Armour Residential REIT Inc

Previous wording

References to “we,” “us,” “our,” or the “Company” are to ARMOUR Residential REIT, Inc. (“ARMOUR”) and its subsidiaries. References to “ACM” are to ARMOUR Capital Management LP, a Delaware limited partnership. ARMOUR owns a 10.8% equity interest in BUCKLER Securities LLC ("BUCKLER"), a Delaware limited liability company and a FINRA-regulated broker-dealer, controlled by ACM and certain executive officers of ARMOUR. Refer to the Glossary of Terms for definitions of capitalized terms and abbreviations used in this report.

Current wording

References to “we,” “us,” “our,” or the “Company” are to ARMOUR Residential REIT, Inc. (“ARMOUR”) and its subsidiaries. References to “ACM” are to ARMOUR Capital Management LP, a Delaware limited partnership. ARMOUR owns a 10.8% equity interest in BUCKLER Securities LLC ("BUCKLER"), a Delaware limited liability company and a FINRA-regulated broker-dealer, controlled by ACM. Refer to the Glossary of Terms for definitions of capitalized terms and abbreviations used in this report.

Previous wording

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. All per share amounts, common shares outstanding and stock-based compensation amounts for all periods reflect the effect of our Reverse Stock Split, which was effective September 29, 2023. U.S. dollar amounts are presented in thousands, except per share amounts or as otherwise noted.

Current wording

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. All per share amounts, common shares outstanding and stock-based compensation amounts for all periods reflect the effect of our Reverse Stock Split. U.S. dollar amounts are presented in thousands, except per share amounts or as otherwise noted.

Previous wording

At December 31, 2023 and December 31, 2022, we invested in MBS, issued or guaranteed by a U.S. GSE, such as Fannie Mae, Freddie Mac, or a government agency such as Ginnie Mae (collectively, Agency Securities). Our Agency Securities consist of fixed rate loans. From time to time we have also invested in U.S. Treasury Securities and money market instruments.

Current wording

At December 31, 2024 and December 31, 2023, we invested in MBS, issued or guaranteed by a U.S. GSE, such as Fannie Mae, Freddie Mac, or a government agency such as Ginnie Mae (collectively, Agency Securities). Our Agency Securities consist primarily of fixed rate loans. From time to time we have also invested in U.S. Treasury Securities and money market instruments.

Previous wording

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Recent events, such as those discussed below, can affect our business in ways that are difficult to predict and may produce results outside of typical operating variances. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. We currently invest primarily in Agency Securities, for which the principal and interest payments are guaranteed by a GSE or other government agency. We also invest in U.S. Treasury Securities and money market instruments. We expect our investments to be subject to risks arising from prepayments resulting from existing home sales, financings, delinquencies and foreclosures. We are exposed to changing mortgage spreads, which could result in declines in the fair value of our investments. Our asset selection, financing and hedging strategies are designed to work together to generate current net interest income while moderating our exposure to market volatility.

Current wording

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Recent events, such as those discussed below, can affect our business in ways that are difficult to predict and may produce results outside of typical operating variances. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. We currently invest primarily in Agency Securities, for which the principal and interest payments are guaranteed by a GSE or other government agency. From time to time, we also invest in U.S. Treasury Securities and money market instruments subject to certain income tests we must satisfy for our qualification as a REIT. We expect our investments to be subject to risks arising from prepayments resulting from existing home sales, financings, delinquencies and foreclosures. We are exposed to changing mortgage spreads, which could result in declines in the fair value of our investments. Our asset selection, financing and hedging strategies are designed to work together to generate current net interest income while moderating our exposure to market volatility.

