SNFCA - NASDAQ

All right, good morning, everybody, and welcome to Security National Financial Corporation's First Quarter 2025 Earnings Call. We thank you for joining us today to review our financial and operational results for the period ended March 31, 2025. 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?

Good afternoon, and welcome to this earnings call. My name is Scott Quist. I am, as noted, the Chairman and Chief Executive Officer of Security National Financial Corporation, and thank you for taking the time to join this investors' call. As you can see from our 10-Q filings this morning, for the three months ended March 31, 2025, SNFC's after-tax earnings decreased by approximately 42% or $3.1 million from $7.475 million in 2024 to $4.338 million in 2025. Pre-tax earnings decreased approximately 41%, or $4.05 billion to $5.571 million. Most of my following comments will be using the pre-tax numbers as I go through some of the details. A decrease in quarterly income is never our goal and falls below our self-set standards. Despite the decrease in net income, I thought as a company, we performed well operationally in the first quarter. Our insurance segment had its second-best first quarter out of the last five years, and our death care segment had its third-best second quarter out of the last five years, which time period is important to note includes the pandemic. Speaking now of the decrease in pre-tax net income of the approximate $4.05 million decrease in pre-tax quarterly income, about 75% or roughly $3 million is attributable to decreases in both our realized and unrealized investment income. Our investment income can be and is lumpy between quarters and years, primarily due to its close relationship to real estate activities and markets, meaning home closings or lot sales, and secondly, to public equity markets. Speaking now to the $3 million decline in investment income, and referring now to that portion more directly related to real estate activities, roughly 56%, or $1.7 million, is of the decline is due to decreased construction profits and decreased gains on the sale of residential lots from our builder relationships. We simply participated in fewer home closings in Q1 2025 than in Q1 2024. I think it fair to say that builders to which we have profit-sharing relationships had more homes in the process of being built in Q1 2025, but fewer closings. Margins appear to be consistent with 2024's experience, but margins are always an issue until a home closes. Lastly, as a general real estate market comment, housing inventories in days on market appear to have increased, but not to a degree that causes alarm. Roughly 42% or $1.25 million of our $3 million investment income decline is due to stock market declines in Q1. Generally speaking, we've chosen not to liquidate our positions, so the reference loss is simply a recognized but unrealized stock market loss as of March 31, 2025. Roughly $900,000 or 22% of the entire $4.05 million decrease in pre-tax income is related to an increase in our bad debt reserve expense, as prescribed by the adoption of the CECL accounting standard, CECL is the Current Expected Credit Losses, the acronym, in Q1 2024. Arguments can be credibly made that this accounting rule is simply another element of our investment income. If that view were accepted, then basically our entire decrease in free tax net income is investment income related. In my view, CECL is a very formulaic and forward-looking calculation that places a heavier weight on outside factors at the time an asset is acquired and less weight on the Company's experience over the course of time. Time will tell if the Company's allowances are appropriate, but in my view CECL did change and does have the potential to further change in the future the Company's bad debt allowances based on factors that are outside its control. After accounting for the investment income and related decreases, the remaining elements causing increases or decreases to net income are smaller in net impact and are much more numerous and nuanced. One element that probably merits comment is personnel costs. Personnel costs rose roughly 11.7% or roughly $2.2 million over 2024. Roughly speaking, 5 percentage points net increase relates to general annual compensation increases for both staff and management. We find it important to remain marketplace competitive in our compensation or experience staff are recruited away from us. The remaining increase relates to increased staffing pretty much across all levels. We are constantly reviewing our operational costs to ensure we remain efficient. But the majority of this increase represents very deliberate strategic hirings of high quality, high performing individuals to augment our sales and fulfillment staffs where we determined we needed greater capability to reach our growth goals. Growth is expensive, but is nevertheless our constant goal. We believe these increased personnel costs to be necessary investments, which will yield returns in the years to come. Despite the decrease in income, many accomplishments were made in the first quarter. In our death care segment, we increased families served by 4%, in what we believe to be a flat to declining mortality climate. In our insurance segment, we've improved our premium margin by several percentage points, reflecting the increased premium rates we've been implementing over the last several years. The full effect of those margin increases will not be apparent for several years hence. In our mortgage segment, we increased volume 11%, Q1 2025 over Q1 2024, with an improved mix of products. Importantly, our mortgage segment was both profitable and cash flow positive in March. This concludes my prepared remarks, and I will now turn the time over to Mr. Garrett Sill, our Chief Financial Officer.

