Derivatives and Hedging (Tables)

3 Months Ended

6 Months Ended

Jun. 30, 2022

Jun. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Derivative Instruments in Statement of Financial Position

11. DERIVATIVES AND HEDGING ACTIVITIES

The Company is a party to various derivative instruments. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require a small or no initial investment, and allow for the net settlement of positions. A derivative’s notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. A derivative’s underlying variable is a specified interest rate, security price, commodity price, foreign exchange rate, index, or other variable. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the fair value of the derivative contract.

The primary types of derivatives that the Company uses are interest rate swaps, forward purchase and sale commitments, and interest rate futures. Generally, these instruments are used to help manage the Company's exposure to interest rate risk related to IRLCs and its inventory of loans HFS and MSRs and also to meet client financing and hedging needs.

Derivatives are recorded at fair value on the Consolidated Balance Sheets, after taking into account the effects of bilateral collateral and master netting agreements. These agreements allow the Company to settle all derivative contracts held with the same counterparty on a net basis, and to offset net derivative positions with related cash collateral, where applicable.

Derivatives Designated in Hedge Relationships

The Company utilizes derivatives that have been designated as part of a hedge relationship in accordance with the applicable accounting guidance to minimize the exposure to changes in benchmark interest rates and volatility of net interest income and EVE to interest rate fluctuations. The primary derivative instruments used to manage interest rate risk are interest rate swaps, which convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) from either a fixed rate to a variable rate, or from a variable rate to a fixed rate.

The Company has pay fixed/receive variable interest rate swaps designated as fair value hedges of certain fixed rate loans. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The variable-rate interest payments are based on LIBOR and will convert to SOFR upon the discontinuation of LIBOR in June 2023.

The Company also had pay fixed/receive variable interest rate swaps, designated as fair value hedges using the last-of-layer method to manage the exposure to changes in fair value associated with fixed rate loans, resulting from changes in the designated benchmark interest rate (federal funds rate). These last-of-layer hedges provided the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets was identified as the hedged item. Under these interest rate swap contracts, the Company received a variable rate and paid a fixed rate on the outstanding notional amount. During the year ended December 31, 2021, the Company completed a partial discontinuation of one of its last-of-layer hedges, which reduced the total hedged amount on these hedges from $1.0 billion to $880 million. During the six months ended June 30, 2022, the Company discontinued the remaining portion of these last-of-layer hedges. The cumulative basis adjustment on the discontinued last-of-layer hedges totaled $31 million, which was allocated across the remaining loan pool upon termination of the hedges and is being amortized over the remaining term.

The Company had a receive fixed/pay variable interest rate swap, designated as a fair value hedge on its $175 million subordinated debentures issued on June 16, 2016. This swap was terminated during the year ended December 31, 2021 in connection with the full redemption of the debt. The Company was paying a variable rate of three-month LIBOR plus 3.25% and was receiving quarterly fixed payments of 6.25% to match the payments on the debt.

Derivatives Not Designated in Hedge Relationships

Management enters into certain foreign exchange derivative contracts and back-to-back interest rate swaps which are not designated as accounting hedges. Foreign exchange derivative contracts include spot, forward, forward window, and swap contracts. The purpose of these derivative contracts is to mitigate foreign currency risk on transactions entered into, or on behalf of customers. Contracts with customers, along with the related derivative trades that the Company places, are both remeasured at fair value, and are referred to as economic hedges since they economically offset the Company's exposure. The Company's back-to-back interest rate swaps are used to allow customers to manage long-term interest rate risk.

As it relates to the Company's mortgage banking business, it also uses derivative financial instruments to manage exposure to interest rate risk related to IRLCs and its inventory of loans HFS and MSRs. The Company economically hedges the changes in fair value associated with changes in interest rates generally by utilizing forward sale commitments and interest rate futures.

Fair Value Hedges

As of June 30, 2022 and December 31, 2021, the following amounts are reflected on the Consolidated Balance Sheets related to cumulative basis adjustments for outstanding fair value hedges:

	June 30, 2022				December 31, 2021
	Carrying Value of Hedged Assets/(Liabilities)		Cumulative Fair Value Hedging Adjustment (1)		Carrying Value of Hedged Assets/(Liabilities)		Cumulative Fair Value Hedging Adjustment (1)
	(in millions)
Loans HFI, net of deferred loan fees and costs (2)	$	494	$	6	$	1,391	$	39

(1)Included in the carrying value of the hedged assets/(liabilities).

(2)As of December 31, 2021, included last-of-layer derivative instruments, with $880 million designated as the hedged amount (from a closed portfolio of prepayable fixed rate loans with a carrying value of $1.4 billion). The cumulative basis adjustment included in the carrying value of these hedged items totaled $16 million and the basis adjustment related to the discontinued portion was $1 million as of December 31, 2021.

For the Company's derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings in the same line item as the offsetting loss or gain on the related interest rate swaps. For loans, the gain or loss on the hedged item is included in interest income and for subordinated debt, the gain or loss on the hedged items was included in interest expense, as shown in the table below.

