snfca10q20100331.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarter ended March 31, 2010, or
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from
_____ to
________
Commission file number: 0-9341
SECURITY
NATIONAL FINANCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
UTAH
|
87-0345941
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
|
|
5300
South 360 West, Suite 250 Salt Lake City, Utah
|
84123
|
(Address
of principal executive office)
|
(Zip
Code)
|
|
|
Registrant’s
telephone number, including area code:
|
(801)
264-1060
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ___ No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
A Common Stock, $2.00 par value
|
|
8,740,727
|
Title
of Class
|
|
Number
of Shares Outstanding as of
|
|
|
May
11, 2010
|
|
|
|
Class
C Common Stock, $.20 par value
|
|
9,211,399
|
Title
of Class
|
|
Number
of Shares Outstanding as of
|
|
|
May
11, 2010
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
___ Accelerated filer ___ Non-accelerated
filer
X Smaller reporting company
___
(Do not
check if a smaller reporting company).
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM
10-Q
QUARTER
ENDED MARCH 31, 2010
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
|
Page
No.
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
(unaudited)
|
3-4
|
|
|
|
|
Condensed
Consolidated Statements of Earnings for the Three Ended March 31, 2010 and
2009 (unaudited)
|
5
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Three months Ended March 31,
2010 and 2009 (unaudited)
|
6
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
33
|
|
|
|
Item
4.
|
Controls
and Procedures
|
33
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
Other
Information
|
34
|
|
|
|
|
Signature
Page
|
41
|
|
|
|
|
Certifications
|
42
|
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Investments:
|
|
|
|
|
|
|
Fixed
maturity securities, held to maturity, at amortized cost
|
|
$ |
118,670,908 |
|
|
$ |
115,832,300 |
|
Fixed
maturity securities, available for sale, at estimated fair
value
|
|
|
1,138,242 |
|
|
|
1,149,523 |
|
Equity
securities, available for sale, at estimated fair value
|
|
|
6,335,868 |
|
|
|
5,786,614 |
|
Mortgage
loans on real estate and construction loans, held for investment
net of allowances for losses of $6,806,003 and $6,808,803 for 2010 and
2009, respectively
|
|
|
107,448,010 |
|
|
|
103,290,076 |
|
Real
estate held for investment, net of accumulated depreciation and allowances
for losses of $4,296,643 and $4,046,272 for 2010 and 2009,
respectively
|
|
|
50,855,209 |
|
|
|
46,901,832 |
|
Policy,
student and other loans, net of allowances for doubtful
accounts
|
|
|
17,590,617 |
|
|
|
18,145,029 |
|
Short-term
investments
|
|
|
4,663,950 |
|
|
|
7,144,319 |
|
Accrued
investment income
|
|
|
2,248,282 |
|
|
|
2,072,495 |
|
Total
investments
|
|
|
308,951,086 |
|
|
|
300,322,188 |
|
Cash
and cash equivalents
|
|
|
21,948,270 |
|
|
|
39,463,803 |
|
Mortgage
loans sold to investors
|
|
|
52,268,524 |
|
|
|
39,269,598 |
|
Receivables,
net
|
|
|
9,603,084 |
|
|
|
10,873,207 |
|
Restricted
assets of cemeteries and mortuaries
|
|
|
2,799,083 |
|
|
|
2,593,413 |
|
Cemetery
perpetual care trust investments
|
|
|
1,187,297 |
|
|
|
1,104,046 |
|
Receivable
from reinsurers
|
|
|
1,108,880 |
|
|
|
5,776,780 |
|
Cemetery
land and improvements
|
|
|
11,015,842 |
|
|
|
10,987,833 |
|
Deferred
policy and pre-need contract acquisition costs
|
|
|
34,621,910 |
|
|
|
34,087,951 |
|
Property
and equipment, net
|
|
|
11,847,822 |
|
|
|
11,994,284 |
|
Value
of business acquired
|
|
|
10,031,849 |
|
|
|
10,252,670 |
|
Goodwill
|
|
|
1,075,039 |
|
|
|
1,075,039 |
|
Other
|
|
|
2,947,929 |
|
|
|
2,776,086 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
469,406,615 |
|
|
$ |
470,576,898 |
|
See
accompanying notes to condensed consolidated financial
statements.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Future
life, annuity, and other benefits
|
|
$ |
339,423,929 |
|
|
$ |
336,343,433 |
|
Unearned
premium reserve
|
|
|
4,905,218 |
|
|
|
4,780,645 |
|
Bank
loans payable
|
|
|
12,906,261 |
|
|
|
8,656,245 |
|
Notes
and contracts payable
|
|
|
263,330 |
|
|
|
283,744 |
|
Deferred
pre-need cemetery and mortuary contract revenues
|
|
|
13,299,299 |
|
|
|
13,381,662 |
|
Cemetery
perpetual care obligation
|
|
|
2,797,629 |
|
|
|
2,756,174 |
|
Accounts
payable
|
|
|
2,454,275 |
|
|
|
2,601,149 |
|
Other
liabilities and accrued expenses
|
|
|
17,966,109 |
|
|
|
24,623,535 |
|
Income
taxes
|
|
|
16,186,547 |
|
|
|
17,344,869 |
|
Total
liabilities
|
|
|
410,202,597 |
|
|
|
410,771,456 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
Stock:
|
|
|
|
|
|
|
|
|
Class
A: common stock - $2.00 par value; 20,000,000 shares authorized; issued
8,740,549 shares in 2010 and 8,730,227 shares in 2009
|
|
|
17,481,098 |
|
|
|
17,460,454 |
|
Class
B: non-voting common stock - $1.00 par value; 5,000,000 shares authorized;
none issued or outstanding
|
|
|
- |
|
|
|
- |
|
Class
C: convertible common stock - $0.20 par value; 15,000,000 shares
authorized; issued 9,213,182 shares in 2010 and 9,214,211 in
2009
|
|
|
1,842,637 |
|
|
|
1,842,842 |
|
Additional
paid-in capital
|
|
|
19,356,458 |
|
|
|
19,191,606 |
|
Accumulated
other comprehensive income, net of taxes
|
|
|
1,712,046 |
|
|
|
1,593,327 |
|
Retained
earnings
|
|
|
22,227,546 |
|
|
|
23,178,944 |
|
Treasury
stock at cost - 1,426,246 Class A shares in 2010 and 1,454,974
Class
A shares in 2009
|
|
|
(3,415,767 |
) |
|
|
(3,461,731 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
59,204,018 |
|
|
|
59,805,442 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$ |
469,406,615 |
|
|
$ |
470,576,898 |
|
See
accompanying notes to condensed consolidated financial
statements.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
Insurance
premiums and other considerations
|
|
$ |
9,922,893 |
|
|
$ |
9,783,718 |
|
Net
investment income
|
|
|
4,568,195 |
|
|
|
6,048,002 |
|
Net
mortuary and cemetery sales
|
|
|
2,901,721 |
|
|
|
2,970,996 |
|
Realized
gains (losses) on investments and other assets
|
|
|
364,446 |
|
|
|
66,046 |
|
Mortgage
fee income
|
|
|
20,410,834 |
|
|
|
40,254,194 |
|
Other
|
|
|
353,817 |
|
|
|
369,141 |
|
Total
revenues
|
|
|
38,521,906 |
|
|
|
59,492,097 |
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Death
benefits
|
|
|
4,834,822 |
|
|
|
4,532,225 |
|
Surrenders
and other policy benefits
|
|
|
586,671 |
|
|
|
515,005 |
|
Increase
in future policy benefits
|
|
|
3,907,828 |
|
|
|
3,781,252 |
|
Amortization
of deferred policy and pre-need acquisition costs and value of business
acquired
|
|
|
1,433,055 |
|
|
|
1,985,305 |
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
12,241,258 |
|
|
|
20,667,813 |
|
Salaries
|
|
|
7,277,959 |
|
|
|
6,885,817 |
|
Provision
for loan losses and loss reserve
|
|
|
1,020,485 |
|
|
|
5,320,661 |
|
Other
|
|
|
7,749,093 |
|
|
|
9,157,036 |
|
Interest
expense
|
|
|
601,367 |
|
|
|
1,100,127 |
|
Cost
of goods and services sold-mortuaries and cemeteries
|
|
|
542,282 |
|
|
|
606,953 |
|
Total
benefits and expenses
|
|
|
40,194,820 |
|
|
|
54,552,194 |
|
|
|
|
|
|
|
|
|
|
Earning
(loss) before income taxes
|
|
|
(1,672,914 |
) |
|
|
4,939,903 |
|
Income
tax benefit (expense)
|
|
|
721,681 |
|
|
|
(1,706,893 |
) |
|
|
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(951,233 |
) |
|
$ |
3,233,010 |
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per Class A Equivalent common share (1)
|
|
$ |
(0.12 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per Class A Equivalent common share-assuming dilution
(1)
|
|
$ |
(0.11 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
Class A equivalent common share outstanding (1)
|
|
|
8,216,148 |
|
|
|
8,073,189 |
|
|
|
|
|
|
|
|
|
|
Weighted-average
Class A equivalent common shares outstanding-assuming dilution
(1)
|
|
|
8,445,982 |
|
|
|
8,073,189 |
|
(1) Earnings (loss) per share
amounts have been adjusted retroactively for the effect of annual stock
dividends. The
weighted-average shares outstanding includes the weighted-average Class A common
shares and the weighted-average Class C common shares determined on an
equivalent Class A common share basis. Net earnings (loss) per
common share represent net earnings (loss) per equivalent Class A common
share. Net earnings
(loss) per Class
C common share is equal to one-tenth (1/10) of such amount.
See
accompanying notes to condensed consolidated financial
statements.
