SNFCA

Business Context and Reporting Period

Company: Security National Financial Corp (SNFCA)

Reporting Period: Fiscal year ended December 31, 2010

Business Segments: The Company operates three integrated segments: Life Insurance (funeral plans, annuities, accident/health), Cemetery and Mortuary (pre-need and at-need services), and Mortgage Loans (origination and underwriting). The segments are designed to cross-sell products, with insurance assets often invested in mortgage loans originated by the mortgage subsidiary.

Key Financial Metrics (2010)

Segment Performance (Pre-Tax Earnings/Loss):

• Life Insurance: $1.86 million profit (improved from a $0.43 million loss in 2009).
• Cemetery/Mortuary: $(0.99) million loss (worsened from a $(0.13) million loss in 2009).
• Mortgage: $(1.96) million loss (worsened from a $6.91 million profit in 2009).

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 22% to $168.53 million, driven primarily by a 32% drop in mortgage fee income ($98.16 million vs. $144.86 million) due to reduced loan volume and lower secondary gains.
• Net Loss: The Company reported a net loss of $0.43 million, a reversal from the $3.77 million net income in 2009. This was caused by the mortgage segment's loss and increased expenses relative to revenue.
• Mortgage Volume: Loan originations dropped to 11,251 loans ($2.09 billion volume) in 2010 compared to 17,797 loans ($3.24 billion volume) in 2009.
• Expense Reduction: Selling, general, and administrative expenses decreased 24.5% to $122.22 million, largely due to reduced mortgage commissions and a significant decrease in the provision for loan losses ($5.4 million in 2010 vs. $19.5 million in 2009).

Guidance, Outlook, Risks, and Contingencies

Outlook: Management anticipates loan volume for 2011 to range between $80 million and $150 million per month, down from the $125 million to $200 million range in 2010, citing low housing demand and rising interest rates.

Material Risks and Contingencies:

• Mortgage Repurchase Claims: Major investors (Bank of America, Wells Fargo, JP Morgan Chase) have asserted potential claims totaling $32 million regarding alleged defective loans. The Company has accrued $5.9 million for these claims but disputes the amounts. Bank of America terminated its business relationship with the Company in October 2010 and debited $5.97 million from an over/under account, which the Company contests.
• Legal Proceedings: The Company is in settlement discussions with Wells Fargo regarding repurchase claims. A proposed settlement was received in March 2011. Failure to settle could lead to litigation and potential curtailment of mortgage operations.
• Florida Regulatory Action: The Florida Office of Insurance Regulation rejected the Company's asset categorization, resulting in a capital deficiency. The Company ceased writing new business in Florida in June 2009 and is exploring the creation of a Florida-only subsidiary to resume operations.
• Subprime/Alt-A Exposure: The Company discontinued subprime and Alt-A loan offerings in 2007. However, it holds a portfolio of foreclosed properties ($49.5 million) and loans with delinquencies over 90 days ($14.3 million).

Investor Verification Checklist

• Mortgage Loss Reserves: Verify the adequacy of the $5.9 million loan loss reserve against the $32 million in asserted claims from major banks.
• Bank of America Dispute: Monitor the status of the $5.97 million debit dispute and the potential impact of the terminated business relationship on future loan sales.
• Florida Compliance: Track progress on resolving the capital deficiency with Florida regulators to determine if the Company can resume writing insurance in that state.
• Foreclosed Real Estate: Assess the valuation and liquidity of the $49.5 million in foreclosed properties held for investment or sale.
• Loan Volume Trends: Confirm if 2011 loan volumes align with management's reduced guidance of $80M-$150M per month.