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3) Investments | 9 Months Ended
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Sep. 30, 2017
Notes |
3) Investments | 3) Investments The Company’s investments as of September 30, 2017 are summarized as follows:
|  | Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
September 30, 2017 |  |  |  |  |  |  |  |
Fixed maturity securities held to maturity carried at amortized cost: |  |  |  |  |  |  |  |
Bonds: |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. Government agencies |  | $ 54,279,156 |  | $ 237,071 |  | $ (226,543) |  | $ 54,289,684
Obligations of states and political subdivisions |  | 5,865,790 |  | 124,685 |  | (77,272) |  | 5,913,203
Corporate securities including public utilities |  | 160,278,125 |  | 14,088,157 |  | (1,285,361) |  | 173,080,921
Mortgage-backed securities |  | 9,764,566 |  | 253,573 |  | (171,423) |  | 9,846,716
Redeemable preferred stock |  | 623,635 |  | 53,403 |  | - |  | 677,038
Total fixed maturity securities held to maturity |  | $ 230,811,272 |  | $ 14,756,889 |  | $ (1,760,599) |  | $ 243,807,562
Equity securities available for sale at estimated fair value: |  |  |  |  |  |  |  |
Common stock: |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 6,310,307 |  | $ 467,132 |  | $ (819,951) |  | $ 5,957,488
Total equity securities available for sale at estimated fair value |  | $ 6,310,307 |  | $ 467,132 |  | $ (819,951) |  | $ 5,957,488
Mortgage loans held for investment at amortized cost: |  |  |  |  |  |  |  |
Residential |  | $ 65,759,761 |  |  |  |  |  |
Residential construction |  | 41,306,722 |  |  |  |  |  |
Commercial |  | 42,923,761 |  |  |  |  |  |
Less: Unamortized deferred loan fees, net |  | (637,735) |  |  |  |  |  |
Less: Allowance for loan losses |  | (2,051,818) |  |  |  |  |  |
Total mortgage loans held for investment |  | $ 147,300,691 |  |  |  |  |  |
Real estate held for investment net of accumulated depreciation: |  |  |  |  |  |  |  |
Residential |  | $ 69,469,220 |  |  |  |  |  |
Commercial |  | 81,099,778 |  |  |  |  |  |
Total real estate held for investment |  | $ 150,568,998 |  |  |  |  |  |
Policy loans and other investments at amortized cost: |  |  |  |  |  |  |  |
Policy loans |  | $ 6,677,924 |  |  |  |  |  |
Insurance assignments |  | 33,340,431 |  |  |  |  |  |
Federal Home Loan Bank stock |  | 689,400 |  |  |  |  |  |
Other investments |  | 2,923,681 |  |  |  |  |  |
Less: Allowance for doubtful accounts |  | (1,142,287) |  |  |  |  |  |
Total policy loans and other investments |  | $ 42,489,149 |  |  |  |  |  |
Short-term investments at amortized cost |  | $ 17,830,990 |  |  |  |  |  |
Accrued investment income |  | $ 3,391,688 |  |  |  |  |  |
The Company’s investments as of December 31, 2016 are summarized as follows:
|  | Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
December 31, 2016: |  |  |  |  |  |  |  |
Fixed maturity securities held to maturity carried at amortized cost: |  |  |  |  |  |  |  |
Bonds: |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of U.S. Government agencies |  | $ 4,475,065 |  | $ 249,028 |  | $ (66,111) |  | $ 4,657,982
Obligations of states and political subdivisions |  | 6,017,225 |  | 153,514 |  | (133,249) |  | 6,037,490
Corporate securities including public utilities |  | 164,375,636 |  | 10,440,989 |  | (3,727,013) |  | 171,089,612
Mortgage-backed securities |  | 9,488,083 |  | 221,400 |  | (280,871) |  | 9,428,612
Redeemable preferred stock |  | 623,635 |  | 13,418 |  | - |  | 637,053
Total fixed maturity securities held to maturity |  | $ 184,979,644 |  | $ 11,078,349 |  | $ (4,207,244) |  | $ 191,850,749
Equity securities available for sale at estimated fair value: |  |  |  |  |  |  |  |
Common stock: |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 10,323,238 |  | $ 447,110 |  | $ (859,092) |  | $ 9,911,256
Total securities available for sale carried at estimated fair value |  | $ 10,323,238 |  | $ 447,110 |  | $ (859,092) |  | $ 9,911,256
Mortgage loans held for investment at amortized cost: |  |  |  |  |  |  |  |
Residential |  | $ 58,593,622 |  |  |  |  |  |
Residential construction |  | 40,800,117 |  |  |  |  |  |
Commercial |  | 51,536,622 |  |  |  |  |  |
Less: Unamortized deferred loan fees, net |  | (190,846) |  |  |  |  |  |
Less: Allowance for loan losses |  | (1,748,783) |  |  |  |  |  |
Total mortgage loans held for investment |  | $ 148,990,732 |  |  |  |  |  |
Real estate held for investment net of accumulated depreciation: |  |  |  |  |  |  |  |
Residential |  | $ 76,191,985 |  |  |  |  |  |
Commercial |  | 68,973,936 |  |  |  |  |  |
