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Derivative Instruments | 9 Months Ended
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Sep. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | 10) Derivative Instruments Mortgage Banking Derivatives Loan Commitments The Company is exposed to price risk due to the potential impact of changes in interest rates on the values of loan commitments from the time a 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 loan commitments that will be exercised (i.e., the number of loans that will be funded) fluctuates. The probability that a loan will not be funded or the loan application is denied or withdrawn within the terms of the commitment is driven by a number of factors, particularly the change, if any, in mortgage rates following the issuance of the loan commitment. 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 loan commitments and are updated periodically to reflect the most current data. SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 10) Derivative Instruments (Continued) The Company estimates the fair value of a loan commitment based on the change in estimated fair value of the underlying mortgage loan, quoted mortgage-backed securities (“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 net of estimated commission expense. The change in fair value of the underlying mortgage loan is measured from the date the loan commitment is issued and is shown net of related expenses. Following issuance, the value of a 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. Forward Sale Commitments The Company utilizes forward commitments to economically hedge the price risk associated with its outstanding mortgage loan commitments. A forward commitment protects the Company from losses on sales of the loans arising from exercise of the loan commitments. Management expects these types of commitments will experience changes in fair value opposite to changes in fair value of the loan commitments, thereby reducing earnings volatility related to the recognition in earnings of changes in the values of the commitments. The net changes in fair value of loan commitments and forward sale commitments are shown in current earnings as a component of mortgage fee income on the consolidated statements of earnings. Mortgage banking derivatives are shown in other assets and other liabilities and accrued expenses on the condensed consolidated balance sheets. Call and Put Options Derivatives The Company uses a strategy of selling “out of the money” call options on its 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 uses the strategy of selling put options as a means of generating cash or purchasing equity securities at lower than current market prices. 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 options is adjusted to fair value at each reporting date. In the event a call option is exercised, the Company sells the equity security at a favorable price enhanced by the value of the option that was sold. If the option expires unexercised, the Company recognizes a gain from the expired option. In the event a put option is exercised, the Company acquires an equity security at the strike price of the option reduced by the value received from the sale of the put option. The equity security is then treated as a normal equity security in the Company’s portfolio. The net changes in the fair value of call and put options are shown in current earnings as a component of realized gains (losses) on investments and other assets. Call and put options are shown in other liabilities and accrued expenses on the condensed consolidated balance sheets. The following table shows the fair value and notional amounts of derivative instruments. Schedule of Derivative Assets at Fair Value
|  |  |  |  | September 30, 2022 |  |  | December 31, 2021 |
|  | Balance Sheet Location |  |  | Notional Amount |  |  | Asset Fair Value |  |  | Liability Fair Value |  |  | Notional Amount |  |  | Asset Fair Value |  |  | Liability Fair Value |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loan commitments |  |  | Other assets and Other liabilities |  |  | $ | 429,673,953 |  |  | $ | 5,922,415 |  |  | $ | 1,750,055 |  |  | $ | 862,568,967 |  |  | $ | 8,563,410 |  |  | $ | 1,547,895 |
Call options |  |  | Other liabilities |  |  |  | 848,900 |  |  |  | - |  |  |  | 1,688 |  |  |  | 982,500 |  |  |  | - |  |  |  | 50,936 |
Put options |  |  | Other liabilities |  |  |  | 297,000 |  |  |  | - |  |  |  | 18,982 |  |  |  | 362,900 |  |  |  | - |  |  |  | 4,493 |
Total |  |  |  |  |  | $ | 430,819,853 |  |  | $ | 5,922,415 |  |  | $ | 1,770,725 |  |  | $ | 863,914,367 |  |  | $ | 8,563,410 |  |  | $ | 1,603,324 |
SECURITY NATIONAL FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements September 30, 2022 (Unaudited) 10) Derivative Instruments (Continued) The following table presents the gains (losses) on derivatives. There were no gains or losses reclassified from accumulated other comprehensive income into income or gains or losses recognized in income on derivatives ineffective portion or any amounts excluded from effective testing. Schedule of Gains and Losses on Derivatives
|  |  |  | Net Amount Gain (Loss) |  |  | Net Amount Gain (Loss) |
|  |  |  | Three Months Ended September 30 |  |  | Nine Months Ended September 30 |
Derivative |  | Classification |  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
Loan commitments |  | Mortgage fee income |  | $ | (3,271,282 | ) |  | $ | (380,696 | ) |  | $ | (2,843,155 | ) |  | $ | (549,093 | )
Call and put options |  | Gains on investments and other assets |  | $ | 50,045 |  |  | $ | 12,985 |  |  | $ | 176,274 |  |  | $ | 128,270 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
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