Security National Financial Corporation — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, compared with the same 2018 periods. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Balance-sheet comparisons are against December 31, 2018.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $75.4 million | $67.2 million | $205.3 million | $218.2 million |
| Earnings before tax | $4.8 million | $2.2 million | $11.8 million | $27.6 million |
| Net earnings | $3.6 million | $2.0 million | $9.0 million | $22.2 million |
| Diluted earnings per share | $0.21 | $0.12 | $0.52 | $1.28 |
| Operating cash flow | Not presented by quarter | $(62.9) million | $(10.3) million |
Q3 pre-tax margin was approximately 6.3% versus 3.3% a year earlier; nine-month pre-tax margin was approximately 5.8% versus 12.6%. The filing reports no separate cash-flow or operating margin guidance.
- Revenue drivers: Q3 mortgage fee income rose 25.5% to $39.7 million, chiefly on stronger secondary gains from loan sales. Nine-month mortgage fee income increased 9.4% to $97.2 million. Insurance premiums increased 6.4% in Q3 and 3.3% for nine months. Net investment income increased 8.7% in Q3 and 5.4% for nine months.
- Profit and unusual comparisons: Nine-month earnings fell substantially as 2018 included a $22.3 million gain on the sale of Dry Creek apartments and a $1.6 million gain on Deseret Mortuary assets. 2019 also included $2.8 million of commercial real-estate impairment losses for the first nine months, including $0.8 million in Q3. Q3 net earnings nevertheless improved year over year.
- Cash flow and liquidity: Operating activities used $62.9 million, primarily reflecting mortgage loan originations held for sale. Investing activities used $23.9 million; financing activities provided $69.0 million. Cash and cash equivalents were $123.2 million at quarter-end; cash, cash equivalents and restricted cash totaled $133.2 million.
- Balance sheet and debt: Total assets were $1.163 billion, up from $1.051 billion at year-end 2018; stockholders’ equity was $181.1 million, up from $171.8 million. Bank and other loans payable increased to $261.0 million from $187.5 million. Mortgage loans held for sale were $233.7 million, compared with $136.2 million at year-end. The company reported compliance with warehouse-line covenants at September 30.
- Capitalization: Stockholders’ equity was 41.0% of total capitalization, versus 47.8% at year-end 2018. Life insurance subsidiaries reported $57.3 million of statutory capital and surplus and compliance with risk-based capital criteria.
Material changes and management commentary
- Mortgage segment earnings before tax improved to $3.3 million for Q3 from a loss of $0.8 million, and to $4.8 million for nine months from a loss of $5.0 million. Management attributed the improvement to higher lending-related revenue and cost reduction and process restructuring.
- Life insurance nine-month pre-tax earnings declined to $4.6 million from $28.8 million, principally reflecting the prior-year Dry Creek gain and 2019 real-estate impairments. Cemetery and mortuary nine-month pre-tax earnings declined to $2.4 million from $3.7 million, partly because of a 2018 asset-sale gain; the 2019 period included the Probst and Heber Valley funeral-home acquisition.
- Management says its cash sources are adequate for expected policyholder and operating needs and describes its investment approach as matching asset duration to long-term insurance and cemetery/mortuary obligations. It notes that business conditions could create a need for greater portfolio liquidity.
- The company adopted lease accounting in 2019, recognizing approximately $12.1 million of right-of-use assets and lease liabilities at adoption; management said the effect on operations was not material.
Outlook, risks and contingencies
- The filing gives no specific earnings or revenue guidance. Management cautions that nine-month results are not necessarily indicative of full-year results.
- Mortgage warehouse facilities had approximately $149.1 million outstanding in total at quarter-end: $95.0 million with Wells Fargo and $54.2 million with Texas Capital. The Wells Fargo facility matures June 2020 and the Texas Capital facility September 2020; cross-default provisions apply. The company said it was covenant-compliant.
- The company had approximately $123.1 million of commitments for construction and land-development loans, of which $94.6 million was funded. Mortgage loan credit exposures include $4.8 million of non-performing loans held for investment; the portfolio is geographically concentrated, with 55% of such loans from Utah borrowers.
- SecurityNational Mortgage faces Lehman Brothers Holdings litigation concerning alleged indemnification obligations on mortgage loans. The company denies liability and intends to defend itself; non-binding mediation was being arranged. Management accrued no amount for the broader described claims, and says other ordinary-course legal actions are not expected to materially affect results or financial position.
- After quarter-end, Security National Life agreed to acquire Kilpatrick Life Insurance Company for $22 million, subject to adjustments and Louisiana regulatory approval. A related coinsurance arrangement is expected to involve an approximately $166.5 million settlement amount, subject to the agreement’s terms and regulatory limits. The filing reports the transaction as pending.
- The company owed $55 million to the Federal Home Loan Bank at September 30; that amount was paid in October 2019.
Most important facts for investors to verify
- Whether mortgage volume, secondary gains, and mortgage fee income remain strong, and how mortgage originations affect operating cash flow and warehouse borrowing.
- Whether the real-estate impairments are complete, and the valuation and performance of the company’s real-estate and mortgage-loan investments.
- Debt levels, warehouse-line renewal or repayment plans, covenant compliance, and the availability of unrestricted liquidity.
- The status and potential financial exposure of the Lehman litigation and mortgage repurchase or indemnification claims.
- Regulatory approval, final purchase-price adjustments, and the funding and execution of the Kilpatrick acquisition and coinsurance agreement.