Security National Financial Corporation — Q3 2016 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2016, compared with the same 2015 periods. The company operates life insurance, cemetery and mortuary, and mortgage businesses. Mortgage operations generated most revenue; insurance and mortgage results improved, while cemetery and mortuary quarterly earnings declined.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $85.24 million | $75.49 million | $232.99 million | $215.58 million |
| Earnings before taxes | $7.81 million | $7.79 million | $18.64 million | $17.02 million |
| Net earnings | $5.29 million | $4.89 million | $12.44 million | $10.61 million |
| Diluted earnings per share | $0.36 | $0.34 | $0.86 | $0.74 |
| Operating cash flow | Not presented for the quarter | $41.53 million | $(3.68) million |
Revenue rose 12.9% in Q3 and 8.1% for the nine-month period. Net earnings increased approximately 8.2% and 17.3%, respectively. Benefits and expenses were 90.8% of revenue in Q3 versus 89.7% in Q3 2015, and 92.0% for nine months versus 92.1% a year earlier.
Financial position and liquidity
- At September 30, 2016, total assets were $837.58 million, total liabilities $711.99 million, and stockholders’ equity $125.59 million. At December 31, 2015, these were $749.93 million, $638.69 million, and $111.25 million, respectively.
- Cash and cash equivalents were $50.91 million, up from $40.05 million at year-end 2015. Management attributed the nine-month operating cash inflow primarily to increased collections on mortgage loans sold to investors.
- Bank and other loans payable were $43.70 million, compared with $40.91 million at year-end. Total capitalization, including equity and debt, was $169.28 million; equity represented 74.2%, compared with 73.1% at year-end.
- Mortgage loans held for investment, net, totaled $129.87 million. The allowance for loan losses was $2.23 million, up from $1.85 million; nonperforming loans were $5.02 million, down from $5.46 million at year-end.
- Life insurance subsidiaries met regulatory risk-based capital criteria. Their $44.28 million of statutory equity is subject to regulatory approval before dividends can be paid to the parent.
Material changes and drivers
- Mortgage: Nine-month segment revenue increased 8% to $152.33 million and pretax earnings rose 29% to $11.69 million. Management cited higher loan origination income and service-release premiums. SecurityNational Mortgage originated and sold 11,720 loans totaling $2.25 billion in the first nine months of 2016, compared with 11,689 loans totaling $2.19 billion.
- Life insurance: Nine-month segment revenue increased 8% to $70.62 million, while pretax earnings fell 21% to $5.67 million. Management attributed lower profitability primarily to reduced realized gains, partly offset by higher premiums and investment income.
- Cemetery and mortuary: Nine-month revenue increased 6% to $10.05 million and pretax earnings increased to $1.28 million from $0.81 million. In Q3, revenue fell 7% and pretax earnings fell 78%, to $0.05 million, with lower pre-need sales cited as a factor.
- Mortgage fees, insurance premiums, and net investment income were the principal consolidated revenue growth drivers. Realized gains on investments and other assets fell substantially against 2015, which included gains from an office-building sale.
- Commercial real estate held for investment rose to $54.85 million from $33.18 million at year-end; residential real estate held for investment was $77.03 million versus $81.67 million. The company said it invests in real estate in part to match asset income and duration to long-term obligations.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said 2016 year-to-date results are not necessarily indicative of full-year results. Its stated operating focus includes niche insurance products, cemetery and mortuary business, and mortgage lending.
- On September 30, the mortgage subsidiary agreed to pay $4.25 million to resolve a DOJ and HUD investigation involving certain FHA-insured loan origination and underwriting. Payment was made October 4, 2016. The subsidiary made no admission of liability, and the settlement did not affect its ability to participate in FHA programs.
- The company completed its $6.75 million acquisition of First Guaranty Insurance Company on July 11, 2016. The acquired company’s assets and liabilities were recorded at preliminary fair values; the filing says those values could be adjusted during the following 12 months.
- Commitments to fund residential construction loans totaled $60.62 million, of which $42.01 million had been funded. Mortgage credit exposure is geographically concentrated: 48% of mortgage loans were to borrowers in Utah, with additional concentrations in California, Texas, Florida, and Oregon.
- Mortgage-loan indemnification reserves increased to $5.33 million from $2.81 million at year-end. Management cautioned that actual losses may differ and that further claims by third-party investors could affect reserves. The company also disclosed ongoing Lehman-related litigation, including a case scheduled for trial beginning December 12, 2016.
- Fixed-maturity securities had $2.74 million of unrealized losses at quarter-end, primarily attributed to interest-rate fluctuations. Management reported no significant change in market-risk exposures since its 2015 Form 10-K.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether mortgage origination volumes, margins, and investor premiums remain strong, and how sensitive results are to interest rates and housing-market conditions.
- Whether the $5.33 million mortgage indemnification reserve and $2.23 million held-for-investment loan allowance adequately reflect potential credit and repurchase claims.
- The financial and operating contribution of First Guaranty after acquisition, including any final purchase-accounting adjustments.
- The accounting period and earnings impact of the $4.25 million DOJ settlement paid after quarter-end.
- Developments in Lehman-related litigation, construction-loan commitments, and the company’s ability to maintain liquidity while meeting long-term insurance obligations and regulatory capital requirements.