SECURITY
NATIONAL FINANCIAL CORPORATION
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
cash provided (used) by operating activities
|
|
$ |
(11,435,436 |
) |
|
$ |
1,621,893 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
Purchase-fixed
maturity securities
|
|
|
(5,086,897 |
) |
|
|
(5,146,684 |
) |
Calls
and maturities - fixed maturity securities
|
|
|
2,342,945 |
|
|
|
8,985,769 |
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Purchase
- equity securities
|
|
|
(2,117,658 |
) |
|
|
(358,395 |
) |
Sales
- equity securities
|
|
|
1,927,415 |
|
|
|
(40,878 |
) |
Purchase
of short-term investments
|
|
|
(2,520,901 |
) |
|
|
(7,132,079 |
) |
Sales
of short-term investments
|
|
|
5,001,270 |
|
|
|
4,990,964 |
|
Sales
(Purchase) of restricted assets
|
|
|
(189,932 |
) |
|
|
1,837,806 |
|
Changes
in assets for perpetual care trusts
|
|
|
(86,068 |
) |
|
|
(40,293 |
) |
Amount
received for perpetual care trusts
|
|
|
41,455 |
|
|
|
24,570 |
|
Mortgage,
policy, and other loans made
|
|
|
(9,740,965 |
) |
|
|
(8,173,806 |
) |
Payments
received for mortgage, policy and other loans
|
|
|
1,920,767 |
|
|
|
3,328,002 |
|
Purchase
of property and equipment
|
|
|
(228,507 |
) |
|
|
(123,984 |
) |
Disposal
of property and equipment
|
|
|
(91,000 |
) |
|
|
- |
|
Purchase
of real estate
|
|
|
(1,208,419 |
) |
|
|
(626,179 |
) |
Sale
of real estate
|
|
|
1,121,112 |
|
|
|
542,500 |
|
Net
cash used in investing activities
|
|
|
(8,915,383 |
) |
|
|
(1,932,687 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Annuity
contract receipts
|
|
|
2,063,131 |
|
|
|
2,267,572 |
|
Annuity
contract withdrawals
|
|
|
(3,449,987 |
) |
|
|
(3,320,898 |
) |
Repayment
of bank loans on notes and contracts
|
|
|
(677,858 |
) |
|
|
(428,407 |
) |
Proceeds
from borrowing on bank loans
|
|
|
4,900,000 |
|
|
|
2,031,953 |
|
Net
cash provided by financing activities
|
|
|
2,835,286 |
|
|
|
550,220 |
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(17,515,533 |
) |
|
|
239,426 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
39,463,803 |
|
|
|
19,914,110 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
21,948,270 |
|
|
$ |
20,153,536 |
|
|
|
|
|
|
|
|
|
|
Non
Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Mortgage
loans foreclosed into real estate
|
|
$ |
4,033,159 |
|
|
$ |
6,277,415 |
|
See
accompanying notes to condensed consolidated financial
statements.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
1) Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by accounting principles generally
accepted in the United States of America for complete financial statements.
These financial statements should be read in conjunction with the consolidated
financial statements of the Company and notes thereto for the year ended
December 31, 2009, included in the Company’s Annual Report on Form 10-K (file
number 0-9341). In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2010 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2010.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The
estimates susceptible to significant change are those used in determining the
liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate and construction loans
held for investment, those used in determining loan loss reserve, and those used
in determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are fairly stated in all material respects.
Certain
2009 amounts have been reclassified to bring them into conformity with the 2010
presentation.
2) Recent Accounting
Pronouncements
Consolidation Analysis
Considering Investments Held through Separate Accounts: In
April 2010, the FASB issued guidance clarifying that an insurer is not
required to combine interests in investments held in a qualifying separate
account with its interests in the same investments held in the general account
when performing a consolidation evaluation. The guidance is
effective for fiscal years and interim periods beginning after December 15,
2010 with early adoption permitted. The adoption of this guidance is not
expected to have a material impact on the Company’s results of operations or
financial position.
Stock-Based
Compensation: In April 2010, the FASB issued guidance to clarify
classification of an employee stock-based payment award when the exercise price
is denominated in the currency of a market in which the underlying equity
security trades. The guidance is effective for fiscal years and interim periods
beginning after December 15, 2010 with early adoption permitted. The
adoption of this guidance is not expected to have a material impact on the
Company’s results of operations or financial position.
3) Comprehensive
Income
For the
three months ended March 31, 2010 and 2009, total comprehensive income (loss)
amounted to $(832,514) and $4,562,581, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
4) Stock-Based
Compensation
The
Company has four fixed option plans (the “1993 Plan,” the “2000 Plan”, the “2003
Plan” and the “2006 Plan”). Compensation expense for options issued of $134,120
and $202,511 has been recognized for these plans for the quarters ended March
31, 2010 and 2009, respectively. Deferred tax credit has been recognized related
to the compensation expense for $45,601 and $68,854 for the quarters ended March
31, 2010 and 2009, respectively.
Options
to purchase 211,000 shares of the Company’s common stock were granted March 31,
2008. The fair value relating to stock-based compensation is $453,650 and was
expensed as options became available to exercise at the rate of 25% at the end
of each quarter over the twelve months ended March 31, 2009.
Options
to purchase 324,000 shares of the Company’s common stock were granted December
5, 2008. The fair value relating to stock-based compensation is $356,400 and was
expensed as options became available to exercise at the rate of 25% at the end
of each quarter over twelve months ending December 31, 2009.
Options
to purchase 330,500 shares of the Company’s common stock were granted December
4, 2009. The fair value relating to stock-based compensation is $542,275 and
will be expensed as options become available to exercise at the rate of 25% at
the end of each quarter over the twelve months ending December 31,
2010.
The weighted-average fair value of each
option granted during 2008 under the 2003 Plan and 2006 Plan is estimated at
$2.15 for the March 31, 2008 options and $1.10 for the December 5, 2008 options
as of the grant date using the Black-Scholes Option Pricing Model with the
following assumptions: dividend yield of 5%, volatility of 63%, risk-free
interest of 3.4%, and an expected life of five to ten years.
The
weighted-average fair value of each option granted during 2009 under
the 2003 Plan and 2006 Plan is estimated at $1.70 and $1.55 for the December 4,
2009 options as of the grant date using the Black-Scholes Option Pricing Model
with the following assumptions: dividend yield of 5%, volatility of 72%,
risk-free interest of 3.4%, and an unexpected life of five to ten
years.
The
Company generally estimates the expected life of the options based upon the
contractual term of the options. Future volatility is
estimated based upon the historical volatility of the Company’s Class A common
stock over a period equal to the estimated life of the options. Common stock issued upon
exercise of stock options are generally new share issuances rather than from
treasury shares.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
5)
Capital
Stock
The
Company has two classes of common stock with shares outstanding, Class A and
Class C. Class C shares are convertible into Class A shares at any time on a ten
to one ratio. The year to date March 31, 2010 decrease in outstanding Class C
shares and the corresponding increase in Class A shares was due to conversion of
Class C to Class A common stock. The decrease in treasury stock was the result
of treasury stock being used to fund the Company’s 401-K and Deferred
Compensation plans.
6) Earnings (Loss) Per
Share
The basic
and diluted earnings (loss) per share amounts were calculated as
follows:
|
|
Three
Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
Net
earnings (loss)
|
|
$ |
(951,233 |
) |
|
$ |
3,233,010 |
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic
weighted-average shares outstanding
|
|
|
8,216,148 |
|
|
|
8,073,189 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
229,834 |
|
|
|
- |
|
Dilutive
potential common shares
|
|
|
229,834 |
|
|
|
- |
|
Diluted
weighted-average shares outstanding
|
|
|
8,445,982 |
|
|
|
8,073,189 |
|
|
|
|
|
|
|
|
|
|
Basic
gain (loss) per share
|
|
$ |
(0.12 |
) |
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
Diluted
gain (loss) per share
|
|
$ |
(0.11 |
) |
|
$ |
0.40 |
|
Earnings (loss)
per share amounts have been adjusted for the effect of annual stock dividends.
For the three months ended March 31, 2010 and 2009 the antidilutive employee
stock option shares were 47,463 and 978,717, respectively.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited
7) Business
Segment
|
|
Life
Insurance
|
|
|
Cemetery/
Mortuary
|
|
|
Mortgage
|
|
|
Reconciling
Items
|
|
|
Consolidated
|
|
For
the Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
14,092,882 |
|
|
$ |
3,304,638 |
|
|
$ |
21,124,386 |
|
|
$ |
- |
|
|
$ |
38,521,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
revenues
|
|
|
1,195,805 |
|
|
|
369,246 |
|
|
|
56,685 |
|
|
|
(1,621,736 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss) before income taxes
|
|
|
147,310 |
|
|
|
(46,944 |
) |
|
|
(1,773,280 |
) |
|
|
- |
|
|
|
(1,672,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
437,402,930 |
|
|
|
99,592,084 |
|
|
|
35,457,153 |
|
|
|
(103,045,552 |
) |
|
|
469,406,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external customers
|
|
$ |
13,958,418 |
|
|
$ |
3,181,095 |
|
|
$ |
42,352,584 |
|
|
$ |
- |
|
|
$ |
59,492,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
revenues
|
|
|
1,063,254 |
|
|
|
82,591 |
|
|
|
51,786 |
|
|
|
(1,197,631 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit (loss) before income taxes
|
|
|
(312,200 |
) |
|
|
245,561 |
|
|
|
5,006,542 |
|
|
|
- |
|
|
|
4,939,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
423,829,889 |
|
|
|
79,150,872 |
|
|
|
34,746,091 |
|
|
|
(83,765,225 |
) |
|
|
453,961,627 |
|
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
8) Disclosure about Fair Value
of Financial Instruments
Generally
accepted accounting principles (GAAP) defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants. GAAP also specifies a
fair value hierarchy based upon the observability of inputs used in valuation
techniques. Observable inputs (highest level) reflect market data obtained from
independent sources, while unobservable inputs (lowest level) reflect internally
developed market assumptions. Fair value measurements are classified under the
following hierarchy:
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.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
8)Disclosure about Fair Value
of Financial Instruments (Continued)
The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the condensed consolidated balance sheet at March 31, 2010.
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in securities available for sale
|
|
$ |
7,474,110 |
|
|
$ |
7,474,110 |
|
|
$ |
- |
|
|
$ |
- |
|
Short-term
investments
|
|
|
4,663,950 |
|
|
|
4,663,950 |
|
|
|
- |
|
|
|
- |
|
Restricted
assets of cemeteries and mortuaries
|
|
|
1,865,040 |
|
|
|
1,865,040 |
|
|
|
- |
|
|
|
- |
|
Cemetery
perpetual care trust investments
|
|
|
1,187,297 |
|
|
|
1,187,297 |
|
|
|
- |
|
|
|
- |
|
Derivatives
- interest rate lock commitments
|
|
|
1,729,965 |
|
|
|
- |
|
|
|
- |
|
|
|
1,729,965 |
|
Total
assets accounted for at fair value on a recurring basis
|
|
$ |
16,920,362 |
|
|
$ |
15,190,397 |
|
|
$ |
- |
|
|
$ |
1,729,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
accounted for at fair value on a recurring
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
type insurance contracts
|
|
$ |
(115,605,444 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(115,605,444 |
) |
Derivatives
- bank loan interest rate swaps
|
|
|
(108,712 |
) |
|
|
- |
|
|
|
- |
|
|
|
(108,712 |
) |
-
call options
|
|
|
(167,157 |
) |
|
|
- |
|
|
|
- |
|
|
|
(167,157 |
) |
-
interest rate lock commitments
|
|
|
(162,099 |
) |
|
|
- |
|
|
|
- |
|
|
|
(162,099 |
) |
Total
liabilities accounted for at fair value on a recurring
basis
|
|
$ |
(116,043,412 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(116,043,412 |
) |
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
|
Investment
Type
Insurance
Contracts
|
|
|
Interest
Rate
Lock
Commitments
|
|
|
Bank
Loan
Interest
Rate
Swaps
|
|
|
Call
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2009
|
|
$ |
(115,763,748 |
) |
|
$ |
1,554,711 |
|
|
$ |
(101,251 |
) |
|
$ |
(134,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(128,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
158,304 |
|
|
|
- |
|
|
|
- |
|
|
|
95,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in other comprehensive income (loss)
|
|
|
- |
|
|
|
13,155 |
|
|
|
(7,461 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- March 31, 2010
|
|
$ |
(115,605,444 |
) |
|
$ |
1,567,866 |
|
|
$ |
(108,712 |
) |
|
$ |
(167,157 |
) |
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
8)Disclosure about Fair Value
of Financial Instruments (Continued)
The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the condensed consolidated balance sheet at March 31, 2009.
