# Security National Financial Corp: Form 10-Q/A for the period ended Mar 31, 2017

- Company: [Security National Financial Corp](/companies/snfca.md) (CIK 318673)
- Form: 10-Q/A
- Filed: 2017-08-25
- Accepted by EDGAR: Aug 25, 2017, 16:58 ET
- Period: 2017-03-31
- Accession: 0001096906-17-000577
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/318673/000109690617000577/security.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/318673/000109690617000577/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-01-01 to 2017-03-31 | $70.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2017-01-01 to 2017-03-31 | $521.9k | us-gaap:CostOfGoodsAndServicesSold |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $1.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $1.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 15,527,996 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | $30.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $312.6k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Total assets | at 2017-03-31 | $959.5m | us-gaap:Assets |
| Total liabilities | at 2017-03-31 | $824.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-03-31 | $134.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,187 characters.

### Overview

The accompanying management's discussion and analysis gives effect to the restatement discussed in Note 13 to the Condensed Consolidated Financial Statements.

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 relatively low interest rates by originating mortgage loans.

### Insurance Operations

The Company's life insurance business includes funeral plans and interest-sensitive life insurance, as well as other traditional life, accident and health insurance products. The Company places specific marketing emphasis on funeral plans through pre-need planning.

A funeral plan is a small face value life insurance policy that generally has face coverage of up to $25,000. The Company believes that funeral plans represent a marketing niche that has lower competition because most insurance companies do not offer similar coverage. The purpose of the funeral plan policy is to pay the costs and expenses incurred at the time of a person's death. On a per thousand-dollar cost of insurance basis, these policies can be more expensive to the policyholder than many types of non-burial insurance due to their low face amount, requiring the fixed cost of the policy administration to be distributed over a smaller policy size, and the simplified underwriting practices that result in higher mortality costs.

The following table shows the condensed financial results of the insurance operations for three months ended March 31, 2017 and 2016. See Note 6 to the Condensed Consolidated Financial Statements.

| Revenues from external customers | Three months ended March 31 (in thousands of dollars) 2017 | 2016 | % Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Insurance premiums | $17,357 | $14,452 | 20% |
| Net investment income | 7,586 | 6,963 | 9% |
| Income from loan originations | 1,188 | 472 | 152% |
| Other | 28 | 188 | (85%) |
| Total | $26,159 | $22,075 | 19% |
| Intersegment revenue | $2,989 | $3,103 | (4%) |
| Earnings before income taxes | $1,483 | $1,104 | 34% |

Intersegment revenues are primarily interest income from the warehouse line provided to SecurityNational Mortgage Company ("SecurityNational Mortgage"). Profitability in the three months ended March 31, 2017 has increased due to increases in insurance premiums, mortgage fee income and net investment income.

### Cemetery and Mortuary Operations

The Company sells mortuary services and products through its eight mortuaries in Utah. The Company also sells cemetery products and services through its five cemeteries in Utah and one cemetery in San Diego County, California. Cemetery land sales and at-need product sales and services are recognized as revenue at the time of sale or when the services are performed. Pre-need cemetery product sales are deferred until the merchandise is delivered and services performed.

The following table shows the condensed financial results of the Cemetery and Mortuary operations for the three months ended March 31, 2017 and 2016. See Note 6 to the Condensed Consolidated Financial Statements.

| Revenues from external customers | Three months ended March 31 (in thousands of dollars) 2017 | 2016 | % Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Mortuary revenues | $1,406 | $1,366 | 3% |
| Cemetery revenues | 2,131 | 2,019 | 6% |
| Other | 68 | (54) | 226% |
| Total | $3,605 | $3,331 | 8% |
| Earnings before income taxes | $759 | $469 | 62% |

Included in other revenue is rental income from residential and commercial properties purchased from Security National Life. Memorial Estates purchased these properties from financing provided by Security National Life. The rental income is offset by property insurance, taxes and maintenance expenses. Memorial Estates has recorded depreciation on these properties of $170,000 and $187,000 for the three months ended March 31, 2017 and 2016, respectively.

