ARMOUR Residential REIT(ARR) - 2025 Q1 - Quarterly Report

PART I. Financial Information Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including the balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, fair value measurements, and specific financial instrument details Consolidated Balance Sheets (Unaudited) Consolidated Balance Sheets (Unaudited) | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total Assets | $ 15.50 | $ 13.55 | | Total Liabilities | $ 13.79 | $ 12.19 | | Total Stockholders' Equity | $ 1.70 | $ 1.36 | | Investments in securities, at fair value | $ 14.44 | $ 12.44 | | Repurchase agreements, net | $ 12.49 | $ 10.71 | - Total Assets increased by approximately $1.95 billion from December 31, 2024, to March 31, 2025, driven by higher investments in securities and cash collateral[8] - Total Stockholders' Equity increased by approximately $342 million, reflecting improved financial position[8] Consolidated Statements of Operations (Unaudited) Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Interest Income | $ 36.34 | $ 5.33 | | Total Other Income | $ 4.13 | $ 29.62 | | Total Expenses after fees waived | $ 13.14 | $ 20.44 | | Net Income | $ 27.33 | $ 14.52 | | Net Income available to common stockholders | $ 24.33 | $ 11.52 | | Basic EPS | $ 0.32 | $ 0.24 | | Diluted EPS | $ 0.32 | $ 0.24 | - Net Income increased by 88.3% year-over-year, primarily due to a significant rise in Net Interest Income and a reversal from loss to gain on Agency Securities, trading, net[10] - Gain (Loss) on Agency Securities, trading, net swung from a loss of $(137.75 million) in Q1 2024 to a gain of $208.26 million in Q1 2025[10] - Gain (Loss) on derivatives, net shifted from a gain of $156.45 million in Q1 2024 to a loss of $(191.22 million) in Q1 2025[10] Consolidated Statements of Stockholders' Equity (Unaudited) Consolidated Statements of Stockholders' Equity (Unaudited) | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total Stockholders' Equity | $ 1.70 | $ 1.36 | | Net income | $ 27.33 | $ 27.33 (for Q1 2025) | | Issuance of common stock, net | $ 371.44 | - | | Common stock dividends | $ (54.08) | - | | Preferred stock dividends | $ (3.00) | - | - Total Stockholders' Equity increased by $342.43 million from December 31, 2024, to March 31, 2025, primarily due to net income and significant common stock issuance[13] - Issuance of common stock, net, contributed $371.44 million to equity during the three months ended March 31, 2025[13] Consolidated Statements of Cash Flows (Unaudited) Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :------------------------------------------------------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash and cash equivalents and cash collateral posted to counterparties provided by operating activities | $ 101.48 | $ 96.81 | | Net cash and cash equivalents and cash collateral posted to counterparties provided by (used in) investing activities | $ (2.09 billion) | $ 178.78 | | Net cash and cash equivalents and cash collateral posted to counterparties provided by (used in) financing activities | $ 2.11 billion | $ (274.93) | | Net increase in cash and cash equivalents and cash collateral posted to counterparties | $ 117.31 | $ 0.66 | - Investing activities resulted in a net cash outflow of $2.09 billion in Q1 2025, a significant change from a $178.78 million inflow in Q1 2024, primarily due to increased purchases of Agency Securities[15] - Financing activities provided a substantial net cash inflow of $2.11 billion in Q1 2025, reversing a $274.93 million outflow in Q1 2024, largely driven by proceeds from repurchase agreements and common stock issuance[15][17] - Purchases of Agency Securities increased significantly to $2.41 billion in Q1 2025 from $422.54 million in Q1 2024[15] Consolidated Financial Statement Notes (Unaudited) Note 1 - Organization and Nature of Business Operations - ARMOUR Residential REIT, Inc. is an externally managed Maryland corporation, incorporated in 2008, and managed by ARMOUR Capital Management LP (ACM)[19] - The Company has elected to be taxed as a Real Estate Investment Trust (REIT) and primarily invests in Agency Mortgage-Backed Securities (MBS) issued or guaranteed by U.S. Government-sponsored entities (GSEs) or government agencies[19][20] Note 2 - Basis of Presentation and Consolidation - Unaudited consolidated financial statements are prepared in accordance with GAAP for interim information and SEC rules, including all necessary adjustments[21] - The statements include ARMOUR and its subsidiaries, with all intercompany accounts and transactions eliminated[22] - Management makes significant estimates and assumptions, particularly for the valuation of MBS and derivative instruments[22] Note 3 - Summary of Significant