Security National Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. The company reports life insurance, cemetery and mortuary, and mortgage segments. Results are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $79.5 million | $102.4 million | Down 22.4% |
| Benefits and expenses | $77.9 million | $98.0 million | Down 20.5% |
| Earnings before tax | $1.6 million | $4.4 million | Down 64.3% |
| Net earnings | $1.2 million | $3.2 million | Down 61.6% |
| Diluted earnings per share | $0.06 | $0.15 | Down $0.09 |
| Operating cash flow | $(16.1) million | $72.5 million | Shifted to cash use |
Benefits and expenses were 98.0% of revenue, versus 95.7% a year earlier; pretax margin was approximately 2.0%, versus 4.3%. No separate consolidated net profit margin is stated; based on reported figures, it was approximately 1.6% versus 3.2%.
Balance sheet, debt and liquidity
- At March 31, total assets were $1.443 billion, down from $1.461 billion at year-end; total liabilities were $1.146 billion and stockholders’ equity was $297.0 million.
- Cash and cash equivalents were $99.6 million, down from $120.9 million. Cash, cash equivalents and restricted cash totaled $109.5 million, compared with $133.5 million at the start of the quarter.
- Bank and other loans payable were $138.4 million, down $23.3 million from year-end. Total capitalization (equity plus bank and other loans) was $435.4 million; equity represented 68.2%, up from 64.4%.
- Mortgage loans held for investment were $286.5 million, down from $308.1 million. Loans held for sale were $173.0 million, up from $141.2 million.
- Operating cash use was attributed primarily to lower proceeds from mortgage loan sales. Investing activities provided $17.4 million; financing activities used $25.2 million.
Material changes and segment results
- Mortgage: Segment revenue fell 50% to $26.9 million, and pretax results shifted to a $3.9 million loss from $1.6 million of income. The company originated 1,702 loans totaling $531.9 million, versus 3,356 loans totaling $1.039 billion. Mortgage fee income declined 46.2%, principally reflecting lower secondary-market gains and reduced originations amid higher mortgage rates.
- Life insurance: External revenue increased 9% to $45.4 million and pretax income rose to $3.7 million from $0.8 million. Premiums increased 6.2% and net investment income rose 15% in the segment.
- Cemetery and mortuary: External revenue declined 4% to $7.2 million; pretax income declined 12% to $1.8 million, primarily due to lower at-need sales and pre-need cemetery sales.
- Consolidated net investment income increased 17.0% to $17.8 million, while insurance premiums and other considerations increased 6.2% to $28.0 million. Other revenue declined 77%, largely because of lower mortgage servicing fees after the October 2022 sale of certain servicing rights.
- Unrealized gains on available-for-sale fixed maturity securities contributed to $4.1 million of other comprehensive income, compared with a $12.2 million loss in Q1 2022. Accumulated other comprehensive loss narrowed to $8.9 million from $13.1 million at year-end.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management describes higher interest rates as reducing refinance activity and weighing on purchase originations. The company says financial-market and economic conditions may affect expected cash flows.
- Warehouse-line covenant issue: At quarter-end, the mortgage subsidiary was not in compliance with the net-income covenant on its U.S. Bank warehouse line. The filing says waivers had been received or were in process from warehouse banks; it also identifies approximately $8.9 million outstanding on a Texas Capital Bank line for which a waiver had not been provided. The company states it had sufficient cash and capacity on lines with waivers to fund originations if repayment were required. The warehouse agreements have cross-default provisions. Several facilities were scheduled to mature in May or June 2023, making subsequent extensions or refinancing important to verify.
- The company had approximately $192.5 million of commitments for construction and land-development loans; $151.7 million had been funded. Management notes housing-market volatility and adjusted its construction-loan credit-loss analysis.
- Mortgage-loan past dues totaled $13.6 million at March 31, versus $7.9 million at year-end; $2.6 million was over 90 days past due and $0.7 million was in foreclosure. The mortgage-loan allowance for credit losses was $2.7 million. The company adopted the expected-credit-loss standard on January 1, 2023, reducing opening retained earnings by $0.7 million.
- Available-for-sale fixed maturities had $15.6 million of gross unrealized losses, which the company primarily attributed to interest rates and inflation; it recognized a $179,500 credit-loss allowance during the quarter. Management reported 98.1% of fixed maturities were investment grade.
- The company reported no deposit accounts or credit facilities with Silicon Valley Bank, Signature Bank or First Republic Bank, while noting it monitors regional and community-bank relationships. It reported no material legal proceedings outside the ordinary course of business and no significant changes in internal controls.
Most important facts for investors to verify
- Whether the warehouse-line covenant waivers were finalized, and the status of the near-term facility maturities, cross-default exposure and borrowing availability.
- Whether mortgage production, secondary gains and operating cash flow stabilize after the sharp year-over-year contraction.
- Developments in construction and land-development lending, delinquency trends, collateral values and credit-loss allowances.
- Whether improved investment income and life-insurance earnings can offset mortgage weakness, and how rate movements affect investment values and policy liabilities.
- The effect and implementation progress of the long-duration insurance accounting standard, scheduled for adoption in 2025; the filing says its financial impact has not yet been estimated.