Security National Financial Corporation — Q3 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2013, compared with the same 2012 periods. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage operations generated about 64% of nine-month revenue.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $50.6 million | $63.7 million | $166.7 million | $167.6 million |
| Earnings before tax | $2.0 million | $6.1 million | $9.7 million | $13.5 million |
| Net earnings | $1.3 million | $4.0 million | $6.1 million | $9.2 million |
| Diluted earnings per Class A equivalent share | $0.11 | $0.36 | $0.52 | $0.92 |
| Net cash from operating activities | Not separately presented | Not separately presented | $43.2 million | $34.5 million |
Net margin was approximately 2.5% in Q3 2013 versus 6.3% a year earlier, and 3.7% for the first nine months versus 5.5%. Benefits and expenses were 96.1% of Q3 revenue and 94.2% of nine-month revenue, compared with 90.4% and 91.9%, respectively, in 2012.
- Q3 drivers: Mortgage fee income declined $14.6 million, or 33.5%, to $28.9 million, mainly due to lower originations and secondary-market gains as rising mortgage rates reduced refinancing. Lower mortgage commissions and other expenses partly offset the revenue decline.
- Nine-month drivers: Mortgage fee income fell $3.4 million and net investment income fell $1.4 million. Higher cemetery and mortuary sales, insurance premiums, realized gains, and other revenue largely offset those decreases.
- Segment pretax earnings: Q3 life insurance earned $1.1 million, cemetery/mortuary $13,000, and mortgage $849,000. Nine-month results were $2.4 million, $197,000, and $7.1 million, respectively. Mortgage segment pretax earnings fell 26% year over year for the nine months.
- Balance sheet at September 30: Total assets were $621.4 million versus $597.2 million at December 31, 2012; stockholders’ equity was $86.1 million versus $79.8 million. Cash and cash equivalents were $35.5 million versus $33.5 million. Bank and other loans payable were $16.3 million versus $11.9 million.
- Cash flows: Nine-month investing activities used $41.4 million, compared with providing $12.5 million in 2012; financing activities provided $0.2 million, versus using $5.9 million. Cash increased $2.0 million to $35.5 million.
- Other balance-sheet developments: Real estate held for investment rose to $99.6 million from $64.3 million. Mortgage servicing rights increased to $4.3 million from $2.8 million. Future life, annuity, and other benefits were $448.4 million.
Outlook, risks, and unusual items
- Management attributed weaker mortgage activity to rising rates and reduced refinancing. It anticipated 2013 monthly loan volume of approximately $125 million to $230 million, compared with $130 million to $250 million in 2012; no broader earnings guidance is provided.
- Mortgage loans originated and sold in the first nine months totaled $1.692 billion across 9,064 loans, down from $1.737 billion across 9,578 loans in 2012. Investor settlements were pending on $125.1 million of loans at September 30.
- The mortgage loan loss reserve for investor indemnification claims was $7.2 million, up from $6.0 million at year-end. Management said the reserve was reasonable, but acknowledged that potential claims are difficult to determine. The company also reported $10.4 million of mortgage loans more than 90 days past due or on nonaccrual, including $2.2 million in foreclosure.
- Third-party investors have made repurchase or indemnification demands concerning allegedly defective loans. The company disputes the demands and says it has defenses; it warns that an adverse substantial judgment beyond its capacity to pay could require mortgage operations to be curtailed or cease.
- In the Lehman/Aurora litigation, Lehman Holdings claimed damages exceeding $5 million, while SecurityNational Mortgage seeks approximately $4 million from related parties. Summary-judgment motions were under advisement in one case; a hearing in the other was scheduled for January 2014, with trial, if necessary, scheduled for March 2014.
- Mortgage-rate-lock derivatives contributed to a $0.8 million nine-month unrealized loss in other comprehensive income. Fixed-maturity securities had $1.4 million of unrealized losses at September 30, primarily attributed to interest-rate fluctuations. Non-investment-grade bonds were 5.04% of bond investments, up from 3.4% at year-end.
- Operating cash flow benefited in part from increased future policy benefits and a decrease in mortgage loans sold to investors. Management stated that cash sources were adequate for expected operating, policyholder, and debt-service needs; the life insurance subsidiary exceeded regulatory risk-based capital criteria.
Important facts for investors to verify
- Whether mortgage originations, secondary-market gains, and monthly loan volume track management’s stated range as rates and refinancing conditions change.
- Whether the $7.2 million investor-claim reserve adequately covers current and potential repurchase or indemnification demands, including the pending Lehman and JP Morgan-related matters.
- Credit quality and recoverability of delinquent mortgage loans, foreclosed real estate, and the enlarged real-estate investment portfolio.
- Liquidity and funding needs given the shift to negative investing cash flow, higher bank and other loans payable, and pending mortgage-loan settlements.
- Investment portfolio exposures, unrealized losses, and the increase in non-investment-grade bond holdings.