XML 25 R14.htm IDEA: XBRL DOCUMENT v3.21.1
USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT
 3 Months Ended
Mar. 31, 2021
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT

NOTE 6 — USE OF DERIVATIVES, OFFSETTING DISCLOSURES AND CHANGES IN OTHER COMPREHENSIVE INCOME BY COMPONENT

Capstead’s portfolio of derivative financial instruments (“Derivatives”) hedge the variability of the underlying benchmark interest rate of current and forecasted 30- to 90-day secured borrowings.  The Company attempts to mitigate exposure to higher interest rates primarily by entering into SOFR- and OIS-indexed, pay-fixed, receive-variable, interest rate swap agreements for terms between eighteen months and three years. From an economic perspective, this hedge relationship establishes a relatively stable fixed rate on related borrowings because the variable-rate payments received on the swap agreements offset a portion of the interest accruing on the borrowings, leaving primarily the fixed-rate swap payments as the Company’s effective borrowing rate. Additionally, changes in fair value of these Derivatives tend to partially offset opposing changes in fair value of the Company’s residential mortgage investments that can occur in response to changes in market interest rates.

During the quarter ended March 31, 2021, Capstead entered into swap agreements with notional amounts totaling $250 million requiring fixed-rate interest payments averaging 0.26%. No swap agreements matured during the quarter ended March 31, 2021. At March 31, 2021 the Company’s swap positions related to secured borrowings had the following characteristics (dollars in thousands):

 

Period of

Contract Expiration

 

Notional

Amount

 

 

Average Fixed-Rate

Payment Requirement

 

Second quarter 2022

 

$

400,000

 

 

 

0.02

%

Third quarter 2022

 

 

1,200,000

 

 

 

0.01

 

Fourth quarter 2022

 

 

900,000

 

 

 

0.07

 

First quarter 2023

 

 

50,000

 

 

 

0.13

 

Third quarter 2023

 

 

100,000

 

 

 

0.03

 

Fourth quarter 2023

 

 

374,500

 

 

 

0.09

 

First quarter 2024

 

 

150,000

 

 

 

0.28

 

Second quarter 2024

 

 

50,000

 

 

 

0.34

 

 

 

$

3,224,500

 

 

 

 

 

The Company has three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements with notional amounts totaling $100 million and average fixed rates of 4.09% with 20-year payment terms coinciding with the floating-rate terms of the Company’s Unsecured borrowings that mature in 2035 and 2036.  These Derivatives, which are designated as cash flow hedges for accounting purposes, hedge the variability of the underlying benchmark interest rate associated with the floating-rate terms of these long-term borrowings. These Derivatives’ LIBOR-indexed receive rates match the underlying floating-rate terms of the Company’s Unsecured borrowings and therefore the eventual replacement of the LIBOR index on these Derivatives is not expected to have any financial impact.

Interest rate swap agreements are measured at fair value on a recurring basis primarily using Level 2 Inputs in accordance with ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  Fair value estimates for these Derivatives are calculated using the net discounted future fixed cash payments and the discounted future variable cash receipts which are based on expected future interest rates derived from observable market interest rate curves.  The Company also incorporates both its own nonperformance risk and its counterparties’ nonperformance risk in determining fair value.  In considering the effect of nonperformance risk, the Company considered the impact of netting and credit enhancements, such as collateral postings and guarantees, and has concluded that counterparty risk is not significant to the overall valuation.  

 

The fair value of exchange-traded swap agreements hedging Secured borrowings is calculated including accrued interest and net of variation margin amounts received or paid through the exchange, resulting in

separately presenting on the balance sheet a significantly reduced fair value amount representing the unsettled fair value of these Derivatives.  Non-exchange traded swap agreements held as cash flow hedges of Unsecured borrowings are reported at fair value calculated excluding accrued interest.  Cash collateral receivable from derivative counterparties includes initial margin for all Derivatives and variation margin for non-exchange traded Derivatives.  Accrued interest for non-exchange traded swap agreements is included in Accounts payable and accrued expenses.  

