Security National Financial Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage operations accounted for approximately 63% of quarterly revenue and expenses.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $54.85 million | $47.32 million; up 15.9% |
| Mortgage fee income | $33.18 million | $25.49 million; up 30.2% |
| Net investment income | $5.09 million | $6.05 million; down 16.0% |
| Pre-tax earnings | $3.23 million | $2.33 million |
| Net earnings / diluted EPS | $2.03 million / $0.17 | $1.66 million / $0.16 |
| Benefits and expenses | $51.62 million; 94.1% of revenue | $44.99 million; 95.1% of revenue |
| Operating cash flow | $5.45 million | $25.19 million |
| Cash and cash equivalents | $58.50 million | $38.91 million at Dec. 31, 2012 |
| Total assets / stockholders’ equity | $601.17 million / $81.82 million | $597.22 million / $79.81 million at Dec. 31, 2012 |
| Bank and other loans payable | $11.49 million | $11.91 million at Dec. 31, 2012 |
Net margin was approximately 3.7% (net earnings divided by revenue); pre-tax margin was approximately 5.9%. Total capitalization, including equity and bank debt and notes payable, was $93.32 million; equity represented 87.7%. Cash increased by $19.59 million during the quarter. Investing activities provided $16.27 million, while financing activities used $2.13 million. The filing says life-insurance subsidiaries exceeded applicable risk-based-capital criteria, but gives no specific ratio here.
Changes versus the prior comparable quarter
- Revenue growth was led by mortgage fee income, reflecting higher originations, increased market share, and greater secondary gains on loans sold to investors. Mortgage segment pre-tax earnings rose 85% to $2.34 million.
- Mortgage originations and sales increased to 2,895 loans totaling $536.61 million, from 2,440 loans totaling $445.52 million. Management attributed growth to expanded retail operations.
- Net investment income fell $968,000, primarily because mortgage-loan interest income declined. Insurance premiums decreased 1.3%; cemetery and mortuary revenue was broadly stable, while that segment’s pre-tax earnings fell 66% to $77,000.
- Benefits and expenses rose 14.7%, including higher commissions, salaries, mortgage funding costs, and other expenses. Nonetheless, expenses declined as a share of revenue and net earnings improved.
- Comprehensive income decreased to $1.66 million from $2.64 million, mainly due to a $578,647 after-tax unrealized derivative loss in other comprehensive income, compared with a gain in 2012.
Outlook, commentary, risks, and unusual items
- Management anticipated 2013 mortgage loan volume of approximately $125 million to $240 million per month, compared with a 2012 monthly range of $80 million to $150 million. This is a volume expectation, not formal earnings guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Mortgage loans totaling $170.1 million were awaiting settlement with third-party investors at March 31. Loan sale agreements can require repurchase or indemnification in specified circumstances. The company had accrued $6.23 million for investor-related mortgage claims; management considered the reserve reasonable, but said actual losses could differ and claims are difficult to estimate.
- SecurityNational Mortgage faced multiple investor demands and litigation. In the Lehman-related cases, the company disputed claims exceeding $5 million and sought approximately $4 million in affirmative relief; summary-judgment proceedings were ongoing, with a hearing scheduled for May 30, 2013. Management warned that a substantial judgment beyond the subsidiary’s capacity to pay could force it to curtail or cease operations. A separate JPMorgan/EMC indemnification claim also remained disputed.
- Mortgage credit exposure included $9.91 million of nonperforming loans, of which $3.63 million were in foreclosure. The mortgage-loan allowance was $4.25 million. Borrower exposure was geographically concentrated: 25% in Utah, 18% in California, 13% in Texas, and 12% in Florida.
- A $710,787 realized gain on other assets, principally from selling a real estate property, contributed to the quarter’s $842,578 total realized gains. The company also reclassified $5.68 million of foreclosed real estate from held for sale to held for investment, intending to rent the properties.
- On May 8, 2013, after quarter-end, the company completed an internal subsidiary reorganization covering appraisal operations, mortgage-servicing income, and property development. The filing reports no significant change in market-risk disclosures from the 2012 annual report and states disclosure controls were effective.
Important facts for investors to verify
- Whether mortgage originations, secondary gains, and management’s stated monthly volume expectations are sustainable as market and interest-rate conditions change.
- The adequacy of the $6.23 million investor-claim reserve, the ultimate exposure from pending repurchases and indemnification demands, and the status and outcomes of the Lehman and JPMorgan-related matters.
- Settlement and funding timing for the $170.1 million of mortgage loans awaiting investor settlement, including any effects on liquidity or warehouse-line covenants.
- Delinquency trends, collateral values, foreclosure recoveries, and the adequacy of mortgage-loan and real-estate valuation estimates.
- How lower investment income, unrealized derivative changes, and the quarter’s real-estate sale gain affect recurring earnings and cash generation.