DYNEX CAPITAL INC
For the period ended Dec 31, 2024. Filed Feb 28, 2025.
View on SEC.govAbout this filing
A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Feb 28, 2025
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What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-02-26.
0000826675-24-000011
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCurrent report: 10-K
Period ended 2024-12-31; filed 2025-02-28.
0000826675-25-000021
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 154 previous paragraphs and 148 current paragraphs.
84 unchanged; 47 reworded; 16 added; 22 removed; 1 previous and 1 current paragraphs rearranged.
Tables are not compared: 11 previous and 13 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (16)
Current report
In late 2023, the 10-year U.S. Treasury approached 5% based on inflation fears, but into the end of 2023 and early 2024, there was optimism that many rate cuts were on the near term horizon which spurred longer term rates to fall in the early part of 2024. As the year progressed and more economic data was available, it became clear that growth was still moderate and the early outlook for rate cuts was too aggressive. Beginning in September, the Federal Reserve began to cut interest rates, reversing the direction of short-term rates for the first time since March of 2022. The Federal Funds rate cut in September was followed by two more rate cuts before year end. This shift in policy and the outlook for 2025 changed the shape of the yield curve, and by the end of 2024, the yield curve was no longer inverted with short-term rates below longer-term rates. This change in the shape of the yield curve allows levered mortgage investors, like Dynex, to earn a positive carry by investing in longer term bonds with a higher yield than its repurchase based financing cost which is generally tied to shorter-term rates. Mortgage spreads to Treasuries remained elevated for most of 2024 which provided for solid opportunities to buy assets that will generate good returns over the long term.
Current report
As a result of capital raising and a more favorable investing environment, we significantly grew our balance sheet during the year ended December 31, 2024. Our total assets increased over 28%, and our total shareholders’ equity increased over 36%. During the year, we added approximately $2.2 billion in higher coupon Agency RMBS at a lower cost of financing, which improved our net interest income to $5.9 million versus a loss of $(7.9) million in the prior year. As the yield curve un-inverted, we repositioned our hedges, changing the majority of our interest rate derivatives from U.S. Treasury futures to interest rate swaps, which contributed net periodic interest of $16.1 million to our earnings for the year ended December 31, 2024. Our investment portfolio declined in fair value because the increase in the 10-year U.S. Treasury rate as well as widening of credit spreads. However, gains from our hedging portfolio exceeded the losses in fair value of our investments by $130.5 million. Despite the growth in our balance sheet, we managed our operating expenses and lowered our expense ratio by approximately 70 basis points compared to the prior year.
Current report
(2)Net proceeds from stock issuance include $6.3 million from amortization of share-based compensation, net of grants, and adjustments for payroll tax withholding on share-based compensation vesting during the year ended December 31, 2024.
Current report
Inflation fears that drove U.S. Federal Reserve policy over the last three years are starting to subside, which allowed the Federal Open Market Committee to start cutting the U.S. Federal Funds rate in the second half of 2024. The shape of the yield curve and less restrictive monetary policy in 2025 provide an investment backdrop that is very different than the last two years, which were marked by rising short-term rates and a prolonged period of an inverted yield curve. Historically wide spreads provide us a good environment to invest into, and the swaps market further supports portfolio returns for levered mortgage investors like Dynex. With rapidly evolving geopolitical and macroeconomic factors, we are focused on regulatory changes and the potential range of impacts on monetary policy, yield curve, and generally supply and demand dynamics. We are also prepared for bouts of volatility and spread widening, which may cause temporary declines in the market value of our assets but should provide for compelling returns for our investors longer term. Inflation is still a focus and tax policy may cause changes to the inflation outlook. The financing environment is still liquid and supportive of ownership of high-quality liquid assets such as Agency MBS. We may continue to expand our capital base through the ATM program to deploy into an attractive market, achieve scale, and continue to attract higher price-to-book multiple on our common stock price.
