Security National Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. The company reports life insurance, cemetery and mortuary, and mortgage operations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $80.2 million | $83.5 million | $243.6 million | $281.5 million |
| Earnings (loss) before tax | $5.2 million | $(3.3) million | $14.9 million | $5.9 million |
| Net earnings (loss) | $4.0 million | $(2.4) million | $11.6 million | $4.4 million |
| Diluted earnings per equivalent Class A share | $0.18 | $(0.10) | $0.51 | $0.19 |
| Operating cash flow | Not separately provided | Not separately provided | $18.4 million | $109.3 million |
Benefits and expenses were 93.6% of revenue in Q3 and 93.9% for the nine-month period, versus 104.0% and 97.9%, respectively, in the comparable 2022 periods. The filing does not provide a single consolidated operating-margin measure.
Balance sheet and liquidity
- At September 30, 2023, total assets were $1.414 billion, total liabilities $1.116 billion, and stockholders’ equity $297.9 million.
- Cash and cash equivalents were $134.8 million; cash, cash equivalents, and restricted cash totaled $147.1 million.
- Bank and other loans payable were $108.4 million, down from $161.7 million at December 31, 2022. The company reported total capitalization of $406.3 million, with equity representing 73.3%.
- Total investments were $886.0 million, down from $949.0 million at year-end. Fixed-maturity securities had a $24.3 million allowance-adjusted unrealized loss at quarter-end; accumulated other comprehensive loss was $18.3 million.
Material changes versus comparable periods
- Q3 revenue declined 3.9% year over year, but the company moved from a $2.4 million net loss to $4.0 million net earnings. Lower expenses, especially selling, general and administrative costs, contributed to the improvement.
- Nine-month revenue fell 13.5%, while net earnings rose to $11.6 million from $4.4 million. Mortgage fee income decreased $42.0 million, mainly because secondary-market gains fell with lower mortgage origination activity. Lower expenses and higher life-insurance premiums and investment income partly offset the decline.
- Mortgage segment pretax losses were $11.2 million for the first nine months, versus $7.5 million in 2022. Mortgage originations declined to 5,680 loans totaling $1.709 billion from 8,886 loans totaling $2.837 billion.
- Life insurance pretax earnings increased to $20.0 million from $9.0 million for the nine-month period; cemetery and mortuary pretax earnings increased to $6.1 million from $4.4 million.
- Operating cash flow fell to $18.4 million from $109.3 million, primarily due to lower proceeds from mortgage loan sales. Financing cash use was $58.5 million; investing activities provided $53.7 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management describes continued emphasis on niche insurance products, cemetery and mortuary operations, and mortgage lending, while noting that higher mortgage rates have reduced refinance originations and also affected purchase activity.
- Warehouse funding and covenants: SecurityNational Mortgage was not in compliance with net-income covenants on its warehouse lines at September 30; waivers had been received or were being obtained. The Wells Fargo $100 million line expired October 31, 2023 and was not renewed because the lender exited the market. The company said it had sufficient cash and borrowing capacity on lines with waivers to continue originations, and was negotiating additional lines. It identified approximately $10.2 million of advances on a line without a waiver as a potential repayment exposure.
- The U.S. Bank $25 million warehouse line was scheduled to mature December 1, 2023; the Texas Capital Bank $100 million line matures November 30, 2024. The filing does not establish the subsequent status of these facilities.
- The company had approximately $157.2 million of commitments for construction and land-development loans, of which $104.4 million had been funded. Mortgage credit risks include housing-market volatility and geographic concentration; 45% of mortgage loans were in Utah. At September 30, $16.3 million of mortgage loans were past due, including $6.4 million more than 90 days past due.
- Interest-rate increases drove much of the unrealized losses on fixed-maturity securities. Management stated it did not intend, and did not consider it more likely than not it would be required, to sell securities before recovery of amortized cost. 98.2% of fixed-maturity securities were investment grade by NAIC designation.
- The company adopted the expected-credit-loss standard on January 1, 2023, reducing opening retained earnings by $671,506. It is implementing the long-duration insurance-contract accounting standard, scheduled for adoption January 1, 2025; the financial impact is still being estimated.
- Management reported no material ordinary-course legal proceedings expected to materially affect financial condition or results. Life insurance subsidiaries were in compliance with risk-based capital criteria.
Important facts for investors to verify
- Current covenant-waiver status, repayment exposure, and replacement or renewed mortgage warehouse capacity after the Wells Fargo line expired.
- Mortgage origination volume, secondary-market gains, and mortgage segment profitability as interest rates and housing demand change.
- Delinquency trends and credit performance in construction, commercial, and Utah-concentrated mortgage exposures, including unfunded loan commitments.
- Whether investment portfolio unrealized losses, credit allowances, and liquidity remain manageable if rates or market conditions deteriorate.
- The eventual financial-statement impact and implementation readiness for the insurance-contract accounting standard due in 2025.