Armour Residential REIT, Inc. (ARR) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
ARMOUR Residential REIT, Inc.
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You should read the following discussion and analysis of our financial condition and results of operations together with “Risk Factors,” and “Special Note Regarding Forward-Looking Statements,” that appear elsewhere in this Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risk Factors” included in this Form 10-K.
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% 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.
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. U.S. dollar amounts are presented in thousands, except per share amounts or as otherwise noted.
Overview
ARMOUR is a Maryland corporation formed in 2008 and managed by ACM, an investment advisor registered with the SEC (see Note 9 and Note 15 to the consolidated financial statements). We have elected to be taxed as a REIT under the Code. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes.
Our strategy is to create shareholder value through thoughtful investment and risk management that produces current yield and superior risk adjusted returns over the long term. Our focus on residential real estate finance supports home ownership for a broad and diverse spectrum of Americans by bringing private capital into the mortgage markets. We are deeply committed to implementing sustainable environmental, responsible social, and prudent governance practices that improve our work and our world.
We strive to contribute to a healthy, sustainable environment by utilizing resources efficiently. As an organization, we create a relatively small environmental footprint. Still, we are focused on minimizing the environmental impact of our business where possible.
At December 31, 2021 and December 31, 2020, 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. The remaining are either backed by hybrid adjustable rate or adjustable rate loans. From time to time we have also invested in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and money market instruments.
We earn returns on the spread between the yield on our assets and our costs, including the interest cost of the funds we borrow, after giving effect to our hedges. We identify and acquire MBS, finance our acquisitions with borrowings under a series of short-term repurchase agreements and then hedge certain risks based on our entire portfolio of assets and liabilities and our management’s view of the market.
Factors that Affect our Results of Operations and Financial Condition
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
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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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. In the past, we have invested in Credit Risk and Non-Agency Securities and it is possible we may do so in the future. 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.
Interest Rates
Changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets, generally of a longer term than those of our liabilities, interest rate increases will tend to decrease our net interest income and the market value of our assets (and therefore our book value). Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our stockholders. Our operating results depend, in large part, upon our ability to manage interest rate risks effectively while maintaining our status as a REIT.
Prepayment Rates
Prepayments on MBS and the underlying mortgage loans may be influenced by changes in market interest rates and a variety of economic and geographic factors, policy decisions by regulators, as well as other factors beyond our control. To the extent we hold MBS acquired at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our MBS will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may decline. Our operating results depend, in large part, upon our ability to manage prepayment risks effectively while maintaining our status as a REIT.
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. Also, since we have not elected to use cash flow hedge accounting, earnings reported in accordance with GAAP will fluctuate even in situations where our derivatives are operating as intended. As a result of this mark-to-market accounting treatment, our results of operations are likely to fluctuate far more than if we were to designate our derivative activities as cash flow hedges. Comparisons with companies that use cash flow hedge accounting for all or part of their derivative activities may not be meaningful. For these and other reasons more fully described under the section captioned “Derivative Instruments” below, no assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition.
In addition to the use of derivatives to hedge interest rate risk, a variety of other factors relating to our business may also impact our financial condition and operating performance; these factors include:
•our degree of leverage;
•our access to funding and borrowing capacity;
•the REIT requirements under the Code; and
•the requirements to qualify for an exclusion under the 1940 Act and other regulatory and accounting policies related to our business.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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Management
See sections titled Management in Item 1. Business and also in Note 9 and Note 15 to the consolidated financial statements. The emergence of variant strains of the COVID-19 virus continues to influence individual and institutional behaviors and likely will for some time to come. Our remote work protocol has allowed us to shift quickly between in-person and virtual work environments to adapt effectively to changing conditions.
Market and Interest Rate Trends and the Effect on our Securities Portfolio
Federal Reserve Actions
In Q4 2021, the Federal Reserve commenced tapering the interventions which began in March 2020. The Fed has indicated that it will accelerate the reduction of its monthly bond purchases, including agency residential and commercial mortgage backed securities, in 2022. The Fed has also indicated that it will likely increase the Federal Funds Rate in 2022. Financial markets will likely be highly sensitive to the Fed’s interest rate and bond purchasing decisions and communication. ARMOUR continues to mitigate risk, use moderate leverage (as compared to historical levels) and maximize liquidity within the scope of its business plan. ARMOUR has carefully selected new Agency Securities within the context of the current historically high prices of our target assets. The agency mortgage backed securities market remains highly dependent on the future course and timing of the Fed's actions on interest rates and market purchases of our target assets.
Developments at Fannie Mae and Freddie Mac
The payments we receive on the Agency Securities in which we invest depend upon a steady stream of payments by borrowers on the underlying mortgages and the fulfillment of guarantees by GSEs. There can be no assurance that the U.S. Government's intervention in Fannie Mae and Freddie Mac will continue to be adequate or assured for the longer-term viability of these GSEs. These uncertainties may lead to concerns about the availability of and market for Agency Securities in the long term. Accordingly, if the GSEs defaulted on their guaranteed obligations, suffered losses or ceased to exist, the value of our Agency Securities and our business, operations and financial condition could be materially and adversely affected.
