Derivatives and Other Hedging Instruments (Tables)

9 Months Ended

Sep. 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 values of interest rate swaptions are 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 MBS 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 September 30, 2014 and December 31, 2013, respectively.  

Derivative Instruments	Balance Sheet Location	September 30, 2014		December 31, 2013
Interest rate swaps and swaptions	Derivative assets	$	27,815	$	15,841
Futures contracts	Derivative assets		1,299		11,148
Forward purchase commitments	Derivative assets		1,888		-
		$	31,002	$	26,989
Interest rate swaps	Derivative liabilities	$	58,484	$	125,133
Futures contracts	Derivative liabilities		96,867		36,733
Forward purchase commitments	Derivative liabilities		19,971		5,741
		$	175,322	$	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
	Nine Months Ended September 30
	2014			2013
Beginning of period	$	10,500,000		$	10,700,000
Additions		-			800,000
Expirations and terminations		(1,300,000	)		(900,000	)
End of period	$	9,200,000		$	10,600,000

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

As of September 30, 2014, the weighted-average remaining term of the Company’s interest rate swaps is 17 months. Additional information regarding the Company’s interest rate swaps as of September 30, 2014 follows.  

			Wtd. Avg.
			Remaining		Weighted Average
	Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate in Contract
12 months or less	$	4,000,000		7		1.70%
Over 12 months to 24 months		2,400,000		18		1.10%
Over 24 months to 36 months		2,200,000		30		0.88%
Over 36 months to 48 months		600,000		40		0.95%
Total	$	9,200,000		17		1.30%

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 September 30, 2014, the Company had four interest rate swaptions outstanding:

	Options						Underlying Swaps
Swaptions	Original Cost		Fair Value		Wtd. Avg. Months to Expiration		Notional		Wtd. Avg. Fixed Pay Rate		Receive Rate	Wtd. Avg. Term (Years)
Fixed payer	$	20,081	$	16,098		9	$	992,300		2.74%	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 MBS.  As of September 30, 2014 and December 31, 2013, the fair value of all Futures Contracts was a liability of $(95,568) and $(25,585), respectively.  

	Fair Value
	September 30, 2014			December 31, 2013
Futures Contracts designed to replicate swaps	$	(96,383	)	$	(27,881	)
Futures Contracts designed to hedge value changes in forward purchases		815			2,296
Total fair market value of Futures Contracts	$	(95,568	)	$	(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
	Nine Months Ended September 30
	2014			2013
Beginning of period		95,327			-
New positions opened		125,547			121,346
Early settlements		(83,444	)		(31,103	)
Settlements at maturity		(6,298	)		(608	)
End of period		131,132			89,635

Schedule of ARM Securities Forward Purchase Commitments

The Company had the following ARM securities forward purchase commitments

	Face		Cost		Fair Market Value		Net Asset (Liability)
September 30, 2014	$	105,239	$	107,814	$	107,798	$	(16	)
December 31, 2013	$	-	$	-	$	-	$	-

Schedule of Mortgage Backed Securities

At September 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)
September 30, 2014	$	3,600,000	$	3,723,183	$	3,703,228	$	(19,955	)
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 September 30, 2014.

	Assets/(Liabilities)			Cash Collateral Posted (Held)			Net Asset/(Liability)
Interest rate swaps	$	11,716		$	-		$	11,716
Interest rate swaptions		16,099			(3,598	)		12,501
Futures contracts		1,299			-			1,299
Forward purchase commitments		1,888			-			1,888
Interest rate swaps	$	(58,484	)	$	63,511		$	5,027
Forward purchase commitments		(19,971	)		9,263			(10,708	)
Futures contracts		(96,867	)		153,990			57,123

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 nine months ended September 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 Sept. 30						Nine Months Ended Sept. 30
	2014			2013			2014			2013
Interest rate swaps – fair value adjustments	$	38,136		$	-		$	62,524		$	-
Interest rate swaptions – fair value adjustments		(1,304	)		-			(3,983	)		-
Interest rate swaps – monthly net settlements		(29,079	)		-			(88,245	)		-
Futures Contracts – fair value adjustments		37,405			(50,129	)		(69,982	)		(44,593	)
Futures Contracts – realized gains (losses)		(1,810	)		(27,327	)		(24,063	)		(27,327	)
TBA dollar roll income		22,370			-			68,813			-
Net realized and unrealized losses on TBA dollar rolls		(30,288	)		-			(6,509	)		-
Gain (loss) on derivative instruments, net	$	35,430		$	(77,456	)	$	(61,445	)	$	(71,920	)

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 nine months ended September 30, 2014 and 2013.  

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Amount of gain (loss) recognized in OCI (effective     portion)	$	-		$	(36,356	)	$	-		$	15,030
Amount of loss reclassified from OCI into net income as interest expense (effective portion)		(19,806	)		(30,954	)		(67,413	)		(91,470	)
Amount of gain (loss) recognized in net income as     interest expense (ineffective portion)		-			109			-			205

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 nine months ended September 30, 2014 and the year ended December 31, 2013.  

	Nine Months Ended September 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		67,413			116,847
Ending balance	$	(43,761	)	$	(111,174	)