|
|
Total
|
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in securities available for sale
|
|
$ |
5,750,758 |
|
|
$ |
5,750,758 |
|
|
$ |
- |
|
|
$ |
- |
|
Short-term
investments
|
|
|
7,424,101 |
|
|
|
7,424,101 |
|
|
|
- |
|
|
|
- |
|
Restricted
assets of cemeteries and mortuaries
|
|
|
1,365,450 |
|
|
|
1,365,450 |
|
|
|
- |
|
|
|
- |
|
Cemetery
perpetual care trust investments
|
|
|
1,818,037 |
|
|
|
1,818,037 |
|
|
|
- |
|
|
|
- |
|
Derivatives
- interest rate lock commitments
|
|
|
3,454,321 |
|
|
|
- |
|
|
|
- |
|
|
|
3,454,321 |
|
Total
assets accounted for at fair value on a recurring basis
|
|
$ |
19,812,667 |
|
|
$ |
16,358,346 |
|
|
$ |
- |
|
|
$ |
3,454,321 |
|
Liabilities
accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment-type
insurance contracts
|
|
$ |
(111,185,553 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(111,185,553 |
) |
Derivatives
- bank loan interest rate swaps
|
|
|
(157,021 |
) |
|
|
- |
|
|
|
- |
|
|
|
(157,021 |
) |
-
call options
|
|
|
(160,231 |
) |
|
|
- |
|
|
|
- |
|
|
|
(160,231 |
) |
-
interest rate lock commitment
|
|
|
(329,270 |
) |
|
|
- |
|
|
|
- |
|
|
|
(329,270 |
) |
Total
liabilities accounted for at fair value on a recurring
basis
|
|
$ |
(111,832,075 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(111,832,075 |
) |
Following
is a summary of changes in the condensed consolidated balance sheet line items
measured using level 3 inputs:
|
|
Investment
Type
Insurance
Contracts
|
|
|
Interest
Rate
Lock
Commitments
|
|
|
Bank
Loan
Interest
Rate
Swaps
|
|
|
Call
Options
|
|
Balance
- December 31, 2008
|
|
$ |
(112,351,916 |
) |
|
$ |
362,231 |
|
|
$ |
(167,483 |
) |
|
$ |
- |
|
Options
sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(269,475 |
) |
Total
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
1,166,363 |
|
|
|
- |
|
|
|
- |
|
|
|
109,244 |
|
Included
in other comprehensive income
|
|
|
- |
|
|
|
2,762,820 |
|
|
|
10,462 |
|
|
|
- |
|
Balance
- March 31, 2009
|
|
$ |
(111,185,553 |
) |
|
$ |
3,125,051 |
|
|
$ |
(157,021 |
) |
|
$ |
(160,231 |
) |
The items
shown under level one are valued as follows:
On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely
that the investment will recover from the loss position, the loss is considered
to be other than temporary, the security is written down to the impaired value
and an impairment loss is recognized.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
8)Disclosure about Fair Value
of Financial Instruments (Continued)
The items
shown under level three are valued as follows:
Investment type insurance
contracts. 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 4% to 6.5%.
Interest rate lock
commitments. As discussed further in Note 11, the Company estimates the
fair value of a mortgage loan commitment based on the change in estimated fair
value of the underlying mortgage loan and the probability that the mortgage loan
will fund within the terms of the commitment. The change in fair value of the
underlying mortgage loan is measured from the date the mortgage loan commitment
is issued.
Bank loan interest rate
swaps. The fair value of the interest rate swap was derived from a
proprietary model of the bank from whom the interest rate swap was purchased and
to whom the note is payable.
9)Other Business
Activity
Mortgage
Operations
Over
fifty percent of revenue and expenses of the Company are through its wholly
owned subsidiary, SecurityNational Mortgage. 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 its retail offices and independent brokers.
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 retail loan officers a commission
for loans that are brokered through SecurityNational Mortgage. For the three
months ended March 31, 2010 and 2009, SecurityNational Mortgage originated and
sold 2,361 loans ($426,766,789 total volume), and 4,935 loans ($939,413,356
total volume), respectively.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreement at March 31, 2010 was
$55,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of March 31, 2010, there were $103,254,431 in
mortgage loans in which settlements with third party investors were still
pending. Generally when certain mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on January 31, 2010 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
9)Other Business
Activity (Continued)
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 generally accepted accounting principles at the time the
sales of mortgage loans meet the sales criteria for the transfer of financial
assets which are: (i) the transferred assets have been isolated from the Company
and its creditors, (ii) the transferee has the right to pledge or exchange the
mortgage, and (iii) the Company does not maintain effective control over the
transferred mortgage. The Company must determine 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 the loans under
the purchase commitments.
The
Company, through SecurityNational Mortgage, sells all mortgage loans to third
party investors without recourse. However, it may be required to repurchase a
loan 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 misrepresentation or 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.
|
Loan
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, however, 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 loan purchase commitments
from third-party investors concerning the 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 later becomes delinquent is evaluated by the Company at that time and
any impairment is 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 the Company uses the market price on the
repurchased date.
|
|
·
|
For
loans where there is no market but there is a similar product, the Company
uses the market value for the similar product on the repurchased
date.
|
|
·
|
For
loans where no active market exists on the repurchased date, the Company
determines 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.
|
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
9)Other Business
Activity (Continued)
The
appraised value of the real estate underlying the original mortgage loan adds
significance to the Company’s determination of fair value because 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 considers the total value of all of
the loans because any sale of loans would be made as a pool.
For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.
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.
During the period the Company will service these loans through Security National
Life, its life insurance subsidiary.
As of
March 31, 2010, the Company’s long term mortgage loan portfolio contained
mortgage loans of $18,210,890 in unpaid principal with delinquencies more than
90 days. Of this amount, $11,778,865 in mortgage loans were in foreclosure
proceedings. The Company has not received any interest income on the $18,210,890
in mortgage loans with delinquencies more than 90 days. During the three month
ended March 31, 2010 and 2009, the Company increased its allowance for mortgage
losses by $166,862 and $780,954, respectively which was charged to loan loss
expense and included in other selling, general and administrative expenses for
the period. The allowance for mortgage loan losses as of March 31, 2010 and
December 31, 2009 was $6,806,003 and $6,808,803, respectively.
Also at
March 31, 2010, the Company has foreclosed on a total of $48,283,978 in long
term mortgage loans, of which $4,033,159 in loans were foreclosed on and
reclassified as real estate during 2010. The foreclosed property was shown in
real estate. The Company carries the foreclosed property in Security National
Life, Memorial Estates and SecurityNational Mortgage, its life, cemeteries and
mortuaries and mortgage subsidiaries, and will rent the properties until it is
deemed desirable to sell them.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
10) Allowance for Loan Losses
and Loan Loss Reserve
The
Company provides allowances for losses on its mortgage loans held for investment
through an allowance for loan losses (a contra-asset account) and for mortgage
loans sold to investors 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 is classified as real estate. The
Company carries the foreclosed properties in Security National Life, Memorial
Estates, and SecurityNational Mortgage, its life, cemeteries and mortuaries and
mortgage subsidiaries, and will rent the properties until it is deemed desirable
to sell them.
The
following is a summary of the allowance for loan losses as a contra-asset
account:
|
|
Three
Months
Ended
March
31, 2010
|
|
|
Three
Months
Ended
March
31, 2009
|
|
Balance,
beginning of period
|
|
$ |
6,808,803 |
|
|
$ |
4,780,467 |
|
Provisions
for losses
|
|
|
166,862 |
|
|
|
780,954 |
|
Charge-offs
|
|
|
(169,662 |
) |
|
|
- |
|
Balance,
at March 31
|
|
$ |
6,806,003 |
|
|
$ |
5,561,421 |
|
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 loans 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.
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 based on the Company’s
historical experience. The amount accrued for the three months ended March 31,
2010 and 2009 was $1,373,354 and $5,384,564, respectively and the charge to
expense has been included in other selling, general and administrative expenses.
The estimated liability for indemnification losses is included in other
liabilities and accrued expenses, and, as of March 31, 2010 and March 31, 2009,
the balance was $8,991,955 and $5,337,012, respectively.
|
|
Three
Months
Ended
March
31, 2010
|
|
|
Three
Months
Ended
March
31, 2009
|
|
Balance,
beginning of period
|
|
$ |
11,662,897 |
|
|
$ |
2,775,452 |
|
Provisions
for losses
|
|
|
1,373,354 |
|
|
|
5,384,564 |
|
Charge-offs
|
|
|
(4,044,296 |
) |
|
|
(2,823,004 |
) |
Balance,
March 31
|
|
$ |
8,991,955 |
|
|
$ |
5,337,012 |
|
The
Company believes the Allowance for Loan Losses and Doubtful Accounts and Loan
Loss Reserve represent probable loan losses incurred as of the balance sheet
date.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
11)
Derivative
Investments
The
Company is exposed to price risk due to the potential impact of changes in
interest rates on the values of mortgage loan commitments from the time a
derivative loan commitment is made to an applicant to the time the loan that
would result from the exercise of that loan commitment is funded. Managing price
risk is complicated by the fact that the ultimate percentage of derivative loan
commitments that will be exercised (i.e., the number of loan commitments that
will be funded) fluctuates. The probability that a loan will not be funded
within the terms of the commitment is driven by a number of factors,
particularly the change, if any, in mortgage rates following the inception of
the interest rate lock. However, many borrowers continue to exercise derivative
loan commitments even when interest rates have fallen.
In
general, the probability of funding increases if mortgage rates rise and
decreases if mortgage rates fall. This is due primarily to the relative
attractiveness of current mortgage rates compared to the applicant’s committed
rate. The probability that a loan will not be funded within the terms of
the mortgage loan commitment also is influenced by the source of the
applications (retail, broker, or correspondent channels), proximity to rate lock
expiration, purpose for the loan (purchase or refinance); product type and the
application approval status. The Company has developed fallout estimates using
historical data that take into account all of the variables, as well as
renegotiations of rate and point commitments that tend to occur when mortgage
rates fall. These fallout estimates are used to estimate the number of
loans that the Company expects to be funded within the terms of the mortgage
loan commitments and are updated periodically to reflect the most current
data.
