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. Insurance Operations The following table shows the condensed financial results for the Company’s insurance operations for 2024 and 2023. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2024 2023 2024 vs 2023 % Increase (Decrease) Revenues from external customers: Insurance premiums $ 119,656 $ 114,658 4 % Net investment income 68,255 67,812 1 % Mortgage fee income 0 77 (100 %) Gains on investments and other assets 2,055 963 113 % Other revenues 1,564 1,666 (6 %) Intersegment revenues 7,272 8,203 (11 %) Total segment revenues $ 198,802 $ 193,379 3 % Segment net earnings $ 24,851 $ 21,617 15 % Profitability for 2024 increased due to (a) a $4,998,000 increase in insurance premiums and other considerations, (b) a $3,301,000 decrease in death, surrenders and other policy benefits, (c) a $2,323,000 decrease in amortization of deferred policy acquisition costs, (d) a $1,092,000 increase in gains on investments and other assets, (e) a $443,000 increase in net investment income, and (f) a $354,000 decrease in interest expense, which were partially offset by (i) a $2,949,000 increase in income tax expense, (ii) a $2,929,000 increase in selling, general and administrative expenses, (iii) a $2,245,000 increase in future policy benefits, (iv) a $931,000 decrease in intersegment revenue, (v) a $102,000 decrease in other revenues, (vi) a $77,000 decrease in mortgage fee income, and (vii) a $42,000 increase in intersegment interest expense and other expenses. Cemetery and Mortuary Operations The following table shows the condensed financial results for the Company’s cemetery and mortuary operations for 2024 and 2023. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2024 2023 2024 vs 2023 % Increase (Decrease) Revenues from external customers: Cemetery revenues $ 16,101 $ 15,189 6 % Mortuary revenues 12,936 12,676 2 % Net investment income 2,569 2,952 (13 %) Gains on investments and other assets 873 717 22 % Other revenues 543 404 34 % Intersegment revenues 341 340 0 % Total segment revenues $ 33,363 $ 32,278 3 % Segment net earnings $ 6,634 $ 6,313 5 % 19 Profitability in 2024 increased due to (a) a $1,140,000 increase in cemetery pre-need sales, (b) a $260,000 increase in mortuary at-need sales, (c) a $156,000 increase in gains on investments and other assets, (d) a $139,000 increase in other revenues, and (e) a $26,000 decrease in intersegment interest expense and other expenses, which were partially offset by (i) a $458,000 increase in selling, general and administrative expenses, (ii) a $383,000 decrease in net investment income, (iii) a $239,000 increase in amortization of deferred policy acquisition costs, (iv) a $228,000 decrease in cemetery at-need sales, and (v) a $96,000 increase in income tax expense. 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 originates 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 SecurityNational Mortgage are funded through loan purchase agreements with the Company, 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 0.44% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. US Treasury rates continue to remain elevated despite the downward trend in inflation data and the Federal Reserve’s action to reduce rates. This has resulted in higher-than-expected mortgage rates, which in turn has further decreased the demand for loan originations classified as refinance. The higher-than-expected mortgage rates have also continued to have a negative effect on loan originations classified as purchases. For 2024 and 2023, SecurityNational Mortgage originated 7,269 loans ($2,295,830,000 total volume) and 7,185 loans ($2,173,081,000 total volume), respectively. The following table shows the condensed financial results for the Company’s mortgage operations for 2024 and 2023. See Note 15 of the Notes to Consolidated Financial Statements. Years ended December 31 (in thousands of dollars) 2024 2023 2024 vs 2023 % Increase (Decrease) Revenues from external customers: Secondary gains from investors $ 70,355 $ 68,428 3 % Income from loan originations 33,604 31,245 8 % Change in fair value of loans held for sale 2,870 (478 ) 700 % Change in fair value of loan commitments 730 (1,124 ) 165 % Net investment income 902 1,580 (43 %) Gains on investments and other assets (986 ) 157 (728 %) Other revenues 2,497 1,576 58 % Intersegment revenues 573 531 8 % Total segment revenues $ 110,545 $ 101,915 8 % Segment net loss $ (4,949 ) $ (13,435 ) 63 % 20 Losses in 2024 compared to 2023 decreased due to (a) a $4,251,000 decrease in other expenses, (b) a $3,348,000 increase in the fair value of loans held for sale, (c) a $2,359,000 increase in income from loan originations, (d) a $2,177,000 decrease in personnel expenses, (e) a $1,927,000 increase in secondary gains from investors, (f) a $1,854,000 increase in the fair value of loan commitments, (g) a $1,729,000 decrease in rent and rent related expenses, (h) a $921,000 increase in other revenues, (i) a $904,000 decrease in intersegment interest expense and other expenses, (j) a $330,000 decrease in advertising expenses, (k) a $306,000 decrease in costs related to funding