 

The following tables include fair value and other related disclosures regarding all Derivatives held as of and for the indicated periods (in thousands):

 

 

 

Balance Sheet

 

March 31

 

 

December 31

 

 

 

Location

 

2021

 

 

2020

 

Balance sheet-related

 

 

 

 

 

 

 

 

 

 

Swap agreements in a gain position (an asset) related to

   secured borrowings

 

(a)

 

$

151

 

 

$

–

 

Swap agreements in a loss position (a liability) related to

 

 

 

 

 

 

 

 

 

 

unsecured borrowings

 

(a)

 

 

(27,223

)

 

 

(41,484

)

Related net interest payable

 

(b)

 

 

(1,105

)

 

 

(597

)

 

 

 

 

$

(28,177

)

 

$

(42,081

)

(a)

The fair value of Derivatives with unrealized gains are aggregated and recorded as an asset on the face of the Balance Sheets separately from the fair value of Derivatives with unrealized losses that are recorded as a liability.

(b)

Included in “Accounts payable and accrued expenses” on the face of the Balance Sheets.

 

Location of

Gain or (Loss)

Recognized in

 

Quarter Ended March 31

 

 

Net Income

 

 

2021

 

 

 

2020

 

Income statement-related

 

 

 

 

 

 

 

 

 

Component of Secured borrowings-related effects

   on interest expense:

 

 

 

 

 

 

 

 

 

Amortization of unrealized gain, net

   of unrealized losses on de-designated

   Derivatives

 

 

$

(647

)

 

$

103

 

 

(a)

 

 

(647

)

 

 

103

 

Component of Unsecured borrowings-related

   effects on interest expense:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from Accumulated

   other comprehensive income (loss)

(b)

 

 

(969

)

 

 

(583

)

Decrease in interest expense as a result of the

   use of Derivatives

 

 

$

(1,616

)

 

$

(480

)

 

 

 

 

 

 

 

 

 

 

Realized and unrealized gain (loss) on non-designated

   Derivatives (net) related to:

 

 

 

 

 

 

 

 

 

Interest rate swap agreements

 

 

$

2,382

 

 

$

(153,224

)

Eurodollar futures

 

 

–

 

 

 

(2,515

)

 

(c)

 

$

2,382

 

 

$

(155,739

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income-related

 

 

 

 

 

 

 

 

 

Amount of gain (loss) recognized in Other

   comprehensive income

 

 

$

13,292

 

 

$

(21,251

)

 

(a)

Included in “Interest expense:  Secured borrowings” on the face of the Consolidated Statements of Operations.

 

(b)

Included in “Interest expense:  Unsecured borrowings” on the face of the Consolidated Statements of Operations.

(c)

Included in “Loss on derivative instruments (net)” on the face of the Consolidated Statement of Operations.

 

Capstead’s swap agreements and borrowings under repurchase arrangements are subject to master netting arrangements in the event of default on, or termination of, any one contract.  See NOTE 5 for more information on the Company’s use of secured borrowings.  The following tables provide disclosures concerning offsetting of financial liabilities and Derivatives as of the indicated dates (in thousands):

 

 

 

Offsetting of Derivative Assets

 

 

 

 

 

 

 

Gross

 

 

Net Amounts

 

 

Gross Amounts Not Offset

 

 

 

 

 

 

 

Gross

 

 

Amounts

 

 

of Assets

 

 

in the Balance Sheet (b)

 

 

 

 

 

 

 

Amounts of

 

 

Offset in

 

 

Presented in

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Recognized

 

 

the Balance

 

 

the Balance

 

 

Financial

 

 

Collateral

 

 

Net

 

 

 

Assets (a)

 

 

Sheet (a)

 

 

Sheet

 

 

Instruments

 

 

Received

 

 

Amount

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 4

 

$

4,949

 

 

$

(4,798

)

 

$

151

 

 

$

–

 

 

$

–

 

 

$

151

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 4

 

$

2,673

 

 

$

(2,673

)

 

$

–

 

 

$

–

 

 

$

–

 

 

$

–

 

 

(a)

Included in gross amounts of recognized assets at March 31, 2021 are the fair value of exchange-traded swap agreements, calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swaps at March 31, 2021.