Thank you, Scott. Good afternoon. As Scott mentioned, my name is Garrett Sill, and I am the Chief Financial Officer of Security National Financial Corporation. I want to start by pointing out that the investment-related items that Scott highlighted in his comments are really found in three-line items on the Company's income statement. In the revenue section, construction profits are component of net investment income. The gains on sale of residential lots and the changes in unrealized gains or losses on common stock are a component of gains on investment and other assets. And finally, our allowances that are related to our adoption of CECL are component of the other line item in the benefits and expense section. Reviewing our balance sheet, total investments increased 3%, with the largest increase in our investments in mortgage loans, followed by an increase in bond holdings, and then real estate as we continue to expand and develop single-family real estate. In my view, our investments are good credit quality and well balanced. Looking at our liabilities, insurance reserves increased less than 1% simply due to the aging of our block of business. Bank loans increased about 15% as we saw increased utilization of our outside warehouse lines due to increased mortgage originations. Finally, our statement of comprehensive income doesn't get a lot of time in the spotlight, but I thought it worthwhile to point out that we had a $5 million improvement in our unrealized losses on our bond portfolio. The fair value of our bond portfolio compared to its amortized cost has not been this close since 2020. Now I'd like to revisit our adoption of ASU 2023-07 or Improvements to Reportable Segment Disclosures. The purpose of this accounting change was to bring parity into the way that reportable business segments were disclosed by public companies. Prior to the change, the Company had always reported its segment's earnings before taxes. Beginning this year, ending December 31, 2024, the Company began to disclose its reportable segment earnings after taxes, as this was the SEC's preferred format. To aid our shareholders in multi-year and quarterly comparisons, the Company will continue to provide before-tax segment earnings in its quarterly and annual press releases. Now, let's look forward to another significant change to our financial reporting. In December, this year, we will adopt ASU 2018-12, better known as Targeted Improvements to the Accounting for Long-Duration Contracts, or LDTI. Basically, the way that the Company will calculate and report its life insurance reserves will change drastically. This has required a significant investment in time and other resources as we've worked on the implementation of these changes over the last two years. The Company is still evaluating the total impact of these accounting changes, but should be able to report a range of its financial impact with our third quarter earnings. The final impact and required disclosures will then be reported in Form 10-K, which will be filed in March of 2026. In closing, we're financially healthy as our balance sheet remains strong with well-balanced investments and minimal debt. We have some significant changes to the way life insurance reserves are calculated and reported in our financial statements for the year ended December 31, 2025, but are confident in our ability to meet the reporting time. All things considered this was a good first quarter for the Company. Thank you. I'll turn this time over to Andrew, our President of Security National Mortgage.

Thank you, and good afternoon. I'm Andrew Quist, President of Security National Mortgage Company, and I'll be covering the mortgage company's results in the first quarter of 2025. After my remarks, Adam Quist will be covering the life insurance company results, and [indiscernible] will be covering the funeral home and cemetery results following that portion. I'd like to apologize in advance for my raspy voice, though some of you may prefer to my regular voice. Hopefully, it will last for the balance of my comments. In quarter one of 2025, Security National Mortgage Company lost $1.994 million compared to a loss of $1.964 million in Q1 of 2024. This was an increase to our loss of $30,000 quarter over quarter or essentially flat. Seasonally, Q1 is a difficult quarter in the mortgage industry, but I do not believe our flat year-over-year results highlight the improvement in our mortgage operations in 2025 from 2024. The reason for that belief is Q1 2024 included a contract expense for deferred compensation of $700,000 and CECL credits of $360,000 more than Q1 2025. These items reduced 2024's Q1 expenses by more than $1 million. Q1 2025 did not have these accounting tailwinds, making year-over-year comparisons difficult. Security National Mortgage's origination volumes in Q1 2025 were strong. We originated $518 million in loan volume in Q1 2025 compared to $467 million in Q1 2024 for a $50.5 million increase in production or up 11%. We believe this is a significant outperformance to the market. The most recent data available from the Mortgage Bankers Association indicates origination volumes nationwide were up just 2% from Q1 2024. Thus, our origination volumes would indicate a 5X outperformance over the nationwide originations. On a sequential quarter basis, Security National Mortgage's origination volume from Q4 2024 was down 10%. Again, using the most recent data from the MBA, nationwide the decrease in origination volume from Q4 2024 to Q1 2025 is reported to be down 22%. We believe this strong origination performance is a direct result of our recruiting strategies in 2023 and 2024. In summary of the quarter, our strong origination volumes compared to the overall market did not result in earnings improvement because of the large contra expense items booked in Q1 2024. But I believe that our cumulative recruiting has as well positioned for strong origination volumes and performance in the future. Thank you.

