Security National Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The unaudited filing covers the company’s life insurance, cemetery and mortuary, and mortgage operations. Comparisons are with Q1 2018 unless otherwise noted.
Financial performance and position
- Revenue: $61.49 million, down 25.1% from $82.08 million. Net investment income was nearly flat at $10.04 million; mortgage fee income declined 3.9% to $24.48 million; cemetery and mortuary sales rose 13.8% to $3.68 million.
- Profit: Earnings before tax were $2.43 million versus $21.19 million; net earnings were $1.93 million versus $16.93 million. Diluted earnings per share were $0.11 versus $0.99. Net margin was approximately 3.1%, compared with 20.6%.
- Key driver of the comparison: Q1 2018 included a $22.25 million gain from the sale of Dry Creek apartments. Investment and other asset gains fell to $1.81 million from $22.02 million.
- Segment results: Life insurance pretax earnings were $2.09 million versus $23.71 million, largely reflecting the prior-year property-sale gain. Cemetery/mortuary pretax earnings increased to $1.18 million from $0.86 million. Mortgage operations reported a pretax loss of $0.84 million, improved from a $3.39 million loss.
- Cash flow: Operating activities provided $19.52 million, compared with $8.71 million. Investing activities used $17.01 million, versus providing $55.70 million in Q1 2018; financing activities used $13.96 million. Cash, cash equivalents, and restricted cash ended at $139.49 million, compared with $111.40 million at the prior-year quarter-end.
- Balance sheet and liquidity: Total assets were $1.056 billion and stockholders’ equity was $174.05 million at March 31. Cash and cash equivalents were $130.13 million. Bank and other loans payable were $175.09 million, down from $187.52 million at year-end 2018. The company reported $349.27 million of total capitalization, with equity equal to 49.9%.
- Other credit indicators: Mortgage loans held for investment were $196.34 million net. Non-performing loans in that portfolio rose to $4.67 million from $3.64 million at year-end. The company had $123.37 million of loans held for sale.
Material changes and management commentary
- Mortgage originations at SecurityNational Mortgage totaled 1,953 loans and $419.49 million in volume, down from 2,368 loans and $471.51 million. Management attributed industry-wide origination pressure to limited housing supply and fewer refinancings, and cited cost reduction and process restructuring as reasons for the smaller segment loss.
- Insurance premiums increased 1.2%, which management attributed primarily to growth in renewal premiums and whole-life business. Cemetery/mortuary growth reflected higher pre-need cemetery and at-need mortuary sales.
- The company acquired Probst Family Funerals and Heber Valley Funeral Home on February 15 for a net purchase price of approximately $3.32 million, subject to a $150,000 holdback.
- The company adopted the lease accounting standard on January 1, 2019, recording approximately $12.08 million of right-of-use assets and related liabilities at adoption. Management said the impact on results was not material.
- No specific full-year earnings or revenue guidance is provided. Management cautions that first-quarter results are not necessarily indicative of full-year results and says operating cash flows are expected to support policyholder obligations, debt service, and operating needs.
Risks, contingencies, and unusual items
- Warehouse-line covenants: SecurityNational Mortgage did not meet Texas Capital Bank’s profitability covenant for the year at March 31 and was seeking a waiver. It had requested, but had not received, a related Wells Fargo waiver. The two warehouse facilities have cross-default provisions; management anticipated a possible further covenant failure at Texas Capital at Q2-end that could trigger a Wells Fargo default. Outstanding balances were approximately $56.11 million at Texas Capital and $22.06 million at Wells Fargo. Management stated it believed it had sufficient cash and borrowing capacity to repay the lines if required and continue originations through other funding sources.
- Other borrowing: The company owed $47 million to the Federal Home Loan Bank at March 31 and reported that it repaid this amount in April 2019.
- Mortgage litigation: Lehman Brothers Holdings claims indemnification relating to mortgage loans, including approximately 136 loans in one matter and approximately 577 additional RMBS loans. Alleged damages are described as millions of dollars, with the amount to be determined. SecurityNational Mortgage denies liability and intends to defend itself. The filing does not provide a clear estimate of potential loss.
- Mortgage repurchase/indemnification reserve: The reserve was $3.70 million at March 31. Management notes actual losses could differ and claims may be asserted by investors.
- Loan funding commitments: Construction and land-development loan commitments were approximately $98.51 million, of which $77.17 million had been funded.
- Investment and estimation risks: The portfolio includes real estate and mortgage lending, with a substantial share of mortgage borrowers located in Utah. Management identifies credit-loss allowances, policy-benefit liabilities, mortgage servicing rights, and fair values as estimates subject to change. The company reported compliance with life-insurance risk-based capital requirements.
Important facts for investors to verify
- Whether Texas Capital and Wells Fargo granted the requested waivers, and the status of covenant compliance and warehouse-line refinancing or repayment.
- Subsequent developments in the Lehman litigation and any change in the company’s assessment or reserves for mortgage claims.
- Whether mortgage origination volumes, mortgage fee income, and the mortgage segment’s cost reductions are sustained in subsequent quarters.
- How much of the sharp year-over-year earnings decline reflects the nonrecurring Dry Creek sale gain, versus ongoing operating trends.
- Changes in non-performing mortgage loans, credit-loss allowances, and the company’s construction-loan commitments.