mortgage loans, (l) a $257,000 decrease in interest expense, (m) a $42,000 increase in intersegment revenues, and (n) a $29,000 decrease in depreciation on property and equipment, which were partially offset by (i) a $7,410,000 increase in commissions, (ii) a $2,717,000 increase in income tax expense, (iii) a $1,143,000 decrease in gains on investments and other assets, and (iv) a $678,000 decrease in net investment income. Critical Accounting Policies and Estimates The Company’s significant accounting policies are fundamental to understanding its results of operations and financial condition as they require that the Company use estimates and assumptions that may affect the value of its assets or liabilities and financial results. See Note 1 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for further information. Five of these policies, discussed below, relate to critical estimates because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. Actual results could differ from those estimates. The Company’s Management and the Audit Committee of the Board of Directors have reviewed and approved the accounting policies associated with these critical estimates. 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. Deferred Acquisition Costs and Value of Business Acquired 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 (“VOBA”) is the present value of estimated future profits of the acquired business and is amortized like deferred acquisition costs. The critical issues explained for deferred acquisition costs would also apply for value of business acquired. 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. 21 Loan Loss Reserve The Company provides for losses on its mortgage loans held for sale through the mortgage loan loss reserve (a liability account). 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. 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 be funded within the terms of the commitments. Results of Consolidated Operations 2024 Compared to 2023 Total revenues increased by $16,025,000, or 5.0%, to $334,522,000 for 2024 from $318,497,000 for 2023. Contributing to this increase in total revenues was primarily a $9,411,000 increase in mortgage fee income, a $4,997,000 increase in insurance premiums and other considerations, a $1,172,000 increase in net cemetery and mortuary sales, a $958,000 increase in other revenues, and a $105,000 increase in gains on investments and other assets. This increase in total revenues was offset by a $618,000 decrease in net investment income. Mortgage fee income increased by $9,411,000, or 9.6%, to $107,559,000 for 2024, from $98,148,000 for 2023. This increase was primarily due to a $5,202,000 increase in the fair value of loans held for sale and loan commitments, a $3,264,000 increase in loan fees and interest income, a $1,850,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market. This increase in mortgage fee income was partially offset by a $905,000 increase in the provision for loan loss reserve. Insurance premiums and other considerations increased by $4,997,000, or 4.4%, to $119,656,000 for 2024, from $114,659,000 for 2023. This increase was due to an increase of $2,555,000 in first year premiums because of increased preneed insurance sales and an increase of $2,442,000 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. Net investment income decreased by $618,000, or 0.9%, to $71,725,000 for 2024, from $72,343,000 for 2023. This decrease was primarily attributable to a $3,416,000 decrease in rental income from real estate held for investment and a $3,290,000 decrease in mortgage loan interest. This decrease was partially offset by a $2,427,000 increase in interest on cash and cash equivalents, a $1,853,000 increase in insurance assignment income, a $941,000 decrease in investment expenses, a $461,000 increase in fixed maturity securities income, a $189,000 increase in income in other investments, a $137,000 increase in policy loan income, and an $82,000 increase in equity securities income. Net mortuary and cemetery sales increased by $1,172,000, or 4.2%, to $29,037,000 for 2024, from $27,865,000 for 2023. This increase was primarily due to a $1,140,000 increase in cemetery pre-need sales and a $260,000 increase in mortuary at-need sales. This increase was partially offset by a $228,000 decrease in cemetery at-need sales. 22 Gains on investments and other assets increased by $105,000, or 5.7%, to $1,942,000 for 2024, from $1,837,000 for 2023. This increase in gains on investments and other assets was primarily due to a $614,000 increase in gains on real estate held for investment, a $234,000 increase in gains on other assets, a $210,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, and a $208,000 increase in gains on fixed maturity securities. This increase was partially offset by a $1,161,000 decrease in gains on mortgage loans held for investment. Other revenues increased by $958,000, or 26.3%, to $4,604,000 for 2024 from $3,646,000 for 2023. This increase was primarily attributable to a $1,350,000 legal settlement, which was partially offset by a decrease of $392,000 in other miscellaneous revenues. Total benefits and expenses were $300,419,000, or 89.8% of total revenues for 2024, as compared to $302,197,000, or 94.9% of total revenues for 2023. Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $1,056,000, or 1.1%, to $98,956,000 for 2024, from $100,012,000 for 2023. This decrease was primarily the result of a $3,274,000 decrease in death benefits and a $27,000 decrease in surrender and other policy benefits. This decrease was partially offset by a $2,245,000 increase in future policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $2,084,000, or 11.6%, to $15,940,000 for 2024, from $18,024,000 for 2023. This decrease was primarily due to increased payment consistency from premium-paying products along with a decrease in new business. Selling, general and administrative expenses increased by an aggregate of $1,975,000, or 1.1%, to $176,465,000 for 2024, from $174,490,000 for 2023. This increase was primarily the result of a $7,043,000 increase in commissions, a $1,943,000 increase in personnel expenses, and a $32,000 increase in depreciation on property and equipment. This increase was partially offset by a $4,432,000 decrease in other expenses, a $1,710,000 decrease in rent and rent related expenses, a $595,000 decrease in advertising expenses, and a $306,000 decrease in costs related to funding mortgage loans. Interest expense decreased by $611,000, or 12.6%, to $4,254,000 for 2024, from $4,865,000 for 2023. This decrease was primarily due to a decrease of $354,000 in interest expense on bank loans and a decrease of $257,000 in interest expense on mortgage warehouse lines of credit for loans held for sale. Income tax expense increased by $5,763,000, or 319.2%, to $7,568,000 for 2024, from $1,805,000 for 2023. This increase was primarily due to an increase in earnings before income taxes for 2024 compared to 2023. The Company’s overall effective tax rate increased from 11.1% for 2023 to 22.2% in 2024, a 11.1% increase in the effective tax rate or a 100.6% change. This increase was partially due to the prior period reducing the valuation allowance to zero and no valuation allowance adjustment in the current period. 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 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. 23 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 2024 and 2023 the Company increased its loan loss reserve by $150,000 and decreased its loan loss reserve by $1,178,000, 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, 2024 and 2023, the balances were $697,000 and $547,000, respectively. The Company believes the loan loss reserve represents probable loan losses incurred as of December 31, 2024. There is a risk, however, that future loan losses may exceed the loan loss reserve. As of December 31, 2024, the Company’s mortgage loans held for investment portfolio consisted of mortgage loans in an aggregate principal amount of $11,400,000 with delinquencies exceeding 90 days. Of this amount, loans with an aggregate principal amount of $4,134,000 were in foreclosure proceedings. The Company has not received or recognized any interest income on the $11,400,000 in mortgage loans with delinquencies exceeding 90 days. During 2024 and 2023, the Company decreased its allowance for credit losses by $1,934,000 and increased it by $1,184,000, respectively, which was charged to bad debt expense and included in selling, general and administrative expenses for the period. The main reasons for the decrease in 2024 when compared to 2023 were due to a decrease in the commercial loan held for investment portfolio, further refinement of the Company’s quantitative loss analysis and general market improvements related to the residential mortgage loan held for investment single family portfolio. The allowances for credit losses on the Company’s mortgage loans held for investment portfolio as of December 31, 2024 and 2023 were $1,885,000 and $3,819,000, 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 make 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. 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 liability for future policy benefits; those used in determining the value of loans held for sale; and those used in determining loan loss reserve. Although some variability is inherent in these estimates, management believes the amounts provided are fairly stated in all material respects. 24 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 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. As of December 31, 2024, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its warehouse lines of credit and its operating cash flow covenant for its standby letter of credit with its primary bank. SecurityNational Mortgage has received or is in the process of receiving waivers from the warehouse banks. In the unlikely event SecurityNational Mortgage is required to repay the outstanding advances of approximately $10,587,449 on the warehouse line of credit that has not provided a covenant waiver, SecurityNational Mortgage has sufficient cash and borrowing capacity on the warehouse lines of credit that have provided covenant waivers to fund its origination