Thank you, Andrew, and good afternoon to everyone who has joined us. I want to thank each of you for joining us today. My name is Adam Quist and I am President of Security National Life Insurance Company. And today, I will report results for our core insurance operations for the first quarter ended March 31, 2025. On a GAAP basis, we earned $4.6 million compared to $7.1 million in the same period last year, which was a decrease of $2.5 million or about 35%. While a year over year decline is never our aim, we view this past quarter as building the foundation for future growth, as we made strategic investments and fortified our underlying strength. Let me begin with our premium collections, which remained relatively flat compared to Q1 2024. However, what's important to understand in this context is that we believe on average, we've improved our premium margin by approximately 14% compared to the same period last year. Obviously, that means we're generating more margin on every new dollar of premium sold, which is a direct result of our efforts for disciplined pricing and our ongoing product refinement, which has created some disruption to our sales force. As Scott noted in his comments, margin improvements across the organization are intentional and reflect long-term efforts to improve profitability. For us in the life insurance segment, this margin expansion is a very deliberate and encouraging trend. But it should be noted that, as is the nature of a multi-pay insurance company, it will take some time for these improved margins to be fully reflected in our GAAP results. Now, let's walk through the major components behind our earnings change, focusing on the key drivers that put downward pressure on our earnings. First, our personnel costs increased by about $1 million or 17% year-over-year. This includes deliberate and strategic hiring of key talent that gives us new capabilities in areas such as lead generation, agent training, value creation to our funeral home partners, enhanced cross-selling of our products, and more robust origination of commercial loans. We've also increased staffing in IT, HR, and other areas of operations, areas we've identified as vital for supporting future growth. As Scott said, growth is expensive but essential, and we view these costs as investments that will pay dividends over time. Second, our unrealized gains on common stocks were about $900,000 lower than in Q1 2024. As with the broader corporation, this largely reflects market-related fluctuations, as by and large, we have not liquidated our positions. Third, we also saw approximately a $900,000 define in the deferral of commission expense following a Q3 2024 update to our actuarial assumptions. These assumptions are reviewed quarterly. Lastly, bad debt expense increased by roughly $700,000 largely due to CECL reserve requirements. As Scott highlighted, CECL is a formulaic forward-looking accounting rule that is heavily influenced by assumptions about perceived market conditions. These perceptions and associated assumptions required by CECL may not always be reflective of the long-term credit performance of our investments. Despite these headwinds, which I would note the majority of which are either market-driven or accounting-based and are not necessarily reflective of operational health, we believe we saw positive operational trends in the quarter. We're identifying and addressing efficiency gaps, particularly in our new business and claims departments, and we're realigning staffing where needed. As Scott noted, our focus on margin expansion, capability development, and discipline growth remain strong. In summary, while our GAAP earnings were down, I believe our underlying fundamentals are strengthening. In my view, our improved premium margin and deliberate talent investments are critical steps to our sustainable long-term success. Thank you for your time and continued support, and I look forward to sharing our progress with you in the quarters ahead. I will now turn the time over to Steve Kiel.

