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| SNFCA > SEC Filings for SNFCA > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
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 months ended March 31, 2009, 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 three months ended March 31, 2009 and 2008, SecurityNational Mortgage originated and sold 4,935 loans ($939,413,000 total volume) and 4,507 loans ($870,395,000 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.
SecurityNational Mortgage has loan purchase agreements with unaffiliated warehouse banks. The total amount available under these loan purchase agreements at March 31, 2009 was $250,000,000. As of March 31, 2009, mortgage loans totaling approximately $156,403,000 have been sold to warehouse banks and were outstanding. 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 (from 1.97% to 2.72% as of March 31, 2009). SecurityNational Mortgage renewed one of its loan purchase agreements that expired on September 30, 2008 for another one year term. The other loan purchase agreement was closed in March 2009. The Company is actively pursuing purchase agreements with other warehouse banks.
Mortgage fee income consists of origination fees, processing fees and certain other income related to the origination and sale of mortgage loans. For mortgage loans sold to third party investors, mortgage fee income and related expenses are recognized pursuant to SFAS 140 at the time the sales of mortgage loans meet the sales criteria for the transfer of financial assets which are: (1) the transferred assets have been isolated from the Company and its creditors, (2) the transferee has the right to pledge or exchange the mortgage, and (3) the Company does not maintain effective control over the transferred mortgage. The Company has determined that all three criteria are met at the time the loan is funded. All rights and title to the mortgage loans are assigned to unrelated financial institution investors, including any investor commitments for these loans prior to warehouse banks purchasing these loans under the purchase commitments.
The Company sells all loans to third party investors without recourse. However, the Company may be required to repurchase loans or pay a fee instead of repurchase under certain events such as the following:
· Failure to deliver original documents specified by the investor.
· The existence of fraud in the origination of the loan.
· The loan becomes delinquent due to nonpayment during the first several months after it is sold.
· Early pay-off of a loan, as defined by the agreements.
· Excessive time to settle a loan.
· Investor declines purchase.
· Discontinued product and expired commitment
Upon completion of a transfer that satisfies the conditions to be accounted for as a sale, the Company initially measures at fair value liabilities incurred in a sale relating to any guarantee or recourse provisions. The Company accrues a monthly allowance for indemnification losses to investors of .20% (20 basis points) of total production. This estimate is based on the Company's historical experience. The amount accrued for the three months ended March 31, 2009 was $5,385,000 and the charge to expense has been included in other general and administrative expenses. The estimated liability for indemnification losses is included in other liabilities and accrued expenses, and as of March 31, 2009 the balance was $5,337,000.
Purchase commitments generally specify a date 30 to 45 days after delivery upon which the underlying loans should be settled. Depending on market conditions, these commitment settlement dates can be extended at a cost to the Company. Generally, a ten day extension will cost .125% (12.5 basis points) of the loan amount. The Company's historical data shows that 99% of all loans originated by the Company are generally settled by the investors as agreed within 16 days after delivery. There are situations when the Company determines that it is unable to enforce the settlement of loans rejected by the third-party investors and that it is in the Company's best interest to repurchase those loans from the warehouse banks. It is the Company's policy to cure any documentation problems with respect to such loans at a minimal cost for up to a six-month time period and to pursue efforts to enforce purchase commitments from third-party investors concerning mortgage loans. The Company believes that six months allows adequate time to remedy any documentation issues, to enforce purchase commitments, and to exhaust other alternatives. Remedy methods include, but are not limited to:
· Research reasons for rejection
· Provide additional documents
· Request investor exceptions
· Appeal rejection decision to purchase committee
· Commit to secondary investors
Once purchase commitments have expired and other alternatives to remedy are exhausted, which could be earlier than the six month time period, the loans are repurchased and transferred to the long term investment portfolio at the lower of cost or market value and previously recorded sales revenue is reversed. Any loan that subsequently becomes delinquent is evaluated by the Company at that time and any allowances for impairment are adjusted accordingly.
Determining lower of cost or market: Cost is equal to the amount paid to the warehouse bank and the amount originally funded by the Company. Market value is often difficult to determine, but is based on the following:
· For loans that have an active market, we use the market price on the repurchased date.
· For loans where there is no market but there is a similar product, we use the market value for the similar product on the repurchased date.