The passage of any new federal legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by them. If Fannie Mae and Freddie Mac were reformed or wound down, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac Agency Securities. The foregoing could materially adversely affect the pricing, supply, liquidity and value of the Agency Securities in which we invest and otherwise materially adversely affect our business, operations and financial condition.
Short-term Interest Rates and Funding Costs
Changes in Fed policy affect our financial results, since our cost of funds is largely dependent on short-term rates. An increase in our cost of funds without a corresponding increase in interest income earned on our MBS would cause our net income to decline. Below is the Fed's target range for the Federal Funds Rate at each Fed meeting where a change was made since March 2019.
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Financial Condition and Results of Operations
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| Meeting Date | Lower Bound | Higher Bound | ||||
|---|---|---|---|---|---|---|
| March 16, 2020 | 0.00 | % | 0.25 | % | ||
| March 3, 2020 | 1.00 | % | 1.25 | % | ||
| October 2019 | 1.50 | % | 1.75 | % | ||
| September 2019 | 1.75 | % | 2.00 | % | ||
| July 2019 | 2.00 | % | 2.25 | % | ||
| March 2019 | 2.25 | % | 2.50 | % |
Our borrowings in the repurchase market have historically closely tracked the Federal Funds Rate and LIBOR, and more recently SOFR. Traditionally, a lower Federal Funds Rate has indicated a time of increased net interest margin and higher asset values. Volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our securities portfolio. If rates were to increase as a result, our net interest margin and the value of our securities portfolio might suffer as a result. The scheduled discontinuation of LIBOR contracts in December 2021 did not significantly impact our liquidity or the value of our MBS. Our remaining MBS exposure to LIBOR at December 31, 2021 is $6,657 of legacy ARMs. Our derivatives are either Federal Funds Rate or SOFR-based interest rate swap contracts; none are LIBOR-based (see Note 8 to the consolidated financial statements).
The following graph shows 30-day LIBOR as compared to the Effective Federal Funds Rate and SOFR Rate on a monthly basis from December 31, 2019 to December 31, 2021.
Long-term Interest Rates and Mortgage Spreads
Our securities are valued at an interest rate spread versus long-term interest rates (mortgage spread). This mortgage spread varies over time and can be above or below long-term averages, depending upon market participants' current desire to own MBS over other investment alternatives. When the mortgage spread gets smaller (or negative) versus long-term interest rates, our book value will be positively affected. When this spread gets larger (or positive), our book value will be negatively affected.
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Financial Condition and Results of Operations
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Mortgage spreads can vary due to movements in securities valuations, movements in long-term interest rates or a combination of both. We mainly use interest rate swap contracts, interest rate swaptions, basis swap contracts and Futures Contracts to economically hedge against changes in the valuation of our securities. We do not use such hedging contracts for speculative purposes.
We may reduce our mortgage spread exposure by entering in to certain TBA Agency Securities short positions. The TBA short positions may represent different securities and maturities than our MBS and TBA Agency Security long positions, and accordingly, may perform somewhat differently. While we expect our TBA Agency Securities short positions to perform well compared to our related mortgage securities, there can be no assurance as to their relative performance.
Results of Operations
| For the Years Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
| Net Interest Income | 73,681 | 106,783 | 151,336 | ||||||||
| Total Other Loss | (23,403) | (289,929) | (362,761) | ||||||||
| Total Expenses after fees waived | (34,915) | (31,966) | (38,480) | ||||||||
| Net Income (Loss) | 15,363 | (215,112) | (249,905) | ||||||||
| Reclassification adjustment for realized (gain) on sale of available for sale Agency Securities | (10,952) | (143,877) | (9,611) | ||||||||
| Reclassification adjustment for credit loss expense on available for sale Agency Securities | — | 1,012 | — | ||||||||
| Net unrealized gain (loss) on available for sale Agency Securities | $ | (61,106) | $ | (33,577) | $ | 408,954 | |||||
| Other comprehensive income (loss) | (72,058) | (176,442) | 399,343 | ||||||||
| Comprehensive Income (Loss) | (56,695) | (391,554) | 149,438 |
Net income for the year ended December 31, 2021 reflects interest income from a smaller average securities portfolio as well as gains (losses) on our Agency Securities and the realized and unrealized gains (losses) on our derivatives, including TBA Agency Securities. Our results for the year ended December 31, 2020 were significantly impacted by COVID-19 that started in the second week of March 2020. To increase liquidity, we significantly reduced our portfolio of Agency Securities (including TBA Agency Securities) by 39.1% from December 31, 2019. During the third quarter of 2020, we completed the liquidation of our Credit Risk and Non-Agency Securities. The net loss for the year ended December 31, 2020 reflected losses on derivatives due to the termination of interest rate swap contracts and losses on Credit Risk Transfer and Non-Agency Securities that were offset by gains on sales of Agency Securities and gains on TBA Agency Securities.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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Net interest income is a function of both our securities portfolio size and net interest rate spread.