Accounting Policies - Investments in securities are generally classified as trading securities and reported at estimated fair values, with gains and losses included in Other Income (Loss)[26] - Repurchase agreements are accounted for as financing arrangements, pledging MBS as collateral, with interest accruing over the agreement's life[29] - Derivatives are recognized individually at fair value on the consolidated balance sheets, with all changes in fair value reflected in the consolidated statements of operations[32] - TBA Agency Securities are accounted for as derivative instruments if physical delivery is not reasonably possible upon settlement[33] Note 4 - Fair Value of Financial Instruments - The company classifies financial instrument valuations into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (significant unobservable inputs)[36][37][38] - Agency Securities and most derivatives are classified as Level 2, with fair values obtained from third-party pricing services and/or dealer quotes[41][42] Assets and Liabilities Measured at Fair Value (March 31, 2025) | Category | Level 1 (in millions) | Level 2 (in billions) | Level 3 (in millions) | Balance (in billions) | | :-------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Assets at Fair Value: | | | | | | Agency Securities | $ — | $ 14.44 | $ — | $ 14.44 | | Derivatives | $ — | $ 724.83 | $ — | $ 724.83 | | Liabilities at Fair Value: | | | | | | Obligations to return securities as collateral | $ — | $ 506.34 | $ — | $ 506.34 | | Derivatives | $ 45.09 | $ 26.21 | $ — | $ 71.30 | - No transfers of assets or liabilities between fair value hierarchy levels occurred during the three months ended March 31, 2025, or the year ended December 31, 2024[44] Note 5 - Investments in Securities Investments in Securities, at Fair Value | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Agency Securities, at fair value | $ 14.44 | $ 12.44 | | TBA Agency Securities, at fair value | $ 917.90 | $ 0 | Agency Securities, Trading - Unrealized Gain/Loss | Metric | March 31, 2025 (in millions) | December 31, 2024 (in millions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Gross Unrealized Loss | $ (220.58) | $ (370.04) | | Gross Unrealized Gain | $ 64.92 | $ 2.95 | - The weighted average lives of investments are calculated using a third-party model based on estimated prepayments, which incorporate assumptions about interest rates, home prices, and housing policy[49] Note 6 - Repurchase Agreements, net Repurchase Agreements, net | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Outstanding Borrowings | $ 12.49 | $ 10.71 | | Weighted Average Contractual Rate | 4.47% | 4.72% | | Weighted Average Maturity (days) | 28 | 17 | | Average Gross Haircut Percentage | 2.74% | 2.77% | - BUCKLER accounted for 45.7% of aggregate borrowings at both March 31, 2025, and December 31, 2024[59] - The fair value of securities pledged against repurchase agreements was $13.71 billion at March 31, 2025, and $11.80 billion at December 31, 2024[56][57] Note 7 - Derivatives - The company uses interest rate swap contracts, interest rate swaptions, basis swap contracts, and futures contracts to manage interest rate risk and agency mortgage rate exposures[61][62] Gain (Loss) on Derivatives, net | Derivative Type | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Interest rate swap contracts | $ (138.92) | $ 160.71 | | Futures contracts | $ (61.51) | $ — | | TBA Agency Securities | $ 9.21 | $ (4.26) | | Total Gain (Loss) on Derivatives, net | $ (191.22) | $ 156.45 | Interest Rate Swap Contracts Notional Amount | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Aggregate Notional Amount | $ 8.38 | $ 7.23 | | Weighted Average Rate | 2.00% | 1.66% | | Weighted Average Remaining Term (Months) | 68 | 76 | TBA Agency Securities Notional Amount | Metric | March 31, 2025 (in millions) | | :-------------------------------- | :------------------------------ | | Total TBA Agency Securities Notional Amount | $ 900.00 | Note 8 - Commitments and Contingencies - The company is managed by ACM under a management agreement that extends through December 31, 2029[83] - ACM voluntarily waived $1.65 million in management fees for both the three months ended March 31, 2025, and March 31, 2024[81] Contractual Management Fee Commitments (prior to waiver) | Year | Contractual Management Fee (in millions) | | :---------------- | :---------------------------------------- | | Remainder of 2025 | $ 33.04 | | 2026 | $ 44.05 | | 2027 | $ 44.05 | | 2028 | $ 44.05 | | 2029 | $ 44.05 | | Total | $ 209.26 | - No material liabilities were recorded for indemnification agreements at March 31, 2025, and December 31, 2024[84] Note 9 - Stock Based Compensation - The company has a Stock Incentive Plan to