SNFCA - NASDAQ

Hello, and welcome. This is Brian Nelsen with Investor Relations for Security National Financial Corporation and welcome to Security National Financial Corporation's Fourth Quarter 2015 Earnings Call. On the call today, we have Scott Quist, Security National's Chairman and Chief Executive Officer; Garrett Sill, Security National's Chief Financial Officer; and Steve Johnson, Security National Mortgage President. Let me take minute to read the Safe Harbor disclosure. During the course of this conference call, we will make certain statements that may be viewed as forward looking. Any statements contained in this call that are not historical facts are forward-looking statements as the term is defined under Private Securities Litigation Reform Act of 1995, PSLRA, which statements may be identified by words such as expects, plans, projects, will, may, anticipates, belief, should intend and other words of similar meanings. Such forward-looking statements are based on current expectations, involve known and unknown risks, relies on third parties for information and other factors that may cause our actual results, performance or achievements or development in our industry to differ material from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. Factors that do not cause actual results to differ materially from anticipated results include risks and uncertainties related to the fluctuations of global economic conditions, the performance of management and our employees, general economic conditions and other factors that are detailed in our periodic reports and on documents that we file from time to time with the Securities and Exchange Commission. The forward-looking statements contained in this conference call speak only as of the date the statements were made and the company does not undertake any obligation to update the forward-looking statements. We intend that all forward-looking statements be subject to the Safe Harbor Provisions Act of the PSLRA. This call will be between 30 and 45 minutes including the question-and-answer session for those questions submitted prior to the call. With that, I’ll turn the time over to Scott Quist. Go ahead, Scott.

Thank you. I think I’ve spoken – I’ve been waiting on the call here for a minute. First of all, perhaps I could ask how many do we have on the call? There were several people I wasn’t aware of. I know we can’t see by raising hands but if you could identify yourself by voice that would be helpful to me.

Everyone’s on mute. So we have 11.