Total real estate held for investment |  | $ 145,165,921 |  |  |  |  |  |
Policy loans and other investments at amortized cost: |  |  |  |  |  |  |  |
Policy loans |  | $ 6,694,148 |  |  |  |  |  |
Insurance assignments |  | 33,548,079 |  |  |  |  |  |
Promissory notes |  | 48,797 |  |  |  |  |  |
Federal Home Loan Bank stock |  | 662,100 |  |  |  |  |  |
Other investments |  | 1,765,752 |  |  |  |  |  |
Less: Allowance for doubtful accounts |  | (1,119,630) |  |  |  |  |  |
Total policy loans and other investments |  | $ 41,599,246 |  |  |  |  |  |
Short-term investments at amortized cost |  | $ 27,560,040 |  |  |  |  |  |
Accrued investment income |  | $ 2,972,596 |  |  |  |  |  |
Fixed Maturity Securities The following tables summarize unrealized losses on fixed maturity securities held to maturity, which are carried at amortized cost, at September 30, 2017 and December 31, 2016. The unrealized losses were primarily related to interest rate fluctuations. The tables set forth unrealized losses by duration with the fair value of the related fixed maturity securities:
|  | Unrealized Losses for Less than Twelve Months |  | Fair Value |  | Unrealized Losses for More than Twelve Months |  | Fair Value |  | Total Unrealized Loss | Fair Value
At September 30, 2017 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Securities and Obligations of U.S. Government Agencies |  | $ 182,493 |  | $ 51,456,444 |  | $ 44,050 |  | $ 851,779 |  | $ 226,543 | $ 52,308,223
Obligations of states and political subdivisions |  | 18,357 |  | 2,486,400 |  | 58,915 |  | 1,651,253 |  | 77,272 | 4,137,653
Corporate securities |  | 286,166 |  | 16,526,010 |  | 999,195 |  | 10,820,005 |  | 1,285,361 | 27,346,015
Mortgage-backed securities |  | 68,972 |  | 2,026,033 |  | 102,451 |  | 1,156,803 |  | 171,423 | 3,182,836
Total unrealized losses |  | $ 555,988 |  | $ 72,494,887 |  | $ 1,204,611 |  | $ 14,479,840 |  | $ 1,760,599 | $ 86,974,727
At December 31, 2016 |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury Securities and Obligations of U.S. Government Agencies |  | $ 66,111 |  | $ 1,342,088 |  | $ - |  | $ - |  | $ 66,111 | $ 1,342,088
Obligations of states and political subdivisions |  | 133,249 |  | 3,686,856 |  | - |  | - |  | 133,249 | 3,686,856
Corporate securities |  | 1,728,312 |  | 41,796,016 |  | 1,998,701 |  | 12,969,135 |  | 3,727,013 | 54,765,151
Mortgage-backed securities |  | 176,715 |  | 4,176,089 |  | 104,156 |  | 940,278 |  | 280,871 | 5,116,367
Total unrealized losses |  | $ 2,104,387 |  | $ 51,001,049 |  | $ 2,102,857 |  | $ 13,909,413 |  | $ 4,207,244 | $ 64,910,462
There were 143 securities with an average fair value of 98.3% of amortized cost at September 30, 2017. There were 250 securities with an average fair value of 93.9% of amortized cost at December 31, 2016. During the three months ended September 30, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $100,000 and $30,000, respectively, and for the nine months ended September 30, 2017 and 2016 an other than temporary decline in fair value resulted in the recognition of credit losses on fixed maturity securities of $418,366 and $90,000, respectively. On a quarterly basis, the Company evaluates its fixed maturity securities held to maturity. This evaluation includes a review of current ratings by the National Association of Insurance Commissions (“NAIC”). Securities with a rating of 1 or 2 are considered investment grade and are not reviewed for impairment. Securities with ratings of 3 to 5 are evaluated for impairment. Securities with a rating of 6 are automatically determined to be impaired and are written down. The evaluation involves an analysis of the securities in relation to historical values, interest payment history, projected earnings and revenue growth rates as well as a review of the reason for a downgrade in the NAIC rating. Based on the analysis of a security that is rated 3 to 5, a determination is made whether the security will likely make interest and principal payments in accordance with the terms of the financial instrument. If it is unlikely that the security will meet contractual obligations, the loss is considered to be other than temporary, the security is written down to the new anticipated market value and an impairment loss is recognized. Impairment losses are treated as credit losses as the Company holds fixed maturity securities to maturity unless the underlying conditions have changed in the financial instrument to require an impairment. 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. The amortized cost and estimated fair value of fixed maturity securities held to maturity, at September 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|  | Amortized Cost |  | Estimated Fair Value
