Security National Financial Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone Q4 filing; quarterly figures are unaudited. The company operates life insurance, cemetery and mortuary, and mortgage businesses.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $283.1 million | $279.6 million | +1.2% |
| Earnings before tax | $13.9 million | $26.2 million | -46.7% |
| Net earnings | $10.9 million | $21.7 million | -49.8% |
| Diluted earnings per equivalent Class A share | $0.60 | $1.19 | Down |
| Operating cash flow | $(75.6) million | $7.0 million | Shifted to use |
| Total assets, at year-end | $1.334 billion | $1.051 billion | +27.0% |
| Bank and other loans payable, at year-end | $217.6 million | $187.5 million | +$30.1 million |
| Stockholders’ equity, at year-end | $196.7 million | $171.8 million | +14.5% |
Net margin was approximately 3.8%, versus 7.8% in 2018. Total benefits and expenses rose to $269.1 million, or 95.1% of revenue, from $253.4 million, or 90.6%. Income tax expense was $3.1 million, and the effective tax rate was 21.9% versus 17.2%.
Segment earnings before tax: Life insurance $6.6 million (down from $30.1 million); cemetery and mortuary $2.7 million (down from $3.9 million); mortgage $4.7 million (versus a $7.9 million loss). Mortgage revenue increased 12% to $140.8 million, with higher origination volume and secondary-market gains. Mortgage originations totaled $2.61 billion, versus $2.19 billion in 2018. Life insurance premiums rose 7.8% to $81.9 million; net investment income rose 7.8% to $43.0 million.
Quarterly context: Q4 2019 revenue was $77.7 million and net earnings were $1.9 million ($0.10 per share), compared with Q4 2018 revenue of $61.5 million and a net loss of $0.5 million ($0.03 loss per share).
Liquidity, capital and material changes
- Year-end cash and cash equivalents were $127.8 million, down from $142.2 million. Operating cash use of $75.6 million was primarily attributed to mortgage loan originations held for sale. Loans held for sale increased to $213.5 million from $136.2 million.
- Debt increased to $217.6 million, including $156.0 million outstanding on two mortgage warehouse lines. The company reported compliance with warehouse-line covenants at year-end. Approximately $193.0 million of bank and other loans payable was classified as due within one year, principally reflecting warehouse borrowings.
- Insurance obligations—future policy benefits and unpaid claims—were $825.6 million, up from $620.4 million. Statutory capital and surplus of life insurance subsidiaries totaled $74.1 million; their capital levels exceeded regulatory criteria. Dividend transfers are restricted by insurance regulation.
- Mortgage loans held for investment, net, grew to $236.7 million from $186.5 million. Loans more than 90 days delinquent were $8.9 million, versus $3.6 million; $1.7 million was in foreclosure. The allowance for these loans was $1.45 million.
- The company acquired Kilpatrick Life Insurance Company in December for $23.8 million and acquired two Heber Valley funeral businesses for $3.3 million. Kilpatrick was approximately 15% of year-end assets.
- On December 31, the company reclassified its bond and preferred-stock investments from held-to-maturity to available-for-sale. Fixed maturities were reported at $356.0 million fair value, with $17.3 million of pretax unrealized gains recognized in other comprehensive income.
- Equity was also affected by $13.7 million of net other comprehensive income, largely from the bond reclassification. The company recorded a $2.8 million impairment on a commercial property and $0.7 million of impairment losses on residential real estate held for investment.
Outlook, risks and unusual items
- Management described continued emphasis on niche insurance products, cemetery and mortuary operations, mortgage origination, acquisitions, and real estate development. No quantified earnings or revenue guidance was provided.
- COVID-19 emerged after year-end. The company said the duration and financial impact were not reliably estimable; it identified possible effects on securities credit risk and mortgage borrowers.
- Management reported a material weakness in Kilpatrick’s policy-administration system controls, involving change management and segregation of duties. The weakness was not remediated at year-end, and management concluded internal control over financial reporting was not effective as of December 31, 2019. The acquired subsidiary was excluded from the year-one internal-control assessment; remediation actions were underway. The auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- SecurityNational Mortgage faces Lehman Brothers Holdings litigation relating to Fannie Mae/Freddie Mac loans and approximately 577 additional RMBS loans. Claimed damages are not stated clearly in the filing; the company denies liability. A motion to dismiss the RMBS action was pending, and mediation had been adjourned. The company separately carried a $4.0 million reserve for investor indemnification and repurchase claims.
- Other risks include interest-rate and investment-value changes, mortgage loan sale/repurchase exposure, real-estate valuation, mortality and morbidity experience, insurance regulation, and estimation uncertainty. The filing lists approximately $123.6 million in construction and land-development loan commitments, of which $90.6 million was funded, and $33.0 million in unfunded residential construction and land-development commitments in another disclosure.
- The company paid no cash dividends and said it did not intend to do so in the foreseeable future. It continued an annual 5% stock dividend. The 2019 stock-repurchase plan authorized 300,000 shares; 162,007 remained available at year-end.
Most important facts for investors to verify
- Whether Kilpatrick’s control remediation was completed and whether subsequent testing identified financial-reporting issues.
- How COVID-19 affected mortgage volumes, borrower credit performance, insurance claims, securities and real-estate values after year-end.
- Whether operating cash use, warehouse borrowing levels and the large amount of debt classified as current remained manageable as mortgage loans were sold.
- Whether delinquent mortgage loans and the $4.0 million investor-claims reserve adequately reflect losses, including outcomes in the Lehman litigation.
- Whether the acquired businesses and Center53 development generate expected returns, and how property impairments or vacancies evolve.