| For the Years Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
| Interest Income: | |||||||||||
| Agency Securities, net of amortization of premium and fees | $ | 80,134 | $ | 151,206 | $ | 382,811 | |||||
| Credit Risk and Non-Agency Securities, including discount accretion | — | 17,746 | 52,919 | ||||||||
| Interest-Only Securities | — | — | 596 | ||||||||
| U.S. Treasury Securities | 587 | 469 | 1,353 | ||||||||
| Buckler Subordinated loan | 70 | 333 | 1,886 | ||||||||
| Total Interest Income | $ | 80,791 | $ | 169,754 | $ | 439,565 | |||||
| Interest expense-repurchase agreements | (7,023) | (62,939) | (288,229) | ||||||||
| Interest expense-U.S. Treasury Securities sold short | (87) | (32) | — | ||||||||
| Net Interest Income | $ | 73,681 | $ | 106,783 | $ | 151,336 |
Year Ended December 31, 2021 vs. Year Ended December 31, 2020:
•Our average securities portfolio, including TBA Agency Securities, decreased 2.0% from $7,834,588 for the year ended December 31, 2020 to $7,677,721 for the year ended December 31, 2021.
•Our average securities portfolio yield decreased 0.55% and our average cost of funds decreased 0.60% year over year.
•Our net interest rate spread increased 0.05% year over year.
•MBS prepayments were $4,292 for the year ended December 31, 2021 compared to $202 for the year ended December 31, 2020.
Year Ended December 31, 2020 vs. Year Ended December 31, 2019:
•Our average securities portfolio, including TBA Agency Securities, decreased 37.1% from $12,461,442 for the year ended December 31, 2019 to $7,834,588 for the year ended December 31, 2020.
•Our average securities portfolio yield decreased 1.04% and our average cost of funds decreased 1.16% year over year.
•Our net interest rate spread increased 0.12% year over year, however net interest income decreased due to a lower average securities portfolio balance.
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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The following table presents the components of the yield earned on our securities portfolio for the quarterly periods ended on the dates shown below:
| Asset Yield | Cost of Funds | Net Interest Margin | Interest Expense on Repurchase Agreements | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | 2.15 | % | 0.40 | % | 1.75 | % | 0.16 | % | ||||
| September 30, 2021 | 2.15 | % | 0.45 | % | 1.70 | % | 0.17 | % | ||||
| June 30, 2021 | 1.95 | % | 0.50 | % | 1.45 | % | 0.17 | % | ||||
| March 31, 2021 | 1.84 | % | 0.35 | % | 1.49 | % | 0.23 | % | ||||
| December 2020 | 1.99 | % | 0.27 | % | 1.72 | % | 0.26 | % | ||||
| September 2020 | 2.21 | % | 0.26 | % | 1.95 | % | 0.26 | % | ||||
| June 2020 | 2.53 | % | 0.90 | % | 1.63 | % | 0.55 | % | ||||
| March 2020 | 3.18 | % | 1.95 | % | 1.23 | % | 1.94 | % | ||||
| December 2019 | 3.63 | % | 2.14 | % | 1.49 | % | 2.14 | % |
The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. The following graph shows the annualized CPR on a monthly basis for the quarterly periods ended on the dates shown below.
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Financial Condition and Results of Operations
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| For the Years Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
| Other Loss: | |||||||||||
| Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive income (loss)) | $ | 10,952 | $ | 143,877 | $ | 9,611 | |||||
| Credit loss expense | — | (1,012) | — | ||||||||
| Gain (loss) on Agency Securities, trading | (77,145) | 19,557 | — | ||||||||
| Loss on Credit Risk and Non-Agency Securities | — | (189,555) | (24,396) | ||||||||
| Gain on Interest-Only Securities | — | — | 123 | ||||||||
| Gain (loss) on U.S. Treasury Securities | (9,363) | 21,771 | 2,024 | ||||||||
| Loss on short sale of U.S. Treasury Securities | (28) | (414) | — | ||||||||
| Subtotal | $ | (75,584) | $ | (5,776) | $ | (12,638) | |||||
| Realized loss on derivatives (1) | (98,143) | (378,208) | (213,996) | ||||||||
| Unrealized gain (loss) on derivatives | 150,324 | 94,055 | (136,127) | ||||||||
| Subtotal | $ | 52,181 | $ | (284,153) | $ | (350,123) | |||||
| Total Other Loss | $ | (23,403) | $ | (289,929) | $ | (362,761) |
Year Ended December 31, 2021 vs. Year Ended December 31, 2020:
•Gains on Agency Securities, available for sale, resulted from the proceeds from sales of Agency Securities during the year ended December 31, 2021 of $167,202 compared to $10,800,879 during the year ended December 31, 2020.
•During the year ended December 31, 2021 we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. No credit loss expense was required for the year ended December 31, 2021.
•Gains (losses) on Agency Securities, trading, resulted from the change in fair value of the securities as well as losses on sales during the year ended December 31, 2021. The change in fair value of the securities was $(74,214) for the year ended December 31, 2021. For the year ended December 31, 2021, we sold $813,178 of these securities which resulted in a loss of $(2,931) for the year ended December 31, 2021. The change in fair value of the securities was $20,691 for the year ended December 31, 2020. For the year ended December 31, 2020, we sold $158,708 of these securities which resulted in a loss of $1,134.