Current report
Net Interest Expense
Current report
Net interest expense and net interest spread improved for the year ended December 31, 2024, compared to the year ended December 31, 2023. Though our average cost of financing remained higher than our effective yield for 2024, our net interest income turned positive as our purchases of higher-yielding assets increased our interest income relative to 2023, while the rate cuts implemented by the FOMC during the year helped to lower our interest expense. As market expectations of a rate reduction increased, we shortened our borrowing terms with our counterparties so we would be in a better position to rollover our borrowings as quickly as possible to take advantage of lower financing rates.
Current report
(6)Represents a non-GAAP measure. Please refer to the section below “Non-GAAP Financial Measures” for a reconciliation of economic net interest income/spread to GAAP measures.
Current report
The 10-year U.S. Treasury rate rose as high as 4.71%, ending 2024 at 4.57%, an increase of approximately 69 basis points since the year began. Throughout the year, we frequently adjusted the volume and type of derivative instruments used to hedge the volatile interest rate environment. As a result, net gains from our interest rate hedging portfolio exceeded the net loss in fair value of our investments by $130.5 million, which also declined in fair value due to wider credit spreads as of December 31, 2024 versus December 31, 2023.
Current report
2)Realized gain (loss) for interest rate swaps consists of net periodic interest benefit of $16.1 million for the year ended December 31, 2024. We did not have any interest rate swap agreements mature or terminate during the year ended December 31, 2024.
Current report
Management also includes net periodic interest from its interest rate swaps, which is included in "gain (loss) on derivatives instruments, net," in EAD and economic net interest income because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including net periodic interest from interest rate swaps is a helpful indicator of the Company’s total financing cost in addition to GAAP interest expense.
Current report
Reconciliations of each non-GAAP measure to certain GAAP financial measures are provided below.
Current report
(2)The following table reconciles “change in fair value of derivative instruments, net” to the “gain (loss) on derivative instruments, net” shown on the consolidated statements of comprehensive income.
Current report
During the year ended December 31, 2024, we issued 10,500,000 shares of common stock through a public offering, resulting in proceeds of $124.5 million, net of issuance costs. We also issued 16,756,835 shares of common stock through our ATM program, resulting in proceeds of $207.6 million, net of broker commissions and fees. We deployed these proceeds into purchases of higher coupon Agency RMBS and to cover increased initial margin requirements related to our interest rate swaps.
Current report
The following table provides details on the “net receipts (payments) on derivative instruments” shown on our consolidated statements of cash flows for the periods indicated:
Current report
(1)Net periodic interest from our effective interest rate swaps are recognized as income or expense during the period earned (incurred), but the cash is not received or paid until the anniversary of each agreement’s effective date or upon maturity.
Current report
(2)The Company did not use put options on U.S. Treasury futures during the year ended December 31, 2024.
Removed paragraphs (22)
Previous report
The focus in early 2023 was the rate of inflation and whether the increases in the Federal Funds Target Rate (“Fed Funds rate”), which started in 2022, would be sufficient to tamp down inflation or if more increases would be needed in 2023. The Federal Reserve continued its path of rate increases in early 2023, prompting interest rates across the yield curve to rise. In early March, the U.S. market experienced a regional bank crisis driven by the combination of unhedged low coupon securities and downgrades which spurred large scale and rapid movement of customer deposits. Given the severe liquidity issues caused by the loss of deposits, several institutions either failed and were seized or were taken over by larger more solvent institutions. Interest rates temporarily fell post regional bank crisis before refocusing on inflation and rising throughout most of the year as the Federal Reserve signaled the need for higher interest rates and messaged a need for “higher for longer” U.S. Federal Reserve policy. In the fourth quarter of 2023, many economic forecasts for 2024 predicted rate cuts, and as a result, interest rates fell going into year end. Despite a very volatile 2023 that experienced over a 170 basis point change in the 10-year U.S. Treasury rate from peak to trough, the rate closed out 2023 virtually unchanged from the end of 2022.
