Derivatives and Other Hedging Instruments (Tables)

3 Months Ended

Mar. 31, 2014

Schedule of Location of Derivatives Instruments on Consolidated Balance Sheet

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The fair value of Futures Contracts is based on quoted prices from the exchange on which they trade.  The table below presents the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2014 and December 31, 2013, respectively.  

Derivative Instruments	Balance Sheet Location	March 31, 2014		December 31, 2013
Interest rate swaps	Interest rate swap asset	$	12,703	$	15,841
Futures contracts	Other assets		5,617		11,148
Forward purchase commitments	Other assets		2,042		-
Interest rate swaps	Interest rate swap liability	$	106,132	$	125,133
Futures contracts	Futures contract liability		48,584		36,733
Forward purchase commitments including TBA dollar rolls	Accounts payable and other liabilities		13,634		5,741

Volume of Activity for the Company's Interest Rate Derivative Instruments

The volume of activity for the Company’s interest rate swap instruments is shown in the table below.  

	Three Months Ended March 31
	2014			2013
Notional amount, beginning of period	$	10,700,000		$	10,700,000
Additions		-			600,000
Expirations and terminations		(600,000	)		(200,000	)
Notional amount, end of period	$	10,100,000		$	11,100,000

Hedging Exposure Future Cash Flows with Interest Rate Swaps for Forecasted Transactions

As of March 31, 2014, the weighted-average remaining term of the Company’s interest rate swaps is 22 months. Additional information regarding the Company’s interest rate swaps as of March 31, 2014 follows.  

			Remaining		Weighted Average
	Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate in Contract
12 months or less	$	2,800,000		8		1.80%
Over 12 months to 24 months		3,300,000		17		1.53%
Over 24 months to 36 months		2,400,000		30		0.95%
Over 36 months to 48 months		1,600,000		41		0.87%
Total	$	10,100,000		22		1.36%

Schedule of Fair Value of Futures Contracts

The Company uses Futures Contracts to 1) synthetically replicate an interest rate swap, or 2) offset the changes in value of its forward purchases of certain agency securities.  As of March 31, 2014 and December 31, 2013, the fair value of all Futures Contracts was a liability of $(42,967) and $(25,585), respectively.  

	Fair Value
	March 31, 2014			December 31, 2013
Futures Contracts designed to replicate swaps	$	(45,537	)	$	(27,881	)
Futures Contracts designed to hedge value changes in forward purchases		2,570			2,296
Total fair market value of Futures Contracts	$	(42,967	)	$	(25,585	)

Schedule of Volume of Activity Futures Contracts

The volume of activity for the Company’s Futures Contracts is shown in the table below.  

	Number ofContracts
As of December 31, 2013		95,327
New positions opened		77,821
Early settlements		(56,817	)
Settlements at maturity		(2,006	)
As of March 31, 2014		114,325

Schedule of ARM Securities Forward Purchase Commitments

The following table shows the ARM securities forward purchase commitments shown as a net asset in other assets on the balance sheets as of March 31, 2014 and December 31, 2013.  

		Face		Cost		Fair Value		Net Asset
March 31, 2014	$	70,000	$	71,839	$	72,040	$	201
December 31, 2013	$	-	$	-	$	-	$	-

Schedule of Mortgage Backed Securities

At March 31, 2014 and December 31, 2013, the Company had the following 15-year TBA dollar roll securities:

	Face		Cost		Fair Value		Net Asset (Liability)
March 31, 2014	$	3,400,000	$	3,565,399	$	3,551,765	$	(13,634	)
December 31, 2013	$	600,000	$	632,270	$	627,187	$	(5,083)

Gross Amounts Associated with Derivative Financial Instruments

The Company does not use either offsetting or netting to present any of its derivative assets or liabilities.  The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of March 31, 2014.  

	Assets/(Liabilities)			Cash Collateral Posted		Net Asset/(Liability)
Interest rate swaps	$	12,703		$	-	$	12,703
Futures contracts		5,617			-		5,617
Forward purchase commitments		2,042			-		2,042
Interest rate swaps	$	(106,132	)	$	111,898	$	5,766
Futures contracts		(48,584	)		106,298		57,714
Forward purchase commitments including TBA dollar rolls		(13,634	)		13,395		(239)

The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2013.  

	Assets/(Liabilities)			Cash Collateral Posted		Net Asset/(Liability)
Interest rate swaps	$	15,841		$	-	$	15,841
Futures contracts		11,148			-		11,148
Interest rate swaps	$	(125,133	)	$	133,661	$	8,528
Futures contracts		(36,733	)		77,713		40,980
Forward purchase commitments including TBA dollar rolls		(5,741	)		14,005		8,264

Schedule of Derivative Instruments Gain (Loss), Net

The following table shows the components of “Gain (loss) on derivative instruments, net” for the three months ended March 31, 2014 and 2013.  Impacts from the Company’s interest rate swaps subsequent to the September 30, 2013 hedge de-designation are included herein.  

	Three Months Ended March 31
	2014			2013
Interest rate swaps – fair value adjustments	$	15,863		$	-
Interest rate swaps – monthly net settlements		(29,412	)		-
Futures Contracts – fair value adjustments		(17,382	)		-
Futures Contracts – realized gains (losses)		(18,606	)		51
TBA dollar roll income		20,821			-
Realized and unrealized losses on TBA securities		(12,899	)		-
Gain (loss) on derivative instruments, net	$	(41,615	)	$	51

Schedule of Location of Derivatives on Income Statement

As discussed above, effective September 30, 2013, the Company discontinued cash flow hedge accounting for its interest rate swaps.  The table below presents the effect of the swaps that were previously designated as cash flow hedges on the Company’s comprehensive income for the three months ended March 31, 2014 and 2013.  

	Three Months Ended March 31
	2014			2013
Amount of gain (loss) recognized in OCI (effective portion)	$	-		$	(5,907	)
Amount of loss reclassified from OCI into net income as interest expense (effective portion)		(24,684	)		(29,929	)
Amount of loss recognized in net income as interest expense (ineffective portion)		-			(116	)

Interest Rate Swap

Schedule of Interest Rate Swap Agreements on Accumulated Other Comprehensive Income

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s AOCI for the three months ended March 31, 2014 and the year ended December 31, 2013.  

	Three Months Ended March 31, 2014			Year Ended December 31, 2013
Beginning balance	$	(111,174	)	$	(243,051	)
Unrealized gain on interest rate swaps		-			15,030
Reclassification of net losses included in income statement		24,684			116,847
Ending balance	$	(86,490	)	$	(111,174	)