Previous wording

While we use strategies to economically hedge some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our securities portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our securities portfolio. For GAAP purposes, all changes in the fair value of our derivatives currently flow through earnings. Changes in the fair value of our legacy Agency MBS portfolio, that was designated as available for sale historically, were recognized in other comprehensive income. Therefore, historical earnings reported in accordance with GAAP have fluctuated even in situations where our derivatives were operating as intended. Currently, all of our Agency MBS portfolio is designated as trading securities and changes in the fair values of our derivatives and Agency MBS flow through earnings together. Accordingly, our results of operations will not be subject to the additional fluctuations caused by the previous differences in mark-to-market accounting treatments.

Current wording

While we use strategies to economically hedge some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our securities portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our securities portfolio. For GAAP purposes, all changes in the fair value of our derivatives currently flow through earnings. Changes in the fair value of our legacy Agency MBS portfolio, that was designated as available for sale historically, were recognized in other comprehensive income (loss). Therefore, historical earnings reported in accordance with GAAP have fluctuated even in situations where our derivatives were operating as intended. Currently, all of our Agency MBS portfolio is designated as trading securities and changes in the fair values of our derivatives and Agency MBS flow through earnings together. Accordingly, our results of operations will not be subject to the additional fluctuations caused by the previous differences in mark-to-market accounting treatments. Comparisons with companies that use hedge accounting for all or part of their derivative activities may not be meaningful.

Previous wording

See section titled Management in Item 1. Business and also in Note 8 and Note 14 to the consolidated financial statements.

Current wording

See section titled Management in Item 1. Business and see also Note 9 and Note 15 to the consolidated financial statements.

Previous wording

The Fed also stated that it will continue reducing its holdings of agency mortgage-backed securities and other fixed-income assets as described in its previously announced plans and that it will reinvest into agency MBS the amount of principal payments from the Fed's holdings of agency debt and agency MBS received in each calendar month that exceeds a cap of $35 billion per month. The Fed further indicated that it will roll over at auction the amount of principal payments from its holdings of Treasury securities maturing in each calendar month that exceeds a cap of $60 billion per month.

Current wording

The Fed said it will continue reducing its holdings of Treasury securities and agency debt and agency mortgage backed securities, according to its previously announced plans. The Fed will roll over at auction the amount of principal payments from its holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. The Fed will also reinvest the amount of principal payments from its holdings of agency debt and agency mortgage backed securities received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities.

Previous wording

Below is the Fed's target range for the Federal Funds Rate at each Fed meeting where a change was made since March 2022.

Current wording

Below is the Fed's target range for the Federal Funds Rate at each Fed meeting where a change was made since the beginning of 2023.

Previous wording

We have made changes to the presentation of certain information related to net interest income, including Net Interest Margin, beginning in the fourth quarter of 2023. The changes in presentation are detailed in the below tables. These changes were the result of matters discussed under Item 9B - Other Information, in which we concluded that our prior presentation of Net Interest Margin is a non-GAAP financial measure. As a result of these changes, the Net Interest Margin information presented prior to the fourth quarter of 2023 is not comparable to the items shown in the table below. The following table details the factors impacting our net interest income for the year ended December 31, 2023.

Current wording

The following table details the factors impacting our net interest income for the year ended December 31, 2022.

Previous wording

▪Interest rate swap contracts' aggregate notional balance was $6,350,000 at December 31, 2022 and $7,210,000 at December 31, 2021.

Current wording

▪Interest rate swap contracts' aggregate notional balance was $7,232,000 at December 31, 2024 and $6,786,000 at December 31, 2023.

Previous wording

▪Our total TBA Agency Securities aggregate notional balance was $800,000 at December 31, 2022 and $4,500,000 at December 31, 2021.

Current wording

▪Our total TBA Agency Securities aggregate notional balance was $0 at December 31, 2024 and $300,000 at December 31, 2023.

Previous wording

•Loss on U.S. Treasury Securities resulted from the change in fair value of the securities as well as the loss on sales. During the year ended December 31, 2023, the change in fair value of the securities was $(16,496). For the year ended December 31, 2023, we sold short $651,621 and sold $618,520 of U.S. Treasury Securities resulting in a realized loss of $(26,597). The change in fair value of the securities was $(7,705) for the year ended December 31, 2022. Sales of U.S. Treasury Securities were $5,374,982 for the year ended December 31, 2022 resulting in realized loss of $(144,563).

