SECURITY NATIONAL FINANCIAL CORP

Previous wording

The following table shows the condensed financial results of the insurance operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Current wording

The following table shows the condensed financial results of the insurance operations for the three and six month periods ended June 30, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Previous wording

Profitability for the three month period ended March 31, 2024 increased due to (a) a $1,884,000 increase in insurance premiums and other considerations, (b) a $1,857,000 increase in net investment income, (c) a $1,031,000 increase in gains on investments and other assets, (d) a $882,000 decrease in death, surrenders and other policy benefits, (e) a $481,000 decrease in selling, general and administrative expenses, (f) a $254,000 decrease in amortization of deferred policy acquisition costs, and (g) a $119,000 decrease in interest expense, which were partially offset by (i) a $1,291,000 increase in future policy benefits, (ii) a $173,000 decrease in other revenues, (iii) a $130,000 decrease in intersegment revenue, (iv) a $44,000 decrease in mortgage fee income, and (v) a $24,000 increase in intersegment interest expense and other expenses.

Current wording

Profitability for the six month period ended June 30, 2024 increased due to (a) a $3,032,000 increase in insurance premiums and other considerations, (b) a $2,174,000 decrease in death, surrenders and other policy benefits, (c) a $621,000 increase in net investment income, (d) a $480,000 decrease in interest expense, (e) a $363,000 increase in gains on investments and other assets, and (f) a $255,000 decrease in amortization of deferred policy acquisition costs, which were partially offset by (i) a $2,004,000 increase in future policy benefits, (ii) a $1,001,000 increase in selling, general and administrative expenses, (iii) a $742,000 decrease in intersegment revenue, (iv) a $228,000 decrease in other revenues, (v) a $66,000 decrease in mortgage fee income, and (vi) a $32,000 increase in intersegment interest expense and other expenses.

Previous wording

The following table shows the condensed financial results of the cemetery and mortuary operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Current wording

The following table shows the condensed financial results of the cemetery and mortuary operations for the three and six month periods ended June 30, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Previous wording

Profitability in the three month period ended March 31, 2024 increased due to (a) a $528,000 increase in gains on investments and other assets, (b) a $483,000 increase in net investment income, (c) a $221,000 increase in cemetery pre-need sales, (d) a $139,000 increase in mortuary at-need sales, (e) a $117,000 increase in cemetery at-need sales, and (f) a $101,000 increase in other revenues, a (g) a $5,000 decrease in intersegment interest expense and other expenses, and (h) a $1,000 increase in intersegment revenues, which were partially offset by (i) a $124,000 increase in selling, general and administrative expenses, (ii) a $114,000 increase in amortization of deferred policy acquisition costs, and (iii) an $88,000 increase in cost of goods and services sold.

Current wording

Profitability in the six month period ended June 30, 2024 increased due to (a) a $956,000 increase in cemetery pre-need sales, (b) a $139,000 increase in mortuary at-need sales, (c) a $135,000 increase in other revenues, (d) a $128,000 increase in gains on investments and other assets, (e) a $7,000 decrease in intersegment interest expense and other expenses, and (f) a $1,000 increase in intersegment revenues, which were partially offset by (i) a $293,000 increase in selling, general and administrative expenses, (ii) a $286,000 decrease in net investment income, (iii) a $166,000 increase in amortization of deferred policy acquisition costs, (iv) an $72,000 increase in cost of goods and services sold, and (v) a $18,000 decrease in cemetery at-need sales.

Previous wording

The Company’s wholly owned subsidiary, SecurityNational Mortgage, is a mortgage lender incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgages 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.

Current wording

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 mortgages 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.

Previous wording

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 0.19% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

Current wording

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 0.28% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

Previous wording

Mortgage rates have followed the US Treasury yields up in response to the increase inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance.’ Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchases,’ although not as significant as those in the refinance classification.

Current wording

Mortgage rates have followed the US Treasury yields up in response to the increased inflation and the expectation that the Federal Reserve will continue to raise rates in the near term. As expected, the rapid increase in mortgage rates has resulted in a decrease in loan originations classified as ‘refinance.’ Higher mortgage rates have also had a negative effect on loan originations classified as ‘purchases,’ although not as significant as those in the refinance classification.

Previous wording

For the three month periods ended March 31, 2024 and 2023, SecurityNational Mortgage originated 1,486 loans ($465,605,000 total volume) and 1,702 loans ($531,868,000 total volume), respectively.

Current wording

For the six month periods ended June 30, 2024 and 2023, SecurityNational Mortgage originated 3,494 loans ($1,089,824,000 total volume) and 3,738 loans ($1,139,735,000 total volume), respectively.