(b)

Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

 

 

 

Offsetting of Financial Liabilities and Derivative Liabilities

 

 

 

 

 

 

 

Gross

 

 

Net Amounts

 

 

Gross Amounts Not Offset

 

 

 

 

 

 

 

Gross

 

 

Amounts

 

 

of Liabilities

 

 

in the Balance Sheet (c)

 

 

 

 

 

 

 

Amounts of

 

 

Offset in

 

 

Presented in

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

Recognized

 

 

the Balance

 

 

the Balance

 

 

Financial

 

 

Collateral

 

 

Net

 

 

 

Liabilities (a)

 

 

Sheet (a)

 

 

Sheet (b)

 

 

Instruments

 

 

Pledged

 

 

Amount

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives by

   counterparty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 1

 

$

28,329

 

 

$

–

 

 

$

28,329

 

 

$

–

 

 

$

(28,329

)

 

$

–

 

Counterparty 4

 

 

81

 

 

 

(81

)

 

–

 

 

–

 

 

–

 

 

–

 

 

 

 

28,410

 

 

 

(81

)

 

 

28,329

 

 

–

 

 

 

(28,329

)

 

–

 

Borrowings under

   repurchase

   arrangements (d)

 

 

6,806,138

 

 

–

 

 

 

6,806,138

 

 

 

(6,806,138

)

 

–

 

 

–

 

 

 

$

6,834,548

 

 

$

(81

)

 

$

6,834,467

 

 

$

(6,806,138

)

 

$

(28,329

)

 

$

–

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives by

   counterparty:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty 1

 

$

42,082

 

 

$

–

 

 

$

42,082

 

 

$

–

 

 

$

(42,082

)

 

$

–

 

Counterparty 4

 

 

257

 

 

 

(257

)

 

 

–

 

 

 

–

 

 

–

 

 

–

 

 

 

 

42,339

 

 

 

(257

)

 

 

42,082

 

 

 

–

 

 

 

(42,082

)

 

–

 

Borrowings under

   repurchase

   arrangements (d)

 

 

7,320,090

 

 

–

 

 

 

7,320,090

 

 

 

(7,320,090

)

 

–

 

 

–

 

 

 

$

7,362,429

 

 

$

(257

)

 

$

7,362,172

 

 

$

(7,320,090

)

 

$

(42,082

)

 

$

–

 

 

 

(a)

Included in gross amounts of recognized liabilities at March 31, 2021 is the fair value of non-exchange traded swap agreements (Counterparty 1) and exchange-traded swap agreements (Counterparty 4), calculated including accrued interest.  Included in gross amounts offset in the balance sheet are variation margin amounts associated with exchange-traded swap agreements at March 31, 2021.

(b)

Amounts presented are limited to recognized liabilities and cash collateral received associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(c)

Amounts presented are limited to recognized assets and collateral pledged associated with the indicated counterparty sufficient to reduce the related Net Amount to zero in accordance with ASU No. 2011-11, as amended by ASU No. 2013-01.

(d)

Amounts include accrued interest payable of $1.1 million and $1.0 million on borrowings under repurchase arrangements as of March 31, 2021 and December 31, 2020, respectively.

The amount of unrealized losses, net of unrealized gains, included in Accumulated other comprehensive income (loss) and scheduled to be recognized in the Consolidated Statements of Operations over the next twelve months primarily in the form of a fixed-rate swap payments in excess of current market rates on swaps related to unsecured borrowings and amortization of net unrealized losses on de-designated interest rate swaps totaled $5.4 million at March 31, 2021. Changes in Accumulated other comprehensive income  by component for the quarter ended March 31, 2021 were as follows (in thousands):

 

 

Unrealized

Gains and Losses

on Cash Flow

Hedges

 

 

Unrealized Gains

and Losses on

Available-for-Sale

Securities

 

 

Total

 

Balance at December 31, 2020

 

$

(43,667

)

 

$

84,551

 

 

$

40,884

 

Activity for the quarter ended March 31, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications

 

 

13,292

 

 

 

(21,483

)

 

 

(8,191

)

Amounts reclassified from accumulated

   other comprehensive income (loss)

 

 

1,616

 

 

–

 

 

 

1,616

 

Other comprehensive income (loss)

 

 

14,908

 

 

 

(21,483

)

 

 

(6,575

)

Balance at March 31, 2021

 

$

(28,759

)

 

$

63,068

 

 

$

34,309