Current wording

•Loss on U.S. Treasury Securities, net resulted from the change in fair value of the securities as well as the loss on sales

Previous wording

The Company is managed by ACM, pursuant to a management agreement. The management fees are determined based on gross equity raised. Therefore, management fees increase when we raise capital and decline when we repurchase previously issued stock and liquidation distributions as approved and so designated by a majority of the Board. However, because the management fee rate decreases to 0.75% per annum for gross equity raised in excess of $1.0 billion pursuant to the management agreement, the effective management fee rate declines as equity is raised. The cost of repurchased stock and any dividends specifically designated by the Board as liquidation dividends will reduce the amount of gross equity raised used to calculate the monthly management fee. Realized and unrealized gains and losses do not affect the amount of gross equity raised. At December 31, 2023, December 31, 2022 and December 31, 2021, the effective management fee, prior to management fees waived was 0.93%, 0.95% and 0.98% based on gross equity raised of $4,231,965, $3,787,042 and $3,313,937, respectively. During the years ended December 31, 2023, December 31, 2022 and December 31, 2021 ACM voluntarily waived management fees of $6,600, $7,800 and $8,600 respectively (see Note 8 to the consolidated financial statements).

Current wording

The Company is managed by ACM, pursuant to a management agreement. The management fees are determined based on gross equity raised. Therefore, management fees increase when we raise capital and decline when we repurchase previously issued stock and distribute liquidation distributions as approved and so designated by a majority of the Board. However, because the management fee rate decreases to 0.75% per annum for gross equity raised in excess of $1.0 billion pursuant to the management agreement, the effective management fee rate declines as equity is raised. The cost of repurchased stock and any dividends specifically designated by the Board as liquidation distributions will reduce the amount of gross equity raised used to calculate the monthly management fee. Realized and unrealized gains and losses do not affect the amount of gross equity raised. At December 31, 2024, December 31, 2023 and December 31, 2022, the effective management fee was 0.92%, 0.93% and 0.95% prior to management fees waived, and 0.77%, 0.77% and 0.74%, after management fees waived, based on gross equity raised of $4,498,880, $4,231,965 and $3,787,042, respectively. During the years ended December 31, 2024, December 31, 2023 and December 31, 2022 ACM voluntarily waived management fees of $6,600, $6,600 and $7,800 respectively (see Note 9 to the consolidated financial statements).

Previous wording

Compensation includes non-executive director compensation as well as the restricted stock units awarded to our Board and executive officers through ACM. The fluctuation from year to year is due to the number of awards vesting.

Current wording

Compensation includes non-executive director compensation as well as the restricted stock units awarded to our Board and executive officers directly or through ACM. The fluctuation from year to year is due to the number of awards vesting.

Previous wording

Realized gains and losses on interest rate contracts terminated before their maturity are deferred and amortized over the remainder of the original term of the contract for REIT taxable income. At December 31, 2023 and at December 31, 2022, we had approximately $(247,349) and $(307,316), respectively, in tax deductible expense relating to previously terminated interest rate swap and treasury futures contracts amortizing through the years 2033 and 2032, respectively. At December 31, 2023, we had $257,341 of net operating loss carryforwards available for use indefinitely. Series C Preferred Stock dividends for 2023 will be treated 100.00% as fully taxable ordinary income. Common stock dividends for 2023 will be treated 52.54% as taxable ordinary income and 47.46% as non-taxable return of capital.

