10-Q: Security National Financial Reports Q2 Profit Drop

Security National Financial Corporation reported a significant decline in net earnings for the six months ended June 30, 2025, despite an increase in total revenues.

Summary

• Total revenues increased by $5,301,000, or 3.2%, to $172,281,000 for the six months ended June 30, 2025, compared to $166,980,000 in the prior year.
• Net earnings decreased by $3,901,424, or 26.5%, to $10,844,647 for the six months ended June 30, 2025, from $14,746,071 in the comparable period of 2024.
• Net earnings per Class A Equivalent common share decreased to $0.44 for the six months ended June 30, 2025, from $0.60 in the prior year.
• The Mortgage Operations segment reported a net loss of $2,771,990 for the six months ended June 30, 2025, a 95% increase in loss compared to $1,418,129 loss in the prior year.
• The Life Insurance segment's net earnings decreased by 14% to $10,549,028 for the six months ended June 30, 2025.
• The Cemetery and Mortuary segment's net earnings decreased by 20% to $3,067,609 for the six months ended June 30, 2025.
• Total assets increased by 3.6% to $1,543,978,107 as of June 30, 2025, from $1,489,807,214 at December 31, 2024.
• Cash and cash equivalents decreased by 43.6% to $79,317,770 as of June 30, 2025, from $140,546,421 at December 31, 2024.
• The company originated 3,375 mortgage loans totaling $1,134,783,000 in volume for the six months ended June 30, 2025, compared to 3,494 loans totaling $1,089,824,000 in the prior year period.

Sentiment

Score: 4

Explanation: The significant decline in net earnings and increased losses in the mortgage segment, coupled with a debt covenant non-compliance, indicate a challenging period. While revenue growth and investment gains are positive, they do not offset the core profitability issues. The increased life insurance lapse rate is also a concern.

Positives

• Total revenues increased by 3.2% for the six months ended June 30, 2025.
• Net investment income increased by 4.7% to $39,783,000 for the six months ended June 30, 2025.
• Gains on investments and other assets increased by 33.8% to $1,729,000 for the six months ended June 30, 2025.
• Mortgage segment's secondary gains from investors increased by 11% to $37,140,000 for the six months ended June 30, 2025.
• Total stockholders' equity increased by 4.7% to $354,754,718 as of June 30, 2025.
• Accumulated other comprehensive loss improved significantly, reducing from $(6,951,266) at December 31, 2024, to $(1,830,143) at June 30, 2025.
• The company's life insurance subsidiaries were in compliance with risk-based capital guidelines as of June 30, 2025.
• The company was in compliance with all debt covenants for its revolving lines of credit and real estate loans as of June 30, 2025.
• Personnel expenses increased due to annual salary increases and key new hires as part of the company's growth strategy.

Negatives

• Net earnings decreased by 26.5% for the six months ended June 30, 2025.
• Net earnings per Class A Equivalent common share decreased by 26.7% for the six months ended June 30, 2025.
• The Mortgage Operations segment's net loss increased by 95% for the six months ended June 30, 2025.
• Life Insurance segment net earnings decreased by 14% due to increased selling, general and administrative expenses, amortization of deferred policy acquisition costs, and death benefits.
• Cemetery and Mortuary segment net earnings decreased by 20% due to a 47% decrease in net investment income and increased personnel expenses.
• Cemetery revenues decreased by 5% for the six months ended June 30, 2025.
• Cash and cash equivalents decreased by 43.6% from December 31, 2024.
• Selling, general and administrative expenses increased by 9.7% for the six months ended June 30, 2025.
• Interest expense increased by 14.8% for the six months ended June 30, 2025, primarily due to mortgage warehouse lines of credit and bank loans.
• The lapse rate for life insurance increased from 4.4% in 2023 to 7.0% in 2024, and remained approximately the same in 2025, indicating higher policy terminations.
• The company was not in compliance with the net income covenant of Western Alliance Bank's warehouse line of credit as of June 30, 2025.

Risks

• Non-compliance with the net income covenant of Western Alliance Bank's warehouse line of credit, requiring waivers to avoid potential repayment demands.
• Exposure to price risk from changes in interest rates on loan commitments and forward sale commitments in the mortgage segment.
• Potential for additional reserves from the captive insurance group if actual claims or adverse development of loss reserves exceed estimates.
• Concentrations of credit risk in mortgage loans, particularly in Utah, Florida, Arizona, California, Texas, and Hawaii, making the portfolio sensitive to regional economic stability.
• Higher inherent risk in residential construction and land acquisition/development loans due to their sensitivity to general economic conditions, availability of long-term financing, and interest rate fluctuations.
• Fluctuations in the ultimate percentage of loan commitments that will be exercised, influenced by changes in mortgage rates and other factors.
• The company is ultimately liable for reinsured amounts in the event that reinsurers are unable to pay their portion of claims.

