Security National Financial Corporation — Q2 2021 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2021, compared with the same 2020 periods. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $116.8 million | $118.7 million | $239.4 million | $198.3 million |
| Earnings before tax | $14.7 million | $27.2 million | $31.0 million | $28.7 million |
| Net earnings | $11.3 million | $20.6 million | $23.4 million | $22.0 million |
| Diluted earnings per share | $0.54 | $1.02 | $1.12 | $1.10 |
| Operating cash flow | Not presented by quarter | $124.5 million | ($109.6 million) |
- Revenue declined 1.6% in Q2 but increased 20.7% for the first six months. Q2 net earnings fell 45.2%; six-month net earnings rose 6.4%.
- Calculated net margin was approximately 9.6% in Q2 2021 versus 17.3% in Q2 2020, and 9.8% for the first half versus 11.1%. Benefits and expenses were 87.4% of Q2 revenue and 87.0% of first-half revenue.
- Six-month mortgage fee income increased to $138.2 million from $113.7 million, principally due to a $47.2 million rise in secondary-market gains. In Q2, mortgage fee income fell 11.2% to $65.2 million, and mortgage segment pre-tax earnings dropped to $7.7 million from $22.0 million.
- At June 30, total assets were $1.50 billion, total liabilities $1.22 billion, and stockholders’ equity $285.8 million. Bank and other loans payable were $232.0 million, down from $297.8 million at year-end 2020. Cash and cash equivalents were $149.2 million; cash, restricted cash, and trust cash together totaled $160.1 million.
- Mortgage loans held for sale were $296.7 million, down from $422.8 million at year-end. Mortgage servicing rights were $46.7 million, up from $35.2 million.
- Net investment income increased 9.4% in Q2 and 8.0% for the first half. Interest expense decreased 10.0% in Q2 and 4.9% for the first half.
Material changes and management commentary
- First-half growth reflected higher mortgage secondary gains, insurance premiums, investment income, and cemetery and mortuary sales. Selling, general and administrative expenses rose 29.3% to $149.1 million, mainly from higher commissions and personnel expenses.
- Life insurance first-half pre-tax earnings increased to $7.4 million from $0.6 million; cemetery and mortuary earnings increased to $5.0 million from $1.7 million. The company attributed results to premium growth, investment gains, and increased cemetery sales, among other factors.
- First-half operating cash flow was $124.5 million, compared with cash usage of $109.6 million in 2020; management attributed the change primarily to sales of mortgage loans held for sale. Investing activities used $8.8 million, including $49.1 million of real estate purchases. Financing activities used $71.1 million.
- Management describes funeral-plan insurance, cemetery and mortuary operations, and mortgage origination as strategic priorities. It says pandemic-related uncertainty makes the duration and severity of business effects difficult to predict. No specific financial guidance or quantified outlook is provided; management cautions interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- COVID-19 may affect operations, financial markets, investment credit quality, mortgage borrowers, and claims. The company reported approximately $3.4 million of COVID-19-related death benefits in the first half of 2021.
- Mortgage loans past due totaled $20.4 million at June 30, compared with $19.4 million at year-end; non-performing loans were $4.7 million, down from $10.3 million. Residential construction loans carry risks tied to project completion, financing availability, and economic conditions.
- The company had approximately $249.8 million of commitments to fund construction and land-development loans, of which $139.2 million had been funded. The filing says the company was in compliance with its debt covenants at June 30; warehouse lines include cross-default provisions.
- A February 2021 settlement resolved mortgage-loan disputes with Lehman Holdings. The settlement was covered by the loan-loss reserve recorded at year-end 2020 and paid in Q1 2021. The reserve for mortgage-loan indemnification losses was $2.4 million at June 30, down from $20.6 million at year-end, following $19.4 million of net charge-offs.
- Other legal actions are described as arising in the ordinary course; management believes they will not materially affect financial position or results. The filing reports no material legal proceedings outside the ordinary course.
Investor facts to verify
- How much of first-half mortgage earnings and revenue growth came from secondary-market gains, and whether those gains are sustainable as mortgage activity and market conditions change.
- Drivers of the sharp Q2 decline in mortgage and consolidated earnings, including fair-value changes, loan fees, commissions, and personnel costs.
- Assumptions underlying the mortgage loan-loss reserve and the reduction from $20.6 million to $2.4 million after settlement and charge-offs; monitor repurchase demands and delinquencies.
- Funding needs and risk exposure associated with construction and land-development commitments, real estate investment, and mortgage warehouse borrowing.
- Effects of COVID-19 on insurance claims, investment credit risk, mortgage borrowers, and operating trends.