The
Company estimates the fair value of a mortgage loan commitment based on the
change in estimated fair value of the underlying mortgage loan and the
probability that the mortgage loan will fund within the terms of the commitment.
The change in fair value of the underlying mortgage loan is measured from the
date the mortgage loan commitment is issued. Therefore, at the time of the
issuance, the estimated fair value is zero. Following issuance, the value of a
mortgage loan commitment can be either positive or negative depending upon the
change in value of the underlying mortgage loans. Fallout rates derived from the
Company’s recent historical empirical data are used to estimate the quantity of
mortgage loans that will fund within the terms of the commitments.
The
Company utilizes derivative instruments to economically hedge the price risk
associated with its outstanding mortgage loan commitments. Forward loan sales
commitments protect the Company from losses on sales of the loans arising from
exercise of the loan commitments by securing the ultimate sales price and
delivery date of the loans. Management expects these derivatives will experience
changes in fair value opposite to changes in fair value of the derivative loan
commitments, thereby reducing earnings volatility related to the recognition in
earnings of changes in the values of the commitments.
The
Company has adopted a strategy of selling “out of the money” call options on its
available for sale equity securities as a source of revenue. The
options give the purchaser the right to buy from the Company specified equity
securities at a set price up to a pre-determined date in the
future. The Company receives an immediate payment of cash for the
value of the option and establishes a liability for the market value of the
option. The liability for call options is adjusted to market value at
each reporting date. The market value of outstanding call options as of March
31, 2010 was $167,157. In the event an option is exercised, the Company
recognizes a gain on the sale of the equity security and a gain from the sale of
the option. If the option expires unexercised, the Company recognizes
a gain from the sale of the option and retains the underlying equity
security.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
11) Derivative
Investments (Continued)
The
following table shows the fair value of derivatives as of March 31, 2010 and
December 31, 2009.
|
|
Fair
Value of Derivative Instruments
|
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
March
31, 2010
|
|
December
31, 2009
|
|
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
|
Balance
Sheet
Location
|
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate lock and forward sales commitments
|
|
other
assets
|
|
|
$ |
1,729,965 |
|
|
other
assets
|
|
|
$ |
1,770,193 |
|
Other
liabilities
|
|
$ |
162,099 |
|
Other
liabilities
|
|
$ |
215,481 |
|
Call
Options
|
|
-- |
|
|
|
-- |
|
|
-- |
|
|
|
-- |
|
Other
liabilities
|
|
|
167,157 |
|
Other
liabilities
|
|
|
134,492 |
|
Interest
rate swaps
|
|
-- |
|
|
|
-- |
|
|
-- |
|
|
|
-- |
|
Bank
loans
payable
|
|
|
108,712 |
|
Bank
loans
payable
|
|
|
101,206 |
|
Total
|
|
|
|
|
|
$ |
1,729,965 |
|
|
|
|
|
|
$ |
1,770,193 |
|
|
|
$ |
437,968 |
|
|
|
$ |
451,179 |
|
The
following table shows the gain (loss) on derivatives for the periods presented.
There were no gains or losses reclassified from accumulated other comprehensive
income (OCI) into income or gains or losses recognized in income on derivatives
ineffective portion or any amounts excluded from effective
testing.
|
|
Gross
Amount Gain (Loss) Recognized in OCI
|
|
|
|
Three
Months ended March 31,
|
|
Derivative - Cash Flow
Hedging Relationships:
|
|
2010
|
|
|
2009
|
|
Interest
Rate Lock Commitments
|
|
$ |
13,155 |
|
|
$ |
2,762,820 |
|
Interest
Rate Swaps
|
|
|
(7,461 |
) |
|
|
10,462 |
|
Total
|
|
$ |
5,694 |
|
|
$ |
2,773,282 |
|
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
12)
|
Commitments and
Contingencies
|
On
December 31, 2008, the Company entered into a Coinsurance Funds Withheld
Reinsurance Agreement with Continental American Insurance Company (“Continental
American”), a South Carolina domiciled insurance company. This agreement was
effective November 30, 2008. Under the terms of the agreement, the Company ceded
to Continental American 100% of a block of deferred annuities in the amount of
$4,828,487 as of December 31, 2008 and retained the assets and recorded a funds
held under coinsurance liability for the same amount. Continental American
agreed to pay the Company an initial ceding commission of $60,000 and a
quarterly management fee of $16,500 per quarter to administer the policies. The
Company will also receive a 90% experience refund for any profits on the
business. The Company has the right to recapture the business on January 1
subsequent to December 31, 2008 or any other date if mutually agreed and with 90
days written notice to Continental American. The Company and Continental
American terminated this agreement on March 31, 2010.
The
Company has entered into commitments to fund new residential construction loans.
As of March 31, 2010 the Company’s commitments are $25,936,843 for these loans
of which $24,289,487 had been funded. The Company will advance funds once the
work has been completed and an independent inspection is made. The maximum loan
commitment ranges between 50% to 80% of appraised value. The Company receives
fees from the borrowers and the interest rate is generally 2% to 6.75% over the
bank prime rate (3.25% as of March 31, 2010). Maturities range between six and
twelve months.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreement at March 31, 2010 was
$55,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of March 31, 2010, there were $103,254,431 in
mortgage loans in which settlements with third party investors were still
pending. Generally, when certain mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on January 31, 2010 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement.
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 certain mortgage loans with alleged breaches
that were purchased from SecurityNational Mortgage.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
12)
Commitments and
Contingencies (Continued)
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 year
ended December 31, 2009 and the quarter ended March 31, 2010 SecurityNational
Mortgage made payments to Aurora Loan Services of $1,174,082 and $500,000,
respectively. 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 and 2009, funds were paid out of the reserve account to indemnify
$2,732,000 in losses from 34 mortgage loans that were among the 54 mortgage
loans with alleged breaches which were listed on the attachment to the
Indemnification Agreement. For the three months ended March 31, 2010,
an additional $486,113 was paid out of the reserve account on two additional
loans. The estimated potential losses from the remaining 18 mortgage loans
listed on the attachment, which would require indemnification by
SecurityNational Mortgage for such losses, is $2,259,887. During 2008, 2009 and
the quarter ended March 31, 2010, the Company recognized losses related to this
matter of $1,636,000, $1,032,000, and $486,113 respectively; 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 subsequent loans under the Indemnification Agreement. The Company has
estimated and accrued $1,020,887 for losses under the Indemnification Agreement
as of March 31, 2010.
There
have been assertions in third party purchaser correspondence that
SecurityNational Mortgage sold mortgage loans that contained alleged
misrepresentations or that experienced early payment defaults, or that were
otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of
America – Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made
demands that SecurityNational Mortgage repurchase certain alleged
defective mortgage loans that were sold to such investors or indemnify them
against any losses related to such loans. The Company has been
reviewing these demands and has reserved what it believes to be an adequate
amount to cover potential losses. Although the Company believes that it has
reserved adequate provisions for losses, from an industry wide perspective the
number of repurchase demands and the loss per loan have shown sharp increases
during the last several months as compared to historical amounts. It is unclear
whether such increases represent a trend that will continue in the
future.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
12)
Commitments and
Contingencies (Continued)
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claimed that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements under certain agreements between CitiMortgage and
SecurityNational Mortgage, the complaint specifically addressing nineteen
mortgage loans. The requirements in the agreements that CitiMortgage claimed in
the complaint were not met by SecurityNational Mortgage are more particularly
described in “Item 1. Legal Proceedings” of this Form 10-Q for March 31,
2010.
The
complaint further alleged that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contended that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requested an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including to repurchase the defective mortgage
loans and indemnify CitiMortgage for its costs and attorneys’ fees in the
lawsuit, interest, and such further relief as the court deems just and
proper.
SecurityNational
Mortgage disputed the claims that CitiMortgage asserted in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010,
SecurityNational Mortgage and CitiMortgage entered into a written Settlement
Agreement and Release encompassing the aforesaid settlement. Under the terms of
the Settlement Agreement and Release, SecurityNational Mortgage paid a
settlement amount to CitiMortgage. The Company reserved a sufficient
amount to cover the settlement payment in its consolidated financial statements
at December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers.
On March
5, 2007, the Company received a proposed consent order from the Florida Office
of Insurance Regulation concerning the New Success Life Program, the higher
education product currently marketed and sold by Southern Security Life and now
marketed and sold by Security National Life. The proposed order states that as a
result of the investigation the Florida Office of Insurance Regulation has
determined that Southern Security Life violated Florida law (i) by knowingly
making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making advertisements, announcements, or
statements containing representations that were untrue or
misleading.
The
proposed order would require Security National Life and Southern Security Life
to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated
value.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
12)
Commitments and
Contingencies (Continued)
Moreover,
the written notice is to provide an opportunity for the Florida consumers who
purchased the New Success Life Program on or after January 1, 1998 to cancel
their policy and be given a full refund, including all premiums paid, together
with interest at the agreed upon rate in the original contract. If each of the
Florida consumers who purchased the New Success Life Program after January 1,
1998 was to cancel his or her policy and receive a refund, the cost to the
Company to refund all premiums paid, including interest, would be approximately
$8,200,000.
The
proposed consent order would also require Security National Life and Southern
Security Life to issue refunds including interest to the eleven policyholders
whose affidavits were taken in connection with the administrative complaint that
the Florida Office of Insurance Regulation had previously filed against Franz
Wallace, the former National Sales Director of Southern Security Life. Security
National Life and Southern Security Life would additionally be required to issue
refunds, including interest, to any Florida policyholder in the New Success Life
Program who had filed a complaint with the Florida Department of Financial
Services or whose coverage had lapsed. Furthermore, Security National Life and
Southern Security Life would be required to notify the state insurance
department in each state in which the New Success Life Program is marketed of
the order and any complaint that Southern Security Life received relating to the
New Success Life Program from policyholders in that state. Finally, Security
National Life and Southern Security Life would be required to pay the Florida
Office of Insurance Regulation a penalty of $100,000 and administrative costs of
$5,000.
The
Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office of Insurance Regulation has
with the New Success Life Program because it has received no specific
administrative complaint from the Florida Office of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company is currently engaged in discussions with the
Florida Office of Insurance Regulation in an effort to settle the dispute
concerning the proposed order. If the Company is unable to reach a satisfactory
resolution with the Florida Office of Insurance Regulation with respect to the
terms of the proposed consent order and the Florida Office of Insurance
Regulation issues a similar order, the Company intends to take action necessary
to protect its rights and interests, including requesting a hearing before an
administrative law judge to oppose the order.
