000142820512/312021Q1FALSE0.083300014282052021-01-012021-03-310001428205arr:PreferredClassCMember2021-01-012021-03-310001428205us-gaap:CommonStockMember2021-01-012021-03-31xbrli:shares00014282052021-04-20iso4217:USD00014282052021-03-3100014282052020-12-31iso4217:USDxbrli:sharesxbrli:pure0001428205us-gaap:SeriesCPreferredStockMember2021-01-012021-03-310001428205us-gaap:SeriesCPreferredStockMember2020-01-012020-12-310001428205us-gaap:SeriesCPreferredStockMember2021-03-310001428205us-gaap:SeriesCPreferredStockMember2020-12-3100014282052020-01-012020-03-310001428205us-gaap:MortgageBackedSecuritiesMember2021-01-012021-03-310001428205us-gaap:MortgageBackedSecuritiesMember2020-01-012020-03-310001428205us-gaap:USTreasurySecuritiesMember2021-01-012021-03-310001428205us-gaap:USTreasurySecuritiesMember2020-01-012020-03-310001428205us-gaap:CorporateDebtSecuritiesMember2021-01-012021-03-310001428205us-gaap:CorporateDebtSecuritiesMember2020-01-012020-03-310001428205us-gaap:SeriesCPreferredStockMemberus-gaap:PreferredStockMember2020-12-310001428205us-gaap:CommonStockMember2020-12-310001428205us-gaap:AdditionalPaidInCapitalMember2020-12-310001428205us-gaap:RetainedEarningsMember2020-12-310001428205us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001428205us-gaap:RetainedEarningsMemberus-gaap:SeriesCPreferredStockMember2021-01-012021-03-310001428205us-gaap:RetainedEarningsMember2021-01-012021-03-310001428205us-gaap:SeriesCPreferredStockMemberus-gaap:PreferredStockMember2021-01-012021-03-310001428205us-gaap:AdditionalPaidInCapitalMemberus-gaap:SeriesCPreferredStockMember2021-01-012021-03-310001428205us-gaap:CommonStockMember2021-01-012021-03-310001428205us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001428205us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310001428205us-gaap:SeriesCPreferredStockMemberus-gaap:PreferredStockMember2021-03-310001428205us-gaap:CommonStockMember2021-03-310001428205us-gaap:AdditionalPaidInCapitalMember2021-03-310001428205us-gaap:RetainedEarningsMember2021-03-310001428205us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001428205us-gaap:SeriesBPreferredStockMember2021-01-012021-03-310001428205us-gaap:SeriesBPreferredStockMember2020-01-012020-03-310001428205us-gaap:SeriesCPreferredStockMember2020-01-012020-03-3100014282052019-12-3100014282052020-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2021-03-31arr:dealer0001428205us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-03-310001428205us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-03-310001428205us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2021-03-310001428205us-gaap:FairValueMeasurementsRecurringMember2021-03-310001428205us-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001428205us-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001428205us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-12-310001428205us-gaap:FairValueMeasurementsRecurringMember2020-12-310001428205arr:TBAAgencySecuritiesMember2021-03-310001428205arr:TBAAgencySecuritiesMember2020-12-310001428205arr:TobeAnnouncedAgencySecuritiesMember2021-03-310001428205arr:TobeAnnouncedAgencySecuritiesMember2020-12-310001428205us-gaap:AgencySecuritiesMember2020-12-310001428205arr:AgencyTradingSecuritiesMember2020-12-310001428205us-gaap:MortgageBackedSecuritiesMember2020-12-310001428205us-gaap:USTreasurySecuritiesMember2020-12-310001428205us-gaap:AgencySecuritiesMember2021-01-012021-03-310001428205arr:AgencyTradingSecuritiesMember2021-01-012021-03-310001428205us-gaap:AgencySecuritiesMember2021-03-310001428205arr:AgencyTradingSecuritiesMember2021-03-310001428205us-gaap:MortgageBackedSecuritiesMember2021-03-310001428205us-gaap:USTreasurySecuritiesMember2021-03-310001428205us-gaap:AgencySecuritiesMember2019-12-310001428205arr:AgencyTradingSecuritiesMember2019-12-310001428205us-gaap:MortgageBackedSecuritiesMember2019-12-310001428205us-gaap:USTreasurySecuritiesMember2019-12-310001428205us-gaap:AgencySecuritiesMember2020-01-012020-12-310001428205arr:AgencyTradingSecuritiesMember2020-01-012020-12-310001428205us-gaap:MortgageBackedSecuritiesMember2020-01-012020-12-310001428205us-gaap:USTreasurySecuritiesMember2020-01-012