Derivative Financial Instruments

9 Months Ended

Sep. 30, 2018

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 September 30, 2018 and December 31, 2017.

Table 10.1 – Fair Value and Notional Amount of Derivative Financial Instruments

	September 30, 2018					December 31, 2017
	Fair Value			Notional Amount		Fair Value			Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps	$	78,006		$	3,139,000	$	10,122		$	1,765,000
TBAs	6,987			1,480,000		133			295,000
Futures	44			15,000		1			7,500
Swaptions	—			—		42			200,000
Assets - Other Derivatives
Loan purchase commitments	2,182			355,353		3,243			547,434
Loan forward sale commitments	—			—		2,177			343,681
Total Assets	$	87,219		$	4,989,353	$	15,718		$	3,158,615
Liabilities - Cash Flow Hedges
Interest rate swaps	$	(26,796	)	$	139,500	$	(43,679	)	$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps	(11,785		)	565,500		(11,888		)	1,248,000
TBAs	(1,744		)	500,000		(3,808		)	1,400,000
Liabilities - Other Derivatives
Loan purchase commitments	(2,399		)	451,136		(3,706		)	697,966
Total Liabilities	$	(42,724	)	$	1,656,136	$	(63,081	)	$	3,485,466
Total Derivative Financial Instruments, Net	$	44,495		$	6,645,489	$	(47,363	)	$	6,644,081

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, 2018, we were party to swaps and swaptions with an aggregate notional amount of $3.70 billion, TBA agreements sold with an aggregate notional amount of $1.98 billion, and financial futures contracts with an aggregate notional amount of $15 million. At December 31, 2017, we were party to swaps and swaptions with an aggregate notional amount of $3.21 billion, TBA agreements sold with an aggregate notional amount of $1.70 billion, and financial futures contracts with an aggregate notional amount of $8 million.

During the three and nine months ended September 30, 2018, risk management derivatives had net market valuation gains of $25 million and $114 million, respectively. During the three and nine months ended September 30, 2017, risk management derivatives had net market valuation losses of $9 million and $36 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net, and Other income, net on our consolidated statements of income.

Loan Purchase and Forward Sale Commitments

LPCs and FSCs that qualify as derivatives are recorded at their estimated fair values. For the three and nine months ended September 30, 2018, LPCs and FSCs had a net market valuation gain of $2 million and a net market valuation loss of $8 million, respectively, that were recorded in Mortgage banking activities, net on our consolidated statements of income. For the three and nine months ended September 30, 2017, LPCs had net market valuation gains of $13 million and $34 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 that are included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges with an aggregate notional balance of $140 million.

For the three and nine months ended September 30, 2018, changes in the values of designated cash flow hedges were positive$5 million and positive$17 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For the three and nine months ended September 30, 2017, changes in the values of designated cash flow hedges were positive$0.3 million and negative$0.4 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $26 million and $43 million at September 30, 2018 and December 31, 2017, respectively.

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, 2018 and 2017.

Table 10.2 – 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)	2018			2017			2018			2017
Net interest expense on cash flows hedges	$	(734	)	$	(1,119	)	$	(2,536	)	$	(3,516	)
Realized net losses reclassified from other comprehensive income	—			(14		)	—			(42		)
Total Interest Expense	$	(734	)	$	(1,133	)	$	(2,536	)	$	(3,558	)

Derivative Counterparty Credit Risk

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, we consider counterparty risk as part of our fair value assessments of all derivative financial instruments at each quarter-end. At September 30, 2018, we assessed this risk as remote and did not record a specific valuation adjustment.

At September 30, 2018, we had outstanding derivative agreements with two counterparties (other than clearinghouses) and were in compliance with ISDA agreements governing our open derivative positions.