attract, retain, and reward directors and service providers, with 228 thousand shares available for future issuance at March 31, 2025[85] Unvested RSU Awards Outstanding | Metric | March 31, 2025 (in thousands) | | :-------------------------------- | :---------------------------- | | Unvested RSU Awards Outstanding beginning of period | 170 | | Vested | (12) | | Unvested RSU Awards Outstanding end of period | 158 | - Expected unvested stock-based compensation expense: $1.48 million for the remainder of 2025, $1.79 million in 2026, and $2.42 million thereafter[86] Note 10 - Stockholders' Equity Cumulative Distributions to Stockholders | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Preferred dividends | $ 171.79 | $ 168.79 | | Common stock dividends | $ 2.27 | $ 2.21 | | Totals | $ 2.44 | $ 2.38 | Common Stock Issued and Outstanding | Metric | March 31, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Common stock issued and outstanding | 82,416 | 62,412 | Equity Transactions (Three Months Ended March 31, 2025) | Transaction Type | Number of Shares (in thousands) | Per Share Price | Net Proceeds (costs) (in millions) | | :-------------------------------- | :------------------------------ | :-------------- | :---------------------------------- | | Preferred C ATM Sales Agreement | 17 | $ 16.08 | $ 0.28 | | 2023 Common stock ATM Sales Agreement | 19,992 | $ 18.58 | $ 371.41 | | DRIP shares issued | 1 | $ 18.47 | $ 0.03 | - The company repurchased 667 common shares for a cost of $(10.03 million) through April 8, 2025, under its Common Stock Repurchase Program, with 2,217 authorized shares remaining[97] Note 11 - Net Income per Common Share Net Income per Common Share Reconciliation | Metric | Three Months Ended March 31, 2025 (in millions, except per share) | Three Months Ended March 31, 2024 (in millions, except per share) | | :----------------------------------- | :--------------------------------------------------------------- | :--------------------------------------------------------------- | | Net Income available to common stockholders | $ 24.33 | $ 11.52 | | Weighted average common shares outstanding – basic | 75,222 | 48,770 | | Basic EPS | $ 0.32 | $ 0.24 | | Diluted EPS | $ 0.32 | $ 0.24 | - Net income available to common stockholders increased by 111.2% year-over-year[106] - Weighted average common shares outstanding (basic) increased by 54.2% year-over-year[106] Note 12 - Income Taxes Estimated REIT Taxable Income | Metric | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | GAAP net income | $ 27.33 | $ 14.52 | | Estimated REIT taxable income | $ 52.80 | $ 27.51 | - Unrealized gains and losses on open interest rate contracts are not included in the determination of REIT taxable income[108] - At March 31, 2025, the company had $257.34 million of net operating loss carryforwards available for use indefinitely[108] - Total dividend payments to stockholders were $57.08 million for Q1 2025, up from $38.31 million in Q1 2024[111] Note 13 - Related Party Transactions - The company is managed by ACM, and all executive officers are ACM employees. ACM voluntarily waived $1.65 million in management fees for both Q1 2025 and Q1 2024[114][115][117] - ARMOUR holds a 10.8% equity interest in BUCKLER Securities LLC, primarily to facilitate access to repurchase financing[119][120] - BUCKLER accounted for 45.7% of ARMOUR's aggregate borrowings under repurchase agreements at March 31, 2025, and December 31, 2024[59] - The company committed to provide on-demand subordinated loan agreements to BUCKLER totaling up to $250 million, collateralized by MBS and/or U.S. Treasury Securities[122] - During Q1 2025, the company sold 9,792 common shares through BUCKLER as a sales agent, generating net proceeds of $183.20 million[124] Note 14 - Segment Reporting - The company operates as a single operating and reportable segment, investing primarily in fixed-rate residential, adjustable-rate, and hybrid adjustable-rate MBS[126][127] - The Chief Operating Decision Maker (CODM) manages the investment portfolio as a whole, with decisions made collectively based on total assets and net income[126] Note 15 - Subsequent Events - No material subsequent events were identified through the date of filing this Quarterly Report on Form 10-Q, except as disclosed in Note 10 and Note 13[128] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, discussing key factors affecting performance, market trends, and critical accounting estimates. It highlights the company's investment strategy, risk management, and liquidity position Overview - ARMOUR is an externally managed Maryland corporation, taxed as a REIT, focused on creating stockholder value through a leveraged and diversified portfolio of Agency MBS[132][133] - The company