•Loss on Credit Risk and Non-Agency Securities results from the sale of securities as well as the change in fair value of the securities. We did not have any Credit Risk and Non-Agency Securities at December 31, 2021 or December 31, 2020.
•Gains on Interest-Only Securities results from the sale of securities as well as the change in fair value of the securities. We did not have any Interest-Only Securities at December 31, 2021 or December 31, 2020.
•Gains (loss) on U.S. Treasury Securities resulted from the change in fair value of the securities as well as gains on sales during the year ended December 31, 2021. The change in fair value of the securities was $154 for the year ended December 31, 2021. For the year ended December 31, 2021, we sold $389,586 of these securities which resulted in a realized gain of $9,209 for the year ended December 31, 2021. Sales of U.S. Treasury Securities were $3,785,248 for the year ended December 31, 2020 resulting in realized gain of $21,771.
•Gain (losses) on Derivatives resulted from a combination of the following:
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Financial Condition and Results of Operations
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▪Interest rate swap contracts' aggregate notional balance was $7,210,000 at December 31, 2021 and $5,337,000 at December 31, 2020.
▪Our total TBA Agency Securities aggregate notional balance was $4,500,000 at December 31, 2021 and $2,600,000 at December 31, 2020.. The rolling of TBA positions throughout 2021 resulted in losses of $(21,347) for the year ended December 31, 2021 compared to the prior period income of $111,927.
Year Ended December 31, 2020 vs. Year Ended December 31, 2019:
•Gains (losses) on Agency Securities, available for sale, resulted from the proceeds from sales of Agency Securities, available for sale, during the year ended December 31, 2020 of $10,800,879 compared to $2,894,339 during the year ended December 31, 2019.
•During the year ended December 31, 2020, we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. It was determined in the first quarter that, as we may have been required to sell certain securities in the near future, we recognized an impairment of $1,012 in our consolidated statements of operations. No credit loss expense was required for the remaining quarters of 2020.
•Gains on Agency Securities, trading, resulted from the change in fair value of the securities as well as losses on sales during the year ended December 31, 2020. The change in fair value of the securities was $20,691 for the year ended December 31, 2020. For the year ended December 31, 2020, we sold $158,708 of these securities which resulted in a loss of $1,134.
•Gain (loss) on Credit Risk and Non-Agency Securities resulted from the sale of securities as well as the change in fair value of the securities. We did not have any Credit Risk and Non-Agency Securities at December 31, 2020.
•Gain on Interest-Only Securities for the year ended December 31, 2019, resulted from a change in the fair value of these securities of $682 in Q1 2019 as well as a loss of $(805) in Q2 2019 from the sale of $18,822 Interest-Only Securities. We did not have Interest-Only Securities at December 31, 2020 or December 31, 2019.
•Sales of U.S. Treasury Securities of $3,785,248 resulted in a realized gain of $21,771 for the year ended December 31, 2020. Sales of U.S. Treasury Securities of $1,786,090 for the year ended December 31, 2019 resulted in realized gain of $1,967. The change in fair value of the securities was $57 for the year ended December 31, 2019.
•Gain (losses) on Derivatives resulted from a combination of the following:
▪Interest rate swap contracts' aggregate notional balance decreased from $7,975,000 at December 31, 2019 to $5,337,000 at December 31, 2020.
▪The increase in TBA prices and in our total TBA Agency Securities aggregate notional balance from $1,000,000 at December 31, 2019 to $2,600,000 at December 31, 2020 resulted in income of $111,927 for the year ended December 31, 2020 compared to the prior period loss of $(5,465).
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Financial Condition and Results of Operations
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The Company is managed by ACM, pursuant to the 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 liquidate distributions as approved and so designated by a majority of the Board. However, because the management fee rate decreased to 0.75% per annum for gross equity raised in excess of $1.0 billion pursuant to the management agreement, the effective average management fee rate declines as equity is raised. The cost of repurchased stock and any dividend 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, 2021, December 31, 2020 and December 31, 2019, the effective management fee, prior to management fees waived was 0.98%, 1.00% and 1.00% based on gross equity raised of $3,313,937, $2,944,169 and $2,965,163, respectively. ACM began waiving 40% of its management fee during the second quarter of 2020 and on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter. On October 25, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver from the rate of $700 per month to $650 per month, effective November 1, 2021, until further notice. During the years ended December 31, 2021 and December 31, 2020, ACM waived management fees of $8,600 and $8,855, respectively.
Professional fees include securities clearing, legal, audit and consulting costs and are generally driven by the size and complexity of our securities portfolio, the volume of transactions we execute and the extent of research and due diligence activities we undertake on potential transactions.
Insurance includes premiums for both general business and directors and officers liability coverage. The fluctuation from year to year is due to changes in premiums.
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Financial Condition and Results of Operations
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Compensation includes non-executive director compensation as well as the restricted stock units awarded to our Board, executive officers and other ACM employees through ACM. The fluctuation from year to year is due to the number of awards vesting.
Other expenses include fees for market and pricing data, analytics and risk management systems and portfolio related data processing costs as well as stock exchange listing fees and similar stockholder related expenses, net of other miscellaneous income.
