Security National Financial Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; quarterly comparisons include the three months ended December 31. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage activities accounted for approximately 62% of 2013 revenue, making results sensitive to mortgage origination and refinancing conditions.
Financial performance
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $215.3 million | $234.3 million | Down 8.1% |
| Pre-tax earnings | $9.8 million | $21.4 million | Down 54.0% |
| Net earnings | $7.6 million | $16.7 million | Down 54.6% |
| Diluted earnings per share | $0.61 | $1.47 | Down 58.5% |
| Cash from operating activities | $36.7 million | $22.4 million | Up $14.2 million |
- Benefits and expenses were 95.3% of revenue, compared with 90.9% in 2012. Pre-tax margin declined to approximately 4.6% from 9.1%; net margin declined to approximately 3.5% from 7.1%.
- Revenue mix: mortgage fee income was $128.8 million, down 15.2%; insurance premiums and other considerations were $50.5 million, up 4.7%; net investment income was $20.4 million, down 7.1%; and cemetery and mortuary sales were $12.0 million, up 10.5%.
- Mortgage subsidiaries originated and sold 11,484 loans totaling $2.147 billion, versus 13,392 loans totaling $2.452 billion in 2012. Management attributed lower mortgage earnings to reduced refinancing activity and lower secondary gains as mortgage rates rose.
- At December 31, 2013, total assets were $618.8 million, liabilities $531.0 million, and stockholders’ equity $87.8 million. Cash and cash equivalents were $38.2 million; total investments were $384.9 million. Bank and other loans payable were $18.3 million, up from $11.9 million.
- Operating cash flow benefited primarily from a $15.7 million decrease in receivables for mortgage loans sold. The filing does not provide a conventional current ratio; insurance and other long-term obligations comprise much of the balance sheet.
Material changes and notable items
- Mortgage fee income fell $23.1 million year over year. Lower mortgage-related commissions and loan-loss provisions helped reduce selling, general and administrative expenses, but total revenue and earnings still declined materially.
- Life insurance premiums increased, but the insurance segment’s pre-tax earnings declined 34% to $2.9 million, which management linked to lower investment income and intersegment revenue, lower loan-origination revenue, and higher expenses.
- Cemetery and mortuary revenue rose, while pre-tax earnings were approximately $0.2 million, little changed from 2012.
- Mortgage servicing rights increased to $4.8 million from $2.8 million. The company retained servicing rights on a portion of loans sold and assigned related net servicing income to the parent under a 2013 subsidiary reorganization.
- Cash from investing activities was negative $33.1 million, including $26.7 million of purchases of investment real estate. A $27.5 million construction and term loan agreement for a planned 282-unit Sandy, Utah development had no amount outstanding at year-end.
- Fourth-quarter 2013 revenue was $48.6 million and net earnings were $1.5 million, compared with $66.7 million and $7.5 million, respectively, in fourth-quarter 2012.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management expects to retain earnings for operations and expansion and does not anticipate cash dividends in the foreseeable future; the company continued its 5% annual stock dividend.
- Management describes its strategic focus as niche life insurance products, cemetery and mortuary operations, and mortgage origination. It considers operating cash flows adequate for anticipated obligations, but mortgage results are exposed to interest rates, refinancing volumes, investor demand, and loan-sale execution.
- Mortgage-related investor claims include repurchase and indemnification demands. The company recorded a mortgage loan loss reserve of approximately $5.5 million at year-end and cautioned that actual claims could exceed reserves; management said an adverse judgment beyond the mortgage subsidiary’s capacity to pay could require it to curtail or cease operations.
- The Lehman/Aurora litigation remains unresolved. Lehman Holdings claimed damages exceeding $5 million; the mortgage subsidiary disputed the claims and sought approximately $4 million in affirmative relief. No losses under the disputed indemnification agreement were accrued at year-end. Motions remained under advisement, with a further hearing scheduled for April 2014.
- Mortgage loans held for investment included $12.4 million more than 90 days delinquent, of which $6.5 million was in foreclosure. No interest was recognized on these loans. The company also reported $59.8 million of foreclosed long-term mortgage loans, including properties held for investment.
- Other commitments include $18.0 million of residential construction loan commitments, of which $12.9 million was funded, and approximately $9.0 million of non-cancelable operating lease payments. The company also remains subject to insurance regulation, interest-rate and investment risk, mortality and persistency risk, and potential reinsurance counterparty risk.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the consolidated financial statements; the auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether mortgage production, secondary gains, and profitability stabilized after the 2013 rise in mortgage rates and refinancing decline.
- The status and potential financial exposure of investor repurchase demands, the Lehman litigation, and the adequacy of the $5.5 million mortgage loss reserve.
- Performance and cash-funding requirements for the planned Sandy multifamily development, including the $27.5 million loan agreement and construction commitments.
- How much of operating cash flow reflects sustainable earnings versus movements in mortgage loans sold to investors and other working-capital balances.
- The filing reports mortgage-segment pre-tax earnings of $7.1 million in its MD&A summary but $6.7 million in the segment-information table; investors should check the underlying filing and reconciliation.