitive advantage because all profits accrue to policyholders. Because the Company is smaller by industry standards and lacks broad diversification of risk, it may be more vulnerable to losses than larger, better-established companies. The Company believes that its policies and rates for the markets it serves are generally competitive. The cemetery and mortuary industry is also highly competitive. In the Utah, California and New Mexico markets where the Company competes, there are a number of cemeteries and mortuaries which have longer business histories, more established positions in the community, and stronger financial positions than the Company. In addition, some of the cemeteries with which the Company must compete for sales are owned by municipalities and, as a result, can offer lower prices than can the Company. The Company bears the cost of a pre-need sales program that is not incurred by those competitors which do not have a pre-need sales force. The Company believes that its products and prices are generally competitive with those in the industry. The mortgage industry is highly competitive with a large number of mortgage companies and banks in the same geographic area in which the Company is operating. The mortgage industry in general is sensitive to changes in interest rates and the refinancing market is particularly vulnerable to changes in interest rates. ### Human Capital Management As of December 31, 2021, the Company employed 1,619 full-time and 114 part-time employees. Of the full-time employees, 1,118 were employed by the mortgage segment, 384 by the life insurance segment, and 116 by the cemetery and mortuary segment. The Company requires monthly acknowledgement of its anti-discrimination and anti-harassment policies and communicates to its employees how to report concerns that relate to their employment experience. #### Employee Benefits All eligible employees may elect coverage under the Company’s group health (including health savings and flexible spending), retirement, supplemental life and voluntary benefit programs. As of December 31, 2021, 878 employees had elected to participate in the Company’s group health insurance plans. The Company has an employee safe harbor retirement plan that qualifies under section 401(k) of the Internal Revenue Code and contributes a matching contribution based on the employee’s contribution and years of service. The Company provides other time off benefits such as paid sick and paid vacation time. The Company provides discounts on pre-need and death benefits to tenured employees. Additionally, the Company offers an employee assistance program that provides 24/7 counseling services for employees who may be facing challenges outside of the workplace. ## Properties As filed, 7,109 characters. | Street | City | State | Function | Owned / Leased | Approximate Square Footage | Lease Amount | | | Expiration | | --- | --- | --- | --- | --- | ---: | ---: | --- | --- | --- | | 921 Club House Blvd. | New Smyma Beach | FL | Mortgage Sales | Leased | 50 | $- | / | mo | month to month | | 106 A Adamson Square | Carrolton | GA | Mortgage Sales | Leased | 1,000 | $1,750 | / | mo | 10/31/2022 | | 900 Circle 75 Pkwy, Suite 175 | Atlanta | GA | Mortgage Sales | Leased | 3,020 | $6,156 | / | mo | 6/30/2026 | | 6600 Peachtree Dunwoody Rd., Suite 135 | Atlanta | GA | Mortgage Sales | Leased | 2,129 | $4,702 | / | mo | 3/31/2026 | | 1780 Stardust Trail | Cummings | GA | Mortgage Sales | Leased | 500 | $- | / | mo | month to month | | 102 Mary Alice Park Rd., Suite 506 | Cummings | GA | Mortgage Sales | Leased | 1,190 | $1,760 | / | mo | 12/31/2023 | | 4370 Kukui Grove St., Suite 201 | Lihue | HI | Mortgage Sales | Leased | 864 | $1,412 | / | mo | 2/28/2022 | | 1001 Kamokila Blvd. | Kapolei | HI | Mortgage Sales | Leased | 737 | $1,708 | / | mo | 12/31/2022 | | 32 Kinnoole St., Suite 101 | Hilo | HI | Mortgage Sales | Leased | 730 | $1,695 | / | mo | 5/31/2023 | | 1885 Main St., Suite 108 | Wailuku | HI | Mortgage Sales | Leased | 1,092 | $1,365 | / | mo | 5/14/2022 | | 116 N. 3rd St., Suite 12 | Mccall | ID | Mortgage Sales | Leased | 480 | $466 | / | mo | month to month | | 3597 E. Sky Lane, Suite 240 | Meridian | ID | Mortgage Sales | Leased | N/A | $2,088 | / | mo | 2/28/2022 | | 1832 Leabrook Ct. | Naperville | IL | Mortgage Sales | Leased | 100 | $50 | / | mo | 12/31/2022 | | 568 Greenluster Dr. | Covington | LA | Mortgage Sales | Leased | 150 | $750 | / | mo | month to month | | 8684 Veterans Hwy, Suite 101 | Millersville | MD | Mortgage Sales | Leased | 4,018 | $6,529 | / | mo | 7/31/2026 | | 4987 Fall Creek Rd. Suite 1 | Branson | MO | Mortgage Sales | Leased | 700 | $1,000 | / | mo | month to month | | 330 Camp Rd., Suite B-39 | Charlotte | NC | Mortgage Sales | Leased | N/A | $650 | / | mo | month to month | | 421 Fayetteville St., Suite 1100 | Raliegh | NC | Mortgage Sales | Leased | 130 | $2,158 | / | mo | 1/31/2022 | | 1980 Festival Plaza Dr., Suite 850 | Las Vegas | NV | Mortgage Sales | Leased | 12,866 | $43,774 | / | mo | 3/31/2027 | | 840 Pinnacle Ct., Suite 3 | Mesquite | NV | Mortgage Sales | Leased | 900 | $720 | / | mo | 3/12/2022 | | 2635 St. Rose Pkwy, Suites D 100 | Hendeson | NV | Mortgage Sales | Leased | 5,788 | $11,923 | / | mo | 9/30/2025 | | 8720 Orion Place, Suite 160 | Colombus | OH | Mortgage Sales | Leased | 1,973 | $1,850 | / | mo | 6/30/2023 | | 4294 Martin Dr. | North Olmstead | OH | Mortgage Sales | Leased | 100 | $- | / | mo | month to month | | 3311 NE MLK Jr Blvd., Suite 203 | Portland | OR | Mortgage Sales | Leased | 1,400 | $875 | / | mo | month to month | | 10365 SE Sunnyside Rd., Suite 310 | Clackamus | OR | Mortgage Sales | Sub-Leased | 1,288 | $2,733 | / | mo | 11/30/2022 | | 11104 SE Stark St., Suite S | Portland | OR | Mortgage Sales | Sub-Leased | 506 | $600 | / | mo | month to month | | 8285 SW Numbus, Suite 160 | Beaverton | OR | Mortgage Sales | Sub-Leased | 800 | $888 | / | mo | month to month | | 85 SE 5th St., Suite 102 | Madras | OR | Mortgage Sales | Leased | N/A | $450 | / | mo | month to month | | 110 Awendaw Way | Greenville | SC | Mortgage Sales | Leased | 50 | $- | / | mo | month to month | | 6263 Poplar Ave., Suite 900 | Memphis | TN | Mortgage Sales | Leased | 1,680 | $1,979 | / | mo | 3/31/2023 | | 144 Alf Taylor Rd. | Johnson City | TN | Mortgage Sales | Sub-Leased | 1,521 | $800 | / | mo | month to month | | 347 Main St., Suite 200 | Franklin | TN | Mortgage Sales | Leased | 2,444 | $5,874 | / | mo | 8/31/2025 | | 7241 Bahne Rd. | Fairview | TN | Mortgage Sales | Leased | 50 | $- | / | mo | month to month | | 1707 Fairview Blvd., Suite 101-C | Fairview | TN | Mortgage Sales | Leased | 120 | $500 | / | mo | 5/1/2023 | | 3027 Marina Bay Dr., Suite 200 | League City | TX | Mortgage Sales | Leased | 1,225 | $2,348 | / | mo | 4/30/2023 | | 11550 Fuqua, Suite 200 | Houston | TX | Mortgage Sales | Leased | 1,865 | $3,186 | / | mo | 6/30/2024 | | 1848 Norwood Plaza, Suite 213 | Hurst | TX | Mortgage Sales | Sub-Leased | 1,596 | $1,031 | / | mo | month to month | | 17347 Village Green Dr., Suite 102 | Houston | TX | Mortgage Sales | Sub-Leased | 3,300 | $8,970 | / | mo | 12/1/2024 | | 1626 Lee Trevino, Suite A | El Paso | TX | Mortgage Sales | Leased | 4,200 | $7,853 | / | mo | 12/31/2022 | | 9737 Great Hills Trail, Suites 150, 200, 220 | Austin | TX | Mortgage Sales | Leased | 19,891 | $38,539 | / | mo | 