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Note 5 - Derivative and Other Hedging Instruments

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 5. 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, 2023 and 2022.

(in thousands)
Derivative and Other Hedging Instruments	*Balance Sheet Location*		*December 31, 2023*				*December 31, 2022*
Assets
Interest rate swaps	Derivative assets, at fair value		$	6,348			$	4,983
Payer swaptions (long positions)	Derivative assets, at fair value			72				33,398
Interest rate caps	Derivative assets, at fair value			-				1,119
TBA securities	Derivative assets, at fair value			-				672
Total derivative assets, at fair value			$	6,420			$	40,172

Liabilities
Interest rate swaps	Derivative liabilities, at fair value		$	-			$	-
Payer swaptions (short positions)	Derivative liabilities, at fair value			-				5,982
TBA securities	Derivative liabilities, at fair value			12,694				1,179
Total derivative liabilities, at fair value			$	12,694			$	7,161

Margin Balances Posted to (from) Counterparties
Futures contracts	Restricted cash		$	4,096			$	16,493
TBA securities	Restricted cash			23,720				1,734
Interest rate swaption contracts	Restricted cash			580				-
TBA securities	Other liabilities			-				(532	)
Interest rate swaption contracts	Other liabilities			-				(12,489	)
Total margin balances on derivative contracts			$	28,396			$	5,206

T-Note and SOFR 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 and SOFR futures positions at December 31, 2023 and 2022.

($ in thousands)
		*December 31, 2023*
		*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 2024 5-year T-Note futures (Mar 2024 - Mar 2029 Hedge Period)		$	421,500				4.36	%			4.04	%		$	(9,936	)
March 2024 10-year Ultra futures (Mar 2024 - Mar 2034 Hedge Period)			320,000				4.38	%			4.39	%		$	(11,393	)
SOFR Futures Contracts (Short Positions)
June 2024 3-Month SOFR futures (Mar 2024 - Jun 2024 Hedge Period)		$	25,000				5.08	%			4.99	%		$	(24	)
September 2024 3-Month SOFR futures (Jun 2024 - Sep 2024 Hedge Period)			25,000				4.67	%			4.52	%		$	(39	)
December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period)			25,000				4.27	%			4.10	%		$	(44	)
March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period)			25,000				3.90	%			3.73	%		$	(43	)
June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period)			25,000				3.58	%			3.42	%		$	(41	)
September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period)			25,000				3.37	%			3.21	%		$	(39	)
December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period)			25,000				3.25	%			3.10	%		$	(37	)
March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period)			25,000				3.21	%			3.07	%		$	(35	)

($ 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 Position)⁽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

(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 $108.77 at December 31, 2023 and $107.93 at December 31, 2022. The contract values of the short positions were $458.5 million and $810.0 million at December 31, 2023 and 2022, respectively. 10-Year Ultra futures contracts were valued at price of $112.89 at December 31, 2023 and $118.28 at December 31, 2022. The contract value of the short positions was $361.3 million and $206.4 million at December 31, 2023 and 2022, 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 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 margin on its interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at December 31, 2023 and 2022.

($ in thousands)
						*Average*
						*Fixed*				*Average*				*Average*
		*Notional*				*Pay*				*Receive*				*Maturity*
		*Amount*				*Rate*				*Rate*				*(Years)*
December 31, 2023
Expiration > 1 to ≤ 5 years		$	500,000				0.84	%			5.64	%			2.7
Expiration > 5 years			1,826,500				2.62	%			5.40	%			6.8
		$	2,326,500				2.24	%			5.45	%			5.9
December 31, 2022
Expiration > 1 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

As of December 31, 2023, the table above includes swaps with aggregate notional amounts of $274.0 million that begin accruing interest February 24, 2024 with a weighted fixed pay rate of 3.43% and a receive rate indexed to overnight SOFR. In accordance with procedures prescribed by the Chicago Mercantile Exchange ("CME"), all of the Company’s remaining LIBOR interest rate swaps cleared through the CME were converted into SOFR interest rate swaps, effective September 10, 2023.

Our interest rate swaps are centrally cleared through two registered commodities exchanges, the CME and the London Clearing House (“LCH”). The clearing exchanges require 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, 2023.

($ 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, 2023 and 2022.

($ in thousands)
		*Option*												*Underlying Swap*
										*Weighted*													*Weighted*
										*Average*								*Average*			*Average*		*Average*
						*Fair*				*Months to*				*Notional*				*Fixed*			*Adjustable*		*Term*
Expiration		*Cost*				*Value*				*Expiration*				*Amount*				*Rate*			*Rate*		*(Years)*
December 31, 2023
Payer Swaptions (long positions)
≤ 1 year		$	1,619			$	72				5.0				800,000				5.40	%	SOFR			1.0
December 31, 2022
Payer Swaptions (long positions)
≤ 1 year		$	36,685			$	21,253				9.6				1,250,000				4.09	%	SOFR			10.0
> 1 year ≤ 2 years			11,021				12,145				239.5				120,000				2.05	%	SOFR			10.0
		$	47,706			$	33,398				29.8			$	1,370,000				3.91	%	SOFR			10.0
Payer Swaptions (short positions)
≤ 1 year		$	(17,800	)		$	(5,982	)			3.6			$	(917,000	)			4.09	%	SOFR			10.0

The following table summarizes the Company's contracts to purchase and sell TBA securities as of December 31, 2023 and 2022.

($ in thousands)
		*Notional*												*Net*
		*Amount*				*Cost*				*Market*				*Carrying*
		*Long (Short)(1)*				*Basis(2)*				*Value(3)*				*Value(4)*
December 31, 2023
*30-Year TBA securities:*
3.0%		$	(70,700	)		$	(59,278	)		$	(62,647	)		$	(3,369	)
5.0%			(250,000	)			(242,725	)			(247,657	)			(4,932	)
5.5%			(325,000	)			(322,410	)			(326,803	)			(4,393	)
Total		$	(645,700	)		$	(624,413	)		$	(637,107	)		$	(12,694	)
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	)

(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 comprehensive income (loss) for the years ended December 31, 2023, 2022 and 2021.

(in thousands)
		*2023*				*2022*				*2021*
Futures contracts (short positions)		$	32,650				206,907				(1,026	)
Interest rate swaps			19,657				167,641				23,398
Payer swaptions (long positions)			(8,734	)			152,365				(2,580	)
Payer swaptions (short positions)			4,113				(81,050	)			9,062
Interest rate caps			(219	)			919				-
Interest rate floors (long positions)			1,785				-				2,765
Interest rate floors (short positions)			(525	)			-				-
TBA securities (short positions)			1,370				4,494				3,432
TBA securities (long positions)			(4,860	)			1,200				(8,559	)
Total		$	45,237			$	452,476			$	26,492

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 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 or LCH serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.