SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2003 Commission File Number: 0-9341
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SECURITY NATIONAL FINANCIAL CORPORATION
Exact Name of Registrant.
UTAH 87-0345941
- ------------------------------ -------------------------
(State or other jurisdiction IRS Identification Number
of incorporation or organization)
5300 South 360 West, Salt Lake City, Utah 84123
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code (801) 264-1060
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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 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 4,707,153
- ------------------------------------- ----------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2003
Class C Common Stock, $.20 par value 6,103,703
- ------------------------------------ ----------------------------------
Title of Class Number of Shares Outstanding as of
June 30, 2003
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page No.
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Consolidated Statement of Earnings - Six and
three months ended June 30, 2003 and 2002 (unaudited)........3
Consolidated Balance Sheet - June 30, 2003
and December 31, 2002 (unaudited)..........................4-5
Consolidated Statement of Cash Flows -
Six months ended June 30, 2003 and 2002 (unaudited)..........6
Notes to Consolidated Financial Statements................7-10
Item 2 Management's Discussion and Analysis........................10-14
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Item 3 Quantitative and Qualitative Disclosure of Market Risk.........14
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Item 4 Controls and Procedures........................................14
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PART II - OTHER INFORMATION
Other Information...........................................14-17
Signature Page.................................................18
Certifications..............................................19-21
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
-------- --------
Revenues: 2003 2002 2003 2002
- -------- ---- ---- ---- ----
Insurance premiums and other considerations $11,590,095 $6,692,209 $5,725,668 $3,369,453
Net investment income 8,365,540 5,451,638 4,445,168 2,527,873
Net mortuary and cemetery sales 5,295,245 5,539,033 2,710,389 2,810,770
Realized gains on investments and other assets -- 718,816 -- (601)
Mortgage fee income 52,912,149 18,840,224 31,156,229 8,974,233
Other 183,425 308,967 59,303 267,620
------------ ------------ ------------ ------------
Total revenues 78,346,454 37,550,887 44,096,757 17,949,348
Benefits and expenses:
Death benefits 7,043,060 2,973,101 3,224,741 1,304,431
Surrenders and other policy benefits 1,101,092 1,070,100 495,936 440,189
Increase in future policy benefits 2,807,653 2,059,116 1,391,082 1,311,930
Amortization of deferred policy acquisition costs
and cost of insurance acquired 2,268,779 1,768,769 1,309,884 934,242
General and administrative expenses:
Commissions 39,220,239 13,962,770 23,369,602 6,931,677
Salaries 6,957,688 5,383,137 3,735,297 2,774,187
Other 10,183,897 6,365,369 5,563,786 3,054,028
Interest expense 1,799,438 522,796 975,970 200,443
Cost of goods and services sold
of the mortuaries and cemeteries 1,123,738 1,282,793 562,871 682,468
------------ ------------ ------------ ------------
Total benefits and expenses 72,505,584 35,387,951 40,629,169 17,633,595
Earnings before income taxes 5,840,870 2,162,936 3,467,588 315,753
Income tax expense (1,920,227) (530,818) (1,252,685) (74,446)
Minority interest (income) loss of subsidiary (14,406) 14,365 6,284 25,315
------------ ------------ ------------ ------------
Net earnings $3,906,237 $1,646,483 $2,221,187 $266,622
============ ============ ============ ============
Net earnings per common share $0.74 $.35 $.42 $.06
============ ============ ============ ============
Weighted average outstanding common shares 5,301,245 4,678,817 5,317,068 4,680,628
============ ============ ============ ============
Net earnings per common share-assuming dilution $.71 $.33 $.40 $.05
============ ============ ============ ============
Weighted average outstanding common shares
