SECURITY NATIONAL FINANCIAL CORP files 10-Q

SECURITY NATIONAL FINANCIAL CORP files 10-Q in a filing on Wed, May 15 accessible here.

There were 186 securities with fair value of 97.5% of amortized cost at March 31, 2019. There were 361 securities with fair value of 96.2% of amortized cost at December 31, 2018. No credit losses have been recognized for the three months ended March 31, 2019 and 2018.

There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities) at March 31, 2019, other than investments issued or guaranteed by the United States Government.

The primary business units of the Company occupy a portion of the real estate owned by the Company.  Currently, the Company occupies nearly 70,000 square feet, or approximately 10% of the overall commercial real estate holdings.

Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from nine months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At March 31, 2019, the Company had 48%, 14%, 14%, 7%, 6%, 4% and 2% of its mortgage loans from borrowers located in the states of Utah, Florida, Texas, California, Nevada, Arizona, and Tennessee, respectively.

Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (‘LTV’) of 80% or less.

The Company has three reportable business segments: life insurance, cemetery and mortuary, and mortgage. The Company’s life insurance segment consists of life insurance premiums and operating expenses from the sale of insurance products sold by the Company’s independent agency force and net investment income derived from investing policyholder and segment surplus funds. The Company’s cemetery and mortuary segment consists of revenues and operating expenses from the sale of at-need cemetery and mortuary merchandise and services at its mortuaries and cemeteries, pre-need sales of cemetery spaces after collection of 10% or more of the purchase price and the net investment income from investing segment surplus funds. The Company’s mortgage segment consists of fee income and expenses from the originations of residential mortgage loans and interest earned and interest expenses from warehousing loans held for sale.

Policyholder Account Balances and Future Policy Benefits-Annuities:  Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 1.5% to 6.5%. The fair values for these investment-type insurance contracts are estimated based on the present value of liability cash flows.

The Company, through its subsidiary SecurityNational Mortgage, has a $100,000,000 line of credit with Wells Fargo Bank N.A. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on June 16, 2019. SecurityNational Mortgage is required to maintain an adjusted tangible net worth of $19,000,000, unrestricted cash of $10,000,000, indebtedness to adjusted tangible net worth of 12:1, liquidity overhead coverage of 1.75:1, and a quarterly gross profit of at least $1.

The Company, through its subsidiary SecurityNational Mortgage, also uses a line of credit with Texas Capital Bank N.A. This agreement with the bank allows SecurityNational Mortgage to borrow up to $100,000,000 for the sole purpose of funding mortgage loans. SecurityNational Mortgage is currently approved to borrow $30,000,000 of the $100,000,000 available. The agreement charges interest at the 1-Month LIBOR rate plus 3% and matures on September 7, 2019. The Company is required to maintain an adjusted tangible net worth of $70,000,000, unrestricted cash of $15,000,000, and no two consecutive quarters with a net loss. The Company is currently seeking to obtain a waiver from Texas Capital Bank as SecurityNational Mortgage did not meet the profitability covenant for the year with a loss at March 31, 2019.

The Company’s overall effective tax rate for the three months ended March 31, 2019 and 2018 was 20.6% and 20.1%, respectively, which resulted in a provision for income taxes of $502,000 and $4,261,000, respectively.  The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% partially due to its provision for state income taxes.  The effective tax rate in the current period increased when compared to the prior year period partly due to the Company’s provision for state income taxes.

Deferred Pre-need Land Revenue: Deferred pre-need revenue and corresponding commissions are deferred until 10% of the funds are received from the customer through regular monthly payments. Deferred pre-need land revenue is not placed in trust.

The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in San Diego County, California. At-need product sales and services are recognized as revenue when the services are performed or when the products are delivered. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed. Recognition of revenue for cemetery land sales occurs when 10% of the purchase price is received.

