SECURITY NATIONAL FINANCIAL CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview The Company’s operations over the last several years generally reflect three strategies which the Company expects to continue: (i) increased attention to “niche” insurance products, such as the Company’s funeral plan policies and traditional whole life products; (ii) increased emphasis on cemetery and mortuary business; and (iii) capitalizing on the housing market by originating mortgage loans. The Company has adjusted its strategies to respond to the changing economic circumstances resulting from COVID-19. Insurance Operations The following table shows the condensed financial results for the Company’s insurance operations for the years ended December 31, 2022 and 2021. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2022 2021 2022 vs 2021 % Increase (Decrease) Revenues from external customers: Insurance premiums $ 105,002 $ 100,255 5 % Net investment income 62,565 56,092 12 % Gains (losses) on investments and other assets (459 ) 4,555 (110 %) Other than temporary impairments - (40 ) 100 % Other 2,075 2,152 (4 %) Total $ 169,183 $ 163,014 4 % Intersegment revenue $ 6,601 $ 7,570 (13 %) Earnings before income taxes $ 14,196 $ 14,973 (5 %) 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 for 2022 decreased due to (a) a $4,974,000 decrease in gains on investments and other assets primarily due to a decrease in the fair value of equity securities, (b) a $3,345,000 increase in selling, general and administrative expenses, (c) a $2,596,000 increase in future policy benefits, (d) a $1,741,000 increase in amortization of deferred policy acquisition costs primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs, (e) a $1,641,000 increase in interest expense, (f) a $968,000 decrease in intersegment revenue, and (g) a $220,000 decrease in other revenues, which were partially offset by (i) a $6,473,000 increase in net investment income, (ii) a $4,890,000 increase in insurance premiums and other considerations, (iii) a $3,152,000 decrease in death, surrenders and other policy benefits, and (iv) a $193,000 decrease in intersegment interest expense and other expenses. 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. Currently, approximately 75% of insurance operations office staff work in the office with the flexibility for hybrid-remote or completely remote working arrangements as needed. 19 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, 2022 and 2021. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2022 2021 2022 vs 2021 % Increase (Decrease) Revenues from external customers: Cemetery revenues $ 13,871 $ 15,626 (11 %) Mortuary revenues 13,123 8,371 57 % Net investment income 2,445 1,654 48 % Gains (losses) on investments and other assets (796 ) 1,512 (153 %) Other 305 100 205 % Total $ 28,948 $ 27,263 6 % Earnings before income taxes $ 6,094 $ 7,925 (23 %) Profitability in 2022 decreased due to (a) a $2,398,000 increase in selling, general and administrative expenses, (b) a $2,308,000 decrease in gains on investments and other assets primarily attributable to a $579,000 decrease in gains on real estate sales and a $1,729,000 decrease in gains on equity securities classified as restricted assets and cemetery perpetual care trust investments primarily due to a decrease in the fair value of equity securities, (c) a $2,066,000 decrease in cemetery pre-need sales, (d) a $1,017,000 increase in costs of goods sold, (e) a $225,000 increase in intersegment interest expense and other expenses, and (f) a $66,000 increase in amortization of deferred policy acquisition costs, which were partially offset by (i) a $4,751,000 increase in mortuary at-need sales, (ii) a $791,000 increase in net investment income, (iii) a $311,000 increase in cemetery at-need sales, (iv) a $205,000 increase in other revenues (v) a $137,000 increase in intersegment revenues, and (vi) a $54,000 decrease in interest expense. 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 subsidiary, SecurityNational Mortgage, is a mortgage lender 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 originates and refinances 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. SecurityNational Mortgage receives 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. Mortgage loans are generally sold with mortgage servicing rights (“MSRs”) released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the MSRs on approximately 7% 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. On October 31, 2022, the Company sold certain of its MSRs. The MSRs related to mortgage loans previously originated by the Company in aggregate unpaid principal amount of approximately $7.02 billion. As a result of the sale, the book value of the Company’s MSRs decreased $51,185,906 and generated a gain of $34,051,938 included in mortgage fee income on the consolidated statements of earnings. 20 For the twelve months ended December 31, 2022 and 2021, SecurityNational Mortgage originated 10,663 loans ($3,373,554,000 total volume) and 19,342 loans ($5,502,894,000 total volume), respectively. For the twelve months ended December 31, 2021, EverLEND Mortgage originated 323 loans ($108,295,000 total volume). Mortgage rates have followed the US Treasury yields up in response to the higher than expected inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance’. Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchase’, although not as significant as those in the refinance classification. The following table shows the condensed financial results for the Company’s mortgage operations for the years ended December 31, 2022 and 2021. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2022 2021 2022 vs 2021 % Increase (Decrease) Revenues from external customers: Secondary gains from investors $ 153,728 $ 230,417 (33 %) Income from loan originations 32,772 44,897 (27 %) Change in fair value of loans held for sale (8,835 ) (8,783 ) 1 % Change in fair value of loan commitments (4,309 ) (3,113 ) 38 % Net investment income 1,188 519 129 % Gains on investments and other assets 398 199 100 % Other 16,580 16,282 2 % Total $ 191,522 $ 280,418 (32 %) Earnings before income taxes $ 14,088 $ 28,903 (51 %) Included in other revenues is service fee income. Profitability in 2022 has decreased due to (a) a $76,689,000 decrease in secondary gains from investors, (b) a $12,125,000 decrease in income from loan originations, (c) $1,196,000 decrease in the fair value of loan commitments, (d) a $1,124,000 increase in intersegment expenses, (e) a $242,000 decrease in intersegment revenues, (e) a $51,000 increase in depreciation on property and equipment, and (f) a $51,000 decrease in the fair value of loans held for sale, which were partially offset by (i) a $55,003,000 decrease in commissions, (ii) an $8,481,000 decrease in other expenses, (iii) a $4,360,000 decrease in personnel expenses, (iv) a $3,002,000 decrease in costs related to funding mortgage loans, (v) a $2,230,000 decrease in intersegment interest expense, (vi) a $1,474,000 decrease in advertising expenses, (vii) a $884,000 decrease in interest expense, (viii) $669,000 increase in net investment income, (ix) a $297,000 increase in other revenues, (x) a $199,000 increase in gains on investments and other assets, (xi) and a $64,000 decrease in rent and rent related expenses. 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 however the flexibility remains to accommodate in office or work from home functionality. 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. 21 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. 22 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. 23 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. 24 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 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. 25 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 2022 Compared to 2021 Total revenues decreased by $81,043,000, or 17.2%, to $389,652,000 for 2022 from $470,695,000 for the fiscal year 2021. Contributing to this decrease in total revenues was a $89,918,000 decrease in mortgage fee income and a $7,123,000 decrease in gains on investments and other assets and other than temporary impairments. This decrease in total revenues was offset by a $7,933,000 increase in net investment income, a $4,747,000 increase in insurance premiums and other considerations, a $2,997,000 increase in net cemetery and mortuary sales, a $281,000 increase in other revenues, and a $40,000 decrease in other than temporary impairments. 26 Mortgage fee income decreased by $89,918,000, or 34.1%, to $173,500,000 for 2022, from $263,418,000 for 2021. This decrease was primarily due to a $76,546,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market, a $13,258,000 decrease in loan fees and interest income, a $1,247,000 decrease in the fair value of loans held for sale and loan commitments. This decrease in mortgage fee income was partially offset by a $1,133,000 decrease in the provision for loan loss reserve. Insurance premiums and other considerations increased by $4,747,000, or 4.7%, to $105,002,000 for 2022, from $100,255,000 for 2021. This increase was due to an increase of $2,253,000 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 $2,494,000 in first year premiums as a result of increased final expense insurance sales. Net investment income increased by $7,933,000, or 13.6%, to $66,198,000 for 2022, from $58,265,000 for 2021. This increase was primarily attributable to a $6,191,000 increase in mortgage loan interest, a $2,228,000 increase in rental income from real estate held for investment, a $1,626,000 increase in fixed maturity securities income, a $1,431,000 increase in interest on cash and cash equivalents, a $388,000 increase in income in other investments, and a $65,000 increase in equity securities income. This increase was partially offset by a $3,039,000 increase in investment expenses, a $949,000 decrease in insurance assignment income, and an $8,000 decrease in policy loan income. Net mortuary and cemetery sales increased by $2,997,000, or 12.5%, to $26,994,000 for 2022, from $23,997,000 for 2021. This increase was primarily due to a $4,751,000 increase in mortuary at-need sales and a $311,000 increase in cemetery at-need sales. This increase was partially offset by a $2,065,000 decrease in cemetery pre-need sales Gains on investments and other assets decreased by $7,123,000, or 113.7%, to $858,000 in losses for 2022, from $6,265,000 in gains for 2021. This decrease in gains on investments and other assets was primarily due to a $5,243,000 decrease in gains on equity securities mostly attributable to decreases in the fair value of these equity securities, a $1,197,000 decrease in gains on other assets mostly attributable to a decrease in gains recognized on the sale of mortgage loans held for investment, and a $683,000 decrease in gains on fixed maturity securities. Other revenues increased by $282,000, or 1.5%, to $18,817,000 for 2022 from $18,535,000 for 2021. This increase was primarily attributable to an increase in servicing fee revenue. Total benefits and expenses were $355,275,000, or 91.2% of total revenues for 2022, as compared to $418,895,000, or 89.0% of total revenues for 2021. Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $556,000, or 0.6%, to $92,926,000 for 2022, from $93,482,000 for 2021. This decrease was primarily the result of a $3,870,000 decrease in death benefits ($4,296,000 for COVID-19 related deaths). This decrease was partially offset by a $2,596,000 increase in future policy benefits and a $718,000 increase in surrender and other policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $1,807,000, or 11.2%, to $17,950,000 for 2022, from $16,143,000 for 2021. 