assuming-dilution 5,514,930 5,011,394 5,537,942 5,024,915
============ ============ ============ ============
See accompanying notes to consolidated financial statements
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2003 December 31,
(Unaudited) 2002
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Assets:
- ------
Insurance-related investments:
Fixed maturity securities held
to maturity, at amortized cost $35,422,326 $33,015,097
Fixed maturity securities available
for sale, at market 18,423,272 18,514,943
Equity securities available for sale,
at market 3,015,675 2,642,093
Mortgage loans on real estate 22,798,053 21,016,008
Real estate, net of accumulated
depreciation and allowances for losses 9,301,555 9,331,248
Policy, student and other loans 10,927,977 10,974,165
Short-term investments 3,108,127 5,335,478
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Total insurance-related
investments 102,996,985 100,829,032
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Restricted assets of cemeteries and mortuaries 5,308,761 5,332,736
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Cash 5,392,385 38,199,041
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Receivables:
Trade contracts 17,119,581 11,358,027
Mortgage loans sold to investors 128,615,874 89,455,105
Receivable from agents 1,604,576 2,054,071
Receivable from officers 55,290 70,290
Other 1,690,646 1,131,977
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Total receivables 149,085,967 104,069,470
Allowance for doubtful accounts (3,975,375) (2,385,309)
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Net receivables 145,110,592 101,684,161
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Policyholder accounts on deposit
with reinsurer 6,877,703 6,955,691
Land and improvements held for sale 8,528,444 8,429,215
Accrued investment income 1,050,951 928,287
Deferred policy and pre-need acquisition costs 16,752,198 15,917,257
Property, plant and equipment, net 10,789,793 10,921,635
Cost of insurance acquired 15,488,104 16,330,711
Excess of cost over net assets
of acquired subsidiaries 683,191 683,191
Other 759,359 945,805
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Total assets $319,738,466 $307,156,762
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
June 30, 2003 December 31,
(Unaudited) 2002
Liabilities:
Future life, annuity, and other policy benefits $217,840,855 $215,980,207
Unearned premium reserve 1,998,696 1,914,700
Bank loans payable 14,872,996 16,113,227
Notes and contracts payable 4,694,002 3,160,009
Deferred pre-need cemetery and funeral
contracts revenues and estimated future
cost of pre-need sales 10,323,844 10,002,396
Accounts payable 2,221,139 1,553,777
Funds held under reinsurance treaties 1,312,974 1,334,964
Other liabilities and accrued expenses 15,739,373 10,182,382
Income taxes 10,023,961 8,103,882
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Total liabilities 279,027,840 268,345,544
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Commitments and Contingencies -- --
Minority interest 4,073,443 4,297,807
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Stockholders' Equity:
Common stock:
Class A: $2.00 par value, authorized
10,000,000 shares, issued 5,860,369 shares
in 2003 and 5,794,492 shares in 2002 11,720,739 11,588,984
Class C: $0.20 par value, authorized
7,500,000 shares, issued 6,175,452 shares
in 2003 and 6,182,669 shares in 2002 1,235,089 1,236,533
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Total common stock 12,955,828 12,825,517
Additional paid-in capital 11,516,685 11,280,842
Accumulated other comprehensive income
(loss) and other items, net of deferred taxes (708,569) 1,191,863
Retained earnings 15,657,826 11,992,542
Treasury stock at cost ( 1,153,216 Class A
shares and 71,749 Class C shares in 2003;
1,151,811 Class A shares and 71,749 Class
C shares in 2002, held by affiliated companies) (2,784,587) (2,777,353)
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Total stockholders' equity 36,637,183 34,513,411
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Total liabilities and stockholders' equity $319,738,466 $307,156,762
============= =============
See accompanying notes to consolidated financial statements.
