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| SNFCA > SEC Filings for SNFCA > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
Overview
The Company's operations over the last several years generally reflect three trends or events which the Company expects to continue: (i) increased attention to "niche" insurance products, such as the Company's funeral plan policies and traditional whole-life products; (ii) emphasis on cemetery and mortuary business; and (iii) capitalizing on lower interest rates by originating and refinancing mortgage loans.
Mortgage Operations
During the three and nine months ended September 30, 2008, SecurityNational Mortgage experienced an increase in revenues and expenses due to the increase in mortgage loan revenue. SecurityNational Mortgage is a mortgage lender incorporated under the laws of the State of Utah. SecurityNational Mortgage is approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), to originate mortgage loans that qualify for government insurance in the event of default by the borrower. SecurityNational Mortgage obtains loans primarily from independent brokers and correspondents. SecurityNational Mortgage funds the loans from internal cash flows and loan purchase agreements with unaffiliated financial institutions. SecurityNational Mortgage receives fees from the borrowers and other secondary fees from third party investors that purchase its loans. SecurityNational Mortgage sells its loans to third party investors and does not retain servicing of these loans. SecurityNational Mortgage pays the brokers and correspondents a commission for loans that are brokered through SecurityNational Mortgage. For the nine months ended September 30, 2008 and 2007, SecurityNational Mortgage originated and sold 14,409 loans ($2,758,592,000 total volume) and 15,843 loans ($2,932,656,000 total volume), respectively.
The mortgage industry is still experiencing substantial change due to higher than expected delinquencies from subprime loans. The market for new subprime loans has been substantially reduced and several mortgage companies whose primary product was subprime mortgage originations have ceased operations. The Company funded $5,505,000 (0.14% of the Company's production) in subprime loans during the twelve months ending December 31, 2007 and eliminated subprime loans from its product offerings in August 2007. The Company believes that its potential losses from subprime loans are minimal.
The industry problem with subprime mortgages has created a volatile secondary market for other products, especially alternative documentation (Alt A) loans. Alt A loans are typically offered to qualified borrowers who have relatively high credit scores but are not required to provide full documentation to support personal income and assets owned. Alt A loans can have a loan to value ratio as high as 100%. As a result of these changes, the Company discontinued offering these loans in September 2007.
As a result of the volatile secondary market for mortgage loans, the Company sold mortgage loans to certain third party investors that experienced financial difficulties and were not able to settle the loans. The total amount of these loans was $36,291,000, of which $14,727,000 were in Alt A loans. Due to these changes in circumstances, the Company regained control of the mortgages and, in accordance with SFAS No. 140, accounted for the loans retained in the same manner as a purchase of the assets from the former transferee(s) in exchange for liabilities assumed. At the time of repurchase, the loans were determined to be held for investment, and the fair value of the loans was determined to be the unpaid principal balances adjusted for chargeoffs, the related allowance for loan losses, and net deferred fees or costs on originated loans. The financial statements reflect the transfer of the mortgage loans from "Mortgage Loans Sold to Investors" to "Mortgage Loans on Real Estate" during June 2008. The loan sale revenue recorded on the sale of the mortgage loans was reversed on the date the loans were repurchased.
As a standard in the industry, the Company received payments on the mortgage loans during the time period between the sale date and settlement or repurchase date. The Company will service these loans through Security National Life, its life insurance subsidiary.
The Company expects further significant industry challenges to continue through the remainder of 2008 and into 2009. Under these circumstances it is difficult to predict profitability, if any. Profitability may be impacted by volume reduction, changes in margins, increased borrowing costs, and future loan losses. Management has taken, and will continue to take, a number of actions in response to the changing market conditions. These include eliminating high risk products, modifying underwriting guidelines, closing unprofitable branch offices, obtaining new warehousing agreements at lower interest rates, and implementing expense reduction initiatives.