After
several months of discussions with the Florida Office of Insurance Regulation
concerning the categorization of certain admitted assets, Security National Life
received a letter dated June 17, 2009, in which Florida indicated its rejection
of Security National Life's position and requested that Security National Life
either infuse additional capital or cease writing new business in the State of
Florida. Florida’s decision was based upon excess investments in
subsidiaries by Security National Life and Florida’s determination to classify
as property acquired and held for the purposes of investment, certain real
property that Security National Life acquired in satisfaction of creditor rights
and subsequently rented to tenants. These determinations resulted in
Security National Life exceeding certain investment limitations under Florida
law and in a corresponding capital and surplus deficiency as of March 31,
2009. Florida has acknowledged that the deficiency may be cured by
the infusion of additional capital in the amount of the excess
investments.
Security
National Life strongly disagrees with Florida’s interpretation of the Florida
statutes, including Florida’s opinion that $21,672,000 of real property that
Security National Life acquired in satisfaction of creditor rights as of March
31, 2009 must be included in an investment category that is subject to a
limitation of only 5% of admitted assets (which category consists of real estate
acquired and held for investment purposes) rather than in the investment
category that is subject to a limitation of 15% of admitted assets (which
category includes real estate acquired in satisfaction of loans, mortgages, or
debts). In rendering its opinion, Florida did not suggest that the
real property assets of Security National Life are not fairly stated. The letter
further stated that Security National Life may not resume writing insurance in
Florida until such time as it regains full compliance with Florida law and
receives written approval from Florida authorizing it to resume writing
insurance.
SECURITY
NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
March 31,
2010 (Unaudited)
12) Commitments and
Contingencies (Continued)
On June
18, 2009, Security National Life responded by letter to Florida and expressed
its disagreement with Florida’s interpretation of the Florida statutes but, for
practical purposes, agreed, beginning as of June 30, 2009 and continuing until
Florida determines that Security National Life has attained full compliance with
the Florida statutes, to cease originating new insurance policies in Florida and
not to enter into any new reinsurance agreements with any Florida domiciled
insurance company. The State of Utah, Security National Life’s state
of domicile, has not determined Security National Life to have a capital and
surplus deficiency, nor is Security National Life aware of any state, other than
Florida, in which Security National Life is determined to have a capital and
surplus deficiency.
During
2008, the annualized premiums for new insurance policies written by Security
National Life in Florida were $464,000, or 4.7% of the total amount of
$9,901,000 in annualized premiums for new insurance policies written by Security
National Life during the same period. Security National Life is in
the process of preparing an application to be submitted to Florida for approval
of a Florida only subsidiary for all new insurance business written in
Florida. Security National Life believes that if Florida were to
approve a Florida only subsidiary, Security National Life would be able to
resume writing new insurance policies in Florida in full compliance with the
Florida statutes relating to investments in real estate and
subsidiaries.
The
Company is a defendant in various other legal actions arising from the normal
conduct of business. Management believes that none of the actions will have a
material effect on the Company’s financial position or results of operations.
Based on management’s assessment and legal counsel’s representations concerning
the likelihood of unfavorable outcomes, no amounts have been accrued for the
above claims in the consolidated financial statements.
The
Company is not a party to any other material legal proceedings outside the
ordinary course of business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on its financial
condition or results of operations.
On April
16, 2010, the Company’s life insurance subsidiary, Security National Life,
entered into a revolving line of credit with a bank for
$15,000,000. The terms for the line of credit are interest at the
LIBOR daily rate plus 2% per annum on amounts drawn and a tiered unused fee
between 0% to .25% per annum on the monthly average unfunded
balances. There would not be an unused fee if the average balances
drawn are 60% or more. The line of credit matures on April 15,
2011. The line of credit is secured by marketable fixed maturity
securities. The amount drawn on the line of credit to the market
value of fixed maturity securities cannot exceed 75%. The main
purpose of the line of credit is for additional funding capacity to originate
mortgage loans for the Company’s mortgage subsidiary operations of originating
and selling loans to third party investors. Amounts drawn will
be paid back once the funds are received from third party
investors.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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
Over
fifty percent of revenues and expenses of the Company are through its wholly
owned subsidiary SecurityNational Mortgage. 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 its retail offices and independent brokers.
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 retail loan officers a commission
for loans that are brokered through SecurityNational Mortgage. For the three
months ended March 31, 2010 and 2009, SecurityNational Mortgage originated and
sold 2,361 loans ($426,767,000 total volume), and 4,935 loans ($939,413,000
total volume), respectively.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreement at March 31, 2010 was
$55,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of March 31, 2010, there were $103,254,000 in
mortgage loans in which settlements with third party investors were still
pending. Generally, when mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on January 31, 2010 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement.
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 generally accepted accounting principles at the time the
sales of mortgage loans meet the sales criteria for the transfer of financial
assets which are: (i) the transferred assets have been isolated from the Company
and its creditors, (ii) the transferee has the right to pledge or exchange the
mortgage, and (iii) the Company does not maintain effective control over the
transferred mortgage. The Company must determine that all three criteria are met
at the time a 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 the loans under
the purchase commitments.
The
Company, through SecurityNational Mortgage, sells all mortgage loans to third
party investors without recourse. However, it may be required to repurchase a
loan 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 misrepresentation or 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.
|
Loan
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
SecurityNational Mortgage are generally settled by the investors as agreed
within 16 days after delivery. There are situations, however, 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 its 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 loan purchase commitments
from third-party investors concerning the 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 later becomes delinquent is evaluated by the Company at that time and
any impairment is 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, the Company uses the market price on the
repurchased date.
|
|
·
|
For
loans where there is no market but there is a similar product, the Company
uses the market value for the similar product on the repurchased
date.
|
|
·
|
For
loans where no active market exists on the repurchased date, the Company
determines 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 mortgage loan adds
significance to the Company’s determination of fair value because, 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 considers the total value of all of
the loans because any sale of loans would be made as a pool.
For
mortgages originated and held for investment, mortgage fee income and related
expenses are recognized when the loan is originated.
As of
March 31, 2010, the Company’s long term mortgage loan portfolio contained
mortgage loans of $18,211,000 in unpaid principal with delinquencies more than
90 days. Of this amount, $11,779,000 in mortgage loans were in foreclosure
proceedings. The Company has not received or recognized any interest income on
the $18,211,000 in mortgage loans with delinquencies more than 90 days. During
the three months ended March 31, 2010 and 2009, the Company has increased its
allowance for mortgage losses by $167,000 and $781,000, respectively, which
allowance was charged to loan loss expense and included in other selling,
general and administrative expenses for the period. The allowance for mortgage
loan losses as of March 31, 2010 and December 31, 2009 was $6,806,000 and
$6,809,000, respectively.
Also at
March 31, 2010, the Company has foreclosed on a total of $48,284,000 in long
term mortgage loans, of which $4,033,000 in loans were foreclosed on and
reclassified as real estate during the three months ended March 31, 2010. The
Company carries the foreclosed properties in Security National Life, Memorial
Estates, and SecurityNational Mortgage, its life, cemeteries and mortuaries, and
mortgage subsidiaries, and will rent the properties until it is deemed desirable
to sell them.
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 certain 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 year
ended 2009 and the quarter ended March 31, 2010, SecurityNational Mortgage made
payments to Aurora Loan Services of $1,174,000 and $500,000, respectively. 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 and 2009, funds were paid out of the reserve account to indemnify
$2,732,000 in losses from 34 mortgage loans that were among the 54 mortgage
loans with alleged breaches which were listed on the attachment to the
Indemnification Agreement. For the three months ended March 31, 2010, an
additional $486,000 was paid out of the reserve account on two additional
mortgage loans. The estimated potential losses from the remaining 18 mortgage
loans listed on the attachment, which would require indemnification by
SecurityNational Mortgage for such losses, is $2,260,000. During 2008 and 2009,
and the quarter ended March 31, 2010, the Company recognized losses related to
this matter of $1,636,000, $1,032,000, and $486,000, respectively; 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 subsequent loans under the Indemnification Agreement. The
Company has estimated and accrued $1,021,000 for losses under the
Indemnification Agreement as of March 31, 2010.
There
have been assertions in third party purchaser correspondence that
SecurityNational Mortgage sold mortgage loans that contained alleged
misrepresentations or that experienced early payment defaults, or that were
otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of America –
Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made demands
that SecurityNational Mortgage repurchase certain alleged defective mortgage
loans that were sold to such investors or indemnify them against any losses
related to such loans. The Company has been reviewing these demands
and has reserved what it believes to be an adequate amount to cover potential
losses. Although the Company believes that it has reserved adequate provisions
for losses, from an industry wide perspective the number of repurchase demands
and the loss per loan have shown sharp increases during the last several months
as compared to historical amounts. It is unclear whether such increases
represent a trend that will continue in the future.
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claimed that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements under certain agreements between CitiMortgage and
SecurityNational Mortgage, the complaint specifically addressing nineteen
mortgage loans. The requirements in the agreements that CitiMortgage claimed in
the complaint were not met by SecurityNational Mortgage are more particularly
described in “Item 1. Legal Proceedings” of this Form 10-Q.
The
complaint further alleged that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contended that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requested an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including to repurchase the defective mortgage
loans and indemnify CitiMortgage for its costs and attorneys’ fees in the
lawsuit, interest, and such further relief as the court deems just and
proper.
SecurityNational
Mortgage disputed the claims that CitiMortgage asserted in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010,
SecurityNational Mortgage and CitiMortgage entered into a written Settlement
Agreement and Release encompassing the aforesaid settlement. Under the terms of
the Settlement Agreement and Release, SecurityNational Mortgage paid a
settlement amount to CitiMortgage. The Company reserved a sufficient
amount to cover the settlement payment in its consolidated financial statements
at December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers.
Results
of Operations
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Total revenues decreased by
$20,970,000, or 35.2%, to $38,522,000 for the three months ended March 31,
2010, from $59,492,000
for the three months ended
March 31, 2009. Contributing to this decrease in total
revenues was a $19,843,000
decrease in mortgage fee
income, a $1,480,000
decrease in investment
income, a $69,000
decrease in net mortuary
and cemetery sales, and a $15,000 decrease in other revenues. This decrease in
total revenues was partially offset by a $139,000 increase in insurance premiums and
other considerations, and a $298,000 increase in realized gains on investments and
other assets.
Insurance premiums and other
considerations increased by $139,000, or 1.4%, to $9,923,000 for the three months ended March 31,
2010, from $9,784,000 for the comparable period in 2009. This increase was primarily the result
of additional premiums realized from new insurance sales.
Net
investment income decreased by $1,480,000, or 24.5%, to $4,568,000 for the three
months ended March 31, 2010, from $6,048,000 for the comparable period in
2009. This decrease
was primarily attributable to reduced interest income resulting from a reduced
number of mortgage loans originated by SecurityNational Mortgage
Company.
