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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2014
Derivative Financial Instruments |
Derivative Financial Instruments | Note 8 — Derivative Financial Instruments The following is a summary of the derivative financial instruments held by the Company as of September 30, 2014 and December 31, 2013 (dollars in thousands):
|  |  |  | Notional Value |  |  |  | Balance |  | Fair Value |
Designation\ Cash Flow |  | Derivative |  | Count |  | September 30, 2014 |  | Count |  | December 31, 2013 |  | Expiration Date |  | Sheet Location |  | September 30, 2014 |  | December 31, 2013 |
Non- Qualifying |  | Basis Swaps |  | 1 |  | $ | 3,000 |  | 1 |  | $ | 11,600 |  | 2015 |  | Other Assets |  | $ | 3 |  | $ | 5 |
Non- Qualifying |  | LIBOR Cap |  | 1 |  | $ | 71,701 |  | — |  | $ | — |  | 2015 |  | Other Assets |  | $ | — |  | $ | — |
Qualifying |  | Interest Rate Swaps |  | 12 |  | $ | 250,377 |  | 14 |  | $ | 297,532 |  | 2015 - 2017 |  | Other Liabilities |  | $ | (16,335 | ) | $ | (24,794 | )
Non- Qualifying |  | Forward Contracts |  | — |  | $ | — |  | 8 |  | $ | — |  | — |  | Other Assets |  | $ | — |  | $ | 6,397 |
The Non-Qualifying Basis Swaps Hedges are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet hedge accounting requirements. The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates and uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. These interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. During the nine months ended September 30, 2014, the notional value on a basis swap decreased by approximately $8.6 million pursuant to the contractual terms of the respective swap agreement. During the nine months ended September 30, 2013, seven basis swaps matured with a combined notional value of approximately $499.4 million and the notional value of one basis swap decreased by approximately $92.6 million pursuant to the contractual terms of the respective swap agreement. The Company entered into a non-qualifying LIBOR Cap Hedge in the first quarter of 2014 due to a loan agreement requiring a LIBOR Cap of 6%. A Non-Qualifying LIBOR Cap Hedge with a notional value of approximately $6.0 million also matured during the nine months ended September 30, 2013. For the three months ended September 30, 2014 and 2013, the change in fair value of the Non-Qualifying Basis Swaps and LIBOR Cap was less than $(0.1) million, and for the nine months ended September 30, 2014 and 2013, the change in fair value of the Non-Qualifying Basis Swaps and LIBOR Cap was less than $(0.1) million and $(0.1) million, respectively, and was recorded in interest expense on the Consolidated Statements of Income. The change in the fair value of Qualifying Interest Rate Swap Cash Flow Hedges was recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets. These interest rate swaps are used to hedge the variable cash flows associated with existing variable-rate debt, and amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the nine months ended September 30, 2014, two interest rate swaps matured with a combined notional value of approximately $32.0 million and the notional value on an interest rate swap decreased by approximately $15.0 million pursuant to the contractual terms of the respective swap agreement. During the nine months ended September 30, 2013, the notional value on an interest rate swap decreased by approximately $14.5 million pursuant to the contractual terms of the respective swap agreement. A Qualifying LIBOR Cap Hedge with a notional value of approximately $73.3 million also matured during the nine months ended September 30, 2013. As of September 30, 2014, the Company expects to reclassify approximately $(10.5) million of other comprehensive loss from Qualifying Cash Flow Hedges to interest expense over the next twelve months assuming interest rates on that date are held constant. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment. Gains and losses on terminated swaps are being deferred and recognized in earnings over the original life of the hedged item. As of September 30, 2014 and December 31, 2013, the Company has a net deferred loss of $1.2 million and $1.6 million, respectively, in accumulated other comprehensive loss, related to these terminated swap agreements. The Company recorded $0.2 million as additional interest expense related to the amortization of the loss for both the three months ended September 30, 2014 and 2013, and $0.1 million as a reduction to interest expense related to the accretion of the net gains for both the three months ended September 30, 2014 and 2013. The Company recorded $0.5 million and $0.6 million as additional interest expense related to the amortization of the loss for the nine months ended September 30, 2014 and 2013, respectively, and $0.2 million as a reduction to interest expense related to the accretion of the net gains for both the nine months