Financial Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. Specifically, the Company's primary source of financing is repurchase agreements and the Company enters into financial derivative and other instruments to manage exposure to variable cash flows on portions of its borrowings under those repurchase agreements. Since the interest rates on repurchase agreements typically change with market interest rates such as LIBOR, the Company is exposed to constantly changing interest rates, which accordingly affects cash flows associated with the Company's borrowings. To mitigate the effect of changes in these interest rates and their related cash flows, the Company may enter into a variety of derivative contracts, including interest rate swaps, futures, swaptions, and TBAs. Additionally, from time to time, the Company may use short positions in U.S. Treasury securities to mitigate its interest rate risk.

The following table details the fair value of the Company's holdings of financial derivatives as of September 30, 2018 and December 31, 2017:



	September 30, 2018			December 31, 2017
	(In thousands)
Financial derivatives–assets, at fair value:
TBA securities purchase contracts	$	33		$	26
TBA securities sale contracts	1,414			376
Fixed payer interest rate swaps	18,189			7,475
Fixed receiver interest rate swaps	—			563
Swaptions	—			181
Futures	3,413			171
Total financial derivatives–assets, at fair value	23,049			8,792
Financial derivatives–liabilities, at fair value:
TBA securities purchase contracts	(295		)	(266		)
TBA securities sale contracts	(25		)	(469		)
Fixed payer interest rate swaps	(13		)	(1,128		)
Total financial derivatives–liabilities, at fair value	(333		)	(1,863		)
Total, net	$	22,716		$	6,929

Interest Rate Swaps

The following tables provide information about the Company's fixed payer interest rate swaps as of September 30, 2018 and December 31, 2017:

September 30, 2018:



					Weighted Average
Maturity	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2020	$	86,000	$	1,529	1.60	%	2.33	%	1.57
2021	133,400		3,332		1.89		2.34		2.66
2022	68,480		2,245		2.00		2.34		3.68
2023	23,600		1,193		1.88		2.34		4.61
2024	8,900		454		1.99		2.34		5.51
2025	47,722		1,398		2.57		2.33		6.42
2026	40,885		4,189		1.63		2.34		7.96
2027	30,000		1,659		2.29		2.35		8.59
2028	126,063		1,949		2.92		2.33		9.82
2043	12,380		228		2.99		2.33		24.63
Total	$	577,430	$	18,176	2.17	%	2.33	%	5.77

December 31, 2017:



						Weighted Average
Maturity	Notional Amount		Fair Value			Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2018	$	65,990	$	187		0.97	%	1.38	%	0.43
2019	19,540		165			1.41		1.60		1.51
2020	131,900		1,514			1.60		1.41		2.39
2021	131,400		1,194			1.88		1.40		3.41
2022	79,044		736			1.97		1.39		4.48
2023	54,200		873			1.93		1.37		5.47
2024	8,900		142			1.99		1.34		6.26
2025	15,322		196			2.04		1.37		7.13
2026	40,885		2,230			1.63		1.36		8.71
2027	48,010		235			2.30		1.40		9.38
2043	12,380		(1,125		)	2.99		1.41		25.38
Total	$	607,571	$	6,347		1.77	%	1.40	%	4.54

The following table provides information about the Company's fixed receiver interest rate swaps as of December 31, 2017. The Company did not hold any fixed receiver interest rate swaps as of September 30, 2018.

December 31, 2017:



					Weighted Average
Maturity	Notional Amount		Fair Value		Pay Rate		Receive Rate		Remaining Years to Maturity
	(In thousands)
2025	$	9,700	$	563	1.36	%	3.00	%	7.54
Total	$	9,700	$	563	1.36	%	3.00	%	7.54

Interest Rate Swaptions

The following tables provide information about the Company's swaptions as of December 31, 2017. The Company did not hold any swaptions as of September 30, 2018.

December 31, 2017:



Option				Underlying Swap
Type	Fair Value		Months to Expiration	Notional Amount		Term (Years)	Fixed Rate
($ in thousands)
Fixed Payer	$	181	7.0	$	10,000	10	2.40%

Futures

The following tables provide information about the Company's short positions in futures as of September 30, 2018 and December 31, 2017.

September 30, 2018:



Description	Notional Amount			Fair Value		Remaining Months to Expiration
($ in thousands)
U.S. Treasury Futures	$	(246,700	)	$	3,413	2.92

December 31, 2017:



Description	Notional Amount			Fair Value		Remaining Months to Expiration
($ in thousands)
U.S. Treasury Futures	$	(25,800	)	$	171	2.63

TBAs

The Company transacts in the forward settling TBA market. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are generally liquid, have quoted market prices, and represent the most actively traded class of MBS. The Company primarily uses TBAs to mitigate interest rate risk, typically in the form of short positions. However, from time to time, the Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions. Overall, the Company typically holds a net short position.

The Company does not generally take delivery of TBAs; rather, it settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished.