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The Company provides allowances for losses on its mortgage loans through an allowance for loan losses (a contra-asset account) and through the mortgage loan loss reserve (a liability account). The allowance for loan losses and doubtful accounts is an allowance for losses on the Company's mortgage loans held for investment. When a mortgage loan is past due more than 90 days, the Company, where appropriate, sets up an allowance to approximate the excess of the carrying value of the mortgage loan over the estimated fair value of the underlying real estate collateral. Once a loan is past due more than 90 days the Company does not accrue any interest income and proceeds to foreclose on the real estate. All expenses for foreclosure are expensed as incurred. Once foreclosed the carrying value will approximate its fair value and the amount will be classified as real estate. The Company will be able to carry the foreclosed property in Security National Life and SecurityNational Mortgage , its life and mortgage subsidiaries, and will rent the properties until it is feasible to sell. The Company is currently able to rent properties for a 5.5% return.
The mortgage loan loss reserve is an estimate of probable losses at the balance sheet date that the Company will realize in the future on mortgage loans sold to third party investors. The Company may be required to reimburse third party investors for costs associated with early payoff of loans within the first six months of such loan duration and to repurchase loans where there is a default in any of the first four monthly payments to the investors or, in lieu of repurchase, to pay a negotiated fee to the investors. The Company's estimates are based upon historical loss experience and the best estimate of the probable loan loss liabilities. The Company believes the allowance for loan losses and doubtful accounts and the loan loss reserve represent probable loan losses incurred as of the balance sheet date.
As of September 30, 2008, the Company's long term mortgage portfolio had $27,589,000 in unpaid principal with delinquencies more than 90 days. Of this amount $22,331,000 was in foreclosure proceedings. The Company has not received any interest income on the $27,589,000 in mortgage loans with delinquencies of more than 90 days. During the nine months ending September 30, 2008, the Company increased its allowance for mortgage losses by $2,248,000, which was charged to loan loss expense and included in other general and administrative expenses for the period. The allowance for mortgage loan losses as of September 30, 2008 was $3,683,000.
Also at September 30, 2008, the Company has foreclosed on $11,514,000 in long term mortgage loans. The foreclosed property was shown in real estate. The Company will be able to carry the foreclosed property in Security National Life and SecurityNational Mortgage, its life and mortgage subsidiaries, and will rent the properties until it is feasible to sell.
In addition to the allowance for mortgage loans losses, the Company also accrues a monthly allowance for indemnification losses to investors of 17.5 basis points of total production. The amount accrued for the nine months ended September 30, 2008 was $4,829,000 and included in other general and administrative expenses. The reserve for indemnification losses is included in other liabilities and as of September 30, 2008 the balance was $1,734,000.
SecurityNational Mortgage has loan purchase agreements with unaffiliated warehouse banks. The total amount available under these loan purchase agreements is $400,000,000. The terms of the loan purchase agreements are typically for one year, with interest rates ranging from 1.5% to 2.25% over the 30 days LIBOR rate (5.48% to 6.23% as of September 30, 2008). SecurityNational Mortgage is currently in the process of renewing one of its loan purchase agreements that expired on September 30, 2008. SecurityNational Mortgage has received a 90 day extension through the end of the year 2008. The other loan purchase agreements is a non-committed line with no expiration date.
Results of Operations
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Total revenues increased by $1,420,000, or 2.7%, to $53,084,000 for the three months ended September 30, 2008, from $51,664,000 for the three months ended September 30, 2007. Contributing to this increase in total revenues was a $2,758,000 increase in mortgage fee income, a $901,000 increase in insurance premiums and other considerations. This increase in total revenues was partially offset by a $846,000 decrease in investment income, a $162,000 decrease in net mortuary and cemetery sales, a $1,109,000 decrease in realized gains (losses) on investments and other assets, and a $122,000 decrease in other revenues.
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Insurance premiums and other considerations increased by $901,000, or 10.7%, to $9,327,000 for the three months ended September 30, 2008, from $8,426,000 for the comparable period in 2007. This increase was primarily the result of additional premiums realized from new insurance sales, the acquisition of Capital Reserve Life Insurance Company on December 20, 2007, and the reinsurance agreement with Southern Security Life Insurance Company on September 1, 2008.