Previous report
Global unrest continues in many parts of the world. The Russia and Ukraine war is ongoing and the attack on Israel by Hamas has created unrest in that region. The economic benefit of the reopening of China post Covid-19 restrictions did not materialize in 2023, and many are looking to the region to determine what steps China may take to stimulate its economy and work with trade partners on a global basis.
Previous report
Artificial Intelligence and Machine Learning created much enthusiasm for investors and entrepreneurs looking to leverage and seize the opportunity. This was tempered by regulators who fear unintended consequences and ethical dilemmas based on incorrect results and data bias. The debates over these issues will continue into the future.
Previous report
(2)Net proceeds from stock issuance include $42.6 million from common stock ATM program and $4.3 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.
Previous report
In all market environments, we seek to pay a consistent dividend and preserve book value for our shareholders. This year, we remained focused on minimizing the impact of volatile interest rates and spreads by actively managing leverage and liquidity. To minimize the loss in fair value of our investments from higher interest rates, we continuously monitored and adjusted our hedge position throughout the year as macroeconomic views and market factors changed. Spread tightening experienced late in the fourth quarter of 2023 favorably impacted the fair value of our investment portfolio because we purchased $3.6 billion in Agency RMBS during 2023 when spreads were wider relative to December 31, 2023. As a result, the net gains on our investment portfolio for the year ended December 31, 2023 exceeded net losses on our interest rate hedges. Comprehensive income to common shareholders for the year ended December 31, 2023 was $9.0 million, or $0.16 per common share. Total economic return to our common shareholders of $0.14 per common share, or 1.0% of beginning book value, consisted of a decline in book value of $(1.42) offset by dividends declared of $1.56.
Previous report
Realized gains and losses on interest rate hedges are recognized in GAAP net income (loss) in the same reporting period in which the derivative instrument matures or is terminated, but are not included in our earnings available for distribution ("EAD"), a non-GAAP measure, during any reporting period. On a tax basis, realized gains and losses on derivative instruments designated for tax purposes as interest rate hedges are amortized into our REIT taxable income over the original periods hedged by those derivatives. Our estimated REIT taxable income for the year ended December 31, 2023 includes an estimated benefit of approximately $80.5 million, or $1.47 per average common share outstanding, from the amortization of accumulated deferred tax hedge gains, which were estimated to be $861.8 million as of December 31, 2023 compared to $695.2 million as of December 31, 2022. This benefit will be distributable to common shareholders as part of our taxable ordinary income in future periods. Additional information regarding the estimated impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Liquidity and Capital Resources” within this Item 7.
Previous report
Global growth expectations are muted as we enter 2024. Chinese officials appear likely to increase fiscal and monetary policy in early 2024, as the consensus forecast for GDP growth is below the pre-pandemic trend. From South Korea to Australia, economies in the region are trending for sub-trend growth. Inflation pressures in Asia remain more muted than in the rest of the world, and we believe European growth will continue to slow. Inflation in most of the Eurozone is trending lower, and most forecasts suggest price pressures will continue to ease throughout 2024.
Previous report
U.S. growth expectations are subdued, with the median of Federal Reserve officials’ expectations for 2024 real GDP growth at just 1.4%. Except for the economic downturn in 2020 during the height of the COVID-19 pandemic, 1.4% would be the slowest pace of real GDP growth since the Global Financial Crisis in 2009. As we started 2024, market expectations for inflation were in the range of 2.0-2.5%. That said, growth and inflation are running higher than those forecasted in late 2023, which suggests that GDP growth could be higher than the Federal Reserve officials’ expectations for 2024.
Previous report
Financial conditions eased dramatically in late 2023 and that has continued in the first few weeks of 2024. Futures markets are expecting easier monetary policy in 2024 and even into 2025, with as much as 150 basis points of Fed Funds rate cuts. This could be seen largely as an adjustment. The real level of the Fed Funds policy rate is historically high. Even considering a modest upside risk to consensus inflation forecasts, the Federal Reserve’s target appears to have room to adjust rates lower. However, the extent and timing of the cuts remain debatable. Growth and inflation could surprise to the upside in the first half of 2024, allowing the Federal Reserve to act less than markets suggested. Moreover, the presidential election in November could be a factor with the Federal Reserve not wanting to be seen as politically motivated.
