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8): Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2017
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 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 significant financial instruments: The items shown under Level 1 and Level 2 are valued as follows: Equity Securities Available for Sale: The fair values of investments in 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 that are used to determine fair value. Also included are cash and cash equivalents and participations in mortgage loans. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. Cemetery Endowment Care Trust Investments: A portion of these assets include equity securities that have quoted market prices that are used to determine fair value. Also included are cash and cash equivalents. The carrying amounts reported in the accompanying condensed consolidated balance sheets for these financial instruments approximate their fair values due to their short-term nature. Call and Put Options: The Company uses quoted market prices to value its call and put options. Additionally, there were no transfers between Level 1 and Level 2 in the fair value hierarchy. The items shown under Level 3 are valued as follows: Loans Held for Sale, at Fair Value: The Company elected the fair value option for all loans held for sale originated after July 1, 2017. 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. 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 model that factors in current market assumptions about future interest rates. Impaired Mortgage Loans Held for Investment: The Company believes that the fair value of these nonperforming loans will approximate the unpaid principal balance expected to be recovered based on the fair value of the underlying collateral. For residential and commercial properties, the collateral value is estimated by obtaining an independent appraisal. The appraisal typically considers area comparables and property condition as well as potential rental income that could be generated (particularly for commercial properties). For residential construction loans, the collateral is typically incomplete, so fair value is estimated as the replacement cost using data from Marshall and Swift, a provider of building cost information to the real estate construction. 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 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, 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 |  | $ 5,957,488 |  | $ 5,957,488 |  | $ - |  | $ -
Total equity securities available for sale |  | $ 5,957,488 |  | $ 5,957,488 |  | $ - |  | $ -
Loans held for sale |  | $ 166,990,187 |  | $ - |  | $ - |  | $ 166,990,187
Restricted assets (1) |  | 78,421 |  | 78,421 |  | - |  | -
Cemetery perpetual care trust investments (1) |  | 676,881 |  | 676,881 |  | - |  | -
Derivatives - loan commitments (2) |  | 3,140,704 |  | - |  | - |  | 3,140,704
Total assets accounted for at fair value on a recurring basis |  | $ 176,843,681 |  | $ 6,712,790 |  | $ - |  | $ 170,130,891
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Derivatives - bank loan interest rate swaps (3) |  | $ (138) |  | $ - |  | $ - |  | $ (138)
- call options (4) |  | (50,452) |  | (50,452) |  | - |  | -
- put options (4) |  | (63,637) |  | (63,637) |  | - |  | -
- loan commitments (4) |  | (8,926) |  | - |  | - |  | (8,926)
Total liabilities accounted for at fair value on a recurring basis |  | $ (123,153) |  | $ (114,089) |  | $ - |  | $ (9,064)
(1) Excluding cash |  |  |  |  |  |  |  |
(2) Included in other assets on the condensed consolidated balance sheet |  |  |  |
(3) Included in bank and other loans payable on the condensed consolidated balance sheet |  |  |  |
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheet |  |
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 |  | Loans Held for Sale
Balance - December 31, 2016 |  | $ 6,809,332 |  | $ (3,308) |  | $ -
Purchases |  |  |  |  |  | 636,022,818
Sales |  |  |  |  |  | (473,930,540)
Total gains (losses): |  |  |  |  |  |
Included in earnings (1) |  | (3,677,554) |  | - |  | 4,897,909
Included in other comprehensive income (2) |  | - |  | 3,170 |  | -
Balance - September 30, 2017 |  | $ 3,131,778 |  | $ (138) |  | $ 166,990,187
(1) As a component of Mortgage fee income on the condensed consolidated statement of earnings
(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statement of comprehensive income
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, 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 held for investment | $ 5,218,392 |  | $ - |  | $ - |  | $ 5,218,392
Mortgage servicing rights additions | 4,057,974 |  | - |  | - |  | 4,057,974
Total assets accounted for at fair value on a nonrecurring basis | $ 9,276,366 |  | $ - |  | $ - |  | $ 9,276,366
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 |  | $ 9,911,256 |  | $ 9,911,256 |  | $ - |  | $ -
Total equity securities available for sale |  | $ 9,911,256 |  | $ 9,911,256 |  | $ - |  | $ -
Restricted assets (1) |  | $ 736,603 |  | $ 736,603 |  | $ - |  | $ -
Cemetery perpetual care trust investments (1) |  | 698,202 |  | 698,202 |  | - |  | -
Derivatives - loan commitments (2) |  | 6,911,544 |  | - |  | - |  | 6,911,544
Total assets accounted for at fair value on a recurring basis |  | $ 18,257,605 |  | $ 11,346,061 |  | $ - |  | $ 6,911,544
Liabilities accounted for at fair value on a recurring basis |  |  |  |  |  |  |  |
