Security National Financial Corporation — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage operations generated about 57% of company revenue, according to the filing.
Key financial results
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $47.3 million | $34.2 million; up 38.5% |
| Benefits and expenses | $45.0 million | $35.5 million |
| Pretax earnings (loss) | $2.3 million | $(1.3) million |
| Net earnings (loss) | $1.7 million | $(0.5) million |
| Diluted earnings (loss) per Class A equivalent share | $0.17 | $(0.06) |
| Operating cash flow | $25.2 million | $42.2 million |
| Cash and cash equivalents, March 31 | $34.7 million | $17.1 million at Dec. 31, 2011 |
| Total assets | $524.8 million | $521.1 million at Dec. 31, 2011 |
| Total liabilities | $460.8 million | $459.9 million at Dec. 31, 2011 |
| Stockholders’ equity | $64.0 million | $61.2 million at Dec. 31, 2011 |
| Bank and other loans payable | $20.2 million | $25.0 million at Dec. 31, 2011 |
Pretax margin was approximately 4.9%, compared with a pretax loss margin of approximately 3.9% in Q1 2011. Net margin was approximately 3.5%, versus a net loss margin of approximately 1.5%. Comprehensive income was $2.6 million, including $1.0 million of other comprehensive income.
Material changes and segment performance
- Mortgage: External revenue rose 91% to $26.7 million; pretax earnings were $1.3 million versus a $2.6 million loss. Management attributed the improvement to higher originations and secondary investor gains. Mortgage fee income increased 89.5% to $25.5 million.
- Insurance: External revenue increased 3% to $17.6 million, but pretax earnings declined 22% to $0.8 million. Premiums were slightly lower; investment income increased.
- Cemetery and mortuary: Revenue declined 2% to $3.0 million; pretax earnings improved to $0.2 million from $0.2 million (reported segment figures: $227,000 versus $152,000).
- Expenses rose 26.8% overall. Commissions increased $7.0 million, largely with mortgage volume; interest expense increased $0.5 million, primarily from greater use of the mortgage warehouse line.
- Operating cash flow was lower year over year. The filing attributes Q1 2012 operating cash generation in part to a $16.4 million decrease in mortgage loans sold to investors and higher future policy benefits. Investing activities used $1.4 million; financing activities used $6.2 million, including a $4.4 million reduction in line-of-credit borrowings.
Outlook, risks, contingencies and unusual items
- Management expected 2012 mortgage originations of approximately $125 million to $200 million per month, compared with a stated 2011 range of $80 million to $150 million per month. It cited increased market share. The filing cautions Q1 results are not necessarily indicative of full-year results.
- Mortgage investors had asserted potential claims and notices substantially exceeding $20 million; the company had accrued $2.903 million for investor-related claims. Management said further losses could not be estimated and asserted it had defenses. It warned a substantial judgment beyond the mortgage subsidiary’s capacity to pay could require it to curtail or cease operations.
- Mortgage loans held for investment included $16.6 million classified as nonperforming; $9.9 million were in foreclosure. The mortgage allowance was $4.5 million. The company also reported $54.7 million of other real estate owned held for investment, up from $46.4 million at year-end, and $9.0 million of mortgage loans foreclosed during the quarter transferred to real estate.
- Separate Lehman/Aurora litigation involves disputed indemnification and loan-sale claims. Lehman Holdings claimed approximately $5.0 million; the subsidiary sought approximately $4.0 million in affirmative relief. No loss was accrued for this dispute at March 31, 2012. The filing also describes a JP Morgan Chase indemnification notice concerning 21 loans and a separate investor’s disputed $5.971 million debit from an account.
- The Wells Fargo settlement requires deductions or payments tied to mortgage sales through March 31, 2017 and allocation of 50% of net proceeds from certain real-estate sales. The 28 properties covered had a combined book value of $5.6 million at quarter-end.
- Mortgage loans were geographically concentrated: 35% in Utah, 11% in California and 11% in Florida. The company identified changing economic conditions and assumptions used for policy-benefit and loan-loss estimates as areas of estimation risk.
- After quarter-end, the company completed its purchase of Trans-Western Life Insurance Company on May 2, 2012, for $480,988.
Important facts for investors to verify
- Reconcile the mortgage origination figures: the filing’s note reports 2,440 loans totaling $445.5 million versus 1,569 loans and $262.6 million in Q1 2011, while MD&A states 1,587 loans and $265.2 million for Q1 2011.
- Track the size, status and potential resolution of investor repurchase and indemnification claims, especially claims exceeding $20 million compared with the $2.903 million reserve and the mortgage subsidiary’s $18.779 million net asset value.
- Monitor nonperforming and foreclosed mortgage loans, real-estate-owned balances, and whether the allowances and reserves remain adequate.
- Assess whether higher mortgage volume and the stated monthly outlook can be sustained, and how commissions, warehouse funding costs and investor settlement timing affect profitability and cash flow.
- Confirm the continuing availability and terms of warehouse funding, and the effects of the Wells Fargo settlement obligations through 2017.