Taxable Income
As a REIT that regularly distributes all of its taxable income, we are generally not required to pay federal income tax (see Note 14 to the consolidated financial statements).
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, 2021 and at December 31, 2020, we had approximately $607,000 and $717,000 in tax deductible expense relating to previously terminated interest rate swap contracts amortizing through the years 2031 and 2029, respectively. We currently project that such amortization will exceed the Company's other taxable income for 2022. As a result, we currently project that all 2022 dividends on the Company's common stock and Series C Preferred Stock will be treated as basis adjustments rather than currently taxable income for stockholder tax purposes. This is consistent with the treatment of dividends for 2021. At December 31, 2021, we had $91,961 of net operating loss carryforwards available for use indefinitely.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners (see Note 13 to the consolidated financial statements).
Financial Condition
Investment In Securities
Our securities portfolio consists primarily of Agency Securities backed by fixed rate home loans. From time to time, a portion of our Agency Securities may be backed by 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 charter permits us to invest in MBS. 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).
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Financial Condition and Results of Operations
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The charts below present our investment in securities by percentage of our total investment in securities, at fair value as of the dates indicated.
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Financial Condition and Results of Operations
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Agency Securities:
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.
Our net interest income is primarily a function of the difference between the yield on our assets and the financing (borrowing and hedging) cost of owning those assets. Since we tend to purchase Agency Securities at a premium to par, the main item that can affect the yield on our Agency Securities after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the homeowners’ regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage but can also result from repurchases of delinquent, defaulted, or modified loans, are less so. Being able to accurately estimate and manage these repayment rates is a critical portion of the management of our securities portfolio, not only for estimating current yield but also for considering the rate of reinvestment of those proceeds into new securities, the yields on those new securities and the impact of the repayments on our hedging strategy.
Adjustable and hybrid adjustable rate mortgage loans underlying some of our Agency Securities have fixed interest rates after which time the interest rates reset and become adjustable. After a reset date, interest rates on our adjustable and hybrid adjustable Agency Securities float based on spreads over various indices, typically LIBOR or the one-year constant maturity treasury rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap and through the maturity of the security, known as a lifetime cap.
Beginning in the second quarter of 2020, we designated Agency MBS purchased as “trading securities” for financial reporting purposes, and consequently, fair value changes for these investments will be reported in net income. We anticipate continuing this designation for newly acquired Agency MBS positions because it is more representative of our results of operations insofar as the fair value changes for these securities are presented in a manner consistent with the presentation and timing of the fair value changes of our hedging instruments. Fair value changes for the legacy Agency MBS positions designated as “available for sale” will continue to be reported in other comprehensive income as required by GAAP.
TBA Agency Securities:
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.
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The tables below summarize certain characteristics of our investments in securities at December 31, 2021 and December 31, 2020.
| Investment in Securities Summary | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Type | Principal Amount | Fair Value | Weighted Average Coupon | CPR (1) | Weighted Average Months to Maturity | Percent of Total | |||||||||||||
| December 31, 2021 | |||||||||||||||||||
| Agency Securities: | |||||||||||||||||||
| Total Fannie Mae | $ | 3,316,796 | $ | 3,523,449 | 3.0 | % | 8.5 | % | 255 | 38.4 | % | ||||||||
| Total Freddie Mac | 829,325 | 869,731 | 3.0 | % | 16.7 | % | 283 | 9.5 | |||||||||||
| Total Ginne Mae | 12,957 | 13,341 | 1.8 | % | 10.7 | % | 210 | 0.1 | |||||||||||
| Total Agency Securities | $ | 4,159,078 | $ | 4,406,521 | 3.0 | % | 10.2 | % | 260 | 48.0 | % | ||||||||
| TBA Agency Securities: | |||||||||||||||||||
| 15 Year Long (2) | 2,700,000 | 2,741,820 | 1.8 | % | n/a | n/a | 29.8 | % | |||||||||||
| 30 Year Long (2) | 1,800,000 | 1,833,240 | 2.5 | % | n/a | n/a | 20.0 | ||||||||||||
| Total TBA Agency Securities | $ | 4,500,000 | $ | 4,575,060 | 2.1 | % | n/a | n/a | 49.8 | % | |||||||||
| U.S. Treasury Securities | $ | 200,000 | $ | 198,833 | 0.68 | % | n/a | 61 | 2.2 | % | |||||||||
| Total Investments in Securities | $ | 8,859,078 | $ | 9,180,414 | 100.0 | % |
| Investment in Securities Summary | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Type | Principal Amount | Fair Value | Weighted Average Coupon | CPR (1) | Weighted Average Months to Maturity | Percent of Total | |||||||||||||
| December 31, 2020 | |||||||||||||||||||
| Agency Securities: | |||||||||||||||||||
| Total Fannie Mae | $ | 3,779,964 | $ | 4,158,987 | 3.2 | % | 14.8 | % | 255 | 52.7 | % | ||||||||
| Total Freddie Mac | 925,036 | 993,173 | 3.3 | % | 23.9 | % | 262 | 12.6 | |||||||||||
| Total Ginne Mae | 25,388 | 26,162 | 2.9 | % | 7.6 | % | 206 | 0.3 | |||||||||||
| Total Agency Securities | $ | 4,730,388 | $ | 5,178,322 | 3.3 | % | 16.6 | % | 256 | 65.6 | % | ||||||||
| TBA Agency Securities: | |||||||||||||||||||
| 15 Year Long (2) | 1,400,000 | 1,459,135 | 1.9 | % | n/a | n/a | 18.5 | % | |||||||||||
| 30 Year Long (2) | 1,200,000 | 1,252,842 | 2.1 | % | n/a | n/a | 15.9 | ||||||||||||
| Total TBA Agency Securities | $ | 2,600,000 | $ | 2,711,977 | 2.0 | % | n/a | n/a | 34.4 | % | |||||||||
| Total Investments in Securities | $ | 7,330,388 | $ | 7,890,299 | 100.0 | % |
(1)Weighted average CPR during the fourth quarter for the securities owned at December 31, 2021 and December 31, 2020.