SECURITY NATIONAL FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net cash provided by (used in)
operating activities $(25,866,840) $7,127,294
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Cash flows from investing activities: Securities
held to maturity:
Purchase - fixed maturity securities (7,580,086) (4,062,931)
Calls and maturities - fixed
maturity securities 5,183,815 3,046,980
Securities available for sale:
Calls and maturities - fixed
maturity securities 360,000 2,301,497
Purchases of equity securities (51,921) (367)
Purchases of short-term investments (11,648,133) (1,182,397)
Sales of short-term investments 13,875,484 --
Purchases of restricted assets 23,975 (193,141)
Mortgage, policy, and other loans made (7,616,206) (652,143)
Payments received for mortgage,
real estate, policy, and other loans 5,860,877 3,197,227
Purchases of property, plant,
and equipment (614,440) (869,642)
Purchases of real estate (673,888) (1,409,857)
Sale of real estate 477,979 --
------------ ------------
Net cash provided by
(used in) investing activities (2,402,544) 175,226
------------ ------------
Cash flows from financing activities:
Annuity receipts 2,951,308 4,345,939
Annuity withdrawals (5,290,214) (5,649,206)
Repayment of bank loans and notes and
contracts payable (2,216,333) (808,626)
Proceeds from borrowings on bank loans
and notes and contracts payable -- 186,594
Sale of Treasury Stock -- 37,824
Other 17,967 --
------------ ------------
Net cash (used in) provided by
financing activities (4,537,272) (1,887,475)
------------ ------------
Net change in cash (32,806,656) 5,415,045
Cash at beginning of period 38,199,041 8,757,246
------------ ------------
Cash at end of period $5,392,385 $14,172,291
============ ============
See accompanying notes to consolidated financial statements
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, (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 Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. 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 and six months ended June 30, 2003, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 2002, included
in the Company's Quarterly Report on Form 10-K (file number 0-9341).
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 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.
2. Comprehensive Income
For the six months ended June 30, 2003 and 2002, total comprehensive income
amounted to $2,005,805 and $1,550,514, respectively.
For the three months ended June 30, 2003 and 2002, total comprehensive income
amounted to $2,306,033 and $242,703, respectively.
3. Stock-Based Compensation
The Company accounts for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted SFAS No. 123,
"Accounting for Stock-Based Compensation". In accordance with the provisions of
SFAS 123, the Company has elected to continue to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25"), and related interpretations in accounting for its stock option plans.
In accordance with APB Opinion No. 25, no compensation cost has been recognized
for these plans. Had compensation cost for these plans been determined based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, the Company's net earnings would have been reduced by the
following:
Six Months Ended June 30,
2003 2002
---- ----
Net earnings as reported $3,906,237 $1,646,483
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects (133,000) --
----------- -----------
Pro forma net earnings $3,773,237 $1,646,483
========== ==========
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 (Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Net earnings per common share:
Basic - as reported $.74 $.35
Basic - pro forma $.71 $.35
Diluted - as reported $.71 $.33
Diluted - pro forma $.68 $.33
4. Earnings Per Share
In accordance with SFAS 128, the basic and diluted earnings per share amounts
were calculated as follows:
Six Months Ended June 30,
2003 2002
---- ----
Numerator:
Net income $3,906,237 $1,646,483
========== ==========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 5,301,245 4,678,817
========== ===========
Effect of dilutive securities:
Employee stock options 208,961 304,318
Stock appreciation rights 4,724 28,259
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Dilutive potential common shares 213,930 332,577
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Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 5,514,247 5,011,394
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Basic earnings per share $.74 $.35
==== ====
Diluted earnings per share $.71 $.33
==== ====
Three Months Ended June 30,
2003 2002
---- ----
Numerator:
Net income $2,221,187 $266,622
========== ========
Denominator:
Denominator for basic earnings per share-
weighted-average shares 5,317,068 4,680,628
----------- -----------
Effect of dilutive securities:
Employee stock options 216,081 314,050
Stock appreciation rights 4,793 30,237
