Note 10 - Collateralized Securities Transactions

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

Repurchase Agreements, Resale Agreements, Securities Borrowed, and Securities Loaned Disclosure [Text Block]

10. COLLATERALIZED SECURITIES TRANSACTIONS

Matched Book Repo Business

The Company enters into repos and reverse repos as part of its matched book repo business.  In general, the Company will lend money to a counterparty after obtaining collateral securities from that counterparty pursuant to a reverse repo.  The Company will borrow money from another counterparty using the same collateral securities pursuant to a repo.  The Company seeks to earn net interest income on these transactions. Until the fourth quarter 2021, the Company categorized its matched book repo business into two major groups: gestation repo and GCF repo.  In the fourth quarter 2021, the Company wound down its GCF repo business.  

GCF Repo 

In October 2017, the Company became a full netting member of the FICC’s Government Securities Division.  As a full netting member of the FICC, the Company had access to the FICC’s GCF repo service that provides netting and settlement services for repo transactions where the underlying security is general collateral (primarily U.S. Treasuries and U.S. Agency securities).  The Company began entering into matched book GCF repo transactions in November 2017.  The borrowers (the reverse repo counterparties) are a diverse group of financial institutions including hedge funds, registered investment funds, REITs, and other similar counterparties.  The lenders (the repo counterparties) are the FICC and other large financial institutions. The Company used Bank of New York (“BONY”) as its settlement agent for its GCF repo matched book transactions.  The Company was considered self-clearing for this business.  In connection with the Company’s full netting membership of the FICC, the Company agreed to establish and maintain a committed line of credit in a minimum amount of $25,000, which it entered into with Fifth Third Financial Bank, N.A. (“FT Financial”) on April 25, 2018.  The FT Financial line of credit arrangement was subsequently amended. In October 2020, the Company entered into a replacement credit agreement with Byline Bank, which was subsequently amended in December 2021.  See note 16.

 In October 2021, primarily due to reduced spreads in the repo market for GCF collateral, the Company decided to wind down this business which was completed by December 31, 2021.  As of   June 30, 2022, the carrying value of the Company's GCF reverse repurchase agreements and repurchase agreements were zero.

In conjunction with the Company’s GCF repo business, on October 19, 2018, the Company and BONY entered into an intraday lending facility.  The lending facility allowed for BONY to advance funds to JVB in order to facilitate the settlement of GCF repo transactions. In conjunction with the wind down of the GCF Repo business, the Company terminated this facility during 2021.

Gestation Repo 

Gestation repo involves entering into repo and reverse repo where the underlying collateral security represents a pool of newly issued mortgage loans.  The borrowers (the reverse repo counterparties) are generally mortgage originators.  The lenders (the repo counterparties) are a diverse group of the counterparties comprised of banks, insurance companies, and other financial institutions.  The Company self-clears its gestation repo transactions.

Gestation trades can be structured in two ways: (i) on balance sheet trades and (ii) agency trades.  For on balance sheet trades, the Company borrows from one counterparty and lends to another on a principal basis and earns net interest margin.  For agency repo trades, the Company gets paid a fee, which is paid by the borrower and is a function of the reverse repo notional amount.  

Bankruptcy of Gestation Counterparty

As of June 30, 2022, the Company had an outstanding reverse repo balance with First Guaranty Mortgage Corporation ("FGMC") of $269,228.  Effective June 30, 2022, FGMC filed for Chapter 11 bankruptcy.  Subsequent to June 30, 2022, the Company issued a default notice to FGMC under the reverse repo.  Also subsequent to June 30, 2022, the Company began liquidating the collateral held related to this reverse repo.  As of the date of this report, the Company has received total cash proceeds from sales of collateral of $183,002 leaving a remaining balance of $86,226 (excluding interest accrued subsequent to June 30, 2022).  The Company continues to sell the remaining collateral and currently estimates the fair value of the collateral exceeds the remaining balance of $86,226.  Therefore, the Company has not recorded a loss related to this transaction for the six months ended June 30, 2022.  If the Company ultimately liquidates the collateral for less than the remaining receivable, it will have an unsecured claim against FGMC.  However, the Company would likely record a partial or total valuation reserve against such a receivable and record a loss in the second half of 2022.  

