Security National Financial Corporation (SNFCA) Earnings Call Transcript

Good afternoon, everyone, and welcome to Security National Financial Corporation's Third Quarter 2026 Earnings Call. We thank you for joining us today to review our financial and operational results for the period ended September 30, 2026. Before we begin, I'd like to remind everyone that our remarks today will include forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those projected. Such risks include, but are not limited to, changes in economic conditions, interest rates, regulatory developments, competitive pressures and other factors detailed in our filings with the Securities and Exchange Commission. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today's date. We undertake no obligation to publicly update or revise these statements to reflect future events or circumstances except as required by law. With that, I'd like to turn the call over to our Chairman, President and Chief Executive Officer, Scott Quist. Scott?

Thank you, Heather. Yes, my name is Scott Quist. I am the Chairman and CEO of Security National Financial Corporation, not necessarily or not its operating subsidiaries. I would like to take this moment as we get started to note 2 things. First, I would like to note Ms. Heather Street, who introduced the call has been our Director of Human Resources and recently received the title of Vice President in addition to directors. So I just wanted to take this opportunity to congratulate miss Heather. And then I also wanted to note that we have a new Chief Legal Officer in the room, Ms. Alissa Neufeld. Very excited to have her. So welcome, Alissa. Let me go into my prepared remarks. There are 2 major financial statements in the 10-Q, the statement of earnings, which goes -- or income statement, excuse me, which is basically 1 page in length and the balance sheet, which is basically 2 pages in length. From the income statement point of view, we had a very rugged third quarter with earnings decreasing some 37%. I'll be using pretax numbers as compared to Q3 2025. From a balance sheet point of view, we have what we believe is the largest single quarter dollar increase in stockholders' equity in our history with equity increasing some $36 million or 8.2% for the quarter to $469 million. From my point of view, both results as divergent as they may see are driven primarily by the same macro factor, i.e., increased interest rates. Going to the segment analysis, our mortgage segment fell from a profit of $66,000 in 2025 to a loss of $2.6 million in 2026. About $625,000 (sic) [ $1 million ] of that loss is a noncash fair value adjustment on derivatives. These derivatives are primarily interest rate lock commitments which is further based upon estimates of future loan fundings from our lock loan pipeline and which can fluctuate from period to period. The major reason behind our reduced profitability in our mortgage segment and simply market conditions. The geopolitical environment was very unfavorable in Q3 which led to accelerating deteriorating market conditions through the entire quarter and very reduced volumes. For comparison's sake, in the Utah Housing market, which is one of our major markets, pending home sales were down 27%, September 26 over September 2025 and closed sales were down 12% with homes for sale increasing 4%. To summarize the Utah market, inventory increased and sales decreased sharply. Similar conditions exist in most of our markets we service. It should be noted that despite the very rugged third quarter, we narrowed our losses by 9% over 2025 and on a year-to-date basis. To me, our Mortgage segment deserves a very hearty thank you for their continued tenacity in the base of such very tough market conditions. I am not discouraged on bids from our deliberate overall corporate strategy. In our Insurance segment, the reduced profitability causes were similar from an income statement point of view. I should stress at the onset that our investment yield remains quite above industry average for life insurance companies. According to the National Association of Insurance Commissioners, industry book yields at year-end 2025 were in the mid-4% range. While ours for Q3 2026 was in the mid-5% range. Nevertheless, our average portfolio yield as comparing last year to this year, did decline by approximately 90 basis points primarily driven by the timing of homebuilder profit recognition with additional impacts from the allowance for credit losses or CECL and the decreased funeral funding deals as well as modest declines in construction interest earnings, fee income and gains on sales. The decreased homebuilder profits construction interest earnings require no further comment than what has been given above regarding mortgage market conditions. Regarding the allowance for credit losses, under the current expected under the accounting standard current expected credit losses, or CECL, we recorded a provision for credit losses of roughly $2 million in Q3, primarily related to 2 loans that went in default during the quarter. If our ultimate recoveries exceed the current estimates, A portion of this provision could be reversed in future periods. And I will add, I would be surprised if it's not. Expense levels at our insurance segment were a little elevated, which I view as