(2)Our TBA Agency Securities are recorded as derivative instruments in our accompanying consolidated financial statements. Our TBA Agency Securities are reported at net carrying value of $7,697 and $19,747, at December 31, 2021 and December 31, 2020, respectively, and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).
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Financial Condition and Results of Operations
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Repurchase Agreements
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 historically moved in close relationship to the Federal Funds Rate and LIBOR and more recently SOFR. We have established borrowing relationships with numerous investment banking firms and other lenders, 18 of which had open repurchase agreements with us at December 31, 2021 and 18 of which had open repurchases agreements with us at December 31, 2020. We had outstanding balances under our repurchase agreements at December 31, 2021 and December 31, 2020 of $3,948,037 and $4,536,065, respectively, consistent with the increase in our MBS in our securities portfolio. At December 31, 2021, BUCKLER accounted for 49.7% of our aggregate borrowings and had an amount at risk of 5.0% of our total stockholders' equity with a weighted average maturity of 35 days on repurchase agreements (see Note 7 to the consolidated financial statements).
Our repurchase agreements require excess collateral, known as a “haircut.” At December 31, 2021, the average haircut percentage was 3.45% compared to 3.13% at December 31, 2020. The change in the average haircut percentage is a reflection of the decrease in our securities portfolio and the disposition of our Credit Risk and Non-Agency Securities which had higher haircut levels than our Agency Securities.
Derivative Instruments
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, 2021. We had interest rate swap contracts with an aggregate notional balance of $7,210,000, a weighted average swap rate of 0.63% and a weighted average term of 77 months at December 31, 2021. We also entered into $4,500,000 notional of TBA Agency Securities during the year ended December 31, 2021 (see Note 8 to the consolidated financial statements).
Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge. No assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition. We have not elected cash flow hedge accounting treatment as allowed by GAAP. Since we do not designate our derivative activities as cash flow hedges, realized as well as unrealized gains/losses from these transactions will impact our GAAP earnings.
Use of derivative instruments may fail to protect or could adversely affect us because, among other things:
•available derivatives may not correspond directly with the interest rate risk for which protection is sought (e.g., the difference in interest rate movements for long-term U.S. Treasury Securities compared to Agency Securities);
•the duration of the derivatives may not match the duration of the related liability;
•the counterparty to a derivative agreement with us may default on its obligation to pay or not perform under the terms of the agreement and the collateral posted may not be sufficient to protect against any consequent loss;
•we may lose collateral we have pledged to secure our obligations under a derivative agreement if the associated counterparty becomes insolvent or files for bankruptcy;
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•we may experience a termination event under one or more of our derivative agreements related to our REIT status, equity levels and performance, which could result in a payout to the associated counterparty and a taxable loss to us;
•the credit-quality of the party owing money on the derivatives may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
•the value of derivatives may be adjusted from time to time in accordance with GAAP to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss.
The following graphs present the notional and weighted average interest rate of our interest rate swap contracts by year of maturity.
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Financial Condition and Results of Operations
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At December 31, 2021 and December 31, 2020, we had derivatives with a net fair value of $188,173 and $53,469, respectively. At December 31, 2021, we had interest rate swap contracts with an aggregate notional balance of $7,210,000, a weighted average swap rate of 0.63% and a weighted average term of 77 months. At December 31, 2020, we had interest rate swap contracts with an aggregate notional balance of $5,337,000, a weighted average swap rate of 0.24% and a weighted average term of 58 months. In addition, during the year ended December 31, 2021, we purchased and sold Futures Contracts with an aggregate notional balance of $500. Futures Contracts are traded on the CME and substantial credit support for the Futures Contracts is provided by the CME. Counterparty risk of derivatives is limited to some degree because of daily mark-to-market and collateral requirements. These derivative transactions are designed to: (1) lock in a portion of funding costs for financing activities associated with our assets in such a way as to help assure the realization of attractive net interest margins and (2) vary inversely in value with our MBS. Such contracts are based on assumptions about prepayments which, if not realized, will cause results to differ from expectations.
We also had TBA Agency Securities with an aggregate notional balance of $4,500,000 and $2,600,000 at December 31, 2021 and December 31, 2020, respectively.
