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Note 20 - Fair Value of Financial Instruments | 9 Months Ended
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Jul. 31, 2022
Notes to Financial Statements |
Fair Value Disclosures [Text Block] |
20. | Fair Value of Financial Instruments
ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
| Level 1: | Fair value determined based on quoted prices in active markets for identical assets.
| Level 2: | Fair value determined using significant other observable inputs.
| Level 3: | Fair value determined using significant unobservable inputs.
Our financial instruments measured at fair value on a recurring basis are summarized below:
|  |  | Fair Value at |  |  | Fair Value at |
| Fair Value |  | July 31, |  |  | October 31, |
(In thousands) | Hierarchy |  | 2022 |  |  | 2021 |
Mortgage loans held for sale (1) | Level 2 |  | $ | 87,795 |  |  | $ | 151,059 |
Forward contracts | Level 2 |  |  | (287 | ) |  |  | (107 | )
Total |  | $ | 87,508 |  |  | $ | 150,952 |
Interest rate lock commitments | Level 3 |  |  | 78 |  |  |  | 152 |
Total |  | $ | 87,586 |  |  | $ | 151,104 |
(1) The aggregate unpaid principal balance was $86.2 million and $146.5 million at July 31, 2022 and October 31, 2021, respectively. We elected the fair value option for our loans held for sale in accordance with ASC 825, “Financial Instruments,” which permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics. The Financial Services segment had a pipeline of loan applications in process of $836.4 million at July 31, 2022. Loans in process for which interest rates were committed to the borrowers totaled $165.8 million as of July 31, 2022. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements. The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At July 31, 2022, the segment had open commitments amounting to $4.0 million to sell MBS with varying settlement dates through September 14, 2022. The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Condensed Consolidated Financial Statements in “Revenues: Financial services.” The changes in fair values that are included in income are shown, by financial instrument and financial statement line item, below:
|  | Three Months Ended July 31, 2022 |
|  | Mortgage |  |  | Interest Rate |  |  |  |  |
|  | Loans Held |  |  | Lock |  |  | Forward |
(In thousands) |  | For Sale |  |  | Commitments |  |  | Contracts |
Fair value included in net income all reflected in financial services revenues |  | $ | 36 |  |  | $ | 364 |  |  | $ | (781 | )
|  | Three Months Ended July 31, 2021 |
|  | Mortgage |  |  | Interest Rate |  |  |  |  |
|  | Loans Held |  |  | Lock |  |  | Forward |
(In thousands) |  | For Sale |  |  | Commitments |  |  | Contracts |
Fair value included in net income all reflected in financial services revenues |  | $ | 227 |  |  | $ | 192 |  |  | $ | 29 |
|  | Nine Months Ended July 31, 2022 |
|  | Mortgage |  |  | Interest Rate |  |  |  |  |
|  | Loans Held |  |  | Lock |  |  | Forward |
(In thousands) |  | For Sale |  |  | Commitments |  |  | Contracts |
Fair value included in net income all reflected in financial services revenues |  | $ | 1,602 |  |  | $ | 78 |  |  | $ | (287 | )
|  | Nine Months Ended July 31, 2021 |
|  | Mortgage |  |  | Interest Rate |  |  |  |  |
|  | Loans Held |  |  | Lock |  |  | Forward |
(In thousands) |  | For Sale |  |  | Commitments |  |  | Contracts |
Fair value included in net income all reflected in financial services revenues |  | $ | 4,484 |  |  | $ | 631 |  |  | $ | (374 | )
The Company's assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the three and nine months ended July 31, 2021. The Company did not have any assets measured at fair value on a nonrecurring basis during the three and nine months ended July 31, 2022. The assets measured at fair value on a nonrecurring basis are all within the Company's Homebuilding operations and are summarized below: Nonfinancial Assets
|  |  | Three Months Ended |
|  |  | July 31, 2021 |
|  |  | Pre- |  |  |  |  |  |  |  |  |
| Fair Value |  | Impairment |  |  |  |  |  |  |  |  |
(In thousands) | Hierarchy |  | Amount |  |  | Total Losses |  |  | Fair Value |
Sold and unsold homes and lots under development | Level 3 |  | $ | 9,236 |  |  | $ | (1,166 | ) |  | $ | 8,070 |