Net investment income decreased by $846,000, or 11.1%, to $6,792,000 for the three months ended September 30, 2008, from $7,638,000 for the comparable period in 2007. This reduction was primarily attributable to decreased interest income from mortgage loans on real estate but partially offset by an increase in investment income from the purchases of C&J Financial and Capital Reserve Life, and the reinsurance agreement with Southern Security Life Insurance Company on September 1, 2008.
Net mortuary and cemetery sales decreased by $162,000, or 5.0%, to $3,051,000 for the three months ended September 30, 2008, from $3,213,000 for the comparable period in 2007. This reduction was due to a decrease in at-need sales in the cemetery and mortuary operations and a decrease in pre-need land sales of burial spaces in the cemetery operations.
Realized gains and (losses) on investments and other assets decreased by $1,109,000 to a $1,107,000 realized loss for the three months ended September 30, 2008, from a $2,000 realized gain for the comparable period in 2007. This increase in realized losses on investments was due to $739,000 in realized losses from fixed maturity securities impairments and $303,000 in realized losses from equity securities impairments. During 2007 there was a net gain of $516,000 from the sale of Colonial Funeral Home, which was partially offset by a loss of $65,000 on the foreclosure and subsequent sale of the funeral home in the third quarter of 2008.
Mortgage fee income increased by $2,758,000, or 8.6%, to $34,757,000 for the three months ended September 30, 2008, from $31,999,000 for the comparable period in 2007. This increase was primarily attributable to an increase in loan fees charged to originate loans, and secondary gain during the third quarter of 2008 on loan production at existing offices.
Other revenues decreased by $122,000, or 31.8%, to $264,000 for the three months ended September 30, 2008 from $386,000 for the comparable period in 2007. This increase was due to increases in several small income items throughout the Company's operations.
Total benefits and expenses were $53,812,000, or 101.4% of total revenues, for the three months ended September 30, 2008, as compared to $52,801,000, or 102.2% of total revenues, for the comparable period in 2007. These ratios exceeded revenues primarily due to increased loan costs at SecurityNational Mortgage Company and increases in the loan loss reserve and loan allowance balances in 2007 and impairment losses in securities in 2008.
Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by an aggregate of $612,000, or 8.0%, to $8,310,000 for the three months ended September 30, 2008, from $7,698,000 for the comparable period in 2007. This increase was primarily the result of increased insurance business, increased reserves for policyholder benefits and death claims, the acquisition of Capital Reserve Life on December 20, 2007, and the reinsurance agreement with Southern Security Life Insurance Company on September 1, 2008.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $495,000, or 34.0%, to $1,952,000 for the three months ended September 30, 2008, from $1,457,000 for the comparable period in 2007. This increase was primarily due to an increase in new business and higher terminations from the previous year.
General and administrative expenses increased by $1,469,000, or 3.7%, to $41,402,000 for the three months ended September 30, 2008, from $39,933,000 for the comparable period in 2007. Salaries increased by $500,000 from $6,138,000 in 2007 to $6,638,000 in 2008, primarily due to merit increases in salaries of existing employees, and an increase in the number of employees necessitated by the Company's expanding business operations. Other expenses increased by $983,000 from $9,186,000 in 2007 to $10,169,000 in 2008. The increase in other expenses primarily resulted from increased costs at SecurityNational Mortgage Company and increases in the loan reserve and loan allowances balance. This increase was partially offset by a decrease in commission expenses of $14,000, from $24,609,000 in the third quarter of 2007 to $24,595,000 in the third quarter of 2008, due to decreased mortgage loan origination costs made by SecurityNational Mortgage which were partially offset by increased life insurance sales during the third quarter of 2008.
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Interest expense decreased by $1,476,000, or 48.0%, to $1,600,000 for the three months ended September 30, 2008, from $3,076,000 for the comparable period in 2007. This reduction was primarily due to decreased warehouse lines of credit required for a reduced number of warehoused mortgage loans by SecurityNational Mortgage.
