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7): Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2017
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 the Company 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 the Company’s 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 the Condensed Consolidated Financial 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 sheets for these financial instruments approximate their fair values. Cemetery Endowment 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 sheets 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: Loan Commitments and Forward Sale Commitments: The Company’s mortgage segment enters into loan commitments with potential borrowers and forward sale commitments to sell loans to third-party investors. The Company also uses a hedging strategy for these transactions. A 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 issuance of the loan commitment. Loan commitments are defined to be derivatives under GAAP and are recognized at fair value on the consolidated balance sheets with changes in their fair values recorded in current earnings. The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted MBS prices, estimates of the fair value of mortgage servicing rights, and an estimate of 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 loan commitment is issued. 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 and other factors from the Company’s recent historical data are used to estimate the quantity and value of mortgage loans that will fund within the terms of the commitments. 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 derivative financial instruments carried at their 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 Company believes that the fair value of impaired loans will approximate the unpaid principal balance. When determining the fair value of mortgage loans on real estate, 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 also considers area comparables and property condition when determining fair value. 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. 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 also considers area comparables and property condition when determining fair value. 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 Mortgage Servicing Rights (“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 seven and nine-year life which estimates the proportion to, and over the period of the estimated future net servicing income of the underlying financial assets. 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 June 30, 2017.
|  | 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 |  | $ 6,499,100 |  | $ 6,499,100 |  | $ - |  | $ -
Total securities available for sale |  | $ 6,499,100 |  | $ 6,499,100 |  | $ - |  | $ -
Restricted assets of cemeteries and mortuaries |  | $ 761,409 |  | $ 761,409 |  | $ - |  | $ -
Cemetery perpetual care trust investments |  | 670,407 |  | 670,407 |  | - |  | -
Derivatives - loan commitments |  | 7,986,876 |  | - |  | - |  | 7,986,876
Total assets accounted for at fair value on a recurring basis |  | $ 15,917,792 |  | $ 7,930,916 |  | $ - |  | $ 7,986,876
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Derivatives - bank loan interest rate swaps |  | $ (692) |  | $ - |  | $ - |  | $ (692)
- call options |  | (24,670) |  | (24,670) |  | - |  | -
- put options |  | (44,573) |  | (44,573) |  | - |  | -
- loan commitments |  | (21,830) |  | - |  | - |  | (21,830)
Total liabilities accounted for at fair value on a recurring basis |  | $ (91,765) |  | $ (69,243) |  | $ - |  | $ (22,522)
Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:
|  | Net Loan Commitments |  | Bank Loan Interest Rate Swaps
Balance - December 31, 2016 |  | $ 6,809,332 |  | $ (3,308)
Total gains (losses): |  |  |  |
Included in earnings |  | 1,155,714 |  | -
Included in other comprehensive income |  | - |  | 2,616
Balance - June 30, 2017 |  | $ 7,965,046 |  | $ (692)
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 June 30, 2017.
|  |  | 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 |  |  |  |  |  |  |
Impaired mortgage loans on real estate | $ 6,684,163 |  | $ - |  | $ - |  | $ 6,684,163
Mortgage servicing rights additions | 2,867,263 |  | - |  | - |  | 2,867,263
Impaired fixed maturity securities, held to maturity | 204,880 |  | - |  | 204,880 |  | -
Total assets accounted for at fair value on a nonrecurring basis | $ 9,756,306 |  | $ - |  | $ 204,880 |  | $ 9,551,426
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, 2016.
|  | 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 |  | $ 10,573,356 |  | $ 10,573,356 |  | $ - |  | $ -
Total securities available for sale |  | $ 10,573,356 |  | $ 10,573,356 |  | $ - |  | $ -
Restricted assets of cemeteries and mortuaries |  | $ 736,603 |  | $ 736,603 |  | $ - |  | $ -
Cemetery perpetual care trust investments |  | 698,202 |  | 698,202 |  | - |  | -
Derivatives - loan commitments |  | 6,911,544 |  | - |  | - |  | 6,911,544
Total assets accounted for at fair value on a recurring basis |  | $ 18,919,705 |  | $ 12,008,161 |  | $ - |  | $ 6,911,544
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Derivatives - bank loan interest rate swaps |  | $ (3,308) |  | - |  | - |  | $ (3,308)
- call options |  | (109,474) |  | (109,474) |  | - |  | -
- put options |  | (26,494) |  | (26,494) |  | - |  | -
- loan commitments |  | (102,212) |  | - |  | - |  | (102,212)
Total liabilities accounted for at fair value on a recurring basis |  | $ (241,488) |  | $ (135,968) |  | $ - |  | $ (105,520)
Following is a summary of changes in the condensed consolidated balance sheet line items measured using level 3 inputs:
|  | Net Loan Commitments |  | Bank Loan Interest Rate Swaps
Balance - December 31, 2015 |  | $ 7,671,495 |  | $ (13,947)
Purchases |  | - |  | -
Total gains (losses): |  |  |  |
Included in earnings |  | (862,163) |  | -
Included in other |  |  |  |
comprehensive income |  | - |  | 10,639
Balance - December 31, 2016 |  | $ 6,809,332 |  | $ (3,308)
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, 2016.