020-12-3100014282052020-01-012020-12-3100014282052020-04-012020-12-310001428205us-gaap:FederalNationalMortgageAssociationCertificatesAndObligationsFNMAMember2021-03-310001428205us-gaap:FederalHomeLoanMortgageCorporationCertificatesAndObligationsFHLMCMember2021-03-310001428205us-gaap:GovernmentNationalMortgageAssociationCertificatesAndObligationsGNMAMember2021-03-310001428205us-gaap:FederalNationalMortgageAssociationCertificatesAndObligationsFNMAMember2020-12-310001428205us-gaap:FederalHomeLoanMortgageCorporationCertificatesAndObligationsFHLMCMember2020-12-310001428205us-gaap:GovernmentNationalMortgageAssociationCertificatesAndObligationsGNMAMember2020-12-310001428205us-gaap:FederalNationalMortgageAssociationCertificatesAndObligationsFNMAMemberus-gaap:AgencySecuritiesMember2021-03-310001428205us-gaap:FederalHomeLoanMortgageCorporationCertificatesAndObligationsFHLMCMemberus-gaap:AgencySecuritiesMember2021-03-310001428205us-gaap:FederalNationalMortgageAssociationCertificatesAndObligationsFNMAMemberus-gaap:AgencySecuritiesMember2020-12-310001428205us-gaap:FederalHomeLoanMortgageCorporationCertificatesAndObligationsFHLMCMemberus-gaap:AgencySecuritiesMember2020-12-31arr:counterparty0001428205us-gaap:MaturityUpTo30DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-03-310001428205us-gaap:MaturityUpTo30DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-01-012021-03-310001428205arr:Maturity31To60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-03-310001428205arr:Maturity31To60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-01-012021-03-310001428205arr:MaturityGreaterThan60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-03-310001428205arr:MaturityGreaterThan60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-01-012021-03-310001428205us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-03-310001428205us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2021-01-012021-03-310001428205us-gaap:MaturityUpTo30DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-12-310001428205us-gaap:MaturityUpTo30DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-01-012020-12-310001428205arr:Maturity31To60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-12-310001428205arr:Maturity31To60DaysMemberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-01-012020-12-310001428205us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-12-310001428205us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember2020-01-012020-12-310001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMemberarr:BUCKLERSecuritiesLLCMember2021-01-012021-03-310001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMemberarr:BUCKLERSecuritiesLLCMember2020-01-012020-06-300001428205arr:CounterpartyConcentrationRiskMemberarr:BUCKLERSecuritiesLLCMemberus-gaap:StockholdersEquityTotalMember2021-01-012021-03-310001428205arr:CounterpartyConcentrationRiskMemberarr:BUCKLERSecuritiesLLCMemberus-gaap:StockholdersEquityTotalMember2020-01-012020-06-300001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMember2021-03-310001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMemberarr:OneRepurchaseAgreementCounterpartyMember2021-01-012021-03-310001428205arr:CounterpartyConcentrationRiskMemberarr:RepurchaseAgreementBorrowingsMemberarr:OneRepurchaseAgreementCounterpartyMember2021-01-012021-03-310001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMember2020-12-310001428205us-gaap:BorrowingsMemberarr:CounterpartyConcentrationRiskMemberarr:OneRepurchaseAgreementCounterpartyMember2020-01-012020-06-300001428205arr:CounterpartyConcentrationRiskMemberarr:RepurchaseAgreementBorrowingsMemberarr:OneRepurchaseAgreementCounterpartyMember2020-01-012020-06-300001428205us-gaap:InterestRateSwapMember2021-03-310001428205us-gaap:InterestRateSwapMember2020-12-310001428205us-gaap:InterestRateSwapMember2021-01-012021-03-310001428205us-gaap:InterestRateSwapMember2020-01-012020-03-310001428205arr:TobeAnnouncedAgencySecuritiesMember2021-01-012021-03-310001428205arr:TobeAnnouncedAgencySecuritiesMember2020-01-012020-03-310001428205arr:InterestRateSwapLessThan3YearsMember2021-01-012021-03-310001428205arr:InterestRateSwapLessThan3YearsMember