Held to Maturity: |  |  |  |
Due in 2017 |  | $ 1,205,533 |  | $ 1,208,929
Due in 2018 through 2021 |  | 77,063,707 |  | 78,846,158
Due in 2022 through 2026 |  | 54,265,268 |  | 56,731,089
Due after 2026 |  | 87,888,563 |  | 96,497,632
Mortgage-backed securities |  | 9,764,566 |  | 9,846,716
Redeemable preferred stock |  | 623,635 |  | 677,038
Total held to maturity |  | $ 230,811,272 |  | $ 243,807,562
The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”). In June through August of 2017, the Company purchased a total of $50,000,000, par value, of United States Treasury fixed maturity securities that it deposited with the FHLB. These securities will generate interest income for the Company and will be available to use as collateral on any cash borrowings from the FHLB. As of September 30, 2017, the Company did not have any outstanding amounts owed to FHLB. Equity Securities The following tables summarize unrealized losses on equity securities available for sale, that were carried at estimated fair value based on quoted trading prices at September 30, 2017 and December 31, 2016. The unrealized losses were primarily the result of decreases in fair value in the retail, industrial and energy sectors. The tables set forth unrealized losses by duration and number of investment positions, together with the fair value of the related equity securities available for sale in a loss position:
|  | Unrealized Losses for Less than Twelve Months |  | No. of Investment Positions |  | Unrealized Losses for More than Twelve Months |  | No. of Investment Positions |  | Total Unrealized Losses
At September 30, 2017 |  |  |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 150,581 |  | 108 |  | $ 669,370 |  | 92 |  | $ 819,951
Total unrealized losses |  | $ 150,581 |  | 108 |  | $ 669,370 |  | 92 |  | $ 819,951
Fair Value |  | $ 988,159 |  |  |  | $ 1,444,994 |  |  |  | $ 2,433,153
At December 31, 2016 |  |  |  |  |  |  |  |  |  |
Industrial, miscellaneous and all other |  | $ 215,563 |  | 124 |  | $ 643,529 |  | 104 |  | $ 859,092
Total unrealized losses |  | $ 215,563 |  | 124 |  | $ 643,529 |  | 104 |  | $ 859,092
Fair Value |  | $ 2,063,144 |  |  |  | $ 1,685,874 |  |  |  | $ 3,749,018
The average fair value of the equity securities available for sale was 74.8% and 81.4% of the original investment as of September 30, 2017 and December 31, 2016, respectively. The intent of the Company is to retain equity securities for a period of time sufficient to allow for the recovery in fair value. However, the Company may sell equity securities during a period in which the fair value has declined below the amount of the original investment. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. During the three months ended September 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $63,375 and $-0-, respectively, and for the nine months ended September 30, 2017 and 2016, an other than temporary decline in the fair value resulted in the recognition of an impairment loss on equity securities of $63,375 and $43,630, respectively. On a quarterly basis, the Company reviews its investment in equity securities that are in a loss position. The first step is to identify securities by lots which are currently carried on the books at a value greater than the 52-week high. These securities are further evaluated by reviewing current market value in relation to historical value, price earnings ratios, projected earnings, revenue growth rates, negative company related events, market sector comparisons and analyst reports to determine if a security has a reasonable expectation to return to the current cost basis. Based on the analysis, a determination is made whether a security will likely recover from the loss position within a reasonable period of time. If it is unlikely that the security will recover from the loss position, the loss is considered to be other than temporary, the security is written down to a restated value and an impairment loss is recognized. The fair values for equity securities are based on quoted market prices. There were no investments, aggregated by issuer, in excess of 10% of shareholders’ equity (before net unrealized gains and losses on equity securities available for sale) at September 30, 2017, other than investments issued or guaranteed by the United States Government. The Company’s net realized gains and losses from sales, calls, and maturities, and other than temporary impairments from investments and other assets are summarized as follows:
|  | Three Months Ended September 30 |  | Nine Months Ended September 30
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Fixed maturity securities held to maturity: |  |  |  |  |  |  |  |
Gross realized gains |  | $ 110,529 |  | $ 65,179 |  | $ 163,950 |  | $ 259,635
Gross realized losses |  | (651,754) |  | (4,527) |  | (686,819) |  | (7,405)
Other than temporary impairments |  | (100,000) |  | (30,000) |  | (418,366) |  | (90,000)
Equity securities available for sale: |  |  |  |  |  |  |  |
Gross realized gains |  | 25,898 |  | 36,751 |  | 132,350 |  | 176,331
Gross realized losses |  | (26) |  | (4,544) |  | (58,464) |  | (37,146)
Other than temporary impairments |  | (63,375) |  | - |  | (63,375) |  | (43,630)
Other assets: |  |  |  |  |  |  |  |
Gross realized gains |  | 225,022 |  | 191,992 |  | 2,006,721 |  | 468,675
Gross realized losses |  | (29,335) |  | (324,020) |  | (844,672) |  | (680,794)
Total |  | $ (483,041) |  | $ (69,169) |  | $ 231,325 |  | $ 45,666
The net realized gains and losses on the sale of securities are recorded on the trade date, and the cost of the securities sold is determined using the specific identification method. The carrying amount of held to maturity securities sold was $2,240,249 and $1,989,159 for the nine months ended September 30, 2017 and 2016, respectively. The net realized loss related to these sales was $385,484 for the nine months ended September 30, 2017 and the net realized gain related to these sales was $156,154 for the nine months ended September 30, 2016. Although the intent is to buy and hold a fixed maturity security to maturity, the Company will sell a security prior to maturity if conditions have changed within the entity that issued the security to increase the risk of default to an unacceptable level. Major categories of net investment income are as follows:
| Three Months Ended September 30 |  | Nine Months Ended September 30
| 2017 |  | 2016 |  | 2017 |  | 2016
Fixed maturity securities | $ 2,692,586 |  | $ 2,410,641 |  | $ 7,475,156 |  | $ 6,472,847
Equity securities | 66,320 |  | 78,402 |  | 209,517 |  | 208,696
Mortgage loans held for investment | 2,973,349 |  | 2,830,853 |  | 8,803,257 |  | 8,238,249
Real estate held for investment | 2,818,672 |  | 2,736,301 |  | 8,540,756 |  | 8,162,574
Policy loans | 195,098 |  | 205,537 |  | 621,854 |  | 558,778
Insurance assignments | 3,234,520 |  | 2,952,170 |  | 9,943,561 |  | 8,915,654
Other investments | 16,051 |  | - |  | 36,041 |  | 13,962
Short-term investments | 109,939 |  | 20,978 |  | 311,989 |  | 66,480
Gross investment income | 12,106,535 |  | 11,234,882 |  | 35,942,131 |  | 32,637,240
Investment expenses | (3,745,069) |  | (3,145,025) |  | (10,383,018) |  | (9,152,960)
Net investment income | $ 8,361,466 |  | $ 8,089,857 |  | $ 25,559,113 |  | $ 23,484,280
Net investment income includes income earned by the restricted assets of the cemeteries and mortuaries of $129,235 and $133,289 for the three months ended September 30, 2017 and 2016, respectively, and $369,721 and $295,630 for the nine months ended September 30, 2017 and 2016, respectively. Net investment income on real estate consists primarily of rental revenue. Investment expenses consist primarily of depreciation, property taxes, operating expenses of real estate and an estimated portion of administrative expenses relating to investment activities. Securities on deposit with regulatory authorities as required by law amounted to $9,166,082 at September 30, 2017 and $9,269,121 at December 31, 2016. The pledged securities are included in various assets under investments on the accompanying condensed consolidated balance sheets. Real Estate Held for Investment The Company continues to strategically deploy resources into real estate to match the income and yield durations of its primary obligations. The sources for these real estate assets come through its various business units in the form of acquisition, development and foreclosures on mortgage loans. Commercial Real Estate Held for Investment The Company owns and manages commercial real estate assets as a means of generating investment income. These assets are acquired in accordance with the Company’s goals and objectives for risk-adjusted returns. Due diligence is conducted on each asset using internal and third-party reports. Geographic locations and asset classes of the investment activity is determined by senior management under the direction of the Board of Directors. The Company employs full-time employees to attend to the day-to-day operations of those assets within the greater Salt Lake