Security National Financial Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The unaudited consolidated results cover the company’s life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $63.75 million | $41.32 million | $167.60 million | $111.96 million |
| Net earnings | $3.99 million | $0.77 million | $9.25 million | $0.46 million |
| Basic earnings per Class A equivalent share | $0.42 | $0.08 | $0.97 | $0.05 |
| Operating cash flow | Not presented separately | Not presented separately | $34.51 million | $18.75 million |
- Mortgage fee income was $43.29 million in Q3 and $103.87 million for the nine months, versus $21.52 million and $50.62 million, respectively, in 2011. Mortgage segment pretax profit was $5.29 million for Q3 and $9.61 million year to date; the comparable 2011 nine-month result was a $3.03 million loss.
- Net investment income rose 12.2% in Q3 to $5.73 million and 27.2% year to date to $17.92 million. Insurance premiums and considerations increased modestly; nine-month cemetery and mortuary sales were approximately flat.
- Total benefits and expenses were 90.4% of revenue in Q3 and 91.9% year to date, compared with 98.0% and 100.3% in 2011.
- At September 30, cash and cash equivalents were $57.17 million, compared with $17.08 million at December 31, 2011. Total assets were $560.76 million and stockholders’ equity was $70.75 million. Bank and other loans payable were $22.69 million, down from $25.02 million at year-end.
- Operating cash flow was $34.51 million; investing activities provided $11.44 million and financing activities used $5.86 million during the nine months. Management said cash sources were adequate for anticipated policyholder obligations, debt service, and operating needs. The life insurer exceeded regulatory risk-based capital criteria.
Material changes and management commentary
- Revenue increased 54.3% in Q3 and 49.7% for the nine months, chiefly from higher mortgage originations and secondary gains. Mortgage originations and sales rose to 9,578 loans totaling about $1.74 billion for the nine months, from 5,682 loans totaling $959.73 million in 2011. Management attributed growth largely to expanded retail operations and increased market share.
- Higher mortgage activity also increased commissions, salaries, loan-funding costs, interest expense, and loan-loss provisions. Nine-month selling, general and administrative expense rose 55.8% to $110.87 million.
- Management anticipated 2012 monthly mortgage volume of approximately $125 million to $240 million, versus $80 million to $150 million per month in 2011. The filing provides no specific earnings guidance and cautions that interim results are not necessarily indicative of full-year results.
- Wells Fargo increased its mortgage warehouse facility from $55 million to $75 million and its funding share to as much as 95%. A UBS facility of up to $30 million was established in July; it was increased to $40 million on October 26, 2012, after quarter-end.
- George R. Quist, chairman and CEO, died September 6, 2012. The board appointed Scott M. Quist chairman and CEO on September 14; he continued as president.
Risks, contingencies, and unusual items
- Mortgage investors had asserted potential repurchase, indemnification, and related claims substantially exceeding $20 million, with additional notices received after quarter-end. The company reserved $5.16 million; management said it could not estimate additional losses and disputed the claims. It warned that an adverse substantial judgment beyond the mortgage subsidiary’s capacity to pay could require it to curtail or cease operations.
- At September 30, $12.73 million of held-for-investment mortgage loans were nonperforming; $7.65 million were in foreclosure. The allowance for these loans was $4.26 million. Foreclosures and transfers to other real estate owned remain important credit and valuation exposures.
- There were $197.2 million of mortgage loans awaiting settlement with third-party investors at September 30. Mortgage loan sales can involve repurchase or indemnification obligations under specified circumstances.
- The company recorded $0.53 million of other-than-temporary investment impairments for the nine months, including impairment of real estate and commercial mortgage assets. Nine-month comprehensive income was $9.08 million, including a $0.16 million other comprehensive loss; Q3 other comprehensive loss was $2.10 million, largely reflecting derivative losses.
- Lehman-related litigation remained pending. The company sought approximately $4 million in relief, while Lehman Holdings had claimed approximately $5.04 million. Summary judgment hearings were scheduled for December 2012; the filing does not establish the eventual outcome.
- Mortgage loans are geographically concentrated: 27% were to borrowers in Utah, 19% in California, and 12% in Florida. Management noted that loan performance depends in part on regional economic conditions.
Most important facts for investors to verify
- Whether the rapid mortgage-volume and fee-income growth is sustainable, and its effect on margins, expenses, and earnings.
- Subsequent developments in investor repurchase and indemnification claims, including whether the $5.16 million reserve is adequate.
- Mortgage loan delinquencies, foreclosures, real estate owned balances, and loan-loss provisioning.
- Settlement timing and funding exposure for the $197.2 million of loans pending investor settlement, and the availability and terms of warehouse facilities.
- Outcomes of the Lehman litigation and any material changes following the CEO succession.