Current wording

Realized gains and losses on interest rate contracts and treasury futures terminated before their maturity are deferred and amortized over the remainder of the original term of the contract for REIT taxable income. At December 31, 2024 and at December 31, 2023, we had approximately $(189,450) and $(247,349) respectively, of net deductible expense relating to previously terminated interest rate swap and treasury futures/shorts contracts amortizing through the years 2034 and 2033, respectively. At December 31, 2024, we had $257,341 of net operating loss carryforwards available for use indefinitely. Series C Preferred Stock dividends for 2024 will be treated 100.00% as fully taxable ordinary income. Common stock dividends for 2024 will be treated 85.18% as taxable ordinary income and 14.82% as non-taxable return of capital.

Previous wording

Our securities portfolio consists of Agency Securities backed by fixed rate home loans. Our charter permits us to invest in MBS backed by fixed rate, hybrid adjustable rate and adjustable rate home loans as well as unsecured notes and bonds issued by GSEs, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a REIT. Our TBA Agency Securities are reported at net carrying value and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 7 to the consolidated financial statements).

Current wording

Our securities portfolio consists primarily of Agency Securities backed by fixed rate home loans. Our charter permits us to invest in MBS backed by fixed rate, hybrid adjustable rate and adjustable rate home loans as well as unsecured notes and bonds issued by GSEs, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a REIT. Our TBA Agency Securities are reported at net carrying value and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).

Previous wording

Agency Security purchase and sale transactions, including purchases and sales for forward settlement, are recorded on the trade date to the extent it is probable that we will take or make timely physical delivery of the related securities. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method. We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset and earnings are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.

Current wording

Agency Security purchase and sale transactions, including purchases and sales for forward settlement, are recorded on the trade date, based on the specific identification method, to the extent it is probable that we will take or make timely physical delivery of the related securities. Premiums and discounts associated with the purchase of Multi-Family MBS, which are generally not subject to prepayment, are amortized or accreted into interest income over the contractual lives of the securities using a level yield method. Premiums and discounts associated with the purchase of other Agency Securities are amortized or accreted into interest income over the actual lives of the securities, reflecting actual prepayments as they occur. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method. We typically purchase Agency Securities at premium prices. The lower the prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset and earnings are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.

Previous wording

We account for TBA Agency Securities as derivative instruments if it is reasonably possible that we will not take or make physical delivery of the Agency Security upon settlement of the contract. TBA Agency Securities are forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered pursuant to the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. TBA Agency Securities are included in the table below on a gross basis as they can be used to establish and finance portfolio positions in Agency Securities

Current wording

We account for TBA Agency Securities as derivative instruments if it is reasonably possible that we will not take or make physical delivery of the Agency Security upon settlement of the contract. TBA Agency Securities are forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered pursuant to the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. TBA Agency Securities are included in the table below on a gross basis, as applicable, since they can be used to establish and finance portfolio positions in Agency Securities.

Previous wording

(2)Our TBA Agency Securities were recorded as derivative instruments in our accompanying consolidated financial statements. Our TBA Agency Securities were reported at net carrying values of $1,816, at December 31, 2023 and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 7 to the consolidated financial statements).

Current wording

(2)Our TBA Agency Securities were recorded as derivative instruments in our accompanying consolidated financial statements. Our TBA Agency Securities were reported at net carrying values of $1,816, at December 31, 2023 and were reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).

Previous wording

We have entered into repurchase agreements to finance the majority of our MBS. Our repurchase agreements are secured by our MBS and bear interest at rates that have moved in close relationship to the Federal Funds Rate and SOFR. We have established borrowing relationships with numerous investment banking firms and other lenders, 14 of which had open repurchase agreements with us at December 31, 2023 and 16 of which had open repurchases agreements with us at December 31, 2022. We had outstanding balances under our repurchase agreements, net at December 31, 2023 of $9,647,982 (net of reverse repurchase agreements of $353,937). We had outstanding balances under our repurchase agreements, net at December 31, 2022 of $6,463,058 (net of reverse repurchase agreements of $704,276). We had obligations to return securities received as collateral associated with our reverse repurchase agreements as of December 31, 2023 and December 31, 2022 of $350,273 and $502,656, respectively. At December 31, 2023 and December 31, 2022, BUCKLER accounted for 48.4% and 50.2%, respectively, of our aggregate borrowings and had an amount at risk of 8.1% and 12.9%, respectively, of our total stockholders' equity (see Note 6 to the consolidated financial statements).