Previous wording

The following table shows the condensed financial results of the mortgage operations for the three month periods ended March 31, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Current wording

The following table shows the condensed financial results of the mortgage operations for the three and six month periods ended June 30, 2024 and 2023. See Note 7 to the condensed consolidated financial statements.

Previous wording

Profitability for the three month period ended March 31, 2024 increased due to (a) a $2,755,000 decrease in personnel expenses, (b) a $1,303,000 decrease in other expenses, (c) a $896,000 decrease in commissions, (d) a $393,000 decrease in costs related to funding mortgage loans, (e) a $382,000 decrease in rent and rent related expenses, (f) a $307,000 decrease in interest expense, (g) a $285,000 increase in income from loan originations, (h) a $176,000 decrease in advertising expenses, (i) a $125,000 decrease in intersegment interest expense and other expenses, (j) a $23,000 increase in intersegment revenues, and (k) a $17,000 decrease in depreciation on property and equipment, which were partially offset by (i) a $3,186,000 decrease in secondary gains from investors, (ii) a $1,096,000 decrease in the fair value of loans held for sale, (iii) a $175,000 decrease in other revenues, (iv) a $168,000 decrease in net investment income, and (v) a $116,000 decrease in the fair value of loan commitments.

Current wording

Profitability for the six month period ended June 30, 2024 increased due to (a) a $3,430,000 decrease in personnel expenses, (b) a $2,001,000 decrease in other expenses, (c) a $1,503,000 increase in the fair value of loans held for sale, (d) a $1,211,000 increase in income from loan originations, (e) a $936,000 decrease in rent and rent related expenses, (f) a $734,000 decrease in intersegment interest expense and other expenses, (g) a $701,000 decrease in costs related to funding mortgage loans, (h) a $465,000 increase in the fair value of loan commitments (i) a $291,000 decrease in advertising expenses, (j) a $287,000 decrease in interest expense, (k) a $32,000 increase in intersegment revenues, and (l) a $24,000 decrease in depreciation on property and equipment, which were partially offset by (i) a $3,854,000 decrease in secondary gains from investors, (ii) a $1,403,000 increase in commissions, (iii) a $291,000 decrease in net investment income, and (iv) a $176,000 decrease in other revenues.

Previous wording

Total revenues increased by $1,687,000, or 2.1%, to $81,188,000 for the three month period ended March 31, 2024, from $79,501,000 for the comparable period in 2023. Contributing to this increase in total revenues was a $2,172,000 increase in net investment income, a $1,885,000 increase in insurance premiums and other considerations, a $1,558,000 increase in gains on investments and other assets, and a $477,000 increase in net mortuary and cemetery sales, which were partially offset by a $247,000 decrease in other revenues and a $4,157,000 decrease in mortgage fee income.

Current wording

Total revenues increased by $1,945,000, or 2.3%, to $85,791,000 for the three month period ended June 30, 2024, from $83,846,000 for the comparable period in 2023. Contributing to this increase in total revenues was a $3,541,000 increase in mortgage fee income, a $1,147,000 increase in insurance premiums and other considerations, and a $600,000 increase in net mortuary and cemetery sales, which were partially offset by a $2,127,000 decrease in net investment income, a $1,194,000 decrease in gains on investments and other assets, and a $22,000 decrease in other revenues.

Previous wording

Insurance premiums and other considerations increased by $1,885,000, or 6.7%, to $29,852,000 for the three month period ended March 31, 2024, from $27,967,000 for the comparable period in 2023. This increase was primarily due to an increase of $1,645,000 in first year premiums and an increase of $240,000 in renewal premiums.

Current wording

Insurance premiums and other considerations increased by $1,147,000, or 4.0%, to $29,960,000 for the three month period ended June 30, 2024, from $28,813,000 for the comparable period in 2023. This increase was primarily due to an increase of $1,020,000 in first year premiums and an increase of $127,000 in renewal premiums.

Previous wording

Total benefits and expenses were $71,569,000, or 88.2% of total revenues, for the three month period ended March 31, 2024, as compared to $77,916,000, or 98.0% of total revenues, for the comparable period in 2023.

Current wording

Total benefits and expenses were $76,402,000, or 89.1% of total revenues, for the three month period ended June 30, 2024, as compared to $75,697,000, or 90.3% of total revenues, for the comparable period in 2023.

Previous wording

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $409,000 or 1.6%, to $26,275,000 for the three month period ended March 31, 2024, from $25,866,000 for the comparable period in 2023. This increase was primarily the result of a $1,291,000 increase in future policy benefits and an $83,000 increase in surrender and other policy benefits, which were partially offset by a $965,000 decrease in death benefits.

