Security National Financial Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; interim financial statements are unaudited. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Key financial results
| Metric | Q1 2018 | Q1 2017 / prior date | Change |
|---|---|---|---|
| Total revenue | $82.1 million | $70.8 million | Up 15.9% |
| Net earnings | $16.9 million | $1.9 million | Up substantially; largely reflects the apartment-sale gain |
| Diluted earnings per share | $1.04 | $0.11 | Up |
| Net investment income | $10.1 million | $9.0 million | Up 11.7% |
| Mortgage fee income | $25.5 million | $39.0 million | Down 34.7% |
| Operating cash flow | $8.7 million provided | $30.4 million provided | Down; filing attributes this mainly to lower cash collected on loans held for sale |
| Total assets | $998.0 million | $982.2 million at Dec. 31, 2017 | Up |
| Cash and cash equivalents | $101.7 million | $45.3 million at Dec. 31, 2017 | Up |
| Bank and other loans payable | $151.5 million | $157.5 million at Dec. 31, 2017 | Down |
| Stockholders’ equity | $165.9 million | $148.6 million at Dec. 31, 2017 | Up |
Performance and material changes
- Revenue growth and the sharp increase in earnings were chiefly driven by a $22.3 million gain on the sale of the Dry Creek apartment complex. The sale closed March 29 for $57.0 million; proceeds included repayment of a $26.8 million loan. The company reported a book basis of approximately $34.4 million.
- Mortgage operations weakened: external segment revenue fell 33% to $27.4 million, and the segment reported a $3.4 million pretax loss versus $0.7 million pretax income a year earlier. SecurityNational Mortgage originated 2,368 loans totaling $471.5 million, compared with 2,985 loans totaling $568.8 million in Q1 2017. Management cited reduced originations and refinancings, housing supply constraints, and higher mortgage rates.
- Life insurance segment pretax income rose to $23.7 million from $1.5 million, with the apartment-sale gain a major contributor. Insurance premiums increased 8.4% to $18.8 million, reflecting renewal and first-year premiums.
- Cemetery and mortuary external revenue was $3.8 million, up 5%; pretax income was $0.9 million, up 13%. Net mortuary and cemetery sales themselves declined 3.8% to $3.2 million.
- Benefits and expenses were $60.9 million, or 74.2% of revenue, compared with $67.9 million, or 95.9%, a year earlier. Selling, general and administrative expenses fell 18.8%; interest expense rose 40.5% to $1.8 million.
Liquidity, debt, and investment profile
- Net cash from investing activities was $55.7 million, including $58.5 million of real estate sale proceeds. Financing activities used $7.5 million; bank-loan repayments were $27.4 million, partly offset by a $21.3 million increase in line-of-credit borrowings.
- Cash, cash equivalents, and restricted cash totaled $111.4 million at quarter-end. Management said operating cash sources were adequate for policyholder obligations, debt service, and operating needs.
- Stockholders’ equity represented 52.3% of total capitalization (equity plus bank and other loans), versus 48.5% at year-end. Life insurance subsidiaries reported $56.4 million of statutory capital and surplus and were in compliance with risk-based capital criteria. Dividends to the parent require regulatory approval.
- Investments totaled $596.9 million. Non-investment-grade bonds (NAIC categories 3–6) were 5.2% of total bond investments at March 31. Mortgage loans held for investment were $205.0 million net; the allowance for loan losses was $1.7 million. Loans 90 or more days past due or in foreclosure totaled $5.4 million, all residential.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance was provided. Management described continued emphasis on niche insurance products, cemetery and mortuary operations, and mortgage lending; it cautioned that Q1 results are not necessarily indicative of full-year results.
- The mortgage loan indemnification reserve was $2.9 million. The company disclosed Lehman Brothers Holdings litigation involving alleged indemnification obligations on mortgage loans; SecurityNational Mortgage denies liability. A motion hearing was scheduled for June 12, 2018.
- The company had approximately $82.5 million in commitments for construction and land-development loans, of which $54.3 million was funded. Reinsurance recoverability and captive insurance reserves also involve uncertainty.
- Management noted geographic concentration in mortgage lending, construction-loan sensitivity to economic and financing conditions, and estimation uncertainty in loan allowances, real estate values, mortgage servicing rights, and insurance liabilities.
- Adoption of ASU 2016-01 moved fair-value changes on equity securities into earnings, increasing earnings volatility; the $603,170 opening balance adjustment was reclassified from accumulated other comprehensive income to retained earnings. Adoption of the revenue standard did not significantly affect results.
- The company adopted restricted-cash presentation guidance, which changed cash-flow-statement presentation but not total cash. It reported effective disclosure controls and no material change in internal control during the quarter.
Most important facts for investors to verify
- How much of Q1 earnings came from the Dry Creek sale and whether core operating performance supports the reported improvement.
- Whether mortgage origination volumes, secondary-market gains, and mortgage segment profitability recover or continue to decline.
- Future mortgage delinquencies, construction-loan exposures, allowance adequacy, and claims under the mortgage indemnification reserve.
- Developments and potential exposure in the Lehman litigation, as well as the company’s ability to resolve investor repurchase demands.
- Liquidity and borrowing trends, including line-of-credit usage, and the intended deployment of Dry Creek sale proceeds.
- Effects of equity-security fair-value volatility and other significant valuation estimates on reported earnings and asset values.