Derivatives - bank loan interest rate swaps (3) |  | $ (3,308) |  | - |  | - |  | $ (3,308)
- call options (4) |  | (109,474) |  | (109,474) |  | - |  | -
- put options (4) |  | (26,494) |  | (26,494) |  | - |  | -
- loan commitments (4) |  | (102,212) |  | - |  | - |  | (102,212)
Total liabilities accounted for at fair value on a recurring basis |  | $ (241,488) |  | $ (135,968) |  | $ - |  | $ (105,520)
(1) Excluding cash |  |  |  |  |  |  |  |
(2) Included in other assets on the condensed consolidated balance sheet |  |  |  |  |
(3) Included in bank and other loans payable on the condensed consolidated balance sheet |  |  |  |
(4) Included in other liabilities and accrued expenses on the condensed consolidated balance sheet |  |
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)
Total gains (losses): |  |  |  |
Included in earnings (1) |  | (862,163) |  | -
Included in other comprehensive income (2) |  | - |  | 10,639
Balance - December 31, 2016 |  | $ 6,809,332 |  | $ (3,308)
(1) As a component of Mortgage fee income on the condensed consolidated statement of earnings
(2) As a component of Unrealized gains on derivative instruments on the condensed consolidated statement of comprehensive income
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 held for investment | $ 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 September 30, 2017 and December 31, 2016. 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, 2017:
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Estimated Fair Value
Assets |  |  |  |  |  |  |  |  |
Fixed maturity securities held to maturity | $ 230,811,272 |  | $ - |  | $ 243,807,562 |  | $ - |  | $ 243,807,562
Mortgage loans held for investment: |  |  |  |  |  |  |  |  |
Residential | 63,908,714 |  | - |  | - |  | 68,139,551 |  | 68,139,551
Residential construction | 40,884,948 |  | - |  | - |  | 40,884,948 |  | 40,884,948
Commercial | 42,507,029 |  | - |  | - |  | 44,223,823 |  | 44,223,823
Mortgage loans held for investment, net | $ 147,300,691 |  | $ - |  | $ - |  | $ 153,248,322 |  | $ 153,248,322
Loans held for sale (at amortized costs) | 34,905,719 |  | - |  | - |  | 35,131,853 |  | 35,131,853
Policy loans | 6,677,924 |  | - |  | - |  | 6,677,924 |  | 6,677,924
Insurance assignments, net (1) | 32,198,144 |  | - |  | - |  | 32,198,144 |  | 32,198,144
Short-term investments | 17,830,990 |  | - |  | 17,830,990 |  | - |  | 17,830,990
Mortgage servicing rights, net | 20,396,568 |  | - |  | - |  | 26,785,380 |  | 26,785,380
Liabilities |  |  |  |  |  |  |  |  |
Bank and other loans payable | $ (182,769,531) |  | $ - |  | $ - |  | $ (182,769,531) |  | $ (182,769,531)
Policyholder account balances (2) | (48,200,442) |  | - |  | - |  | (37,564,692) |  | (37,564,692)
Future policy benefits - annuities (2) | (99,519,758) |  | - |  | - |  | (100,851,101) |  | (100,851,101)
(1) Included in policy loans and other investments on the condensed consolidated balance sheet. |  |  |
(2) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet. |  |
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 held for investment: |  |  |  |  |  |  |  |  |
Residential | 57,096,961 |  | - |  | - |  | 61,357,393 |  | 61,357,393
Residential construction | 40,700,003 |  | - |  | - |  | 40,700,003 |  | 40,700,003
Commercial | 51,193,768 |  | - |  | - |  | 53,299,800 |  | 53,299,800
Mortgage loans held for investment, net | $ 148,990,732 |  | $ - |  | $ - |  | $ 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 (1) | 32,477,246 |  | - |  | - |  | 32,477,246 |  | 32,477,246
Short-term investments | 27,560,040 |  | - |  | 27,560,040 |  | - |  | 27,560,040
Mortgage servicing rights, net | 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 (2) | (49,421,125) |  | - |  | - |  | (38,530,031) |  | (38,530,031)
Future policy benefits - annuities (2) | (99,388,662) |  | - |  | - |  | (100,253,261) |  | (100,253,261)
(1) Included in policy loans and other investments on the condensed consolidated balance sheet. |  |  |
(2) Included in future policy benefits and unpaid claims on the condensed consolidated balance sheet. |  |
The methods, assumptions and significant valuation techniques and inputs used to estimate the fair value of these 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 Held for Investment: The estimated fair value of the Company’s mortgage loans held for investment 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 is determined through a combination of discounted cash flows (estimating expected future cash flows of interest payments and discounting them using current interest rates from single family mortgages) and considering pricing of similar loans that were sold recently. Residential Construction – These loans are primarily short in maturity accordingly, the estimated fair value is determined to be the carrying 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, at Amortized Cost: 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 primarily 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. Mortgage Servicing Rights, Net: The methods used to determine fair value of mortgage servicing rights were previously disclosed in this Note 8. 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 interest 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 these investment-type insurance contracts 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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