Derivatives and Other Hedging Instruments (Tables)

6 Months Ended

Jun. 30, 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 interest rate swaptions is based on third party broker quotations that are non binding bids to trade.  The fair value of Futures Contracts is based on quoted prices from the exchange on which they trade.  The fair value of forward purchase commitments was determined using the same methodology as agency securities as described in Note 4.  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 June 30, 2014 and December 31, 2013, respectively.  

Derivative Instruments	Balance Sheet Location	June 30, 2014		December 31, 2013
Interest rate swaps and swaptions	Derivative assets	$	11,642	$	15,841
Futures contracts	Derivative assets		-		11,148
Forward purchase commitments	Derivative assets		16,939		-
		$	28,581	$	26,989
Interest rate swaps	Derivative liabilities	$	89,225	$	125,133
Futures contracts	Derivative liabilities		132,972		36,733
Forward purchase commitments	Derivative liabilities		-		5,741
		$	222,197	$	167,607

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.  

	Notional Value
	Six Months Ended June 30
	2014			2013
Beginning of period	$	10,500,000		$	10,700,000
Additions		-			800,000
Expirations and terminations		(600,000	)		(400,000	)
End of period	$	9,900,000		$	11,100,000

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

As of June 30, 2014, the weighted-average remaining term of the Company’s interest rate swaps is 19 months. Additional information regarding the Company’s interest rate swaps as of June 30, 2014 follows.  

			Wtd. Avg.
			Remaining		Weighted Average
	Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate in Contract
12 months or less	$	3,800,000		7		1.78%
Over 12 months to 24 months		2,700,000		18		1.30%
Over 24 months to 36 months		2,600,000		31		0.91%
Over 36 months to 48 months		800,000		41		0.93%
Total	$	9,900,000		19		1.35%

Schedule of Outstanding Interest Rate Swaptions

A swaption is a derivative instrument that gives the holder the option to enter into a pay-fixed interest rate swap in the future, if it so desires.  As of June 30, 2014, the Company had two interest rate swaptions outstanding:

	Options						Underlying Swaps
Swaptions	Cost		Fair Value		Wtd. Avg. Months to Expiration		Notional		Wtd. Avg. Fixed Pay Rate		Receive Rate	Wtd. Avg. Term (Years)
Fixed payer	$	10,000	$	7,321		11	$	492,300		2.81%	3 month LIBOR		7

The Company did not have any interest rate swaptions outstanding at December 31, 2013.

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 June 30, 2014 and December 31, 2013, the fair value of all Futures Contracts was a liability of $(132,972) and $(25,585), respectively.  

	Fair Value
	June 30, 2014			December 31, 2013
Futures Contracts designed to replicate swaps	$	(131,652	)	$	(27,881	)
Futures Contracts designed to hedge value changes in forward purchases		(1,320	)		2,296
Total fair market value of Futures Contracts	$	(132,972	)	$	(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 of Contracts
	Six Months Ended June 30
	2014			2013
Beginning of period		95,327			-
New positions opened		102,746			12,949
Early settlements		(70,979	)		-
Settlements at maturity		(3,819	)		-
End of period		123,275			12,949

Schedule of Mortgage Backed Securities

At June 30, 2014 and December 31, 2013, the Company had the following 15-year TBA dollar roll securities:

	Face		Cost		Fair Market Value		Net Asset (Liability)
June 30, 2014	$	2,850,000	$	2,949,433	$	2,962,617	$	13,184
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 June 30, 2014.

	Assets/(Liabilities)			Cash Collateral Posted		Net Asset/(Liability)
Interest rate swaps	$	4,321		$	-	$	4,321
Interest rate swaptions		7,321			-		7,321
Forward purchase commitments		16,939			3,387		20,326
Interest rate swaps	$	(89,225	)	$	111,088	$	21,863
Futures contracts		(132,972	)		190,607		57,635

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		(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 and six months ended June 30, 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 June 30						Six Months Ended June 30
	2014			2013			2014			2013
Interest rate swaps – fair value adjustments	$	8,525		$	-		$	24,388		$	-
Interest rate swaptions – fair value adjustments		(2,679	)		-			(2,679	)		-
Interest rate swaps – monthly net settlements		(29,754	)		-			(59,166	)		-
Futures Contracts – fair value adjustments		(90,005	)		5,537			(107,387	)		5,537
Futures Contracts – realized gains (losses)		(3,647	)		(52	)		(22,253	)		(1	)
TBA dollar roll income		25,622			-			46,443			-
Realized and unrealized gains on TBA dollar roll transactions		36,678			-			23,779			-
Gain (loss) on derivative instruments, net	$	(55,260	)	$	5,485		$	(96,875	)	$	5,536

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 interest rate swaps that were previously designated as cash flow hedges on the Company’s comprehensive income for the three and six months ended June 30, 2014 and 2013.  

	Three Months Ended June 30						Six Months Ended June 30
	2014			2013			2014			2013
Amount of gain (loss) recognized in OCI (effective     portion)	$	-		$	57,294		$	-			$	51,385
Amount of loss reclassified from OCI into net income     as interest expense (effective portion)		(22,923	)		(30,585	)		(47,607	)			(60,515	)
Amount of gain (loss) recognized in net income as     interest expense (ineffective portion)		-			212			-				96

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 six months ended June 30, 2014 and the year ended December 31, 2013.  

	Six Months Ended June 30, 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		47,607			116,847
Ending balance	$	(63,567	)	$	(111,174	)