money well spent. First year life sales are up over 20% year-to-date, as measured by annualized premium, 27% as measured by face amount over 2025, which is a very incredible accomplishment given that we changed out almost our entire senior sales management, sales management staff last year. Much hard work from new sales management has gone into improving our sales processes and offerings, and we believe we are just getting started. Due to how first year sales are accounted for, the profit from those sales will not be realized from an accounting point of view until future years. In fact, first year sales are mildly profit negative in the insurance segment. Lastly, due to the increase in interest rates, our life reserves were revalued downwards. Under current accounting rules, that revaluation is not included in net earnings instead it flows through other comprehensive income, which is reported in a separate statement on the 10Q and directly in the stockholders' equity, which is what caused the large increase noted above. In a nutshell, our liabilities have a longer average duration on our assets, so increases in interest rates generally have the effect of noted, meaning that reserves will be going -- would go down and owners equity going up but decreases will have the opposite effect. Our Cemetery and Mortuary segment similarly had a rugged Q3 with profit declining roughly $500,000 or 17% as compared to 2025. While there are numerous impacts that lead to any increase or decrease in profitability, there were 2 major factors for Q3 totaling over $600,000. First, the segment had unrealized losses of over $400,000 in it's stock portfolio for the quarter. And in comparison, say, in Q3 2025, they had a -- they recognized a leasing income gain of $241,000, which is not present in the 2026 thus giving a negative comparison. Operationally speaking, while families served in Q3 increased modestly over 2025, for year-to-date, family served decreased modestly, reflecting the constrained death rate environment that has been experienced nationwide. Our traditional funeral versus cremation mix, leaned more towards cremation, which gives a lower revenue, and we are experiencing cost pressures. Nevertheless, we control what we could control and our preneed cemetery sales rose roughly 12% for the quarter and 17% for the year which is the largest single factor giving us a 9% profit improvement year-to-date. To summarize very broadly, we held serve operationally and our preneed cemetery sales year-to-date overcame our unrealized losses, giving a 9% profit improvement. Lastly, I will comment at this time but the financial balance inherent in our businesses is illustrated markedly when the financial statements are due as a whole, meaning that increased interest rates gave our mortgage segment a very rugged environment, but at least from a GAAP balance sheet point of view, gave our insurance segment a very favorable environment. Our Cemetery and Mortuary segment, which is not affected nearly as much by interest rates is affected by the death rate. But again, note the balance that decreases in death rates benefit in the Insurance segment. With that, I will turn the time over to Mr. Garrett Sill.

Thanks, Scott, and good afternoon, everyone. I'm Garrett Sill, Chief Financial Officer of Security National Financial Corporation, and I appreciate you taking time to be with us. Before getting into the numbers, I'd like to recognize the employees of Security National. In a rugged quarter, as Scott described, their hard work and commitment of what keeps this company looking forward, and we are grateful for your efforts. Let me now add some color to the consolidated financial statements beyond what Scott cover. Starting with the balance sheet. Total assets reached $1.62 billion at September 30, 2026, up almost $62 million or 12% since December 31. Cash and cash equivalents nearly doubled to $196 million, primarily a result of lower mortgage volume, which led to a decrease in our loans up for sale by $55 million or 35%. Our total investments edged up $7.5 million, 0.7% to a little over $1 billion. On the other side of the letter, total liabilities were essentially flat, up just $3.7 million and to $1.16 billion because of the $47 million reduction in future policy benefit from a higher discount rates, which were largely offset a $41 million increase in bank and other loans payables. Stockholders' equity has grown to -- has grown $58.2 million or 14.2% so far this year, to just about $469 million, which brings our debt-to-equity ratio down to 2.4x. On the income statement, third quarter net earnings came in at about $6.2 million, down $2.8 million or 31% from the $9 million incurred in the second quarter. Our expense discipline remained a bright spot. Commissions and personnel costs, which together make up the bulk of our operating expenses fell $6 million or 17.4% versus the third quarter of 2025. We are down $40 million or 13.7% through the 9 months, reflecting both reduced mortgage activity and cost actions taken throughout the organization. Those savings were partly offset by a $2.8 million increase in other expenses driven mainly by the credit loss provision Scott discussed and a $450,000 or 42% increase in interest expense tied to the greater use of our third-party mortgage warehouse lines. As