ended September 30, 2014 and 2013. The Company expects to record approximately $0.5 million of net deferred loss to interest expense over the next twelve months. The fair value of Non-Qualifying Forward Contracts was $6.4 million as of December 31, 2013 and was recorded in other assets on the Consolidated Balance Sheets and consisted of $66.0 million of RMBS investments, which is net of $1.5 million of net unrealized losses in fair value, and $59.6 million of repurchase financing. The RMBS investments were financed with repurchase agreements and were accounted for as linked transactions, which are considered forward contracts. The repurchase agreements generally financed 80% - 90% of the purchase and bore interest at a rate of 125 to 175 basis points over LIBOR. During the nine months ended September 30, 2014, the Company sold the eight remaining RMBS investments, which were accounted for as linked transactions, with an aggregate carrying value of $65.7 million for approximately $65.8 million and recorded a net gain of $0.1 million related to the settlement of these linked transactions. During the nine months ended September 30, 2014, the Company received total principal paydowns on the RMBS of $2.7 million and paid down the associated repurchase agreements by $4.2 million, which includes a decreased in the amount financed on the repurchase agreements of $1.7 million. The eight RMBS investments were financed with repurchase agreements totaling $55.4 million which were repaid with the proceeds. For the nine months ended September 30, 2014, $0.3 million of net interest income and a less than $0.1 million decrease in fair value was recorded to other income in the Consolidated Statements of Income. For the nine months ended September 30, 2013, $1.6 million of net interest income and a $1.7 million decrease in fair value was recorded to other income in the Consolidated Statements of Income. The following table presents the effect of the Company’s derivative financial instruments on the Statements of Income as of September 30, 2014 and 2013 (dollars in thousands):
|  |  |  | Amount of Loss Recognized in Other Comprehensive Loss (Effective Portion) For the Nine Months Ended |  | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Interest Expense (Effective Portion) For the Nine Months Ended |  | Amount of Gain (Loss) Recognized in Interest Expense (Ineffective Portion) For the Nine Months Ended |  | Amount of Loss Recognized in Other Income For the Nine Months Ended |
Designation \Cash Flow |  | Derivative |  | September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013 |  | September 30, 2014 |  | September 30, 2013 |
Non- Qualifying |  | Basis Swaps |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 1 |  | $ | (11 | ) | $ | — |  | $ | — |
Qualifying |  | Interest Rate Swaps |  | $ | 813 |  | $ | 98 |  | $ | (9,615 | ) | $ | (10,564 | ) | $ | — |  | $ | — |  | $ | — |  | $ | — |
Non- Qualifying |  | Forward Contracts |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | (45 | ) | $ | (1,688 | )
The cumulative amount of other comprehensive loss related to net unrealized losses on derivatives designated as qualifying hedges as of September 30, 2014 and December 31, 2013 of approximately $(17.5) million and approximately $(26.3) million, respectively, is a combination of the fair value of qualifying cash flow hedges of $(16.3) million and $(24.8) million, respectively, deferred losses on terminated interest swaps of $(1.4) million and $(1.9) million, respectively, and deferred net gains on termination of interest swaps of $0.2 million and $0.3 million, respectively. The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of September 30, 2014 and December 31, 2013, the fair value of derivatives in a net liability position, which includes accrued interest, was $(10.2) million and $(13.8) million, respectively. As of September 30, 2014 and December 31, 2013, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $10.6 million and $14.2 million, respectively, which is recorded in other assets in the Company’s Consolidated Balance Sheets.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5618551-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708775-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624181-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624163-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5708773-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624177-113959 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579245-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5580258-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5579240-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41641-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35706170&loc=d3e41638-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=35706170&loc=SL5624171-113959 + Details
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