Thank you, Adam. Good afternoon, and I as well would like to thank each of you for joining us today. My name is Steve Kiel, and I am the Chief Operating Officer of Security National Funeral Homes and Cemeteries. I want to begin by recognizing the dedication and professionalism of our funeral home and cemetery teams. Their unwavering commitment to service excellence and operational consistency continues to be a cornerstone of our stability and long-term growth, even as we navigate a more challenging macroeconomic environment. In the first quarter of 2025, Security National Funeral Homes and Cemeteries reported net earnings before tax of $2.21 million, a 27% decline from $3.07 million in the first quarter of 2024. This decline was primarily driven by an $828,000 reduction in investment income gains, coupled with modestly softer performance and select mortuary and cemetery markets. Despite these headwinds, we're seeing continued operational momentum and are investing strategically in key areas where we believe it will drive sustainable long-term value. Pertaining to our funeral home operations, in the first quarter of 2025, our funeral home operations reported pre-tax net earnings of $613,000, reflecting a 6.9% decrease from the $658,000 in the same period of 2024. Despite the decline in earnings, revenue grew by 3.4% year-over-year to $3.67 million. This increase was driven by a 3% rise in total services performed, along with a 0.4% increase in average revenue per contract realized. Our revenue growth this quarter highlights the success of our enhanced service offerings, especially those tailored to cremation families, as well as the impact of our funeral directors’ customer focused educational efforts. We continue to prioritize disciplined cost management across our funeral home operations to ensure we fully capture the benefits of this top line momentum. Regarding our cemetery operations. In the first quarter of 2025, our cemetery operations delivered pre-tax net earnings of $815,000 representing a 1.2% increase compared to $805,000 in the same period last year. Revenue held steady at $3.66 million with a modest year-over-year decline of 0.2%. And term in volumes rose by 3% over the prior year, largely driven by continued growth in cremation related services, highlighting both evolving consumer preferences and the strong reception to our broadened suite of offerings. We remain focused on the ongoing development of our cemeteries, ensuring we offer a comprehensive range of burial and cremation options that that reflect the diverse needs of the families that we are honored to serve. Pertaining to our investment income, our investment income totaled 778,000 in the first quarter of 2025, representing a 51% decrease compared to the same period last year. This decline was primarily due to the absence of $637,000 compared to prior year investment returns associated with our homebuilder relationships as well as $360,000 reduction in unrealized gains on our common stock positions. These were partially offset by contributions from our undeveloped land real estate activities. As Scott previously mentioned, our investment income can be and is lumpy between quarters and years, primarily due to its close relationship to real estate activities and secondly to public equity markets. Looking ahead to the remainder of 2025, our strategic priorities remain centered on growth, operational discipline, and long-term value creation. Key areas of focus include, first, talent development and training, strengthening the capabilities of our funeral and sales staff, especially in articulating value in the cremation space. Second, technology investment, deploying digital tools to enhance service efficiency and elevate our customer experience. Third, expense management, maintaining a disciplined cost control across all operating units to support margin expansion. And fourth, sales culture and accountability, recruiting top performers and reinforcing a results-oriented culture across our field operations. We remain caution cautiously optimistic about the remainder of the year. While market volatility may continue to impact investment related income, we are confident in the resilience of our operating model and the growth potential of our four operating business segments. Our deliberate investments in people, technology and service innovation, combined with strong cost discipline, will continue to enhance our competitive position and drive performance gains in the coming quarters. Thank you for your time and your continued support. We value your partnership and remain committed to delivering long term returns for our shareholders.

Before we conclude today’s call, we would like to open the floor for questions. As a reminder, to ask a question, please use the

I've got a question. When I look at sort of your tangible equity, which I come up with by looking at your equity and then subtracting out the value of business acquired and goodwill. I look at it and I kind of see about a $330 million average amount of equity that you had during the first quarter with about $4.3 million of net income that annualizes to about $17 million or just a little over $17 million of annualized net income, which would be about a 5.2% return on equity. When I look at that equity number, though, I say to myself, it's pretty undervalued given you've got so much real estate that's on the books at significantly below market values. And so, when I sort of adjust that tangible equity, I come up with more like a $410 million number. So, my question for you is when I adjust that, then I come with around a 4.2% return on tangible equity. So, either way that I look at it, the return on tangible equity is quite low. I know your explanation is that you're investing in people for the future. So, my question is, once you get to the point where you've invested for the future, what do you think your future return on equity can be or what do you think is adequate for a publicly traded company where the risk-free rate in the markets today is really very similar to the type of return on equity that you're generating?

Well, allow me to respond. First of all, to your adjustments, Will, I'm glad you are paying attention. I will not comment as to the accuracy of your estimations on real estate, et cetera. We look at the numbers as they are. Referring to the return on equity, I disagree with the comment that we were low because of investing in talented people. Instead, I would say, no, we were low because the investment returns on investments we've already made in real estate were not equal to what they were in 2024. And that same comment would hold true for the stock market. I mean, the reality is, if you talk in rough numbers, we had a seven -- comparing 2024, we were at seven point, whatever million, $7.7 million, I think. And when that went down to, what was it, three, I'm looking at it now, pre-tax, we were $9.6 million. Excuse me, last year, this year, pre-tax, we were $5.5 million that $4 million delta, $3 million of that, I could point to home closings, lot sales, and $1 million of that, I can point to season. So, one could argue that the increased personnel have already paid for themselves, keeping the Company on a level operating basis. We don't view it that way. We think there's going to be great returns ahead. Lastly, I would say, and when you compare rates of return, I would say, beauty is in the eye of the beholder. If you believe you're better served by buying U.S. Treasuries, then I think you should. We believe our earnings will be growing. We believe that operationally the Company is performing well and we've given the reasons why. But again, beauty is in the eye of the beholder.

Thank you again for your questions and participation. We value the engagement and thoughtful input of our shareholders and analysis. Before we officially close, I'd like to take this opportunity to remind everyone that our Annual Shareholder Meeting will be held June 27, 2025, at 10 a.m. Mountain Daylight Time at 433 Ascension Way, first floor, Salt Lake City, Utah. For those unable to attend in person, the meeting will also be available via