XML 38 R23.htm IDEA: XBRL DOCUMENT v3.6.0.2
Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2016
Derivative Financial Instruments

NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s derivative financial instruments consist of financial forward and futures contracts, interest rate swaps, IRLCs, and options. These derivatives relate to mortgage banking operations, residential MSRs, and other risk management activities, and seek to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, other changing market conditions, and the types of assets held.

In accordance with the applicable accounting guidance, the Company takes into account the impact of collateral and master netting agreements that allow it to settle all derivative contracts held with a single counterparty on a net basis, and to offset the net derivative position with the related collateral when recognizing derivative assets and liabilities. As a result, the Company’s Statements of Financial Condition could reflect derivative contracts with negative fair values that are included in derivative assets, and contracts with positive fair values that are included in derivative liabilities.

The Company held derivatives with a notional amount of $2.8 billion at December 31, 2016. Changes in the fair value of these derivatives are reflected in current-period earnings. None of these derivatives are designated as hedges for accounting purposes.

The Company uses various financial instruments, including derivatives, in connection with its strategies to reduce pricing risk resulting from changes in interest rates. Derivative instruments may include IRLCs entered into with borrowers or correspondents/brokers to acquire agency-conforming fixed and adjustable rate residential mortgage loans that will be held for sale, as well as Treasury options and Eurodollar futures.

The Company enters into forward contracts to sell fixed rate mortgage-backed securities to protect against changes in the prices of agency-conforming fixed rate loans held for sale. Forward contracts are entered into with securities dealers in an amount related to the portion of IRLCs that is expected to close. The value of these forward sales contracts moves inversely with the value of the loans in response to changes in interest rates.

To manage the price risk associated with fixed-rate non-conforming mortgage loans, the Company generally enters into forward contracts on mortgage-backed securities or forward commitments to sell loans to approved investors. Short positions in Eurodollar futures contracts are used to manage price risk on adjustable rate mortgage loans held for sale.

The Company uses interest rate swaps to hedge the fair value of its residential MSRs. The Company also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close.

 

The following table sets forth information regarding the Company’s derivative financial instruments at December 31, 2016:

 

     December 31, 2016  
(in thousands)    Notional
Amount		      Unrealized (1)  
      Gain      Loss  

Treasury options

    $ 300,000      $ 44      $ 720  

Eurodollar futures

      75,000        135        —    

Interest rate swaps

      350,000        572        5,289  

Forward commitments to sell loans/mortgage-backed securities

      1,056,000        15,509        3,190  

Forward commitments to buy loans/mortgage-backed securities

      785,000        1,321        14,529  

Interest rate lock commitments

      257,928        982        —    
  

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 2,823,928      $ 18,563      $ 23,728  
  

 

 

     

 

 

     

 

 

  

 

(1) Derivatives in a net gain position are recorded as “Other assets” and derivatives in a net loss position are recorded as “Other liabilities” in the Consolidated Statements of Condition.

In addition, the Company mitigates a portion of the risk associated with changes in the value of its residential MSRs. The general strategy for mitigating this risk is to purchase derivative instruments, the value of which changes in the opposite direction of interest rates. This action partially offsets changes in the value of its servicing assets, which tends to move in the same direction as interest rates. Accordingly, the Company purchases Eurodollar futures and call options on Treasury securities, and enters into forward contracts to purchase mortgage-backed securities.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the periods indicated:

 

     (Loss) Gain Included in Mortgage Banking Income  
     For the Twelve Months Ended December 31,  
(in thousands)    2016      2015      2014  

Treasury options

    $ (2,795 )     $ (8,222 )     $ 1,968  

Treasury and Eurodollar futures

      165        501        333  

Interest rate swaps

      (4,561 )       —          —    

Forward commitments to buy/sell loans/mortgage-backed securities

      (4,963 )       5,752        12,009  
  

 

 

     

 

 

     

 

 

  

Total (loss) gain

    $ (12,154 )     $ (1,969 )     $ 14,310  
  

 

 

     

 

 

     

 

 

  

The Company has in place an enforceable master netting arrangement with every counterparty. All master netting arrangements include rights to offset associated with the Company’s recognized derivative assets, derivative liabilities, and the cash collateral received and pledged. Accordingly, the Company, where appropriate, offsets all derivative asset and liability positions with the cash collateral received and pledged.

 

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets in the Consolidated Statements of Condition as of the dates indicated:

 

     December 31, 2016  
(in thousands)    Gross Amount
of Recognized
Assets (1)		      Gross Amount
Offset in the
Statement of
Condition		      Net Amount of
Assets Presented
in the Statement
of Condition		      Gross Amounts Not
Offset in the
Consolidated Statement
of Condition		      Net
Amount		  
            Financial
Instruments		      Cash
Collateral
Received		     

Derivatives

    $ 20,422      $ 17,861      $ 2,561      $ —        $ —        $ 2,561  

 

(1) Includes $1.9 million to purchase Treasury options.

 

     December 31, 2015  
(in thousands)    Gross Amount
of Recognized
Assets (1)		      Gross Amount
Offset in the
Statement of
Condition		      Net Amount of
Assets Presented
in the Statement
of Condition		      Gross Amounts Not
Offset in the
Consolidated Statement
of Condition		      Net
Amount		  
            Financial
Instruments		      Cash
Collateral
Received		     

Derivatives

    $ 5,743      $ 1,024      $ 4,719      $ —        $ —        $ 4,719  

 

(1) Includes $1.9 million to purchase Treasury options.

The following tables present the effect the master netting arrangements had on the presentation of the derivative liabilities in the Consolidated Statements of Condition as of the dates indicated:

 

     December 31, 2016  
(in thousands)    Gross Amount
of Recognized
Liabilities		      Gross Amount
Offset in the
Statement of
Condition		      Net Amount of
Liabilities
Presented in the
Statement of
Condition		      Gross Amounts Not
Offset in the
Consolidated Statement
of Condition		      Net
Amount		  
            Financial
Instruments		      Cash
Collateral
Pledged		     

Derivatives

    $ 23,728      $ 16,588      $ 7,140      $ —        $ —        $ 7,140  
     December 31, 2015  
(in thousands)    Gross Amount
of Recognized
Liabilities		      Gross Amount
Offset in the
Statement of
Condition		      Net Amount of
Liabilities
Presented in the
Statement of
Condition		      Gross Amounts Not
Offset in the
Consolidated Statement
of Condition		      Net
Amount		  
            Financial
Instruments		      Cash
Collateral
Pledged		     

Derivatives

    $ 4,322      $ 3,986      $ 336      $ —        $ —        $ 336