Security National Financial Corporation — Q2 2022 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2022, compared with the same 2021 periods. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Its filing identifies mortgage rate increases and lower mortgage activity as important current conditions. Interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $95.6 million | $116.8 million | $198.0 million | $239.4 million |
| Pretax earnings | $4.7 million | $14.7 million | $9.2 million | $31.0 million |
| Net earnings | $3.6 million | $11.3 million | $6.8 million | $23.4 million |
| Diluted earnings per equivalent Class A share | $0.16 | $0.51 | $0.31 | $1.07 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $97.6 million | $124.5 million |
Revenue fell 18.1% in Q2 and 17.3% for the first half. Pretax margin, calculated as pretax earnings divided by revenue, was approximately 5.0% in Q2 versus 12.6%; for the first half it was 4.6% versus 13.0%. The filing reports no separate operating margin measure.
- Revenue drivers: Mortgage fee income declined 35.5% in Q2 and 34.6% for the first half, chiefly from lower secondary-market gains. Insurance premiums and other considerations rose 3.8% and 8.2%, respectively; net investment income rose 12.7% and 9.5%; mortuary and cemetery sales rose 14.8% and 17.9%.
- Expenses and investment results: Benefits and expenses were 95.1% of revenue in Q2 versus 87.4% a year earlier, and 95.4% for the half versus 87.0%. Investment and other-asset results shifted to losses of $0.9 million in Q2 and $0.7 million for the half, from gains of $1.5 million and $3.4 million, respectively.
- Balance sheet at June 30: Assets were $1.472 billion, down from $1.548 billion at year-end 2021; stockholders’ equity was $280.5 million, down from $299.8 million. Cash and cash equivalents were $131.3 million; cash, cash equivalents, and restricted cash totaled $142.4 million.
- Debt and liquidity: Bank and other loans payable were $200.3 million, versus $251.3 million at year-end. Total capitalization (equity plus bank and other loans) was $480.8 million, and equity represented 58.3%, versus 54.4% at year-end. Operating cash flow remained positive but declined 21.6% year over year for the half. The company reported compliance with debt covenants.
- Other notable balances: Loans held for sale were $209.9 million, down from $302.8 million at year-end. Mortgage servicing rights were $56.3 million net; their estimated fair value was $95.6 million. Future policy benefits and unpaid claims totaled $875.7 million.
Material changes and management commentary
- The mortgage segment recorded a Q2 pretax loss of $0.7 million, versus $7.7 million pretax profit in Q2 2021. First-half pretax profit fell to $0.9 million from $18.7 million. The company originated 6,419 loans totaling about $2.05 billion in the first half of 2022, compared with 10,149 loans totaling $2.75 billion in 2021; the prior-year figure also included EverLEND originations.
- Management attributed mortgage weakness to higher rates and reduced refinance activity, with purchase originations also affected. It noted a $47.7 million first-half decline in secondary gains from mortgage loan sales.
- Life insurance first-half pretax profit decreased 36% to $4.7 million; cemetery and mortuary pretax profit decreased 29% to $3.5 million. Management cited lower investment gains and higher expenses among the pressures, partly offset by premium, investment-income, and at-need sales growth.
- Unrealized losses on available-for-sale fixed maturity securities drove a $22.5 million after-tax first-half other comprehensive loss. Accumulated other comprehensive income shifted from $18.1 million at year-end to a $4.4 million loss. The company said fixed-income unrealized losses primarily reflected rising interest rates and reported no additional credit-loss impairment for the periods presented.
- Six-month operating cash flow declined primarily because of lower proceeds from mortgage loans held for sale. Financing cash use was $60.5 million, including a $65.4 million net reduction in warehouse-line borrowings; investing cash use was $36.1 million.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified revenue, earnings, or other formal financial guidance. Management says cash-flow sources are considered adequate for expected policyholder and cemetery/mortuary liabilities, debt service, and operating needs; this is subject to economic and market uncertainty.
- Management cannot predict the severity or duration of COVID-19 effects. The filing identifies potential impacts on operations, financial markets, issuer credit quality, and mortgage-borrower credit risk.
- Mortgage loans held for investment were $274.7 million net; 79% of the portfolio was associated with Utah borrowers. Past-due loans totaled $8.5 million, including $1.3 million more than 90 days past due. The allowance for loan losses was $1.5 million. Construction and development lending carries risks tied to project completion, collateral valuations, financing availability, and economic conditions.
- The company had approximately $328.6 million of commitments to fund construction and land-development loans, of which $207.7 million had been funded. The filing also reports mortgage warehouse facilities with stated limits of $100 million at Wells Fargo, $100 million at Texas Capital Bank, $75 million at Comerica, and $100 million at U.S. Bank; all covenants were met at quarter-end.
- Reinsurance does not eliminate exposure if reinsurers fail to pay. The company also faces uncertainty in captive-insurance reserves, mortgage-loan repurchase/indemnification claims, fair-value estimates, and future policy-benefit assumptions. Management reported no material pending legal proceedings and no accrual for ordinary-course claims it assessed as not likely to have a material adverse effect.
- Accounting changes remain ahead: credit-loss guidance is scheduled for adoption January 1, 2023, and long-duration insurance-contract guidance for January 1, 2025. The company had not yet estimated the financial-statement impact of the latter.
- The quarter included $6.5 million of treasury-stock purchases, in addition to $0.8 million in the first quarter; the repurchase plan showed 443,178 shares remaining at June 30. The company also issued stock dividends, which are reflected in share and per-share data.
Important facts for investors to verify
- Whether lower mortgage originations and secondary gains persist as interest rates and housing activity change.
- Whether insurance premium and investment-income growth can offset weaker mortgage results, expenses, and investment-market volatility.
- The quality and geographic concentration of mortgage and construction loans, delinquency trends, and adequacy of credit and repurchase reserves.
- Liquidity, warehouse-line utilization and renewal terms, covenant compliance, and the scale and timing of unfunded loan commitments.
- The effects of rising rates on fixed-maturity fair values, mortgage servicing rights, and the company’s future adoption of accounting standards.