As of September 30, 2018 and December 31, 2017, the Company had outstanding contracts to purchase ("long positions") and sell ("short positions") TBA securities as follows:



	September 30, 2018												December 31, 2017
TBA Securities	Notional Amount⁽¹⁾			Cost Basis⁽²⁾			Market Value⁽³⁾			Net Carrying Value⁽⁴⁾			Notional Amount ⁽¹⁾			Cost Basis⁽²⁾			Market Value⁽³⁾			Net Carrying Value⁽⁴⁾
(In thousands)
Purchase contracts:
Assets	$	16,800		$	16,503		$	16,536		$	33		$	37,355		$	38,065		$	38,091		$	26
Liabilities	111,229			113,076			112,781			(295		)	75,789			79,570			79,304			(266		)
	128,029			129,579			129,317			(262		)	113,144			117,635			117,395			(240		)
Sale contracts:
Assets	(343,137		)	(344,620		)	(343,206		)	1,414			(358,279		)	(372,219		)	(371,843		)	376
Liabilities	(9,811		)	(9,856		)	(9,881		)	(25		)	(328,576		)	(341,134		)	(341,603		)	(469		)
	(352,948		)	(354,476		)	(353,087		)	1,389			(686,855		)	(713,353		)	(713,446		)	(93		)
Total TBA securities, net	$	(224,919	)	$	(224,897	)	$	(223,770	)	$	1,127		$	(573,711	)	$	(595,718	)	$	(596,051	)	$	(333	)


(1)	Notional amount represents the 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 underlying Agency RMBS (on a forward delivery basis) as of period end.


(4)	Net carrying value represents the difference between the market value of the TBA contract as of period end and the cost basis and is reported in Financial derivatives-assets at fair value and Financial derivatives-liabilities at fair value on the Consolidated Balance Sheet.

The table below details the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the nine-month period ended September 30, 2018 and the year ended December 31, 2017:



Derivative Type	Nine-Month Period Ended September 30, 2018		Year Ended December 31, 2017
	(In thousands)
Interest rate swaps	$	596,159	$	549,907
TBAs	624,974		796,813
Futures	231,870		30,092
Swaptions	7,000		4,615

Gains and losses on the Company's financial derivatives for the three- and nine-month periods ended September 30, 2018 and 2017 are summarized in the tables below:



	Three-Month Period Ended September 30, 2018
Derivative Type	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps			Net Realized Gains (Losses) on Financial Derivatives			Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) on Financial Derivatives
(In thousands)
Interest rate swaps	$	1,281	$	2,096		$	3,377		$	(893	)	$	2,383		$	1,490
Swaptions			(249		)	(249		)				(221		)	(221		)
TBAs			(692		)	(692		)				2,100			2,100
Futures			1,622			1,622						1,237			1,237
Total	$	1,281	$	2,777		$	4,058		$	(893	)	$	5,499		$	4,606



	Three-Month Period Ended September 30, 2017
Derivative Type	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps			Net Realized Gains (Losses) on Financial Derivatives			Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) on Financial Derivatives
(In thousands)
Interest rate swaps	$	957	$	(76	)	$	881		$	(1,657	)	$	808		$	(849	)
Swaptions			—			—						(37		)	(37		)
TBAs			(3,475		)	(3,475		)				(179		)	(179		)
Futures			(387		)	(387		)				376			376
Total	$	957	$	(3,938	)	$	(2,981	)	$	(1,657	)	$	968		$	(689	)



	Nine-Month Period Ended September 30, 2018
Derivative Type	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps			Net Realized Gains (Losses) on Financial Derivatives			Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps		Change in Net Unrealized Gains (Losses) on Financial Derivatives
(In thousands)
Interest rate swaps	$	1,072	$	5,065		$	6,137		$	(932	)	$	12,167	$	11,235
Swaptions			(249		)	(249		)				68		68
TBAs			10,151			10,151						1,460		1,460
Futures			272			272						3,242		3,242
Total	$	1,072	$	15,239		$	16,311		$	(932	)	$	16,937	$	16,005



	Nine-Month Period Ended September 30, 2017
Derivative Type	Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps		Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps			Net Realized Gains (Losses) on Financial Derivatives			Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps			Change in Net Unrealized Gains (Losses) on Financial Derivatives
(In thousands)
Interest rate swaps	$	7	$	(71	)	$	(64	)	$	(1,801	)	$	(870	)	$	(2,671	)
Swaptions			—			—						(37		)	(37		)
TBAs			(9,363		)	(9,363		)				936			936
Futures			(1,028		)	(1,028		)				470			470
Total	$	7	$	(10,462	)	$	(10,455	)	$	(1,801	)	$	499		$	(1,302	)

From time to time, the Company uses short positions in U.S. Treasury positions as a component of its interest rate hedging portfolio. As of September 30, 2018, the Company held short positions in U.S. Treasury securities, with a principal amount of $26.8 million and a fair value of $26.4 million. As of December 31, 2017, the Company held short positions in U.S. Treasury securities, with a principal amount of $82.5 million and a fair value of $81.3 million. Such securities are included on the Company's Consolidated Balance Sheet under the caption U.S. Treasury securities sold short, at fair value.