Security National Financial Corporation — Q2 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2023. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Comparisons below are with the corresponding 2022 periods unless otherwise noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $83.8 million | $95.6 million | $163.3 million | $198.0 million |
| Pre-tax earnings | $8.1 million | $4.7 million | $9.7 million | $9.2 million |
| Net earnings | $6.4 million | $3.6 million | $7.6 million | $6.8 million |
| Diluted earnings per equivalent Class A share | $0.28 | $0.15 | $0.34 | $0.29 |
| Operating cash flow | Not separately provided | Not separately provided | $2.2 million | $97.6 million |
- Revenue mix and changes: Q2 mortgage fee income fell 38% to $26.1 million; insurance premiums and other considerations rose 11% to $28.8 million; net investment income increased 26% to $20.2 million. For the first half, mortgage fee income declined 42% to $52.1 million, while net investment income rose 22% to $37.9 million and insurance premiums increased 9% to $56.8 million.
- Profitability: Q2 benefits and expenses were 90.3% of revenue, compared with 95.1% a year earlier; first-half ratio was 94.0%, versus 95.4%. The reported figures imply pre-tax margins of approximately 9.7% and 6.0%, respectively, compared with 4.9% and 4.6% in the comparable periods.
- Segment results: Q2 pre-tax earnings were $9.2 million for life insurance and $2.8 million for cemetery/mortuary; mortgage recorded a $3.8 million pre-tax loss. First-half results were $12.8 million, $4.6 million, and a $7.7 million loss, respectively.
- Cash flow and liquidity: First-half operating cash flow dropped to $2.2 million from $97.6 million, primarily because proceeds from sales of mortgage loans held for sale decreased. Cash and cash equivalents were $110.3 million at June 30, 2023, down from $120.9 million at year-end; cash, cash equivalents and restricted cash totaled $121.6 million.
- Debt and capital: Bank and other loans payable declined to $103.3 million from $161.7 million at December 31, 2022. Stockholders’ equity was $298.8 million, up from $292.8 million. Equity represented 74.3% of total capitalization, compared with 64.4% at year-end.
- Balance sheet: Total assets were $1.404 billion, down from $1.461 billion at year-end. Future policy benefits and unpaid claims were $901.8 million. Mortgage loans held for investment were $271.0 million, compared with $308.1 million at year-end.
Material changes, outlook and risks
- Mortgage-market contraction: Mortgage originations fell to 3,738 loans totaling $1.14 billion in the first half, from 6,419 loans totaling $2.05 billion in 2022. Management attributed weaker mortgage revenue chiefly to higher interest rates and reduced originations, particularly refinancing. No quantified forward guidance was provided.
- Warehouse facilities and covenant compliance: The company was not in compliance with a net-income covenant at June 30 and had received, or was seeking, waivers from warehouse lenders. Approximately $7.1 million of advances on a line without a waiver could require repayment; management stated available cash and borrowing capacity on lines with waivers would support origination activity. Wells Fargo’s $100 million and Comerica’s $75 million facilities were not to be renewed because the lenders were exiting the market. The filing says the company was negotiating additional warehouse lines.
- Credit and rate exposure: Mortgage loans past due totaled $18.4 million at June 30, versus $7.9 million at year-end; $2.3 million was over 90 days past due. The company also reported $170.8 million of construction and land-development loan commitments, of which $125.0 million had been funded. Management noted continued housing-market volatility and adjusted its construction-loan credit-loss analysis.
- Investment marks and credit: Available-for-sale fixed maturity securities had $19.1 million of gross unrealized losses and a $224,005 credit-loss allowance. Management said most unrealized losses reflected interest rates and inflation; 98.0% of the fixed-maturity portfolio was investment grade. Accumulated other comprehensive loss was $12.9 million.
- Other notable items: The company adopted the expected-credit-loss standard (ASU 2016-13) on January 1, 2023, reducing opening retained earnings by $671,506. Management had not yet estimated the financial-statement impact of the insurance-contract accounting standard due for adoption January 1, 2025. The company said it held no deposits or credit facilities with Silicon Valley Bank, Signature Bank, or First Republic Bank, and continued to monitor banking relationships.
- Legal and controls: Management reported no material legal proceedings outside the ordinary course and no material adverse effect expected from ordinary-course claims. Disclosure controls were concluded effective; no significant quarterly change in internal control was reported.
Important facts for investors to verify
- Whether warehouse covenant waivers are finalized and replacement or renewed mortgage funding facilities are secured before existing lines mature.
- Mortgage origination volumes, secondary-market gains, and the mortgage segment’s path back to profitability in a higher-rate environment.
- Trends in delinquent mortgage loans, construction lending commitments, credit-loss allowances, and insurance-assignment collectability.
- How interest-rate movements affect fixed-maturity valuations, accumulated other comprehensive loss, and the company’s ability to match investment assets with long-term policy obligations.
- The eventual estimated impact of ASU 2018-12, scheduled for adoption in 2025.