8/31/2024 | | 1213 East Alton Gloor Blvd., Suite H | Brownsville | TX | Mortgage Sales | Leased | 2,000 | $2,200 | / | mo | 2/28/2022 | | 5020 Collinwood Ave., Suite 100 | Fort Worth | TX | Mortgage Sales | Leased | 2,687 | $5,300 | / | mo | 1/31/2025 | | 2408 Jacaman Road, Suite F | Laredo | TX | Mortgage Sales | Leased | N/A | $900 | / | mo | 6/1/2022 | | 1900 Country Club Dr., Suite 150 | Mansfield | TX | Mortgage Sales | Leased | 175 | $325 | / | mo | month to month | | 3220 Gus Thomasson Rd. | Mesquite | TX | Mortgage Sales | Sub-Leased | 130 | $1,000 | / | mo | month to month | | 722 Kiowa Dr. West | Lake Kiowa | TX | Mortgage Sales | Leased | 150 | $495 | / | mo | month to month | | 2102 Jitterbug Ln. | Katy | TX | Mortgage Sales | Leased | 100 | $100 | / | mo | 1/31/2022 | | 124 N. Main St. | Mansfield | TX | Mortgage Sales | Sub-Leased | 100 | $3,000 | / | mo | month to month | | 4411 W. Illinois, Suite B-4 | Midland | TX | Mortgage Sales | Sub-Leased | 100 | $1,700 | / | mo | month to month | | 23227 Red River Dr. | Katy | TX | Mortgage Sales | Leased | 144 | $750 | / | mo | month to month | | 6401 Eldorado Pkwy, Suite 313 | McKinney | TX | Mortgage Sales | Sub-Leased | 345 | $796 | / | mo | month to month | | 590 W. State Street | Pleasant Grove | UT | Mortgage Sales | Leased | 250 | $500 | / | mo | month to month | | 6575 S. Redwood Rd. | Taylorsville | UT | Mortgage Sales | Leased | 3,323 | $5,491 | / | mo | 12/31/2022 | | 126 W. Sego Lily Dr., Suite 260 | Sandy | UT | Mortgage Sales | Leased | 2,794 | $6,781 | / | mo | 1/31/2027 | | 75 Towne Ridge Parkway, Suite 100 | Sandy | UT | Mortgage Sales | Leased | 6,867 | $17,196 | / | mo | 8/31/2023 | | 1133 North Main St., Suite 150 | Layton | UT | Mortgage Sales | Sub-Leased | 300 | $1,000 | / | mo | month to month | | 497 S. Main | Ephraim | UT | Mortgage Sales | Leased | 1,884 | $1,600 | / | mo | 4/30/2025 | | 11240 S. River Heights Dr. | South Jordan | UT | Mortgage Sales | Leased | 3,403 | $7,973 | / | mo | 11/30/2024 | | 500 East Village Blvd. | Stansbury Park | UT | Mortgage Sales | Leased | 1,950 | $3,276 | / | mo | 10/31/2024 | | 833 N. 900 W. | Orem | UT | Mortgage Sales | Leased | 2,391 | $3,104 | / | mo | 1/31/2023 | | 1350 E. 300 S. 3rd Floor | Lehi | UT | Mortgage Sales | Leased | 15,446 | $36,182 | / | mo | 12/22/2026 | | 2455 E. Parleys Way, Suites 120 & 150 | Salt Lake City | UT | Mortgage Sales | Leased | 5,256 | $8,530 | / | mo | 7/31/2030 | 12 ## Legal proceedings As filed, 3,752 characters. ### 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 the complaint filed in May 2011 and that filed in June 2011 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. 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. The full amount of SecurityNational Mortgage’s settlement payment was accounted for in the Company’s loan loss reserve as of December 31, 2020 and was paid during the first quarter 2021. ## Management's discussion and analysis As filed, 56,763 characters. ### Overview The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. The Company has adjusted its strategies to respond to the changing economic circumstances resulting from the COVID-19 pandemic. ### Insurance Operations The following table shows the condensed financial results for the Company’s insurance operations for the years ended December 31, 2021 and 2020. See Note 15 of the Notes to Consolidated Financial Statements. | Revenues from external customers: | Years ended December 31 (in thousands of dollars) 2021 | 2020 | 2021 vs 2020 % Increase (Decrease) | | --- | ---: | ---: | ---: | | Insurance premiums | $100,255 | $93,021 | 8% | | Net investment income | 56,092 | 54,811 | 2% | | Gains (losses) on investments and other assets | 4,555 | 2,089 | 118% | | Other than temporary impairments | (40) | (371) | (89)% | | Other | 2,152 | 1,492 | 44% | | Total | $163,014 | $151,042 | 8% | | Intersegment revenue | $7,570 | $8,023 | (6)% | | Earnings before income taxes | $14,973 | $11,923 | 26% | Intersegment revenues for the Company’s insurance operations were comprised primarily of interest income from the warehouse lines provided to the Company’s mortgage lending affiliates to fund loans held for sale. Profitability in 2021 increased due to a $7,234,000 increase in insurance premiums, a $2,466,000 increase in gains on investments and other assets, a $1,280,000 increase in net investment income, a $661,000 increase in other revenues, a $550,000 decrease in selling, general and administrative expenses, a $331,000 decrease in other than temporary impairments, and a $44,000 decrease in interest expense. This increase was partially offset by a $4,377,000 increase in death, surrenders and other policy benefits ($2,305,000 of which was related to COVID-19 related deaths), a $2,695,000 increase in future policy benefits, a $1,993,000 increase in amortization of deferred policy acquisition costs, and a $453,000 decrease in intersegment revenue. In response to the COVID-19 pandemic, the Company’s life insurance sales force began using virtual and tele sales processes to market products. During the third quarter 2021, the life insurance sales force returned to in person sales, however, it continues to use virtual and tele sales where needed. As of December 31, 2021, approximately 75% of insurance operations office staff were working in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed. ### Cemetery and Mortuary Operations The following table shows the condensed financial results for the Company’s cemetery and mortuary operations for the years ended December 31, 2021 and 2020. See Note 15 of the Notes to Consolidated Financial Statements. | Revenues from external customers: | Years ended December 31 (in thousands of dollars) 2021 | 2020 | 2021 vs 2020 % Increase (Decrease) | | --- | ---: | ---: | ---: | | Cemetery revenues | $15,626 | $12,454 | 25% | | Mortuary revenues | 8,371 | 7,854 | 7% | | Net investment income | 1,654 | 808 | 105% | | Gains on investments and other assets | 1,512 | (163) | 1028% | | Other | 100 | 94 | 6% | | Total | $27,263 | $21,047 | 30% | | Earnings before income taxes | $7,925 | $4,399 | 80% | Profitability in 2021 increased due to a $2,682,000 increase in cemetery pre-need sales, a $1,675,000 increase in gains on investments and other assets (which, in turn, was primarily attributable to a $1,092,000 increase in gains on real estate sales) and a $582,000 increase in the fair value of equity securities classified as restricted assets and cemetery perpetual care trust investments, an $846,000 increase in net investment income, a $518,000 increase in mortuary at-need sales, and a $490,000 increase in cemetery at-need sales. This increase was partially offset by a $2,559,000 increase in selling, general and administrative expenses, and a $451,000 increase in costs of goods sold. In response to the COVID-19 pandemic, the cemetery and mortuary’s pre-need sales force began using virtual selling processes to market its products and services including some in home sales as local regulations permitted. During the third quarter 2021, the sales force returned mostly to in home sales, however, it continues to use virtual selling where needed. Currently, the cemetery and mortuary operations office staff works in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed. ### Mortgage Operations The Company’s wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company, are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage originate and refinance mortgage loans on a retail basis. Mortgage loans originated or refinanced by the Company’s mortgage subsidiaries are funded through loan purchase agreements with Security National Life, Kilpatrick Life and unaffiliated financial institutions. The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 54% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. In December 2021, the Company ceased operations in EverLEND Mortgage and merged its operations into SecurityNational Mortgage. For the twelve months ended December 31, 2021 and 2020, SecurityNational Mortgage originated 19,342 loans ($5,502,894,000 total volume) and 21,206 loans ($5,472,503,000 total volume), respectively. For the twelve months ended December 31, 2021 and 2020, EverLEND Mortgage originated 323 loans ($108,295,000 total volume) and 511 loans ($154,511,000 total volume), respectively. Record low mortgage interest rates that prevailed during the third quarter of 2020 and into the first quarter of 2021 trended higher through the second, third and fourth quarters of 2021. Production volumes remained strong in the second, third and fourth quarters of 2021, particularly for purchase mortgage transactions but were below those experienced during the earlier low interest rate period. The following table shows the condensed financial results for the Company’s mortgage operations for the years ended December 31, 2021 and 2020. See Note 15 of the Notes to Consolidated Financial Statements. | Revenues from external customers: | Years ended December 31 (in thousands of dollars) 2021 | 2020 | 2021 vs 2020 % Increase (Decrease) | | --- | ---: | ---: | ---: | | Secondary gains from investors | $230,417 | $231,759 | (1)% | | Income from loan originations | 44,897 | 49,124 | (9)% | | Change in fair value of loans held for sale | (8,783) | 10,413 | (184)% | | Change in fair value of loan commitments | (3,113) | 7,637 | (141)% | | Net investment income | 519 | 711 | (27)% | | Gains on investments and other assets | 199 | 0 | 100% | | Other | 16,282 | 9,732 | 67% | | Total | $280,418 | $309,376 | (9)% | | Earnings before income taxes | $28,903 | $55,128 | (48)% | Included in other revenues is service fee income. Profitability in 2021 has decreased due to a $19,197,000 decrease in the fair value of loans held for sale, a $15,009,000 increase in personnel expenses, a $10,750,000 decrease in the fair value of loan commitments, a $4,662,000 increase in other expenses, a $4,225,000 decrease in income from loan originations, a $1,342,000 decrease in secondary gains from investors, a $664,000 increase in costs related to funding mortgage loans, a $520,000 increase in advertising expenses, a $477,000 increase in rent and rent related expenses, a $192,000 decrease in net investment income, a $117,000 decrease in intersegment revenues, and a $90,000 increase in other intersegment expenses. These decreases were partially offset by a $16,506,000 decrease in the provision for loan loss reserve, a $6,551,000 increase in other revenues, a $5,917,000 decrease in commissions, a $1,281,000 decrease in interest expense, a $470,000 decrease in intersegment interest expense, a $199,000 increase in gains on investments and other assets, and a $97,000 decrease in depreciation on property and equipment. In response to the COVID-19 pandemic, the mortgage operations has integrated employee work from home accommodations into its standard operating procedures. A large percentage of fulfillment employees are in office in 2021 compared to 2020, however the flexibility remains to accommodate in office or work from home functionality. ### Mortgage Loan Loss Settlements Future loan losses can be extremely difficult to estimate. However, management believes that the Company’s reserve methodology and its current practice of property preservation allow it to make reasonable estimates of potential losses on mortgage loans sold. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2021 and 2020, the balances were $2,447,000 and $20,584,000, respectively. ### Mortgage Loan Loss Litigation For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers Holdings, see Part I, Item 3. Legal Proceedings. ### Critical Accounting Policies and Estimates The following is a brief summary of the Company’s significant accounting policies and a review of the Company’s most critical accounting estimates. See Note 1 of the Notes to Consolidated Financial Statements. #### Insurance Operations In accordance with generally accepted accounting principles in the United States of America (“GAAP”), premiums and other considerations received for interest sensitive products are reflected as increases in liabilities for policyholder account balances and not as revenues. Revenues reported for these products consist of policy charges for the cost of insurance, administration charges, amortization of policy initiation fees and surrender charges assessed against policyholder account balances. Surrender benefits paid relating to these products are reflected as decreases in liabilities for policyholder account balances and not as expenses. The Company receives investment income earned from the funds deposited into account balances, a portion of which is passed through to the policyholders in the form of interest credited. Interest credited to policyholder account balances and benefit claims in excess of policyholder account balances are reported as expenses in the consolidated financial statements. Premiums and other considerations received for traditional life insurance products are recognized as revenues when due. Future policy benefits are recognized as expenses over the life of the policy by means of the provision for future policy benefits. The costs related to acquiring new business, including certain costs of issuing policies and other variable selling expenses (principally commissions), defined as deferred policy acquisition costs, are capitalized and amortized into expense. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued. For interest sensitive products, these costs are amortized generally in proportion to expected gross profits from surrender charges and investment, mortality and expense margins. This amortization is adjusted when the Company revises the estimate of current or future gross profits or margins. For example, deferred policy acquisition costs are amortized earlier than originally estimated when policy terminations are higher than originally estimated or when investments backing the related policyholder liabilities are sold at a gain prior to their anticipated maturity. Death and other policyholder benefits reflect exposure to mortality risk and fluctuate from year to year on the level of claims incurred under insurance retention limits. The profitability of the Company is primarily affected by fluctuations in mortality, other policyholder benefits, expense levels, interest spreads (i.e., the difference between interest earned on investments and interest credited to policyholders) and persistency. The Company has the ability to mitigate adverse experience through sound underwriting, asset and liability duration matching, sound actuarial practices, adjustments to credited interest rates, policyholder dividends and cost of insurance charges. #### Cemetery and Mortuary Operations Pre-need sales of funeral