Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments [Abstract]

Derivative Instruments

8. Derivative Instruments

Interest Rate Swap Agreements

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. These agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company's effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates.

     The Company's interest rate swap agreements have not been designated as hedging instruments.

TBA Securities

     The Company enters into TBA contracts as a means of acquiring exposure to Agency RMBS and may, from time to time, utilize TBA dollar roll transactions to finance Agency RMBS purchases. The Company may also enter into TBA contracts as a means of hedging against short-term changes in interest rates. The Company accounts for its TBA contracts as derivative instruments due to the fact that it does not intend to take physical delivery of the securities.

The following table summarizes information related to derivative instruments:

	September 30,		December 31,
Non-hedge derivatives	2013		2012
Notional amount of interest rate swaps	$	17,200,000	$	32,600,000
Notional amount of TBAs		-		-
Total notional amount	$	17,200,000	$	32,600,000

During the three months ended September 30, 2013, the Company paired off purchases of TBA securities with a combined notional amount of $170.0 million by entering into simultaneous sales of TBA securities and recognized realized losses of $3.0 million and a change in unrealized gains or losses of $2.5 million as a result. During the nine months ended September 30, 2013, the Company paired off purchases of TBA securities with a combined notional amount of $643.0 million by entering into simultaneous sales of TBA securities and realized losses of $4.2 million and recognized a change in unrealized gains or losses of $0.5 million as a result.

The following table presents the fair value of the Company's derivative instruments and their balance sheet location:

			September 30,			December 31,
Derivative instruments	Designation	Balance Sheet Location	2013			2012
Interest rate swaps	Non-hedge	Derivative liabilities, at fair value	$	(52,457	)	$	(1,144,744	)
TBAs(1)	Non-hedge	Derivative liabilities, at fair value	$	(544,531	)	$	-

____________________
 

(1) At September 30, 2013 the Company has no remaining exposure to TBA contracts as all open contracts had been paired off. The related derivative liability at September 30, 2013 represents settlement amounts to be paid subsequent to September 30, 2013.

The following table summarizes gains and losses related to derivatives:

		Three Months Ended						Nine Months Ended
Non-hedge		September 30,			September 30,			September 30,			September 30,
derivatives	Income Statement Location	2013			2012			2013			2012
Interest rate swaps	Gain/(loss) on derivative instruments	$	2,058,737		$	(362,681	)	$	10,275,664		$	(1,118,633	)
TBAs(1)	Gain/(loss) on derivative instruments		(548,594	)		-			(4,785,996	)		-

____________________
 

(1) For the three and nine month periods ended September 30, 2013, gains and losses from purchases and sales of TBAs consist of $0.2 million and $1.3 million, respectively, of net TBA dollar roll net interest income and net losses of $0.8 million and $6.0 million, respectively, due to price declines.

The following table presents information about the Company's interest rate swap agreements as of September 30, 2013:

			Weighted		Weighted		Weighted
			Average Pay		Average Receive		Average Years to
Maturity	Notional Amount		Rate		Rate		Maturity
2023	$	17,200,000	2.72	%	0.26	%	9.8
Total/Weighted average	$	17,200,000	2.72	%	0.26	%	9.8

The following table presents information about the Company's interest rate swap agreements as of December 31, 2012:

			Weighted Average		Weighted Average		Weighted Average
Maturity	Notional Amount		Pay Rate		Receive Rate		Years to Maturity
2016	$	12,102,000	1.21	%	0.31	%	3.7
2017		11,050,000	1.28		0.31		4.3
2021		9,448,000	2.16		0.31		8.7
Total/Weighted average	$	32,600,000	1.51	%	0.31	%	5.3

Restricted cash at September 30, 2013 included $0.3 million of cash pledged as collateral against TBA contracts and $0.9 million of cash pledged as collateral against interest rate swap agreements. Restricted cash at December 31, 2012 included $2.4 million of cash pledged as collateral against interest rate swaps.