Net
mortuary and cemetery sales decreased by $69,000, or 2.3%, to $2,902,000 for the
three months ended March 31, 2010, from $2,971,000 for the comparable period in
2009. This decrease was due to a decline in at-need mortuary sales.
Realized gains on investments and other
assets increased by $298,000 to $364,000 in realized gains for the three months
ended March 31, 2010, from $66,000 in realized gains for the comparable period
in 2009. This increase in
realized gains on investments was due to gains from the sale of equity and fixed
maturity securities.
Mortgage fee income decreased by
$19,843,000, or 49.3%, to $20,411,000 for the three months ended March 31,
2010, from $40,254,000 for the comparable period in 2009. This decrease was primarily
attributable to an decrease in the number of mortgage loans
originated.
Other revenues decreased by
$15,000, or 4.1%, to $354,000 for the three months ended March 31,
2010 from $369,000
for the comparable period
in 2009. This increase was
due to additional miscellaneous income throughout the Company's
operations.
Total
benefits and expenses were $40,195,000, or 104.3% of total revenues, for the
three months ended March 31, 2010, as compared to $54,552,000, or 91.7% of total
revenues, for the comparable period in 2009. This decrease resulted primarily
from a reduced number of mortgage loans originated by SecurityNational Mortgage
Company.
Death benefits, surrenders and other
policy benefits, and increase in future policy benefits increased by an
aggregate of $501,000, or 5.7%, to $9,329,000 for the three months ended March 31,
2010, from $8,828,000 for the comparable period in
2009. This increase was
primarily the result of increased death benefits, future policy benefits and
surrenders, and other policy benefits.
Amortization
of deferred policy and pre-need acquisition costs and value of business acquired
decreased by $552,000, or 27.8%, to $1,433,000 for the three months ended March
31, 2010, from $1,985,000 for the comparable period in 2009. This decrease was
due to an increase in new business and a lower interest rate credited on the
fund values of universal life policies.
Selling, general and administrative
expenses decreased by $13,742,000, or 32.7%, to $28,289,000 for the three months ended March 31,
2010, from $42,031,000 for the comparable period in 2009. Salaries increased by $392,000 from $6,886,000 in 2009 to $7,278,000 in 2010, primarily due to merit
increases in salaries of existing employees. Other expenses decreased by
$1,408,000 from $9,157,000 in 2009 to $7,749,000 in 2010 due to decreased investor
fees, processing fees, and loan costs. Provision for loan losses decreased by
$4,300,000 from $5,321,000 in 2009 to $1,021,000 in 2010 due primarily to
decreased loan loss reserve and loan allowance balances at SecurityNational
Mortgage Company. Commission expenses decreased by $8,427,000, from $20,668,000 in the first quarter of 2009 to
$12,241,000 in the first quarter of 2010, due to a
reduction in mortgage loan origination costs made by SecurityNational Mortgage,
a decrease in sales at the cemetery operations, offset by an increase in life
insurance renewal commissions during the first quarter of
2010.
Interest expense decreased by
$499,000, or 45.3%, to $601,000 for the three months ended March 31,
2010, from $1,100,000 for the comparable period in 2009. This reduction was primarily due to
decreased borrowing from warehouse lines as a result of a reduction in mortgage
loans originated.
Cost of
goods and services sold of the mortuaries and cemeteries decreased by $65,000,
or 10.7%, to $542,000 for the three months ended March 31, 2010, from $607,000
for the comparable period in 2009. This decrease was
primarily due to a reduction in at-need mortuary sales.
For the
three months ended March 31, 2010 and 2009, total comprehensive income (loss)
amounted to $(833,000) and $4,563,000, respectively. This decrease of $5,396,000
was primarily the result of a $1,826,000 decrease in derivative losses related
to mortgage loans, and a decrease in net income of $4,184,000, which was
partially offset by a $605,000 increase in unrealized gains in securities
available for sale.
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, 2010, the Company's operations used cash of
$11,435,000. This was due primarily to a $12,999,000 increase in the first
quarter of 2010 in the balance of mortgage loans sold to investors. During the
three months ended March 31, 2009, the Company’s operations provided cash of
$1,293,000. This was due primarily to a $13,240,000 decrease in 2009 in the
balance of Mortgage loans sold to investors. During the twelve months ended
December 31, 2009, the Company’s operations provided cash of $17,172,000. This
was due primarily to a $19,354,000 increase in 2009 in the balance of mortgage
loans sold to investors, which was attributed to a transfer of loans totaling
$5,028,000 to long-term mortgages in 2009.
The
Company’s liability for future life, annuity and other benefits is expected to
be paid out over the 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, real estate 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 $119,809,000 as of March 31, 2010 compared to
$116,982,000 as of December 31, 2009. This represents 38.9% and 39.1% of the
total investments as of March 31, 2010, and December 31, 2009, 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, 2010, 5.6% (or
$6,666,000) and at December 31, 2009, 6.9% (or $7,930,000) 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.
Generally
accepted accounting principles (GAAP) defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants. GAAP also specifies a
fair value hierarchy based upon the observability of inputs used in valuation
techniques. Observable inputs (highest level) reflect market data obtained from
independent sources, while unobservable inputs (lowest level) reflect internally
developed market assumptions. Fair value measurements are classified under the
following hierarchy:
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.
The
following tables summarize Level 1, 2 and 3 financial assets and financial
liabilities measured at fair value on a recurring basis by their classification
in the condensed consolidated balance sheet at March 31, 2010.
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
|
Significant
Observable
Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Assets
accounted for at fair value on a recurring basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in securities available for sale
|
|
$ |
7,474,110 |
|
|
$ |
7,474,110 |
|
|
$ |
- |
|
|
$ |
- |
|
Short-term
investments
|
|
|
4,663,950 |
|
|
|
4,663,950 |
|
|
|
- |
|
|
|
- |
|
Restricted
assets of cemeteries and mortuaries
|
|
|
1,865,040 |
|
|
|
1,865,040 |
|
|
|
- |
|
|
|
- |
|
Cemetery
perpetual care trust investments
|
|
|
1,187,297 |
|
|
|
1,187,297 |
|
|
|
- |
|
|
|
- |
|
Derivatives
- interest rate lock commitments
|
|
|
1,729,965 |
|
|
|
- |
|
|
|
- |
|
|
|
1,729,965 |
|
Total
assets accounted for at fair value on a recurring basis
|
|
$ |
16,920,362 |
|
|
$ |
15,190,397 |
|
|
$ |
- |
|
|
$ |
1,729,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
accounted for at fair value on a recurring
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
type insurance contracts
|
|
$ |
(115,605,444 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(115,605,444 |
) |
Derivatives
- bank loan interest rate swaps
|
|
|
(108,712 |
) |
|
|
- |
|
|
|
- |
|
|
|
(108,712 |
) |
-
call options
|
|
|
(167,157 |
) |
|
|
- |
|
|
|
- |
|
|
|
(167,157 |
) |
-
interest rate lock commitments
|
|
|
(162,099 |
) |
|
|
- |
|
|
|
- |
|
|
|
(162,099 |
) |
Total
liabilities accounted for at fair value on a recurring
basis
|
|
$ |
(116,043,412 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(116,043,412 |
) |
Following
is a summary of changes in the consolidated balance sheet line items measured
using level 3 inputs:
|
|
Investment
Type
Insurance
Contracts
|
|
|
Interest
Rate
Lock
Commitments
|
|
|
Bank
Loan
Interest
Rate
Swaps
|
|
|
Call
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2009
|
|
$ |
(115,763,748 |
) |
|
$ |
1,554,711 |
|
|
$ |
(101,251 |
) |
|
$ |
(134,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
sold
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(128,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
158,304 |
|
|
|
- |
|
|
|
- |
|
|
|
95,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in other comprehensive income (loss)
|
|
|
- |
|
|
|
13,155 |
|
|
|
(7,461 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- March 31, 2010
|
|
$ |
(115,605,444 |
) |
|
$ |
1,567,866 |
|
|
$ |
(108,712 |
) |
|
$ |
(167,157 |
) |
The items
shown under level one are valued as follows:
On a
quarterly basis, the Company reviews its available-for-sale fixed investment
securities related to corporate securities and other public utilities,
consisting of bonds and preferred stocks that are in a loss position. The review
involves an analysis of the securities in relation to historical values, and
projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
On a
quarterly basis, the Company reviews its investment in industrial, miscellaneous
and all other equity securities that are in a loss position. The review involves
an analysis of the securities in relation to historical values, price earnings
ratios, projected earnings and revenue growth rates. Based on the analysis, a
determination is made whether a security will likely recover from the loss
position within a reasonable period of time. If it is unlikely that the
investment will recover from the loss position, the loss is considered to be
other than temporary, the security is written down to the impaired value and an
impairment loss is recognized.
The items
shown under level three are valued as follows:
Investment type insurance
contracts. 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 credit
rates for interest-sensitive insurance products ranged from 4% to
6.5%.
Interest rate lock
commitments. As discussed further in Note 11, the Company estimates the
fair value of a mortgage loan commitment based on the change in estimated fair
value of the underlying mortgage loan and the probability that the mortgage loan
will fund within the terms of the commitment. The change in fair value of the
underlying mortgage loan is measured from the date the mortgage loan commitment
is issued.
Bank loan interest rate
swaps. The fair value of the interest rate swap was derived from a
proprietary hedges. The interest rate swaps are derivative financial instruments
carried at their fair value.
The
Company is subject to risk based capital guidelines established by statutory
regulators requiring minimum capital levels based on the perceived risk of
assets, liabilities, disintermediation, and business risk. At March 31, 2010,
and December 31, 2009, the life insurance subsidiary exceeded the regulatory
criteria.
The Company’s total capitalization of
stockholders’ equity, and bank debt and notes payable were $72,374,000 as of March 31, 2010, as compared to $68,745,000 as of
December 31, 2009. Stockholders’ equity as a percent of total capitalization was
81.8% and 87.0% as of March 31, 2010 and December 31, 2009,
respectively. Bank debt
and notes payable increased $4,230,000 for the three months ended March 31,
2010 when compared to December 31, 2009, thus decreasing the stockholders equity
percentage.
Lapse
rates measure the amount of insurance terminated during a particular period. The
Company’s lapse rate for life insurance in 2009 was 8.4% as compared to a rate
of 9.0% for 2008. The 2010 lapse rate to date has been approximately the same as
2009.
At March
31, 2010, $21,089,000 of the Company’s consolidated stockholders’ equity
represents the statutory stockholders’ equity of the Company’s life insurance
subsidiaries. The life insurance subsidiaries cannot pay a dividend to its
parent company without the approval of insurance regulatory
authorities.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk.
There
have been no significant changes since the annual report on Form 10-K filed for
the year ended December 31, 2009.
