Security National Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Comparisons are with Q1 2013 unless otherwise stated. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $45.05 million | $54.85 million | Down 17.9% |
| Benefits and expenses | $44.89 million | $51.62 million | Down 13.1% |
| Earnings before tax | $166,000 | $3.23 million | Down 94.9% |
| Net earnings | $139,000 | $2.03 million | Down 93.2% |
| Diluted earnings per equivalent Class A share | $0.01 | $0.16 | Down from $0.16 |
| Operating cash flow | $22.72 million | $5.45 million | Up $17.27 million |
Net margin was approximately 0.3%, compared with 3.7% a year earlier. The 2014 income tax line was a $27,000 benefit; Q1 2013 tax expense was $1.19 million. Comprehensive income was $455,000 versus $1.66 million.
Segment results and material changes
- Mortgage: External revenue was $23.54 million, down 32%; pretax loss was $1.35 million versus $2.34 million of pretax income. SecurityNational Mortgage originated and sold 2,034 loans totaling $370.2 million, versus 2,895 loans totaling $536.6 million. Management attributed the deterioration to lower secondary gains and reduced refinancing as mortgage rates rose.
- Life insurance: External revenue increased 7% to $18.47 million; pretax income rose 64% to $1.33 million. Higher premiums and investment income supported results.
- Cemetery and mortuary: External revenue increased 2% to $3.04 million; pretax income was $183,000 versus $77,000.
- Mortgage fee income fell $10.73 million, the main driver of the consolidated revenue decline. Net investment income rose 12.8% to $5.64 million, while realized gains on investments and other assets declined $644,000 to $199,000.
- Total benefits and expenses declined, including lower commissions and mortgage funding costs, but remained 99.7% of revenue, versus 94.1% in Q1 2013.
Financial position, liquidity and cash flow
- At March 31, 2014, total assets were $626.74 million, liabilities $538.24 million, and stockholders’ equity $88.50 million. Assets increased $7.98 million from year-end 2013.
- Cash and cash equivalents were $44.83 million, up from $38.20 million at year-end. Bank and other loans payable were $17.72 million, down from $18.29 million. Management reported total capitalization of $106.23 million, with equity representing 83.3%.
- Operating activities provided $22.72 million; investing activities used $14.46 million; financing activities used $1.63 million. Cash increased $6.63 million. Management attributed operating cash flow chiefly to an $18.14 million decline in mortgage loans sold to investors and a $5.65 million increase in future policy benefits.
- Investments totaled $406.06 million. Mortgage loans held for investment, net, were $116.08 million; mortgage loans sold to investors were $59.04 million. Future life, annuity and other benefit liabilities were $460.05 million.
- Mortgage loans past due or in foreclosure totaled $16.72 million; nonperforming loans were $13.16 million, compared with $12.42 million at year-end. The mortgage portfolio is geographically concentrated, including 34% in Utah, 20% in California and 10% in Florida.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. Management expects its focus on niche life products, cemetery and mortuary business, and mortgage lending to continue. It cautions that quarterly results are not necessarily indicative of full-year results.
- Management said cash sources were adequate for expected obligations and operating needs. The life insurance subsidiary complied with risk-based capital criteria; $32.9 million of consolidated equity represented statutory equity of life insurance subsidiaries, whose dividends require regulatory approval.
- Mortgage originations face sensitivity to interest rates and refinancing volumes. Other risks include mortgage credit quality, investor repurchase and indemnification demands, and estimates for policy benefits, loan losses and pre-need costs.
- The company held $5.53 million in its mortgage loan loss reserve at quarter-end; the filing also describes the reserve as $5.52 million in another passage. Management says potential investor claims are difficult to quantify and warns adverse litigation outcomes could require the mortgage subsidiary to curtail or cease operations.
- In the Lehman/Aurora litigation, SecurityNational Mortgage sought approximately $4 million and Lehman Holdings had asserted claims exceeding $5 million. No accrual was recorded for claims under the indemnification agreement. After quarter-end, on May 6, 2014, a judge granted SecurityNational Mortgage summary judgment against Aurora Bank and Aurora Loan Services; a June 2 hearing was scheduled to determine the amount owed. A related Lehman Holdings matter remained pending, with a trial set for August if needed.
- Other disclosed exposure includes a JP Morgan/EMC indemnification demand concerning 21 loans and a Wells Fargo settlement requiring payments tied to loan sales through March 2017 and certain property-sale proceeds. The company also had $21.58 million of residential construction loan commitments, of which $13.98 million had been funded.
- The company recaptured the remaining TransWestern Life policies from North America Life in February 2014, receiving $4.684 million less a $57,000 ceding commission; the reinsurance agreement was terminated.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No significant change in market-risk disclosures from the 2013 Form 10-K was reported.
Important facts for investors to verify
- Whether mortgage production, secondary gains and profitability stabilize after the sharp year-over-year decline in originations and refinancing.
- Whether the approximately $5.5 million investor-claim reserve is adequate, including the filing’s $5.522 million versus $5.527 million figures and the unaccrued Lehman-related exposure.
- The outcome and financial effect of the remaining Lehman Holdings and JP Morgan/EMC matters, and the amount ultimately determined in the Aurora judgment.
- Mortgage delinquency and foreclosure trends, geographic concentrations, and changes in loan-loss allowances.
- The sustainability of operating cash flow, particularly because the quarter’s cash generation was substantially influenced by a reduction in mortgage loans sold to investors.