All right, I’m sorry. Everyone’s on mute. All right. Thank you. Let me just proceed ahead then. Security National Financial Corporation is comprised of three business segments or perhaps I should start out and say the life insurance company, the Security National Life was organized in 1965 and accordingly our 50th anniversary was held this last year. Currently, Security National operates through three business segments; life insurance, mortgage banking and cemetery or mortuary or what I call death care services. In our life insurance segment, we primarily sell what I would call burial-related life insurance products. These are sold through three marketing channels; one is what is called preneed, which means a policy that is sold in connection with a guarantee from a funeral home to perform a funeral in exchange for the benefits of the policy. So in other words, when the person dies, the funeral home gets paid the death benefit usually directly and the person owes nothing else. It essentially becomes a fixed price funeral. The other major marketing segment is – or of three is our final expense where in our final expense channel you sell a life insurance policy that does not have a funeral home guarantee attached to it. And then our third segment or our third marketing channel is home service, which is somewhat of a subset of our final expense marketing channel but in our home service, we actually go door-to-door selling the insurance and collecting the premiums on a weekly or monthly basis. On our mortgage side, we are primarily a single-family residential lender using or rather originating conforming primarily in FHA products. On our death care side, of course we have cemeteries and mortuaries and provide the usual services. 2015 was a good year for our company. In our view or in my view any time you can accomplish a 59% improvement in pre-tax earnings on a 25% increase in revenues, that’s a great year. I would also note that in 2015, we passed our $100 million mark in stockholder’s equity. Now going to our three segments and how they’ve performed, our life insurance segment, the profitability was basically flat. I think we were between $3,000 or $4,000 at around 8.3 million as I’m recalling. Excuse me, we’re 8.4 million. Our goal obviously is – I shouldn’t say obviously. Our goal is not flat profitability but I would stress that equally last year’s profitability, meaning 2014, I’m sorry – let me back up and clarify. 2014 had a tremendous increase in profitability from 2.8 million to 8.4 million. I forget the percentage increase but let’s call that a 300% to 400% increase. That represented the most profitable year in the life company’s history by about two times. In other words, prior to 2014 the most profitable year has been about $2.8 million – excuse me, $4.5 million in 2012. So in 2015, to repeating that level of profitability I took some consolation that we did not fall back into our historical profitability. But we maintained the high ground that we took in 2014, we maintained that ground in 2015. And 2015 was the reason I think the life company is more profitable now than it has been in the past that’s basically twofold. We paid more attention – I shouldn’t say more attention, we’ve accomplished better results in the quality of our business, meaning persistency and mortality if better on our life products. And then secondly our investment income has produced better results. And then I should add a third subset and that of course is that our asset base is bigger, so you are beginning to achieve economies of scale. While our investment income was good in 2015, it was not as good as what it was in 2014. We did face some headwinds. And in fact in the fourth quarter of 2015, which is our weak quarter for investment income, we were almost $2 million below what we had recognized or realized in 2014. So, all-in-all, I thought that was a good year for our life segment. We were disappointed that we did not improve profitability. We did take some consolation that we matched 2014, which was the most profitable year for the life company by about two times over any other year. So we took some consolation that we were in the high ground that we’ve reached in 2014. Going to our mortgage segment, we had about 38% improvement or rather increase in funding to just a little under $3 billion. I’ve just got a couple of notes here I’m going through, which represented – which gave us about 212% increase in profitability. We thought that was a pretty good accomplishment. There was some refinance activity in 2015 – at the beginning of 2015 but most of those results were achieved in what I’ll call a normal environment. So what we believe we saw in 2015 was further driving of our sales platforms, i.e. to realtors and to builders, we saw rather increases in the percentage of our business that was related to purchased transactions and we saw further increases in our business that was related to retail originations. In fact, in 2015, I believe on the retail side, we were at 93%, which meant that the 7% of our business was either wholesale or brokered, which is a – that’s a historical low percentage for us and I believe we had 76% of our production was purchased related. The reason that’s important is we believe purchased-related business is the more sustainable business model for a mortgage company. We do not believe the mortgage company long term can survive on refis. So we think that 2015 [indiscernible] some conformation of the marketing channel, rather the marketing strategy that we’ve been employing and working on over the last several years. Moving on to death care, death care has been a troubling segment for us for the last several years. We began to turn it around at the end of 2014 and in 2015, I thought we showed excellent progress on an operating earnings-only basis, because our death care – excuse me, by way of explanation in our death care segment, we put much of our REO, our other real estate owned. There’s a couple of tax reasons and then because of their expertise in management property. If you strip out the effects of the REO, which are essentially unrelated to the death care operating results and look at the operating results only of the death care segment, we had a 38% improvement in profitability in death care on a 12% improvement of EBIT earnings. We are still weak – excuse me, that was accomplished on basically flat revenues. So we became more efficient and we’re doing a better job with the customers who come to us. Where we need to grow it next of course is in our sales efforts, our preneed cemetery sales where we have been weak and continue to see weakness through 2015. We are in the process and have reorganized sales. That sales effort has brought in new people and have been encouraged by the recent results that we’ve seen. So in general, again, when we say that 2015 was a very good year for the company, we had a 25% increase in revenues overall, which led to a 59% increase in pre-tax earnings. So is there anything I missed there, Brian?

No. I think that’s great. Thank you. We’ll turn the time over to Garrett now for some further financial discussion.