· For loans where no active market exists on the repurchased date, we determine that the unpaid principal balance best approximates the market value on the repurchased date, after considering the fair value of the underlying real estate collateral and estimated future cash flows.
The appraised value of the real estate underlying the original loan adds significance to the Company's determination of fair value since, if the loan becomes delinquent, the Company has sufficient value to collect the unpaid principal balance or the carrying value of the loan. In determining the market value on the date of repurchase the Company looks at the total value of all of the loans since any sale of loans would be as a pool.
For mortgages originated and held for investment, mortgage fee income and related expenses are recognized when the loan is originated.
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 ended 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%. 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 in 2007 and 2008 that experienced financial difficulties and were not able to settle the loans. The total amount of these loans was $52,556,000, of which $36,499,000 were in loans where the secondary market no longer exists. 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 approximate 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". The loan sale revenue recorded on the sale of the mortgage loans was reversed on the date the loans were repurchased.
As is 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. During this period the Company services these loans through Security National Life, its life insurance subsidiary.
As of March 31, 2009, the Company's long term mortgage loan portfolio had $24,488,000 in unpaid principal with delinquencies more than 90 days. Of this amount $18,863,000 was in foreclosure proceedings. The Company has not received or recognized any interest income on the $24,488,000 in mortgage loans with delinquencies more than 90 days. During the twelve months ended March 31, 2009, the Company increased its allowance for mortgage losses by $781,000, 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 March 31, 2009 was $5,561,000.
Also at March 31, 2009, the cumulative total the Company has foreclosed on is $26,238,000 in long term mortgage loans. The foreclosed property was shown in real estate. The Company is 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 1998, SecurityNational Mortgage entered into a Loan Purchase Agreement with Lehman Brothers Bank and its wholly owned subsidiary, Aurora Loan Services, LLC. Under the terms of the Loan Purchase Agreement, Lehman Brothers, through its subsidiary, Aurora Loan Services, agreed to purchase mortgage loans from time to time from SecurityNational Mortgage. During 2007, Aurora Loan Services purchased a total of 1,490 mortgage loans in the aggregate amount of $352,774,000 from SecurityNational Mortgage. On January 17, 2008, Aurora Loan Services announced it was suspending all wholesale and correspondent mortgage originations. As a result of this policy change, Aurora Loan Services discontinued purchasing mortgage loans from all mortgage brokers and lenders, including SecurityNational Mortgage.
During 2007, Aurora Loan Services maintained that as part of its quality control efforts it reviewed mortgage loans purchased from SecurityNational Mortgage and determined that certain of the loans contained alleged misrepresentations and early payment defaults. Aurora Loan Services further maintained that these alleged breaches in the purchased mortgage loans provide it with the right to require SecurityNational Mortgage to immediately repurchase the mortgage loans containing the alleged breaches in accordance with the terms of the Loan Purchase Agreement. In order for Lehman Brothers and Aurora Loan Services to refrain from demanding immediate repurchase of the mortgage loans by SecurityNational Mortgage, SecurityNational Mortgage was willing to enter into an agreement to indemnify Lehman Brothers and Aurora Loan Services for any losses incurred in connection with the mortgage loans with alleged breaches that were purchased from SecurityNational Mortgage.
On December 17, 2007, SecurityNational Mortgage entered into an Indemnification Agreement with Lehman Brothers and Aurora Loan Services. Under the terms of the Indemnification Agreement, SecurityNational Mortgage agrees to indemnify Lehman Brothers and Aurora Loan Services for 75% of all losses that Lehman Brothers and Aurora Loan Services may have as a result of any current or future defaults by mortgagors on 54 mortgage loans that were purchased from SecurityNational Mortgage and listed as an attachment to the Indemnification Agreement. SecurityNational Mortgage is released from any obligation to pay the remaining 25% of such losses. The Indemnification Agreement also requires SecurityNational Mortgage to indemnify Lehman Brothers and Aurora Loan Services for 100% of losses incurred on mortgage loans with alleged breaches that are not listed on the attachment to the agreement.