Current wording

We have entered into repurchase agreements to finance the majority of our MBS. Our repurchase agreements are secured by our MBS and bear interest at rates that have moved in close relationship to the Federal Funds Rate and SOFR. We have established borrowing relationships with numerous investment banking firms and other lenders, 17 and 14 of which had open repurchase agreements with us at December 31, 2024 and December 31, 2023, respectively. We had outstanding balances under our repurchase agreements, net at December 31, 2024 of $10,713,830 (net of reverse repurchase agreements of $498,250). We had outstanding balances under our repurchase agreements, net at December 31, 2023 of $9,647,982 (net of reverse repurchase agreements of $353,937). We had obligations to return securities received as collateral associated with our reverse repurchase agreements as of December 31, 2024 and December 31, 2023 of $493,433 and $350,273, respectively. At December 31, 2024 and December 31, 2023, BUCKLER accounted for 45.7% and 48.4%, respectively, of our aggregate borrowings and had an amount at risk of 8.0% and 8.1%, respectively, of our total stockholders' equity (see Note 7 to the consolidated financial statements).

Previous wording

Our repurchase agreements require excess collateral, known as a “haircut.” At December 31, 2023, the average haircut percentage was 2.74% compared to 3.85% at December 31, 2022.

Current wording

Our repurchase agreements require excess collateral, known as a “haircut.” At December 31, 2024, the average gross haircut percentage was 2.77% compared to 2.74% at December 31, 2023.

Previous wording

We use various contracts to manage our interest rate risk as we deem prudent in light of market conditions and the associated costs with counterparties that have a high quality credit rating and with futures exchanges. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate or SOFR.

Current wording

We use various contracts to manage our interest rate risk as we deem prudent in light of market conditions and the associated costs with counterparties that have a high-quality credit rating and with futures exchanges. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate or SOFR. We had contractual commitments under derivatives at December 31, 2024 and December 31, 2023. At December 31, 2024 and December 31, 2023, we had derivatives with a net fair value of $906,778 and $872,376, respectively (see Note 8 to the consolidated financial statements).

Previous wording

At December 31, 2023, we had interest rate swap contracts with an aggregate notional balance of $6,786,000, a weighted average swap rate of 1.37% and a weighted average term of 68 months. At December 31, 2022, we had interest rate swap contracts with an aggregate notional balance of $6,350,000, a weighted average swap rate of 0.72% and a weighted average term of 73 months (see Note 7 to the consolidated financial statements). We also had TBA Agency Securities with an aggregate notional balance of $300,000 and $800,000 at December 31, 2023 and December 31, 2022, respectively.

Current wording

At December 31, 2024 and December 31, 2023, we had interest rate swap contracts with an aggregate notional balance of $7,232,000 and $6,786,000, a weighted average swap rate of 1.66% and 1.37% and a weighted average term of 76 and 68 months, respectively. We also had TBA Agency Securities with an aggregate notional balance of $0 and $300,000 at December 31, 2024 and December 31, 2023, respectively (see Note 8 to the consolidated financial statements).

Previous wording

Although we attempt to structure our derivatives to offset the changes in asset prices, the complexity of the actual and expected prepayment characteristics of the underlying mortgages as well as the volatility in mortgage interest rates relative to U.S. Treasury and interest rate swap contract rates makes achieving high levels of offset difficult. We recognized net gains related to our derivatives of $51,748, $810,808 and $52,493, respectively for the years ended December 31, 2023, December 31, 2022 and December 31, 2021.