2021-03-310001428205srt:MinimumMemberarr:InterestRateSwapBetween3and5YearsMember2021-01-012021-03-310001428205arr:InterestRateSwapBetween3and5YearsMembersrt:MaximumMember2021-01-012021-03-310001428205arr:InterestRateSwapBetween3and5YearsMember2021-03-310001428205arr:InterestRateSwapBetween3and5YearsMember2021-01-012021-03-310001428205srt:MinimumMemberarr:InterestRateSwapBetween5and7YearsMember2021-01-012021-03-310001428205arr:InterestRateSwapBetween5and7YearsMembersrt:MaximumMember2021-01-012021-03-310001428205arr:InterestRateSwapBetween5and7YearsMember2021-03-310001428205arr:InterestRateSwapBetween5and7YearsMember2021-01-012021-03-310001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMembersrt:MaximumMember2021-01-012021-03-310001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMember2021-03-310001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMember2021-01-012021-03-310001428205arr:InterestRateSwapLessThan3YearsMember2020-01-012020-06-300001428205arr:InterestRateSwapLessThan3YearsMember2020-12-310001428205arr:InterestRateSwapLessThan3YearsMember2020-01-012020-12-310001428205srt:MinimumMemberarr:InterestRateSwapBetween3and5YearsMember2020-01-012020-06-300001428205arr:InterestRateSwapBetween3and5YearsMembersrt:MaximumMember2020-01-012020-06-300001428205arr:InterestRateSwapBetween3and5YearsMember2020-12-310001428205arr:InterestRateSwapBetween3and5YearsMember2020-01-012020-12-310001428205srt:MinimumMemberarr:InterestRateSwapBetween5and7YearsMember2020-01-012020-06-300001428205arr:InterestRateSwapBetween5and7YearsMembersrt:MaximumMember2020-01-012020-06-300001428205arr:InterestRateSwapBetween5and7YearsMember2020-12-310001428205arr:InterestRateSwapBetween5and7YearsMember2020-01-012020-12-310001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMembersrt:MaximumMember2020-01-012020-06-300001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMember2020-12-310001428205arr:InterestRateSwapGreaterThanOrEqualTo7YearsMember2020-01-012020-12-310001428205us-gaap:FederalFundsEffectiveSwapRateMember2021-03-310001428205us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2021-03-310001428205us-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2020-12-310001428205us-gaap:FederalFundsEffectiveSwapRateMember2020-12-310001428205arr:TBAAgencySecurities15Year15Member2021-03-310001428205arr:TBAAgencySecurities15year2.0Member2021-03-310001428205arr:TBAAgencySecurities30Year20Member2021-03-310001428205arr:TBAAgencySecurities30year2.5Member2021-03-310001428205arr:TBAAgencySecuritiesMember2021-03-310001428205arr:TBAAgencySecurities15Year15Member2020-12-310001428205arr:TBAAgencySecurities15year2.0Member2020-12-310001428205arr:TBAAgencySecurities30Year20Member2020-12-310001428205arr:TBAAgencySecurities30year2.5Member2020-12-310001428205arr:TBAAgencySecurities30Year35Member2020-12-310001428205arr:TBAAgencySecuritiesMember2020-12-310001428205us-gaap:LimitedLiabilityCompanyMember2021-03-310001428205us-gaap:LimitedLiabilityCompanyMember2020-03-310001428205us-gaap:LimitedLiabilityCompanyMember2020-04-012020-06-3000014282052021-01-130001428205us-gaap:SubsequentEventMember2021-04-20arr:lawsuit0001428205arr:TransactionsCaseMember2016-03-012016-03-01arr:defendant0001428205arr:TransactionsCaseMember2016-04-242016-04-240001428205arr:TransactionsCaseMember2016-04-252016-04-250001428205arr:The2009StockIncentivePlanMember2021-03-310001428205arr:The2009StockIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2020-12-310001428205arr:The2009StockIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2021-01-012021-03-310001428205arr:The2009StockIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2021-03-310001428205arr:The2009StockIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMemberarr:ArmourCapitalManagementMember2021-01-012021-03-310001428205srt:DirectorMemberarr:The2009StockIncentivePlanMemberus-gaap:RestrictedStockUnitsRSUMember2021-01-012021-03-310001428205arr:The2009StockIncentivePlanMember2021-01-012021-03-310001428205srt:DirectorMember2021-01-012021-03-310001428205us-gaap:CommonStockMember2020-01-012020-03-3100014282052020-01-012020-01-3100014282052020-02-012020-02-2900014282052020-03-012020