a reminder, all 2025 comparisons we are presenting today continue to reflect our LDTI restatement, so the periods are comparable. Next, Scott explained how the downward revaluation of our life reserves by fastest net earnings and goes through [indiscernible]. And I'd like to quantify that effect. Comprehensive income was about $35 million for the third quarter, up $2.6 million a year ago and a little over $57 million for the first 9 months, almost 4x the $15 million reported for the same 2025 period. Nearly all of that improvement came from remeasuring our future policy benefits and higher discount rates. A pretax benefit of nearly $52 million in the quarter and almost $65 million year-to-date. In the first 9 months of 2025 that same line was $23 million. So the year-over-year change was roughly $88 million. Higher rates had the opposite effect on our bond holdings producing pretax unrealized losses of about $15 million in the quarter and $20.3 million year-to-date versus unrealized gains of $10 million through September last year. Last quarter, the 3-month regents income transported in different directions. This work, they both improved because these results move with interest rates, they can reverse just as quickly. and it highlights how happens equity will change with fluctuations in interest rates. On the credit, the bond portfolio continues to be a strong quality, 98.4% carried an investment-grade designation at September 30 versus the same number at December 31, with roughly $60 million considered on-grade investment. Within our most loans held for investment balances more than 90 days delinquent foreign foreclosure rose to $17.5 million up from $15.8 million at the end of the second quarter and $6.5 million at year-end 2025. Loans and foreclosures account for about $11 million, up $7.5 million of which are commercial. The allowance for credit losses on these loans now stands at about $4.5 million compared to $2.6 million at the start of the year. Lastly, the 10-Q discloses that a quarter end security masorders did not read the quarterly net income come onto its warehouse lines of credit. Since then, we've been every way [indiscernible] arrived after the 10-Q was filed. To wrap up, the third quarter tested our earnings large case conditions in the mortgage market total assets, stockholders' equity or our capital position is stronger than it was at the start of the year. On internal controls or financial reporting, remediation of the information technology general controls identified at year-end is ongoing, and we are continuing to test and refine our processes. Our priorities are unchanged to grow revenue and improve profitability across all 3 segments. With that, I'll turn the time over to Andrew Quist, President and Chief Executive Officer of Security National Financial.

Thank you, Garrett. And good afternoon, fellow shareholders. I'm Andrew Quist, President and CEO of Security National Mortgage Company. In the third quarter of 2026, Security National Mortgage Company had a pretax net loss of $2.649 million compared to pretax net income of $66,000 in the third quarter of 2025. This was a year-over-year decrease of $2.715 million from last year's quarterly results. Year-to-date, SMC has a pretax net loss of $3.276 million compared to a pretax net loss of $3.601 billion in 2025. This is a decrease to our year-to-date loss of $325,000 or an improvement of 9%. Swinging to a loss in the third quarter after a profitable second quarter was disappointing. This swing was the result of a historic rise in interest rates during the quarter. We experienced a 90 basis point increase in 30-year rates over the third quarter, which significantly depressed mortgage activity. While we are still slightly ahead of 2025's results, we must continue to realign SMC for the current interest rate environment. This is an ongoing and constantly evolving exercise that changes with the rate environment. I'd like to thank our employees for their tireless effort and work in that alignment. The rise in interest rates resulted in SNMC's lowest quarterly origination volume in 10 quarters. In the third quarter of 2026, we originated $470 million of loan volume compared to $622 million in the third quarter of 2025, a 24% year-over-year decrease. On a sequential quarter basis, origination volumes were down 14%. Based on the Mortgage Bankers Associations reported total industry origination volumes for the third quarter, SNMC's market share decreased to 9 basis points down from 10 basis points in Q2. There were 2 bright spots for SNMC in an otherwise dim origination market. First, SNMC's third quarter reverse mortgage origination volume more than doubled with a 187% increase over Q3 2025. We believe we are now a top 50 letter nationwide of reverse mortgages. The second bright spot for SNMC is HELOC originations. In the third quarter, our HELOC originations were up 128% over Q3 2025. We will continue to increase our focus on the pockets of the mortgage industry where loan volume is growing so we can better serve our borrowers and help our loan officers close more loans. On that note, our loans originated per loan officer increased 9% in the third quarter over Q3 2025. Our loan officers were closing more loans in the third quarter than they were last year. I'm particularly proud of that