Great. Thanks. What I wanted to do was talk a little bit about reducing comparisons for some of the key components of the balance sheet and we’ll talk a little bit about 2012. As Scott mentioned, our pre-tax earnings for 2015 were 19,822,000. That turns out to be second best year in the history of the company only surpassed by 2012 were pre-tax earnings were 21,350,000. So 2015 in comparison was a very, very good year. One of the things that Scott was highlighting was that there wasn’t – although there was some refi in 2015, 2012 was a very, very big refi year for Security National Mortgage company and so a lot of the pre-tax earnings and revenues that we saw were from a lot of refi activity. So 2015 being predominately purchased with a little bit of refi we felt the results for 2015 were very, very good. When we compare 2014 to 2015, we have about $7 million increase in pre-tax earnings or 59% as Scott said or mentioned earlier. So we’re very, very pleased with that. When we look at our asset growth just comparing back to 2012, which was the company’s best performing year, we had just under 600 million in total assets; that was 597 million, 217,000 in assets. Looking at 2015, we ended the year just shy of 750 million assets. So in that four-year span, assets increased roughly 152 million or 26%. When we look at 2014 compared to 2015, we had an increase of about 80 million, so a little over half of the increase in assets came between 2014 and 2015. Talking about our assets a little bit, one of the things that you’ll notice in the 10-K that is different this year is some of the disclosures, and I’ll talk about the disclosures that we kind of broke out for real estate in a little bit. But I want to talk a little bit now about our investments and how those are broken down between years. If you look at our 2012 asset classification, we have 135 million in stocks and bonds. We had 179 million in mortgages and our real estate classification was roughly about 73 million. If you look to where we were in 2014; stocks and bonds grew to 142 million, mortgages grew to 187 million and real estate grew to 125 million. So we had modest increases from 2012 to 2014 in bonds and stocks and mortgages that had a fairly sizable increase in our real estate investments. When we compare 2014 to 2015, our bonds and stocks in 2015 are about 154 million. That represents a $12 million increase over 2014. Our mortgages are at 228 million and that represents a $41 million increase over 2014. And our real estate shows a $4 million increase over 2014 and comes in about 129 million. So as I mentioned earlier, our increase in assets from 2014 to 2015 was roughly about 79 million. The key what I call components of that 79 million were investments – were invested in stocks and bonds of 12 million, mortgages of 41 million and then real estate at 4 million. And we had an increase in cash at 10 million. So if I add those numbers up, that’s about 67 million of the 79 million increase in assets. That’s what’s allocated on the balance sheet. Just a further clarification, because I have had questions in the past how I come up with the mortgages. Mortgages are comprised of two line items on our financial statements. We have the investment in mortgage loans at 2015. If you look to the financial statement, that would be about 112 million. And then we also have another section that is called mortgage loans sold to investors. For 2015 that was roughly 115,500,000 as well. So the sum of those two numbers comes to about the 228 million that I referred to previously. The same question usually comes up with real estate. I said that we had at 2015 roughly 129 million in investments in real estate. There is three different line items on our balance sheet where those numbers come from. Two are very easily defined. The third is a little more difficult. First of all is real estate held for investment. It’s just shy of 115 million. On the balance sheet it shows 114,852,000. We also have another line item that shows cemetery land, an improvement. That’s been pretty static through the year. It only goes down because of depreciation but that number is just under 11 million at 10,780,000. And then the third line item is a little more difficult to define because it includes two assets that we own that we have offices in, and that’s for our life insurance subsidiaries and it’s about 3 million. So that includes our office in Jackson, Mississippi and also our corporate office here in Salt Lake City or in Murray, Utah and as I mentioned that’s about 3 million. So if you add those numbers up that’s how you come up with about 129 million when we’re talking about the assets. I would just note in our 10-K we do talk about affiliated warehouse lines for our mortgage company. I mentioned earlier mortgage loans sold to investors was about 115 million. That is the number that represents our warehouse line that our affiliated companies use to fund mortgage loans as their way to be purchased by third-party investors. As I mentioned a little bit earlier, we only had a $4 million increase in our real estate but we did have a lot of activity as it related to real estate. And so one point that I would point out is on our cash flow statement and that’s Page 40 on the 10-K. If you go to the bottom we have a section that’s called cash flows from investing activities. So as I mentioned, real estate increased 4 million but if you look at the two line items just four lines up from the bottom, we talked about purchases of real estate held for investment. We actually spent just under $17 million in acquiring new real estate. And then the line just below that talked about sell of real estate. We actually sold 13.5 million in real estate. So in total, even though assets for the real estate section were only up 4 million, there was about 31 million worth of activity for 2015 in the real estate group. And so it is an asset class that we’re very, very active in. And by that same manner, you could go up a little bit further up in that and you can you see our activity in bonds. Bonds rolling up 12 million but between the purchases and the maturity of the bonds, there was roughly about 34 million in activity there. So sometimes just looking from year-to-date changes in assets doesn’t give you a true picture to what’s actually happening in the company. So I’d like to turn to the cash flow statement and get a little better idea of the activity that’s happening on the investment side. With that said, I just want to highlight two different disclosures that we had in this year’s K that we haven’t in the past. As I’ve tried to highlight, investment real estate has become a bigger part of Security National Financial Corporation and so we actually put a little more disclosures for this year’s 10-K to give our investors a little bit better idea or shareholders a better idea of activities. The first one that I would draw your attention to is on Page 8. It was actually item number one. Before you actually get to the financial statements and the title of this section is recent acquisitions and other business activities. Towards the end of that on Page 8 and a little bit on Page 9, we actually talked about our real estate development. We specifically list Dry Creek at East Village. Those are apartments. We’ve had some press releases in the past as it relates to that. And we just finished the last two buildings in December and just call your attention to some past press releases that we’ve done. In December 2, 2013, we announced the groundbreaking, so that was a two-year project for us. And in April 15, 2015, we talked about the awards that we received from Sandy City for that particular development. So that project is complete. It’s 282 units as it says and as of right now, its occupancy is in the upper 80% occupied. Then we talk a little bit about our 53rd corporate development that we did a press release on December 9, 2015 in regards to that and there’s a little more information in the press release. But that talked about our development that’s happening right next to our corporate office. The second point that I would draw your attention to is actually in the investment footnotes to the consolidated financial statements and those are on pages 57, 58 and 59. In this section, we’ve decided to break out or separate our commercial real estate from our single-family residential real estate that we own. And then also disclose a little bit better about the property that we own that I mentioned earlier, we have our office in Jackson, Mississippi as well as our home office here in Murray, Utah about how much of the company occupies as well as another asset that we own that’s considered an investment that our mortgage company occupies for their corporate operations. And so to my point, those were some of the highlights from the 10-K this year and I’ll turn it back.

