Security National Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Comparisons are with the corresponding 2020 periods unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $119.5m | $146.2m | $358.9m | $344.5m |
| Pretax earnings | $14.1m | $38.6m | $45.2m | $67.3m |
| Net earnings | $10.8m | $29.3m | $34.2m | $51.3m |
| Diluted EPS | $0.51 | $1.44 | $1.63 | $2.55 |
| Benefits and expenses as % of revenue | 88.2% | 73.6% | 87.4% | 80.5% |
| Operating cash flow | Not presented quarterly | $128.9m | ($164.6m) |
Q3 revenue declined 18.3% and net earnings fell 63.2%; nine-month revenue rose 4.2% while net earnings declined 33.4%. Mortgage fee income was the main Q3 drag, down $32.3m to $66.3m. Nine-month mortgage fee income decreased 3.7% to $204.4m. Management cited lower loan fees and fair-value effects, partly offset over nine months by higher secondary-market gains. Insurance premiums and other considerations increased 11.3% in Q3 and 8.4% year to date; nine-month mortuary and cemetery sales rose 25.4%.
Mortgage segment pretax earnings fell to $8.7m in Q3 from $32.5m and to $27.3m for nine months from $58.9m. Life insurance pretax earnings were $3.7m in Q3 and $11.1m year to date; cemetery/mortuary pretax earnings were $1.7m and $6.7m, respectively.
Financial position and liquidity
- At September 30, 2021, total assets were $1.558bn, stockholders’ equity $296.7m, and liabilities $1.262bn. Equity was 53.0% of total capitalization, versus 47.0% at December 31, 2020.
- Cash and cash equivalents were $111.5m, versus $106.2m at year-end 2020. Cash plus restricted cash and equivalents was $123.0m at September 30, 2021, compared with $161.5m at September 30, 2020.
- Bank and other loans payable were $263.2m, down from $297.8m at year-end. Interest expense for nine months was $5.3m, versus $6.1m. The company reported compliance with warehouse-line debt covenants.
- Investment assets totaled $857.7m. Mortgage loans held for investment increased to $307.4m from $249.3m at year-end; real estate held for investment rose to $189.6m from $131.7m. Loans held for sale declined to $312.7m from $422.8m.
- Operating activities provided $128.9m in cash in the first nine months, compared with $164.6m used in the prior-year period; management attributed the change primarily to sales of mortgage loans held for sale. Investing activities used $80.2m and financing activities used $41.2m.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management says mortgage production remained strong in Q2 and Q3, particularly purchase transactions, but was below the earlier low-rate period as mortgage rates rose. The filing notes the 2021 results are not necessarily indicative of full-year results.
- COVID-19 effects remain uncertain and may affect operations, investment and mortgage borrower credit quality, and cash flows. COVID-related deaths contributed approximately $2.9m to the nine-month increase in death benefits.
- Mortgage credit exposure merits attention: $15.5m of investment mortgage loans were past due at September 30, including $2.5m more than 90 days past due; nonperforming loans totaled approximately $3.7m, down from $10.3m at year-end. The portfolio is concentrated geographically, with 62% of mortgage loans from Utah borrowers.
- Construction and land-development loan commitments were approximately $318.1m, of which $172.6m had been funded. Additional funding depends on completion of work and inspection. Loan maturities generally range from six to eighteen months.
- The mortgage loan indemnification reserve declined to $2.4m from $20.6m at year-end, following $19.9m of net charge-offs. The large 2020 reserve increase related to estimated settlement losses. The company says COVID-related uncertainty complicates forecasting future losses.
- SecurityNational Mortgage settled all Lehman-related mortgage loan claims in February 2021; the settlement amount had been reserved at year-end 2020 and was paid in Q1. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
- MSRs were carried at $50.4m, with estimated fair value of $63.9m. Their valuation depends on assumptions including prepayment speeds and servicing cash flows. The filing also identifies significant estimates for policy benefits, loan-loss allowances, and fair values.
Important facts for investors to verify
- Whether mortgage revenue and segment profitability continue to weaken as rates, production volumes, secondary gains, and fair-value marks change.
- Whether the reduced indemnification reserve adequately covers repurchase claims and future settlements, given charge-offs and uncertain loss estimates.
- Credit quality, geographic concentration, and funding requirements for the expanding mortgage and real-estate portfolios, including the $318.1m commitment pipeline.
- MSR valuation assumptions and sensitivity, and the company’s continued compliance with warehouse-line covenants and liquidity requirements.
- The ongoing effects of COVID-19 on insurance claims, borrowers, investment credit quality, and operating cash flows.