NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS

The Company had no derivative financial instruments as of December 31, 2017, due to the sale of the mortgage banking business.

During 2016 and until December 2017, the Company’s derivative financial instruments consisted of financial forward and futures contracts, interest rate swaps, IRLCs, and options. These derivatives related to mortgage banking operations, residential MSRs, and other risk management activities, and sought to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities varied 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 took into account the impact of collateral and master netting agreements that allowed 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 were included in derivative assets, and contracts with positive fair values that were included in derivative liabilities.

Changes in the fair value of these derivatives were reflected in current-period earnings. None of these derivatives were designated as hedges for accounting purposes.

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

The Company entered 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 were entered into with securities dealers in an amount related to the portion of IRLCs that was expected to close. The value of these forward sales contracts moved 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 entered into forward contracts on mortgage-backed securities or forward commitments to sell loans to approved investors. Short positions in Eurodollar futures contracts were used to manage price risk on adjustable rate mortgage loans held for sale.

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

In addition, the Company mitigated a portion of the risk associated with changes in the value of MSRs. The general strategy for mitigating this risk was to purchase derivative instruments, the value of which changed in the opposite direction of interest rates, thus partially offsetting changes in the value of our servicing assets, which tended to move in the same direction as interest rates. Accordingly, the Company purchased Eurodollar futures and call options on Treasury securities, and entered 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 for the periods indicated:


	(Loss) Gain Included in Mortgage Banking Income
	For the Twelve Months Ended December 31,
(in thousands)	2017			2016			2015
Treasury options	$	(262	)	$	(2,795	)	$	(8,222	)
Treasury and Eurodollar futures		55			165			501
Interest rate swaps		3,068			(4,561	)		—
Forward commitments to buy/sell loans/mortgage-backed securities		(8,815	)		(4,963	)		5,752

Total (loss) gain	$	(5,954	)	$	(12,154	)	$	(1,969	)

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

The following table presents the effect of the master netting arrangements on the presentation of the derivative assets in the Consolidated Statements of Condition as of December 31, 2016:

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)

Included $1.9 million to purchase Treasury options.

The following table presents the effect the master netting arrangements had on the presentation of the derivative liabilities in the Consolidated Statements of Condition as of December 31, 2016:

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