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Dilutive potential common shares 220,874 344,287
----------- -----------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions 5,537,942 5,024,915
=========== ===========
Basic earnings per share $.42 $.06
==== ====
Diluted earnings per share $.40 $.05
==== ====
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, (Unaudited)
5. Business Segment
Life Cemetery/ Reconciling
Insurance Mortuary Mortgage Items Consolidated
---------- --------- --------- ------------ ------------
For the Six Months Ended
June 30, 2003
- ------------------------
Revenues from
external customers $14,774,646 $5,828,578 $57,743,230 $ -- $78,346,454
Intersegment revenues 4,715,862 -- -- (4,715,862) --
Segment profit (loss) 603,100 (89,628) 5,327,398 -- 5,840,870
Identifiable assets 304,595,198 43,015,895 24,293,368 (52,165,995) 319,738,466
For the Six Months Ended
June 30, 2002
- ------------------------
Revenues from
external customers $9,761,198 $6,751,231 $21,038,458 $ -- $37,550,887
Intersegment revenues 2,277,396 -- -- (2,277,396) --
Segment profit (loss) 504,694 1,026,417 631,825 -- 2,162,936
Identifiable assets 202,337,272 40,505,340 5,717,796 (33,930,211) 214,630,197
For the Three Months Ended
June 30, 2003
- --------------------------
Revenues from
external customers $7,338,524 $2,987,765 $33,770,468 $ -- $44,096,757
Intersegment revenues 1,900,134 -- -- (1,900,134) --
Segment profit 715,561 7,651 2,744,376 -- 3,467,588
For the Three Months Ended
June 30, 2002
- --------------------------
Revenues from
external customers $4,887,456 $3,062,323 $9,999,569 $ -- $17,949,348
Intersegment revenues 1,071,324 -- -- (1,071,324) --
Segment profit 168,843 55,575 91,335 -- 315,753
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003, (Unaudited)
6. Recent Acquisition
On December 23, 2002, the Company completed an asset purchase transaction with
Acadian Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), in which it acquired from Acadian $75,000,000 in assets and
$75,000,000 in insurance reserves through its wholly owned subsidiary, Security
National Life Insurance Company, a Utah domiciled life insurance company. The
acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, consisting of all of GNLIC's insurance policies in force and in effect
on June 1, 2001.
7. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30, 2003. We are currently
evaluating the effect that the adoption of SFAS No. 149 will have on our results
of operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance may
have been accounted for as equity, must now be accounted for as liabilities (or
an asset in some circumstances). The financial instruments affected include
mandatory redeemable stock, certain financial instruments that require or may
require the issuer to buy back some of its shares in exchange for cash or other
assets and certain obligations that can be settled with shares of stock. This
Statement is effective for all such financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. We are currently evaluating
the effect that the adoption of SFAS No. 150 will have on our results of
operations and financial position.
Item 2. Management's Discussion and Analysis
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.
During the six months ended June 30, 2003, Security National Mortgage Company
("SNMC") experienced increases in revenue and expenses due to the increase in
loan volume of its operations. SNMC is a mortgage lender incorporated under the
laws of the State of Utah. SNMC 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. SNMC obtains loans primarily
from independent brokers and correspondents. SNMC funds the loans from internal
cash flows and lines of credit from financial institutions. SNMC receives fees
from the borrowers and other secondary
fees from third party investors who purchase the loans from SNMC. SNMC sells all
of its loans to third party investors and does not retain servicing to these
loans. SNMC pays the brokers and correspondents a commission for loans that are
brokered through SNMC. SNMC originated and sold 9,995 ($1,462,000,000) and 4,132
($587,497,000) loans respectively for the six months ended June 30, 2003 and
2002.
On December 23, 2002, the Company completed an asset purchase transaction with
Acadian Life Insurance Company, a Louisiana domiciled life insurance company
("Acadian"), in which it acquired from Acadian $75,000,000 in assets and
$75,000,000 in insurance reserves through its wholly owned subsidiary, Security
National Life Insurance Company, a Utah domiciled life insurance company. The
acquired assets consist primarily of approximately 275,000 funeral insurance
policies in force in the state of Mississippi. The assets were originally
acquired by Acadian from Gulf National Life Insurance Company ("GNLIC") on June
6, 2001, consisting of all of GNLIC's insurance policies in force and in effect
on June 1, 2001.
