Security National Financial Corporation — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015, with audited comparisons for 2014 and 2013. The company operates life insurance, cemetery and mortuary, and mortgage lending businesses. It filed as a smaller reporting company. The independent auditor gave an unqualified opinion on the consolidated financial statements; management reported effective disclosure controls and internal control over financial reporting.
Key financial results
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $283.2 million | $226.9 million | +24.8% |
| Net earnings | $12.6 million | $7.8 million | +62.8% |
| Basic / diluted EPS | $0.92 / $0.89 | $0.59 / $0.57 | Higher |
| Pre-tax earnings | $19.8 million | $12.5 million | +58.8% |
| Operating cash flow | $(15.8) million | $31.0 million | Down $46.8 million |
| Cash and cash equivalents at year-end | $40.1 million | $30.9 million | +$9.2 million |
| Total assets | $749.9 million | $671.1 million | +11.8% |
| Bank and other loans payable | $40.9 million | $29.0 million | +41.0% |
| Stockholders’ equity | $111.2 million | $97.1 million | +14.6% |
Benefits and expenses were 93.0% of revenue, compared with 94.5% in 2014. Net earnings were about 4.5% of revenue, versus 3.4% in 2014. Interest expense rose to $4.5 million from $3.0 million. The filing does not provide a single consolidated liquidity ratio.
Segments and changes versus prior year
- Mortgage: Segment pre-tax earnings increased to $10.4 million from $3.3 million. SecurityNational Mortgage originated and sold 14,976 loans totaling $2.84 billion, versus 10,794 loans and $2.04 billion in 2014. Consolidated mortgage fee income rose 35.5% to $174.3 million, driven by greater origination volume and secondary gains. Higher commissions, personnel, funding costs, and loan-loss provisions also contributed to expense growth.
- Life insurance: Segment pre-tax earnings were nearly flat at $8.5 million. Premiums and other considerations increased 6.4% to $56.4 million, and net investment income increased 20.2% to $34.0 million. Death benefits rose by $4.1 million. The 2015 reinsurance transactions expanded assumed policy obligations and assets.
- Cemetery and mortuary: Segment pre-tax earnings improved to $0.9 million from $0.7 million; revenue was essentially unchanged at $11.5 million. Dry Creek at East Village, a 282-unit apartment project, was completed in December and was 69% occupied at year-end.
- Fourth quarter: Revenue was $67.6 million, compared with $60.7 million in Q4 2014. Net earnings were $2.0 million, down from $2.9 million; diluted EPS was $0.14 versus $0.21.
Cash flow, debt and liquidity
Operating activities used $15.8 million of cash in 2015, principally because receivables for mortgage loans sold increased by $47.8 million as year-end investor settlements were pending. Investing activities provided $15.4 million and financing activities provided $9.7 million; cash rose by $9.2 million over the year. At December 31, mortgage loans sold to investors were $115.3 million on the balance sheet, and additional settlements were pending on approximately $199.9 million of mortgage loans.
Loans payable totaled $40.9 million, including $29.6 million classified as current; the filing lists total 2016 maturities of $29.6 million. The company also reported several undrawn revolving credit facilities and mortgage warehouse funding arrangements. Insurance subsidiaries exceeded regulatory risk-based capital criteria, but dividends or transfers from them are subject to regulatory limits and approvals.
Outlook, risks and unusual items
- Management described continued emphasis on niche insurance products, cemetery and mortuary operations, and mortgage origination. It provided no quantified earnings or revenue guidance.
- Management cited mortgage-market and interest-rate sensitivity, competition, regulation, mortality and persistency experience, asset-liability matching, real-estate values, and the adequacy of reserves as material risks.
- Mortgage loan-loss expense increased to $6.3 million from $3.1 million; the liability for investor indemnification claims rose to $2.8 million from $1.7 million. Management cautioned that actual claims could exceed estimates. Loans over 90 days delinquent totaled $5.5 million, including $3.2 million in foreclosure.
- SecurityNational Mortgage was cooperating with a DOJ/HUD civil investigation into FHA loan compliance involving approximately 45,900 loans originated from 2006 through May 2013, with original principal of about $7.9 billion. No demand had been made, no liability was recorded, and management said a potential loss range could not be estimated.
- Lehman-related disputes remain unresolved. In one Utah matter, SecurityNational Mortgage had obtained a $3.9 million summary judgment plus prejudgment interest against Lehman Bank and Aurora, but reserve replenishment and offset issues remained pending. Separate Delaware and bankruptcy-court proceedings concern alleged claims on about 136 loans; the company disputes liability.
- The company continued real-estate development. The first phase of its Salt Lake City corporate campus was expected to be completed in Q2 2017. The filing describes more than $100 million of initial development costs across assets developed or in progress; project returns and funding needs remain relevant to monitor.
- The company has not paid cash dividends and said it did not anticipate doing so in the foreseeable future. It has paid annual 5% stock dividends through 2015.
Important facts for investors to verify
- Whether the increase in mortgage originations and earnings is sustainable, and how pending investor settlements affect operating cash flow and warehouse funding.
- Developments in the FHA investigation and Lehman litigation, including any demands, reserve changes, or material outcomes.
- Whether mortgage repurchase and indemnification reserves remain adequate as loan volume and claims evolve.
- The timing, financing, occupancy and realized returns of Dry Creek and the corporate-campus development.
- Insurance subsidiary statutory capital, dividend restrictions, investment performance, and exposure to interest-rate and policyholder behavior changes.