The Company’s mortgage subsidiaries receive fees from borrowers that are involved in mortgage loan originations and refinancings, and secondary fees earned from third party investors that purchase the mortgage loans originated by the mortgage subsidiaries. Mortgage loans originated by the mortgage subsidiaries are generally sold with mortgage servicing rights released to third-party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 19% of its loan origination volume. These mortgage loans are serviced by either SecurityNational Mortgage or an approved third-party sub-servicer.

Total revenues decreased by $20,582,000, or 25.1%, to $61,494,000 for the three months ended March 31, 2019, from $82,076,000 for the comparable period in 2018. Contributing to this decrease in total revenues was a $20,214,000 decrease in gains on investments and other assets, a $981,000 decrease in mortgage fee income, a $33,000 decrease in net investment income, and a $17,000 decrease in other revenues. This decrease in total revenues was partially offset by a $446,000 increase in net mortuary and cemetery sales and a $217,000 increase in insurance premiums and other considerations.

Insurance premiums and other considerations increased by $217,000, or 1.2%, to $19,027,000 for the three months ended March 31, 2019, from $18,810,000 for the comparable period in 2018. This increase was primarily due to an increase in renewal premiums due to the growth of the Company in recent years, particularly in whole life products, which resulted in more premium paying business in force.

Net investment income decreased by $33,000, or 0.3%, to $10,042,000 for the three months ended March 31, 2019, from $10,075,000 for the comparable period in 2018. This decrease was primarily attributable to a $760,000 decrease in rental income from real estate held for investment, a $428,000 decrease in mortgage loan interest, a $26,000 decrease in fixed maturity securities income, and a $15,000 decrease in policy loan income. This decrease was partially offset by a $463,000 decrease in investment expenses, a $362,000 increase interest on cash and cash equivalents, a $351,000 increase in insurance assignment income, and a $20,000 increase in equity securities income.

Net mortuary and cemetery sales increased by $446,000, or 13.8%, to $3,679,000 for the three months ended March 31, 2019, from $3,233,000 for the comparable period in 2018. This increase was primarily due to a $214,000 increase in cemetery preneed sales and a $242,000 increase in mortuary at-need sales.

Gains on investments and other assets decreased by $20,214,000, or 91.8%, to $1,807,000 for the three months ended March 31, 2019, from $22,021,000 for the comparable period in 2018. This decrease in gains on investments and other assets was primarily attributable to a $21,675,000 decrease in gains on other assets due to the $22,252,000 gain that was realized on the sale of Dry Creek at East Village Apartments in the first quarter 2018. This decrease was partially offset by a $331,000 increase in gains on fixed maturity securities and a $1,130,000 increase in gains on equity securities mostly attributable to increases in the fair value of these securities. Due to the adoption of Accounting Standards Update (‘ASU’) 2016-01 on January 1, 2018, these changes in fair value are now recognized in earnings instead of other comprehensive income.

Mortgage fee income decreased by $981,000, or 3.9%, to $24,479,000, for the three months ended March 31, 2019, from $25,460,000 for the comparable period in 2018.  This decrease was primarily due to a net decrease of $2,110,000 in the fair value of loans held for sale and loan commitments. This decrease was partially offset by a $786,000 increase in secondary gains, a $249,000 decrease in the provision for loan loss reserve, and an $94,000 increase in other loan fees and interest income. It should be noted that the recent overall decline in mortgage fee income was due to a reduction in mortgage loan originations that was indicative of the mortgage loan industry as a whole. This reduction was primarily caused by a national shortage of available new housing for mortgage loan origination transactions. The reduction was also caused by a decline in mortgage loan refinancings, which was due to recent increases in interest rates on mortgage loans.

Other revenues increased by $16,000, or 0.7%, to $2,461,000 for the three months ended March 31, 2019, from $2,477,000 for the comparable period in 2018. This increase was primarily attributable to an increase in the cemetery and mortuary segment primarily due to the acquisition of Probst Family Funerals and Cremations and Heber Valley Funeral Home. This was partially offset by a decrease in servicing fee revenue.