	Three Months Ended June 30,
	2022				2021
Income Statement Classification	Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item		Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item
	(in millions)
Interest income	$	15.2	$	(15.2)	$	(10.8)	$	10.8
Interest expense	—		—		3.7		(3.7)
	Six Months Ended June 30,
	2022				2021
Income Statement Classification	Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item		Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item
	(in millions)
Interest income	$	48.7	$	(48.7)	$	27.9	$	(27.9)
Interest expense	—		—		(1.9)		1.9

In addition to the gains and losses on the Company's outstanding fair value hedges presented in the above table, the Company recognized $3.0 million and $4.0 million in interest income related to the amortization of the cumulative basis adjustment on its discontinued last-of-layer hedges during the three and six months ended June 30, 2022, respectively.

Fair Values, Volume of Activity, and Gain/Loss Information Related to Derivative Instruments

The following table summarizes the fair value of the Company's derivative instruments on a gross basis as of June 30, 2022, December 31, 2021, and June 30, 2021. The change in the notional amounts of these derivatives from June 30, 2021 to June 30, 2022 indicates the volume of the Company's derivative transaction activity during these periods. The derivative asset and liability balances are presented on a gross basis, prior to the application of bilateral collateral and master netting agreements. Total derivative assets and liabilities are adjusted to take into account the impact of legally enforceable master netting agreements that allow the Company to settle all derivative contracts with the same counterparty on a net basis and to offset the net derivative position with the related cash collateral. Where master netting agreements are not in effect or are not enforceable under bankruptcy laws, the Company does not adjust those derivative amounts with counterparties.

	June 30, 2022						December 31, 2021						June 30, 2021
			Fair Value						Fair Value						Fair Value
	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
	(in millions)
Derivatives designated as hedging instruments:
Fair value hedges
Interest rate swaps (1)	$	500	$	5	$	11	$	1,383	$	14	$	55	$	1,682	$	9	$	66
Total	500		5		11		1,383		14		55		1,682		9		66
Derivatives not designated as hedging instruments (2):
Foreign currency contracts	$	138	$	1	$	—	$	180	$	—	$	1	$	132	$	1	$	1
Forward purchase contracts	4,764		32		10		11,714		8		18		7,293		22		3
Forward sales contracts	9,621		35		35		17,358		16		18		12,156		10		33
Futures purchase contracts (3)	192,369		—		—		218,054		—		—		230,600		—		—
Futures sales contracts (3)	197,741		—		—		229,040		—		—		248,399		—		—
Interest rate lock commitments	2,819		15		3		3,033		11		2		3,753		32		1
Interest rate swaps	64		—		—		4		—		—		3		—		—
Options contracts	—		—		—		—		—		—		650		2		—
Total	$	407,516	$	83	$	48	$	479,383	$	35	$	39	$	502,986	$	67	$	38
Margin			(9)		24				1		6				—		—
Total, including margin	$	407,516	$	74	$	72	$	479,383	$	36	$	45	$	502,986	$	67	$	38

(1)Interest rate swap amounts include a notional amount of $880 million and $1.0 billion related to the last-of-layer hedges at December 31, 2021 and June 30, 2021, respectively.

(2)Relate to economic hedging arrangements.

(3)The Company enters into forward purchase and sales contracts that are subject to daily remargining and almost all of which are based on three-month LIBOR to hedge against its MSR valuation exposure. The notional amount on these contracts is substantial as these contracts have a duration of only 0.25 years and are intended to cover the longer duration of MSR hedges.

The fair value of derivative contracts, after taking into account the effects of master netting agreements, is included in other assets or other liabilities on the Consolidated Balance Sheets, as summarized in the table below:

	June 30, 2022						December 31, 2021						June 30, 2021
	Gross amount of recognized assets (liabilities)		Gross offset		Net assets (liabilities)		Gross amount of recognized assets (liabilities)		Gross offset		Net assets (liabilities)		Gross amount of recognized assets (liabilities)		Gross offset		Net assets (liabilities)
	(in millions)
Derivatives subject to master netting arrangements:
Assets
Forward purchase contracts	$	31	$	—	$	31	$	8	$	—	$	8	$	21	$	—	$	21
Forward sales contracts	33		—		33		15		—		15		10		—		10
Interest rate swaps	5		—		5		14		—		14		9		—		9
Margin	(9)		—		(9)		1		—		1		—		—		—
Netting	—		(55)		(55)		—		(28)		(28)		—		(31)		(31)
	$	60	$	(55)	$	5	$	38	$	(28)	$	10	$	40	$	(31)	$	9
Liabilities
Forward purchase contracts	$	(10)	$	—	$	(10)	$	(18)	$	—	$	(18)	$	(3)	$	—	$	(3)
Forward sales contracts	(34)		—		(34)		(18)		—		(18)		(33)		—		(33)
Interest rate swaps	(11)		—		(11)		(54)		—		(54)		(66)		—		(66)
Margin	(24)		—		(24)		(6)		—		(6)		—		—		—
Netting	—		55		55		—		28		28		—		31		31
	$	(79)	$	55	$	(24)	$	(96)	$	28	$	(68)	$	(102)	$	31	$	(71)
Derivatives not subject to master netting arrangements:
Assets
Foreign currency contracts	$	1	$	—	$	1	$	—	$	—	$	—	$	1	$	—	$	1
Forward purchase contracts	1		—		1		—		—		—		—		—		—
Forward sales contracts	2		—		2		1		—		1		—		—		—
Interest rate lock commitments	15		—		15		11		—		11		32		—		32
Options contracts	—		—		—		—		—		—		3		—		3
	$	19	$	—	$	19	$	12	$	—	$	12	$	36	$	—	$	36
Liabilities
Foreign currency contracts	$	—	$	—	$	—	$	(2)	$	—	$	(2)	$	(1)	$	—	$	(1)
Forward sales contracts	(1)		—		(1)		—		—		—		—		—		—
Interest rate lock commitments	(3)		—		(3)		(2)		—		(2)		(1)		—		(1)
	$	(4)	$	—	$	(4)	$	(4)	$	—	$	(4)	$	(2)	$	—	$	(2)
Total derivatives and margin
Assets	$	79	$	(55)	$	24	$	50	$	(28)	$	22	$	76	$	(31)	$	45
Liabilities	$	(83)	$	55	$	(28)	$	(100)	$	28	$	(72)	$	(104)	$	31	$	(73)

