Derivative Instruments

3 Months Ended

Mar. 31, 2017

Derivative Instruments [Abstract]

Derivative Instruments

Note 8 — Derivative Instruments

Interest Rate Swap Agreements, Swaptions, TBAs and Treasury Futures

In order to help mitigate exposure to higher short-term interest rates in connection with its repurchase agreements, the Company enters into 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. A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. The Company’s interest rate swap agreements and swaptions have not been designated as qualifying hedging instruments for GAAP purposes.

In order to help mitigate duration risk and basis risk management, the Company utilizes Treasury futures and forward-settling purchases and sales of RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular RMBS to be delivered is not identified until shortly before the TBA settlement date.

The following table summarizes the outstanding notional amounts of derivative instruments as of the dates indicated (dollars in thousands):

Non-hedge derivatives	March 31, 2017		December 31, 2016
Notional amount of interest rate swaps	$	609,950	$	415,850
Notional amount of swaptions		80,000		70,000
Notional amount of TBAs, net		-		(6,000	)
Notional amount of Treasury futures		37,500		50,000
Notional amount of options on Treasury futures		15,000		20,000
Total notional amount	$	742,450	$	549,850

The following table presents information about the Company’s interest rate swap agreements as of the dates indicated (dollars in thousands):

	Notional Amount		Weighted Average Pay Rate			Weighted Average Receive Rate			Weighted Average Years to Maturity
March 31, 2017	$	609,950		1.70	%		1.07	%		5.5
December 31, 2016	$	415,850		1.46	%		0.90	%		4.8

The following table presents information about the Company’s interest rate swaption agreements as of the dates indicated (dollars in thousands):

	Notional Amount		Weighted Average Pay Rate			Weighted Average Receive Rate(A)			Weighted Average Years to Maturity
March 31, 2017	$	80,000		2.76	%		LIBOR-BBA	%		10.9
December 31, 2016	$	70,000		2.74	%		LIBOR-BBA	%		10.9

(A) Floats in accordance with LIBOR.

The following table presents information about derivatives realized gain (loss), which is included on the consolidated statement of income (loss) for the periods indicated (dollars in thousands):

Realized Gains (Losses) on Derivatives

		Three Months Ended March 31,
Non-Hedge Derivatives	Income Statement Location	2017			2016
Interest rate swaps	Realized gain (loss) on derivatives, net	$	(159	)	$	(1,350	)
Swaptions	Realized gain (loss) on derivatives, net		(69	)		-
TBAs	Realized gain (loss) on derivatives, net		(112	)		(82	)
Treasury futures	Realized gain (loss) on derivatives, net		(677	)		(29	)
Total		$	(1,017	)	$	(1,461	)

Offsetting Assets and Liabilities

The Company has netting arrangements in place with all of its derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association (“ISDA”). Under GAAP, if the Company has a valid right of offset, it may offset the related asset and liability and report the net amount. The Company presents interest rate swaps, swaptions and Treasury futures assets and liabilities on a gross basis in its consolidated balance sheets. The Company presents TBA assets and liabilities on a net basis in its consolidated balance sheets. The Company presents repurchase agreements in this section even though they are not derivatives because they are subject to master netting arrangements. However, repurchase agreements are presented on a gross basis. Additionally, the Company does not offset financial assets and liabilities with the associated cash collateral on the consolidated balance sheets.

The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s consolidated balance sheets as of the dates indicated (dollars in thousands):

Offsetting Assets and Liabilities

As of March 31, 2017

	Gross		Gross Amounts		Net Amounts of Assets Presented in		Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts of Recognized Assets or Liabilities		Offset in the Consolidated Balance Sheet		the Consolidated Balance Sheet		Financial Instruments			Cash Collateral Received (Pledged)		Net Amount
Assets
Interest rate swaps	$	8,240	$	-	$	8,240	$	(8,240	)	$	-	$	-
Swaptions		1,300		-		1,300		(1,300	)		-		-
Total Assets	$	9,540	$	-	$	9,540	$	(9,540	)	$	-	$	-

Liabilities
Repurchase agreements	$	773,317	$	-	$	773,317	$	(767,450	)	$	(5,867	)	$	-
Interest rate swaps		413		-		413		-			(413	)		-
TBAs		83		-		83		(83	)		-			-
Treasury futures		144		-		144		661			(805	)		-
Total Liabilities	$	773,957	$	-	$	773,957	$	(766,872	)	$	(7,085	)	$	-

As of December 31, 2016

	Gross		Gross Amounts		Net Amounts of Assets Presented in		Gross Amounts Not Offset in the Consolidated Balance Sheet
	Amounts of Recognized Assets or Liabilities		Offset in the Consolidated Balance Sheet		the Consolidated Balance Sheet		Financial Instruments			Cash Collateral Received (Pledged)		Net Amount
Assets
Interest rate swaps	$	7,639	$	-	$	7,639	$	(7,639	)	$	-	$	-
Swaptions		1,482		-		1,482		(1,482	)		-		-
Total Assets	$	9,121	$	-	$	9,121	$	(9,121	)	$	-	$	-

Liabilities
Repurchase agreements	$	594,615	$	-	$	594,615	$	(574,181	)	$	(20,434	)	$	-
Interest rate swaps		339		-		339		-			(339	)		-
TBAs		75		-		75		(75	)		-			-
Treasury futures		280		-		280		526			(806	)		-
Total Liabilities	$	595,309	$	-	$	595,309	$	(573,730	)	$	(21,579	)	$	-