services and caskets, including revenue and costs associated with the sales of pre-need funeral services and caskets, are deferred until the services are performed or the caskets are delivered. Pre-need sales of cemetery interment rights (cemetery burial property), including revenue and costs associated with the sales of pre-need cemetery interment rights, are recognized in accordance with the retail land sales provisions of GAAP. Under GAAP, recognition of revenue and associated costs from constructed cemetery property must be deferred until a minimum percentage of the sales price has been collected. Revenues related to the pre-need sale of unconstructed cemetery property will be deferred until such property is constructed and meets the criteria of GAAP, described above. Pre-need sales of cemetery merchandise (primarily markers and vaults), including revenue and costs associated with the sales of pre-need cemetery merchandise, are deferred until the merchandise is delivered, fulfilling the performance obligation. Pre-need sales of cemetery services (primarily merchandise delivery and installation fees and burial opening and closing fees), including revenue and costs associated with the sales of pre-need cemetery services, are deferred until the services are performed. Prearranged funeral and pre-need cemetery customer obtaining costs, including costs incurred related to obtaining new pre-need cemetery and prearranged funeral business are accounted for under the guidance of the provisions of GAAP. Obtaining costs, which include only costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business, are deferred until the merchandise is delivered or services are performed. Revenues and costs for at-need sales are recorded when a valid contract exists, the services are performed, collection is reasonably assured, and there are no significant company obligations remaining. #### Mortgage Operations Mortgage fee income consists of origination fees, processing fees, interest income and certain other income related to the origination and sale of mortgage loans. The Company has elected to use fair value accounting for all mortgage loans that are held for sale. Accordingly, all revenues and costs are now recognized when the mortgage loan is funded and any changes in fair value are shown as a component of mortgage fee income. The Company, through its mortgage subsidiaries, sells mortgage loans to third-party investors without recourse, unless defects are identified in the representations and warranties made at loan sale. It may be required, however, to repurchase a loan or pay a fee instead of repurchase under certain events, which include the following: - Failure to deliver original documents specified by the investor, - The existence of misrepresentation or fraud in the origination of the loan, - The loan becomes delinquent due to nonpayment during the first several months after it is sold, - Early pay-off of a loan, as defined by the agreements, - Excessive time to settle a loan, - Investor declines purchase, and - Discontinued product and expired commitment. Loan purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company. It is the Company’s policy to cure any documentation problems regarding such loans at a minimal cost for up to a six-month time period and to pursue efforts to enforce loan purchase commitments from third-party investors concerning the loans. The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives. Remedial methods include the following: - Research reasons for rejection, - Provide additional documents, - Request investor exceptions, - Appeal rejection decision to purchase committee, and - Commit to secondary investors. Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six-month time period, the loans are repurchased and transferred to mortgage loans held for investment at the lower of cost or fair value and the previously recorded sales revenue that was to be received from a third-party investor is written off against the loan loss reserve. Any loan that later becomes delinquent is evaluated by the Company at that time and any impairment is adjusted accordingly. Determining fair value. Cost for loans held for sale is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Market value, while often difficult to determine and may contain significant unobservable inputs, is based on the following guidelines: - For loans that are committed, the Company uses the commitment price. - For loans that are non-committed that have an active market, the Company uses the market price. - For loans that are non-committed where there is no market but there is a similar product, the Company uses the market value for the similar product. - For loans that are non-committed where no active market exists, the Company determines that the unpaid principal balance best approximates the market value, after considering the fair value of the underlying real estate collateral, estimated future cash flows, and loan interest rate. 22 The appraised value of the real estate underlying the original mortgage loan adds significance to the Company’s determination of fair value because, if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan, thus minimizing credit risk. The majority of loans originated are sold to third-party investors. The amounts expected to be sold to investors are shown on the consolidated balance sheets as loans held for sale. Use of Significant Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. It is reasonably possible that actual experience could differ from the estimates and assumptions utilized which could have a material impact on the financial statements. The following is a summary of our significant accounting estimates, and critical issues that impact them: #### Loan Commitments The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed security (“MBS”) prices, estimates of the fair value of mortgage servicing rights, and an estimate of the probability that the mortgage loan will fund within the terms of the commitment net of estimated commission expense. The change in fair value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued and is shown net of related expenses. Following issuance, the value of a loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments. #### Deferred Acquisition Costs Amortization of deferred policy acquisition costs (“DAC”) for interest sensitive products is dependent upon estimates of current and future gross profits or margins on this business. Key assumptions used include the following: yield on investments supporting the liabilities, amount of interest or dividends credited to the policies, amount of policy fees and charges, amount of expenses necessary to maintain the policies, amount of death and surrender benefits, and the length of time the policies will stay in force. For nonparticipating traditional life products, these costs are amortized over the premium paying period of the related policies in proportion to the ratio of annual premium revenues to total anticipated premium revenues. Such anticipated premium revenues are estimated using the same assumption used for computing liabilities for future policy benefits and are generally “locked in” at the date the policies are issued. #### Value of Business Acquired Value of business acquired (“VOBA”) is the present value of estimated future profits of the acquired business and is amortized