accomplishment in such a difficult environment. Focusing on what we can control in this environment, security national mortgage has reduced expenses by $14 million year-over-year or by 16%. And Additionally, we've recently completed another $2.5 million of annualized expense savings to cost other than variable compensation. These are necessary steps as we focus on profitability in this market, and I believe this rightsizing will ensure SNMC stays competitive. In summary, in the third quarter of 2026, Security National Mortgage had a pretax net loss of $2.649 mill. This was a departure from our profitable second quarter and our profitable third quarter last year. Rapidly rising interest rates put extreme pressure on the mortgage market, and we're aligning security national mortgage to this rate environment. I'd like to conclude by again thanking our loan officers and employees for their wonderful work improving Security National in this difficult environment. The progress is tangible, and I'm optimistic about our competitive position moving forward. Thank you. And I'll now turn the time over to Adam Quist.

Thanks, Andrew. My name is Adam Quist as Anderw said. I'm President and CEO of the Security National Life Insurance company. My remarks will focus on the third quarter for our life companies with some context on year-to-date. For the third quarter, our Life segment reported earnings before income taxes of $8.3 million compared to an approximately $10 million a year ago. or a decrease of about $1.65 million or about 16%. When we look at our results, I think there are 3 main themes: insurance results, investment results and our expenses and I'll address each of these 3 themes in turn. First, our insurance results. Collected premiums were down about $1.5 million in the quarter with all of that decrease occurring in our least profitable products. while our insured multipay collected premiums were up for the quarter for both our first year and renewal precise. Of course, premiums are not occur in a vacuum, every premium dollar must fund reserves and acquisition costs, and as total premiums came down, those associated costs also came down with them. Additionally, when considering the deferral of acquisition costs pursuant to GAAP and the amortization to deferred acquisition costs, our insurance results were about $400,000 better than a year ago for the quarter. Year-to-date, that improvement is about $1.2 million. Within that, our mortality results many debt benefits net of the reserve release when times are paid were about $800,000 better than last year through 9 months. Perhaps most importantly, our focus on building our new sales engine is working. Year-to-date, first year new sales in our core products are up more than 20% by annualized premium and more than 30% when measured by face. This increase is led by a sales leadership team is largely new to our organization since last year. Under GAAP, new business is mildly profit negative in the first year. So those new sales cost us a little today, but we'll build earnings to be years ahead. Now turning to our investment results. Net investment income was about $600,000 lower than a year ago on the quarter. For the quarter, the pressure predominantly came from lower funding volume from our mortgage segment decreased home builder profit shares and lower construction lending interest and fees, all of which, in my view, are related to the housing market Scott described. Year-to-date, this is a single largest factor in our results. with investment income down about $5.6 million. However, as mentioned, our portfolio -- our average portfolio yield declined year-over-year, but it remains in the mid-5% range which we believe compares favorably to the industry averages despite our decline on the year. Lastly, our land position, which we view as a leading indicator of future builder profit share but which also carries an opportunity cost in current periods, sits at about $120 million as of the end of the quarter. Finally, examining our expenses. The single largest item in the quarter was a credit loss provision of roughly $2 million under the current expected credit loss, or CECL accounting standard, as Scott mentioned. If our recoveries exceed current estimates established by CECL, all or a portion of that provision could be reversed in future periods. Excluding the CECL provision, Operating expenses were up only modestly, mainly from continued investment in sales leadership in the people and systems to support our agents and partners and some exploratory AI initiatives. As noted, higher rates also caused our life reserves to revalue downwards. That revaluation does not run through earnings, it flows through other comprehensive income into stockholders' equity and is a major contributor to the increased equity, as Scott mentioned. To summarize, the quarter's decline largely came from a credit loss provision and investment income, largely related to the back of housing. Our insurance results improved our mortality experience improved, and our new sales are growing by more than 20%. I remain confident in the direct home of our life companies and on the team executing our strategy. Thank you for your support, and I will now turn the time over to Steven Kehl, our Chief Operating Officer for our Funeral Homes and Cemeteries division.

