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8): Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2013
Notes |
8): Fair Value of Financial Instruments | 8) 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. Real Estate Held for Investment: The Company believes that in an orderly market fair value will approximate the replacement cost of a home and the rental income provides a cash flow stream for investment analysis. The Company believes the highest and best use of the properties are as income producing assets since it is the Company’s intent to hold the properties as rental properties, matching the income from the investment in rental properties with the funds required for future estimated policy claims. Accordingly, the fair value determination will be weighted more heavily toward the rental analysis. It should be noted that for replacement cost, when determining the fair value of mortgage properties, the Company uses Marshall and Swift, a provider of building cost information to the real estate construction industry. For the investment analysis, the Company uses market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company uses 60% of the projected cash flow analysis and 40% of the replacement cost to approximate fair value of the collateral. In addition to this analysis performed by the Company, the Company depreciates Real Estate 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. Mortgage Servicing Rights: The Company initially recognizes MSRs at their estimated fair values derived from the net cash flows associated with the servicing contracts, where the Company assumes the obligation to service the loan in the sale transaction. Considerable judgment is required to estimate the fair values of these assets and the exercise of such judgment can significantly affect the Company’s earnings. 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 September 30, 2013.
|  | 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 |  |  |  |  |  |  |  |
Common stock |  | $ 5,129,640 |  | $ 5,129,640 |  | $ - |  | $ -
Total securities available for sale |  | 5,129,640 |  | 5,129,640 |  | - |  | -
Restricted assets of cemeteries and mortuaries |  | 647,242 |  | 647,242 |  | - |  | -
Cemetery perpetual care trust investments |  | 634,657 |  | 634,657 |  | - |  | -
Derivatives - interest rate lock commitments |  | 2,719,681 |  | - |  | - |  | 2,719,681
Total assets accounted for at fair value on a recurring basis |  | $ 9,131,220 |  | $ 6,411,539 |  | $ - |  | $ 2,719,681
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Policyholder account balances |  | $ (48,232,865) |  | $ - |  | $ - |  | $ (48,232,865)
Future policy benefits - annuities |  | (64,775,274) |  | - |  | - |  | (64,775,274)
Derivatives - bank loan interest rate swaps |  | (65,881) |  | - |  | - |  | (65,881)
- call options |  | (129,110) |  | (129,110) |  | - |  | -
- interest rate lock commitments |  | (855,315) |  | - |  | - |  | (855,315)
Total liabilities accounted for at fair value on a recurring basis |  | $ (114,058,445) |  | $ (129,110) |  | $ - |  | $ (113,929,335)
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, 2012 |  | $ (49,746,337) |  | $ (65,171,687) |  | $ 2,961,465 |  | $ (93,572)
Total gains (losses): |  |  |  |  |  |  |  |
Included in earnings |  | 1,513,472 |  | 396,413 |  | - |  | -
Included in other comprehensive income (loss) |  | - |  | - |  | (1,097,099) |  | 27,691
Balance - September 30, 2013 |  | $ (48,232,865) |  | $ (64,775,274) |  | $ 1,864,366 |  | $ (65,881)
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 September 30, 2013.
|  |  | 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 |  |  |  |  |  |  |
Mortgage servicing rights | $ 4,336,016 |  | - |  | - |  | $ 4,336,016
Mortgage loans on real estate | 89,000 |  | - |  | - |  | 89,000
Other real estate owned held for investment | 660,784 |  | - |  | - |  | 660,784
Total assets accounted for at fair value on a nonrecurring basis | $ 5,085,800 |  | $ - |  | $ - |  | $ 5,085,800
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, 2012.
|  | 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 |  | $ 18,795 |  | $ 18,795 |  | $ - |  | $ -
Common stock |  | 5,386,317 |  | 5,386,317 |  | - |  | -
Total securities available for sale |  | 5,405,112 |  | 5,405,112 |  | - |  | -
Restricted assets of cemeteries and mortuaries |  | 585,412 |  | 585,412 |  | - |  | -
Cemetery perpetual care trust investments |  | 626,048 |  | 626,048 |  | - |  | -
Derivatives - interest rate lock commitments |  | 3,127,689 |  | - |  | - |  | 3,127,689
Total assets accounted for at fair value on a recurring basis |  | $ 9,744,261 |  | $ 6,616,572 |  | $ - |  | $ 3,127,689
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Policyholder account balances |  | $ (49,746,337) |  | $ - |  | $ - |  | $ (49,746,337)
Future policy benefits - annuities |  | (65,171,687) |  | - |  | - |  | (65,171,687)
Derivatives - bank loan interest rate swaps |  | (93,572) |  | - |  | - |  | (93,572)
- call options |  | (126,215) |  | (126,215) |  | - |  | -
- interest rate lock commitment |  | (166,224) |  | - |  | - |  | (166,224)
Total liabilities accounted for at fair value on a recurring basis |  | $ (115,304,035) |  | $ (126,215) |  | $ - |  | $ (115,177,820)
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, 2011 |  | $ (50,926,020) |  | $ (65,281,586) |  | $ 1,694,541 |  | $ (117,812)
Total gains (losses): |  |  |  |  |  |  |  |
Included in earnings |  | 1,179,683 |  | 109,899 |  | - |  | -
Included in other |  |  |  |  |  |  |  |
comprehensive income |  | - |  | - |  | 1,266,924 |  | 24,240
Balance - December 31, 2012 |  | $ (49,746,337) |  | $ (65,171,687) |  | $ 2,961,465 |  | $ (93,572)
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, 2012.
|  |  | 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 |  |  |  |  |  |  |
Mortgage servicing rights | $ 2,797,470 |  | - |  | - |  | $ 2,797,470
Mortgage loans on real estate | 4,621,500 |  | - |  | - |  | 4,621,500
Other real estate owned held for investment | 985,219 |  | - |  | - |  | 985,219
Total assets accounted for at fair value on a |  |  |  |  |  |  |
nonrecurring basis | $ 8,404,189 |  | $ - |  | $ - |  | $ 8,404,189

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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/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. + Details
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