Previous report
Early in 2024, certain representatives of the Federal Reserve suggested they could consider reducing their quantitative tightening measures, a term used for the plan to shrink the Fed’s balance sheet. If the steady pace of declines in the Federal Reserve’s holdings of U.S. Treasuries and Agency MBS slows or even stops, the availability of U.S. dollar liquidity and financial conditions could improve.
Previous report
Overall, yields on fixed-income spread products tightened relative to U.S. Treasuries in December 2023 as investors tried to get ahead of the January tightening typically experienced in prior years. Investors may expect lower interest-rate volatility amid less monetary tightening and possibly even easing in 2024. That would likely offer a tailwind for risky assets, especially Agency MBS, which repriced significantly in the previous two years on the expectation of declining Federal Reserve holdings. Corporate bond yields remain tighter relative to MBS, suggesting MBS could retain a bid even if corporate bonds were finally repriced for the risk of higher credit losses in a recession scenario.
Previous report
Historically, yield curves have steepened as the Federal Reserve starts to ease policy. Trend models started to suggest a new steepening trend in late 2023 and early 2024. A steeper yield curve has usually proven positive for mortgages. Moreover, investors owning leveraged MBS positions could benefit from hedging in longer maturity U.S. Treasuries as the curve steepens.
Previous report
Risks to the outlook remain high as we enter 2024. The ongoing war in Ukraine and the war between Hamas and the state of Israel highlight the risk of human conflict. The rapid adoption of artificial intelligence technologies has introduced multi-layered risks for 2024. Capital investment could boost developed world economies, while security risks could overwhelm emerging economies and even developed ones. Fiscal imbalances, especially in those critical to the global financial system like the U.S., will likely continue to grow in 2024. These risks remain top of mind for 2024.
Previous report
Despite these risks, our outlook for 2024 is a positive one. We expect monetary policy to be less restrictive this year with lower interest rate volatility. Yield spreads relative to U.S. Treasuries should remain wider than when the Federal Reserve was more active in its purchases of MBS. Still, the spreads of MBS offer attractive leveraged returns for long-term holders. Moreover, we expect tactical opportunities to increase amid moderate spread volatility in 2024. We will likely have opportunities to actively manage our coupon exposure as markets re-price for the new liquidity environment. Finally, we see the potential for opportunities to re-introduce compelling yield opportunities in CMBS and other segments of the RMBS market.
Previous report
Our investment portfolio (including TBAs) as of December 31, 2023 increased 27% compared to December 31, 2022. The increase during the year ended December 31, 2023 was due to our strategy of deploying capital during periods of wider spreads into higher coupon Agency RMBS with higher forward returns relative to the investments held as of December 31, 2022. We purchased Agency RMBS with a cost basis of $3.6 billion during the year ended December 31, 2023.
Previous report
We frequently change the coupon distribution in our Agency RMBS and TBA portfolios in order to minimize losses due to spread volatility. We expect spreads will remain volatile and range-bound in the intermediate term while the Federal Reserve continues reducing MBS from its balance sheet. Longer term, as investors return to the MBS market and demand improves, we expect the fair value of our investment portfolio to increase and our book value to trend higher.
Previous report
Repurchase Agreements
Previous report
Net Interest Income (Expense)
Previous report
During the year ended December 31, 2022, our interest rate hedges mitigated the impact of higher interest rates on the fair value of our investment portfolio; however, we experienced spread widening across all of our asset classes throughout 2022. As a result, the decline in the fair value of our investments including TBA securities exceeded the gains from our interest rate hedges by $54.2 million.
Previous report
Reconciliations of EAD to common shareholders and adjusted net interest income to the related GAAP financial measures are provided below.
Previous report
(2)Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss.