### Mortgage Operations

#### Overview

The Company's wholly owned subsidiaries, SecurityNational Mortgage and EverLEND Mortgage Company (formerly known as Green Street Mortgage Services, Inc.), are mortgage lenders incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), incorporated under the laws of the State of Utah and approved and regulated by the Federal Housing Administration (FHA), a department of the U.S. Department of Housing and Urban Development (HUD), which originate mortgage loans that qualify for government insurance in the event of default by the borrower, in addition to various conventional mortgage loan products. SecurityNational Mortgage and EverLEND Mortgage obtain mortgage loans originated in retail offices and through independent brokers. Mortgage loans originated by the Company's mortgage subsidiaries are funded through loan purchase agreements from Security National Life and unaffiliated financial institutions.

The Company's mortgage subsidiaries receive fees from the borrowers and secondary fees from third party investors that purchase their loans. Loans originated by SecurityNational Mortgage are generally sold with mortgage servicing rights released to third party investors or retained by SecurityNational Mortgage. SecurityNational Mortgage currently retains the mortgage servicing rights on approximately 30% of its loan origination volume. These loans are serviced by an approved third party sub-servicer.

For the three months ended March 31, 2017 and 2016, SecurityNational Mortgage originated 2,985 loans ($568,846,000 total volume) and 3,139 loans ($586,580,000 total volume), respectively. For the three months ended March 31, 2017 and 2016, EverLEND Mortgage originated one loan ($310,000 total volume) and -0- loans ($-0- total volume), respectively.

The following table shows the condensed financial results of the mortgage operations for the three months ended March 31, 2017 and 2016. See Note 6 to the Condensed Consolidated Financial Statements.

| Revenues from external customers | Three months ended March 31 (in thousands of dollars) 2017 | 2016 | % Increase (Decrease) |
| --- | ---: | ---: | ---: |
| Income from loan originations | $35,822 | $36,784 | (3%) |
| Secondary gains from investors | 5,244 | 7,266 | (28%) |
| Total | $41,066 | $44,050 | (7%) |
| Earnings before income taxes | $655 | $2,498 | (74%) |

The decrease in earnings for the three months ended March 31, 2017 was due to a reduction in mortgage loan originations.

### Mortgage Loan Loss Settlements

Future loan losses can be extremely difficult to estimate. However, management believes that the Company's reserve methodology and its current practice of property preservation allow it to estimate its potential losses on loans sold. The estimated liability for indemnification losses was included in other liabilities and accrued expenses and, as of March 31, 2017 and December 31, 2016, the balances were $1,065,000 and $628,000, respectively.

### Mortgage Loan Loss Litigation

For a description of the litigation involving SecurityNational Mortgage and Lehman Brothers and Aurora Loan Services, reference is to Part II, Item 1. Legal Proceedings.

### Consolidation

### Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016

Total revenues increased by $1,373,000, or 2.0%, to $70,829,000 for the three months ended March 31, 2017, from $69,456,000 for the comparable period in 2016. Contributing to this increase in total revenues was a $2,906,000 increase in insurance premiums and other considerations, a $571,000 increase in net investment income, a $499,000 increase in other revenues, a $113,000 increase in net mortuary and cemetery sales, a $47,000 increase in realized gains on investments and other assets, and a $21,000 decrease in other than temporary impairments on investments. This increase in total revenues was partially offset by a $2,784,000 decrease in mortgage fee income.

Insurance premiums and other considerations increased by $2,906,000, or 20.1%, to $17,357,000 for the three months ended March 31, 2017, from $14,451,000 for the comparable period in 2016. This increase was primarily due to an increase in renewal premiums and an increase in first year premiums as a result of increased insurance sales.