Results of Operations
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Total revenues increased by $40,795,000, or 108.6%, to $78,346,000, for the six
months ended June 30, 2003, from $37,551,000 for the six months ended June 30,
2002. Contributing to this increase in total revenues was a $34,072,000 increase
in mortgage fee income, a $4,898,000 increase in insurance premiums and other
considerations, and a $2,914,000 increase in net investment income.
Insurance premiums and other considerations increased by $4,898,000, or 73.2%,
to $11,590,000 for the six months ended June 30, 2003, from $6,692,000 for the
comparable period in 2002. This increase was primarily due to the additional
insurance premiums from the policies acquired in the asset purchase transaction
with Acadian Life.
Net investment income increased by $2,914,000, or 53.5%, to $8,366,000 for the
six months ended June 30, 2003, from $5,452,000 for the comparable period in
2002. This increase was primarily attributable to the additional investment
income from the assets acquired in the asset purchase transaction with Acadian
Life.
Net mortuary and cemetery sales decreased by $244,000, or 4.4%, to $5,295,000
for the six months ended June 30, 2003, from $5,539,000 for the comparable
period in 2002. This decrease was primarily due to fewer at-need mortuary sales.
Realized gains on investments and other assets decreased by $719,000 or 100%, to
$0 for the six months ended June 30, 2003, from $719,000 for the comparable
period in 2002. This decrease was the result of gains on sale of real estate in
2002.
Mortgage fee income increased by $34,072,000, or 180.8%, to $52,912,000 for the
six months ended June 30, 2003, from $18,840,000 for the comparable period in
2002. This increase was primarily attributable to a greater number of loan
originations during the six months of 2003 due to lower interest rates resulting
in more borrowers refinancing their mortgage loans.
Total benefits and expenses were $72,506,000, or 92.6%, of total revenues for
the six months ended June 30, 2003, as compared to $35,388,000, or 94.2%, of
total revenues for the comparable period in 2002.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits increased by an aggregate of $4,850,000, or 79.5%, to
$10,952,000 for the six months ended June 30, 2003, from $6,102,000 for the
comparable period in 2002. This increase was primarily due to the additional
death benefits, surrenders and other policy benefits from the policies acquired
in the asset purchase transaction with Acadian Life.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $500,000, or 28.3%, to $2,269,000 for the six months ended June 30,
2003, from $1,769,000 for the comparable period in 2002. This increase was
primarily due to the additional amortization of deferred policy acquisition
costs and cost of insurance acquired from the additional policies acquired in
the asset purchase transaction with Acadian Life.
General and administrative expenses increased by $30,651,000, or 119.2%, to
$56,362,000 for the six months ended June 30, 2003, from $25,711,000 for the
comparable period in 2002. This increase primarily resulted from an increase in
commissions and other expenses due to additional mortgage loan originations
having been made by the Company's mortgage subsidiary during the six months of
2003.
Interest expense increased by $1,277,000, or 244.2%, to $1,799,000 for the six
months ended June 30, 2003, from $523,000 for the comparable period in 2002.
This increase was primarily due to additional warehouse lines of credit required
for the additional mortgage loan originations by the Company's mortgage
subsidiary.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$159,000, or 12.4%, to $1,124,000 for the six months ended June 30, 2003, from
$1,283,000 for the comparable period in 2002. This decrease was primarily due to
fewer at-need mortuary sales.
Second Quarter of 2003 Compared to Second Quarter of 2002
Total revenues increased by $26,148,000 to $44,097,000 for the three months
ended June 30, 2003, from $17,949,000 for the three months ended June 30, 2002.
Contributing to this increase in total revenues was a $22,182,000 increase in
mortgage fee income, a $2,357,000 increase in insurance premiums and other
considerations, and a $1,917,000 increase in net investment income.
Insurance premiums and other considerations increased by $2,357,000, or 69.9%,
to $5,726,000 for the three months ended June 30, 2003, from $3,369,000 for the
comparable period in 2002. This increase was primarily due to the additional
insurance premiums from the policies acquired in the asset purchase transaction
with Acadian Life.
