DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2021

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of

September 30, 2021 and December 31, 2020.

(in thousands)

Derivative and Other Hedging Instruments

Balance Sheet Location

September 30, 2021

December 31, 2020

Assets

Interest rate swaps

Derivative assets, at fair value

$

16,972

$

7

Payer swaptions (long positions)

Derivative assets, at fair value

28,051

17,433

Interest rate floors

Derivative assets, at fair value

2,360

-

TBA securities

Derivative assets, at fair value

-

3,559

Total derivative assets, at fair value

$

47,383

$

20,999

Liabilities

Interest rate swaps

Derivative liabilities, at fair value

$

2,225

$

24,711

Payer swaptions (short positions)

Derivative liabilities, at fair value

8,063

7,730

TBA securities

Derivative liabilities, at fair value

-

786

Total derivative liabilities, at fair value

$

10,288

$

33,227

Margin Balances Posted to (from) Counterparties

Futures contracts

Restricted cash

$

2,475

$

489

TBA securities

Restricted cash

-

284

TBA securities

Other liabilities

-

(2,520)

Interest rate swaption contracts

Restricted cash

1,099

-

Interest rate swaption contracts

Other liabilities

(13,765)

(3,563)

Interest rate swap contracts

Restricted cash

-

19,761

Interest rate swap contracts

U.S. Treasury Notes

29,927

-

Total margin balances on derivative contracts

$

19,736

$

14,451

Eurodollar, Fed Funds 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 and T-Note futures positions at September 30,

2021 and December 31, 2020.

($ in thousands)

September 30, 2021

Average

Weighted

Weighted

Contract

Average

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Rate

Equity

(1)

Eurodollar Futures Contracts (Short Positions)

2021

$

50,000

1.01%

0.17%

$

(104)

Treasury Note Futures Contracts (Short Positions)

(2)

December 2021 5-year T-Note futures

(Dec 2021 - Dec 2026 Hedge Period)

$

269,000

1.14%

1.29%

$

1,631

December 2021 10-year Ultra futures

(Dec 2021 - Dec 2031 Hedge Period)

$

23,500

0.97%

1.19%

$

518

($ in thousands)

December 31, 2020

Average

Weighted

Weighted

Contract

Average

Average

Notional

Entry

Effective

Open

Expiration Year

Amount

Rate

Rate

Equity

(1)

Eurodollar Futures Contracts (Short Positions)

2021

$

50,000

1.03%

0.18%

$

(424)

Treasury Note Futures Contracts (Short Position)

(2)

March 2021 5 year T-Note futures

(Mar 2021 - Mar 2026 Hedge Period)

$

69,000

0.72%

0.67%

$

(186)

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

(2)

5-Year T-Note futures contracts were valued at a price of $

122.74

 at September 30, 2021 and $

126.16

 at December 31, 2020. The contract

values of the short positions were $

330.2

 million and $

87.1

 million at September 30, 2021 and December 31, 2020, respectively. 10-Year Ultra

futures contracts were valued at a price of $

145.25

 at September 30, 2021. The contract value of the short position was $

34.1

 million at

September 30, 2021.

Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on LIBOR ("payer swaps").

The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase

agreements and cash flows on such liabilities. We are typically required to post collateral on our interest rate swap agreements. The table

below presents information related to the Company’s interest rate swap positions at September 30, 2021 and December 31, 2020.

($ in thousands)

Average

Net

Fixed

Average

Estimated

Average

Notional

Pay

Receive

Fair

Maturity

Amount

Rate

Rate

Value

(Years)

September 30, 2021

Expiration > 3 to ≤ 5 years

$

955,000

0.64%

0.13%

$

11,566

4.3

Expiration > 5 years

400,000

1.16%

0.12%

3,181

7.5

$

1,355,000

0.79%

0.13%

$

14,747

5.2

December 31, 2020

Expiration > 3 to ≤ 5 years

$

620,000

1.29%

0.22%

$

(23,760)

3.6

Expiration > 5 years

200,000

0.67%

0.23%

(944)

6.4

$

820,000

1.14%

0.23%

$

(24,704)

4.3

The table below presents information related to the Company’s interest rate floor positions at September 30, 2021.