Cost of goods and services sold of the mortuaries and cemeteries decreased by $89,000, or 14.0%, to $548,000 for the three months ended September 30, 2008, from $637,000 for the comparable period in 2007. This increase was primarily due to decreased at-need cemetery sales and mortuary sales.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Total revenues increased by $11,682,000, or 7.5%, to $166,708,000 for the nine months ended September 30, 2008, from $155,026,000 for the nine months ended September 30, 2007. Contributing to this increase in total revenues was a $13,752,000 increase in mortgage fee income, a $2,883,000 increase in insurance premiums and other considerations, and a $23,000 increase in other revenues. This increase in total revenues was partially offset by a $3,045,000 decrease in investment income, a $1,805,000 decrease in realized gains (losses) on investments and other assets, and a $126,000 decrease in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $2,883,000, or 11.9%, to $27,178,000 for the nine months ended September 30, 2008, from $24,295,000 for the comparable period in 2007. This increase was primarily the result of additional insurance premiums realized from new insurance sales, the acquisition of Capital Reserve Life Insurance Company on December 20, 2007, and the reinsurance agreement with Southern Security Life Insurance Company on September 1, 2008.
Net investment income decreased by $3,045,000, or 12.4%, to $21,545,000 for the nine months ended September 30, 2008, from $24,590,000 for the comparable period in 2007. This reduction was primarily attributable to decreased interest income from mortgage loans on real estate but partially offset by an increase in investment income from the purchase of C & J Financial and Capital Reserve Life, and the reinsurance agreement with Southern Security Life Insurance Company on September 1, 2008.
Net mortuary and cemetery sales decreased by $126,000, or 1.2%, to $10,032,000 for the nine months ended September 30, 2008, from $10,158,000 for the comparable period in 2007. This decrease was due to decreased at-need sales in the cemetery and mortuary operations and decreased pre-need land sales of burial spaces in cemetery operations.
Realized gains and (losses) on investments and other assets decreased by $1,805,000 to a $1,067,000 realized loss for the nine months ended September 30, 2008, from a $738,000 realized gain for the comparable period in 2007. This increase in realized losses on investments was due to $739,000 in realized losses from fixed maturity securities impairments and $303,000 in realized losses from equity securities impairments. During 2007 there was a net gain of $516,000 from the sale of Colonial Funeral Home, which was partially offset by a loss of $65,000 on the foreclosure and subsequent sale of the funeral home in third quarter of 2008.
Mortgage fee income increased by $13,752,000, or 14.5%, to $108,352,000 for the nine months ended September 30, 2008, from $94,600,000 for the comparable period in 2007. This increase was primarily attributable to an increase in the loan fees charged to originate loans, and secondary gain during the first nine months of 2008 on loan production at existing offices.
Other revenues increased by $23,000, or 3.6%, to $667,000 for the nine months
ended September 30, 2008 from $644,000 for the comparable period in 2007. This
increase was due to increases in several small income items throughout the
Company's operations.
Total benefits and expenses were $162,404,000, or 97.4% of total revenues, for the nine months ended September 30, 2008, as compared to $153,746,000, or 99.2% of total revenues, for the comparable period in 2007. This decreased primarily resulted from improved profitability of SecurityNational Mortgage Company.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $2,565,000, or 11.3%, to
$25,183,000 for the nine months ended September 30, 2008, from $22,618,000 for
the comparable period in 2007. This increase was primarily the result of
increased insurance business, increased reserves for policyholder benefits and
death claims, the acquisition of Capital Reserve Life on December 20, 2007, and
the reinsurance agreement with Southern Security Life Insurance Company on
September 1, 2008.
Amortization of deferred policy and pre-need acquisition costs and value of
business acquired increased by $184,000, or 4.4%, to $4,364,000 for the nine
months ended September 30, 2008, from $4,180,000 for the comparable period in
2007. This increase was primarily due to an increase in new business.
General and administrative expenses increased by $10,596,000, or 9.2%, to $125,259,000 for the nine months ended September 30, 2008, from $114,663,000 for the comparable period in 2007. This increase primarily resulted from an increase in commission expenses by $2,354,000 from $71,904,000 in 2007 to $74,258,000 in 2008, due to increased loan origination costs incurred by SecurityNational Mortgage and increased life insurance sales made during the first nine months of 2008. Salaries increased by $1,729,000 from $17,824,000 in 2007 to $19,553,000 in 2008, primarily due to merit increases in salaries of existing employees, and an increase in the number of employees necessitated by the Company's expanding business operations. Other expenses increased by $6,513,000 from $24,934,000 in 2007 to $31,447,000 in 2008. The increase in other expenses primarily resulted from increased costs at SecurityNational Mortgage Company and increases in the loan reserve and loan allowance balances.