Future Outlook

The company expects to continue its three core strategies: focusing on niche insurance products like funeral plans and traditional whole life policies, emphasizing the cemetery and mortuary business, and capitalizing on an improving housing market through mortgage loan originations. The company is currently assessing the impact of the newly enacted One Big Beautiful Bill Act (OBBBA) but does not anticipate a material impact on its consolidated financial statements. It also continues to negotiate other warehouse lines of credit with lenders.

Management Comments

• "The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage."
• "The Company believes that the Companys reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold."
• "In the unlikely event the Company is required to repay the outstanding advances of approximately $12,751,822 on the warehouse lines of credit, the Company has sufficient cash to do so."
• "The Company has also performed an analysis of its funding capacities of both internal and external sources and has determined that there are sufficient funds to continue its current business model."
• "The Company continues to negotiate other warehouse lines of credit with other lenders."
• "The Company expects to pay out liabilities under its funeral plans over the long term given the nature of those plans."
• "The Companys 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 is currently assessing its impact [of OBBBA], however the Company does not expect a material impact to its consolidated financial statements."
• The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2025.

Industry Context

The mortgage segment's performance was impacted by rising U.S. Treasury yields and increased inflation, which led to higher mortgage rates. This resulted in a decrease in refinance loan originations and a negative effect on purchase loan originations, although less significant. The company's life insurance business focuses on niche products like funeral plans, which it believes are less competitive. The company's fixed maturity securities portfolio is largely investment grade, with 98.1% rated NAIC 1 or 2, aligning with regulatory standards for insurance companies.

Comparison to Industry Standards

• The company's fixed maturity securities portfolio had 98.1% rated investment grade (NAIC 1 or 2) as of June 30, 2025, indicating a strong credit quality in line with prudent insurance industry investment practices.
• The life insurance lapse rate increased from 4.4% in 2023 to 7.0% in 2024, and remained similar in 2025. Without specific industry benchmarks for comparable niche funeral plan policies, it is difficult to assess if this rate is better or worse than industry standards, but it represents an increase in policy terminations for the company.

Legal Proceedings

• The company is not a party to any material legal proceedings outside the ordinary course of business or to any other legal proceedings which, if adversely determined, would have a material adverse effect on its financial condition or results of operations.

Related Party Transactions

• The company has a 50% ownership interest in HHH Real Estate LLC, accounted for under the equity method of accounting, which holds and develops single family lots for residential construction.
• Mortgage loans originated by SecurityNational Mortgage are funded through loan purchase agreements with Security National Life and Kilpatrick Life (wholly-owned subsidiaries).

Stakeholder Impact

• Shareholders: Negative impact due to significant decrease in net earnings and earnings per share. The ongoing stock repurchase program may offer some support.
• Employees: Positive impact indicated by increased personnel expenses due to annual salary increases and key new hires.
• Creditors: Potential concern due to non-compliance with a debt covenant, although management asserts sufficient liquidity and is seeking waivers.
• Policyholders/Customers: No direct negative impact mentioned, but increased life insurance lapse rates could indicate some policyholder behavior changes.

Next Steps

• Adopt ASU No. 2018-12 (Targeted Improvements to the Accounting for Long-Duration Contracts) commencing with the annual reporting period ending December 31, 2025.
• Adopt ASU No. 2023-09 (Improvements to Income Tax Disclosures) commencing with the annual reporting period ending December 31, 2025.
• Adopt ASU No. 2024-03 (Disaggregation of Income Statement Expenses) commencing with the annual reporting period ending December 31, 2027.
• SecurityNational Mortgage is in the process of receiving waivers for non-compliance with the net income covenant of Western Alliance Bank's warehouse line of credit.
• Continue negotiating other warehouse lines of credit with other lenders.

Key Dates

Recommendation

While the company experienced a significant decline in net earnings and increased losses in its mortgage segment, it also demonstrated overall revenue growth and improved comprehensive income. The non-compliance with a debt covenant is a concern, but management is actively addressing it and asserts sufficient liquidity. The company's diversified business model across insurance, mortgage, and cemetery/mortuary segments provides some resilience. A seasoned investor would likely hold to monitor the resolution of the debt covenant issue and assess if the profitability declines are temporary or indicative of deeper structural challenges, especially given the long-term nature of its core insurance and cemetery businesses.

Keywords

Financial Services, Life Insurance, Mortgage Lending, Cemetery Operations, Mortuary Services, SEC Filing, Quarterly Report, Investment Income, Loan Originations, Real Estate Investment, Debt Covenants, Share Repurchase