Derivative Financial Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 12. Derivative Financial Instruments

The Company’s derivative financial instruments consist of financial forward and futures contracts, IRLCs, and options. These derivatives relate to mortgage banking operations, MSRs, and other risk management activities, and seek to mitigate or reduce the Company’s exposure to losses from adverse changes in interest rates. These activities will vary in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions.

In accordance with the applicable accounting guidance, the Company takes into account the impact of collateral and master netting agreements that allow 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 included in derivative assets, and contracts with positive fair values included in derivative liabilities.

The Company held derivatives with a notional amount of $2.3 billion at September 30, 2014. Changes in the fair value of these derivatives are reflected in current-period earnings. None of these derivatives are designated as hedges for accounting purposes.

The following table sets forth information regarding the Company’s derivative financial instruments at September 30, 2014:

	September 30, 2014
	Notional		Unrealized(1)
(in thousands)	Amount		Gain		Loss
Treasury options	$	552,500	$	--	$	1,572
Eurodollar futures		125,000		30		--
Treasury futures		25,000		--		51
Forward commitments to sell loans/mortgage-backed securities		602,000		251		1,440
Forward commitments to buy loans/mortgage-backed securities		640,000		1,018		449
Interest rate lock commitments		360,221		2,180		--
Total derivatives	$	2,304,721	$	3,479	$	3,512

(1) Derivatives in a net gain position are recorded as “Other assets” and derivatives in a net loss position are recorded as “Other liabilities” in the Consolidated Statements of Condition.

The Company uses various financial instruments, including derivatives, in connection with its strategies to reduce pricing risk resulting from changes in interest rates. Derivative instruments may include IRLCs entered into with borrowers or correspondents/brokers to acquire agency-conforming fixed and adjustable rate residential mortgage loans that will be held for sale. Other derivative instruments include Treasury options and Eurodollar futures.

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

The Company also purchases put and call options to manage the risk associated with variations in the amount of IRLCs that ultimately close.

In addition, the Company mitigates a portion of the risk associated with changes in the value of MSRs. The general strategy for mitigating this risk is to purchase derivative instruments, the value of which changes in the opposite direction of interest rates, thus partially offsetting changes in the value of our servicing assets, which tends to move in the same direction as interest rates. Accordingly, the Company purchases Eurodollar futures and call options on Treasury securities, and enters into forward contracts to purchase mortgage-backed securities.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income and Comprehensive Income for the periods indicated:

	Gain (Loss) Included in Mortgage Banking Income
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(in thousands)	2014			2013			2014			2013
Treasury options	$	(2,580	)	$	(641	)	$	(1,525	)	$	(7,597	)
Treasury/Eurodollar futures		(6	)		--			100			4
Forward commitments to buy/sell    loans/mortgage-backed securities		1,615			(15,070	)		8,148			15,814
Total (loss) gain	$	(971	)	$	(15,711	)	$	6,723		$	8,221

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

The following tables present the effect the master netting arrangements had on the presentation of the derivative assets in the Consolidated Statements of Financial Condition as of the dates indicated:

September 30, 2014

Gross Amounts Not

Offset in the

Consolidated Statement

Gross

Gross Amounts

Net Amounts of

of Condition

Amounts of

Offset in the

Assets Presented

Cash

Recognized

Statement of

in the Statement

Financial

Collateral

Net

(in thousands)

Assets

Condition

of Condition

Instruments

Received

Amount

Derivatives

$

6,633

$

2,602

$

4,031

$

--

$

--

$

4,031

December 31, 2013

Gross Amounts Not

Offset in the

Consolidated Statement

Gross

Gross Amounts

Net Amounts of

of Condition

Amounts of

Offset in the

Assets Presented

Cash

Recognized

Statement of

in the Statement

Financial

Collateral

Net

(in thousands)

Assets

Condition

of Condition

Instruments

Received

Amount

Derivatives

$

6,680

$

4,848

$

1,832

$

--

$

--

$

1,832

The following tables present the effect the master netting arrangements had on the presentation of the derivative liabilities in the Consolidated Statements of Financial Condition as of the dates indicated:

September 30, 2014

Gross Amounts Not

Offset in the

Net Amounts of

Consolidated Statement

Gross

Gross Amounts

Liabilities

of Condition

Amounts of

Offset in the

Presented in the

Cash

Recognized

Statement of

Statement of

Financial

Collateral

Net

(in thousands)

Liabilities

Condition

Condition

Instruments

Received

Amount

Derivatives

$

3,512

$

3,422

$

90

$

--

$

--

$

90

December 31, 2013

Gross Amounts Not

Offset in the

Net Amounts of

Consolidated Statement

Gross

Gross Amounts

Liabilities

of Condition

Amounts of

Offset in the

Presented in the

Cash

Recognized

Statement of

Statement of

Financial

Collateral

Net

(in thousands)

Liabilities

Condition

Condition

Instruments

Received

Amount

Derivatives

$

8,012

$

7,624

$

388

$

--

$

--

$

388