Land and land options held for future development or sale | Level 3 |  | $ | - |  |  | $ | - |  |  | $ | - |
|  |  | Nine Months Ended |
|  |  | July 31, 2021 |
|  |  | Pre- |  |  |  |  |  |  |  |  |
| Fair Value |  | Impairment |  |  |  |  |  |  |  |  |
(In thousands) | Hierarchy |  | Amount |  |  | Total Losses |  |  | Fair Value |
Sold and unsold homes and lots under development | Level 3 |  | $ | 11,522 |  |  | $ | (2,009 | ) |  | $ | 9,513 |
Land and land options held for future development or sale | Level 3 |  | $ | - |  |  | $ | - |  |  | $ | - |
We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are included in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from inventory, of $1.2 million and $2.0 million for the three and nine months ended July 31, 2021. The Company did not record any inventory impairments for the three and nine months ended July 31, 2022. See Note 4 for further detail of the communities evaluated for impairment. The fair value of our cash equivalents, restricted cash and cash equivalents and customers' deposits approximates their carrying amount, based on Level 1 inputs. The fair value of each series of our Notes and Credit Facilities are listed below. Level 2 measurements are estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields. Level 3 measurements are estimated based on third-party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments. As shown in the table below, our 5.0% 2040 Notes were a Level 2 measurement at July 31, 2022 due to recent trades on such notes (whereas such notes were a Level 3 measurement at October 31, 2021).
Fair Value as of July 31, 2022
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Senior Secured Notes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 |  |  | - |  |  |  | - |  |  |  | 167,410 |  |  |  | 167,410 |
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 243,675 |  |  |  | 243,675 |
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 277,292 |  |  |  | 277,292 |
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 164,865 |  |  |  | 164,865 |
Senior Notes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
13.5% Senior Notes due February 1, 2026 |  |  | - |  |  |  | - |  |  |  | 96,600 |  |  |  | 96,600 |
5.0% Senior Notes due February 1, 2040 |  |  | - |  |  |  | 48,214 |  |  |  | - |  |  |  | 48,214 |
Senior Credit Facilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Unsecured Term Loan Credit Facility due February 1, 2027 |  |  | - |  |  |  | - |  |  |  | 32,131 |  |  |  | 32,131 |
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 |  |  | - |  |  |  | - |  |  |  | 86,062 |  |  |  | 86,062 |
Total fair value |  | $ | - |  |  | $ | 48,214 |  |  | $ | 1,068,035 |  |  | $ | 1,116,249 |
Fair Value as of October 31, 2021
(In thousands) |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Senior Secured Notes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
10.0% Senior Secured 1.75 Lien Notes due November 15, 2025 |  |  | - |  |  |  | - |  |  |  | 167,348 |  |  |  | 167,348 |
7.75% Senior Secured 1.125 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 366,426 |  |  |  | 366,426 |
10.5% Senior Secured 1.25 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 300,913 |  |  |  | 300,913 |
11.25% Senior Secured 1.5 Lien Notes due February 15, 2026 |  |  | - |  |  |  | - |  |  |  | 162,548 |  |  |  | 162,548 |
Senior Notes: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
13.5% Senior Notes due February 1, 2026 |  |  | - |  |  |  | - |  |  |  | 92,331 |  |  |  | 92,331 |
5.0% Senior Notes due February 1, 2040 |  |  | - |  |  |  | - |  |  |  | 63,084 |  |  |  | 63,084 |
Senior Credit Facilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Senior Unsecured Term Loan Credit Facility due February 1, 2027 |  |  | - |  |  |  | - |  |  |  | 28,196 |  |  |  | 28,196 |
Senior Secured 1.75 Lien Term Loan Credit Facility due January 31, 2028 |  |  | - |  |  |  | - |  |  |  | 86,046 |  |  |  | 86,046 |
Total fair value |  | $ | - |  |  | $ | - |  |  | $ | 1,266,892 |  |  | $ | 1,266,892 |
The Senior Secured Revolving Credit Facility is not included in the above tables because there were no borrowings outstanding thereunder as of July 31, 2022 and October 31, 2021.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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