Item
4. Controls and Procedures.
Under the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are
effective.
(a) Management’s
annual report on internal control over financial reporting.
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial reporting is
a process that is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of assets of the
Company,
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures
are being made only in accordance with authorizations of management and
the board of directors of the Company,
and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management
performed an assessment of the effectiveness of the Company's internal control
over financial reporting as of March 31, 2010. The objective of this assessment
was to determine whether the Company's internal control over financial reporting
was effective as of March 31, 2010. Based on that assessment the Company
believes that, at March 31, 2010, its internal control over financial reporting
was effective.
(b) Changes
in internal control over financial reporting.
There was
no change in our internal control over financial reporting that occurred in the
fourth quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Part II - Other Information
Item
1. Legal
Proceedings.
Florida Office of Insurance
Regulation Proposed Consent Order
On March
5, 2007, the Company received a proposed consent order from the Florida Office
of Insurance Regulation concerning the New Success Life Program, the higher
education product previously marketed and sold by Southern Security Life and now
marketed and sold by Security National Life. The proposed order states that as a
result of an investigation the Florida Office of Insurance Regulation has
determined that Southern Security Life violated Florida law (i) by knowingly
making statements, sales presentations, omissions or comparisons that
misrepresented the benefits, advantages, or terms of the New Success Life
Program, and (ii) by knowingly making advertisements, announcements, or
statements containing representations that were untrue or
misleading.
The
proposed order would require Security National Life and Southern Security Life
to immediately cease and desist from making any false or misleading
representations to Florida consumers suggesting that the New Success Life
Program would accumulate enough value to pay for college expenses in full. The
proposed order would also require Security National Life and Southern Security
Life to agree to no longer market or sell the New Success Life Program in the
State of Florida. In addition, Security National Life and Southern Security Life
would be required to send a written notice to Florida consumers who purchased
the New Success Life Program on or after January 1, 1998 stating that the higher
education program is a whole life insurance product, with a term and annuity
rider, and not a college trust fund, savings plan, or other program, and it may
not necessarily pay college expenses in full from the accumulated
value.
Moreover,
the written notice is to provide an opportunity for the Florida consumers who
purchased the New Success Life Program on or after January 1, 1998 to
cancel their policy and be given a full refund, including all premiums paid,
together with interest at the agreed upon rate in the original contract. If each
of the Florida consumers who purchased the New Success Life Program after
January 1, 1998 was to cancel his or her policy and receive a refund, the cost
to the Company to refund all premiums paid, including interest, would be
approximately $8,200,000.
The
proposed consent order would also require Security National Life and Southern
Security Life to issue refunds including interest to the eleven policyholders
whose affidavits were taken in connection with the administrative complaint that
the Florida Office of Insurance Regulation had previously filed against Franz
Wallace, the former National Sales Director of Southern Security Life. Security
National Life and Southern Security Life would additionally be required to issue
refunds, including interest, to any Florida policyholder in the New Success Life
Program who had filed a complaint with the Florida Department of Financial
Services or whose coverage had lapsed. Furthermore, Security National Life and
Southern Security Life would be required to notify the state insurance
department in each state in which the New Success Life Program is marketed of
the order and any complaint that Southern Security Life received relating to the
New Success Life Program from policyholders in that state. Finally, Security
National Life and Southern Security Life would be required to pay the Florida
Office of Insurance Regulation a penalty of $100,000 and administrative costs of
$5,000.
The
Company disputes the terms of the proposed consent order. The Company is not
aware of specific concerns that the Florida Office of Insurance Regulation has
with the New Success Life Program because it has received no specific
administrative complaint from the Florida Office of Insurance Regulation nor is
it aware of any recent market conduct examination that the Florida Office has
conducted relative to the program. The Company intends to vigorously oppose the
proposed consent order. The Company has engaged in discussions with the Florida
Office of Insurance Regulation in an effort to settle the dispute concerning the
proposed order. If the Company is unable to reach a satisfactory resolution with
the Florida Office of Insurance Regulation with respect to the terms of the
proposed consent order and the Florida Office of Insurance Regulation issues a
similar order, the Company intends to take action necessary to protect its
rights and interests, including requesting a hearing before an administrative
law judge to oppose the order.
CitiMortgage
Litigation and Settlement
On
November 24, 2009, a complaint was filed in the United States District Court,
Eastern District of Missouri, by CitiMortgage, Inc. against SecurityNational
Mortgage Company. The complaint claimed that at various times since
May 3, 2004 SecurityNational Mortgage sold mortgage loans to CitiMortgage that
did not meet requirements under certain agreements between CitiMortgage and
SecurityNational Mortgage, the complaint specifically addressing nineteen
mortgage loans. The requirements that SecurityNational Mortgage did
not meet, according to the allegations in the complaint, include delivering
mortgage loans (i) that were underwritten or originated based upon materially
inaccurate information or on material misrepresentations made by the borrower or
by SecurityNational Mortgage or its officers, employees or agents; (ii) for
which CitiMortgage discovered discrepancies concerning property ownership,
income representations, prior undisclosed mortgage or other debts, and
occupancy; (iii) for which applicable requirements or guidelines of
CitiMortgage, SecurityNational Mortgage, the loan originator, Fannie Mae,
Freddie Mac, FHA, VA and/or HUD were not followed; (iv) that were subject to
early payment defaults; and/or (v) that have turned out to be otherwise
defective or not in compliance with certain agreements between CitiMortgage and
SecurityNational Mortgage.
The
complaint further alleged that with respect to the nineteen mortgage loans,
SecurityNational Mortgage refused to cure these alleged nonconforming mortgage
loans or to repurchase such loans. Because of SecurityNational
Mortgage’s alleged failure to comply with its repurchase obligations in such
agreements, the complaint contended that SecurityNational Mortgage owes
CitiMortgage in excess of $3,226,000. The complaint also requested an
order requiring SecurityNational Mortgage to perform its obligations under the
agreements with CitiMortgage, including to repurchase the defective mortgage
loans and indemnify CitiMortgage for its costs and attorneys’ fees in the
lawsuit, interest, and such further relief as the court deems just and
proper.
SecurityNational
Mortgage disputed the claims that CitiMortgage asserted in the
complaint. Prior to filing an answer to the complaint,
SecurityNational Mortgage and CitiMortgage engaged in settlement
discussions. As a result of the settlement discussions, a settlement
was reached. The settlement covers the nineteen mortgage loans in the
complaint and, in addition, other mortgage loans that CitiMortgage purchased
from SecurityNational Mortgage. On February 15, 2010, SecurityNational Mortgage
and CitiMortgage entered into a written Settlement Agreement and Release
encompassing the aforesaid settlement. Under the terms of the
Settlement Agreement and Release, SecurityNational Mortgage paid a settlement
amount to CitiMortgage. The Company reserved a sufficient amount to
cover the settlement payment in its consolidated financial statements at
December 31, 2009.
The
Settlement Agreement and Release specifically provides that SecurityNational
Mortgage and CitiMortgage fully release each other from any and all claims,
liabilities and causes of action that each has or may have had against the other
concerning the nineteen mortgage loans identified in the complaint and the other
mortgage loans that CitiMortgage purchased from SecurityNational Mortgage prior
to the date of the agreement. The agreement does not extend to any
mortgage loans purchased by CitiMortgage after the effective date of the
settlement agreement nor to claims by borrowers. Moreover, the
release does not take effect until 91 days have passed from the date in which
SecurityNational Mortgage made payment to CitiMortgage under the Settlement
Agreement and Release, provided there has been no bankruptcy petition filed by
or against SecurityNational Mortgage during the 91-day period.
The Company is not a party to any other material proceedings
outside the ordinary course of business or to any other legal proceedings, which
if adversely determined, would have a material adverse effect on its financial
condition or results of operation.
Item
1A. Risk Factors.
The
following is a description of the most significant risk facing the Company and
how the Company mitigates this risk.
Mortgage Industry
Risk - Developments in the mortgage industry and credit markets adversely
affected the Company’s ability to sell certain of its mortgage loans to
investors, which impacted the Company’s financial results by requiring it to
assume the risk of holding and servicing many of these loans.
The
mortgage industry is still experiencing substantial change due to higher than
expected delinquencies from subprime loans and traditional and non-traditional
products. The market for new subprime loans has been substantially reduced and
several mortgage companies whose primary product consisted of subprime mortgage
originations have ceased operations. The Company funded $5,505,000 (0.14% of the
Company’s loan 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 created a volatile secondary market for
other products, especially alternative documentation (Alt A) loans. Alt A loans
were typically offered to qualified borrowers who had relatively high credit
scores but were not required to provide full documentation to support disclosure
in the loan application of personal income and assets owned. Alt A loans could
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.
The
Company provides allowances for losses on its mortgage loans held for investment
through an allowance for loan losses (a contra-asset account) and for mortgage
loans sold to investors 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 is classified as real estate. The
Company carries the foreclosed properties in Security National Life, Memorial
Estates, and SecurityNational Mortgage, its life, cemeteries and mortuaries and
mortgage subsidiaries, and will rent the properties until it is deemed desirable
to sell them.
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 loans 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.
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 based on the Company’s
historical experience. The amount accrued for the three months ended March 31,
2010 and 2009 was $1,373,000 and $5,385,000, respectively, and the charge to
expense has been included in selling, general and administrative expenses. The
estimated liability for indemnification losses is included in other liabilities
and accrued expenses, and, as of March 31, 2010 and 2009 the balance was
$8,992,000 and $5,337,000, respectively.
The
Company believes the allowance for loan losses and the loan loss reserve
represent probable loan losses incurred as of the balance sheet
date.
As of
March 31, 2010, the Company’s long term mortgage loan portfolio contained
mortgage loans of $18,211,000 in unpaid principal with delinquencies more than
90 days. Of this amount $11,799,000 in mortgage loans were in foreclosure
proceedings. The Company has not received or recognized any interest income on
the $18,211,000
in mortgage loans with delinquencies more than 90 days. During the three months
ended March 31, 2010 and 2009, the Company has increased its allowance for
mortgage loan losses by $167,000 and $781,000, respectively, which allowance was
charged to loan loss expense and is included in other selling, general and
administrative expenses for the period. The allowance for mortgage loan losses
as of March 31, 2010 and December 31, 2009 was $6,806,000 and $6,809,000,
respectively.
Also, at
March 31, 2010, the Company had foreclosed on a total of $48,284,000 in long
term mortgage loans, of which $4,033,000 in loans were foreclosed on and
reclassified as real estate during the three months ended March 31, 2010. The
Company carries the foreclosed properties in Security National Life, Memorial
Estates, and SecurityNational Mortgage, its life, cemeteries and mortuaries, and
mortgage subsidiaries, and will rent the properties until it is deemed desirable
to sell them.