Concurrently with the execution of the Indemnification Agreement, SecurityNational Mortgage paid $395,000 to Aurora Loan Services as a deposit into a reserve account to secure the obligations of SecurityNational Mortgage under the Indemnification Agreement. This deposit is in addition to a $250,000 deposit that SecurityNational Mortgage made to Aurora Loan Services on December 10, 2007, for a total of $645,000. Losses from mortgage loans with alleged breaches are payable by SecurityNational Mortgage from the reserve account. However, Lehman Brothers and Aurora Loan Services are not to apply any funds from the reserve account to a particular mortgage loan until an actual loss has occurred.
The Indemnification Agreement further provides that SecurityNational Mortgage will be entitled to have held back 25 basis points on any mortgage loans that Aurora Loan Services purchases from SecurityNational Mortgage and to add the amount of the basis point holdbacks to the reserve account. SecurityNational Mortgage agreed to deliver to Aurora Loan Services at least $300,000,000 in mortgage loans on an annual basis or at least $600,000,000 in 24 months. These provisions may not be effective, however, because Aurora Loan Services has discontinued purchasing mortgage loans from SecurityNational Mortgage. SecurityNational Mortgage also agrees to pay to Aurora Loan Services the difference between the reserve account balance and $645,000, but in no event will SecurityNational Mortgage be required to pay any amount into the reserve account that would result in a total contribution, including both the basis point holdbacks and cash payments, in excess of $125,000 for any calendar month.
During 2007 and 2008, SecurityNational Mortgage made $1,730,000 in total payments to Aurora Loan Services pursuant to the Indemnification Agreement. During the three months ended March 31, 2009, SecurityNational Mortgage made no payments to Aurora Loan Services, but $625,000 in payments were made in April 2009. When SecurityNational Mortgage entered into the Indemnification Agreement, it anticipated using basis point holdbacks from loan production credits toward satisfying the $125,000 monthly obligations. Because Aurora Loan Services discontinued purchasing mortgage loans from SecurityNational Mortgage shortly after the Indemnification Agreement was executed, SecurityNational Mortgage has not had the benefit of using the basis point holdbacks toward payment of the $125,000 monthly obligations.
During 2008, funds were paid out of the reserve account to indemnify $1,700,000 in losses from 22 mortgage loans that were among the 54 mortgage loans with alleged breaches which were listed on the attachment to the Indemnification Agreement. The estimated potential losses from the remaining 32 mortgage loans listed on the attachment, which would require indemnification by SecurityNational Mortgage for such losses, is $3,357,000. Moreover, Aurora Loan Services has made a request to be indemnified for losses related to ten mortgage loans not listed on the attachment to the Indemnification Agreement. Aurora Loan Services claims the total amount of such potential losses is $2,746,000. During 2009, the Company recognized losses related to this matter of $1,636,000; however, management cannot fully determine the total losses, if any, nor the rights that the Company may have as a result of Lehman Brothers' and Aurora Loan Services' refusal to purchase other loans under the Indemnification Agreement.
Results of Operations
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Total revenues increased by $6,271,000, or 11.8%, to $59,492,000 for the three months ended March 31, 2009, from $53,221,000 for the three months ended March 31, 2008. Contributing to this increase in total revenues was a $6,765,000 increase in mortgage fee income, a $1,048,000 increase in insurance premiums and other considerations, a $43,000 increase in realized gains on investments and other assets, and a $190,000 increase in other revenues. This increase in total revenues was partially offset by a $1,156,000 decrease in investment income, and a $619,000 decrease in net mortuary and cemetery sales.
Insurance premiums and other considerations increased by $1,048,000, or 12.0%, to $9,784,000 for the three months ended March 31, 2009, from $8,736,000 for the comparable period in 2008. This increase was primarily the result of additional premiums realized from new insurance sales, and the acquisition of Southern Security Life Insurance Company on December 18, 2008.
Net investment income decreased by $1,156,000, or 16.0%, to $6,048,000 for the three months ended March 31, 2009, from $7,204,000 for the comparable period in 2008. This reduction was primarily attributable to decreased interest income from mortgage loans on real estate and construction lending, and a reduction in the yields on bonds.
Net mortuary and cemetery sales decreased by $619,000, or 17.2%, to $2,971,000 for the three months ended March 31, 2009, from $3,590,000 for the comparable period in 2008. This reduction was due to a decrease in at-need sales in the mortuary operations and a decrease in pre-need land sales of burial spaces in the cemetery operations.