Other Repo Transactions 

In addition to the Company’s matched book repo business, the Company may also enter into reverse repos to acquire securities to cover short positions or as an investment.  Additionally, the Company may enter into repos to finance the Company’s securities positions held in inventory.  These repo and reverse repo agreements are generally cleared on a bilateral or triparty basis; no clearing broker is involved.  These transactions are not matched.

Repo Information 

At   June 30, 2022 and December 31, 2021, the Company held reverse repos of $ 1,792,325 and $3,175,645, respectively, and the fair value of collateral received under reverse repos was $1,845,674 and $3,249,411, respectively.  As of  June 30, 2022 and December 31, 2021, the reverse repo balance was comprised of receivables collateralized by securities with 13 and 14 counterparties, respectively.

At June 30, 2022 and December 31, 2021, the Company held repos of $ 1,790,469 and $3,171,415, respectively, and the fair value of securities and cash pledged as collateral under repos was $1,820,189 and $3,232,091, respectively. These amounts include collateral for reverse repos that were re-pledged as collateral for repos.

Concentration 

In the matched book repo business, the demand for borrowed funds is generated by the reverse repo counterparty and the supply of funds is provided by the repo counterparty. 

On the demand side, the Company did not consider its GCF repo business to be concentrated because the Company’s reverse repo counterparties were comprised of a diverse group of financial institutions. On the supply side, the Company obtained a significant amount of its funds from the FICC. Therefore, during the period the Company operated a GCF business, it considered that business to be concentrated from the supply side of the business. 

The gestation repo business has been and continues to be concentrated as to reverse repurchase counterparties.  The Company conducts this business with a limited number of reverse repo counterparties.  As of June 30, 2022 and December 31, 2021, the Company’s gestation reverse repos shown in the tables below represented balances from 13 and 14 counterparties, respectively.  The Company also has a limited number of repo counterparties in the gestation repo business.  However, this is primarily a function of the limited number of reverse repo agreement counterparties with whom the Company conducts this business rather than a reflection of a limited supply of funds.  Therefore, the Company considers the gestation repo business to be concentrated on the demand side. 

The total net revenue earned by the Company on its matched book repo business (net interest margent and fee revenue) was $4,742  and $12,779  for the three and six months ended June 30, 2022. The total net revenue earned by the Company on its matched book repo business (both gestation repo and GCF repo) was $9,789 and $19,022 for the three and six months ended June 30, 2021. 

Detail 

ASC 210 provides the option to present reverse repo and repo on a net basis if certain netting conditions are met.  The Company presents all repo and reverse repo transaction, as well as counterparty cash collateral (see note 13), on a gross basis even if the underlying netting conditions are met.  The amounts in the table below are presented on a gross basis.

The following tables summarize the remaining contractual maturity of the gross obligations under repos accounted for as secured borrowings segregated by the underlying collateral pledged as of each date shown.  All amounts as well as counterparty cash collateral (see note 13) are subject to master netting arrangements.

SECURED BORROWINGS

(Dollars in Thousands)

June 30, 2022

	Repurchase Agreements
	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to		30 - 90		Greater than
Collateral Type:	Continuous		30 days		days		90 days		Total
MBS (gestation repo)	$	68,114	$	1,722,355	$	-		-	$	1,790,469
	$	68,114	$	1,722,355	$	-	$	-	$	1,790,469

	Reverse Repurchase Agreements
	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to		30 - 90		Greater than
Collateral Type:	Continuous		30 days		days		90 days		Total
MBS (gestation repo)	$	68,160	$	1,724,165	$	-	$	-	$	1,792,325
	$	68,160	$	1,724,165	$	-	$	-	$	1,792,325

SECURED BORROWINGS

(Dollars in Thousands)

December 31, 2021

	Repurchase Agreements
	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to		30 - 90		Greater than
Collateral Type:	Continuous		30 days		days		90 days		Total
MBS (gestation repo)	$	-	$	3,171,415	$	-	$	-	$	3,171,415
	$	-	$	3,171,415	$	-	$	-	$	3,171,415

	Reverse Repurchase Agreements
	Remaining Contractual Maturity of the Agreements
	Overnight and		Up to		30 - 90		Greater than
Collateral Type:	Continuous		30 days		days		90 days		Total
MBS (gestation repo)	$	-	$	3,175,645	$	-	$	-	$	3,175,645
	$	-	$	3,175,645	$	-	$	-	$	3,175,645