Thank you, Adam. Good afternoon, everyone, and thank you for joining us. I am Steve Kehl, Chief Operating Officer of Security National Funeral Homes and Cemeteries. I will walk through our third quarter results and what drove them. For the third quarter, earnings before tax decreased 16.9% to $2.53 million from $3.05 million a year ago. Revenue increased 1.3% to $9.5 million from $8.93 million. For the first 9 months of the year, earnings before tax increased 9.1% and to $772 million, and revenue increased 8.6% to $27.3 million. Excluding investment results, revenue for our funeral homes and cemeteries increased 8.4% in the third quarter to $7.96 million from $7.34 million. Operating earnings before tax were $1.41 million, essentially even with $1.42 million a year ago. For the first 9 months, operating revenue increased 7.7% to $23.62 million, and our operating earnings before tax increased 4.1% and to $3.9 million from $3.74 million. Both of our businesses contributed, Funeral Homes held steady on higher revenue and our cemeteries grew on stronger preneed land sales. In our funeral home operations, revenue increased 4.7% to $3.83 million from the $3.66 million while earnings before tax decreased 7.3% to $671,000 from $724,000. Earnings declined because costs grew faster than revenue. Year-to-date, our personnel costs are the largest driver followed by higher depreciation from our deliberate updates of several of our funeral home facilities. As I noted last quarter, both our investments in the family experience and we are monitoring them closely. Several key operational metrics continue to move in the right direction. Families served increased 2.5% in the quarter although the year-to-date total remains 1.3% below last year and a lower death rate in [indiscernible]. The share of families choosing cremation with the service rose to 48% in the quarter, bringing our year-to-date figure to 46.3%. Average revenue per family served is up 4.7% year-to-date to $5.51 per family. Within our cemetery operations, revenue increased 12.3% to $4.13 million from $3.68 million and earnings before tax increased 7.1% to $740,000 from $691,000. Net preneed land sales remained the main driver. They were $1.85 million in the quarter, representing an increase of 8.5% over the third quarter of 2025, and for the first 9 months, they've increased 14.6% to $6.09 million. And [indiscernible] also grows 8.8% in the quarter and 2.5% year-to-date including increases in both our traditional families as well as cremation final resting places. This growth reflects discipline in the basics of prospecting. Through the first 9 months, our counselors held about 8% more conversations with families and our appointment set gained 47% and so a substantially greater share of those conversations are resulting in appointments being set. Our priorities within our cemeteries remain consistent, build family relationships, carry more appointments through to a full presentation and how more cremation families choose a permanent place of remembrance within one of our memorial parks. As Scott noted earlier, the decline this quarter came from our investment results. Net investment income increased 22% to $781,000. However, lower unrealized investment gains and the absence of last year's onetime leasing gains more than offset that increase. As I said last quarter, these results can move in either direction, which is why we evaluate our operating businesses separately. In summary, investment results held back reported earnings this quarter while our operating businesses held steady and continue to grow through 9 months. Cemetery revenue, particularly preneed land sales and our cremation with service families all improved. We cannot influence the death rate, but we can control how every family is served and how every property is maintained, and we will keep converting that discipline into earnings growth. I want to thank our funeral home cemetery grounds and operational support teams. These results are their work, and it is an honor to work alongside them. I'll now turn the time back over to Heather Street, our Vice President of Human Resources.

Thank you, Steve. Before we conclude today's call, I would like to open the floor for questions. [Operator Instructions] Noticing we had raised for Curtis Thompson.