Previous report
We primarily use U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments. In the past, we used interest rate swaps to hedge interest rate risk and included the net periodic interest benefit/cost of those instruments in each of the non-GAAP measures mentioned above. Management is using U.S. Treasury futures instead of interest rate swaps because U.S. Treasury futures generally have lower margin requirements and offer more liquidity and flexibility in the current volatile interest rate environment. The Company’s realized gains on its U.S. Treasury futures as well as other interest rate hedges are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated, but are not included in EAD or adjusted net interest income during any reporting period. Furthermore, because the majority of the U.S. Treasury futures and other derivative instruments are designated as hedges for tax purposes, the realized gains are not distributable to our shareholders until amortized into REIT taxable income over the period originally hedged. Additional information regarding the expected impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Executive Overview” and “Liquidity and Capital Resources.”
Reworded paragraphs (47)
Previous wording
The following discussion should be read in conjunction with our financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Current wording
The following discussion should be read in conjunction with our financial statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Previous wording
This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed. Please refer to “Forward-Looking Statements” contained within this Item 7 for additional information. This discussion also contains non-GAAP financial measures, which are discussed in the section “Non-GAAP Financial Measures.”
Current wording
This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Part I, Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed. Please refer to “Forward-Looking Statements” contained within this Item 7 for additional information. This discussion also contains non-GAAP financial measures, which are discussed in the section “Non-GAAP Financial Measures.”
Previous wording
For a complete description of our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Item 1 of Part I of this Annual Report on Form 10-K.
Current wording
For a complete description of our business, including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1 of this Annual Report on Form 10-K.
Previous wording
The charts below show the range of U.S. Treasury rates for the past twelve months and information regarding market spreads as of and for the periods indicated:
Current wording
The charts below show the range of U.S. Treasury rates for the past year and information regarding market spreads as of and for the periods indicated:
Previous wording
The following table provides details about the changes in our financial position during the year ended December 31, 2023:
Current wording
The following table summarizes the changes in the Company's financial position during 2024:
Previous wording
(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock, in thousands and on a per common share basis.
Current wording
(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111.5 million, in thousands and on a per common share basis.
Previous wording
The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:
Current wording
Our investment portfolio (including TBAs) as of December 31, 2024, increased approximately 32% compared to December 31, 2023. The following charts compare the composition of our MBS portfolio (including TBAs) as of the dates indicated:
Previous wording
The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
Current wording
We purchased approximately $2.2 billion of higher coupon Agency RMBS during the year ended December 31, 2024, of which $335.1 million were pending settlement as of December 31, 2024. We also increased our TBA positions by a notional of $1.0 billion during the year ended December 31, 2024. The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
Previous wording
(7)Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility.
Current wording
(7)Represents the weighted average market yield projected using cash flows generated from the forward curve based on market prices as of the date indicated and assuming zero volatility.
Previous wording
Less than 4% of our MBS portfolio as of December 31, 2023 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of November 2023. Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 28% retail, 25% office, 15% multifamily, 12% hotel and 20% all other real estate categories. In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS.
Current wording
Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO comprise 2.1% of our MBS portfolio as of December 31, 2024 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of September 2024. Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 27% retail, 40% office, 4% multifamily, 10% hotel and 19% all other real estate categories. In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS. Our non-Agency CMBS IO investments are nearing maturity and have very little amortized cost remaining; any changes in actual payments may result in large swings in yield as shown below. Non-Agency CMBS IO do not comprise a material percentage of our portfolio and future income is not expected to have a material impact on our financial results.
Previous wording
We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Annual Report on Form 10-K as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 7 for additional information relating to our repurchase agreement borrowings.
Current wording
Our repurchase agreement borrowings increased to $6.6 billion as of December 31, 2024 from $5.4 billion as of December 31, 2023 as we used these funds to partially finance our purchases of Agency RMBS during the year. We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Annual Report on Form 10-K as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 7 for additional information relating to our repurchase agreement borrowings.