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 off-set difficult. We recognized net gains (losses) of $52,181, $(284,153) and $(350,123), for the years ended December 31, 2021, December 31, 2020, and December 31, 2019, respectively, related to our derivatives.
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. Cleared interest rate swaps may have higher margin requirements than un-cleared interest rate swaps we previously had. We have established an account with a
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Financial Condition and Results of Operations
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futures commission merchant for this purpose. To date, we have not entered into any cleared interest rate swap contracts.
We are required to account for our TBA Agency Securities as derivatives when it is reasonably possible that we will not take or make timely physical delivery of the related securities. However, from time to time, we use TBA Agency Securities primarily to effectively establish portfolio positions. See the section, "TBA Agency Securities" above.
Liquidity and Capital Resources
At December 31, 2021, our liquidity totaled $848,354, consisting of $337,664 of cash plus $510,690 of unencumbered Agency Securities and U.S. government securities (including securities received as 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 (refer to Note 11 to the consolidated financial statements). We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of our borrowings can be adjusted on a daily basis, the level of cash carried on our consolidated balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We continue to pursue additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets.
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. We did not have any reverse repurchase agreements outstanding at December 31, 2021 and December 31, 2020.
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, 2021 and December 31, 2020, we financed our securities portfolio with $3,948,037 and $4,536,065 of borrowings under repurchase agreements. 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, 2021 and December 31, 2020, were 3.45:1 and 4.83:1, respectively, as we substituted TBA Agency Securities for some of our Agency MBS portfolio. Our leverage ratios, including notional on our TBA Agency Securities, were 7.39:1 and 7.61:1 at December 31, 2021 and December 31, 2020, respectively.
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Securities Portfolio Matters
| For the Years Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
| Securities purchased using proceeds from repurchase agreements and principal repayments | $ | 2,253,829 | $ | 10,698,641 | $ | 11,120,526 | |||||
| Average securities portfolio | $ | 7,677,721 | 7,834,588 | 12,461,442 | |||||||
| Cash received from principal repayments on MBS | $ | 870,985 | 1,262,930 | 1,755,047 | |||||||
| Net cash increase (decrease) from repurchase agreements | $ | (588,028) | (6,818,482) | 4,316,896 | |||||||
| Cash interest payments made on liabilities | $ | 21,262 | 183,365 | 425,746 | |||||||
| Cash and cash collateral posted to counterparties provided by (used in) operating activities (1) | $ | 11,738 | (257,824) | (40,717) |
(1)The decrease in cash and cash collateral posted to counterparties related to operating activities from 2019 to 2020 was primarily due to the liquidation of our Credit Risk and Non-Agency Securities as we determined that securities that exhibit these characteristics did not fit with our current investment strategy. The increase in cash and cash collateral posted to counterparties related to operating activities from 2020 to 2021 is related to the realized gains on derivatives.
Other Contractual Obligations
The Company is managed by ACM, pursuant to a management agreement (see Note 9 and Note 15 to the consolidated financial statements). The management agreement runs through June 18, 2027 and is thereafter automatically renewed for an additional five-year term unless terminated under certain circumstances.
The following table reconciles the fees incurred in accordance with the management agreement for the years ended December 31, 2021, December 31, 2020 and December 31, 2019.
| For the Years Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
| ARMOUR management fees | $ | 31,063 | $ | 29,580 | $ | 29,513 | |||||
| Less management fees waived | (8,600) | (8,855) | — | ||||||||
| Total Management fee expense | $ | 22,463 | $ | 20,725 | $ | 29,513 |
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, 2021, there were 2,167 shares available for future issuance under the Plan.
At December 31, 2021, there was approximately $11,584 of unvested stock based compensation related to the Awards (based on a weighted grant date price of $14.07 per share), which we expect to recognize as an expense as follows: in 2022 an expense of $4,263, in 2023 an expense of $2,416, and thereafter an expense of $4,905. 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
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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 10 to the consolidated financial statements).
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on repurchase borrowings, reacquisition of securities to be returned to borrowers and the payment of cash dividends as required for continued qualification as a REIT.
Repurchase Agreements
Declines in the value of our Agency Securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately.
Changing capital or other financial market regulatory requirements may cause our lenders to exit the repurchase market, increase financing rates, tighten lending standards or increase the amount of required equity capital or haircut we post, any of which could make it more difficult or costly for us to obtain financing.
The following graph represents the outstanding balances of our repurchase agreements (before the effect of netting reverse repurchase agreements), which finance most of our MBS. Our repurchase agreements balance will fluctuate based on our change in capital, leverage targets and the market prices of our assets (including the effects of principal paydowns) and the level and timing of investment and reinvestment activity (see Note 7 and Note 15 to the consolidated financial statements).
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Effects of Margin Requirements, Leverage and Credit Spreads
Our MBS have values that fluctuate according to market conditions and, as discussed above, the market value of our MBS will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase agreement decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which requires us to pay the difference in cash or pledge additional collateral to meet the obligations under our repurchase agreements. Under our repurchase facilities, our lenders have full discretion to determine the value of the MBS we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled principal repayments are announced monthly.
