Security National Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The company operates life insurance, cemetery and mortuary, and mortgage businesses. It ceased EverLEND Mortgage operations in December 2021 and merged them into SecurityNational Mortgage.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $102.4 million | $122.7 million; down 16.5% |
| Pre-tax earnings | $4.4 million | $16.4 million; down 72.8% |
| Net earnings | $3.2 million; $0.16 basic and $0.15 diluted per share | $12.1 million; $0.60 basic and $0.58 diluted per share |
| Net margin | 3.2% | 9.9% |
| Operating cash flow | $72.5 million | $101.0 million |
| Cash and cash equivalents | $145.6 million at March 31 | $131.4 million at December 31, 2021 |
| Total assets | $1.520 billion | $1.548 billion at December 31, 2021 |
| Bank and other loans payable | $233.6 million | $251.3 million at December 31, 2021 |
| Stockholders’ equity | $292.3 million | $299.8 million at December 31, 2021 |
Benefits and expenses were $98.0 million, or 95.7% of revenue, compared with $106.3 million, or 86.7%, a year earlier. Comprehensive loss was $9.0 million, including $12.2 million of after-tax other comprehensive loss, primarily reflecting unrealized fixed-maturity-security losses as interest rates rose.
Material changes versus the prior-year quarter
- Mortgage fee income fell 33.8% to $48.3 million, mainly because secondary-market gains declined by $28.8 million. Mortgage originations totaled $1.039 billion across 3,356 loans, versus $1.450 billion across 5,471 loans in Q1 2021.
- Mortgage segment pre-tax earnings dropped to $1.6 million from $11.0 million. The life insurance segment earned $0.8 million before tax, down from $2.7 million; cemetery and mortuary earned $2.0 million, down from $2.7 million.
- Insurance premiums and other considerations increased 12.8% to $26.3 million; net investment income rose 6.3% to $15.2 million; and mortuary and cemetery sales increased 21.3% to $7.2 million.
- Operating cash flow declined $28.5 million, which management attributed primarily to lower proceeds from sales of mortgage loans held for sale. Investing activities used $37.2 million; financing activities used $19.8 million.
- Fixed-maturity securities available for sale had a $12.2 million net-of-tax unrealized loss in Q1. The company reported no new credit impairments, attributing the unrealized losses primarily to interest-rate movements.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management says Q1 results are not necessarily indicative of full-year results and describes its continuing focus on niche insurance products, cemetery and mortuary operations, and mortgage originations.
- Management considers cash flows adequate for policyholder and cemetery/mortuary obligations, debt service, and operating needs. It also reported that life insurance subsidiaries met regulatory risk-based capital criteria. Subsidiary dividends to the parent require regulatory approval.
- Mortgage warehouse facilities had stated maturities from May through August 2022; the company reported compliance with all debt covenants at March 31, 2022. The facilities include cross-default provisions.
- Construction and land-development loan commitments were approximately $335.6 million, of which $196.8 million had been funded. Mortgage loans are concentrated geographically: 75% were to Utah borrowers at quarter-end. Residential construction lending and mortgage volumes are exposed to economic, financing, interest-rate, and collateral-value risks.
- COVID-19 effects and duration remained uncertain and could affect operations, financial markets, and credit risk. The company also identifies estimation uncertainty in policy benefits, loan-loss allowances, mortgage servicing rights, and other valuations.
- The company held $55.6 million of mortgage servicing rights, with estimated fair value of $87.2 million. Changes in prepayment behavior, interest rates, and servicing assumptions can affect valuations and earnings.
- Management reported no material legal proceedings outside the ordinary course and no amounts accrued for ordinary-course claims it believes would not materially affect financial position or results.
Important facts for investors to verify
- Whether mortgage production, secondary-market gains, and segment profitability continue to decline, and the effect on cash generation.
- Current status and refinancing or renewal of warehouse lines that were nearing maturity after quarter-end, including covenant compliance.
- Changes in fixed-maturity unrealized losses, credit quality, and the impact of interest-rate movements on equity and investment income.
- Performance and collateral quality of the Utah-concentrated mortgage portfolio, including construction commitments and past-due or non-performing loans.
- Whether insurance premium growth and cemetery/mortuary sales can offset mortgage weakness, and how policy-benefit costs develop.
- Implementation effects of expected credit-loss accounting (effective for the company in 2023) and long-duration insurance accounting (effective in 2025); the company had not yet estimated the latter’s financial-statement impact.