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7): Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2015
Notes |
7): Fair Value of Financial Instruments | 7) 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 of the Notes to Condensed Consolidated Statements. Restricted Assets: 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 and Put Options: The Company uses quoted market prices to value its call and put options. The items shown under Level 3 are valued as follows: Policyholder Account Balances and Future Policy Benefits-Annuities: 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. The Company estimates the fair value of a mortgage loan commitment based on the change in estimated fair value of the underlying mortgage loan and the probability that the mortgage loan will fund within the terms of the commitment. The change in fair value of the underlying mortgage loan is measured from the date the mortgage loan commitment is issued. Therefore, at the time of issuance, the estimated fair value is zero. Following issuance, the value of a mortgage loan commitment can be either positive or negative depending upon the change in value of the underlying mortgage loans. Fallout rates derived from the Company’s recent historical empirical data are used to estimate the quantity of mortgage loans that will fund within the terms of the commitments. 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 condensed 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 used market data based upon its real estate operation experience and projected the present value of the net rental income over seven years. The Company used 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 Other 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. The precise fair value of MSRs cannot be readily determined because MSRs are not actively traded in stand-alone markets. 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 Company’s subsequent accounting for MSRs is based on the class of MSRs. The Company has identified two classes of MSRs: MSRs backed by mortgage loans with initial term of 30 years and MSRs backed by mortgage loans with initial term of 15 years. The Company distinguishes between these classes of MSRs due to their differing sensitivities to change in value as the result of changes in market. After being initially recorded at fair value, MSRs backed by mortgage loans are accounted for using the amortization method. MSR amortization is determined by amortizing the balance straight-line over an estimated nine year life. The Company periodically assesses MSRs for impairment. Impairment occurs when the current fair value of the MSR falls below the asset’s carrying value (carrying value is the amortized cost reduced by any related valuation allowance). If MSRs are impaired, the impairment is recognized in current-period earnings and the carrying value of the MSRs is adjusted through a valuation allowance. Management periodically reviews the various loan strata to determine whether the value of the MSRs in a given stratum is impaired and likely to recover. When management deems recovery of the value to be unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable value is charged to the valuation allowance. 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, 2015.
|  | 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 |  | $ 7,208,726 |  | $ 7,208,726 |  | $ - |  | $ -
Total securities available for sale |  | $ 7,208,726 |  | $ 7,208,726 |  | $ - |  | $ -
Restricted assets of cemeteries and mortuaries |  | $ 670,390 |  | $ 670,390 |  | $ - |  | $ -
Cemetery perpetual care trust investments |  | 609,303 |  | 609,303 |  | - |  | -
Derivatives - interest rate lock commitments |  | 4,756,170 |  | - |  | - |  | 4,756,170
Total assets accounted for at fair value on a recurring basis |  | $ 13,244,589 |  | $ 8,488,419 |  | $ - |  | $ 4,756,170
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Policyholder account balances |  | $ (50,915,543) |  | $ - |  | $ - |  | $ (50,915,543)
Future policy benefits - annuities |  | (63,289,669) |  | - |  | - |  | (63,289,669)
Derivatives - call options |  | (6,715) |  | (6,715) |  | - |  | -
- put options |  | (103,684) |  | (103,684) |  | - |  | -
- interest rate lock commitments |  | (518,227) |  | - |  | - |  | (518,227)
Total liabilities accounted for at fair value on a recurring basis |  | $ (114,833,838) |  | $ (110,399) |  | $ - |  | $ (114,723,439)
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, 2014 |  | $ (45,310,699) |  | $ (65,540,985) |  | $ 1,929,851 |  | $ (31,370)
Total gains (losses): |  |  |  |  |  |  |  |
Included in earnings |  | (5,604,844) |  | 2,251,316 |  | - |  | -
Included in other comprehensive income (loss) |  | - |  | - |  | 2,308,092 |  | 31,370
Balance - September 30, 2015 |  | $ (50,915,543) |  | $ (63,289,669) |  | $ 4,237,943 |  | $ -
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 condensed consolidated balance sheet at September 30, 2015.
|  |  | 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 | $ 4,674,218 |  | - |  | - |  | $ 4,674,218
Mortgage loans on real estate | 320,000 |  | - |  | - |  | 320,000
Total assets accounted for at fair value on a nonrecurring basis | $ 4,994,218 |  | $ - |  | $ - |  | $ 4,994,218
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, 2014.