Forward-Looking Statements Regarding Liquidity
Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and our ability to make timely portfolio adjustments will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, meet our financing obligations, pay fees under the management agreement and fund our distributions to stockholders and pay general corporate expenses.
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, continue 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.
Stockholders’ Equity
See Note 11 to the consolidated financial statements.
Critical Accounting Estimates
Valuation
Fair value is based on valuations obtained from third-party pricing services and/or dealer quotes. The third-party pricing services use common market pricing methods that include valuation models which incorporate such factors as coupons, collateral type, bond structure, historical and projected future prepayment speeds, priority of payments, historical and projected future delinquency rates and default severities, spread to the Treasury curve and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of the MBS is not available from the third-party pricing services or such data appears unreliable, we obtain pricing indications from up to three dealers who make markets in similar MBS. Management reviews pricing used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer pricing indications and comparisons to a third-party pricing model.
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
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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.
From time to time, we challenge the information and valuations we receive from third-party pricing services. Occasionally, the third-party pricing services revise their information or valuations as a result of such challenges. While we have concluded that the fair values reflected in the financial statements are appropriate, there is no way to verify that the particular fair value estimated for any individual position represents the price at which it may actually be bought or sold at any given date.
Fair value for our U.S. Treasury Securities is based on obtaining a valuation for each U.S. Treasury Security from third-party pricing services and/or dealer quotes.
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 2021, 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 $0.38 per common share. Similarly, 95% of inter-day movements in estimated value translated to changes in estimated book value per share of $0.19 or less.
Available for Sale Securities
Agency Securities acquired on or before March 31, 2020 are classified as available for sale. We realize gains and losses on our available for sale securities upon their sale. At that time, previously unrealized amounts included in accumulated other comprehensive income are reclassified and reported in net income as other gain or loss. To the extent that we sell available for sale securities in later periods after changes in the fair value of those available for sale securities have occurred, we may report significant net income or net loss without a corresponding change in our total stockholders' equity.
Declines in the fair values of our available for sale securities that represent credit impairments are also treated as realized losses and reported in net income as other loss. We evaluate available for sale securities for impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider available for sale securities impaired if we (1) intend to sell the available for sale securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations), and (3) a credit loss exists. Impairment losses recognized establish a new cost basis for the related available for sale securities. Gains or losses on subsequent sales are determined by reference to such new cost basis.
Gains and losses on available for sale Agency Securities are included in net income only when realized upon sale or recognized as impairments; therefore, reported net income will generally not reflect all elements of our overall investment performance for the period. At December 31, 2021, the fair value of our available for sale Agency Securities totaled $1,387,845 which represented 30.1% of our securities positions, or 15.1% of our total investment securities, including TBA Agency Securities.
Inflation
Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our Board based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.
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Subsequent Events
See Note 16 to the consolidated financial statements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. See Part I, Item 1A. "Risk Factors" of this Annual Report on Form 10-K. You should carefully consider these risks before you make an investment decision with respect to our stock, along with the following factors that could cause actual results to vary from our forward-looking statements:
•the impact of COVID-19 on our operations;
•the impact of the federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government and the Fed system;
•the possible material adverse effect on our business if the U.S. Congress passed legislation reforming or winding down Fannie Mae or Freddie Mac;
•mortgage loan modification programs and future legislative action;
•actions by the Fed which could cause a change of the yield curve, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders;
•the impact of a delay or failure of the U.S. Government in reaching an agreement on the national debt ceiling;
•availability, terms and deployment of capital;
•extended trade disputes with foreign countries;
•changes in economic conditions generally;
•changes in interest rates, interest rate spreads and the yield curve or prepayment rates;
•general volatility of the financial markets, including markets for mortgage securities;
•a downgrade of the U.S. Government's or certain European countries' credit ratings and future downgrades of the U.S. Government's or certain European countries' credit ratings may materially adversely affect our business, financial condition and results of operations;
•our inability to maintain the level of non-taxable returns of capital through the payment of dividends to our stockholders or to pay dividends to our stockholders at all;
•inflation or deflation;
•the impact of a shutdown of the U.S. Government;
•availability of suitable investment opportunities;
•the degree and nature of our competition, including competition for MBS;
•changes in our business and investment strategy;
•our failure to maintain our qualification as a REIT;
•our failure to maintain an exemption from being regulated as a commodity pool operator;
•our dependence on ACM and ability to find a suitable replacement if ACM was to terminate its management relationship with us;
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•the existence of conflicts of interest in our relationship with ACM, BUCKLER, certain of our directors and our officers, which could result in decisions that are not in the best interest of our stockholders;
•the potential for Buckler's inability to access attractive repurchase financing on our behalf or secure profitable third-party business;
•our management's competing duties to other affiliated entities, which could result in decisions that are not in the best interest of our stockholders;
•changes in personnel at ACM or the availability of qualified personnel at ACM;
•limitations imposed on our business by our status as a REIT under the Code;
•the potential burdens on our business of maintaining our exclusion from the 1940 Act and possible consequences of losing that exclusion;
•changes in GAAP, including interpretations thereof; and
•changes in applicable laws and regulations.
We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this report. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements set forth in this report to reflect new information, future events or otherwise, except as required under the U.S. federal securities laws.