Current wording

Although we attempt to structure our derivatives to offset the changes in asset prices, the complexity of the actual and expected prepayment characteristics of the underlying mortgages as well as the volatility in mortgage interest rates relative to U.S. Treasury and interest rate swap contract rates makes achieving high levels of offset difficult. We recognized net gains related to our derivatives of $323,500, $51,748 and $810,808, respectively for the years ended December 31, 2024, December 31, 2023 and December 31, 2022.

Previous wording

As required by the Dodd-Frank Act, the Commodity Futures Trading Commission has adopted rules requiring certain interest rate swap contracts to be cleared through a derivatives clearing organization. We are required to clear certain new interest rate swap contracts. Centrally-cleared interest rate swaps may have higher margin requirements than bilateral interest rate swaps. We have established an account with a futures commission merchant for this purpose. At December 31, 2023, we had $1,275,000 notional amount of centrally-cleared interest rate swap contracts.

Current wording

As required by the Dodd-Frank Act, the Commodity Futures Trading Commission has adopted rules requiring certain interest rate swap contracts to be cleared through a derivatives clearing organization. We are required to clear certain new interest rate swap contracts. Centrally-cleared interest rate swaps may have higher margin requirements than bilateral interest rate swaps. We have established an account with a futures commission merchant for this purpose. At December 31, 2024 and December 31, 2023, we had $2,025,000 and $1,275,000, respectively, of notional amount of centrally-cleared interest rate swap contracts.

Previous wording

At December 31, 2023, our liquidity totaled $657,001, consisting of $221,888 of cash and cash equivalents plus $435,113 of unencumbered Agency Securities and U.S. government securities (including securities received as reverse margin collateral). Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our MBS and cash generated from our operating results. Other potential sources of liquidity include our automatic shelf registration filed with the SEC, pursuant to which we may offer an unspecified amount of shares of our common stock, preferred stock, warrants, depositary shares and debt securities. During the years ended December 31, 2023 and December 31, 2022, we sold 16,633 and 14,008 shares under Common stock ATM Sales Agreements for proceeds of $450,097 and $475,537, net of issuance costs and commissions of approximately $4,628 and $5,157, respectively. During the year ended December 31, 2023, we also sold 3 shares under the DRIP for proceeds of $51. During the years ended December 31, 2023 and December 31, 2022, we repurchased (477) and (296) common shares under our current repurchase authorization for a cost of $(9,935) and $(7,664), respectively (see Note 10 to the consolidated financial statements). See Note 14 for additional discussion of transactions with BUCKLER.

Current wording

At December 31, 2024, our liquidity totaled $608,026, consisting of $67,970 of cash and cash equivalents plus $540,056 of unencumbered Agency Securities and U.S. government securities (including securities received as reverse margin collateral). Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our MBS and cash generated from our operating results.

Previous wording

In addition to the repurchase agreement financing discussed above, from time to time we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell such U.S. Treasury Securities to third parties and recognize a liability to return the securities to the original borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same MRA, settlement through the same brokerage or clearing account and maturing on the same day. The practical effect of these transactions is to replace a portion of our repurchase agreement financing of our MBS in our securities portfolio with short positions in U.S. Treasury Securities. We believe that this helps to reduce interest rate risk, and therefore counterparty credit and liquidity risk. Both parties to the repurchase and reverse repurchase transactions have the right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged. At December 31, 2023 and December 31, 2022, we had $353,937 and $704,276 in reverse repurchase agreements. We had obligations to return securities received as collateral associated with our reverse repurchase agreements as of December 31, 2023 and December 31, 2022 of $350,273 and $502,656, respectively.

Current wording

In addition to the repurchase agreement financing discussed above, from time to time we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell such U.S. Treasury Securities to third parties and recognize a liability to return the securities to the original borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same MRA, settlement through the same brokerage or clearing account and maturing on the same day. The practical effect of these transactions is to replace a portion of our repurchase agreement financing of our MBS in our securities portfolio with short positions in U.S. Treasury Securities. We believe that this helps to reduce interest rate risk, and therefore counterparty credit and liquidity risk. Both parties to the repurchase and reverse repurchase transactions have the right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged.

