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Note 4 - Derivative and Other Hedging Instruments

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

The table below summarizes fair value information about the Company's derivative and other hedging instruments assets and liabilities as of December 31, 2022 and 2021.

(in thousands)
Derivative and Other Hedging Instruments	*Balance Sheet Location*		*December 31, 2022*				*December 31, 2021*
Assets
Interest rate swaps	Derivative assets, at fair value		$	4,983			$	29,293
Payer swaptions (long positions)	Derivative assets, at fair value			33,398				21,493
Interest rate caps	Derivative assets, at fair value			1,119				-
TBA securities	Derivative assets, at fair value			672				-
Total derivative assets, at fair value			$	40,172			$	50,786

Liabilities
Interest rate swaps	Derivative liabilities, at fair value		$	-			$	2,862
Payer swaptions (short positions)	Derivative liabilities, at fair value			5,982				4,423
TBA securities	Derivative liabilities, at fair value			1,179				304
Total derivative liabilities, at fair value			$	7,161			$	7,589

Margin Balances Posted to (from) Counterparties
Futures contracts	Restricted cash		$	16,493			$	8,035
TBA securities	Restricted cash			1,734				-
TBA securities	Other liabilities			(532	)			(856	)
Interest rate swaption contracts	Other liabilities			(12,489	)			(6,350	)
Interest rate swap contracts	Other liabilities			-				-
Total margin balances on derivative contracts			$	5,206			$	829

Eurodollar, Fed Funds 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 T-Note futures positions at December 31, 2022 and 2021.

($ in thousands)
		*December 31, 2022*
		*Average*				*Weighted*				*Weighted*
		*Contract*				*Average*				*Average*
		*Notional*				*Entry*				*Effective*				*Open*
Expiration Year		*Amount*				*Rate*				*Rate*				*Equity(1)*
U.S. Treasury Note Futures Contracts (Short Positions)⁽²⁾
March 2023 5-year T-Note futures (Mar 2023 - Mar 2028 Hedge Period)		$	750,500				4.20	%			4.22	%		$	(100	)
March 2023 10-year Ultra futures (Mar 2023 - Mar 2033 Hedge Period)		$	174,500				3.66	%			3.79	%		$	965

($ in thousands)
		*December 31, 2021*
		*Average*				*Weighted*				*Weighted*
		*Contract*				*Average*				*Average*
		*Notional*				*Entry*				*Effective*				*Open*
Expiration Year		*Amount*				*Rate*				*Rate*				*Equity(1)*
U.S. Treasury Note Futures Contracts (Short Position)⁽²⁾
March 2022 5-year T-Note futures (Mar 2022 - Mar 2027 Hedge Period)		$	369,000				1.56	%			1.62	%		$	1,013
March 2022 10-year Ultra futures (Mar 2022 - Mar 2032 Hedge Period)		$	220,000				1.22	%			1.09	%		$	(3,861	)

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

(2)

5-Year T-Note futures contracts were valued at a price of $107.93 at December 31, 2022 and $120.98 at December 31, 2021. The contract values of the short positions were $810.0 million and $446.4 million at December 31, 2022 and 2021, respectively. 10-Year Ultra futures contracts were valued at price of $118.28 at December 31, 2022 and $146.44 at December 31, 2021. The contract value of the short positions was $206.4 million and $322.2 million at December 31, 2022 and 2021, respectively.

Under its interest rate swap agreements, the Company typically pays a fixed rate and receives a floating rate ("payer swaps") based on an index, such as the London Interbank Offered Rate ("LIBOR") and the Secured Overnight Financing Rate ("SOFR). The floating rate the Company receives under its swap agreements has the effect of offsetting the repricing characteristics of its repurchase agreements and cash flows on such liabilities. The Company is typically required to post collateral on its interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at December 31, 2022 and 2021.

($ in thousands)
						Average
						Fixed				Average				Average
		*Notional*				*Pay*				*Receive*				*Maturity*
		*Amount*				*Rate*				*Rate*				*(Years)*
December 31, 2022
Expiration > 3 to ≤ 5 years		$	500,000				0.84	%			4.75	%			3.7
Expiration > 5 years		$	900,000				1.70	%			4.23	%			6.6
		$	1,400,000				1.39	%			4.41	%			5.6
December 31, 2021
Expiration > 3 to ≤ 5 years		$	955,000				0.64	%			0.16	%			4.0
Expiration > 5 years		$	400,000				1.16	%			0.21	%			7.3
		$	1,355,000				0.79	%			0.18	%			5.0

Our interest rate swaps are centrally cleared through a two registered commodities exchanges, Chicago Mercantile Exchange ("CME") and the London Clearing House (“LCH”). The clearing exchanges requires that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.