Current wording

Death benefits, surrenders and other policy benefits, and future policy benefits decreased by an aggregate of $580,000 or 2.3%, to $24,326,000 for the three month period ended June 30, 2024, from $24,906,000 for the comparable period in 2023. This decrease was primarily the result of a $1,385,000 decrease in death benefits, which were partially offset by a $713,000 increase in future policy benefits and a $92,000 increase in surrender and other policy benefits.

Previous wording

Interest expense decreased by $426,000, or 29.3%, to $1,027,000 for the three month period ended March 31, 2024, from $1,453,000 for the comparable period in 2023. This decrease was primarily due to a decrease of $307,000 in interest expense on mortgage warehouse lines of credit for loans held for sale and a decrease of $119,000 in interest expense on bank loans.

Current wording

Interest expense decreased by $341,000, or 24.1%, to $1,074,000 for the three month period ended June 30, 2024, from $1,415,000 for the comparable period in 2023. This decrease was primarily due to a decrease of $19,000 in interest expense on mortgage warehouse lines of credit for loans held for sale and a decrease of $322,000 in interest expense on bank loans.

Previous wording

Mortgage fee income decreased by $4,157,000, or 16.0%, to $21,832,000, for the three month period ended March 31, 2024, from $25,989,000 for the comparable period in 2023. This decrease was primarily due to a $3,230,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market due to the decline in origination activity because of increasing interest rates, a $1,096,000 decrease in the fair value of loans held for sale, and a $116,000 decrease in the fair value of loan commitments, which was partially offset by a $285,000 increase in loan fees and interest income net of a decrease in the provision for loan loss reserve.

Current wording

Mortgage fee income decreased by $617,000, or 1.2%, to $51,451,000, for the six month period ended June 30, 2024, from $52,068,000 for the comparable period in 2023. This decrease was primarily due to a $3,854,000 decrease in secondary gains from mortgage loans sold to third-party investors into the secondary market due to the decline in origination activity because of increasing interest rates, which was partially offset by a $1,503,000 increase in the fair value of loans held for sale, a $1,269,000 increase in loan fees and interest income net of a decrease in the provision for loan loss reserve, and a $465,000 increase in the fair value of loan commitments.

Previous wording

Net investment income increased by $2,172,000, or 12.2%, to $19,947,000 for the three month period ended March 31, 2024, from $17,775,000 for the comparable period in 2023. This increase was primarily attributable to a $903,000 increase in interest on cash and cash equivalents, $391,000 increase in fixed maturity securities income, a $326,000 increase in mortgage loan interest, a $308,000 increase in insurance assignment income, a $150,000 increase in real estate income, a $101,000 increase in policy loan interest, a $70,000 increase in other investment income, and a $28,000 increase in equity securities income, which were partially offset by a $105,000 increase in investment expenses.

Current wording

Net investment income increased by $45,000, or 0.1%, to $37,991,000 for the six month period ended June 30, 2024, from $37,947,000 for the comparable period in 2023. This increase was primarily attributable to a $1,839,000 increase in interest on cash and cash equivalents, a $733,000 increase in insurance assignment income, a $593,000 increase in fixed maturity securities income, a $258,000 decrease in investment expenses, an $83,000 increase in policy loan interest, a $63,000 increase in equity securities income, and a $58,000 increase in other investment income, which were partially offset by a $2,119,000 decrease in mortgage loan interest and a $1,463,000 decrease in real estate income.

Previous wording

Net mortuary and cemetery sales increased by $477,000, or 7.4%, to $6,948,000 for the three month period ended March 31, 2024, from $6,471,000 for the comparable period in 2023. This increase was primarily due to a $221,000 increase in cemetery pre-need sales, a $139,000 increase in mortuary at-need sales, and a $117,000 increase in cemetery at-need sales.

Current wording

Net mortuary and cemetery sales increased by $1,077,000, or 7.9%, to $14,717,000 for the six month period ended June 30, 2024, from $13,640,000 for the comparable period in 2023. This increase was primarily due to a $956,000 increase in cemetery pre-need sales and a $139,000 increase in mortuary at-need sales, which were partially offset by an $18,000 decrease in cemetery at-need sales.

Previous wording

Gains on investments and other assets increased by $1,558,000, or 1401.9%, to $1,669,000 for the three month period ended March 31, 2024, from $111,000 for the comparable period in 2023. This increase in gains on investments and other assets was primarily due to a $1,203,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, a $250,000 increase in gains on real estate, and a $122,000 increase in gains on fixed maturity securities, which were partially offset by a $17,000 decrease in gains on other assets mostly attributable to the Company discontinuing its use of call and put option derivatives in the first quarter of 2023.