Total benefits and expenses were $59,062,000, or 96.0% of total revenues, for the three months ended March 31, 2019, as compared to $60,889,000, or 74.2% of total revenues, for the comparable period in 2018.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $692,000 or 4.3%, to $16,695,000 for the three months ended March 31, 2019, from $16,003,000 for the comparable period in 2018. This increase was primarily the result of a $470,000 increase in death benefits, a $166,000 increase in future policy benefits, and a $56,000 increase in surrender and other policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $18,000, or 0.6%, to $3,128,000 for the three months ended March 31, 2019, from $3,110,000 for the comparable period in 2018. This increase was primarily due to an increase in the average outstanding balance of deferred policy and pre-need acquisition costs.

Selling, general and administrative expenses decreased by $2,405,000, or 6.1%, to $37,094,000 for the three months ended March 31, 2019, from $39,499,000 for the comparable period in 2018. This decrease was primarily the result of a $1,607,000 decrease in commissions, a $1,535,000 decrease in personnel expenses, a $59,000 decrease in rent and rent related expenses, a $27,000 decrease in depreciation on property and equipment, and a $14,000 decrease in costs related to funding mortgage loans. This decrease was partially offset by a $835,000 increase in other expenses. The decreases in commissions and personnel expenses are primarily a result of the efforts of the Mortgage segment to reduce costs and restructure internal processes in order to offset the reductions in mortgage fee income that resulted from a reduction in mortgage loan originations that was indicative of the mortgage loan industry as a whole and a reduction in mortgage loan refinancings, which was due to recent increases in interest rates on mortgage loans.

Interest expense decreased by $270,000, or 15.3%, to $1,492,000 for the three months ended March 31, 2019, from $1,762,000 for the comparable period in 2018. This decrease was primarily due to a decrease in interest expense on bank loans for real estate held for investment due to the sale of the Dry Creek Apartments at East Village in the first quarter 2018.

Cost of goods and services sold-mortuaries and cemeteries increased by $137,000, or 26.7%, to $653,000 for the three months ended March 31, 2019, from $515,000 for the comparable period in 2018. This increase was primarily due to increases in both mortuary at-need and cemetery preneed sales.

The Company’s investment policy is to invest predominantly in fixed maturity securities, real estate, mortgage loans, and warehousing of mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $231,275,000 and $231,976,000 as of March 31, 2019 and December 31, 2018, respectively. This represents 37.9% and 38.9% of the total investments as of March 31, 2019 and December 31, 2018, respectively. Generally, all bonds owned by the life insurance subsidiaries are rated by the National Association of Insurance Commissioners. Under this rating system, there are nine categories used for rating bonds. At March 31, 2019, 3.68% (or $8,513,000) and at December 31, 2018, 3.6% (or $8,413,000) of the Company’s total bond investments were invested in bonds in rating categories three through nine, which were considered non‑investment grade.

The Company’s total capitalization of stockholders’ equity, bank and other loans payable was $349,274,000 as of March 31, 2019, as compared to $359,172,000 as of December 31, 2018. Stockholders’ equity as a percent of total capitalization was 49.9% and 47.8% as of March 31, 2019 and December 31, 2018, respectively.

Lapse rates measure the amount of insurance terminated during a particular period. The Company’s lapse rate for life insurance in 2018 was 9.9% as compared to a rate of 10.6% for 2017. The 2019 lapse rate to date has been approximately the same as 2018.

The Dry Creek apartments consist of 282 units, with a mixture of one, two, and three-bedroom units. The construction of Dry Creek was completed in December 2015. As of December 31, 2017, the apartments were 95% leased. Also, rental rates in the market had increased by 9.8% over pro forma rents, and effective (achieved) rates net of concessions increased. The Company had owned the land for the development since 1991, when the Company purchased the land, along with the cemetery and mortuary that are adjacent to the property. The Company continues to operate the cemetery and mortuary.

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