The table below presents information related to the Company's interest rate cap positions at December 31, 2022. The Company had no interest rate cap positions in place at December 31, 2021.

($ in thousands)

Net

Strike

Estimated

Notional

Swap

Curve

Fair

Expiration

Amount

Cost

Rate

Spread

Value

February 8, 2024

$

200,000

$

1,450

0.09

%

2Y10Y

$

1,119

The table below presents information related to the Company’s interest rate swaption positions at December 31, 2022 and 2021.

($ in thousands)
		*Option*												*Underlying Swap*
										*Weighted*											*Average*		*Weighted*
										*Average*								*Average*			*Adjustable*		*Average*
						*Fair*				*Months to*				*Notional*				*Fixed*			*Rate*		*Term*
Expiration		*Cost*				*Value*				*Expiration*				*Amount*				*Rate*			*(LIBOR)*		*(Years)*
December 31, 2022
Payer Swaptions (long positions)
≤ 1 year		$	36,685			$	21,253				9.6				1,250,000				4.09	%	3 Month			10.0
> 10 years		$	11,021			$	12,145				239.5				120,000				2.05	%	3 Month			10.0
		$	47,706			$	33,398				29.8			$	1,370,000				3.91	%	3 Month			10.0
Payer Swaptions (short positions)
≤ 1 year		$	(17,800	)		$	(5,982	)			3.6			$	(917,000	)			4.09	%	3 Month			10.0
December 31, 2021
Payer Swaptions (long positions)
≤ 1 year		$	4,000			$	1,575				3.2				400,000				1.66	%	3 Month			5.0
> 1 year ≤ 2 years			32,690				19,918				18.4				1,258,500				2.46	%	3 Month			14.1
		$	36,690			$	21,493				14.7			$	1,658,500				2.27	%	3 Month			11.9
Payer Swaptions (short positions)
≤ 1 year		$	(16,185	)		$	(4,423	)			5.3			$	(1,331,500	)			2.29	%	3 Month			11.4

The following table summarizes the Company's contracts to purchase and sell TBA securities as of December 31, 2022 and 2021.

($ in thousands)
			Notional												Net
			Amount				Cost				Market				Carrying
			Long (Short)⁽¹⁾				Basis⁽²⁾				Value⁽³⁾				Value⁽⁴⁾
December 31, 2022
*30-Year TBA securities:*
2.0%			$	(175,000	)		$	(142,268	)		$	(143,145	)		$	(877	)
3.0%				(500,000	)			(440,644	)			(440,274	)			370
Total			$	(675,000	)		$	(582,912	)		$	(583,419	)		$	(507	)
December 31, 2021
*30-Year TBA securities:*
3.0%			$	(575,000	)		$	(595,630	)		$	(595,934	)		$	(304	)
Total			$	(575,000	)		$	(595,630	)		$	(595,934	)		$	(304	)

(1)	Notional amount represents the par value (or 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 TBA securities (or of the underlying Agency RMBS) 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 the balance sheets.

Gain (Loss) From Derivative and Other Hedging Instruments, Net

The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for the years ended December 31, 2022, 2021 and 2020.

(in thousands)
		*2022*				*2021*				*2020*
U.S. Treasury Note futures contracts (short position)		$	207,511			$	(846	)		$	(4,707	)
Eurodollar futures contracts (short positions)			-				(10	)			(8,337	)
Interest rate swaps			170,297				23,613				(66,212	)
Payer swaptions (long positions)			152,365				(2,580	)			98
Payer swaptions (short positions)			(81,050	)			9,062				(3,070	)
Interest rate caps			919				-				-
Interest rate floors			-				2,765				-
TBA securities (short positions)			4,494				3,432				(6,719	)
TBA securities (long positions)			1,200				(8,559	)			9,950
U.S. Treasury securities (short positions)			-				-				(95	)
Total		$	455,736			$	26,877			$	(79,092	)

Credit Risk-Related Contingent Features

The use of derivatives and other hedging instruments 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 by limiting its counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and 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 obtaining 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 its balance sheets.

It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, CME, Intercontinental Exchange ("ICE"), and LCH 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, ICE, or LCH serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.