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Fair Value of Financial Instruments
 3 Months Ended
Jun. 30, 2011
Fair Value Measures and Disclosures  
Fair Value Disclosures [Text Block]
9)         Fair Value of Financial Instruments


Generally accepted accounting principles (GAAP) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP also specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques. Observable inputs (highest level) reflect market data obtained from independent sources, while unobservable inputs (lowest level) reflect internally developed market assumptions. Fair value measurements are classified under the following hierarchy:


Level 1:   Financial assets and financial liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we can access.


Level 2:   Financial assets and financial liabilities whose values are based on the following:
 
    a) Quoted prices for similar assets or liabilities in active markets;
    b) Quoted prices for identical or similar assets or liabilities in non-active markets; or
    c) Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.


Level 3:   Financial assets and financial liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs may reflect our estimates of the assumptions that market participants would use in valuing the financial assets and financial liabilities.


The Company utilizes a combination of third party valuation service providers, brokers, and internal valuation models to determine fair value.


The following methods and assumptions were used by the Company in estimating the fair value disclosures related to other significant financial instruments:




The items shown under Level 1 and Level 2 are valued as follows:


Securities Available for Sale and Held-to-Maturity: The fair values of investments in fixed maturity and equity securities along with methods used to estimate such values are disclosed in Note 3.


Restricted Assets of the Cemeteries and Mortuaries: A portion of these assets include mutual funds and equity securities that have quoted market prices. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.


Cemetery Perpetual Care Trust Investments:  A portion of these assets include equity securities that have quoted market prices. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.


Call Options: The fair values along with methods used to estimate such values are disclosed in Note 3.


The items shown under Level 3 are valued as follows:


Investment-Type Insurance Contracts:  Future policy benefit reserves for interest-sensitive insurance products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Interest crediting rates for interest-sensitive insurance products ranged from 4% to 6.5%. The fair values for the Company’s liabilities under investment-type insurance contracts (disclosed as policyholder account balances and future policy benefits – annuities) are estimated based on the contracts’ cash surrender values.


The fair values for the Company’s insurance contracts other than investment-type contracts are not required to be disclosed. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk, such that the Company’s exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
 
Interest Rate Lock Commitments: The Company’s mortgage banking activities enters into interest rate lock commitments with potential borrowers and forward commitments to sell loans to third-party investors. The Company also implements a hedging strategy for these transactions. A mortgage loan commitment binds the Company to lend funds to a qualified borrower at a specified interest rate and within a specified period of time, generally up to 30 days after inception of the mortgage loan commitment. Mortgage loan commitments are defined to be derivatives under generally accepted accounting principles and are recognized at fair value on the consolidated balance sheet with changes in their fair values recorded as part of other comprehensive income from mortgage banking operations.


Bank Loan Interest Rate Swaps: Management considers the interest rate swap instruments to be an effective cash flow hedge against the variable interest rate on bank borrowings since the interest rate swap mirrors the term of the note payable and expires on the maturity date of the bank loan it hedges. The interest rate swaps are a derivative financial instruments carried at its fair value. The fair value of the interest rate swap was derived from a proprietary model of the bank from whom the interest rate swap was purchased and to whom the note is payable.


Mortgage Loans on Real Estate: The fair values are estimated using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amounts reported in the accompanying consolidated balance sheet for these financial instruments approximate their fair values.


Other Real Estate Owned Held for Investment and Held for Sale: On a quarterly and annual basis the Company does an analysis on property classified as Other Real Estate Owned. This analysis compares national home selling indexes at the time of original appraisal to the comparable index at time of foreclosure.  The percentage change in the index is applied to the original appraised value and compared to the current book value of the property. For any significant decrease in property values, the Company normally obtains a new appraisal. Any impairment identified by the comparison analysis is recorded during the quarter of identification.


In addition to the index comparison analysis performed by the Company, the Company depreciates Other Real Estate Owned Held for Investment.  This depreciation reduces the book value of these properties and lessens the exposure to the Company from further deterioration in real estate values.
 
The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at June 30, 2011.
 
   
Total
  
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  
Significant
 Observable
Inputs
(Level 2)
  
Significant
 Unobservable
Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis
            
Non-redeemable preferred stock
 $16,531  $16,531  $-  $- 
Common stock
  6,729,667   6,729,667   -   - 
Total securities available for sale
  6,746,198   6,746,198   -   - 
Restricted assets of cemeteries and mortuaries
  562,006   562,006   -   - 
Cemetery perpetual care trust investments
  582,104   582,104   -   - 
Derivatives - interest rate lock commitments
  1,588,261   -   -   1,588,261 
Total assets accounted for at fair value on a recurring basis
 $9,478,569  $7,890,308  $-  $1,588,261 
                  
