SECURITY NATIONAL FINANCIAL CORP 10-Q

Item 2. 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 the cemetery and mortuary business; and (iii) capitalizing on an improving housing market by originating mortgage loans. Insurance Operations The Company’s life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning. A funeral plan is a small face value life insurance policy that generally has face coverage of up to $30,000. The Company believes that funeral plans represent a marketing niche that is less competitive because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person’s death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs. The following table shows the condensed financial results of the insurance operations for the three- and nine-month periods ended September 30, 2025, and 2024. See Note 7 to the condensed consolidated financial statements. Three months ended September 30, (in thousands of dollars) Nine months ended September 30, (in thousands of dollars) 2025 2024 % Increase (Decrease) 2025 2024 % Increase (Decrease) Revenues from external customers: Insurance premiums $ 29,881 $ 30,011 0 % $ 89,846 $ 89,824 0 % Net investment income 19,279 17,106 13 % 57,910 52,902 9 % Gains on investments and other assets 1,259 1,317 (4 %) 2,423 2,195 10 % Other revenues 372 420 (11 %) 1,423 1,141 25 % Intersegment revenues 2,044 2,066 (1 %) 5,193 5,352 (3 %) Total segment revenues $ 52,835 $ 50,920 4 % $ 156,795 $ 151,414 4 % Segment net earnings $ 5,508 $ 9,706 (43 %) $ 16,057 $ 22,035 (27 %) Profitability for the nine month period ended September 30, 2025 decreased due to (a) a $5,991,000 increase in selling, general and administrative expenses, primarily attributable to a $3,623,000 increase in personnel expenses due to an annual increase in salaries and key new hires as a part of the Company’s growth strategy, (b) a $4,728,000 increase in amortization of deferred policy acquisition costs, (c) a $2,896,000 increase in death benefits, (d) a $354,000 increase in surrenders and other policy benefits (e) a $159,000 decrease in intersegment revenue, and (f) a $22,000 increase in interest expense, which were partially offset by (i) a $5,008,000 increase in net investment income, (ii) a $1,490,000 decrease in income tax expense, (iii) a $983,000 decrease in future policy benefits, (iv) a $282,000 increase in other revenues, (v) a $228,000 increase in gains on investments and other assets, (vi) a $157,000 decrease in intersegment expenses, and (vii) a $22,000 increase in insurance premiums and other considerations. Cemetery and Mortuary Operations The Company sells mortuary services and products through its eleven mortuaries in Utah and four mortuaries in New Mexico. The Company also sells cemetery services, products and land (burial plots) through its five cemeteries in Utah, one cemetery in San Diego County, California, and one cemetery in Santa Fe, New Mexico. At-need mortuary and cemetery product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need mortuary and cemetery product sales and services are deferred until the merchandise is delivered, or services are performed. Revenue for pre-need cemetery land sales is recognized at the time of sale, and land is removed from inventory. 69 The following table shows the condensed financial results of the cemetery and mortuary operations for the three- and nine-month periods ended September 30, 2025, and 2024. See Note 7 to the condensed consolidated financial statements. Three months ended September 30, (in thousands of dollars) Nine months ended September 30, (in thousands of dollars) 2025 2024 % Increase (Decrease) 2025 2024 % Increase (Decrease) Revenues from external customers: Cemetery revenues $ 3,624 $ 3,598 1 % $ 11,428 $ 11,776 (3 %) Mortuary revenues 3,517 3,216 9 % 10,271 9,755 5 % Net investment income 642 478 34 % 1,529 2,137 (28 %) Gains on investments and other assets 712 1,125 (37 %) 1,193 1,504 (21 %) Other revenues 433 126 244 % 767 436 76 % Interesegment revenues 86 86 0 % 254 255 0 % Total segment revenues $ 9,014 $ 8,629 4 % $ 25,442 $ 25,863 (2 %) Segment net earnings $ 2,287 $ 2,123 8 % $ 5,355 $ 5,959 (10 %) Profitability in the nine month period ended September 30, 2025 decreased due to (a) a $701,000 increase in selling, general and administrative expenses, primarily attributable to a $555,000 increase in personnel expenses, (b) a $608,000 decrease in net investment income, (c) a $311,000 decrease in gains on investments and other assets, (d) a $240,000 decrease in cemetery pre-need sales, (e) a $108,000 decrease in cemetery at-need sales, and (f) a $1,000 decrease in intersegment revenues, which were partially offset by (i) a $516,000 increase in mortuary at-need sales, (ii) a $331,000 increase in other revenues, (iii) a $303,000 decrease in income tax expense, (iv) a $101,000 decrease in cost of goods and services sold, (v) a $92,000 decrease in amortization of deferred policy acquisition costs, and (vi) a $22,000 decrease in intersegment expenses. Mortgage Operations The Company’s wholly owned subsidiary, SecurityNational Mortgage Company (“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 the SecurityNational Mortgage 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 mortgage servicing rights on approximately 0.43% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer. Mortgage rates have followed the US Treasury yields in response to inflation and slowing new home sales. As expected, the lack of mortgage rate reductions has resulted in a decrease in loan originations classified as ‘refinance.’ Higher than anticipated mortgage rates have also had a negative effect on loan originations classified as ‘purchases’ although not as significant as those in the refinance classification. For the nine-month periods ended September 30, 2025, and 2024, SecurityNational Mortgage originated 5,216 loans ($1,756,289,000 total volume) and 5,505 loans ($1,723,036,000 total volume), respectively. 70 The following table shows the condensed financial results of the mortgage operations for the three- and nine-month periods ended September 30, 2025, and 2024. See Note 7 to the condensed consolidated financial statements. Three months ended September 30, (in thousands of dollars) Nine months ended September 30, (in thousands of dollars) 2025 2024 % Increase (Decrease) 2025 2024 % Increase (Decrease) Revenues from external customers Secondary gains from investors $ 20,378 $ 17,982 13 % $ 57,518 $ 51,388 12 % Income from loan originations 8,953 9,462 (5 %) 24,551 25,619 (4 %) Change in fair value of loans held for sale (203 ) 2,960 (107 %) 404 3,856 (90 %) Change in fair value of loan commitments 11 (180 ) (106 %) 960 812 18 % Net investment income 189 216 (13 %) 455 751 (39 %) Gains (losses) on investments and other assets 1 (1,094 ) 100 % 85 (1,059 ) 108 % Other revenues 279 1,532 (82 %) 844 2,216 (62 %) Intersegment revenues 76 138 (45 %) 272 430 (37 %) Total segment revenues $ 29,684 $ 31,016 (4 %) $ 85,089 $ 84,013 1 % Segment net earnings (loss) $ 20 $ 2 900 % $ (2,752 ) $ (1,416 ) 94 % Losses for the nine month period ended September 30, 2025 increased due to (a) a $3,452,000 decrease in the fair value of loans held for sale, (b) a $2,075,000 increase in commissions, (c) a $1,371,000 decrease in other revenues, (d) a $1,197,000 increase in other expenses, (e) a $1,068,000 decrease in income from loan originations, (f) a $443,000 increase in costs related to funding mortgage loans, (g) a $337,000 increase in advertising expenses, (h) a $296,000 increase in interest expense, (i) a $296,000 decrease in net investment income, and (j) a $157,000 decrease in intersegment revenues, which were partially offset by (i) a $6,130,000 increase in secondary gains from investors, (ii) a $1,144,000 increase in gains on investments and other assets, (iii) a $1,132,000 decrease in rent and rent related expenses, (iv) a $452,000 increase in income tax benefit, (v) a $213,000 decrease in personnel expenses, (vi) a $148,000 increase in the fair value of loan commitments, and (vii) a $138,000 decrease in intersegment expenses. Consolidated Results of Operations Three-month period ended September 30, 2025, Compared to Three-month period ended September 30, 2024 Total revenues increased by $1,052,000, or 1.2%, to $89,326,000 for the three-month period ended September 30, 2025, from $88,274,000 for the comparable period in 2024. Contributing to this increase in total revenues was a $2,310,000 increase in net investment income, a $624,000 increase in gains on investments and other assets, and a $327,000 increase in net mortuary and cemetery sales, which were partially offset by a $1,085,000 decrease in mortgage fee income, a $994,000 decrease in other revenues, and a $130,000 decrease in insurance premiums and other considerations. Mortgage fee income decreased by $1,085,000, or 3.6%, to $29,139,000, for the three-month period ended September 30, 2025, from $30,224,000 for the comparable period in 2024. This decrease was primarily due to a $3,163,000 decrease in the fair value of loans held for sale and a $509,000 decrease in income from loan originations, which were partially offset by a $2,396,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market and a $191,000 increase in the fair value of loan commitments. Insurance premiums and other considerations decreased by $130,000, or 0.4%, to $29,881,000 for the three-month period ended September 30, 2025, from $30,011,000 for the comparable period in 2024. This decrease was primarily due to an increase of $557,000 in renewal premiums, which was partially offset by a decrease of $687,000 in first year premiums. Net investment income increased by $2,310,000, or 13.0%, to $20,109,000 for the three-month period ended September 30, 2025, from $17,799,000 for the comparable period in 2024. This increase was primarily attributable to a $3,117,000 increase in mortgage loan interest, a $517,000 increase in fixed maturity securities income, a $39,000 increase in equity securities income, and a $32,000 increase in policy loan interest, which were partially offset by a $953,000 decrease in interest on cash and cash equivalents, a $208,000 decrease in real estate income, a $137,000 increase in investment expenses, a $61,000 decrease in insurance assignment income, and a $36,000 decrease in other investment income. 71 Net mortuary and cemetery sales increased by $327,000, or 4.8%, to $7,141,000 for the three-month period ended September 30, 2025, from $6,814,000 for the comparable period in 2024. This increase was primarily due to a $301,000 increase in mortuary at-need sales, a $23,000 increase in cemetery at-need sales, and a $3,000 increase in cemetery pre-need sales. Gains (losses) on investments and other assets increased by $624,000 to $1,972,000 in net gains for the three-month period ended September 30, 2025, from $1,348,000 in net gains for the comparable period in 2024. This increase in gains on investments and other assets was primarily due to a $1,161,000 increase in gains on mortgage loans held for investment and a $561,000 increase in gains on real estate, which were partially offset by a $929,000 decrease in gains on equity securities primarily attributable to decreases in the fair value of these equity securities, a $158,000 decrease in gains on other assets, and a $11,000 decrease in gains on fixed maturity securities. Other revenues decreased by $994,000, or 47.8%, to $1,083,000 for the three-month period ended September 30, 2025, from $2,077,000 for the comparable period in 2024. This decrease was primarily due to a decrease of $994,000 in other miscellaneous revenues. Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $1,580,000 or 6.8%, to $24,934,000 for the three-month period ended September 30, 2025, from $23,354,000 for the comparable period in 2024. This increase was primarily the result of a $1,612,000 increase in death benefits and a $180,000 increase in surrender and other policy benefits, which were partially offset by a $212,000 decrease in future policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $3,246,000, or 142.0%, to $5,533,000 for the three-month period ended September 30, 2025, from $2,287,000 for the comparable period in 2024. This increase was primarily due to an increase in the termination rate for deaths, lapses, policies moving to a reduced paid up status, and a shift in product mix. Selling, general and administrative expenses increased by $1,286,000, or 2.8%, to $46,525,000 for the three-month period ended September 30, 2025, from $45,239,000 for the comparable period in 2024. This increase was primarily the result of a $1,409,000 increase in other expenses, a $269,000 increase in personnel expenses, a $119,000 increase in costs related to funding mortgage loans, and a $76,000 increase in advertising expense, which were partially offset by a $432,000 decrease in rent and rent related expenses, a $150,000 decrease in commissions, and a $5,000 decrease in depreciation on property and equipment. Interest expense increased by $6,000, or 0.6%, to $1,067,000 for the three-month period ended September 30, 2025, from $1,061,000 for the comparable period in 2024. This increase was primarily due to an increase of $26,000 in interest expense on mortgage warehouse lines of credit for loans held for sale, which was partially offset by a decrease of $20,000 in interest expense on bank loans. Cost of goods and services sold in mortuaries and cemeteries decreased by $4,000, or 0.4%, to $1,113,000 for the three-month period ended September 30, 2025, from $1,117,000 for the comparable period in 2024. This decrease was primarily due to a decrease of $20,000 in pre-need sales, which was partially offset by an increase of $16,000 in at-need sales. In summary, total benefits and expenses were $79,173,000, or 88.6% of total revenues, for the three-month period ended September 30, 2025, as compared to $73,059,000, or 82.8% of total revenues, for the comparable period in 2024. 