Thanks, Garrett. With that, we’ll turn the next portion of time over to Steve Johnson who is our President of the Security National Mortgage, so all yours.

Thank you. I appreciate that. I think Scott did a great job of presenting the overall summary with the financial results of the mortgage company. And for further summary in the 10-K starting on Page 20, I think that’s a great overview of our performance. What I’d like to do is just take a minute and add a little bit of color because I think the shareholders will be interested in knowing that we have developed and build a very strong foundation in the mortgage company as a company and asset to the overall growth that will continue to perform well in years to come. In the two areas I’d like to talk about a little bit are the effect of regulation on our industry in general and also our servicing portfolio specifically that we have retained as a matter of strategic direction. Scott mentioned we started the process of moving from a wholesale originator, meaning what we bought along from other originators as a primary sourcing than mortgage loans to moving to a retail origination channel where we actually have brick and mortar offices throughout the country and access loans directly from consumers. This was a challenging undertaking and we think we’ve done a very good job, really started to earnest in 2011. And the performance in 2015 is not only a reflection of I guess we can call it improvement in the economy in general but also of inventory [ph] of our process. Scott mentioned that we had an increase in production that was roughly 40% in 2015 over 2014. The industry average as a whole is about 18%. So that reflects that with our retail channel, our growth rate is exceeding that of the industry in general. To regulation, part of that has been both a burden and a boom to independent mortgage bankers and Security National Mortgage in general. We are seeing and if you follow the press, we’re seeing a number of money-centered banks exit the mortgage space over the last couple of years just because in part the cost of being compliant with regulations is onerous and so their market share has declined fairly significantly. Into that, the quality – independent mortgage bank is a step down, Security National being one of those. One of the big headlines for this year is the Consumer Financial Protection Bureau or CFPB was a change in the process for actually disclosing several services. What was a complicated process became even more complicated from an actual production standpoint and Security National brought all hands on deck, we expanded our compliance department by a number of people and really dug in beginning in 2014 and throughout 2015 to make sure that when the regulation took effect, it would be as smooth as possible. And we believe that we have achieved that complicated process. And in fact, the results that we’ve had in having as little disruption as possible to a customer when it comes time to close the loan we think we’ve performed well enough on that that it’s actually become a recruiting tool to us in some aspects and we’ve actually had some loan officers join us as a result of our ability to perform. So we see that as solidifying our base and will serve us well continuing in the future. The second point that I just wanted to mention is that with our shift to a retail platform, we also made a strategic decision to start holding some of these servicing rights that are generated through the mortgage origination process. And the process has generally had basically two pieces of value on a mortgage loan. We had the loan itself which ends up being sold in a secondary market. And the collective payments, which are known as mortgage servicing rights, Security National Mortgage did not as a strategic objective hold servicing rights until the beginning of 2012. As of the end of 2015, we are holding close to 1.8 billion in mortgage loan servicing rights based on the originated balance. The point that I want to make with that is that that represents a very high quality asset on the balance sheet of the mortgage company, as we value those servicing rights we retain them. Not only are we maintaining a profitable day-to-day mortgage operation but that asset which as of December 31 is valued on the balance sheet at 12.6 million, it represents an asset that is valued based on an assumption of 10% return. And that’s where we price the acquisition of that asset. So I think for the shareholders that’s something that’s important for them to understand that not only is there growth, we see it as a very high-quality growth in building very high quality assets that will generate revenue over time. And with that, I’ll turn it back to Brian.