prioritizes maintaining common share dividends appropriate for the intermediate term and is committed to sustainable environmental, social, and governance practices[133][134] - Returns are earned on the spread between the yield on assets and the costs of borrowed funds, after giving effect to hedges[136] Factors that Affect our Results of Operations and Financial Condition Interest Rates - Changes in interest rates, especially short-term rates, significantly influence net interest income and the market value of assets; increases tend to decrease net interest income and book value[140] - The company uses strategies to economically hedge some, but not all, interest rate risk, and for GAAP purposes, all changes in the fair value of derivatives flow through earnings[141] Prepayment Rates - Prepayments on MBS are influenced by market interest rates, economic factors, and policy decisions, impacting anticipated yield, especially for securities acquired at a premium or discount[142] - In periods of declining interest rates, increased prepayments may reduce net interest income if proceeds cannot be reinvested at comparable yields[142] Market and Interest Rate Trends and the Effect on our Securities Portfolio First Quarter 2025 Trends - U.S. tariffs and responsive tariffs from global trading partners have increased financial market volatility and interest rates[144] - The company is focused on prioritizing liquidity, mitigating risk, and managing its assets and hedging portfolios through this period of increased market volatility[147] Federal Reserve Actions - The Federal Reserve maintained the target range for the Federal Funds Rate at 4.25% to 4.50% in January and March 2025[148] - Beginning April 2025, the Fed will slow the pace of decline of its securities holdings, reducing the monthly Treasury redemption cap to $5 billion from $25 billion, while maintaining the agency debt and MBS cap at $35 billion[149] - The agency mortgage-backed securities market remains highly dependent on the future course and timing of the Fed's actions on interest rates and asset purchases/holdings[150] Developments at Fannie Mae and Freddie Mac - The long-term viability of Fannie Mae and Freddie Mac, and thus the market for Agency Securities, remains uncertain due to ongoing U.S. Government intervention[151] - Default or cessation of these GSEs could materially and adversely affect the value of the company's Agency Securities and its business[151] Short-term Interest Rates and Funding Costs - The company's cost of funds is largely dependent on short-term rates; an increase without a corresponding increase in MBS interest income would cause net income to decline[152] Federal Funds Rate Target Range Changes (since beginning of 2023) | Meeting Date | Lower Bound | Higher Bound | | :--------------- | :---------- | :----------- | | December 18, 2024 | 4.25 % | 4.50 % | | September 18, 2024 | 4.75 % | 5.00 % | | July 26, 2023 | 5.25 % | 5.50 % | | May 3, 2023 | 5.00 % | 5.25 % | | March 22, 2023 | 4.75 % | 5.00 % | | February 1, 2023 | 4.50 % | 4.75 % | - Borrowings in the repurchase market closely track the Federal Funds Rate and SOFR, and volatility or divergence in these rates could negatively impact portfolio management[154] Long-term Interest Rates and Mortgage Spreads - Mortgage spreads, which represent the valuation of securities versus long-term interest rates, vary over time and affect the company's book value[157] - The company primarily uses interest rate swap contracts, swaptions, basis swap contracts, and futures contracts to economically hedge against changes in securities valuation, not for speculative purposes[160] Results of Operations Net Interest Income Net Interest Income | Metric | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | Interest Income | $ 172.88 | $ 141.48 | | Interest Expense | $ (136.54) | $ (136.15) | | Net Interest Income | $ 36.34 | $ 5.33 | - Net Interest Income increased significantly by $31.01 million (581.7%) year-over-year, driven by a larger investment portfolio and lower repurchase financing costs[162][164] Net Interest Spread | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net Interest Spread | 0.49 % | (0.47)% | | Net Yield on Interest Earning Assets | 1.05 % | 0.18 % | Other Income (Loss) Other Income (Loss) | Metric | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Gain (Loss) on Agency Securities, trading, net | $ 208.26 | $ (137.75) | | Gain (Loss) on U.S. Treasury Securities, net | $ (12.91) | $ 10.92 | | Gain (Loss) on derivatives, net | $ (191.22) | $ 156.45 | | Total Other Income | $ 4.13 | $ 29.62 | - Total Other Income decreased by $25.49 million year-over-year, primarily due to a significant loss on derivatives, despite a substantial gain on Agency