Net investment income increased by $1,917,000, or 75.8%, to $4,445,000 for the
three months ended June 30, 2003, from $2,528,000 for the comparable period in
2002. This increase was primarily attributable to the additional investment
income from the assets acquired in the asset purchase transaction with Acadian
Life.
Net mortuary and cemetery sales decreased by $101,000, or 3.6%, to $2,710,000
for the three months ended June 30, 2003, from $2,811,000 for the comparable
period in 2002. This decrease was primarily due to fewer at-need mortuary sales.
Mortgage fee income increased by $22,182,000, or 247.2%, to $31,156,000 for the
three months ended June 30, 2003, from $8,974,000 for the comparable period in
2002. This increase was primarily attributable to a greater number of loan
originations during the second quarter of 2003, due to lower interest rates
resulting in more borrowers refinancing their mortgage loans.
Total benefits and expenses were $40,629,000, or 92.1%, of total revenues for
the three months ended June 30 2003, as compared to $17,634,000, or 98.3%, of
total revenues for the comparable period in 2002.
Death benefits, surrenders and other policy benefits, and increase in future
policy benefits decreased by an aggregate of $2,055,000, or 67.2%, to $5,112,000
for the three months ended June 30, 2003, from $3,057,000 for the comparable
period in 2002. This increase was primarily due to the additional death
benefits, surrenders and other policy benefits from the policies acquired in the
asset purchase transaction with Acadian Life.
Amortization of deferred policy acquisition costs and cost of insurance acquired
increased by $376,000 or 40.2%, to $1,310,000 for the three months ended June
30, 2003, from $934,000 for the comparable period in 2002. This increase was
primarily due to the additional amortization of deferred policy acquisition
costs and cost of insurance acquired from the additional policies acquired in
the asset purchase transaction with Acadian Life.
General and administrative expenses increased by $19,909,000, or 156.0%, to
$32,669,000 for the three months ended June 30, 2003, from $12,760,000 for the
comparable period in 2002. This increase primarily resulted from an increase in
commissions and other expenses due to additional mortgage loan originations
having been made by the Company's mortgage subsidiary during the second quarter
of 2003.
Interest expense increased by $776,000, or 386.9%, to $976,000 for the three
months ended June 30, 2003, from $200,000 for the comparable period in 2002.
This increase was primarily due to additional warehouse lines of credit required
for the additional mortgage loan originations by the Company's mortgage
subsidiary.
Cost of goods and services sold of the mortuaries and cemeteries decreased by
$119,000, or 17.5%, to $563,000 for the three months ended June 30, 2003, from
$682,000 for the comparable period in 2002. This decrease was primarily due to
fewer at-need mortuary sales.
Liquidity and Capital Resources
The Company's life insurance subsidiaries and cemetery and mortuary subsidiaries
realize cash flow from premiums, contract payments and sales on personal
services rendered for cemetery and mortuary business, from interest and
dividends on invested assets, and from the proceeds from the maturity of
held-to-maturity investments, or sale of other investments. The mortgage
subsidiary realizes cash flow from fees generated by originating and refinancing
mortgage loans and interest earned on mortgages sold to investors. The Company
considers these sources of cash flow to be adequate to fund future policyholder
and cemetery and mortuary liabilities, which generally are long-term, and
adequate to pay current policyholder claims, annuity payments, expenses on the
issuance of new policies, the maintenance of existing policies, debt service,
and operating expenses.
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 warehouse 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 life
insurance subsidiaries amounted to $53,846,000 as of June 30, 2003, compared to
$51,530,000 as of December 31, 2002. This represents 52% and 51% of the total
insurance-related investments as of June 30, 2003, and December 31, 2002,
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 June 30, 2003 and
December 31, 2002, 3% ($1,831,000) and 4% ($1,903,000) of the Company's total
investment in bonds were invested in bonds in rating categories three through
six, which are considered non-investment grade.