Great. Thank you gentlemen for your talks on 2015 and basic general overview of the company. Now we’ll switch to the question-and-answer session. Before I start that, I want to point out that a few of the questions have been answered; those regarding the commercial real estate disclosure and also mortgage servicing rights. If there are any further questions about those or any more clarification that hasn’t been discussed today, we can answer those directly. Just reach out to us about those. But I’ll start with the first question for Scott that came through regarding the possibility of instituting a cash dividend, more the company’s thoughts and what drivers of those have been brought about by and what the long-term is of that possibility?

Sure. We make a disclosure of course of that in the 10-K on Page 17 where we indicate that we have not paid a cash dividend and we do not anticipate paying a cash dividend in the foreseeable future. The reason for that is actually pretty simple. We are in very capital-intensive operations. That’s what we do. Life insurance, for example, when you write a life insurance policy using – and this is on a statutory accounting basis, which is the basis under which we’re regulated, which is different than GAAP and generally accepted. But on a statutory basis, we’re going to take a loss when we write that policy of about 150% in the first year premium. Now the reason for the loss is basically the payment of commissions. Are you going to pay commissions that’s anywhere between say 110% to maybe 130% of the first year premium, which results in the statutory law. So the reality is you have to have capital to grow in life insurance. And the amount of that capital, which you have to have is increasing not just because of growth but because of the regulatory climate as well. For example, there has been legislation passed, I think I was reading yesterday in 75% of the states now, as I’m recalling The American Council of Life Insurers press release of a model law called a risk-based capital, if you will – excuse me not risk-based capital, excuse me, principle-based reserves. In the principle-based reserves there is a capital provision basically and while the complexity is a little much for this call, suffice it to say that basically by my calculation it requires a life insurer who increases the capital by about 20% to stay within good standards. In other words, the amount of risk-based capital that a life insurer had to have prior to principle-based reserves and the amount of capital they will have to have after the principle-based reserves I think are very broad statements increased by my calculations by about 20%. Now there’s a lot of numbers that go into those calculations with the asset quality, et cetera, but take that as a general proposition that you have to have capital to grow in the life insurance industry and the amount of capital that you have to carry is getting greater. So, if you start paying a cash dividend of any reasonable magnitude, then you’re going to have to constrain growth. The life insurance side is not unique. Cemeteries and mortuaries by their nature are capital intensive. You have to invest in the ground and the equipment. Mortgage banking by its nature is capital intensive. You do not capitalize, for example, the cost of branch openings. We’ve opened, I don’t know, I guess probably 100 plus branches right now. None of those branches are carried on our balance sheet because under accounting principles you have to expense those. So my point is to grow requires capital. Now the argument has been made to me that we should just pay a nominal dividend, nominal cash dividend, one penny. For me, I don’t see the point of that. And then the final point I wanted to make was that in financial theory, a company can only buy back shares or pay a cash dividend if it does not have a better use for those funds. I think there’s been quite a bit of press actually the last several weeks about the risk in those companies buying back their shares and that shows that their growth prospects are minimal. We are on the other end of that spectrum. We believe that we have great opportunities and great growth prospects and a variety of investments what we consider to be very good yields and that’s where the company should be deploying its fund.