Previous wording

Our primary uses of cash are to purchase MBS, pay interest and principal on our borrowings, fund our operations and pay dividends. From time to time, we purchase or sell assets for forward settlement up to 90 days in the future to lock in purchase prices or sales proceeds. At December 31, 2023 and December 31, 2022, we financed our securities portfolio with $9,647,982 (net of reverse repurchase agreements of $353,937) and $6,463,058 (net of reverse repurchase agreements of $704,276) of borrowings under repurchase agreements, respectively. We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders’ equity. Our debt to equity ratios at December 31, 2023 and December 31, 2022, were 7.59:1 and 5.81:1, respectively, as we substituted Agency MBS for TBA Agency Securities. Our leverage ratios, including our TBA Agency Securities, were 7.83:1 and 6.51:1 at December 31, 2023 and December 31, 2022, respectively. Implied leverage, including TBA Securities and forward settling sales and unsettled purchases was 7.96:1 and 6.83:1 at December 31, 2023 and December 31, 2022, respectively.

Current wording

We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders’ equity. Our debt to equity ratios at December 31, 2024 and December 31, 2023, were 7.87:1 and 7.59:1, respectively, as we substituted Agency MBS for TBA Agency Securities. Our leverage ratios, including our TBA Agency Securities, were 7.87:1 and 7.83:1 at December 31, 2024 and December 31, 2023, respectively. Implied leverage, including TBA Securities and forward settling sales and unsettled purchases was 7.95:1 and 7.96:1 at December 31, 2024 and December 31, 2023, respectively.

Previous wording

(1)The increase in cash and cash collateral posted to counterparties related to operating activities from 2022 to 2023 is related to the repositioning of our securities portfolio and the increase from 2021 to 2022 is related to the realized gains on derivatives.

Current wording

(1)The increase in cash and cash collateral posted to counterparties related to operating activities from 2023 to 2024 is related to exiting certain MBS positions.

Previous wording

We adopted the 2009 Stock Incentive Plan (as amended, the “Plan”) to attract, retain and reward directors and other persons who provide services to us in the course of operations. The Plan authorizes the Board to grant awards including common stock, restricted shares of common stock (“RSUs”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively, “Awards”), subject to terms as provided in the Plan. At December 31, 2023, there were 173 shares available for future issuance under the Plan.

Current wording

We adopted the 2009 Stock Incentive Plan (as amended, the “Plan”) to attract, retain and reward directors and other persons who provide services to us in the course of operations. The Plan authorizes the Board to grant awards including common stock, restricted shares of common stock (“RSUs”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively, “Awards”), subject to terms as provided in the Plan. At December 31, 2024, there were 228 shares available for future issuance under the Plan.

Previous wording

At December 31, 2023, there was approximately $11,404 of unvested stock based compensation related to the Awards (based on a weighted grant date price of $38.21 per share), which we expect to recognize as an expense as follows: in 2024 an expense of $3,626, in 2025 an expense of $2,346, and thereafter an expense of $5,432. Our policy is to account for forfeitures as they occur. We also pay each of our non-executive Board members quarterly fees, which are payable in cash, common stock, RSUs or a combination of common stock, RSUs and cash at the option of the director. Compensation to be paid to our non-executive Board in the form of cash and common equity is $1,351 annually (see Note 9 to the consolidated financial statements).

Current wording

At December 31, 2024, there was approximately $6,185 of unvested stock based compensation related to the Awards (based on a weighted grant date price of $36.38 per share), which we expect to recognize as an expense as follows: in 2025 an expense of $1,987, in 2026 an expense of $1,793, and thereafter an expense of $2,405. Our policy is to account for forfeitures as they occur. We also pay each of our non-executive Board members quarterly fees, which are payable in cash, common stock, RSUs or a combination of common stock, RSUs and cash at the option of the director. Compensation to be paid to our non-executive Board in the form of cash and common equity is $1,219 annually (see Note 10 to the consolidated financial statements).