area and close surrounding markets. The Company utilizes third party property managers when the geographic boundary does not warrant full-time staff or through strategic lease-up periods. The Company generally looks to acquire assets in regions that are high growth regions for employment and population and in assets that provide operational efficiencies. The Company currently owns and operates 12 commercial properties in 7 states. These properties include industrial warehouses, office buildings, retail centers, undeveloped land and includes the redevelopment and expansion of its corporate campus in Salt Lake City, Utah. The Company does use debt in strategic cases to leverage established yields or to acquire a higher quality or different class of asset. The aggregated net ending balance of commercial real estate that serves as collateral for bank borrowings was approximately $65,907,000 and $51,507,000 as of September 30, 2017 and December 31, 2016, respectively. The associated bank loan carrying values totaled approximately $38,161,000 and $21,831,000 as of September 30, 2017 and December 31, 2016, respectively. The following is a summary of the Company’s commercial real estate held for investment for the periods presented:
|  | Net Ending Balance |  | Total Square Footage
|  | September 30 |  | December 31 |  | September 30 |  | December 31
|  | 2017 |  | 2016 |  | 2017 |  | 2016
Arizona |  | $ 4,000 | (1) | $ 450,538 | (1) | - |  | 16,270
Arkansas |  | 97,219 |  | 100,369 |  | 3,200 |  | 3,200
Kansas |  | 11,993,029 |  | 12,450,297 |  | 222,679 |  | 222,679
Louisiana |  | 499,573 |  | 518,700 |  | 7,063 |  | 7,063
Mississippi |  | 3,748,324 |  | 3,818,985 |  | 33,821 |  | 33,821
New Mexico |  | 7,000 | (1) | 7,000 | (1) | - |  | -
Texas |  | 3,728,960 |  | 3,734,974 |  | 23,470 |  | 23,470
Utah |  | 61,021,673 | (2) | 47,893,073 | (2) | 433,244 |  | 433,244
|  | $ 81,099,778 |  | $ 68,973,936 |  | 723,477 |  | 739,747
(1) Includes undeveloped land |  |  |  |  |  |
(2) Includes 53rd Center completed in July 2017 |  |  |  |
Residential Real Estate Held for Investment The Company owns a portfolio of residential homes primarily as a result of loan foreclosures. The strategy has been to lease these homes to produce cash flow, and allow time for the economic fundamentals to return to the various markets. As an orderly and active market for these homes returns, the Company has the option to dispose or to continue and hold them for cash flow and acceptable returns. The Company established Security National Real Estate Services (“SNRE”) to manage the residential portfolio. SNRE cultivates and maintains the preferred vendor relationships necessary to manage costs and quality of work performed on the portfolio of homes across the country. As of September 30, 2017, SNRE manages 107 residential properties in 9 states across the United States which includes a newly constructed apartment complex, Dry Creek at East Village, in Sandy, Utah. The net ending balance of residential real estate that serves as collateral for a bank borrowing was approximately $34,772,000 and $35,798,000, as of September 30, 2017 and December 31, 2016, respectively. The associated bank loan carrying value was approximately $26,893,000 and $27,377,000 as of September 30, 2017 and December 31, 2016, respectively. The net ending balance of foreclosed residential real estate included in residential real estate held for investment is $34,167,065 and $39,856,434 as of September 30, 2017 and December 31, 2016, respectively. The following is a summary of the Company’s residential real estate held for investment for the periods presented:
|  | Net Ending Balance
|  | September 30 |  | December 31
|  | 2017 |  | 2016
Arizona |  | $ 217,516 |  | $ 742,259
California |  | 5,663,871 |  | 5,848,389
Colorado |  | - |  | 364,489
Florida |  | 7,311,913 |  | 8,327,355
Hawaii |  | 712,286 |  | -
Ohio |  | 46,658 |  | 46,658
Oklahoma |  | 17,500 |  | -
Texas |  | 511,486 |  | 1,091,188
Utah |  | 54,701,809 |  | 59,485,466
Washington |  | 286,181 |  | 286,181
|  | $ 69,469,220 |  | $ 76,191,985
Real Estate Owned and Occupied by the Company The primary business units of the Company occupy a portion of the real estate owned by the Company. Currently, the Company occupies nearly 80,000 square feet, or approximately 10% of the overall commercial real estate holdings. As of September 30, 2017, real estate owned and occupied by the Company is summarized as follows:
Location |  | Business Segment |  | Approximate Square Footage |  | Square Footage Occupied by the Company