Interest expense decreased by $4,589,000, or 44.4%, to $5,744,000 for the nine months ended September 30, 2008, from $10,333,000 for the comparable period in 2007. This reduction was primarily from decreased warehouse lines of credit required for a reduced number of warehoused mortgage loans by SecurityNational Mortgage Company.
Cost of goods and services sold by the mortuaries and cemeteries decreased by $99,000, or 5.1%, to $1,853,000 for the nine months ended September 30, 2008, from $1,952,000 for the comparable period in 2007. This decrease was primarily due to decreased cemetery and mortuary sales.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries realize cash flow from premiums, contract payments and sales on personal services rendered for cemetery and mortuary business, from interest and dividends on invested assets, and from the proceeds from the maturity of held-to-maturity investments or sale of other investments. The mortgage subsidiary realizes cash flow from fees generated by originating and refinancing mortgage loans and interest earned on mortgages sold to investors. The Company considers these sources of cash flow to be adequate to fund future policyholder and cemetery and mortuary liabilities, which generally are long-term, and adequate to pay current policyholder claims, annuity payments, expenses on the issuance of new policies, the maintenance of existing policies, debt service, and to meet operating expenses.
During the nine months ended September 30, 2008, the Company's operations provided cash of $41,186,000, while cash totaling $24,559,000 was used by operations during the nine months ended September 30, 2007. This was due primarily to a decrease of $26,490,000 in 2008 and an increase of $33,186,000 in 2007 in the balance of mortgage loans sold to investors.
The Company attempts to match the duration of invested assets with its policyholder and cemetery and mortuary liabilities. The Company may sell investments other than those held-to-maturity in the portfolio to help in this timing; however, to date, that has not been necessary. The Company purchases short-term investments on a temporary basis to meet the expectations of short-term requirements of the Company's products.
The Company's investment philosophy is intended to provide a rate of return, which will persist during the expected duration of policyholder and cemetery and mortuary liabilities regardless of future interest rate movements.
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The Company's investment policy is to invest predominantly in fixed maturity securities, 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 $126,408,000 as of September 30, 2008, compared to $119,777,000 as of December 31, 2007. This represents 40.9% and 47.6% of the total investments as of September 30, 2008 and December 31, 2007, 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 six categories used for rating bonds. At September 30, 2008, 3.9% (or $4,908,000) and at December 31, 2007, 3.1% (or $3,708,000) of the Company's total bond investments were invested in bonds in rating categories three through six, which are considered non-investment grade.
The Company has classified certain of its fixed income securities, including high-yield securities, in its portfolio as available for sale, with the remainder classified as held to maturity. However, in accordance with Company policy, any such securities purchased in the future will be classified as held to maturity. Business conditions, however, may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event the Company believes it could sell short-term investment grade securities before liquidating higher-yielding longer-term securities.
Financial Accounting Standards Board (FASB) Statement No. 157, Fair Value Measurements ("SFAS No. 157") is effective for fiscal years beginning after November 15, 2007. The Company adopted the provisions of SFAS No. 157 as of January 1, 2008 for financial assets and financial liabilities that are measured at fair value. SFAS No. 157:
· Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value;
· Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation as of the measurement date;
· Expands disclosures about financial instruments measured at fair value.
Financial assets and financial liabilities recorded on the Condensed Consolidated Balance Sheet at fair value are categorized based on the reliability of inputs to the valuation techniques as follows:
Level 1: Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.
Level 2: Financial assets and financial liabilities whose values are based on the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in
non-active markets; or
c) Valuation models whose inputs are observable, directly or indirectly,
for substantially the full term of the asset or liability
Level 3: Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect our estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.
We utilize a combination of third party valuation service providers, brokers, and internal valuation models to determine fair value.
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The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities by their classification in the Condensed Consolidated Statement of Balance Sheet at September 30, 2008.
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