Previous wording

We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, including classes of preferred stock, common stock and senior or subordinated notes to meet our liquidity requirements. These requirements include maturing repurchase agreements, settling TBA Agency Security positions and potentially making net payments on our interest rate swap contracts, and in each case, continuing to meet ongoing margin requirements. Such financing will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain any such financing.

Current wording

We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, including classes of preferred stock, common stock and senior or subordinated notes to meet our liquidity requirements. As of the date hereof, we have "at-the-market" offering programs with 3,136 shares of 7.00% Series C Cumulative Redeemable Preferred Stock available under the Preferred C ATM Sales Agreement and 9,049 shares of common stock remain available under the 2023 Common stock ATM Sales Agreement. In accordance with the terms of these agreements, we may offer and sell shares of stock over a period of time and from time to time, with BUCKLER and other agents as sales agents (see Note 11 to the consolidated financial statements). These liquidity requirements include maturing repurchase agreements, settling TBA Agency Security positions and potentially making net payments on our interest rate swap contracts, and in each case, continuing to meet ongoing margin requirements. Such financing will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain any such financing.

Previous wording

Valuation modeling is required because each individual MBS pool is a separately identified security with individual combinations of characteristics that influence market pricing. While the Agency Security market is generally very active and liquid within the context of broader classes of MBS, any particular security will likely trade infrequently. Our interest rate contracts are bilateral contracts with individual dealers and counterparties and are not cleared through recognized clearing organizations. Valuation models for these positions rely on information from the active and liquid general interest rate swap market to infer the value of these unique positions.

Current wording

Valuation modeling is required because each individual MBS pool is a separately identified security with individual combinations of characteristics that influence market pricing. While the Agency Security market is generally very active and liquid within the context of broader classes of MBS, any particular security will likely trade infrequently. Our bilateral contracts with individual dealers and counterparties are not cleared through recognized clearing organizations, and valuation models for these positions rely on information from the active and liquid general interest rate swap market to infer the value of these unique positions.

Previous wording

We update our fair value estimates at the end of each business day to reflect current market dynamics. During times of high market volatility, it can be difficult to obtain accurate market information timely, and accordingly, the confidence interval around our valuation estimates will increase, potentially significantly. During 2023, the largest inter-day movement was the overall estimated values of our investment and hedge positions translated to a change in estimated book value of $(0.94) per common share. Similarly, 95% of inter-day movements in estimated value translated to changes in estimated book value per share of $1.30 or less.

Current wording

We update our fair value estimates at the end of each business day to reflect current market dynamics. During times of high market volatility, it can be difficult to obtain accurate market information timely, and accordingly, the confidence interval around our valuation estimates will increase, potentially significantly. During 2024, the largest inter-day movement was the overall estimated values of our investment and hedge positions translated to a change in estimated book value of $(0.52) per common share. Similarly, 95% of inter-day movements in estimated value translated to changes in estimated book value per share of $0.86 or less.

Previous wording

•the geopolitical situation as a result of the war between Russia and Ukraine, as well as the recent outbreak of hostilities in the Middle East, may continue to adversely affect the U.S. economy, which may lead the Fed to take actions that may impact our business;

Current wording

•the geopolitical situation as a result of the war between Russia and Ukraine, as well as the outbreak of hostilities in the Middle East, may continue to adversely affect the U.S. economy, which may lead the Fed to take actions that may impact our business;

Previous wording

•our management's competing duties to other affiliated entities, which could result in decisions that are not in the best interest of our stockholders;

Current wording

•our management's and certain directors' competing duties to other affiliated entities, which could result in decisions that are not in the best interest of our stockholders;

Previous wording

•changes in GAAP, including interpretations thereof; and

Current wording

•changes in GAAP, including interpretations thereof;

Previous wording

•changes in applicable laws and regulations.

Current wording

•changes in applicable laws and regulations; and