5300 South 360 West, Salt Lake City, UT (1) |  | Corporate Offices, Life Insurance and Cemetery/Mortuary Operations |  | 36,000 |  | 100%
5201 Green Street, Salt Lake City, UT |  | Mortgage Operations |  | 36,899 |  | 34%
1044 River Oaks Dr., Flowood, MS |  | Life Insurance Operations |  | 5,522 |  | 27%
(1) This asset is included in property and equipment on the condensed consolidated balance sheet |  |
Mortgage Loans Held for Investment Mortgage loans held for investment consist of first and second mortgages. The mortgage loans bear interest at rates ranging from 2.0% to 10.5%, maturity dates range from three months to 30 years and are secured by real estate. Concentrations of credit risk arise when a number of mortgage loan debtors have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified mortgage loan portfolio consisting of residential mortgages, commercial loans and residential construction loans and requires collateral on all real estate exposures, a substantial portion of its debtors’ ability to honor obligations is reliant on the economic stability of the geographic region in which the debtors do business. At September 30, 2017, the Company had 45%, 11%, 11%, 7%, 5%, 5% and 4% of its mortgage loans from borrowers located in the states of Utah, California, Texas, Florida, Arizona, Nevada, and Tennessee, respectively. Mortgage loans held for investment are carried at their unpaid principal balances adjusted for net deferred fees, charge-offs and the related allowance for loan losses. Interest income is included in net investment income on the condensed consolidated statements of earnings and is recognized when earned. The Company defers related material loan origination fees, net of related direct loan origination costs, and amortizes the net fees over the term of the loans. Origination fees are included in net investment income on the condensed consolidated statements of earnings. Mortgage loans are secured by the underlying property and require an appraisal at the time of underwriting and funding. Generally, the Company will fund a loan not to exceed 80% of the loan’s collateral fair market value. Amounts over 80% will require additional collateral or mortgage insurance by an approved third-party insurer. The Company provides for losses on its mortgage loans held for investment through an allowance for loan losses (a contra-asset account). The allowance is comprised of two components. The first component is an allowance for collectively evaluated impairment that is based upon the Company’s historical experience in collecting similar receivables. The second component is based upon individual evaluation of loans that are determined to be impaired. Upon determining impairment, the Company establishes an individual impairment allowance based upon an assessment of the fair value of the underlying collateral. When a loan becomes delinquent, the Company proceeds to foreclose on the real estate and all expenses for foreclosure are expensed as incurred. Once foreclosed, an adjustment for the lower of cost or fair value is made, if necessary, and the amount is classified as real estate held for investment. The Company will rent the properties until it is deemed desirable to sell them. The allowance for losses on mortgage loans held for investment could change based on changes in the value of the underlying collateral, the performance status of the loans, or the Company’s actual collection experience. The actual losses could change, in the near term, from the established allowance, based upon the occurrence or non-occurrence of these events. For purposes of determining the allowance for losses, the Company has segmented its mortgage loans held for investment by loan type. The Company’s loan types are commercial, residential, and residential construction. The inherent risks within the portfolio vary depending upon the loan type as follows: Commercial - Underwritten in accordance with the Company’s policies to determine the borrower’s ability to repay the obligation as agreed. Commercial loans are made primarily based on the underlying collateral supporting the loan. Accordingly, the repayment of a commercial loan depends primarily on the collateral and its ability to generate income and secondary on the borrower’s (or guarantors) ability to repay. Residential – Secured by family dwelling units. These loans are secured by first mortgages on the unit, which are generally the primary residence of the borrower, generally at a loan-to-value ratio (“LTV”) of 80% or less. Residential construction (including land acquisition and development) – Underwritten in accordance with the Company’s