Realized gains on investments and other assets increase by $43,000 or 187.0% to a $66,000 realized gain for the three months ended March 31, 2009, from a $23,000 realized gain for the comparable period in 2008. This increase in realized losses on investments was due to gains from the sale of bonds.
Mortgage fee income increased by $6,765,000, or 20.2%, to $40,254,000 for the three months ended March 31, 2009, from $33,489,000 for the comparable period in 2008. This increase was primarily attributable to an increase in loan fees charged to originate loans and secondary gains on mortgage loan production.
Other revenues increased by $190,000, or 106.1%, to $369,000 for the three months ended March 31, 2009 from $179,000 for the comparable period in 2008. This increase was due to an increase of interest on mortgage investments and increases in several small income items throughout the Company's operations.
Total benefits and expenses were $54,552,000, or 91.7% of total revenues, for the three months ended March 31, 2009, as compared to $51,277,000, or 96.3% of total revenues, for the comparable period in 2008. This decrease primarily resulted from the improved profitability of SecurityNational Mortgage Company.
Death benefits, surrenders and other policy benefits, and increase in future policy benefits increased by an aggregate of $333,000, or 3.9%, to $8,828,000 for the three months ended March 31, 2009, from $8,495,000 for the comparable period in 2008. This increase was primarily the result of increased insurance business, increased reserves for policyholder benefits that were partially offset by decreases in death claims, and increased cash surrenders of policies.
Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $837,000, or 72.9%, to $1,985,000 for the three months ended March 31, 2009, from $1,148,000 for the comparable period in 2008. This increase was primarily due to an increase in new business and the purchase of Southern Security Life Insurance Company on December 18, 2008.
General and administrative expenses increased by $3,266,000, or 8.4%, to $42,031,000 for the three months ended March 31, 2009, from $38,765,000 for the comparable period in 2008. Salaries increased by $620,000 from $6,266,000 in 2008 to $6,886,000 in 2009, primarily due to merit increases in salaries of existing employees and an increase in the number of employees necessitated by the Company's growing business operations. Other expenses increased by $4,715,000 from $9,763,000 in 2008 to $14,478,000 in 2009. The increase in other expenses primarily resulted from increased costs and increased loan reserve and loan allowance balances at SecurityNational Mortgage Company. This increase was partially offset by a decrease in commission expenses of $2,068,000, from $22,736,000 in the first quarter of 2008 to $20,668,000 in the first quarter of 2009, due to decreased mortgage loan origination costs made by SecurityNational Mortgage, a decrease in sales at the cemetery operations, and a decrease in life insurance sales during the first quarter of 2009.
Interest expense decreased by $1,091,000, or 49.8%, to $1,100,000 for the three months ended March 31, 2009, from $2,191,000 for the comparable period in 2008. 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 $70,000, or 10.3%, to $607,000 for the three months ended March 31, 2009, from $677,000 for the comparable period in 2008. This decrease was primarily due to decreased at-need cemetery sales 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 three months ended March 31, 2009 and March 31, 2008, the Company's operations provided cash of $1,293,000, and $19,338,000, respectively. This was due primarily to an increase of $13,240,000 in 2009 and a decrease of $13,074,000 in 2008 in the balance of mortgage loans sold to investors.
The Company's liability for future life, annuity and other benefits is expected to be paid out over long-term due to the Company's market niche of selling funeral plans. Funeral plans are small face value life insurance that will pay the costs and expenses incurred at the time of a person's death. A person generally will keep these policies in force and will not surrender them prior to a person's death. Because of the long-term nature of these liabilities the Company is able to hold to maturity its bonds and mortgage loans thus reducing the risk of liquidating these long-term investments as a result of any sudden changes in market values.
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.
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 $122,765,000 as of March 31, 2009 compared to $126,583,000 as of December 31, 2008. This represents 40.0% and 41.6% of the total investments as of March 31, 2009, and December 31, 2008, 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 March 31, 2009, 3.7% (or $4,550,000) and at December 31, 2008, 2.8% (or $3,485,000) 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.
The amortized cost and contractual payments on mortgage loans on real estate available for sale by category are shown below. Expected principal payments may differ from contractual obligations because certain borrowers may elect to pay . . .
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