Previous wording
The table below discloses details on the Company's interest rate hedges held as of December 31, 2023 compared to hedging portfolio held as of December 31, 2022:
Current wording
During the year ended December 31, 2024, we shifted the majority of our interest rate hedges from U.S. Treasury futures to interest rate swaps. The table below discloses details on the Company's interest rate hedges held as of December 31, 2024, compared to hedging portfolio held as of December 31, 2023:
Previous wording
Net interest income and net interest spread declined for the year ended December 31, 2023 compared to year ended December 31, 2022 due to higher borrowing costs resulting from the Federal Reserve’s increases in the Fed Funds rate during 2023. The increase in our borrowing costs has been partially offset by an increase in our average balance of investments with higher yields and our increased investment in cash equivalents. The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
Current wording
The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
Previous wording
(4)Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.
Current wording
(4)Financing cost is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.
Previous wording
As shown in the graph in Executive Overview, the 10-year U.S. Treasury rate ranged from a low of 3.31% in April 2023 to a high of 4.99% in October 2023, yet ended the year where it started at 3.88%. Credit spreads, which were wider for the majority of 2023, also tightened during the fourth quarter of 2023. We purchased $3.6 billion of Agency RMBS throughout the year when credit spreads were wider relative to December 31, 2023. As a result, the fair value of our investment portfolio including TBA securities increased a net $68.4 million for the year ended December 31, 2023. These gains were partially offset by net losses on our interest rate hedges of $(10.8) million for the year ended December 31, 2023.
Current wording
During the year ended December 31, 2023, the 10-year U.S. Treasury rate ranged from a low of 3.31% in April 2023 to a high of 4.99% in October 2023, yet ended the year where it started at 3.88%. Credit spreads, which were wider for most of 2023, also tightened during the fourth quarter of 2023. We purchased $3.6 billion of Agency RMBS throughout the year when credit spreads were wider relative to December 31, 2023. As a result, the fair value of our investment portfolio, including TBAs, increased a net $68.4 million for the year ended December 31, 2023. These gains were partially offset by net losses on our interest rate hedges of $(10.8) million for the year ended December 31, 2023.
Previous wording
Operating expenses for the year ended December 31, 2023 decreased $1.0 million compared to the year ended December 31, 2022 primarily due to lower consulting and legal expenses.
Current wording
Operating expenses for the year ended December 31, 2024, increased $3.6 million compared to the year ended December 31, 2023, primarily due to accelerated recognition of share-based compensation expense for certain stock incentive awards granted in March 2024 to a retirement eligible employee. In addition, our salary and bonus expenses increased by $1.0 million due to an increase in average headcount as well as salary increases and other performance-based incentives.
Previous wording
In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: EAD to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest
Current wording
In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include earnings available for distribution (“EAD”) to common shareholders (including per common share) and economic net interest income and the related metric economic net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses.
Previous wording
income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. However, these non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income or its distribution requirements in accordance with the Tax Code.
Current wording
Non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income, its distribution requirements in accordance with the Tax Code or total economic return.
Previous wording
(3)TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.
Current wording
(3)TBA drop income (loss) is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.
Previous wording
investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.
Current wording
Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.
Previous wording
Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet. We also include in our measure of liquidity the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Though the fair value of this noncash collateral is not recorded on our consolidated balance sheet, we include this amount in our liquidity measure because we have the right repledge the noncash collateral pledged to us by our counterparties. Our liquidity as of December 31, 2023 was $453.6 million, which consisted of unrestricted cash of $119.6 million, unencumbered Agency MBS with a fair value of $157.6 million, and noncash collateral received from our counterparties, which consisted of U.S. Treasuries and Agency RMBS, with a fair value of $176.3 million. The decline in our liquidity, which was $632.3 million as of December 31, 2022, is primarily due to our use of cash to partially finance investment purchases during the year ended December 31, 2023 and to cover dividends declared in excess of cash provided by operating activities.