underwriting policies which include a financial analysis of the builders, borrowers (guarantors), construction cost estimates, and independent appraisal valuations. These loans will rely on the value associated with the project upon completion. These cost and valuation estimates may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project and the ability of the borrower to secure long-term financing. Additionally, land is underwritten according to the Company’s policies, which include independent appraisal valuations as well as the estimated value associated with the land upon completion of development into finished lots. These cost and valuation estimates may be inaccurate. These loans are considered to be of a higher risk than other mortgage loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term or construction financing, and interest rate sensitivity. The following is a summary of the allowance for loan losses as a contra-asset account for the periods presented:
Allowance for Credit Losses and Recorded Investment in Mortgage Loans
| Commercial |  | Residential |  | Residential Construction |  | Total
September 30, 2017 |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |
Beginning balance - January 1, 2017 | $ 187,129 |  | $ 1,461,540 |  | $ 100,114 |  | $ 1,748,783
Charge-offs | - |  | (49,775) |  | (64,894) |  | (114,669)
Provision | - |  | 417,704 |  | - |  | 417,704
Ending balance - September 30, 2017 | $ 187,129 |  | $ 1,829,469 |  | $ 35,220 |  | $ 2,051,818
Ending balance: individually evaluated for impairment | $ - |  | $ 411,172 |  | $ - |  | $ 411,172
Ending balance: collectively evaluated for impairment | $ 187,129 |  | $ 1,418,297 |  | $ 35,220 |  | $ 1,640,646
Mortgage loans: |  |  |  |  |  |  |
Ending balance | $ 42,923,761 |  | $ 65,759,761 |  | $ 41,306,722 |  | $ 149,990,244
Ending balance: individually evaluated for impairment | $ 203,806 |  | $ 5,425,757 |  | $ - |  | $ 5,629,563
Ending balance: collectively evaluated for impairment | $ 42,719,955 |  | $ 60,334,004 |  | $ 41,306,722 |  | $ 144,360,681
December 31, 2016 |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |
Beginning balance - January 1, 2016 | $ 187,129 |  | $ 1,560,877 |  | $ 100,114 |  | $ 1,848,120
Charge-offs | - |  | (420,135) |  | - |  | (420,135)
Provision | - |  | 320,798 |  | - |  | 320,798
Ending balance - December 31, 2016 | $ 187,129 |  | $ 1,461,540 |  | $ 100,114 |  | $ 1,748,783
Ending balance: individually evaluated for impairment | $ - |  | $ 374,501 |  | $ - |  | $ 374,501
Ending balance: collectively evaluated for impairment | $ 187,129 |  | $ 1,087,039 |  | $ 100,114 |  | $ 1,374,282
Mortgage loans: |  |  |  |  |  |  |
Ending balance | $ 51,536,622 |  | $ 58,593,622 |  | $ 40,800,117 |  | $ 150,930,361
Ending balance: individually evaluated for impairment | $ 202,992 |  | $ 2,916,538 |  | $ 64,895 |  | $ 3,184,425
Ending balance: collectively evaluated for impairment | $ 51,333,630 |  | $ 55,677,084 |  | $ 40,735,222 |  | $ 147,745,936
The following is a summary of the aging of mortgage loans held for investment for the periods presented:
Age Analysis of Mortgage Loans Held for Investment
| 30-59 Days Past Due | 60-89 Days Past Due | Greater Than 90 Days (1) | In Process of Foreclosure (1) | Total Past Due | Current | Total Mortgage Loans | Allowance for Loan Losses | Unamortized deferred loan fees, net | Net Mortgage Loans
September 30, 2017 |  |  |  |  |  |  |  |  |
Commercial | $ 513,218 | $ - | $ - | $ 203,806 | $ 717,024 | $ 42,206,737 | $ 42,923,761 | $ (187,129) | $ (229,603) | $ 42,507,029
Residential | 22,277 | 1,236,721 | 2,200,206 | 3,225,551 | 6,684,755 | 59,075,006 | 65,759,761 | (1,829,469) | (21,578) | 63,908,714
Residential Construction | - | - | - | - | - | 41,306,722 | 41,306,722 | (35,220) | (386,554) | 40,884,948
Total | $ 535,495 | $ 1,236,721 | $ 2,200,206 | $ 3,429,357 | $ 7,401,779 | $ 142,588,465 | $ 149,990,244 | $ (2,051,818) | $ (637,735) | $ 147,300,691
December 31, 2016 |  |  |  |  |  |  |  |  |
Commercial | $ - | $ - | $ - | $ 202,992 | $ 202,992 | $ 51,333,630 | $ 51,536,622 | $ (187,129) | $ (155,725) | $ 51,193,768
Residential | 964,960 | 996,779 | 1,290,355 | 1,626,183 | 4,878,277 | 53,715,345 | 58,593,622 | (1,461,540) | (35,121) | 57,096,961
Residential Construction | - | - | 64,895 | - | 64,895 | 40,735,222 | 40,800,117 | (100,114) | - | 40,700,003
Total | $ 964,960 | $ 996,779 | $ 1,355,250 | $ 1,829,175 | $ 5,146,164 | $ 145,784,197 | $ 150,930,361 | $ (1,748,783) | $ (190,846) | $ 148,990,732
(1) Interest income is not recognized on loans past due greater than 90 days or in foreclosure.