Net investment income increased by $571,000, or 6.4%, to $9,563,000 for the three months ended March 31, 2017, from $8,992,000 for the comparable period in 2016. This increase was primarily attributable to a $318,000 increase in fixed maturity securities income, a $260,000 increase in insurance assignment income, a $197,000 increase in mortgage loan interest, and a $56,000 increase in rental income from real estate owned. This increase was partially offset by a $204,000 increase in investment expenses, a $58,000 decrease in short-term investment income, and a $17,000 decrease in equity securities income.

Net mortuary and cemetery sales increased by $113,000, or 3.5%, to $3,359,000 for the three months ended March 31, 2017, from $3,246,000 for the comparable period in 2016. This increase was primarily due to an increase in at-need sales in both the cemetery and mortuary operations.

Realized gains on investments and other assets increased by $47,000, or 48.4%, to $145,000 in realized gains for the three months ended March 31, 2017, from $98,000 in realized gains for the comparable period in 2016. This increase in realized gains on investments and other assets was primarily attributable to a $27,000 increase in realized gains on fixed maturity securities, and a $17,000 increase in realized gains on securities available for sale.

Mortgage fee income decreased by $2,784,000, or 6.8%, to $38,428,000, for the three months ended March 31, 2017, from $41,212,000 for the comparable period in 2016. This decrease was primarily due to a reduction in mortgage loan originations.

Other revenues increased by $499,000, or 32.6%, to $2,029,000 for the three months ended March 31, 2017, from $1,530,000 for the comparable period in 2016. This increase was due to an increase in mortgage servicing fees.

Total benefits and expenses were $67,932,000, or 95.9% of total revenues, for the three months ended March 31, 2017, as compared to $65,385,000, or 94.1% of total revenues, for the comparable period in 2016.

Death benefits, surrenders and other policy benefits, and future policy benefits increased by an aggregate of $2,756,000 or 22.1%, to $15,220,000 for the three months ended March 31, 2017, from $12,464,000 for the comparable period in 2016. This increase was primarily the result of a $1,446,000 increase in future policy benefits, a $971,000 increase in death benefits, and a $339,000 increase in surrender and other policy benefits.

Amortization of deferred policy and pre-need acquisition costs and value of business acquired increased by $51,000, or 2.3%, to $2,264,000 for the three months ended March 31, 2017, from $2,213,000 for the comparable period in 2016. This increase was primarily due to an increase in insurance sales expenses.

Selling, general and administrative expenses decreased by $514,000, or 1.0%, to $48,671,000 for the three months ended March 31, 2017, from $49,185,000 for the comparable period in 2016. This decrease was primarily the result of a $2,856,000 decrease in commissions resulting from a decrease in sales, and a $413,000 decrease in costs related to funding mortgage loans. This decrease was partially offset by a $1,392,000 increase in personnel expenses resulting from increased salaries for existing employees and the hiring of new employees, a $950,000 increase in other expenses, a $233,000 increase in advertising, a $104,000 increase in depreciation on property and equipment, and a $75,000 increase in rent and rent related expenses.

Interest expense increased by $190,000, or 17.8%, to $1,254,000 for the three months ended March 31, 2017, from $1,064,000 for the comparable period in 2016. This increase was primarily due to an increase in interest expense on mortgage warehouse lines, and an increase in interest expense due to the completion of the Dry Creek at East Village Apartments development in December 2015, resulting from interest from the bank loan that had been capitalized during the construction phase of each building and now being expensed.

Comprehensive income for the three months ended March 31, 2017 and 2016 amounted to gains of $1,881,000 and $2,837,000, respectively. This $956,000 decrease in comprehensive income was primarily the result of a $679,000 decrease in net income, and a $278,000 decrease 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 subsidiaries realize 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 related to the issuance of new policies, the maintenance of existing policies, debt service, and to meet current operating expenses.

During the three months ended March 31, 2017 and 2016, the Company's operations provided cash of $30,431,000 and $27,275,000, respectively. This was due primarily to an increase in cash collected on loans held for sale.