Thank you, Scott. I’ll go to the next question regarding the construction loan risk. Actually this will be more for the group. I’ll open it up to Scott first, but over the last few years we’ve taken on this considerable amount of construction loans and the question was raised are we worried about the risk attached to that? And also do we see this as a long-term revenue stream for the company?

I’ll take the first swing at that. I think we’ve been in construction lending for, oh gosh, a considerable period of time, greater than 10 years now. We took our lumps in the downturn 2008, 2009 period. We feel that construction lending if properly handled will continue to be a good profit driver. We are getting right now in our construction lending either 6% or 7% depending on the area and two origination points. And that would be on either a six or a nine-month loan just kind of depending on the negotiation in the area, how long it takes to put the house up. So let’s say it’s a six months loan because the math is a little easier and let’s say it’s a 7% and you got two points, you’re picking up basically 7 plus 4, so you’re picking up 11% for that construction loan risk. Now there is a saying in the life insurance industry that I quite like, which is never let the perfume of the premium overcome the stench of the risk. In construction lending I think that’s a fair maxim to follow. What we look for in construction lending is areas with which we are familiar, we are comfortable with the growth aspects of the area and we really look for sort of a vanilla-kind of a home, a 3 bedroom, 3 bath say 350,000 or less type of a purchase price. Now I’m not saying we don’t make bigger loans, we do and we analyze the credit much more thoroughly and across the construction, et cetera, on the bigger loans. But on a vanilla-kind of a loan like that even through the downturn we didn’t take much risk or rather didn’t take much of a loss. We try to avoid areas, for example, we look at Texas. We are pretty active in the Austin market – when I say pretty active that’s a little bit of a misnomer. I think we have maybe 5 million in loans in the Texas market altogether, maybe a little more than that. And most of those are in the Austin area rather than for example Houston and that goes to knowing your demographic. If you look at the – I think three fastest growing areas in the country at least from the homebuilding perspective, Austin is one, Denver is one and Salt Lake City is another. Most of us in construction lending is actually in Utah in areas that we are quite familiar with. The last point I would make on construction lending is – two final points. In construction lending, there continues to be a lack of inventory for realtors. The National Press has talked about this quite a bit. Our local press talked about it quite a bit. One of the reasons why home prices are going up is because local inventory, especially in new home inventories are down. If you believe that and we happen to subscribe to that, then construction lending is a relatively low risk and I’m using those words very advisedly activity right now. Secondly, we will – I believe for myself that I’ll have a sense of when construction – when the construction market is getting overheated is when you start to see the interest rates on those loans fall. In other words, if this current interest rate market were to continue then we would see now our competitors originating construction loans in the 4% range, for example, rather than what they are right now in the 7% range, then that would tell me that perhaps we’re getting a little overheated in the construction lending area. I don’t think we’ve seen that yet. I believe it continued to be reliable, relatively high yield investment where the risk can be controlled. And I don’t know if there’s any other comments that Steve you may want to make on the loan structure, et cetera, or anybody else on the line.

This is Steve Johnson. I would just add to Scott’s comment that the way we are sourcing these construction loans is substantially different than what we were doing 10 years ago. At that point, we were a wholesale operation and so these loans were originated and coming to us through brokers. And we did not have the same degree of familiarity with the end customers, especially the builders that we do now. The nature of our involvement with construction lending now is more as – or to a large degree is the support for the relationships that we had with our retail originators and as Scott mentioned, realtors and builders, so we know these people. And we know their book of business. We not only know the end borrower and the [indiscernible] customer well, we also monitor closely the builders and the developers. They come in frequently. I know Scott has had a number of one-on-one discussions with builders and developers, so we are watching very carefully what’s going on and again as opposed to the move up in larger construction loans that were being done in 2005, '06 timeframe. These are primarily starter homes in that range. So it’s a different complexion to what was being done as Security National 10 years ago.

Great. Thank you everyone. We appreciate your attendance for this earnings call and we hope you found it informational and gave you some insight into our management team. If there are any further questions, please feel free to reach out to me, Brian Nelsen, and we can address those at a further time. Thank you again for your time. And at this time, we’ll adjourn.