Current wording
Our liquidity fluctuates based on our investment activities, leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet. In our measure of liquidity, we also include the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Our liquidity as of December 31, 2024, was $658.3 million, which consisted of unrestricted cash of $377.1 million and unencumbered Agency MBS with a fair value of $281.2 million. Our liquidity as of December 31, 2023, was $453.6 million.
Previous wording
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, frequent potential for a government shutdown, the impact on global markets stemming from global central bank policies, and the wars between Russia and Ukraine and between Israel and Hamas. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements. In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We also communicate frequently with our counterparties. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.
Current wording
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve’s balance sheet, quantitative tightening or easing measures, the frequent potential for a government shutdown, and the impact on global markets stemming from global central bank policies. We are also monitoring the wars and conflicts around the globe. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements. In performing these analyses, we will also consider the current state of the fixed-income markets and the repurchase agreement markets to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.
Previous wording
Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.8 times shareholders’ equity as of December 31, 2023. We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 6.2 times shareholders’ equity as of December 31, 2023.
Current wording
Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.9 times shareholders’ equity as of December 31, 2024. We include 100% of the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment.
Previous wording
Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers.
Current wording
Leverage based solely on repurchase agreement amounts outstanding was 5.5 times shareholders’ equity as of December 31, 2024. Our repurchase agreement borrowings are uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances, we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker-dealer subsidiaries of regulated financial institutions or primary dealers.
Previous wording
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Current wording
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon several factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Previous wording
For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin, or collateral.. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of December 31, 2023 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 12-16% for borrowings collateralized with CMBS IO.
Current wording
For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in the fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin or collateral. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of December 31, 2024, was consistent with prior periods, typically averaging less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.
Previous wording
The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings. As of December 31, 2023, the Company had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
Current wording
The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and uncommitted nature of the repurchase agreement borrowings. As of December 31, 2024, we had amounts outstanding under 27 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
Previous wording
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of December 31, 2023, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future.
Current wording
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. We do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of December 31, 2024, and we are not aware of circumstances that could potentially result in our non-compliance in the near future.
Previous wording
receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash. As of December 31, 2023, we had cash collateral posted to our counterparties of $118.2 million under these agreements.
Current wording
receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in cash. As of December 31, 2024, we had cash collateral posted to our counterparties of $244.4 million under these agreements.
Previous wording
As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions. When declaring dividends, our Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, financial performance measures, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.
Current wording
We set our dividend based on many factors, including our view on long-term returns, yield on comparable investments, liquidity and market risk, and levels of taxable income. Among these factors, we focus on economic returns and taxable income within the context of the distribution requirements. As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions, including the separate dividend requirements of the Series C Preferred Stock.
Previous wording
Currently, we are primarily using U.S. Treasury futures to hedge the impact of increasing interest rates on our financing costs and fair value of our investments. Realized and unrealized gains (losses) on these derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company, but are not included in EAD to common shareholders during any reporting period. Furthermore, because we designate the majority of our derivative instruments as interest rate hedges for tax purposes, realized gains and losses recognized in GAAP net income are generally not recognized in REIT taxable income until future periods. Due to the significant increase in interest rates over the past two years, our net deferred tax hedge gain has increased substantially to $861.8 million as of December 31, 2023. The amortization of our net deferred tax hedge gain will be amortized into REIT taxable income over several years. We expect our taxable income for 2023 will include $80.5 million related to amortization of net deferred tax hedge gains, and our taxable income for 2024 is currently projected to include approximately $102.9 million from amortization of deferred tax hedge gains. As of December 31, 2023, we also had $590.8 million in capital loss carryforwards, the majority of which expire by 2028, and NOL carryforwards of $8.1 million, which will expire over the next 2 years. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2024 or in any given year.
Current wording
We designate certain derivative instruments as interest rate hedges for tax purposes. Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company but are generally not recognized in REIT taxable income until future periods. Our remaining net deferred tax hedge gain was estimated to be $719.0 million as of December 31, 2024, which will be amortized into REIT taxable income over several years. As of December 31, 2024, we also had $557.9 million in capital loss carryforwards, all of which will expire by either December 31, 2027 or by December 31, 2028. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income, coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2025 or in any given year.
