Note 10 - Collateralized Securities Transactions

3 Months Ended

Mar. 31, 2024

Notes to Financial Statements

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

10. COLLATERALIZED SECURITIES TRANSACTIONS

Gestation Repo

Gestation repo involves entering into repo and reverse repo transactions 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:

On Balance Sheet: The Company executes a reverse repo with the borrower and a matching repo (with the same collateral and maturity date) with the lender. In this case, the Company is a principal to each trade and is borrowing from one counterparty and lending to another and earning net interest margin. These transactions are referred to by the Company as on balance sheet gestation repo trades.

Agency Repo: Similar to the on balance sheet repo, the Company first executes a reverse repo with the borrower and a matching repo (with the same collateral and maturity date) with the lender. However, in this case, all three parties (the borrower, the lender, and the Company) simultaneously enter into an assignment agreement. The effect of this assignment is to remove the Company as principal to the reverse repo and repo and have the lender and borrower directly face each other in a repo trade. The Company receives a fee for its role in arranging the financing. These transactions are referred to by the Company as agency gestation repo trades.

Bankruptcy of Gestation Repo Counterparty

As of June 30, 2022, the Company had an outstanding reverse repo balance with First Guaranty Mortgage Corporation (“FGMC”) totaling $269,228. Effective June 30, 2022, FGMC filed for bankruptcy. Subsequent to June 30, 2022, the Company issued a default notice to FGMC under the reverse repo. The Company took possession of the collateral and began liquidating it. As of  March 31, 2024 and December 31, 2023, the Company had liquidated all of the collateral with the exception of $1,554 and $3,113, respectively, of residential mortgage loans. These loans are carried at fair value and are included in investments-trading in the consolidated balance sheets. During the three months ended March 31, 2024 and 2023, the Company recorded losses of $2 and $1,165, respectively, which were included as a component of net trading revenue related to the decline in fair value of the remaining collateral.  

Other Repo Transactions 

In addition to the Company’s gestation 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.

Repo Information 

As of  March 31, 2024 and December 31, 2023, the Company held reverse repos of $692,438 and $408,408, respectively, and the fair value of collateral received under reverse repos was $698,581 and $415,057, respectively. 

As of  March 31, 2024 and December 31, 2023, the Company held repos of $690,900 and $408,203, respectively, and the fair value of securities and cash pledged as collateral under repos was $698,581 and $415,057, respectively. These amounts include collateral for reverse repos that were re-pledged as collateral for repos.

Concentration 

In the gestation 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. 

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 March 31, 2024 and December 31, 2023, the Company’s gestation reverse repos shown in the tables below represented balances from 7 and 7 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 gestation repo business (net interest margin and fee revenue) was $3,456 for the three months ended March 31, 2024. The total net revenue earned by the Company on its gestation repo business was $4,381 for the three months ended March 31, 2023. 

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 transactions, 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)

March 31, 2024

	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)	$	74,322	$	616,578	$	-	$	-	$	690,900
	$	74,322	$	616,578	$	-	$	-	$	690,900

	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)	$	74,378	$	618,060	$	-	$	-	$	692,438
	$	74,378	$	618,060	$	-	$	-	$	692,438

SECURED BORROWINGS

(Dollars in Thousands)

December 31, 2023

	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)	$	-	$	408,203	$	-	$	-	$	408,203
	$	-	$	408,203	$	-	$	-	$	408,203

	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)	$	-	$	408,408	$	-	$	-	$	408,408
	$	-	$	408,408	$	-	$	-	$	408,408