Securities, trading, net[170] - The change in fair value of Agency Securities was a gain of $211.43 million in Q1 2025, compared to a loss of $(135.12 million) in Q1 2024[171] Expenses Expenses | Metric | Three Months Ended March 31, 2025 (in millions) | Three Months Ended March 31, 2024 (in millions) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Management fees | $ 10.77 | $ 9.80 | | Compensation | $ 0.81 | $ 1.44 | | Other operating | $ 3.21 | $ 10.85 | | Total Expenses | $ 14.79 | $ 22.09 | | Less management fees waived | $ (1.65) | $ (1.65) | | Total Expenses after fees waived | $ 13.14 | $ 20.44 | - Total Expenses after fees waived decreased by $7.29 million (35.7%) year-over-year, primarily due to lower other operating expenses, which included non-recurring costs in the prior year[173] - Other operating expenses in Q1 2024 included $9.01 million related to a Special Committee internal investigation[175] - The effective management fee (prior to waiver) was 0.90% at March 31, 2025, compared to 0.93% at March 31, 2024[173] Taxable Income - As a REIT that regularly distributes its taxable income, the company is generally not required to pay federal income tax[174] - At March 31, 2025, the company had approximately $(192.66 million) of net deductible expense relating to previously terminated interest rate swap and treasury futures/shorts contracts[177] - The company had $257.34 million of net operating loss carryforwards available for use indefinitely at March 31, 2025[177] Financial Condition Investment In Securities - The securities portfolio primarily consists of Agency Securities backed by fixed-rate home loans, with TBA Agency Securities reported at net carrying value in Derivatives, at fair value[178] Total Investments in Securities (Fair Value) | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Total Agency Securities | $ 14.44 | $ 12.44 | | Total TBA Agency Securities | $ 917.90 | $ 0 | | Total Investments | $ 15.36 | $ 12.44 | - The weighted average Constant Prepayment Rate (CPR) for Agency Fixed Rates ≥ 181 months was 6.1% during Q1 2025, compared to 8.7% during Q4 2024[184][187] Changes in Investments in Securities (Q1 2025) | Activity | Agency Securities, Trading (in billions) | | :------------------------ | :-------------------------------------- | | Balance, beginning of period | $ 12.44 | | Purchases | $ 2.30 | | Proceeds from sales | $ (234.20) | | Principal repayments | $ (274.01) | | Gains (losses) | $ 208.26 | | Balance, end of period | $ 14.44 | Repurchase Agreements, net Outstanding Repurchase Agreements, net | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Outstanding Balances | $ 12.49 | $ 10.71 | | Average Gross Haircut Percentage | 2.74% | 2.77% | - BUCKLER accounted for 45.7% of the company's aggregate borrowings at both March 31, 2025, and December 31, 2024[191] Derivative Instruments Derivatives Net Fair Value | Metric | March 31, 2025 (in millions) | December 31, 2024 (in millions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Net Fair Value of Derivatives | $ 653.53 | $ 906.78 | Interest Rate Swap Contracts | Metric | March 31, 2025 (in billions) | December 31, 2024 (in billions) | | :-------------------------------- | :------------------------------ | :------------------------------- | | Aggregate Notional Balance | $ 8.38 | $ 7.23 | | Weighted Average Swap Rate | 2.00% | 1.66% | | Weighted Average Term (Months) | 68 | 76 | - The company had TBA Agency Securities with an aggregate notional balance of $900 million at March 31, 2025, compared to $0 at December 31, 2024[194] - Net (losses) gains related to derivatives were $(191.22 million) for Q1 2025, compared to $156.45 million for Q1 2024[199] Liquidity and Capital Resources - Total liquidity at March 31, 2025, was $847.96 million, comprising $49.12 million in cash and cash equivalents and $798.85 million in unencumbered Agency Securities and U.S. government securities[208] Debt to Equity Ratios | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Debt to Equity Ratio | 7.33:1 | 7.87:1 | | Leverage Ratio (incl. TBA Securities) | 7.87:1 | 7.87:1 | - Primary sources of funds include borrowings under repurchase arrangements, monthly principal and interest payments on MBS, and cash generated from operating results[208] Securities Portfolio Matters Securities Portfolio Key Metrics | Metric | Three Months Ended March 31, 2025 (in billions) | Three Months Ended March 31, 2024 (in millions) | | :------------------------------------------------------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Securities purchased using proceeds from repurchase agreements and principal repayments | $ 2.30 | $ 450.70 | | Average securities portfolio, including TBA Securities | $ 14.36 | $ 11.51 | | Cash received from principal