Security National Financial Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the same 2016 period. The company operates life insurance, cemetery and mortuary, and mortgage businesses. It emphasizes niche funeral-plan insurance, cemetery and mortuary services, and mortgage lending.
Financial results and liquidity
- Revenue: $69.45 million, up 3.1% from $67.36 million. Insurance premiums and considerations rose 20.1% to $17.36 million; net investment income increased 6.4% to $9.56 million. Mortgage fee income declined 5.3% to $37.05 million.
- Earnings: Pretax income was $2.27 million, down from $4.19 million. Net earnings fell 43.8% to $1.47 million from $2.61 million. Diluted earnings per share were $0.09 versus $0.17. Net margin was approximately 2.1%, compared with 3.9%.
- Expenses and margins: Benefits and expenses rose 6.4% to $67.18 million and equaled 96.7% of revenue, versus 93.8% a year earlier. Increased policy benefits, personnel costs, and other expenses contributed to the rise.
- Cash flow: The cash flow statement reports $24.05 million provided by operating activities, compared with $25.86 million in Q1 2016. Investing activities provided $15.80 million, versus using $19.11 million; financing provided $6.23 million, versus using $0.10 million. Cash increased to $85.07 million from $38.99 million.
- Balance sheet and debt: Total assets were $867.21 million and stockholders’ equity was $129.91 million at March 31. Bank and other loans payable were $61.55 million, up from $53.72 million at year-end 2016. Management reported equity at 67.9% of total capitalization, down from 70.5%.
- Investment and credit exposure: Mortgage loans held for investment, net, were $134.12 million. The allowance for loan losses rose to $1.96 million from $1.75 million. Nonperforming mortgage loans increased to $5.53 million from $3.18 million; loans past due or in foreclosure totaled $7.90 million.
Material changes versus the prior comparable period
- Insurance segment pretax income increased 75% to $1.87 million; management attributed the improvement to higher premiums, mortgage fee income, and investment income.
- Cemetery and mortuary revenue increased 8% to $3.60 million, and pretax income increased 62% to $0.76 million.
- Mortgage segment revenue declined 5% to $39.69 million, and the segment moved from $2.66 million pretax income to a $0.36 million pretax loss. Management cited reduced originations. The company originated and sold 2,985 loans totaling $568.85 million, versus 3,139 loans totaling $586.58 million.
- Insurance benefits increased by $2.33 million in aggregate. Selling, general and administrative expenses increased 2.9% to $48.31 million, while interest expense rose 17.8% to $1.25 million.
Outlook, management commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said operating results for the quarter are not necessarily indicative of full-year results and considers operating cash sources adequate for obligations and expenses.
- Management’s strategy includes matching investment durations to long-term policyholder and cemetery liabilities. Life insurance subsidiaries were reported in compliance with risk-based capital requirements; certain statutory equity cannot be distributed to the parent without regulatory approval.
- Mortgage repurchase and indemnification claims remain a risk. The reserve for indemnification losses was $1.07 million, up from $0.63 million at year-end. SecurityNational Mortgage denies liability in Lehman Brothers litigation concerning alleged loan representations and warranties and intends to defend itself.
- The company had approximately $45.92 million in commitments for construction and land-development loans, of which $33.92 million had been funded. It also disclosed exposure to real estate, mortgage credit, interest rates, insurance claims, and valuation estimates.
- The filing says two material weaknesses identified in the prior annual report were remediated; management concluded disclosure controls were effective as of March 31, 2017.
- Figures warranting reconciliation: the cash flow statement reports operating cash flow of $24.05 million, while MD&A states $24.10 million. The comprehensive income statement reports $1.49 million, while MD&A describes comprehensive income as $1.54 million.
Important facts for investors to verify
- Reconcile the cash flow and comprehensive income amounts cited inconsistently between the statements and MD&A.
- Track mortgage originations, segment profitability, and the size and adequacy of mortgage indemnification and loan-loss reserves.
- Review developments and potential exposure in the Lehman Brothers litigation, including the claims and pending motions.
- Assess the increase in nonperforming mortgage loans, geographic concentration of mortgage exposure, and the company’s real estate and investment risks.
- Monitor debt growth, liquidity needs, and insurance-subsidiary capital and dividend restrictions.