Security National Financial Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; compared with the corresponding 2010 periods. Unaudited consolidated results. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $41.3 million | $46.0 million | $112.0 million | $127.0 million |
| Pretax earnings (loss) | $0.8 million | $0.8 million | ($0.3 million) | ($0.8 million) |
| Net earnings (loss) | $0.8 million | $0.5 million | $0.5 million | ($0.03 million) |
| Net earnings (loss) per Class A equivalent share | $0.09 | $0.06 | $0.05 | ($0.00) |
- Margins: Benefits and expenses were 98.0% of revenue in Q3 2011, versus 98.2% a year earlier; for the first nine months they were 100.3%, versus 100.6%. Net margin was approximately 1.9% for Q3 and 0.4% year to date in 2011.
- Cash flow: Operating activities provided $18.7 million in the first nine months, compared with $46.8 million used in 2010. Investing activities used $40.8 million; financing activities provided $5.5 million. Cash declined to $23.0 million from $39.6 million at December 31, 2010.
- Balance sheet and debt: Total assets were $506.1 million and stockholders’ equity $60.5 million at September 30, 2011. Bank loans payable were $17.0 million, up from $6.9 million at year-end 2010. Total liabilities were $445.6 million. Management reported that the life insurance subsidiary exceeded applicable risk-based capital criteria.
- Asset and credit exposures: Mortgage and construction loans held for investment were $112.2 million net of a $6.6 million allowance. Nonperforming mortgage loans were $25.7 million, up from $14.3 million at year-end; $19.4 million was in foreclosure. Other real estate owned held for investment or sale totaled $52.0 million.
Material changes versus prior periods
- Revenue fell 10.1% in Q3 and 11.8% year to date, principally as mortgage fee income declined 24.4% and 30.4%, respectively. Insurance premiums increased 27.8% in Q3 and 26.0% year to date, partly reflecting the North America Life reinsurance transaction.
- Mortgage origination and sale volume fell to $959.7 million for the first nine months, from $1.574 billion in 2010; the company attributed the decline mainly to reduced refinancing demand. Mortgage segment pretax losses widened to $3.0 million from $2.4 million year to date.
- Lower mortgage commissions and other operating costs helped reduce total expenses, while insurance benefit costs and policy acquisition amortization increased, partly due to the reinsurance transaction. Cemetery and mortuary revenue declined 1% year to date; the segment returned to pretax profitability, aided in part by the funeral-home asset sale.
- Investments totaled $332.2 million, versus $275.9 million at year-end 2010; fixed-maturity securities held to maturity increased to $135.0 million from $98.0 million. Total capitalization rose to $77.5 million from $67.0 million, with equity’s share declining to 78.1% from 89.5% as debt increased.
Outlook, risks, contingencies, and unusual items
- Management expected 2011 mortgage production of approximately $80 million to $150 million per month, compared with $125 million to $200 million per month in 2010, and said it had reduced staff and operating costs in response to lower volume. No other quantified earnings guidance is provided.
- The mortgage subsidiary had $20.3 million of estimated potential investor claims for alleged loan defects, repurchases, and indemnification. The company accrued $3.1 million, considers the reserve adequate, disputes the claims, and says additional losses cannot currently be estimated. It warns an adverse substantial judgment beyond the subsidiary’s capacity could require it to curtail or cease operations.
- A Wells Fargo settlement required $4.3 million in payments, including $3.3 million paid after execution, continuing 10-basis-point deductions on loan proceeds through March 2017, and sharing 50% of net proceeds from specified property sales. The specified properties had a $5.6 million book value at quarter-end.
- SecurityNational Mortgage and Lehman-related entities are litigating claims under a prior loan indemnification agreement. Lehman Holdings asserted approximately $3.7 million was owed; the company disputes the claims and seeks more than $4.0 million in its own action. No amount was accrued for these claims at September 30, 2011.
- The North America Life transaction transferred $15.7 million of assets and $19.2 million of statutory reserves; Security National Life assumed the policies effective September 1, 2011. The company also sold substantially all operating assets of two funeral homes for $2.225 million and recorded an approximately $887,000 realized gain.
- Management identified significant estimation areas including future policy benefits, mortgage-loan valuation allowances, loan-loss reserves, and future pre-need costs. It stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether mortgage originations and secondary gains stabilize, and whether the stated monthly production range is achieved.
- Potential outcomes and adequacy of the $3.1 million investor-claims reserve, including the Lehman litigation and any additional Wells Fargo settlement effects.
- Trends in delinquent and foreclosed mortgage loans, recoveries on other real estate owned, and the sufficiency of the $6.6 million held-for-investment loan allowance.
- Liquidity and borrowing availability, including renewal of the warehouse loan purchase agreement expiring November 18, 2011; the filing says renewal was in process.
- How the North America Life policies affect premiums, policy benefits, reserves, and cash requirements, and whether insurance subsidiary capital remains above regulatory requirements.