72 Nine-month period ended September 30, 2025, Compared to Nine-month period ended September 30, 2024 Total revenues increased by $6,354,000, or 2.5%, to $261,607,000 for the nine-month period ended September 30, 2025, from $255,253,000 for the comparable period in 2024. Contributing to this increase in total revenues was a $4,103,000 increase in net investment income, a $1,758,000 increase in mortgage fee income, a $1,061,000 increase in gains on investments and other assets, a $167,000 increase in net mortuary and cemetery sales, and a $22,000 increase in insurance premiums and other considerations, which were partially offset by a $758,000 decrease in other revenues. Mortgage fee income increased by $1,758,000, or 2.2%, to $83,433,000, for the nine-month period ended September 30, 2025, from $81,675,000 for the comparable period in 2024. This increase was primarily due to a $6,130,000 increase in secondary gains from mortgage loans sold to third-party investors into the secondary market and a $148,000 increase in the fair value of loan commitments, which were partially offset by a $3,452,000 decrease in the fair value of loans held for sale, and a $1,068,000 decrease in income from loan originations. Insurance premiums and other considerations increased by $22,000, less than a percentage point, to $89,846,000 for the nine-month period ended September 30, 2025, from $89,824,000 for the comparable period in 2024. This increase was primarily due to an increase of $1,432,000 in renewal premiums, which was partially offset by a decrease of $1,410,000 in first year premiums. Net investment income increased by $4,103,000, or 7.4%, to $59,893,000 for the nine-month period ended September 30, 2025, from $55,790,000 for the comparable period in 2024. This increase was primarily attributable to a $7,704,000 increase in mortgage loan interest, a $1,183,000 increase in fixed maturity securities income, a $847,000 increase in insurance assignment income, a $134,000 increase in equity securities income, and a $21,000 increase in policy loan interest which were partially offset by a $2,415,000 increase in investment expenses, a $2,004,000 decrease in interest on cash and cash equivalents, a $1,175,000 decrease in real estate income, and a $192,000 decrease in other investment income. Net mortuary and cemetery sales increased by $167,000, or 0.8%, to $21,699,000 for the nine-month period ended September 30, 2025, from $21,532,000 for the comparable period in 2024. This increase was primarily due to a $516,000 increase in mortuary at-need sales, which were partially offset by a $240,000 decrease in cemetery pre-need sales and a $109,000 decrease in cemetery at-need sales. Gains (losses) on investments and other assets increased by $1,061,000, or 40.2% to $3,701,000 for the nine-month period ended September 30, 2025, from $2,640,000 for the comparable period in 2024. This increase in gains on investments and other assets was primarily due to a $1,161,000 increase in gains on mortgage loans held for investment, a $869,000 increase in gains on real estate, and a $6,000 increase in gains on fixed maturity securities, which were partially offset by a $833,000 decrease in gains on equity securities primarily attributable to decreases in the fair value of these equity securities and a $142,000 decrease in gains on other assets. Other revenues decreased by $758,000, or 20.00%, to $3,034,000 for the nine-month period ended September 30, 2025, from $3,792,000 for the comparable period in 2024. This decrease was primarily due to a decrease of $713,000 in other miscellaneous revenues and a decrease of $45,000 in servicing fee revenue due to a decrease in the retention of mortgage servicing rights. Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $2,267,000 or 3.1%, to $76,223,000 for the nine-month period ended September 30, 2025, from $73,956,000 for the comparable period in 2024. This increase was primarily the result of a $2,896,000 increase in death benefits and a $354,000 increase in surrender and other policy benefits, which were partially offset by $983,000 decrease in future policy benefits. Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $4,635,000, or 40.9%, to $15,968,000 for the nine-month period ended September 30, 2025, from $11,332,000 for the comparable period in 2024. This increase was primarily due to an increase in the termination rate for deaths, lapses, policies moving to a reduced paid up status, and a shift in product mix. 73 Selling, general and administrative expenses increased by $9,399,000, or 7.3%, to $138,351,000 for the nine-month period ended September 30, 2025, from $128,952,000 for the comparable period in 2024. This increase was primarily the result of a $3,966,000 increase in personnel expenses due to an annual increase in salaries and key new hires as a part of the Company’s growth strategy, a $3,480,000 increase in other expenses, a $2,319,000 increase in commissions, a $443,000 increase in costs related to funding mortgage loans, a $366,000 increase in advertising expense, and a $30,000 increase in depreciation on property and equipment, which were partially offset by a $1,205,000 decrease in rent and rent related expenses. Interest expense increased by $317,000, or 10.0%, to $3,479,000 for the nine-month period ended September 30, 2025, from $3,162,000 for the comparable period in 2024. This increase was primarily due to an increase of $296,000 in interest expense on mortgage warehouse lines of credit for loans held for sale and an increase of $21,000 in interest expense on bank loans. Cost of goods and services sold in mortuaries and cemeteries decreased by $101,000, or 2.8%, to $3,526,000 for the nine-month period ended September 30, 2025, from $3,627,000 for the comparable period in 2024. This decrease was primarily due to a decrease of $87,000 in at-need sales and a decrease of $14,000 in pre-need sales. In summary, total benefits and expenses were $237,547,000, or 90.8% of total revenues, for the nine-month period ended September 30, 2025, as compared to $221,030,000, or 86.6% of total revenues, for the comparable period in 2024. 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 from 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 September 30, 2025, SecurityNational Mortgage was not in compliance with the adjusted tangible net worth covenant of Western Alliance Bank’s warehouse line of credit. SecurityNational Mortgage is in the process of receiving waivers. In the unlikely event the Company is required to repay the outstanding advances of approximately $7,412,571 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. During the nine-month periods ended September 30, 2025, and 2024, the Company’s operations provided cash of approximately $27,553,000 and of approximately $34,894,000, respectively. The decrease in cash provided by operations was due primarily to the decrease 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. 74 The Company’s investment policy is also to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans. 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 $370,953,000 (at estimated fair value) and $348,774,000 (at estimated fair value) as of September 30, 2025, and December 31, 2024, respectively. This represented 35.4% and 38.0% of the total investments of the Company as of September 30, 2025, and December 31, 2024, 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 the rating of bonds. As of September 30, 2025, 1.6% (or $5,882,000) and as of December 31, 2024, 2.4% (or $8,431,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade. 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 September 30, 2025, and December 31, 2024, the life insurance subsidiaries were in compliance with the regulatory criteria. The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $488,478,000 as of September 30, 2025, as compared to $445,522,000 as of December 31, 2024. This increase was primarily due to an increase of $26,600,000 in stockholders’ equity and an increase of $16,356,000 in bank loans and other loans payable. Stockholders’ equity as a percent of total capitalization was 74.8% and 76.1% as of September 30, 2025, and December 31, 2024, respectively. Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2024 was 7.0% as compared to a lapse rate of 4.4% for 2023. The 2025 lapse rate to date has been approximately the same as 2024. The combined statutory capital and surplus of the Company’s life insurance subsidiaries was approximately $133,949,000 and $120,216,000 as of September 30, 2025, and December 31, 2024, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities. The One Big Beautiful Bill Act (“OBBBA”), which was signed into law on July 4, 2025, significantly affected U.S. income tax law. The Company is currently assessing its impact; however, the Company does not expect a material impact to its consolidated financial statements. Item 3. 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. 75