Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The following table presents the fair value and notional amount of our derivative financial instruments at September 30, 2020 and December 31, 2019.

Table 11.1 – Fair Value and Notional Amount of Derivative Financial Instruments


	September 30, 2020				December 31, 2019
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)


Assets - Risk Management Derivatives
Interest rate swaps	$	78	$	25,000	$	17,095	$	1,399,000
TBAs	402		140,000		5,755		2,445,000
Interest rate futures	63		40,000		777		213,700
Swaptions	3,393		285,000		1,925		1,065,000

Assets - Other Derivatives
Loan purchase and interest rate lock commitments	10,773		1,724,207		10,149		1,537,162

Total Assets	$	14,709	$	2,214,207	$	35,701	$	6,659,862

Liabilities - Cash Flow Hedges
Interest rate swaps	$	—	$	—	$	(51,530)	$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps	(15)		25,000		(97,235)		2,314,300
TBAs	(263)		105,000		(13,359)		4,160,000
Interest rate futures	—		—		(10)		12,300
Liabilities - Other Derivatives
Loan purchase commitments	(1,334)		231,651		(1,290)		303,394

Total Liabilities	$	(1,612)	$	361,651	$	(163,424)	$	6,929,494
Total Derivative Financial Instruments, Net	$	13,097	$	2,575,858	$	(127,723)	$	13,589,356

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At September 30, 2020, we were party to swaps and swaptions with an aggregate notional amount of $335 million, TBA agreements sold with an aggregate notional amount of $245 million, and interest rate futures contracts with an aggregate notional amount of $40 million. At December 31, 2019, we were party to swaps and swaptions with an aggregate notional amount of $4.78 billion, TBA agreements sold with an aggregate notional amount of $6.61 billion, and interest rate futures contracts with an aggregate notional amount of $226 million.

During the three and nine months ended September 30, 2020, risk management derivatives had net market valuation losses of zero and $98 million, respectively. During the three and nine months ended September 30, 2019, risk management derivatives had net market valuation losses of $36 million and $147 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income on our consolidated statements of income (loss). During the three months ended March 31, 2020, we settled substantially all of our outstanding derivative contracts as we determined that they were no longer effectively managing the risks associated with certain assets and liabilities.

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended September 30, 2020, LPCs and IRLCs had net market valuation gains of $14 million and $35 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss). For the three and nine months ended September 30, 2019, LPCs and IRLCs had net market valuation gains of $14 million and $42 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income (loss).

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to portions of our long-term debt and certain adjustable-rate securitization entity liabilities that are included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges.

During the first quarter of 2020, we terminated and settled all of our outstanding derivatives that had been designated as cash flow hedges for our long-term debt, with a payment of $84 million. For interest rate agreements previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $82 million and $51 million at September 30, 2020 and December 31, 2019, respectively. We will amortize this loss into interest expense over the remaining term of the trust preferred securities and subordinated notes. As of September 30, 2020, we expect to amortize $4 million of realized losses related to terminated cash flow hedges into interest expense over the next twelve months.

For the three and nine months ended September 30, 2020, changes in the values of designated cash flow hedges were zero and negative $33 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For the three and nine months ended September 30, 2019, changes in the values of designated cash flow hedges were negative $12 million and negative $27 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the three and nine months ended September 30, 2020 and 2019.

Table 11.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2020		2019		2020		2019
Net interest expense on cash flows hedges	$	—	$	(727)	$	(860)	$	(2,004)

Realized net losses reclassified from other comprehensive income	(1,040)		—		(2,148)		—
Total Interest Expense	$	(1,040)	$	(727)	$	(3,008)	$	(2,004)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2020, we assessed this risk as remote and did not record a specific valuation adjustment.

At September 30, 2020, we were in compliance with our derivative counterparty ISDA agreements.