similar to deferred acquisition costs. The critical issues explained for deferred acquisition costs would also apply for value of business acquired. #### Mortgage Loans Foreclosed to Real Estate Held for Investment or Sale These properties are recorded at the lower of cost or fair value upon foreclosure. The Company believes that in an orderly market, fair value approximates the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for estimated future policy benefits. Accordingly, the fair value determination is generally weighted more heavily toward the rental analysis. The fair value is also estimated by obtaining an independent appraisal, which typically considers area comparable properties and property condition. #### Future Policy Benefits Reserves for future policy benefits for traditional life insurance products requires the use of many assumptions, including the duration of the policies, mortality experience, expenses, investment yield, lapse rates, surrender rates, and dividend crediting rates. These assumptions are made based upon historical experience, industry standards and a best estimate of future results and, for traditional life products, include a provision for adverse deviation. For traditional life insurance, once established for a particular series of products, these assumptions are generally held constant. #### Unearned Premium Reserve The universal life products the Company sells have significant policy initiation fees (front-end load) that are deferred and amortized into revenues over the estimated expected gross profits from surrender charges and investment, mortality and expense margins. The same issues that impact deferred acquisition costs would apply to unearned revenue. #### Premium Deficiency and Loss Recognition Testing At least annually, the Company tests the adequacy of the net benefit reserves (liability for future policy benefits, net of DAC and VOBA) recorded for life insurance and annuity products. The Company tests for recoverability by using the Company’s current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns. These tests evaluate whether the present value of future contract-related cash flows will support the capitalized DAC and VOBA assets. These cash flows consist primarily of premium income, less benefits and expenses. If the current contract liabilities plus the present value of future premiums is greater than the sum of the present values of future policy benefits, commissions, and expenses plus the current DAC and VOBA less unearned premium reserve balances, then the capitalized assets are deemed recoverable. The present values are calculated using the best estimate of the after tax net investment earned rate. #### Deferred Pre-need Cemetery and Funeral Contracts Revenues and Estimated Future Cost of Pre-need Sales The revenue and cost associated with the sales of pre-need cemetery merchandise and funeral services are deferred until the merchandise is delivered or the service is performed. The Company, through its cemetery and mortuary operations, provides a guaranteed funeral arrangement wherein a prospective customer can receive future goods and services at guaranteed prices. To accomplish this, the Company, through its life insurance operations, sells to the customer an increasing benefit life insurance policy that is assigned to the mortuaries. If, at the time of need, the policyholder or potential mortuary customer utilizes one of the Company’s facilities, the guaranteed funeral arrangement contract that has been assigned will provide the funeral goods and services at the contracted price. The increasing life insurance policy will cover the difference between the original contract prices and current prices. Risks may arise if the difference cannot be fully met by the life insurance policy. #### Mortgage Servicing Rights Mortgage Service Rights (“MSR”) arise from contractual agreements between the Company and third-party investors (or their agents) when mortgage loans are sold. Under these contracts, the Company is obligated to retain and provide loan servicing functions on the loans sold, in exchange for fees and other remuneration. The servicing functions typically performed include, among other responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling delinquent mortgagors; and supervising the acquisition of real estate owned and property dispositions. The Company initially accounts for MSRs at fair value and subsequently accounts for them using the amortization method. MSR amortization is determined by amortizing the MSR balance in proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. The Company periodically assesses MSRs accounted for using the amortization method for impairment. #### Mortgage Allowance for Loan Losses and Loan Loss Reserve The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account) and through the mortgage loan loss reserve (a liability account). The allowance for loan losses is an allowance for losses on the Company’s mortgage loans held for investment. The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. In addition, when a mortgage loan is past due more than 90 days, the Company does not accrue any interest income. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them. The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on mortgage loans sold to third-party investors. The Company may be required to reimburse third-party investors for costs associated with early payoff of loans within six months of origination of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities. Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale relating to any guarantee or recourse provisions in the event of defects in the representations and warranties made at loan sale. The Company accrues a monthly allowance for indemnification losses to investors based on total production. This estimate is based on the Company’s historical experience and is included as a component of mortgage fee income. Subsequent updates to the recorded liability from changes in assumptions are recorded in selling, general and administrative expenses. The estimated liability for indemnification losses is included in other liabilities and accrued expenses. The Company believes the allowance for loan losses and the loan loss reserve represent probable loan losses incurred as of the balance sheet date. #### Deferred Tax Assets and Liabilities Deferred tax assets and liabilities require various estimates and judgments and may be affected favorably or unfavorably by various internal and external factors. These estimates and judgments occur in the calculation of certain deferred tax assets and liabilities that arise from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes and in estimating the ultimate amount of deferred tax assets recoverable in future periods. Factors affecting the deferred tax assets and liabilities include, but are not limited to, changes in tax laws, regulations and/or rates, changing interpretations of existing tax laws or regulations, and changes to overall levels of pre-tax earnings. Changes in these estimates, judgments or factors may result in an increase or decrease to the Company’s deferred tax assets and liabilities with a related increase or decrease in the Company’s provision for income taxes. ### Results of Consolidated Operations ### 2021 Compared to 2020 Total revenues decreased by $10,768,000, or 2.2%, to $470,695,000 for 2021 from $481,463,000 for the fiscal year 2020. Contributing to this decrease in total revenues was a $35,515,000 decrease in mortgage fee income. This decrease in total revenues was offset by a $7,234,000 increase in insurance premiums and other considerations, a $7,218,000 increase in other revenues, a $4,339,000 increase in gains on investments and other assets, a $3,690,000 increase in net cemetery and mortuary sales, a $1,935,000 increase in net investment income, and a $331,000 decrease in other than temporary impairments. Mortgage fee income decreased by $35,515,000, or 11.9%, to $263,418,000 for 2021, from $298,933,000 for 2020. This decrease was primarily due to a $29,947,000 decrease in the fair value of loans held for sale and loan commitments, a $6,951,000 decrease in loan fees and interest income, and a $1,342,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market. This decrease in mortgage fee income was partially offset by a $2,727,000 decrease in the provision for loan loss reserve. Insurance premiums and other considerations increased by $7,234,000, or 7.8%, to $100,255,000 for 2021, from $93,021,000 for 2020. This increase was due to an increase of $1,859,000 in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying policies in force and an increase of $5,375,000 in first year premiums as a result of increased preneed insurance sales. Net investment income increased by $1,935,000, or 3.4%, to $58,265,000 for 2021, from $56,330,000 for 2020. This increase was primarily attributable to a $3,086,000 increase in mortgage loan interest, a $1,224,000 increase in insurance assignment income, and a $389,000 increase in rental income from real estate held for investment. This increase was partially offset by a $1,463,000 decrease in fixed maturity securities income, a $835,000 increase in investment expenses, a $196,000 decrease in equity securities income, a $191,000 decrease in interest on cash and cash equivalents, and an $84,000 decrease in policy loan income. Net mortuary and cemetery sales increased by $3,690,000, or 18.2%, to $23,997,000 for 2021, from $20,307,000 for 2020. This increase was primarily due to a $2,682,000 increase in cemetery pre-need sales, a $518,000 increase in mortuary at-need sales, and a $490,000 increase in cemetery at-need sales. Gains on investments and other assets increased by $4,339,000, or 225.3%, to $6,265,000 for 2021, from $1,926,000 for 2020. This increase in gains on investments and other assets was primarily due to a $1,940,000 increase in gains on other assets mostly attributable to gains recognized on the sale of mortgage loans held for investment, a $1,922,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, and a $477,000 increase in gains on fixed maturity securities. Other revenues increased by $7,218,000, or 63.8%, to $18,535,000 for 2021 from $11,317,000 for 2020. This increase was primarily attributable to an increase in servicing fee revenue. Total benefits and expenses were $418,895,000, or 89.0% of total revenues for 2021, as compared to $410,013,000, or 85.2% of total revenues for 2020. Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $7,072,000, or 8.2%, to $93,482,000 for 2021, from $86,410,000 for 2020. This increase was primarily the result of a $4,207,000 increase in death benefits ($2,305,000 for COVID-19 related deaths), a $2,695,000 increase in future policy benefits, and a $170,000 increase in surrender and other policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,836,000, or 12.8%, to $16,143,000 for 2021, from $14,307,000 for 2020. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs. Selling, general and administrative expenses increased by $974,000, or 0.3%, to $298,438,000 for 2021, from $297,464,000 for 2020. This increase was primarily the result of a $15,750,000 increase in personnel expenses, a $5,735,000 increase in other expenses, a $1,245,000 increase in advertising expenses, a $664,000 increase in costs related to funding mortgage loans, and a $369,000 increase in rent and rent related expenses. This increase was partially offset by a $16,506,000 decrease in the provision for loan loss reserve, a $6,140,000 decrease in commissions, and a $143,000 decrease in depreciation on property and equipment. Interest expense decreased by $1,451,000, or 16.9%, to $7,128,000 for 2021, from $8,579,000 for 2020. This decrease was primarily due to a decrease of $1,281,000 in interest expense on mortgage warehouse lines for loans held for sale. Cost of goods and services sold of the cemeteries and mortuaries increased by $451,000, or 13.9%, to $3,704,000 for 2021, from $3,253,000 for 2020. This increase was primarily due to a $232,000 increase in cemetery at-need sales, a $151,000 increase in cemetery pre-need sales, and a $68,000 increase in mortuary at-need sales. Income tax expense decreased by $3,572,000, or 22.5%, to $12,282,000 for 2021, from $15,854,000 for 2020. This decrease was primarily due to a decrease in earnings before income taxes for 2021 compared to 2020. ### Risks The following is a description of the material risks facing the Company and how it mitigates those risks: Legal and Regulatory Risks. Changes in the legal or regulatory environment in which the Company operates may create additional expenses and risks not anticipated by the Company in developing and pricing its products. Regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. In addition, changes in tax law with respect to mortgage interest deductions or other public policy or legislative changes may affect the Company’s mortgage sales. Also, the Company may be subject to further regulations in the cemetery and mortuary business. The Company aims to mitigate these risks by offering a wide range of products and by diversifying its operations, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices that identify and minimize the adverse impact of such risks. Mortgage Industry Risks. Developments in the mortgage industry and credit markets can adversely affect the Company’s ability to sell its mortgage loans to investors, which can impact the Company’s financial results by requiring it to assume the risk of holding and servicing any unsold loans. The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company could realize in the future on mortgage loans sold to third-party investors. The Company’s mortgage subsidiaries may be required to reimburse third-party investors for costs associated with early payoff of loans within the first six months of such loans and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company’s estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities. During the twelve months ended December 31, 2021 and 2020 the Company increased its loan loss reserve by $2,211,000 and $4,938,000, respectively, for loan originations, and the charges have been included in mortgage fee income. During the twelve months ended December 31, 2021 and 2020 the Company increased its loan loss reserve by an additional $-0- and $16,506,000, respectively, to account for changes in estimates specific to settlements of loan losses. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2021 and 2020, the balances were $2,447,000 and $20,584,000, respectively. The Company believes the loan loss reserve represent probable loan losses incurred as of December 31, 2021. There is a risk, however, that future loan losses may exceed the loan loss reserve. As of December 31, 2021, the Company’s mortgage loans held for investment portfolio consisted of mortgage loans in an aggregate principal amount of $4,272,000 with delinquencies exceeding 90 days. Of this amount, loans with an aggregate principal amount of $497,000 were in foreclosure proceedings. The Company has not received or recognized any interest income on the $4,272,000 in mortgage loans with delinquencies exceeding 90 days. During the twelve months ended December 31, 2021 and 2020, the Company decreased and increased its allowance for loan losses by $305,000 and by $552,000, respectively, which was charged to bad debt expense and included in selling, general and administrative expenses for the period. The allowances for loan losses on the Company’s held for investment portfolio as of December 31, 2021 and 2020 were $1,700,000 and $2,005,000, respectively. Interest Rate Risk. Fluctuations in interest rates may cause a decrease in the value of the Company’s investments or impair the ability of the Company to market its mortgage and cemetery and mortuary products. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company aims to mitigate this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, the Company might have to borrow funds or sell assets prior to maturity and potentially recognize a loss on the sale. Mortality and Morbidity Risks. The Company’s actuarial assumptions differing from actual mortality and morbidity experienced may mean that the Company’s relevant products sold were underpriced, may require the Company to liquidate insurance or other claims earlier than planned, and have other potentially adverse consequences to the business. The Company aims to minimize this risk through sound underwriting practices, asset and liability duration matching, and sound actuarial practices. COVID-19. During 2020, the outbreak of COVID-19 had spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19, and its variants, pose a threat to the health and economic well-being of the Company’s employees, customers, and vendors. The Company continues to closely monitor developments relating to the ongoing COVID-19 pandemic and assessing its impact on the Company’s business. The continued uncertainty surrounding the COVID-19 pandemic has had and continues to have a significant impact on the global economy and financial markets. Governments and businesses have taken numerous measures to try to contain the virus and its variants, which include the implementation of travel bans, self-imposed quarantine periods, social distancing, and various mask and vaccine mandates. These measures have disrupted and will continue to disrupt businesses globally. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize the economic conditions. Like most businesses, COVID-19 has impacted the Company, including the adoption of work from home arrangements and a restructuring of selling techniques for its products and services. The Company also experienced increased expenses for cleaning services of its offices. Throughout 2021 the Company continued to adapt to the impact of COVID-19. The Company cannot, with any certainty predict the severity or duration with which COVID-19 will impact the Company’s business, financial condition, results of operations, and cash flows. To the extent the COVID-19 pandemic adversely affects the Company’s business, financial condition, and results of operations, it may also have the effect of heightening many of the other Company risks. These uncertainties have the potential to negatively affect the risk of credit default for the issuers of the Company’s fixed maturity debt securities and individual borrowers with mortgage loans held by the Company. The Company has implemented risk management, business continuity plans and has taken preventive measures and other precautions, including some remote work arrangements. Such measures and precautions have enabled the Company to continue to conduct business. Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are those used in determining the value of derivative assets and liabilities; those used in determining deferred acquisition costs and the value of business acquired; those used in determining the value of mortgage loans foreclosed to real estate held for investment; those used in determining the liability for future policy benefits and unearned revenue; those used in determining the estimated future costs for pre-need sales; those used in determining the value of mortgage servicing rights; those used in determining allowances for loan losses for mortgage loans held for investment; those used in determining loan loss reserve; and those used in determining deferred tax assets and liabilities. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects. ### Liquidity and Capital Resources The Company’s life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the sale or maturity of investments. The mortgage subsidiaries realize cash flow from fees generated by originating and refinancing mortgage loans and fees on mortgage loans held for sale that are sold to investors. It should be noted that current conditions in the financial markets and economy caused by the COVID-19 pandemic may affect the realization of these expected cash flows. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses. During the twelve months ended December 31, 2021 and 2020, the Company’s operations provided cash of $144,638,000 and used cash of $129,627,000, respectively. This change from cash used in operations to cash from operations was primarily due to the decreased originations of mortgage loans held for sale. The Company’s liability for future policy benefits is expected to be paid out over the long-term due to the Company’s market niche of selling funeral plans. Funeral plans are small face value life insurance policies that payout upon a person’s death to cover funeral burial costs. Policyholders generally keep these policies in force and do not surrender them prior to death. Because of the long-term nature of these liabilities, the Company is able to hold to maturity its bonds, real estate, and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in their fair values. The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held to maturity in the portfolio to help in this timing matching. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company’s products. The Company’s investment philosophy is intended to provide a rate of return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements. The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $259,005,000 (at estimated fair value) and $294,384,000 (at estimated fair value) as of December 31, 2021 and 2020, respectively. This represented 31.5% and 38.0% of the total investments as of December 31, 2021, and 2020, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are six categories used for rating bonds. At December 31, 2021, 3.9% (or $9,991,000) and at December 31, 2020, 4.2% (or $12,418,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade. See Note 2 of the Notes to Consolidated Financial Statements for the schedule of the maturity of fixed maturity securities available for sale and for the schedule of principal payments for mortgage loans held for investment. See Note 7 of the Notes to Consolidated Financial Statements for a description of the Company’s sources of liquidity. If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio (of approximately $536,594,000), which includes bonds, preferred stocks and mortgage loans held for investment, could change by the following amounts based on the respective basis point swing (the change in the fair values were calculated using a modeling technique): | | -200 bps | -100 bps | +100 bps | +200 bps | | --- | ---: | ---: | ---: | ---: | | Change in Fair Value (in thousands) | $33,663 | $16,294 | $(18,444) | $(35,813) | The Company is subject to risk-based capital guidelines established by statutory regulators requiring minimum capital levels based on the perceived risk of assets, liabilities, disintermediation, and business risk. At December 31, 2021 and 2020, the life insurance subsidiaries were in compliance with the regulatory criteria. The Company’s total capitalization of stockholders’ equity, and bank loans and other loans payable was $551,054,000 as of December 31, 2021, as compared to $561,811,000 as of December 31, 2020. Stockholders’ equity as a percent of total capitalization was 54.4% and 47.0% as of December 31, 2021 and December 31, 2020, respectively. Bank loans and other loans payable decreased by $46,537,000 for the twelve months ended December 31, 2021 as compared to December 31, 2020, and stockholders’ equity increased by $35,780,000 for the twelve months ended December 31, 2021 as compared to December 31, 2020, thus causing the increase in the stockholders’ equity percentage. Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance was 4.8% in 2021 as compared to a rate of 5.9% for 2020. The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $82,823,000 and $78,493,000 as of December 31, 2021 and 2020, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities. Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements to encourage companies to provide prospective information about their businesses without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. The Company desires to take advantage of the “safe harbor” provisions of the act. This Annual Report on Form 10-K contains forward-looking statements, together with related data and projections, about the Company’s projected financial results and its future plans and strategies. However, actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company on the basis of management’s then-current expectations. The business in which the Company is engaged involves changing and competitive markets, which may involve a high degree of risk, and there can be no assurance that forward-looking statements and projections will prove accurate. Factors that may cause the Company’s actual results to differ materially from those contemplated or projected, forecast, estimated or budgeted in such forward looking statements include among others, the following possibilities: (i) heightened competition, including the intensification of price competition, the entry of new competitors, and the introduction of new products by new and existing competitors; (ii) adverse state and federal legislation or regulation, including decreases in rates, limitations on premium levels, increases in minimum capital and reserve requirements, benefit mandates and tax treatment of insurance products; (iii) fluctuations in interest rates causing a reduction of investment income or increase in interest expense and in the market value of interest rate sensitive investment; (iv) failure to obtain new customers, retain existing customers or reductions in policies in force by existing customers; (v) higher service, administrative, or general expenses due to the need for additional advertising, marketing, administrative or management information systems expenditures; (vi) loss or retirement of key executives or employees; (vii) increases in medical costs; (viii) changes in the Company’s liquidity due to changes in asset and liability matching; (ix) restrictions on insurance underwriting based on genetic testing and other criteria; (x) adverse changes in the ratings obtained by independent rating agencies; (xi) failure to maintain adequate reinsurance; (xii) possible claims relating to sales practices for insurance products and claim denials; (xiii) adverse trends in mortality and morbidity; (xiv) deterioration of real estate markets; and (xv) lawsuits in the ordinary course of business. Off-Balance Sheet Agreements The Company has entered into commitments to fund construction and land development loans and has also provided financing for land acquisition and development. As of December 31, 2021, the Company’s commitments were approximately $329,903,000 for these loans, of which $179,673,000 had been funded. The Company advances funds once the work has been completed and an inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed 5.50% to 8.00% per annum. Maturities generally range between six and eighteen months. ### Contractual Obligations In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations. Such obligations include operating leases for office space, agreements with respect to borrowed funds and future policy benefits. See Notes 7, 22, 24 of the Notes to Consolidated Financial Statements for more information about these obligations. ### Casualty Insurance Program In conjunction with the Company’s casualty insurance program, limited equity interests are held in a captive insurance entity. This program permits the Company to self-insure a portion of losses, to gain access to a wide array of safety-related services, to pool insurance risks and resources in order to obtain more competitive pricing for administration and reinsurance and to limit its risk of loss in any particular year. The maximum exposure to loss related to the Company’s involvement with this entity is limited to approximately $443,758, which is collateralized under a standby letter of credit issued on the insurance entity’s behalf. See Note 10, “Reinsurance, Commitments and Contingencies,” for additional discussion of commitments associated with the insurance program. The Company does not expect any material losses to result from the issuance of the standby letter of credit because claims are not expected to exceed premiums paid. ## Controls and procedures As filed, 3,410 characters. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. (a) Management’s annual report on internal control over financial reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”), and includes those policies and procedures that: - Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company, - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors of the Company, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether the Company’s internal control over financial reporting was effective as of December 31, 2021. Based on that assessment management believes that at December 31, 2021, the Company’s internal control over financial reporting was effective. This annual report on internal control over financial reporting does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report. (b) Changes in internal control over financial reporting. There was no change in the Company’s internal control over financial reporting that occurred in the fourth quarter 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Filed Mar 31, 2022. Source: SEC EDGAR, the filing index for accession 0001493152-22-008236. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.