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 fair 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. 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 that 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, real estate, mortgage loans, and warehousing of mortgage loans on a short-term basis before selling the loans to investors in accordance with the requirements and laws governing the life insurance subsidiaries. Bonds owned by the insurance subsidiaries amounted to $185,822,000 and $184,356,000 as of March 31, 2017 and December 31, 2016, respectively. This represents 33.4% and 33.1% of the total investments as of March 31, 2017 and December 31, 2016, 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, 2017, 8.8% (or $16,424,000) and at December 31, 2016, 9.0% (or $16,513,000) of the Company's total bond investments were invested in bonds in rating categories three through six, which were 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. In accordance with Company policy, however, any such securities purchased in the future will be classified as held to maturity. Notwithstanding, business conditions may develop in the future which may indicate a need for a higher level of liquidity in the investment portfolio. In that event, the Company believes it could sell short-term investment grade securities before liquidating higher yielding longer-term securities.

The 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, 2017 and December 31, 2016, the life insurance subsidiaries were in compliance with the regulatory criteria.

The Company's total capitalization of stockholders' equity, bank loans and notes payable was $288,275,000 as of March 31, 2017, as compared to $284,700,000 as of December 31, 2016. Stockholders' equity as a percent of total capitalization was 46.7% and 46.6% as of March 31, 2017 and December 31, 2016, respectively.

Lapse rates measure the amount of insurance terminated during a particular period. The Company's lapse rate for life insurance in 2016 was 9.6% as compared to a rate of 7.4% for 2015. The 2017 lapse rate to date has been approximately the same as 2016.

At March 31, 2017, $44,605,000 of the Company's consolidated stockholders' equity represented the statutory stockholders' equity of the Company's life insurance subsidiaries. The life insurance subsidiaries cannot pay a dividend to its parent company, without approval of state insurance regulatory authorities.

## Market risk

As filed, 121 characters.

There have been no significant changes since the Annual Report on Form 10-K/A filed for the year ended December 31, 2016.

## Controls and procedures

As filed, 3,617 characters.

#### Disclosure Controls and Procedures

As of March 31, 2017, the Company carried out an evaluation under the supervision and with the participation of its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC's rules and forms and that such information is accumulated and communicated to management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The officers have concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2017, and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented in conformity with United States Generally Accepted Accounting Principles (GAAP).

#### Changes in Internal Control over Financial Reporting

Except for the material weaknesses discussed in the Company's Annual Report on Form 10K/A, there have not been any significant changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) in the first quarter of 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

### Remediation Efforts to Address Material Weakness

During the fourth quarter of 2016, there were changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Two of the prior errors were determined to be immaterial errors and were noted in connection with the annual audit of the Company's consolidated financial statements for the fiscal year ended December 31, 2016. The other two errors were discovered as a result of a review of current accounting policies and were determined to be material errors. Management has corrected these errors in this Form 10-K/A for the fiscal year ended December 2016. See Notes 21 and 22 to the Company's Consolidated Financial Statements.

The Company is implementing measures to remediate the underlying causes that gave rise to the material weaknesses. The following remediation steps are among the measures currently being implemented at the time of this filing by management: (i) a thorough review of the accounting department to ensure that the staff has the appropriate training and the level of reviews are commensurate with the complexity of the accounting; and (ii) a thorough review of the processes and procedures used in the Company's accounting policies and the implementation of those policies.

The Company believes the measures described above will remediate the control deficiencies that it has identified and strengthen its internal control over financial reporting. The Company is committed to continuous improvement of its internal control processes and will continue to diligently review its financial reporting controls and procedures.

Filed Aug 25, 2017.
Source: SEC EDGAR, the filing index for accession 0001096906-17-000577. Last ingested by Listed: Nov 9, 2026, 23:01 ET. No prices; not investment advice.