|  |  | 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 |  |  |  |  |  |  |
Impaired mortgage loans on real estate | $ 2,809,925 |  | $ - |  | $ - |  | $ 2,809,925
Mortgage servicing rights additions | 8,603,154 |  | - |  | - |  | 8,603,154
Real estate held for investment | 2,347,820 |  | - |  | - |  | 2,347,820
Total assets accounted for at fair value on a |  |  |  |  |  |  |
nonrecurring basis | $ 13,760,899 |  | $ - |  | $ - |  | $ 13,760,899
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 June 30, 2017 and December 31, 2016. The estimated fair value amounts for June 30, 2017 and December 31, 2016 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 June 30, 2017:
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Fixed maturity securities, held to maturity | $ 193,208,660 |  | $ - |  | $ 205,044,443 |  | $ - |  | $ 205,044,443
Mortgage loans: |  |  |  |  |  |  |  |  |
Residential | 61,306,680 |  | - |  | - |  | 65,473,057 |  | 65,473,057
Residential construction | 34,300,908 |  | - |  | - |  | 34,300,908 |  | 34,300,908
Commercial | 39,391,676 |  | - |  | - |  | 40,945,013 |  | 40,945,013
Mortgage loans, net | $ 134,999,264 |  | $ - |  | $ - |  | $ 140,718,978 |  | $ 140,718,978
Loans held for sale | 173,367,938 |  | - |  | - |  | 177,060,605 |  | 177,060,605
Policy loans | 6,685,452 |  | - |  | - |  | 6,685,452 |  | 6,685,452
Insurance assignments, net | 31,377,542 |  | - |  | - |  | 31,377,542 |  | 31,377,542
Short-term investments | 23,448,480 |  | - |  | 23,448,480 |  | - |  | 23,448,480
Mortgage servicing rights | 20,096,965 |  | - |  | - |  | 26,448,288 |  | 26,448,288
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (163,581,969) |  | $ - |  | $ - |  | $ (163,581,969) |  | $ (163,581,969)
Policyholder account balances | (48,540,633) |  | - |  | - |  | (37,834,097) |  | (37,834,097)
Future policy benefits - annuities | (99,076,489) |  | - |  | - |  | (99,975,768) |  | (99,975,768)
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, 2016:
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Fixed maturity securities, held to maturity | $ 184,979,644 |  | $ - |  | $ 191,850,749 |  | $ - |  | $ 191,850,749
Mortgage loans: |  |  |  |  |  |  |  |  |
Residential | 57,132,082 |  | - |  | - |  | 61,357,393 |  | 61,357,393
Residential construction | 40,700,003 |  | - |  | - |  | 40,700,003 |  | 40,700,003
Commercial | 51,349,493 |  | - |  | - |  | 53,299,800 |  | 53,299,800
Mortgage loans, net | $ 149,181,578 |  | $ - |  | $ - |  | $ 155,357,196 |  | $ 155,357,196
Loans held for sale | 189,578,243 |  | - |  | - |  | 192,289,854 |  | 192,289,854
Policy loans | 6,694,148 |  | - |  | - |  | 6,694,148 |  | 6,694,148
Insurance assignments, net | 32,477,246 |  | - |  | - |  | 32,477,246 |  | 32,477,246
Short-term investments | 27,560,040 |  | - |  | 27,560,040 |  | - |  | 27,560,040
Mortgage servicing rights | 18,872,362 |  | - |  | - |  | 25,496,832 |  | 25,496,832
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (152,137,371) |  | $ - |  | $ - |  | $ (152,137,371) |  | $ (152,137,371)
Policyholder account balances | (49,421,125) |  | - |  | - |  | (38,530,031) |  | (38,530,031)
Future policy benefits - annuities | (99,388,662) |  | - |  | - |  | (100,253,261) |  | (100,253,261)
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of financial instruments are summarized as follows: Fixed Maturity Securities, Held to Maturity: The fair values of fixed maturity securities are based on quoted market prices, when available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services, or in the case of private placements, are estimated by discounting expected future cash flows using a current market value applicable to the coupon rate, credit and maturity of the investments. 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 thru 2017 is determined from pricing of similar loans that were sold in 2016. 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. Loans Held for Sale: The fair value is based on quoted market prices, when available. When a quoted market price is not readily available, the Company uses the market price from its last sale of similar assets. Policy Loans: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values because they are fully collateralized by the cash surrender value of the underlying insurance policies. Insurance Assignments, Net: These investments are short in maturity accordingly, 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 due to their short-term nature. Bank and Other Loans Payable: The carrying amounts reported in the accompanying condensed consolidated balance sheet for these financial instruments approximate their fair values due to their relatively short-term maturities and variable rates. 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 1.5% 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 present value of liability cash flows. 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.

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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 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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