Security National Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Results are unaudited.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior year-end |
|---|---|---|
| Total revenue | $64.05 million | $45.05 million; up 42.2% |
| Earnings before income taxes | $3.00 million | $0.17 million |
| Net earnings | $1.86 million | $0.14 million |
| Diluted earnings per Class A equivalent share | $0.14 | $0.01 |
| Net margin | 2.9% | 0.3% |
| Operating cash flow | $0.71 million | $22.72 million |
| Cash and cash equivalents | $40.74 million | $30.86 million at Dec. 31, 2014 |
| Total assets | $701.78 million | $671.07 million at Dec. 31, 2014 |
| Total liabilities | $601.21 million | $573.98 million at Dec. 31, 2014 |
| Stockholders’ equity | $100.57 million | $97.09 million at Dec. 31, 2014 |
| Bank and other loans payable | $29.44 million | $29.02 million at Dec. 31, 2014 |
Benefits and expenses were $61.05 million, or 95.3% of revenue, versus $44.89 million, or 99.6%, a year earlier. Comprehensive income was $3.16 million, including $1.29 million of other comprehensive income, largely from derivative-related gains.
Business drivers and changes versus prior period
- Mortgage: External segment revenue rose to $39.97 million from $23.54 million; pretax profit was $1.19 million versus a $1.35 million loss. The company originated and sold 3,275 loans totaling $640.1 million, compared with 2,034 loans totaling $370.2 million. Management attributed improvement to higher secondary gains and increased refinance activity. Mortgage fee income consolidated-wide increased 67.8% to $37.82 million.
- Life insurance: Segment revenue increased 14% to $20.99 million and pretax profit rose 5% to $1.40 million. Premiums increased 5.5%, which management attributed primarily to higher first-year premiums and sales.
- Cemetery and mortuary: Segment revenue increased 2% to $3.10 million; pretax profit increased to $0.41 million from $0.18 million. Mortuary revenue declined while cemetery revenue rose.
- Net investment income grew 38.6% to $7.82 million, primarily reflecting higher short-term investment income, including gains related to mortgage-loan sales. Selling, general and administrative expenses rose 47.7% to $45.68 million, mainly due to higher mortgage origination activity and associated commissions and personnel costs.
- Green Street Mortgage elected to cease its current mortgage operations effective March 31, 2015.
Liquidity, capital, risks and outlook
- Operating cash flow fell substantially year over year to $0.71 million. Investing activities provided $9.75 million, and financing activities used $0.57 million; cash increased by $9.89 million during the quarter. Management stated that available cash flows are expected to be adequate for claims, debt service, and operating needs.
- Mortgage loans held for investment were $125.89 million net of a $1.90 million allowance. Nonperforming mortgage loans totaled $6.72 million, down from $7.50 million at year-end. Mortgage loans sold to investors on the balance sheet were $75.01 million.
- The mortgage loss reserve increased to $2.21 million from $1.72 million; the quarter’s provision was $0.67 million. Investor repurchase and indemnification claims are difficult to quantify, and management cautioned actual losses may differ from the reserve.
- Mortgage construction-loan commitments totaled $40.84 million, of which $29.68 million had been funded at quarter-end. The portfolio is geographically concentrated, including 39% of mortgage loans in Utah. Non-investment-grade bonds represented 8.64% of bond investments, up from 6.8% at year-end.
- Life insurance subsidiaries were in compliance with risk-based capital requirements. Statutory equity of $37.05 million at the life subsidiaries cannot be distributed to the parent without regulatory approval. Stockholders’ equity was 77.4% of total capitalization, compared with 77.0% at year-end.
- Management described continued emphasis on niche insurance products, cemetery and mortuary business, and mortgage lending. No quantified earnings or revenue guidance was provided. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- Contingencies: SecurityNational Mortgage has ongoing disputes with third-party investors over alleged loan defects; the company says it disputes the demands and intends to defend claims. In the Lehman/Aurora litigation, a December 2014 order awarded SecurityNational Mortgage $3.89 million plus prejudgment interest, but remaining offset and other issues were unresolved; related proceedings continued after quarter-end. A separate JPMorgan/EMC indemnification demand concerns 21 loans, and the company says it has significant defenses.
- Subsequent event: On May 8, 2015, Security National Life agreed to assume obligations and risks for certain policies from North America Life; it paid a $281,908 ceding commission and received $8.90 million cash and $9.18 million in statutory reserves.
Most important facts for investors to verify
- How much of the mortgage segment’s revenue and earnings improvement is sustainable, given its dependence on loan volumes, refinancing, and secondary gains?
- Whether mortgage repurchase and indemnification claims exceed the $2.21 million reserve, including the outcome and collectability of the Lehman/Aurora award and unresolved litigation.
- Why operating cash flow declined sharply despite higher net earnings, and how mortgage-loan funding and investor-sale timing affect cash needs.
- The effect of Green Street Mortgage’s shutdown on future mortgage volumes, costs, and segment profitability.
- Whether loan performance, geographic concentration, investment credit quality, and insurance liability assumptions create needs for higher reserves or capital.