The following table summarizes the net gain (loss) on derivatives included in income:

	Three Months Ended June 30,				Six Months Ended June 30, 2022
	2022		2021
	($ in millions)
Net gain (loss) on loan origination and sale activities:
Interest rate lock commitments	$	23.2	$	19.6	$	2.4
Forward contracts	101.0		(67.7)		342.3
Other contracts	(6.1)		2.3		(9.8)
Total gain	$	118.1	$	(45.8)	$	334.9
Net loan servicing revenue:
Forward contracts	$	(8.0)	$	12.7	$	(42.9)
Options contracts	—		(1.0)		—
Futures contracts	(21.9)		24.6		(43.9)
Total loss	$	(29.9)	$	36.3	$	(86.8)

Counterparty Credit Risk

Like other financial instruments, derivatives contain an element of credit risk. This risk is measured as the expected replacement value of the contracts. Management enters into bilateral collateral and master netting agreements that provide for the net settlement of all contracts with the same counterparty. Additionally, management monitors counterparty credit risk exposure on each contract to determine appropriate limits on the Company's total credit exposure across all product types, which may require the Company to post collateral to counterparties when these contracts are in a net liability position and conversely, for counterparties to post collateral to the Company when these contracts are in a net asset position. Management reviews the Company's collateral positions on a daily basis and exchanges collateral with counterparties in accordance with standard ISDA documentation and other related agreements. The Company generally posts or holds collateral in the form of cash deposits or highly rated securities issued by the U.S. Treasury or government-sponsored enterprises, such as GNMA, FNMA, and FHLMC. The total collateral pledged by the Company to counterparties for its derivatives designated as hedging instruments totaled $27 million, $67 million, and $104 million as of June 30, 2022, December 31, 2021, and June 30, 2021, respectively.

Schedule of Derivative Assets at Fair Value

As of June 30, 2022 and December 31, 2021, the following amounts are reflected on the Consolidated Balance Sheets related to cumulative basis adjustments for outstanding fair value hedges:

	June 30, 2022				December 31, 2021
	Carrying Value of Hedged Assets/(Liabilities)		Cumulative Fair Value Hedging Adjustment (1)		Carrying Value of Hedged Assets/(Liabilities)		Cumulative Fair Value Hedging Adjustment (1)
	(in millions)
Loans HFI, net of deferred loan fees and costs (2)	$	494	$	6	$	1,391	$	39

(1)Included in the carrying value of the hedged assets/(liabilities).

(2)As of December 31, 2021, included last-of-layer derivative instruments, with $880 million designated as the hedged amount (from a closed portfolio of prepayable fixed rate loans with a carrying value of $1.4 billion). The cumulative basis adjustment included in the carrying value of these hedged items totaled $16 million and the basis adjustment related to the discontinued portion was $1 million as of December 31, 2021.

Derivative Instruments, Gain (Loss)

For the Company's derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings in the same line item as the offsetting loss or gain on the related interest rate swaps. For loans, the gain or loss on the hedged item is included in interest income and for subordinated debt, the gain or loss on the hedged items was included in interest expense, as shown in the table below.

	Three Months Ended June 30,
	2022				2021
Income Statement Classification	Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item		Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item
	(in millions)
Interest income	$	15.2	$	(15.2)	$	(10.8)	$	10.8
Interest expense	—		—		3.7		(3.7)
	Six Months Ended June 30,
	2022				2021
Income Statement Classification	Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item		Gain/(Loss) on Swaps		Gain/(Loss) on Hedged Item
	(in millions)
Interest income	$	48.7	$	(48.7)	$	27.9	$	(27.9)
Interest expense	—		—		(1.9)		1.9

In addition to the gains and losses on the Company's outstanding fair value hedges presented in the above table, the Company recognized $3.0 million and $4.0 million in interest income related to the amortization of the cumulative basis adjustment on its discontinued last-of-layer hedges during the three and six months ended June 30, 2022, respectively.