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11) Derivative Investments | 9 Months Ended
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Sep. 30, 2013
Notes |
11) Derivative Investments | 11) Derivative Commitments The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of mortgage loan commitments from the time a derivative loan commitment is made to an applicant to the time the loan that would result from the exercise of that loan commitment is funded. Managing price risk is complicated by the fact that the ultimate percentage of derivative loan commitments that will be exercised (i.e., the number of loan commitments that will be funded) fluctuates. The probability that a loan will not be funded within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the inception of the interest rate lock. However, many borrowers continue to exercise derivative loan commitments even when interest rates have fallen. In general, the probability of funding increases if mortgage rates rise and decreases if mortgage rates fall. This is due primarily to the relative attractiveness of current mortgage rates compared to the applicant’s committed rate. The probability that a loan will not be funded within the terms of the mortgage loan commitment also is influenced by the source of the applications (retail, broker or correspondent channels), proximity to rate lock expiration, purpose for the loan (purchase or refinance) product type and the application approval status. The Company has developed fallout estimates using historical data that take into account all of the variables, as well as renegotiations of rate and point commitments that tend to occur when mortgage rates fall. These fallout estimates are used to estimate the number of loans that the Company expects to be funded within the terms of the mortgage loan commitments and are updated periodically to reflect the most current data. 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 an asset or liability 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. The Company utilizes forward loan sales commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward loan sales commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments by securing the ultimate sales price and delivery date of the loans. Management expects these derivatives will experience changes in fair value opposite to changes in fair value of the derivative loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. The Company has adopted a strategy of selling “out of the money” call options on its available for sale equity securities as a source of revenue. The options give the purchaser the right to buy from the Company specified equity securities at a set price up to a pre-determined date in the future. The Company receives an immediate payment of cash for the value of the option and establishes a liability for the fair value of the option. The liability for call options is adjusted to fair value at each reporting date. The fair value of outstanding call options as of September 30, 2013 and December 31, 2012 was $129,110 and $126,215, respectively. In the event an option is exercised, the Company recognizes a gain on the sale of the equity security and a gain from the sale of the option. If the option expires unexercised, the Company recognizes a gain from the sale of the option and retains the underlying equity security. The following table shows the fair value of derivatives as of September 30, 2013 and December 31, 2012.
| Fair Value of Derivative Instruments
| Asset Derivatives |  | Liability Derivatives
| September 30, 2013 |  | December 31, 2012 |  | September 30, 2013 |  | December 31, 2012
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate lock and forward sales commitments | other assets |  | $2,719,681 |  | other assets |  | $3,127,689 |  | Other liabilities |  | $ 855,315 |  | Other liabilities |  | $ 166,224
Call Options | -- |  | -- |  | -- |  | -- |  | Other liabilities |  | 129,110 |  | Other liabilities |  | 126,215
Interest rate swaps | -- |  | -- |  | -- |  | -- |  | Bank loans payable |  | 65,881 |  | Bank loans payable |  | 93,572
Total |  |  | $2,719,681 |  |  |  | $3,127,689 |  |  |  | $1,050,306 |  |  |  | $ 386,011
The following table shows the gain (loss) on derivatives for the periods presented. There were no gains or losses reclassified from accumulated other comprehensive income (OCI) into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing.
|  | Net Amount Gain (Loss) Recognized in OCI |  | Net Amount Gain (Loss) Recognized in OCI
|  | Three Months Ended September 30 |  | Nine Months Ended September 30
Derivative - Cash Flow Hedging Relationships: |  | 2013 |  | 2012 |  | 2013 |  | 2012
Interest Rate Lock Commitments |  | $ (1,616,310) |  | $ (3,313,971) |  | $ (1,097,099) |  | $ (412,438)
Interest Rate Swaps |  | 5,890 |  | 4,746 |  | 27,691 |  | 14,779
Sub Total |  | (1,610,420) |  | (3,309,225) |  | (1,069,408) |  | (397,659)
Tax Effect |  | (628,356) |  | (1,125,137) |  | (270,380) |  | (137,421)
Total |  | $ (982,064) |  | $ (2,184,088) |  | $ (799,028) |  | $ (260,238)

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. 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