Impaired Mortgage Loans Held for Investment Impaired mortgage loans held for investment include loans with a related specific valuation allowance or loans whose carrying amount has been reduced to the expected collectible amount because the impairment has been considered other than temporary. The recorded investment in and unpaid principal balance of impaired loans along with the related loan specific allowance for losses, if any, for each reporting period and the average recorded investment and interest income recognized during the time the loans were impaired were as follows:
Impaired Loans
| Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance |  | Average Recorded Investment |  | Interest Income Recognized
September 30, 2017 |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ 203,806 |  | $ 203,806 |  | $ - |  | $ 456,524 |  | $ -
Residential | 3,872,587 |  | 3,872,587 |  | - |  | 3,281,980 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ - |  | $ - |  | $ - |  | $ - |  | $ -
Residential | 1,553,170 |  | 1,553,170 |  | 411,172 |  | 1,287,394 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
Total: |  |  |  |  |  |  |  |  |
Commercial | $ 203,806 |  | $ 203,806 |  | $ - |  | $ 456,524 |  | $ -
Residential | 5,425,757 |  | 5,425,757 |  | 411,172 |  | 4,569,374 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
December 31, 2016 |  |  |  |  |  |  |  |  |
With no related allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ 202,992 |  | $ 202,992 |  | $ - |  | $ 202,992 |  | $ -
Residential | - |  | - |  | - |  | - |  | -
Residential construction | 64,895 |  | 64,895 |  | - |  | 79,082 |  | -
With an allowance recorded: |  |  |  |  |  |  |  |  |
Commercial | $ - |  | $ - |  | $ - |  | $ - |  | $ -
Residential | 2,916,538 |  | 2,916,538 |  | 374,501 |  | 3,001,850 |  | -
Residential construction | - |  | - |  | - |  | - |  | -
Total: |  |  |  |  |  |  |  |  |
Commercial | $ 202,992 |  | $ 202,992 |  | $ - |  | $ 202,992 |  | $ -
Residential | 2,916,538 |  | 2,916,538 |  | 374,501 |  | 3,001,850 |  | -
Residential construction | 64,895 |  | 64,895 |  | - |  | 79,082 |  | -
Credit Risk Profile Based on Performance Status The Company’s mortgage loan held for investment portfolio is monitored based on performance of the loans. Monitoring a mortgage loan increases when the loan is delinquent or earlier if there is an indication of impairment. The Company defines non-performing mortgage loans as loans 90 days or greater delinquent or on non-accrual status. The Company’s performing and non-performing mortgage loans held for investment were as follows:
Mortgage Loans Held for Investment Credit Exposure
Credit Risk Profile Based on Payment Activity
| Commercial |  | Residential |  | Residential Construction |  | Total
| September 30, 2017 |  | December 31, 2016 |  | September 30, 2017 |  | December 31, 2016 |  | September 30, 2017 |  | December 31, 2016 |  | September 30, 2017 |  | December 31, 2016
Performing | $ 42,719,955 |  | $ 51,333,630 |  | $ 60,334,004 |  | $ 55,677,084 |  | $ 41,306,722 |  | $ 40,735,222 |  | $ 144,360,681 |  | $ 147,745,936
Non-performing | 203,806 |  | 202,992 |  | 5,425,757 |  | 2,916,538 |  | - |  | 64,895 |  | 5,629,563 |  | 3,184,425
Total | $ 42,923,761 |  | $ 51,536,622 |  | $ 65,759,761 |  | $ 58,593,622 |  | $ 41,306,722 |  | $ 40,800,117 |  | $ 149,990,244 |  | $ 150,930,361
Non-Accrual Mortgage Loans Held for Investment Once a loan is past due 90 days, it is the policy of the Company to end the accrual of interest income on the loan and write off any interest income that had been accrued. Payments received for loans on a non-accrual status are recognized on a cash basis. Interest income recognized from any payments received for loans on a non-accrual status was immaterial. Accrual of interest resumes if a loan is brought current. Interest not accrued on these loans totals approximately $185,000 and $172,000 as of September 30, 2017 and December 31, 2016, respectively. The following is a summary of mortgage loans held for investment on a non-accrual status for the periods presented.
| Mortgage Loans on Non-Accrual Status
| As of September 30 2017 |  | As of December 31 2016
Commercial | $ 203,806 |  | $ 202,992
Residential | 5,425,757 |  | 2,916,538
Residential construction | - |  | 64,895
Total | $ 5,629,563 |  | $ 3,184,425

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