Previous wording
We generally fund our dividend distributions through our cash flows from operations. If we make dividend distributions in excess of our operating cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K for additional important information regarding dividends declared on our taxable income.
Current wording
We generally fund dividend distributions through portfolio cash flows. If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business," as well as Part I, Item 1A, “Risk Factors” of this Form 10-K for additional important information regarding dividends declared on our taxable income.
Previous wording
There were no accounting pronouncements issued during the year ended December 31, 2023 that are expected to have a material impact on the Company’s financial condition or results of operations. Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Annual Report on Form 10-K for additional information.
Current wording
Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Previous wording
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ from the estimated amounts we have recorded.
Current wording
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ significantly from the estimated amounts we have recorded.
Previous wording
The following discussion provides information on our critical accounting policies that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions. Please also refer to Note 1 of our Notes to the Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on Form 10-K for additional information related to significant accounting policies.
Current wording
The following discussion provides information on our critical accounting policies, which require management's most difficult, subjective, or complex judgments, and may result in materially different results under different assumptions and conditions. Please also refer to Note 1 of our Notes to the Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on Form 10-K for additional information related to significant accounting policies.
Previous wording
Fair Value Measurements. Our Agency MBS, as well as a majority of our non-Agency MBS, are substantially similar to securities that either are actively traded or have been recently traded in their respective market. Pricing services and brokers have access to observable market information through trading desks and various information services. MBS prices are based on prices we receive from third-party pricing services and broker quotes. To determine each security's valuation, the pricing service uses either a market approach or income approach, both of which rely on observable market data. The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value. Management reviews the assumptions and inputs utilized in the valuation techniques. Examples of these observable inputs and assumptions include market interest rates, credit spreads, cash flows and projected prepayment speeds, among other things.
Current wording
Fair Value Measurements. The fair value of our Agency MBS, as well as a majority of our non-Agency MBS, is based on estimated prices provided by third-party pricing services who have access to observable market information through trading desks and various information services. Most of our MBS are substantially similar to securities actively traded and observable in the market. To determine each security's valuation, the pricing service uses either a market approach or income approach, which rely on observable market data. The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value. Examples of these observable inputs and assumptions used in the valuation techniques include market interest rates, credit spreads, cash flows, and projected prepayment speeds, among other factors. Management reviews the prices it receives from the pricing service for reasonableness using broker quotes as well as other third-party pricing services.
Previous wording
In addition, management reviews the prices received for each security by comparing those prices to actual purchase and sale transactions, our internally modeled prices that are calculated based on observable market rates and credit spreads, and the prices that our borrowing counterparties use in financing our securities. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment. Please refer to Note 6 of the Notes to the Consolidated Financial Statements contained within Part II, Item 8 of this Annual Report on Form 10-K for additional information on fair value measurements.
Current wording
In addition, management reviews the prices received for each security by comparing those prices to a second pricing source. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment. Although it is rare, we may exclude a price received from a third party if we determine, based on our knowledge and expertise of the market, that the price received is significantly different from other observable market data. Please refer to Note 6 of the Notes to the Consolidated Financial Statements contained within Part II, Item 8 of this Annual Report on Form 10-K for additional information on fair value measurements.
Previous wording
Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act. Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, taking into account all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.
Current wording
Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Previous wording
•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;
Current wording
•Our business and investment strategy, including our ability to generate acceptable risk-adjusted returns, our target investment allocations, and our views on the future performance of MBS and other investments;
Previous wording
•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market as well as the impact more broadly on fixed income and equity markets:
Current wording
•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market and the impact more broadly on fixed income and equity markets:
Showing the first 40 of 47 pairs. Open the source sections for the rest.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in EAD because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. However, drop income/loss doesnot represent the total realized gain/loss from the Company’s investments in TBA securities.
Rearranged previous paragraphs (1)
Previous report — wording carried elsewhere
Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may also include proceeds from the sale of