Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

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

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

	December 31, 2020				December 31, 2019
	Fair Value		Notional Amount		Fair Value		Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps	$	224	$	42,000	$	17,095	$	1,399,000
TBAs	18,260		3,520,000		5,755		2,445,000
Interest rate futures	—		—		777		213,700
Swaptions	19,727		1,585,000		1,925		1,065,000
Assets - Other Derivatives
Loan purchase and interest rate lock commitments	15,027		2,617,254		10,149		1,537,162
Total Assets	$	53,238	$	7,764,254	$	35,701	$	6,659,862
Liabilities - Cash Flow Hedges
Interest rate swaps	$	—	$	—	$	(51,530)	$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps	—		—		(97,235)		2,314,300
TBAs	(15,495)		3,105,000		(13,359)		4,160,000
Interest rate futures	—		—		(10)		12,300
Liabilities - Other Derivatives
Loan purchase commitments	(577)		477,153		(1,290)		303,394
Total Liabilities	$	(16,072)	$	3,582,153	$	(163,424)	$	6,929,494
Total Derivative Financial Instruments, Net	$	37,166	$	11,346,407	$	(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 December 31, 2020, we were party to swaps and swaptions with an aggregate notional amount of $1.63 billion and TBA agreements with an aggregate notional amount of $6.63 billion. At December 31, 2019, we were party to swaps with an aggregate notional amount of $4.78 billion, TBA agreements with an aggregate notional amount of $6.61 billion, and interest rate futures contracts with an aggregate notional amount of $226 million.

For the years ended December 31, 2020, 2019, and 2018, risk management derivatives had a net market valuation loss of $93 million, a net market valuation loss of $134 million, and a net market valuation gain of $40 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.

Loan Purchase and Interest Rate Lock Commitments

LPCs and IRLCs that qualify as derivatives are recorded at their estimated fair values. For the years ended December 31, 2020, 2019, and 2018, LPCs and IRLCs had a net market valuation gain of $57 million, a net market valuation gain of $62 million, and a net market valuation loss of $1 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income.

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 $81 million and $51 million at December 31, 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 December 31, 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 years ended December 31, 2020, 2019, and 2018, changes in the values of designated cash flow hedges were negative $33 million, negative $17 million, and positive $9 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 years ended December 31, 2020, 2019, and 2018.

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

	Years Ended December 31,
(In Thousands)	2020		2019		2018
Net interest expense on cash flows hedges	$	(860)	$	(2,847)	$	(3,228)
Realized net losses reclassified from other comprehensive income	(3,188)		—		—
Total Interest Expense	$	(4,048)	$	(2,847)	$	(3,228)

Derivative Counterparty Credit Risk

We incur credit risk to the extent that counterparties to our derivative financial instruments do not perform their obligations under specified contractual agreements. If a derivative counterparty does not perform, we may not receive the proceeds to which we may be entitled under these agreements. Each of our derivative counterparties that is not a clearinghouse must maintain compliance with International Swaps and Derivatives Association (“ISDA”) agreements or other similar agreements (or receive a waiver of non-compliance after a specific assessment) in order to conduct derivative transactions with us. Additionally, we review non-clearinghouse derivative counterparty credit standings, and in the case of a deterioration of creditworthiness, appropriate remedial action is taken. To further mitigate counterparty risk, we exit derivatives contracts with counterparties that (i) do not maintain compliance with (or obtain a waiver from) the terms of their ISDA or other agreements with us; or (ii) do not meet internally established guidelines regarding creditworthiness. Our ISDA and similar agreements currently require full bilateral collateralization of unrealized loss exposures with our derivative counterparties. Through a margin posting process, our positions are revalued with counterparties each business day and cash margin is generally transferred to either us or our derivative counterparties as collateral based upon the directional changes in fair value of the positions. We also attempt to transact with several different counterparties in order to reduce our specific counterparty exposure. With respect to certain of our derivatives, clearing and settlement is through one or more clearinghouses, which may be substituted as a counterparty. Clearing and settlement of derivative transactions through a clearinghouse is also intended to reduce specific counterparty exposure. We consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At December 31, 2020, we assessed this risk as remote and did not record a specific valuation adjustment.

At December 31, 2020,