Note 5 - Derivative and Other Hedging Instruments

12 Months Ended

Dec. 31, 2024

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, 2024 and 2023.

(in thousands)
Derivative and Other Hedging Instruments	Balance Sheet Location	December 31, 2024			December 31, 2023
Assets
Interest rate swaps	Derivative assets, at fair value	$	4,574		$	6,348
Payer swaptions (long positions)	Derivative assets, at fair value		-			72
TBA securities	Derivative assets, at fair value		4,703			-
Total derivative assets, at fair value		$	9,277		$	6,420
Liabilities
TBA securities	Derivative liabilities, at fair value	$	332		$	12,694
Total derivative liabilities, at fair value		$	332		$	12,694
Margin Balances Posted to (from) Counterparties
Futures contracts	Restricted cash	$	2,625		$	4,096
TBA securities	Restricted cash		280			23,720
Interest rate swaption contracts	Restricted cash		-			580
TBA securities	Other liabilities		(4,282	)		-
Total margin balances on derivative contracts		$	(1,377	)	$	28,396

T-Note and SOFR futures are cash and securities settled futures contracts on their respective underlying or delivery eligible underlying U.S. Treasury security, 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, 2024 and 2023.

($ in thousands)
	December 31, 2024
	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 2025 5-year T-Note futures (Mar 2025 - Mar 2030 Hedge Period)	$	312,500		4.22	%		4.37	%	$	1,890
March 2025 10-year T-Note futures (Mar 2025 - Mar 2035 Hedge Period)		93,500		4.30	%		4.49	%		1,119
March 2024 10-year Ultra futures (Mar 2025 - Mar 2035 Hedge Period)		32,500		4.25	%		4.58	%		914

($ 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	)

(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 $106.30 at December 31, 2024 and $108.77 at December 31, 2023. The contract values of the short positions were $332.2 million and $458.5 million at December 31, 2024 and 2023, respectively. 10-Year T-Note futures contracts were valued at a price of $108.75, with a contract value of the short positions of $101.7 million at December 31, 2024. 10-Year Ultra futures contracts were valued at price of $111.31 at December 31, 2024 and $112.89 at December 31, 2023.  The contract value of the short positions was $36.2 million and $361.3 million at December 31, 2024 and 2023, 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, 2024 and 2023.

($ in thousands)
			Average
			Fixed			Average			Average
	Notional		Pay			Receive			Maturity
	Amount		Rate			Rate			(Years)
December 31, 2024
Expiration > 1 to ≤ 5 years	$	1,450,000		1.69	%		4.58	%		3.4
Expiration > 5 years		2,066,800		3.55	%		4.52	%		7.0
	$	3,516,800		2.78	%		4.54	%		5.5
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

Our interest rate swaps are centrally cleared through two registered commodities exchanges, the Chicago Mercantile Exchange ("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 swaption position at December 31, 2023.

($ in thousands)

Option

Underlying Swap

Weighted

Weighted

Average

Average

Adjustable

Average

Fair

Months to

Notional

Fixed

Rate

Term

Expiration

Cost

Value

Expiration

Amount

Rate

Index

(Years)

December 31, 2023

Payer Swaptions (long positions)

≤ 1 year

$

1,619

$

72

5.0

800,000

5.40

%

SOFR

1.0

We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our interest rate swaption agreements are not subject to central clearing. The difference between the premium paid and the fair value of the swaption is reported in gain (loss) on derivative and other hedging instruments in our statements of comprehensive income (loss). If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap and the premium paid.

The following table summarizes the Company's contracts to purchase and sell TBA securities as of December 31, 2024 and 2023.

($ in thousands)
	Notional									Net
	Amount			Cost			Market			Carrying
	Long (Short)(1)			Basis(2)			Value(3)			Value(4)
December 31, 2024
15-Year TBA securities:
5.0%	$	50,000		$	50,074		$	49,742		$	(332	)
30-Year TBA securities:
3.0%		(200,000	)		(174,406	)		(169,703	)		4,703
Total	$	(150,000	)	$	(124,332	)	$	(119,961	)	$	4,371
December 31, 2023
30-Year TBA securities:
2.0%	$	(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	)

(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, 2024, 2023 and 2022.

(in thousands)
	2024			2023			2022
Futures contracts (short positions)	$	26,638			32,650			206,907
Interest rate swaps		101,151			19,657			167,641
Payer swaptions (long positions)		(72	)		(8,734	)		152,365
Payer swaptions (short positions)		-			4,113			(81,050	)
Interest rate caps		-			(219	)		919
Dual digital option		(500	)		-			-
Interest rate floors (long positions)		-			1,785			-
Interest rate floors (short positions)		-			(525	)		-
TBA securities (short positions)		6,567			1,370			4,494
TBA securities (long positions)		(230	)		(4,860	)		1,200
Total	$	133,554		$	45,237		$	452,476

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.