Security National Financial Corporation — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Revenue | $83.5 million | Down 30.1% from $119.5 million in Q3 2021 |
| Net earnings (loss) | $(2.4) million; diluted loss per share $(0.11) | Versus net earnings of $10.8 million and diluted EPS of $0.49 |
| Nine-month revenue | $281.5 million | Down 21.6% from $358.9 million |
| Nine-month net earnings | $4.45 million; diluted EPS $0.20 | Versus $34.2 million and $1.56 diluted EPS |
| Operating cash flow | $109.3 million for nine months | Down from $128.9 million |
| Cash and cash equivalents | $84.9 million | Down from $131.4 million at December 31, 2021 |
| Bank and other loans payable | $201.5 million | Down from $251.3 million at year-end |
| Total assets / stockholders’ equity | $1.460 billion / $268.9 million | Year-end 2021: $1.548 billion / $299.8 million |
Q3 benefits and expenses were $86.8 million, or 104.0% of revenue, compared with 88.2% a year earlier. For the first nine months, expenses were 97.9% of revenue versus 87.4%. Q3 and nine-month net margins were approximately negative 2.8% and 1.6%, respectively, based on reported revenue and earnings.
Q3 segment pretax results: life insurance earned $4.2 million, cemetery/mortuary earned $0.9 million, and mortgage lost $8.4 million. For nine months, the respective results were $9.0 million, $4.4 million, and a $7.5 million mortgage loss.
Material changes and management commentary
- Mortgage fee income fell 56.8% in Q3 and 41.8% for nine months, principally reflecting lower secondary-market gains as mortgage originations weakened. Nine-month mortgage production was 8,886 loans totaling $2.84 billion, versus 14,898 loans totaling $4.16 billion in 2021; EverLEND’s operations had been merged into SecurityNational Mortgage in December 2021.
- Management attributed the originations slowdown to sharply higher mortgage rates, which reduced refinance volume and also weighed on purchase lending.
- Net investment income rose 23.3% in Q3 and 14.2% for nine months, supported largely by increased mortgage-loan interest income. Insurance premiums and other considerations increased 5.0% year to date; cemetery/mortuary sales increased 14.8%.
- Investment and other asset results shifted to losses: $(2.2) million in Q3 and $(2.9) million year to date, versus gains in the comparable 2021 periods. The company recorded $33.1 million of nine-month after-tax other comprehensive losses, largely from unrealized fixed-maturity-security losses as interest rates rose. Accumulated other comprehensive income moved from $18.1 million at year-end to a loss of $15.1 million.
- Operating cash flow declined mainly because proceeds from mortgage-loan sales were lower. Cash, cash equivalents, and restricted cash together fell to $94.2 million from $141.4 million at the beginning of the year.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or revenue guidance. Management says results for the interim period are not necessarily indicative of full-year results.
- SecurityNational Mortgage was not in compliance with warehouse-line covenants at September 30, 2022, but obtained waivers or amendments. The company said it had sufficient cash and borrowing capacity to repay the lines if required. The Texas Capital facility, with a stated $100 million limit, matured November 9, 2022; verify its renewal, repayment, or replacement status. Other disclosed facilities include Wells Fargo, Comerica, and U.S. Bank lines.
- The company had approximately $302.6 million of commitments to fund construction and land-development loans, of which $206.3 million was funded. Mortgage-credit exposure includes construction lending and geographic concentration: 69% of mortgage loans were associated with Utah borrowers.
- On October 31, 2022, after quarter-end, the company sold certain mortgage servicing rights to PNC for approximately $89.7 million gross consideration. The rights related to approximately $7.05 billion of unpaid principal balance; most consideration had been received, with the remainder subject to transfer-related holdbacks.
- The mortgage-servicing-rights carrying amount was $54.4 million at quarter-end, versus estimated fair value of $93.9 million. The subsequent sale is a significant event; compare final proceeds and any related accounting effects with those estimates.
- Management cited continuing uncertainty from COVID-19 and related economic effects, including possible impacts on investment issuers and mortgage borrowers. Other exposures include interest-rate movements, fair-value estimates, credit losses, and mortgage repurchase demands. Management reported no material litigation expected to adversely affect the company.
- The company estimated a $0.5–$0.75 million increase to residential mortgage-loan credit-loss allowances upon adopting the expected-credit-loss standard on January 1, 2023; commercial-loan effects remained under evaluation. The long-duration insurance accounting standard is scheduled for adoption in 2025, with impact not yet estimated.
Key facts for investors to verify
- Whether warehouse-line covenant waivers remain effective and whether the Texas Capital facility was renewed or replaced after its November 2022 maturity.
- Final cash proceeds, holdbacks, and reported gain or loss from the October 31 MSR sale, and the impact on servicing income and future results.
- Mortgage production, secondary-market gains, and fair-value changes as rates and housing conditions evolve.
- Credit quality and funding exposure in construction and land-development loans, including the $302.6 million commitment balance and Utah concentration.
- Investment portfolio credit quality and the effect of continued rate changes on unrealized losses, equity, and statutory capital.