Security National Financial Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; financial statements are unaudited. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage operations accounted for approximately 67% of revenue and expenses in the first half of 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $61.3 million | $56.5 million | $116.2 million | $103.9 million |
| Earnings before income taxes | $4.5 million | $5.0 million | $7.7 million | $7.4 million |
| Net earnings | $2.8 million | $3.6 million | $4.8 million | $5.3 million |
| Diluted EPS | $0.24 | $0.34 | $0.41 | $0.51 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $38.8 million | $24.4 million |
- Q2 revenue rose 8.5%, while net earnings fell 22.1%; first-half revenue rose 11.9%, while net earnings fell 8.0%.
- Benefits and expenses were 92.7% of revenue in Q2, compared with 91.1% a year earlier; for the first half, 93.4% versus 92.9%. Net margin was approximately 4.6% in Q2 and 4.2% for the first half, down from approximately 6.4% and 5.1%, respectively.
- Mortgage fee income increased 10.8% in Q2 and 18.1% for the first half. The mortgage segment’s first-half pretax earnings increased 45% to $6.3 million. Insurance segment first-half pretax earnings fell 57% to $1.3 million; cemetery and mortuary segment earnings increased 23% to $0.2 million.
- Cash and cash equivalents were $49.7 million at June 30, up from $33.5 million at year-end 2012. Investing activities used $18.7 million and financing activities used $3.9 million during the first half.
- Total assets were $617.0 million and stockholders’ equity was $85.5 million at June 30. Bank and other loans payable were $10.9 million, down from $11.9 million at year-end. Equity represented 88.7% of stated capitalization; life subsidiaries exceeded regulatory risk-based capital criteria.
Material changes and management commentary
- Mortgage originations and sales totaled 6,292 loans with $1.181 billion in volume in the first half, up from 5,740 loans and $1.035 billion a year earlier. Management attributed the increase to market-share gains and retail expansion, including six additional mortgage offices.
- Management anticipated mortgage loan volume of approximately $125 million to $240 million per month in 2013, compared with $80 million to $150 million per month in 2012. This is a mortgage-volume expectation, not full-company earnings guidance.
- Lower net investment income weighed on results: it declined 9.7% in Q2 and 10.1% in the first half, mainly due to lower mortgage-loan interest income and higher investment expenses. Higher mortgage revenue was partly offset by increased salaries, commissions, and other expenses.
- The company purchased $15.6 million of real estate during the first half. Properties previously classified as held for sale were reclassified as held for investment and are being rented and depreciated.
- On May 8, 2013, the company completed an internal subsidiary reorganization involving appraisal operations, mortgage servicing income, and property-development assets. It also disclosed its CFO’s appointment to the position on July 12, 2013.
Risks, contingencies, and unusual items
- Mortgage loans held for investment totaled $85.0 million gross, with a $4.4 million allowance. Nonperforming loans were $11.0 million, including $3.5 million in foreclosure; interest is not accrued on loans over 90 days delinquent.
- The company had a $6.66 million reserve for investor indemnification and repurchase claims, up from $6.04 million at year-end. Management said potential claims are difficult to determine; adverse litigation outcomes beyond the mortgage subsidiary’s capacity to pay could force it to curtail or cease operations.
- Lehman-related mortgage litigation remained pending. SecurityNational Mortgage sought approximately $4.0 million in relief, while Lehman Holdings claimed damages exceeding $5.0 million. A summary-judgment motion and cross-motion were under advisement; a related hearing was scheduled for September 26, 2013.
- A separate JP Morgan Chase/EMC indemnification demand related to 21 loans was disclosed; the company stated it believed it had significant defenses. The filing also describes a Wells Fargo settlement requiring payments tied to loan sale proceeds through March 2017 and a share of net proceeds from specified property sales.
- First-half realized gains included gains primarily from a real estate sale; the company also recorded $176,000 of investment impairments. Mortgage servicing rights rose to $4.0 million, and management cautioned that their valuation requires significant judgment.
- Mortgage lending and investment exposures include geographic concentration: 29% of mortgage loans were in Utah, 27% in California, 12% in Texas, and 10% in Florida. Management noted that future results are subject to estimates and that interim results are not necessarily indicative of full-year performance.
Key facts for investors to verify
- Whether mortgage volume and margins can hold up as market conditions and refinancing activity change.
- Whether the $6.66 million investor-claim reserve adequately reflects potential repurchase and indemnification exposure, including the Lehman and EMC matters.
- Credit performance, collateral values, and allowance adequacy for the $11.0 million of nonperforming mortgage loans and the broader real-estate portfolio.
- Drivers of declining investment income and rising operating expenses, and the sustainability of reported operating cash flow.
- Actual cash availability after accounting for restricted assets, insurance-subsidiary dividend restrictions, and warehouse-lender covenants.