($ in thousands)

Net

Strike

Estimated

Notional

Swap

Curve

Fair

Expiration

Amount

Cost

Rate

Spread

Value

February 3, 2023

$

70,000

$

511

0.76%

30Y5Y

$

1,257

February 3, 2023

80,000

504

1.10%

10Y2Y

1,103

$

150,000

$

1,015

0.94%

2,360

The table below presents information related to the Company’s interest rate swaption positions at September 30, 2021 and

 December

31, 2020.

($ in thousands)

Option

Underlying Swap

Weighted

Average

Weighted

Average

Average

Adjustable

Average

Fair

Months to

Notional

Fixed

Rate

Term

Expiration

Cost

Value

Expiration

Amount

Rate

(LIBOR)

(Years)

September 30, 2021

Payer Swaptions - long

≤ 1 year

$

4,000

$

1,421

6.2

$

400,000

1.66%

3 Month

5.0

>1 year ≤ 2 years

25,390

26,630

16.1

1,027,200

2.20%

3 Month

15.0

$

29,390

$

28,051

13.3

$

1,427,200

2.05%

3 Month

12.2

Payer Swaptions - short

≤ 1 year

$

(13,400)

$

(8,063)

4.8

$

(1,182,850)

2.10%

3 Month

11.6

December 31, 2020

Payer Swaptions - long

≤ 1 year

$

3,450

$

5

2.5

$

500,000

0.95%

3 Month

4.0

>1 year ≤ 2 years

13,410

17,428

17.4

675,000

1.49%

3 Month

12.8

$

16,860

$

17,433

11.0

$

1,175,000

1.26%

3 Month

9.0

Payer Swaptions - short

≤ 1 year

$

(4,660)

$

(7,730)

5.4

$

(507,700)

1.49%

3 Month

12.8

The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2020

. There were no

outstanding TBA contracts as of September 30, 2021.

($ in thousands)

Notional

Net

Amount

Cost

Market

Carrying

Long (Short)

(1)

Basis

(2)

Value

(3)

Value

(4)

December 31, 2020

30-Year TBA securities:

2.0%

$

465,000

$

479,531

$

483,090

$

3,559

3.0%

(328,000)

(342,896)

(343,682)

(786)

Total

$

137,000

$

136,635

$

139,408

$

2,773

Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2)

Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)

Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4)

Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported

in derivative assets (liabilities) at fair value in our balance sheets.

Gain (Loss) From Derivative and Other Hedging Instruments, Net

The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of

operations for the nine and three months ended September 30, 2021 and 2020.

(in thousands)

Nine Months Ended September 30,

Three Months Ended September 30,

2021

2020

2021

2020

Eurodollar futures contracts (short positions)

$

(14)

$

(8,324)

$

(7)

$

(6)

T-Note futures contracts (short position)

866

(4,837)

581

(113)

Interest rate swaps

12,446

(67,713)

3,000

489

Payer swaptions (short positions)

3,507

(1,561)

2,295

(672)

Payer swaptions (long positions)

5,477

(3,287)

1,767

914

Interest rate floors

1,345

-

45

-

TBA securities (short positions)

864

(6,282)

(2,306)

95

TBA securities (long positions)

(8,559)

4,469

-

3,336

U.S. Treasury securities (short positions)

-

(95)

-

36

Total

$

15,932

$

(87,630)

$

5,375

$

4,079

Credit Risk-Related Contingent Features

The use of derivatives and other hedging instruments 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. We minimize this risk by limiting our 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, we may be required to pledge assets as collateral for our 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,

we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining

our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative

instruments are included in restricted cash on our balance sheets.

It is the Company's policy not to offset assets and

liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize

variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets

and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are

presented as if these derivatives had been settled as of the reporting date.