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 decreased by $66,590,000, or 22.3%, to $231,848,000 for 2022, from $298,438,000 for 2021. This decrease was primarily the result of a $54,965,000 decrease in commissions, a $7,268,000 decrease in other expenses, a $3,002,000 decrease in costs related to funding mortgage loans, a $928,000 decrease in advertising expenses, a $629,000 decrease in personnel expenses, and a $359,000 decrease in rent and rent related expenses. This decrease was partially offset by a $561,000 increase in depreciation on property and equipment. Interest expense increased by $703,000, or 9.9%, to $7,830,000 for 2022, from $7,127,000 for 2021. This increase was primarily due to a $1,587,000 increase in interest expense on bank loans, which was partially offset by a decrease of $884,000 in interest expense on mortgage warehouse lines for loans held for sale. 27 Cost of goods and services sold of the cemeteries and mortuaries increased by $1,017,000, or 27.5%, to $4,721,000 for 2022, from $3,704,000 for 2021. This increase was primarily due to a $1,196,000 increase in mortuary at-need sales and a $77,000 increase in cemetery at-need sales, which was partially offset by a $256,000 decrease in cemetery pre-need sales. Income tax expense decreased by $3,595,000, or 29.3%, to $8,687,000 for 2022, from $12,282,000 for 2021. This decrease was primarily due to a decrease in earnings before income taxes for 2022 compared to 2021. 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 subsidiary 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, 2022 and 2021 the Company increased its loan loss reserve by $1,079,000 and $2,211,000, respectively, for loan originations, and the charges have been included in mortgage fee income. The estimated liability for indemnification losses is included in other liabilities and accrued expenses and, as of December 31, 2022 and 2021, the balances were $1,726,000 and $2,447,000, respectively. The Company believes the loan loss reserve represents probable loan losses incurred as of December 31, 2022. There is a risk, however, that future loan losses may exceed the loan loss reserve. As of December 31, 2022, the Company’s mortgage loans held for investment portfolio consisted of mortgage loans in an aggregate principal amount of $2,567,000 with delinquencies exceeding 90 days. Of this amount, loans with an aggregate principal amount of $1,281,000 were in foreclosure proceedings. The Company has not received or recognized any interest income on the $2,567,000 in mortgage loans with delinquencies exceeding 90 days. During the twelve months ended December 31, 2022 and 2021, the Company increased its allowance for loan losses by $270,000 and by $305,000, 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, 2022 and 2021 were $1,970,000 and $1,700,000, 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. 28 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 . Like most businesses, COVID-19 has impacted the Company, including the temporary adoption of work-from-home arrangements for employees and a restructuring of selling techniques for its products and services. Throughout 2021 and 2022, the Company continued to adapt to the impact of COVID-19 and its related economic effects. The Company experienced, like all life insurance companies, higher than expected death rates during the pandemic. Death rates in 2022 declined over 2021 and 2020, but remain higher than pre-COVID-19 levels. Banking Environment . Item 7.01 Regulation FD Disclosure. Silicon Valley Bank was placed in receivership with the Federal Deposit Insurance Corporation (“ FDIC “). On March 12, 2023, the FDIC announced that depositors of Silicon Valley Bank will have access to all of their funds starting Monday, March 13, 2023. On March 12, 2023, Signature Bank was placed in receivership with the FDIC. On March 12, 2023, the FDIC announced that banking activities will resume on Monday, March 13, 2023. The Company does not maintain any deposit or other accounts or credit facilities with Silicon Valley Bank or Signature Bank, or their successors. The Company holds one bond with a par value of $250,000 in the Company’s debt portfolio and is junior in priority to a debt investment of Silicon Valley Bank or its successors. The Company continues to monitor the banking industry. The information furnished in this Item 7.01 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing. 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 into the secondary market. It should be noted that current conditions in the financial markets and economy caused by COVID-19 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, 2022 and 2021, the Company’s operations provided cash of $130,450,000 and of $144,638,000, respectively. The decrease in cash provided by operations was due primarily to decreased proceeds from the sale of loans held for sale. 29 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 $345,598,000 (at estimated fair value) and $259,005,000 (at estimated fair value) as of December 31, 2022 and 2021, respectively. This represented 36.4% and 31.5% of the total investments as of December 31, 2022, and 2021, 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, 2022, 2.2% (or $7,833,000) and at December 31, 2021, 3.9% (or $9,991,000) 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 $653,982,000), 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) $ 60,877 $ 29,720 $ (32,592 ) $ (63,748 ) 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, 2022 and 2021, 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 $454,499,000 as of December 31, 2022, as compared to $551,054,000 as of December 31, 2021. Stockholders’ equity as a percent of total capitalization was 64.4% and 54.4% as of December 31, 2022 and December 31, 2021, respectively. Bank loans and other loans payable decreased by $89,574,000 for the twelve months ended December 31, 2022 as compared to December 31, 2021, and stockholders’ equity decreased by $6,981,000 for the twelve months ended December 31, 2022 as compared to December 31, 2021, 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 4.3% in 2022 as compared to a rate of 4.8% for 2021. 30 The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $94,254,000 and $82,823,000 as of December 31, 2022 and 2021, 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, 2022, the Company’s commitments were approximately $231,250,000 for these loans, of which $175,754,000 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 5.25% to 8.50% 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. Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the Company is not required to provide information typically disclosed under this item. 31