DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

The table below summarizes fair value information about our derivative assets and liabilities as of December 31, 2020 and 2019.

(in thousands)
Derivative Instruments and Related Accounts	Balance Sheet Location	December 31, 2020		December 31, 2019
Liabilities
TBA Securities	Other liabilities	$	-	$	59
Total derivative liabilities, at fair value		$	-	$	59

Margin Balances Posted to (from) Counterparties
Futures contracts	Restricted cash	$	1	$	537
Total margin balances on derivative contracts		$	1	$	537

Eurodollar 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 December 31, 2020 and December 31, 2019.

($ in thousands)
As of December 31, 2020
		Junior Subordinated Debt Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2021	$	1,000	1.02%	0.18%	$	(8)

($ in thousands)
As of December 31, 2019
			Repurchase Agreement Funding Hedges
			Average	Weighted	Weighted
			Contract	Average	Average
			Notional	Entry	LIBOR		Open
Expiration Year			Amount	Rate	Rate		Equity⁽¹⁾
Eurodollar Futures Contracts (Short Positions)
2020		$	120,000	2.90%	1.67%	$	(1,480)
2021			80,000	2.80%	1.57%		(984)
Total / Weighted Average		$	200,000	2.86%	1.63%	$	(2,464)
Treasury Note Futures Contracts (Short Positions)⁽²⁾
	March 2020 5-year T-Note futures	$	20,000	1.96%	2.06%		88

($ in thousands)
As of December 31, 2019
		Junior Subordinated Debt Funding Hedges
		Average	Weighted	Weighted
		Contract	Average	Average
		Notional	Entry	LIBOR		Open
Expiration Year		Amount	Rate	Rate		Equity⁽¹⁾
2020	$	19,500	1.92%	1.68%	$	(46)

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

(2)T-Note futures contracts were valued at a price of $118.61 at December 31, 2019. The contract value of the short positions was $23.7 million.

The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019. There were no open TBA contracts as of December 31, 2020.

($ in thousands)
			Notional						Net
			Amount		Cost		Market		Carrying
			Long (Short)⁽¹⁾		Basis⁽²⁾		Value⁽³⁾		Value⁽⁴⁾
December 31, 2019
30-Year TBA Securities:
	3.5%	$	(50,000)	$	(51,414)	$	(51,438)	$	(24)
	4.5%		(50,000)		(52,621)		(52,656)		(35)
	Totals	$	(100,000)	$	(104,035)	$	(104,094)	$	(59)

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

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

(3)Market value represents the current market value of the TBA securities (or of the underlying Agency MBS) 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 consolidated balance sheets.

Losses on Derivative Instruments

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the years ended December 31, 2020 and 2019.

(in thousands)
			2020		2019
Eurodollar futures contracts (short positions)
	Repurchase agreement funding hedges	$	(2,328)	$	(2,709)
	Junior subordinated debt funding hedges		(517)		(390)
T-Note futures contracts (short positions)
	Repurchase agreement funding hedges		(1,007)		(522)
Net TBA securities			(1,441)		(2,197)
Losses on derivative instruments		$	(5,293)	$	(5,818)

Credit Risk-Related Contingent Features

The use of derivatives 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. The Company attempts to minimize this risk in several ways. For instruments which are not centrally cleared on a registered exchange, the Company limits it counterparties to major financial institutions with acceptable credit ratings, and by monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its 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, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty recovering its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company’s derivative instruments are included in restricted cash on the consolidated 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.