The Company has classified certain of its fixed income securities, including
high-yield securities, in its portfolio as available for sale, with the
remainder classified as held to maturity. However, in accordance with Company
policy, any such securities purchased in the future will be classified as held
to maturity. Business conditions, however, may
develop in the future which may indicate a need for a higher level of liquidity
in the investment portfolio. In that event the Company believes it could sell
short-term investment grade securities before liquidating higher-yielding
longer-term securities.
The Company has a substantial portion of its assets invested in cash, short-term
investments and mortgage loans sold to investors. If market conditions were to
change so that rates for these investments were to drop or if these investments
and higher yielding long-term investments were not available, the Company's
interest rate spread (excess interest earned over interest credited to
policyholders) would be adversely affected and could result in significant
decreases in the Company's overall profitability or losses.
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 June 30, 2003, and
December 31, 2002, the life insurance subsidiary exceeded the regulatory
criteria.
The Company's total capitalization of stockholders' equity and bank debt and
notes payable was $56,204,000 as of June 30, 2003, as compared to $53,787,000 as
of December 31, 2002. Stockholders' equity as a percent of capitalization
increased to 65 % as of June 30, 2003, from 64% as of December 31, 2002.
Lapse rates measure the amount of insurance terminated during a particular
period. The Company's lapse rate for life insurance in 2002 was 10.7% as
compared to a rate of 13.2% for 2001. The 2003 lapse rate has been approximately
the same as 2002.
At June 30, 2003, $22,088,000 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 Disclosure of Market Risk
There have been no significant changes since the annual report Form 10-K filed
for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer (the
"Certifying Officers"), are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded (based on their evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934) are effective. No
significant changes were made in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Part II Other Information:
Item 1. Legal Proceedings
An action was brought against the Company in May 2001, by Glenna Brown Thomas
individually and as personal representative of the Estate of Lynn W. Brown in
the Third Judicial Court, Salt Lake County, Utah. The action asserts that
Memorial Estates delivered to Lynn W. Brown six stock certificates representing
2,000 shares in 1970 and 1971. Mr. Brown died in 1972. It is asserted that at
the time the 2,000 shares were issued and outstanding, such represented a 2%
ownership of Memorial Estates. It is alleged Mr. Brown was entitled to
preemptive rights and that after the issuance of the stock to Mr. Brown there
were further issuances of stock without providing written notice to Mr. Brown or
his estate with respect to an opportunity to purchase more stock. It is asserted
among other things that the plaintiff "has the right to a transfer of Brown's
shares to Thomas on defendants' (which includes Security National Financial
Corporation as well as Memorial Estates, Inc.) books and to restoration of
Brown's proportion of share ownership in Memorial at the time of his death by
issuance and delivery to Thomas of sufficient shares of defendant's publicly
traded and unrestricted stock in exchange for the 2,000 shares of Memorial stock
and payment of all dividends from the date of Thomas's demand, as required by
Article XV of the Articles of Incorporation." Based on present information, the
Company intends to vigorously defend the matter, including an assertion that the
statute of limitations bars the claims.
An action was brought against Southern Security Life Insurance Company by
National Group Underwriters, Inc. ("NGU") in state court in the State of Texas.
The case was removed by the Company to the United States District Court for the
Northern District of Texas, Fort Worth Division, with Civil No. 4:01-CV-403-E.
An Amended Complaint was filed on or about July 18, 2001. The Amended Complaint
asserts that NGU had a contract with the Company wherein NGU would submit
applications for certain policies of insurance to be issued by the Company. It
is alleged that disputes have arisen between NGU and the Company with regard to
the calculation and payment of certain advanced commissions as well as certain
production bonuses.