|  | 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 |  | $ 6,752,750 |  | $ 6,752,750 |  | $ - |  | $ -
Total securities available for sale |  | $ 6,752,750 |  | $ 6,752,750 |  | $ - |  | $ -
Restricted assets of cemeteries and mortuaries |  | $ 715,202 |  | $ 715,202 |  | $ - |  | $ -
Cemetery perpetual care trust investments |  | 695,235 |  | 695,235 |  | - |  | -
Derivatives - interest rate lock commitments |  | 2,111,529 |  | - |  | - |  | 2,111,529
Total assets accounted for at fair value on a recurring basis |  | $ 10,274,716 |  | $ 8,163,187 |  | $ - |  | $ 2,111,529
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Policyholder account balances |  | $ (45,310,699) |  | $ - |  | $ - |  | $ (45,310,699)
Future policy benefits - annuities |  | (65,540,985) |  | - |  | - |  | (65,540,985)
Derivatives - bank loan interest rate swaps |  | (31,370) |  | - |  | - |  | (31,370)
- call options |  | (116,036) |  | (116,036) |  | - |  | -
- put options |  | (11,867) |  | (11,867) |  | - |  | -
- interest rate lock commitment |  | (181,678) |  | - |  | - |  | (181,678)
Total liabilities accounted for at fair value on a recurring basis |  | $ (111,192,635) |  | $ (127,903) |  | $ - |  | $ (111,064,732)
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, 2013 |  | $ (48,000,668) |  | $ (65,052,928) |  | $ 1,487,908 |  | $ (58,310)
Total gains (losses): |  |  |  |  |  |  |  |
Included in earnings |  | 2,689,969 |  | (488,057) |  | - |  | -
Included in other |  |  |  |  |  |  |  |
comprehensive income |  | - |  | - |  | 441,943 |  | 26,940
Balance - December 31, 2014 |  | $ (45,310,699) |  | $ (65,540,985) |  | $ 1,929,851 |  | $ (31,370)
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 condensed consolidated balance sheet at December 31, 2014.
|  |  | 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 | $ 3,741,381 |  | - |  | - |  | $ 3,741,381
Real estate held for investment | 53,500 |  | - |  | - |  | 53,500
Total assets accounted for at fair value on a |  |  |  |  |  |  |
nonrecurring basis | $ 3,794,881 |  | $ - |  | $ - |  | $ 3,794,881
Fair Value of Financial Instruments Carried at Other Than Fair Value ASC 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2015 and December 31, 2014. The estimated fair value amounts for September 30, 2015 and December 31, 2014 have been measured as of period-end, and have not been reevaluated or updated for purposes of these Condensed Consolidated Financial Statements subsequent to those dates. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at period-end. The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of September 30, 2015:
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |  |
Residential | $ 46,506,794 |  | $ - |  | $ - |  | $ 49,579,568 |  | $ 49,579,568
Residential construction | 28,762,546 |  | - |  | - |  | 28,762,546 |  | 28,762,546
Commercial | 36,413,914 |  | - |  | - |  | 38,062,674 |  | 38,062,674
Mortgage loans, net | $ 111,683,254 |  | $ - |  | $ - |  | $ 116,404,788 |  | $ 116,404,788
Policy loans | 7,038,768 |  | - |  | - |  | 7,038,768 |  | 7,038,768
Other loans | 27,422,787 |  | - |  | - |  | 27,422,787 |  | 27,422,787
Short-term investments | 19,980,369 |  | - |  | - |  | 19,980,369 |  | 19,980,369
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (39,535,964) |  | $ - |  | $ - |  | $ (39,535,964) |  | $ (39,535,964)
The carrying values and estimated fair values for such financial instruments, and their corresponding placement in the fair value hierarchy, are summarized as follows as of December 31, 2014:
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Mortgage loans: |  |  |  |  |  |  |  |  |
Residential | $ 51,876,621 |  | $ - |  | $ - |  | $ 55,247,638 |  | $ 55,247,638
Residential construction | 32,971,824 |  | - |  | - |  | 32,971,824 |  | 32,971,824
Commercial | 35,201,627 |  | - |  | - |  | 36,829,266 |  | 36,829,266
Mortgage loans, net | $ 120,050,072 |  | $ - |  | $ - |  | $ 125,048,728 |  | $ 125,048,728
Policy loans | 7,011,012 |  | - |  | - |  | 7,011,012 |  | 7,011,012
Other loans | 27,114,416 |  | - |  | - |  | 27,114,416 |  | 27,114,416
Short-term investments | 27,059,495 |  | - |  | - |  | 27,059,495 |  | 27,059,495
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (28,989,008) |  | $ - |  | $ - |  | $ (28,989,008) |  | $ (28,989,008)
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows: Mortgage Loans on Real Estate: The estimated fair value of the Company’s mortgage loans is determined using various methods. The Company’s mortgage loans are grouped into three categories: Residential, Residential Construction and Commercial. When estimating the expected future cash flows, it is assumed that all loans will be held to maturity, and any loans that are non-performing are evaluated individually for impairment. Residential – The estimated fair value of mortgage loans originated prior to 2013 is determined by estimating expected future cash flows of interest payments and discounting them using current interest rates from single family mortgages. The estimated fair value of mortgage loans originated in 2013, 2014 and 2015 is determined from pricing of similar loans that were sold in 2013 and 2014. Residential Construction – These loans are primarily short in maturity (4-6 months) accordingly, the estimated fair value is determined to be the net book value. Commercial – The estimated fair value is determined by estimating expected future cash flows of interest payments and discounting them using current interest rates for commercial mortgages. Policy and Other Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values. Short-Term Investments: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values. Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values.

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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 Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=36462937&loc=d3e19207-110258 Reference 2: 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 3: 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 4: 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=49121117&loc=d3e13537-108611 Reference 5: 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=49121117&loc=d3e13504-108611 Reference 6: 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=49121117&loc=d3e13433-108611 + Details
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