activities. The Company has done an internal analysis of the funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its business model. The Company continues to negotiate other warehouse lines of credit with other lenders. During 2024 and 2023, the Company’s operations provided cash of $57,320,000 and of $53,875,000, respectively. The increase in cash provided by operations was due primarily to the increase in net earnings. The Company expects to pay out liabilities under its funeral plans over the long term given the nature of those 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 until, and do not surrender prior to, death. Because of the long-term nature of these liabilities, the Company can hold to maturity or for the targeted investment period its corresponding bond, real estate, and mortgage loan investments, thus reducing the risk of liquidating these long-term investments because 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 expected short-term requirements of the Company’s insurance products. The Company’s investment philosophy is intended to provide a rate of return for the expected duration of its cemetery and mortuary policies that will exceed the accruing of liabilities under those policies 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. The warehoused mortgage loans are typically held for sale on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the Company’s life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $348,774,000 (at estimated fair value) and $362,663,000 (at estimated fair value) as of December 31, 2024 and 2023, respectively. This represented 38.0% and 38.7% of the total investments of the Company as of December 31, 2024, and 2023, 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. As of December 31, 2024, 2.4% (or $8,431,000) and as of December 31, 2023, 1.8% (or $6,954,000) of the insurance subsidiaries’ 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. 25 If market conditions were to cause interest rates to change, the fair value of the Company’s fixed income portfolio (of approximately $668,293,000), 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 $ 46,923 $ 21,650 $ (22,661 ) $ (45,101 ) (in thousands) The Company’s life insurance subsidiaries are 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. As of December 31, 2024 and 2023, 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 $445,758,000 as of December 31, 2024, as compared to $418,450,000 as of December 31, 2023. This increase was primarily due to a $26,122,000 increase in stockholders’ equity and an increase of $1,185,000 in bank loans and other loans payable. Stockholders’ equity as a percentage of total capitalization was 76.1% and 74.8% as of December 31, 2024 and 2023, respectively. Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance was 7.0% for 2024 as compared to a rate of 4.4% for 2023. The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $120,216,000 and $107,385,000 as of December 31, 2024 and 2023, respectively. The life insurance subsidiaries cannot pay dividends 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 plans and strategies. However, the actual results and needs of the Company may vary materially from forward-looking statements and projections made from time to time by the Company based on 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. 26 Off-Balance Sheet Agreements The Company has commitments to fund existing construction and land development loans pursuant to the various loan agreements. As of December 31, 2024, the Company’s commitments were approximately $216,368,000 for these loans, of which $152,361,000 had been funded. The Company advances funds in accordance with the loan agreements once the work has been completed and an independent inspection is made. The maximum loan commitment ranges between 50% and 80% of appraised value. The Company receives fees and interest for these loans and the interest rate is generally fixed at 5.25% to 8.50% per annum. Maturities range between six and eighteen months. Contractual Obligations In the ordinary course of the Company’s operations, the Company enters 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. Captive Insurance Participation The Company has a limited equity interest in a captive insurance entity (the “Captive’) that provides workers compensation, general liability and automobile insurance . This program permits the Company to pool insurance risks and resources with like-minded companies in order to obtain more competitive pricing for claims administration, stop loss insurance premiums and to limit its risk of loss in any particular year. The Captive also provides access to a wide array of safety-related services and regular safety training to help the Company control claims. The maximum exposure to a loss related to the Company’s involvement in the Captive 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 has been a member of the Captive since 2006 and does not expect any material losses to result from the issuance of the standby letter of credit given the Company’s past performance. 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. 27