Derivative Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Instruments

NOTE 13. DERIVATIVE INSTRUMENTS

The table below presents the fair value of our derivative instruments as well as their classification in our consolidated balance sheets as of September 30, 2014 and December 31, 2013:

Derivative Instruments	Balance Sheet Location	September 30, 2014		December 31, 2013
		(in thousands)
Hedged interest rate swaps	Derivative Assets	$	-	$	22,551
De-designated interest rate swaps	Derivative Assets		-		-
Eurodollar Futures Contracts	Derivative Assets		1,419		-
TBA Securities - Open Contract	Derivative Assets		660,676		-
		$	662,095	$	22,551
Hedged interest rate swaps	Derivative Liabilities	$	-	$	55,914
TBA Securities - Payable	Derivative Liabilities		660,310		-
De-designated interest rate swaps	Derivative Liabilities		10,978		-
		$	671,288	$	55,914

Interest Rate Swap Agreements

At September 30, 2014, we were a counterparty to interest rate swaps, which are derivative instruments as defined by ASC 815-10, with an aggregate notional amount of $3.81 billion and a weighted average maturity of approximately four years. During the three months ended September 30, 2014, we added four new swap agreements with an aggregate notional balance of $350 million. During the three months ended September 30, 2014, no swap agreements matured. However, 32 swaps with a notional amount of $1.81  billion were terminated. We utilize interest rate swaps to manage interest rate risk relating to our repurchase agreements and do not anticipate entering into derivative transactions for speculative or trading purposes. In accordance with the swap agreements, we will pay a fixed-rate of interest during the term of the swap agreements (ranging from 0.578% to 3.06%) and receive a payment that varies with the three-month LIBOR rate.

At September 30, 2014 and December 31, 2013, our swaps had the following notional amounts (dollar amounts in thousands), weighted average fixed rates and remaining terms (in months):

	September 30, 2014							December 31, 2013
Maturity	Notional Amount		Weighted Average Fixed Rate			Remaining Term  in Months		Notional Amount		Weighted Average Fixed Rate			Remaining Term  in Months
Less than 12 months	$	85,000		1.15	%		1	$	410,000		2.07	%		4
1 year to 2 years		500,000		0.90			22		680,000		2.07			18
2 years to 3 years		925,000		1.06			31		1,145,000		1.82			29
3 years to 5 years		1,390,000		1.44			47		1,715,000		1.18			48
5 years to 7 years		555,000		2.35			75		925,000		2.11			76
7 years to 10 years		350,000		2.93			103		500,000		2.84			107
	$	3,805,000		1.54	%		48	$	5,375,000		1.81	%		47

Swap Agreements by Counterparty

	September 30, 2014		December 31, 2013
	(in thousands)
Chicago Mercantile Exchange(1)	$	780,000	$	400,000
JPMorgan Securities		775,000		1,175,000
Deutsche Bank Securities		715,000		1,165,000
ING Financial Markets LLC		650,000		650,000
RBS Greenwich Capital		350,000		800,000
Nomura Securities International		300,000		650,000
Bank of New York		160,000		260,000
Credit Suisse		75,000		75,000
Morgan Stanley		-		150,000
LBBW Securities, LLC		-		50,000
	$	3,805,000	$	5,375,000

(1) For all swap agreements entered into after September 9, 2013, the counterparty is the Chicago Mercantile Exchange regardless of who the trading party is. See the section entitled “Derivative Financial Instruments – Interest Rate Risk Management” in Note 1 for additional details.

During the nine months ended September 30, 2014, there was an increase in unrealized losses of approximately $20.6 million, from approximately $33.3 million in unrealized losses at December 31, 2013 to approximately $53.9 million in unrealized losses, on our swap agreements included in “Other comprehensive income” (this increase in unrealized losses consisted of unrealized losses on derivatives of $74 million and a reclassification adjustment for interest expense included in net income of $53.4 million).

On March 17, 2014, we decided to discontinue hedge accounting on certain swaps with a notional balance of approximately $1.685 billion. On August 22, 2014, we decided to discontinue hedge accounting on the remainder of our swaps. During September 2014, 32 of our swaps with a notional balance of $ 1.81 billion were terminated. For both the terminated swaps and the de-designated swaps, as long as there is the probability that the forecasted transactions that were being hedged (i.e., rollovers of our repurchase agreement borrowings) are still expected to occur, the amount of the gain or less in AOCI remains in AOCI and is amortized over the remaining term of the swaps. During the three and nine months ended September 30, 2014, the net gain on these interest rate swaps was approximately $10.9 million and $9.6 million, respectively.

Eurodollar Futures Contracts

Each Futures Contract embodies $1 million of notional value and is effective for a term of approximately three months. We do not designate these contracts as hedges for accounting purposes. As a result, realized and unrealized changes in fair value are recognized in earnings in the period in which the changes occur. At September 30, 2014, we had 5,500 Futures Contracts representing $5.5 billion in notional amount. The fair value of these Futures Contracts was approximately $1.4 million. For the three and nine months ended September 30, 2014, we had gains on Futures Contracts of approximately $111 thousand and $111 thousand, respectively. We did not enter into these types of contracts during 2013.

TBA Securities

We may also enter TBA contracts and recognize a gain or loss on the sale of the contracts or dollar roll income. See the section in Note 1 on “Derivative Financial Instruments – TBA Securities” for more information on TBA securities. During the three and nine months ended September 30, 2014, we recognized a loss on derivatives-TBA securities of approximately $779 thousand and a gain of approximately $798 thousand, respectively. During the three and nine months ended September 30, 2014, we also recognized derivative income on the TBA securities of approximately $366 thousand. During the three and nine months ended September 30, 2013, we did not enter into any TBA contracts. The types of securities involved in these TBA contracts are Fannie Mae 15-year fixed-rate securities with coupons ranging from 2.5% to 3.5%.

For more information on our accounting policies, the objectives and risk exposures relating to derivatives and hedging agreements, see the section on “Derivative Financial Instruments” in Note 1. For more information on the fair value of our swap agreements, see Note 7.