The
Company is exposed to the risk that certain third party purchasers could have
claims against the Company requiring it to repurchase alleged defective mortgage
loans or to indemnify such purchasers against any losses related to such
loans. In particular, there have been assertions in third party
purchaser correspondence that SecurityNational Mortgage sold mortgage loans that
contained alleged misrepresentations or that experienced early payment defaults,
or that were otherwise defective or not in compliance with agreements between
SecurityNational Mortgage and the third party investors. As a result
of these claims, certain third party investors, including Bank of America –
Countrywide Home Loans, Inc. and Wells Fargo Funding, Inc., have made demands
that SecurityNational Mortgage repurchase certain alleged defective mortgage
loans that were sold to such investors or indemnify them against any losses
related to such loans. The Company has been reviewing these demands
and has reserved what it believes to be an adequate amount to cover potential
losses. Although the Company believes that it has reserved adequate
provisions for losses, from an industry wide perspective the number of
repurchase demands and the loss per loan have shown sharp increases during the
last several months as compared to historical amounts. It is unclear
whether such increases represent a trend that will continue in the
future.
SecurityNational
Mortgage has entered into loan purchase agreements to originate and sell
mortgage loans to unaffiliated warehouse banks. The total amount available to
originate loans under these loan purchase agreement at March 31, 2010 was
$55,000,000. SecurityNational Mortgage originates the loans and immediately
sells them to warehouse banks. As of March 31, 2010, there were $103,254,000 in
mortgage loans in which settlements with third party investors were still
pending. Generally, when mortgage loans are sold to warehouse banks,
SecurityNational Mortgage is no longer obligated, except in certain
circumstances, to pay the amounts outstanding on the mortgage loans, but is
required to pay a fee in the form of interest on a portion of the mortgage loans
between the date that the loans are sold to warehouse banks and the date of
settlement with third party investors. The terms of the loan purchase agreements
are typically for one year, with interest rates on a portion of the mortgage
loans ranging from 2.5% to 2.75% over the 30 day Libor rate. SecurityNational
Mortgage is in the process of renewing one of its loan purchase agreements that
expired on January 31, 2010 for an additional one year term. SecurityNational
Mortgage continues to sell mortgage loans to such warehouse bank while
negotiating the renewal of the loan purchase agreement.
The
following is a description of the most significant additional risks facing the
Company and how the Company mitigates those risks:
Legal and Regulatory
Risks - The risk that changes in the legal or regulatory environment in
which the Company operates will create additional expenses and/or risks not
anticipated by the Company in developing and pricing its products. That is,
regulatory initiatives designed to reduce insurer profits, new legal theories or
insurance company insolvencies through guaranty fund assessments may create
costs for the insurer beyond those recorded in the consolidated financial
statements. In addition, changes in tax law with respect to mortgage interest
deductions or other public policy or legislative changes may affect the
Company’s mortgage sales. Also, the Company may be subject to further
regulations in the cemetery/mortuary business. The Company mitigates these risks
by offering a wide range of products and by diversifying its operations, thus
reducing its exposure to any single product or jurisdiction, and also by
employing underwriting practices which identify and minimize the adverse impact
of such risks.
Interest Rate Risk -
The risk that interest rates will change which may cause a decrease in the value
of the Company’s investments or impair the ability of the Company to market its
mortgage and cemetery/mortuary products. This change in rates may cause certain
interest-sensitive products to become uncompetitive or may cause
disintermediation. The Company mitigates this risk by charging fees for
non-conformance with certain policy provisions,
by offering products that transfer this risk to the purchaser, and/or by
attempting to match the maturity schedule of its assets with the expected
payouts of its liabilities. To the extent that liabilities come due more quickly
than assets mature, the Company might have to borrow funds or sell assets prior
to maturity and potentially recognize a loss on the
sale.
Mortality/Morbidity
Risk - The risk that the Company’s actuarial assumptions may differ from
actual mortality/morbidity experience may cause the Company’s products to be
underpriced, may cause the Company to liquidate insurance or other claims
earlier than anticipated and other potentially adverse consequences to the
business. The Company minimizes this risk through sound underwriting practices,
asset/liability duration matching, and sound actuarial practices.
Estimates - The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
The
estimates susceptible to significant change are those used in determining the
liability for future policy benefits and claims, those used in determining
valuation allowances for mortgage loans on real estate, construction loans,
estimate of probable loan loss reserve, and other receivables, and those used in
determining the estimated future costs for pre-need sales. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None
Item
3. Defaults Upon Senior Securities.
None
Item
4. Submission of Matters to a Vote of Security
Holders.
None
Item
5. Other Information.
On April
16, 2010, the Company’s life insurance subsidiary, Security National Life,
entered into a revolving line of credit agreement with Key Bank National
Association, which provides for maximum revolving credit of $15,000,000. The
terms for the line of credit are interest at the LIBOR daily rate plus 2% per
annum on amounts drawn and a tiered unused fee between 0% to .25% per annum on
the monthly average unfunded balances. There will not be an unused fee if the
average balances drawn are 60% or more of the maximum revolving credit. The
maturity date of the line of credit is April 15, 2011. The line of credit is
secured by marketable fixed maturity securities. The amount drawn on the line of
credit to the market value of fixed maturity securities cannot exceed 75%. The
primary purpose of the line of credit is for additional funding capacity in
order for SecurityNational Mortgage to originate and sell mortgage loans to
third party investors. Amounts drawn on the line of credit will be repaid once
the funds are received from third party investors.
Item 6. Exhibits, Financial Statements
Schedules and Reports on Form 8-K.
(a)(1)
Financial
Statements
See “Table of Contents – Part I –
Financial Information” under page 2 above
(a)(2) Financial Statement
Schedules
None
All other
schedules to the consolidated financial statements required by Article 7 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
(a)(3)
Exhibits
The
following Exhibits are filed herewith pursuant to Rule 601 of Regulation S-K or
are incorporated by reference to previous filings.
|
3.1
|
Articles
of Restatement of Articles of Incorporation (4)
|
|
3.2
|
Amended
Bylaws (6)
|
|
4.1
|
Specimen
Class A Stock Certificate (1)
|
|
4.2
|
Specimen
Class C Stock Certificate (1)
|
|
4.3
|
Specimen
Preferred Stock Certificate and Certificate of Designation of Preferred
Stock (1)
|
|
10.1
|
Restated
and Amended Employee Stock Ownership Plan and Trust Agreement
(1)
|
|
10.2
|
2003
Stock Option Plan (5)
|
|
10.3
|
2006
Director Stock Option Plan (12)
|
|
10.4
|
Deferred
Compensation Agreement with George R. Quist (2)
|
|
10.5
|
Deferred
Compensation Plan (3)
|
|
10.6
|
Employment
agreement with J. Lynn Beckstead, Jr. (7)
|
|
10.7
|
Employment
agreement with Scott M. Quist (8)
|
|
10.8
|
Indemnification
Agreement among Security National Life Insurance Company, Capital Reserve
Life Insurance Company, and the shareholders of Capital Reserve Life
Insurance Company (9)
|
|
10.9
|
Escrow
Agreement among Security National Insurance Company, Capital Reserve Life
Insurance Company, the shareholders of Capital Reserve Life Insurance
Company, and Mackey Price Thompson & Ostler as Escrow Agent
(9)
|
|
10.10
|
Reinsurance
Agreement between Security National Life Insurance Company and Capital
Reserve Life Insurance Company (9)
|
|
10.11
|
Stock
Purchase Agreement among Security National Life Insurance Company,
Southern Security Life Insurance Company, and the shareholders of Southern
Security Life Insurance Company (10)
|
|
10.12
|
Reinsurance
Agreement among Security National Life Insurance Company, Southern
Security Life Insurance Company, and the shareholders of Southern Security
Life Insurance Company (11)
|
|
10.13
|
Escrow
Agreement among Security National Life Insurance Company, Southern
Security Life Insurance Company, the shareholders of Southern Security
Life Insurance Company, and Mackey Price Thompson & Ostler, as escrow
agent (12)
|
|
10.14
|
Indemnification
Agreement among SecurityNational Mortgage Company, Lehman Brothers Bank,
and Aurora Loan Services (13)
|
|
10.15
|
Agreement
and Plan of Complete Liquidation of Security National Life Insurance
Company of Louisiana into Security National Life Insurance Company
(14)
|
|
10.16
|
Assumption
Reinsurance Agreement between Security National Life Insurance Company of
Louisiana and Security National Life Insurance Company
(14)
|
|
10.17
|
Assignment
between Security National Life Insurance Company of Louisiana and Security
National Life Insurance Company (14)
|
|
10.18
|
Agreement
and Plan of Complete Liquidation of Capital Reserve Life Insurance Company
into Security National Life Insurance Company (14)
|
|
10.19
|
Assignment
between Capital Reserve Life Insurance Company and Security National Life
Insurance Company (14)
|
|
21
|
Subsidiaries
of the Registrant
|
|
31.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as enacted by Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
(1)
|
Incorporated
by reference from Registration Statement on Form S-1, as filed on
September 29, 1987
|
|
(2)
|
Incorporated
by reference from Annual Report on Form 10-K, as filed on March 31,
1989
|
|
(3)
|
Incorporated
by reference from Annual Report on Form 10-K, as filed on April 3,
2002
|
|
(4)
|
Incorporated
by reference from Report on Form 8-K/A as filed on January 8,
2003
|
|
(5)
|
Incorporated
by reference from Schedule 14A Definitive Proxy Statement, Filed on
September 5, 2003, relating to the Company’s Annual Meeting of
Shareholders
|
|
(6)
|
Incorporated
by reference from Report on Form 10-Q, as filed on November 14,
2003
|
|
(7)
|
Incorporated
by reference from Report on Form 10-K, as filed on March 30,
2004
|
|
(8)
|
Incorporated
by reference from Report on Form 10-Q, as filed on August 13,
2004
|
|
(9)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 14,
2008
|
|
(10)
|
Incorporated
by reference from Report on Form 8-K, as filed on August 25,
2008
|
|
(11)
|
Incorporated
by reference from Report on Form 8-K/A, as filed on September 17,
2008
|
|
(12)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 7,
2009
|
|
(13)
|
Incorporated
by reference from Report on Form 10-K, as filed on March 31,
2009
|
|
(14)
|
Incorporated
by reference from Report on Form 8-K, as filed on January 12,
2010
|
Current
report on Form 8-K, as filed on January 12, 2010.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
REGISTRANT
SECURITY NATIONAL FINANCIAL
CORPORATION
Registrant
Dated:
May 14, 2010
|
|
/s/ George R.
Quist
|
|
|
George
R. Quist
|
|
|
Chairman
of the Board and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
Dated:
May 14, 2010
|
|
/s/ Stephen M.
Sill
|
|
|
Stephen
M. Sill
|
|
|
Vice
President, Treasurer and Chief Financial Officer
|
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|