Derivative Financial Instruments

9 Months Ended

Sep. 30, 2023

Derivative Financial Instruments

Derivative Financial Instruments

Note 8—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating and investing activities. Derivative financial instruments are created in the Company’s loan production activities and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created in the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.

The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and its MSRs.

The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

Derivative Notional Amounts, Fair Value of Derivatives and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from or posted to its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:

	September 30, 2023					December 31, 2022
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Derivative instrument	amount (1)	assets		liabilities		amount (1)	assets		liabilities
	(in thousands)
Not subject to master netting arrangements:
Interest rate lock commitments	7,527,726	$	42,385	$	21,611	7,009,119	$	36,728	$	10,884
Subject to master netting arrangements (2):
Forward purchase contracts	10,768,362		7,227		41,538	8,320,849		2,433		48,670
Forward sales contracts	16,995,313		115,778		14,808	12,487,760		80,754		20,684
MBS put options	400,000		4,408		4,301	1,750,000		6,057		—
Put options on interest rate futures purchase contracts	3,775,000		36,391		—	6,800,000		29,203		—
Call options on interest rate futures purchase contracts	2,125,000		2,324		—	1,350,000		2,820		—
Put options on interest rate futures sale contracts	325,000		—		4,945	250,000		—		3,008
Treasury futures purchase contracts	3,559,500		—		—	3,709,200		—		—
Treasury futures sale contracts	7,036,000		—		—	3,456,900		—		—
Total derivatives before netting			208,513		87,203			157,995		83,246
Netting			(105,147)		(46,003)			(58,992)		(61,534)
		$	103,366	$	41,200		$	99,003	$	21,712
Deposits (received from) placed with derivative counterparties included in the derivative balances above, net		$	(59,144)				$	2,542

(1) Notional amounts provide an indication of the volume of the Company’s derivative activity.

(2) All derivatives subject to master netting agreements are interest rate derivatives that are used as economic hedges.

Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting.

	September 30, 2023								December 31, 2022
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	42,385	$	—	$	—	$	42,385	$	36,728	$	—	$	—	$	36,728
RJ O'Brien		33,770		—		—		33,770		29,016		—		—		29,016
Morgan Stanley Bank, N.A.		17,820		—		—		17,820		18,501		—		—		18,501
Bank of America, N.A.		2,170		—		—		2,170		1,519		—		—		1,519
Athene Annuity & Life Assurance Company		1,449		—		—		1,449		—		—		—		—
Federal National Mortgage Association		1,338		—		—		1,338		—		—		—		—
Barclays Capital		1,129		—		—		1,129		—		—		—		—
Goldman Sachs		—		—		—		—		5,757		—		—		5,757
Citibank, N.A.		—		—		—		—		5,098		—		—		5,098
Others		3,305		—		—		3,305		2,384		—		—		2,384
	$	103,366	$	—	$	—	$	103,366	$	99,003	$	—	$	—	$	99,003

Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair values that exceed the liability amounts recorded on the consolidated balance sheets.

	September 30, 2023								December 31, 2022
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments (1)		pledged		amount		balance sheet		instruments (1)		pledged		amount
	(in thousands)
Interest rate lock commitments	$	21,611	$	—	$	—	$	21,611	$	10,884	$	—	$	—	$	10,884
Atlas Securitized Products, L.P.		1,213,620		(1,213,620)		—		—		—		—		—		—
Credit Suisse First Boston Mortgage Capital LLC		—		—		—		—		970,725		(968,804)		—		1,921
Bank of America, N.A.		912,887		(912,887)		—		—		567,745		(567,745)		—		—
JPMorgan Chase Bank, N.A.		426,244		(423,721)		—		2,523		211,713		(211,713)		—		—
BNP Paribas		405,501		(405,498)		—		3		300,280		(300,280)		—		—
Royal Bank of Canada		330,880		(330,880)		—		—		381,893		(381,893)		—		—
Wells Fargo Bank, N.A.		305,603		(304,986)		—		617		228,181		(221,986)		—		6,195
Barclays Capital		280,160		(280,160)		—		—		80,276		(79,295)		—		981
Citibank, N.A.		248,656		(243,891)		—		4,765		94,211		(94,211)		—		—
Goldman Sachs		138,954		(134,542)		—		4,412		64,486		(64,486)		—		—
Morgan Stanley Bank, N.A.		120,735		(118,112)		—		2,623		114,277		(114,277)		—		—
Nomura Corporate Funding Americas		50,165		(50,000)		—		165		—		—		—		—
Bank of Oklahoma		2,738		—		—		2,738		—		—		—		—
Others		1,743		—		—		1,743		1,731		—		—		1,731
	$	4,459,497	$	(4,418,297)	$	—	$	41,200	$	3,026,402	$	(3,004,690)	$	—	$	21,712

(1) Amounts represent the UPB of Assets sold under agreements to repurchase.

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:

		Quarter ended September 30,				Nine months ended September 30,
Derivative activity	Consolidated income statement line	2023		2022		2023		2022
		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	(9,862)	$	(121,353)	$	(5,069)	$	(378,396)
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	162,006	$	363,272	$	217,968	$	1,360,341
Mortgage servicing rights	Net loan servicing fees–Mortgage servicing rights hedging results	$	(423,656)	$	(164,749)	$	(531,565)	$	(558,614)

(1) Represents net change in fair value of IRLCs from the beginning to the end of the period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans or the cancellation of the commitment are shown in the rollforward of IRLCs for the period in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.