Derivative Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative Financial Instruments [Abstract]

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding and junior subordinated notes by entering into derivatives and other hedging contracts. To date, the Company has entered into Eurodollar and T-Note futures contracts and interest rate swaptions, but may enter into other contracts in the future. The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

As of December 31, 2015 and 2014, such instruments were comprised entirely of Eurodollar futures contracts. During the year ended December 31, 2015, the Company entered into, and settled before the end of the year, a T-Note futures contract. Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains or losses credited or charged to the Company’s account on a daily basis and reflected in earnings as they occur. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The Company is exposed to the changes in value of the futures by the amount of margin held by the broker. This margin represents the collateral the Company has posted for its open positions and is recorded on the consolidated balance sheets as part of restricted cash.

Eurodollar and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s Eurodollar futures positions at December 31, 2015 and December 31, 2014.

($ in thousands)
Eurodollar Futures Positions
As of December 31, 2015
		Repurchase Agreement Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2016	$	56,000	1.45%	0.98%	$	(264)
2017		56,000	2.23%	1.59%		(362)
2018		56,000	2.65%	1.91%		(207)
Total / Weighted Average	$	56,000	2.00%	1.41%	$	(833)

($ in thousands)
Eurodollar Futures Positions
As of December 31, 2015
		Junior Subordinated Debt Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2016	$	26,000	1.77%	0.98%	$	(205)
2017		26,000	2.49%	1.59%		(234)
2018		26,000	2.94%	1.91%		(134)
Total / Weighted Average	$	26,000	2.29%	1.41%	$	(573)

($ in thousands)
Eurodollar Futures Positions
As of December 31, 2014
		Repurchase Agreement Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2015	$	36,500	0.65%	0.63%	$	(5)
2016		56,000	1.45%	1.54%		46
2017		56,000	2.23%	2.23%		(3)
2018		56,000	2.65%	2.51%		(38)
Total / Weighted Average	$	50,429	1.72%	1.72%	$	-

($ in thousands)
Eurodollar Futures Positions
As of December 31, 2014
		Junior Subordinated Debt Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2015	$	26,000	1.48%	0.57%	$	(237)
2016		26,000	1.77%	1.54%		(61)
2017		26,000	2.49%	2.23%		(67)
2018		26,000	2.94%	2.51%		(56)
Total / Weighted Average	$	26,000	2.06%	1.60%	$	(421)

Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

Gain (Loss) From Derivative Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2015 and 2014.

(in thousands)
		Consolidated				Parent-Only
		2015		2014		2015		2014
Eurodollar futures contracts (short positions)	$	(1,377)	$	(9,838)	$	(1,377)	$	(280)
T-Note futures contracts (short positions)		-		86		-		14
Payer swaptions		-		(4,439)		-		-
Net losses on derivative instruments	$	(1,377)	$	(14,191)	$	(1,377)	$	(266)

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting its counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty obtaining its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company’s derivative instruments are included in restricted cash on the consolidated balance sheets.