Security National Financial Corporation — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $122.7 million | $79.6 million | +54.1% |
| Pre-tax earnings | $16.4 million | $1.5 million | Up $14.9 million |
| Net earnings | $12.1 million | $1.4 million | Up $10.7 million |
| Diluted earnings per share | $0.61 | $0.08 | Up $0.53 |
| Operating cash flow | $101.0 million provided | $63.8 million used | Improved $164.7 million |
Benefits and expenses were $106.3 million, or 86.7% of revenue, compared with $78.1 million, or 98.1%, a year earlier. Net earnings margin was approximately 9.9%, versus 1.8% in Q1 2020.
- Revenue drivers: Mortgage fee income rose 81.2% to $73.0 million, principally reflecting higher originations and secondary-market gains. Net investment income rose 6.7% to $14.3 million; insurance premiums rose 4.8% to $23.4 million; mortuary and cemetery sales rose 33.3% to $5.9 million.
- Segment pre-tax earnings: Life insurance earned $2.7 million versus a $3.1 million loss; cemetery and mortuary earned $2.7 million versus $0.1 million; mortgage earned $11.0 million versus $4.4 million.
- Balance sheet at March 31: Total assets were $1.488 billion, down from $1.549 billion at year-end; stockholders’ equity was $271.9 million, up from $264.0 million. Cash and cash equivalents were $144.2 million, up from $106.2 million.
- Debt and liquidity: Bank and other loans payable were $246.0 million, down from $297.8 million. Management reported compliance with debt covenants and said available cash flows were considered adequate for obligations and operating needs. Warehouse lines had maximum commitments of $150 million, $175 million, $90 million, and $5 million; maturities ranged from May through November 2021.
- Cash flow context: Operating cash flow improved mainly due to sales of mortgage loans held for sale. Financing activities used $54.6 million, including a $60.4 million net reduction in warehouse-line borrowings; investing activities used $8.0 million.
Material changes and notable items
- Mortgage originations increased: SecurityNational Mortgage originated 5,361 loans totaling $1.416 billion, versus 3,067 loans totaling $769.3 million. Higher secondary gains were a major earnings driver, partly offset by increased commissions, personnel and other operating expenses.
- Mortgage fee income included a $6.9 million decrease in fair value of loans held for sale, compared with a $0.4 million increase in Q1 2020; the fair-value change in loan commitments was also lower year over year.
- Death benefits increased by about $4.9 million; management attributed approximately $4.1 million to COVID-19-related deaths. Management also cited pandemic-related limits on funeral-service case sizes, while mortgage demand benefited from home purchases and refinancings.
- Investment gains and other asset gains were $2.0 million, compared with losses of $3.2 million, largely reflecting improved fair values of equity securities and other assets. Other comprehensive loss was $5.4 million, primarily from unrealized losses on available-for-sale fixed maturities; accumulated other comprehensive income declined to $17.9 million.
- The company paid a settlement with Lehman Brothers Holdings in Q1 2021, resolving the related mortgage-loan proceedings. The settlement was fully provided for in the loan-loss reserve at December 31, 2020; the reserve for indemnification losses fell from $20.6 million to $2.2 million after payments and other activity.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said Q1 results are not necessarily indicative of full-year results and that it cannot predict the severity or duration of COVID-19’s effects. The pandemic may affect business, financial markets, investment-issuer credit quality, mortgage borrowers, and cash flows.
- Mortgage credit and valuation exposures include approximately $13.7 million of past-due mortgage loans and $5.7 million of nonperforming loans at March 31; nonperforming loans were down from $10.3 million at year-end. The mortgage portfolio is geographically concentrated, with 54% of borrowers in Utah.
- The company had approximately $194.8 million of commitments to fund construction and land-development loans, of which $110.0 million had been funded by March 31.
- Warehouse credit agreements contain cross-default provisions. Management reported covenant compliance at quarter-end; investors should monitor upcoming maturities and refinancing or renewal arrangements.
- Available-for-sale fixed maturities included 4.1% of bond investments in NAIC categories 3–6, described as non-investment grade. Unrealized losses were attributed primarily to interest-rate fluctuations and COVID-19 uncertainty; no new credit losses were recognized in the quarter.
- Insurance subsidiaries were in compliance with risk-based capital criteria. Their $75.1 million combined statutory capital and surplus is subject to regulatory limits on dividends to the parent.
Important facts for investors to verify
- Whether mortgage-volume and secondary-gain levels are sustainable, and how lower loan-sale volumes or fair-value changes could affect earnings.
- The status and terms of renewals or refinancing for warehouse lines maturing in 2021, including covenant compliance and cross-default exposure.
- Whether the remaining $2.2 million mortgage-loan indemnification reserve adequately reflects potential repurchase and settlement claims.
- Developments in COVID-19 mortality claims, mortgage delinquencies, investment credit quality, and the valuation of mortgage servicing rights and real estate.
- Whether the substantial operating cash inflow recurs; Q1 cash generation was materially influenced by mortgage-loan sales and working-capital flows.