Security National Financial Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports quarterly results, including the fourth quarter. The company operates life insurance, cemetery and mortuary, and mortgage lending businesses.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $159.6 million | $168.5 million |
| Income (loss) before tax | $1.24 million | $(1.09) million |
| Net earnings (loss) | $1.30 million | $(0.43) million |
| Net earnings per equivalent Class A share | $0.14 | $(0.05) |
| Operating cash flow | $6.87 million | $(14.25) million |
| Cash and cash equivalents at year-end | $17.08 million | $39.56 million |
| Total assets | $521.14 million | $465.63 million |
| Total liabilities | $459.91 million | $405.71 million |
| Stockholders’ equity | $61.23 million | $59.93 million |
| Bank and other loans payable | $25.02 million | $7.07 million |
- Net margin was approximately 0.8% in 2011, calculated from reported net earnings and revenue. Total benefits and expenses were 99.2% of revenue, compared with 100.6% in 2010.
- Fourth-quarter 2011 revenue was $47.63 million and net earnings were $0.84 million, versus fourth-quarter 2010 revenue of $41.54 million and a net loss of $0.40 million.
- At year-end, mortgage loans sold to investors pending settlement totaled $77.34 million on the balance sheet; $64.99 million had settlements still pending. A $65 million warehouse facility was available for loan origination.
Changes versus 2010
- Revenue declined 5.3%, primarily because mortgage fee income fell $19.74 million (20.3%). Mortgage originations and sales decreased to 8,100 loans totaling $1.41 billion, from 11,251 loans totaling $2.09 billion.
- Insurance premiums and other considerations rose 25.8% to $48.48 million, mainly reflecting the North America Life reinsurance transaction, renewal premiums, and increased first-year premiums. Net investment income increased 7.5% to $20.01 million.
- Benefits and expenses declined 6.6% to $158.35 million. Selling, general and administrative expense fell 16.1%, including lower commissions and mortgage funding costs; policyholder benefits increased 22.0%, largely associated with the reinsurance transaction.
- Life insurance segment pre-tax earnings increased to $2.70 million from $1.86 million. Cemetery and mortuary segment pre-tax earnings were $0.46 million versus a $0.99 million loss. Mortgage segment recorded a $1.92 million pre-tax loss, little changed from 2010.
- Operating cash flow improved to positive $6.87 million from negative $14.25 million, while cash on hand fell $22.47 million. Investment activity used $41.45 million of cash, and financing activities provided $12.11 million.
- Debt rose by $17.95 million. Of the $25.02 million total, $18.02 million was classified as due within one year.
Outlook, risks, and unusual items
- Management expected 2012 mortgage loan volume to remain in a range of $80 million to $150 million per month, and said staffing and funding costs would be adjusted to production levels. This is management’s forecast, not a guarantee.
- Mortgage investor claims and notices exceeded $20 million at December 31, 2011, with additional notices received afterward. The company had accrued $2.34 million and said excess losses could not be estimated; it disputes the claims and cites defenses. Management warned that a substantial judgment beyond the mortgage subsidiary’s capacity to pay could require it to curtail or cease operations.
- Mortgage credit stress remained material: $19.88 million of the long-term mortgage portfolio was more than 90 days delinquent, including $13.02 million in foreclosure. No interest income was recognized on these loans. The loan-loss allowance was $4.88 million, down from $7.07 million in 2010.
- In April 2011, SecurityNational Mortgage settled with Wells Fargo for $4.30 million and agreed to remit 10 basis points on covered loan sales through March 31, 2017, plus 50% of net proceeds from specified property sales. The specified properties had a book value of $5.60 million at year-end.
- Lehman-related litigation remains unresolved. Lehman Holdings claimed approximately $3.75 million under an indemnification arrangement; SecurityNational Mortgage disputes the claim and seeks approximately $4 million in its own action. The company recorded no year-end accrual for losses under that arrangement.
- The March 2011 North America Life coinsurance transaction brought in $15.70 million of assets and $19.23 million in statutory reserves, and included a $3.53 million ceding commission paid. The transaction materially affected insurance revenue and policyholder benefit costs.
- Other risks cited include interest-rate and investment-value changes, mortgage market weakness, insurance mortality and lapse experience, regulation, reinsurance collectability, and uncertainty in loan-loss and other accounting estimates. Insurance subsidiaries exceeded the stated regulatory risk-based capital criteria, but dividends to the parent require regulatory approval.
- The filing reports an unqualified audit opinion on the consolidated financial statements. Management assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Investor verification priorities
- Track the status, asserted amounts, and resolution prospects of investor repurchase and indemnification claims, including the adequacy of the $2.34 million reserve and the Lehman litigation.
- Review mortgage delinquencies, foreclosure outcomes, collateral values, and changes in the $4.88 million loan-loss allowance and $46.40 million balance of foreclosed real estate held for investment.
- Assess near-term debt maturities, renewal or refinancing of credit facilities, and cash requirements; $18.02 million of loans payable was due within one year.
- Separate recurring operating results from the North America Life transaction, the $0.89 million gain on two funeral-home sales, and investment and real-estate impairments.
- Compare 2012 mortgage production and profitability with management’s $80 million–$150 million monthly volume outlook, and monitor whether insurance growth offsets continued mortgage weakness.