Security National Financial Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. This is an annual filing, not a standalone fourth-quarter report. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $481.5 million | $283.1 million |
| Earnings before income taxes | $71.5 million | $13.9 million |
| Net earnings | $55.6 million | $10.9 million |
| Diluted earnings per Class A equivalent share | $2.88 | $0.58 |
| Operating cash flow | $(129.6) million | $(75.6) million |
- Total revenue rose 70.1%; net earnings increased substantially. Calculated pretax margin was approximately 14.8%, compared with 4.9% in 2019; net margin was approximately 11.5%, compared with 3.8%.
- Mortgage operations produced $309.4 million in external revenue and $55.1 million in pretax earnings, versus $140.8 million and $4.7 million in 2019. Mortgage originations rose to $5.63 billion at SecurityNational Mortgage and $154.5 million at EverLEND.
- Insurance operations reported $151.0 million in revenue and $11.9 million in pretax earnings; cemetery and mortuary reported $21.0 million and $4.4 million, respectively. Both segments’ pretax earnings increased year over year.
- At December 31, 2020, total assets were $1.549 billion, liabilities $1.285 billion, and stockholders’ equity $264.0 million. Cash and cash equivalents were $106.2 million; loans held for sale were $422.8 million.
- Bank and other loans payable totaled $297.8 million, up from $217.6 million. The contractual-obligations table shows $284.2 million due in under one year, largely reflecting mortgage warehouse financing. Management said the company was in compliance with debt covenants.
- Insurance subsidiaries’ statutory capital and surplus totaled $78.5 million, versus $74.1 million. The company reported that subsidiaries exceeded regulatory risk-based capital criteria.
Material changes and drivers
- The mortgage segment drove most of the earnings surge: mortgage fee income increased $167.0 million, mainly from higher secondary-market gains, loan fees, and fair-value changes amid much higher originations and refinancing.
- Operating cash use increased, primarily because of mortgage loan originations held for sale. Loan originations were $5.63 billion and loan-sale proceeds were $5.60 billion; financing activities provided $71.2 million.
- Insurance premiums increased 13.6%, partly reflecting the December 2019 Kilpatrick Life acquisition. Policy benefits rose $17.9 million, including $6.2 million attributed to COVID-19-related deaths.
- Cemetery and mortuary revenue increased 32.8%, driven by pre-need and at-need sales. Management noted that COVID-related limits on funeral services reduced average case size.
- The mortgage loan-loss reserve rose to $20.6 million from $4.0 million, including a $16.5 million additional provision tied to settlement estimates. More than-90-day delinquent mortgage loans held for investment totaled $10.3 million; $2.5 million was in foreclosure.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management described ongoing uncertainty from COVID-19 and said its duration and financial effects could not be predicted reliably. It reported increased mortgage demand during 2020 and a shift to remote work and virtual sales.
- Key exposures include mortgage-market and investor demand, loan repurchase and indemnification claims, interest-rate and refinancing risk, mortality and morbidity experience, investment credit risk, real-estate conditions, regulation, and competition. Management warned future mortgage losses could exceed reserves.
- On February 1, 2021, the mortgage subsidiary settled two Lehman Brothers-related proceedings, resolving the asserted claims. The filing says the full settlement payment was included in the December 31, 2020 loan-loss reserve; it does not state the settlement payment amount in the provided text.
- The company began phase two of its Center53 development in March 2020; the project includes a six-story building and garage. The company planned to occupy the building in September 2021. Existing development activity had an initial cost exceeding $100 million.
- Management reported that Kilpatrick-related control deficiencies had been remediated sufficiently that they no longer constituted a material weakness at year-end. Management assessed internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
- Management does not anticipate cash dividends in the foreseeable future. The company paid a 7.5% stock dividend for 2020.
Important facts for investors to verify
- Whether mortgage production, secondary-market gains, and margins can be sustained if refinancing demand or investor pricing weakens.
- The adequacy of the $20.6 million mortgage loan-loss reserve, including the Lehman settlement accounting and subsequent repurchase or indemnification claims.
- Near-term refinancing and renewal of warehouse facilities, including the large share of reported debt due within one year and related covenant requirements.
- Insurance mortality experience, investment portfolio credit quality, and the effect of COVID-19 claims; also note that non-investment-grade bonds were 4.2% of total bond investments at year-end.
- Execution, funding needs, and leasing progress for Center53 phase two and other real-estate development commitments.
- Statutory capital, dividend restrictions, and the distinction between consolidated cash and cash available to the parent company.