Liabilities accounted for at fair value on a  recurring basis
                
Policyholder account balances
 $(51,529,981) $-  $-  $(51,529,981)
Future policy benefits - annuities
  (65,386,383)  -   -   (65,386,383)
Derivatives - bank loan interest rate swaps
  (110,229)  -   -   (110,229)
   - call options
  (82,585)  (82,585)  -   - 
   - interest rate lock commitments
  (38,038)  -   -   (38,038)
Total liabilities accounted for at fair value on a recurring basis
 $(117,147,216) $(82,585) $-  $(117,064,631)
 
Following is a summary of changes in the consolidated balance sheet line items measured using level 3 inputs:
 
   
Policyholder
 Account
 Balances
  
Future
Policy
Benefits -
Annuities
  
Interest Rate
Lock
Commitments
  
Bank Loan
 Interest Rate
Swaps
 
              
Balance - December 31, 2010
 $(52,340,807) $(65,936,445) $873,059  $(116,533)
                  
Total gains (losses):
                
                  
Included in earnings
  810,826   550,062   -   - 
                  
Included in other
                
comprehensive income (loss)
  -   -   677,164   6,304 
                  
Balance - June 30, 2011
 $(51,529,981) $(65,386,383) $1,550,223  $(110,229)


The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the consolidated balance sheet at June 30, 2011.



      
Quoted Prices
       
      
in Active
  
Significant
  
Significant
 
      
Markets for
  
Observable
  
Unobservable
 
      
Identical Assets
  
Inputs
  
Inputs
 
   
Total
  
(Level 1)
  
(Level 2)
  
(Level 3)
 
Assets accounted for at fair value on a
   nonrecurring basis
            
Other real estate owned held for investment
 $1,855,612  $-  $-  $1,855,612 
Other real estate owned held for sale
  318,000   -   -   318,000 
Total assets accounted for at fair value on a
   nonrecurring basis
 $2,173,612  $-  $-  $2,173,612 




The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a recurring basis by their classification in the condensed consolidated balance sheet at December 31, 2010.
 
   
Total
  
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
  
Significant
 Observable
 Inputs
(Level 2)
  
Significant
 Unobservable
 Inputs
(Level 3)
 
Assets accounted for at fair value on a recurring basis
            
Non-redeemable preferred stock
 $16,058  $16,058  $-  $- 
Common stock
  6,768,585   6,768,585   -   - 
Total securities available for sale
  6,784,643   6,784,643   -   - 
Restricted assets of cemeteries and mortuaries
  545,433   545,433   -   - 
Cemetery perpetual care trust investments
  527,672   527,672   -   - 
Derivatives - interest rate lock commitments
  1,024,587   -   -   1,024,587 
Total assets accounted for at fair value on a recurring basis
 $8,882,335  $7,857,748  $-  $1,024,587 
Liabilities accounted for at fair value on a recurring basis
                
Policyholder account balances
 $(52,340,807) $-  $-  $(52,340,807)
Future policy benefits - annuities
  (65,936,445)  -   -   (65,936,445)
Derivatives - bank loan interest rate swaps
  (116,533)  -   -   (116,533)
                   - call options
  (157,319)  (157,319)  -   - 
                   - interest rate lock commitment
  (151,528)  -   -   (151,528)
Total liabilities accounted for at fair value on a recurring basis
 $(118,702,632) $(157,319) $-  $(118,545,313)


Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:


   
Policyholder
 Account
Balances
  
Future Policy
 Benefits -
Annuities
  
Interest Rate
Lock
Commitments
  
Bank Loan
 Interest Rate
 Swaps
 
Balance - December 31, 2009
 $(54,356,491) $(61,407,257) $1,554,711  $(101,206)
Total gains (losses):
                
Included in earnings
  2,015,684   (4,529,188)  -   - 
Included in other
                
comprehensive income
  -   -   (681,652)  (15,327)
Balance - December 31, 2010
 $(52,340,807) $(65,936,445) $873,059  $(116,533)




The following tables summarize Level 1, 2 and 3 financial assets and financial liabilities measured at fair value on a nonrecurring basis by their classification in the consolidated balance sheet at December 31, 2010.
 
      
Quoted Prices
       
      
in Active
  
Significant
  
Significant
 
      
Markets for
  
Observable
  
Unobservable
 
      
Identical Assets
  
Inputs
  
Inputs
 
   
Total
  
(Level 1)
  
(Level 2)
  
(Level 3)
 
Assets accounted for at fair value on a nonrecurring basis
            
Investment in securities held-to-maturity
 $346,219  $-  $346,219  $- 
Mortgage loans on real estate
  523,971   -   -   523,971 
Other real estate owned held for investment
  2,158,110   -   -   2,158,110 
Other real estate owned held for sale
  1,444,000   -   -   1,444,000 
Total assets accounted for at fair value on a
             
   nonrecurring basis
 $4,472,300  $-  $346,219  $4,126,081