NGU alleged that it has been damaged far in excess of the $75,000 minimum
jurisdictional limits of this Court. NGU also seeks attorney's fees and costs as
well as prejudgment and postjudgment interest. A second amended complaint and a
third amended complaint which included a fraud claim were filed. A motion was
filed by the Company to dismiss the third amended complaint, including the fraud
claim. The court denied the motion. The Company has counterclaimed for what it
claims to be a debit balance owing to it pursuant to the relationship between
the parties with said counterclaim seeking a substantial amount from NGU (the
amount subject to reduction as premiums are received). The Company is also
seeking to recover attorney's fees and costs, as well as punitive damages on
three of its causes of action. Certain discovery has taken place. The federal
case was dismissed per stipulation. The matter was refiled in Texas state court,
Tarrant County, Case No. 348 195490 02. The claims of the respective parties are
essentially the same as set forth above which claims against Southern Security
Life Insurance Company include fraudulent inducement relative to entering into a
contract, fraud, breach of contract, breach of duty of good faith and fair
dealing, attorneys' fees and exemplary damages. Further discovery involving the
parties is anticipated. The Company intends to vigorously defend the matter as
well as prosecute its counterclaim. A trial is presently set for November 2003.
The Company is not a party to any other legal proceedings outside the ordinary
course of the Company's business or to any other legal proceedings, which, if
adversely determined, would have a material adverse effect on the Company or its
business.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a)(3) Exhibits:
3.A. Articles of Restatement of Articles of Incorporation (8)
B. Bylaws (1)
4.A. Specimen Class A Stock Certificate (1)
B. Specimen Class C Stock Certificate (1)
C. Specimen Preferred Stock Certificate and Certificate of Designation of
Preferred Stock (1)
10.A. Restated and Amended Employee Stock Ownership Plan and
Trust Agreement (1)
B. 1993 Stock Option Plan (3)
C. 2000 Director Stock Option Plan (5)
D.2003 Stock Option Plan (10)
E. Deferred Compensation Agreement with George R. Quist (2)
F.Employment Agreement with Scott M. Quist. (4)
G.Promissory Note with George R. Quist (6)
H.Deferred Compensation Plan (7)
I. Coinsurance Agreement between Security National Life and Acadian (8)
J. Assumption Agreement among Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (8)
K. Asset Purchase Agreement between Acadian, Acadian Financial Group, Inc.,
Security National Life and the Company (8)
L. Promissory Note with Key Bank of Utah (9)
M. Loan and Security Agreement with Key Bank of Utah (9)
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 June 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 March 31, 1994.
(4) Incorporated by reference from Annual Report on Form 10-K, as
filed on March 31, 1998.
(5) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed August 29, 2000, relating to the Company's
Annual Meeting of Shareholders.
(6) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 16, 2001.
(7) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 3, 2002.
(8) Incorporated by reference from Report on Form 8-K-A as filed on
January 8, 2003.
(9) Incorporated by reference from Annual Report on Form 10-K, as
filed on April 15, 2003.
(10) Incorporated by reference from Schedule 14A Definitive Proxy
Statement, filed on June 5, 2003, relating to the Company's
Annual Meeting of Shareholders.
Subsidiaries of the Registrant
(b) Reports on Form 8-K:
No Current Report on Form 8-K was filed by the Company during the
quarter ended June 30, 2003.
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: August 14, 2003 By: George R. Quist,
----------------
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
DATED: August 14, 2003 By: Stephen M. Sill
---------------
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, George R. Quist, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
By: George R. Quist
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ENACTED BY SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Stephen M. Sill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Security National
Financial Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2003
By: Stephen M. Sill
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending June 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, George R. Quist, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
George R. Quist
Chief Executive Officer
August 14, 2003
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Security National Life Insurance
Company and will be retained by Security National Life Insurance Company and
furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Security National Financial
Corporation (the "Company") on Form 10Q for the period ending June 30, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Stephen M. Sill, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
Stephen M. Sill
Chief Financial Officer
August 14, 2003
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Security National Life Insurance
Company and will be retained by Security National Life Insurance Company and
furnished to the Securities and Exchange Commission or its staff upon request.