repayments on MBS | $ 274.01 | $ 182.55 | - The average securities portfolio, including TBA Securities, increased by 24.8% year-over-year[214] Other Contractual Obligations - The management agreement with ACM runs through December 31, 2029, with ACM voluntarily waiving $1.65 million in management fees for Q1 2025[217][220] - Expected unvested stock-based compensation expense is $1.48 million for the remainder of 2025, $1.79 million in 2026, and $2.42 million thereafter[221] Effects of Margin Requirements, Leverage and Credit Spreads - Declines in the value of the Agency Securities portfolio can trigger margin calls from lenders under repurchase agreements, requiring additional collateral or cash[228] - Lenders have full discretion to determine the value of pledged MBS and issue margin calls based on market conditions and principal balance changes[228] - Changing capital or financial market regulatory requirements may cause lenders to exit the repurchase market, increase financing rates, or tighten lending standards[224] Forward-Looking Statements Regarding Liquidity - The company believes it has sufficient liquidity from operations and portfolio adjustments to meet short-term requirements, including investment activities, financing obligations, and dividend payments[229] - Potential sources of increased capital resources include long-term credit facilities or public/private offerings of equity or debt securities[230] - As of the filing date, the company has 'at-the-market' offering programs with 3.14 million shares of Series C Preferred Stock and 18.06 million shares of common stock available[230] Stockholders' Equity - Refer to Note 10 for detailed information regarding stockholders' equity[233] Critical Accounting Estimates Valuation - Fair value estimates for financial instruments are based on valuations from third-party pricing services and/or dealer quotes, utilizing models that incorporate various market factors[234] - Management reviews and challenges pricing to ensure current market conditions are reflected, acknowledging that estimated fair values may not represent actual transaction prices[234][236] - During Q1 2025, the largest inter-day movement in overall estimated values of investment and hedge positions translated to a change in estimated book value of $(0.28) per common share[238] Inflation - The company's performance is primarily influenced by interest rates, as virtually all assets and liabilities are interest rate-sensitive, rather than inflation rates[239] - Financial statements and distributions are measured with reference to fair value without considering inflation[241] Subsequent Events - Refer to Note 10, Note 13, and Note 15 to the consolidated financial statements for details on subsequent events[242] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS - Forward-looking statements are based on beliefs, assumptions, and expectations that are subject to various risks and uncertainties, which could cause actual results to vary materially[244] - Key risk factors include changes in interest rates, governmental regulation (e.g., tariffs, Fed actions, GSE developments), economic conditions, and the company's REIT status[244][247] - The company disclaims any duty or obligation to update or revise forward-looking statements, except as required under U.S. federal securities laws[246] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to various market risks, including interest rate, mortgage spread, prepayment, credit, liquidity, and operational risks, and outlines its approach to managing these risks Interest Rate Risk - The primary market risk is interest rate risk, which affects net interest income and the market value of MBS, as borrowing costs may rise or fall more quickly than earnings rates on assets[254][255] - The company assesses interest rate risk by estimating the effective duration of assets and liabilities and the time difference in their interest rate adjustments[258] Sensitivity Analysis: Impact of Interest Rate Changes (March 31, 2025) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Including Derivatives | Percentage Change in Projected Shareholder's Equity | | :----------------------- | :----------------------------------------------- | :--------------------------------------------------- | :-------------------------------------------------- | | 1.00% | (1.23)% | (0.99)% | (8.94)% | | 0.50% | (0.69)% | (0.36)% | (3.26)% | | (0.50)% | 0.87% | (0.02)% | (0.22)% | | (1.00)% | 2.06% | (0.47)% | (4.27)% | Mortgage Spread Risk - Weakness in the mortgage market can adversely affect the performance and market value of investments, potentially impacting book value[262] Sensitivity Analysis: Impact of MBS Spread Changes (March 31, 2025) | Change in MBS spread | Percentage Change in Projected Portfolio Value | Percentage Change in Projected Shareholders' Equity | | :------------------- | :------------------------------------------- | :-------------------------------------------------- | | +25 BPS | (1.23)% | (11.12)% | | +10 BPS | (0.49)% | (4.45)% | | -10 BPS | 0.49% | 4.45% | | -25 BPS | 1.23% | 11.12% | Prepayment Risk - Volatility in actual prepayment speeds on MBS creates volatility in the amount of premium amortization recognized, directly impacting interest income[266] - Higher prepayment speeds reduce interest income, while lower speeds increase it[266] Credit Risk - The company has limited exposure to impairment losses on its Agency Securities, as principal and interest payments are guaranteed by GSEs or backed by the full faith and credit of the U.S. Government[267] - All Agency Securities are issued and guaranteed by GSEs or Ginnie Mae, with GSEs having a long-term credit rating of AA+[267] - Uncertainty regarding the U.S. Government's conservatorship of Fannie Mae and Freddie Mac could impact the credit risk and value of Agency Securities[267] Liquidity Risk - The primary liquidity risk arises from financing long-maturity MBS with short-term debt, which can lead to increased borrowing costs in a rising interest rate environment[268] - A decline in the value of MBS pledged as collateral for repurchase agreements could result in margin calls, requiring additional collateral or liquidation of existing collateral[268] Operational Risk - The company relies on its financial, accounting, and data processing systems and is exposed to cybersecurity risks, including malware, viruses, hacking, and phishing attacks[269] - An Information Technology Steering Committee (ITSC) and the Audit Committee oversee cybersecurity risks, including assessments, training, policies, and penetration testing[270][271] - Despite mitigation efforts, there is no assurance that cybersecurity risks will be effectively mitigated or that incidents will not occur[270] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting Evaluation of Disclosure Controls and Procedures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2025[273] Internal Control Over Financial Reporting - Management's evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during Q1 2025[274] PART II. Other Information Item 1. Legal Proceedings This section confirms that there have been no material changes to the legal proceedings previously disclosed in the company's Annual Report on Form 10-K - No material changes to the legal proceedings disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024, were reported during the quarter ended March 31, 2025[276] Item 1A. Risk Factors This section updates the risk factors, noting no material changes except for the added risk concerning recent tariff actions by the U.S. and other countries, which may adversely affect the business and financial markets - No material changes to the risk factors disclosed in the Annual Report on Form 10-K, except for the impact of recent tariff actions by the U.S. and other countries[277] - U.S. tariffs and responsive tariffs have resulted in significant financial market volatility and may have a material adverse effect on the company's business, financial condition, and the market price of its common stock[278] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - None[279] Item 3. Defaults Upon Senior Securities This section reports that there were no defaults upon senior securities - None[279] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Not applicable[279] Item 5. Other Information This section states that there is no other information to report - None[280] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to equity sales agreements and various certifications - Exhibit 10.1 includes Amendment No. 5, dated February 13, 2025, to the 2023 Common stock ATM Sales Agreement[282] - Includes certifications of the Chief Executive Officer and Chief Financial Officer pursuant to SEC Rules 13a-14(a)/15d-14(a) and 18 U.S.C. §1350[282] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are filed[282] GLOSSARY OF TERMS - Provides definitions for key terms and abbreviations used in the report, such as 'Agency Securities' (MBS issued or guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae)[249] - Defines 'BUCKLER' as a FINRA-regulated broker-dealer, where the company's investment facilitates access to repurchase financing[249] - Explains 'TBA Agency Securities' as forward contracts for the purchase or sale of Agency Securities at a predetermined price and future date[251] SIGNATURES - The report was duly signed on April 23, 2025, by Gordon M. Harper, Chief Financial Officer, Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer[285]