Current wording

Gains (losses) on investments and other assets increased by $364,000, or 39.3%, to $1,292,000 for the six month period ended June 30, 2024, from $928,000 for the comparable period in 2023. This increase in gains on investments and other assets was primarily due to a $250,000 increase in gains on equity securities mostly attributable to increases in the fair value of these equity securities, a $206,000 increase in gains on fixed maturity securities, and a $128,000 increase in gains on real estate, which were partially offset by a $220,000 decrease in gains on other assets.

Previous wording

Other revenues decreased by $247,000, or 20.8%, to $940,000 for the three month period ended March 31, 2024, from $1,187,000 for the comparable period in 2023. This decrease was primarily attributable to a decrease of $180,000 in servicing fee revenue due to a decrease in the retention of mortgage servicing rights.

Current wording

Other revenues decreased by $269,000, or 13.6%, to $1,715,000 for the six month period ended June 30, 2024, from $1,984,000 for the comparable period in 2023. This decrease was primarily attributable to a decrease of $132,000 in servicing fee revenue due to a decrease in the retention of mortgage servicing rights.

Previous wording

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $140,000, or 2.9%, to $4,744,000 for the three month period ended March 31, 2024, from $4,884,000 for the comparable period in 2023. This decrease was primarily due to increased payment consistency from premium-paying products.

Current wording

Amortization of deferred policy and pre-need acquisition costs and value of business acquired decreased by $90,000, or 1.0%, to $9,045,000 for the six month period ended June 30, 2024, from $9,135,000 for the comparable period in 2023. This decrease was primarily due to increased payment consistency from premium-paying products.

Previous wording

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 March 31, 2024, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its Warehouse Lines of Credit and 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 $6,963,000 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.

Current wording

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 June 30, 2024, the Company’s subsidiary SecurityNational Mortgage was not in compliance with the net income covenants under its Warehouse Lines of Credit and 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 $6,617,000 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.

Previous wording

During the three month periods ended March 31, 2024 and 2023, the Company’s operations provided cash of approximately $25,077,000 and used cash of approximately $16,074,000, respectively. The increase in cash provided by operations was due primarily to increased proceeds from the sale of mortgage loans held for sale.

Current wording

During the six month periods ended June 30, 2024 and 2023, the Company’s operations provided cash of approximately $8,104,000 and of approximately $2,181,000, respectively. The increase in cash provided by operations was due primarily to increased proceeds from the sale of mortgage loans held for sale.

Previous wording

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 $360,314,000 (at estimated fair value) and $362,663,000 (at estimated fair value) as of March 31, 2024 and December 31, 2023, respectively. This represented 38.5% and 38.7% of the total investments of the Company as of March 31, 2024 and December 31, 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 March 31, 2024, 1.9% (or $7,042,000) and as of December 31, 2023, 1.8% (or $6,954,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

Current wording

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 $330,052,000 (at estimated fair value) and $362,663,000 (at estimated fair value) as of June 30, 2024 and December 31, 2023, respectively. This represented 35.9% and 38.7% of the total investments of the Company as of June 30, 2024 and December 31, 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 June 30, 2024, 2.0% (or $6,561,000) and as of December 31, 2023, 1.8% (or $6,954,000) of the Company’s total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.

Previous wording

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $424,439,000 as of March 31, 2024, as compared to $418,450,000 as of December 31, 2023. This increase was primarily due to an increase of $7,209,000 in stockholders’ equity as partially offset by a decrease of $1,220,000 in bank loans and other loans payable. Stockholders’ equity as a percent of total capitalization was 75.4% and 74.8% as of March 31, 2024 and December 31, 2023, respectively.

Current wording

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $429,307,000 as of June 30, 2024, as compared to $418,450,000 as of December 31, 2023. This increase was primarily due to an increase of $12,871,000 in stockholders’ equity as partially offset by a decrease of $2,014,000 in bank loans and other loans payable. Stockholders’ equity as a percent of total capitalization was 75.9% and 74.8% as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $110,239,000 and $107,385,000 as of March 31, 2024, and December 31, 2023, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.

Current wording

The combined statutory capital and surplus of the Company’s life insurance subsidiaries was $114,667,000 and $107,385,000 as of June 30, 2024, and December 31, 2023, respectively. The life insurance subsidiaries cannot pay a dividend to their parent company without the approval of state insurance regulatory authorities.