-03-310001428205us-gaap:SeriesCPreferredStockMember2020-01-280001428205us-gaap:SeriesCPreferredStockMember2020-01-282020-01-280001428205arr:January232020UnderwritingAgreementMemberus-gaap:SeriesCPreferredStockMember2020-01-230001428205us-gaap:SeriesCPreferredStockMemberarr:January292020EquitySalesAgreementMember2020-01-290001428205us-gaap:SeriesCPreferredStockMemberarr:January292020EquitySalesAgreementMember2020-05-040001428205us-gaap:SeriesCPreferredStockMemberarr:January292020EquitySalesAgreementMember2021-01-012021-03-310001428205arr:AtTheMarketOfferingProgramMember2020-05-042020-05-040001428205arr:AtTheMarketOfferingProgramMember2020-05-040001428205arr:June242019PreferredBATMSalesAgreementMemberus-gaap:SeriesBPreferredStockMember2020-03-022020-03-020001428205us-gaap:SeriesCPreferredStockMemberarr:DividendReinvestmentProgramMember2021-01-012021-03-310001428205us-gaap:SeriesCPreferredStockMemberarr:PreferredCAtTheMarketSalesAgreementMember2021-03-310001428205us-gaap:SeriesCPreferredStockMemberarr:PreferredCAtTheMarketSalesAgreementMember2021-01-012021-03-310001428205arr:CommonStockAtTheMarketSaleAgreementMemberus-gaap:CommonStockMember2021-01-012021-03-310001428205arr:CommonStockAtTheMarketSaleAgreementMemberus-gaap:CommonStockMember2021-03-310001428205us-gaap:SeriesCPreferredStockMemberus-gaap:OverAllotmentOptionMember2020-01-012020-12-310001428205us-gaap:SeriesCPreferredStockMemberus-gaap:OverAllotmentOptionMember2020-12-310001428205us-gaap:SeriesCPreferredStockMemberarr:PreferredCAtTheMarketSalesAgreementMember2020-01-012020-12-310001428205us-gaap:SeriesCPreferredStockMemberarr:PreferredCAtTheMarketSalesAgreementMember2020-12-310001428205arr:CommonStockAtTheMarketSaleAgreementMemberus-gaap:CommonStockMember2020-01-012020-12-310001428205arr:CommonStockAtTheMarketSaleAgreementMemberus-gaap:CommonStockMember2020-12-310001428205us-gaap:CommonStockMember2020-01-012020-12-310001428205us-gaap:SeriesCPreferredStockMember2021-01-272021-01-270001428205us-gaap:SeriesCPreferredStockMember2021-02-152021-02-150001428205us-gaap:SeriesCPreferredStockMember2021-03-152021-03-150001428205us-gaap:CommonStockMember2021-01-282021-01-280001428205us-gaap:CommonStockMember2021-02-262021-02-260001428205us-gaap:CommonStockMember2021-03-292021-03-290001428205us-gaap:TaxYear2018Memberus-gaap:CapitalLossCarryforwardMember2021-03-310001428205us-gaap:TaxYear2019Memberus-gaap:CapitalLossCarryforwardMember2021-03-310001428205arr:ArmourManagementAgreementMemberus-gaap:LimitedLiabilityCompanyMember2021-01-012021-03-310001428205us-gaap:LimitedLiabilityCompanyMemberus-gaap:OtherExpenseMember2021-01-012021-03-310001428205us-gaap:LimitedLiabilityCompanyMemberus-gaap:OtherExpenseMember2020-01-012020-03-310001428205us-gaap:RestrictedStockUnitsRSUMemberus-gaap:LimitedLiabilityCompanyMember2021-01-012021-03-310001428205arr:StockBasedCompensationExpenseMemberus-gaap:LimitedLiabilityCompanyMember2021-01-012021-03-310001428205arr:StockBasedCompensationExpenseMemberus-gaap:LimitedLiabilityCompanyMember2020-01-012020-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2017-03-012017-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2017-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2020-12-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2021-01-012021-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2020-01-012020-03-31arr:loan00014282052019-03-180001428205us-gaap:CorporateJointVentureMemberarr:RequiredRegulatoryCapitalRequirementofRelatedPartyMemberarr:BUCKLERSecuritiesLLCMember2021-03-310001428205us-gaap:CorporateJointVentureMemberarr:RequiredRegulatoryCapitalRequirementofRelatedPartyMemberarr:BUCKLERSecuritiesLLCMember2021-01-012021-03-310001428205us-gaap:CorporateJointVentureMemberarr:RequiredRegulatoryCapitalRequirementofRelatedPartyMemberarr:BUCKLERSecuritiesLLCMember2020-01-012020-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMember2020-01-012020-12-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMemberus-gaap:USTreasurySecuritiesMember2021-01-012021-03-310001428205us-gaap:CorporateJointVentureMemberarr:BUCKLERSecuritiesLLCMemberus-gaap:USTreasurySecuritiesMember2020-01-012020-12-310001428205us-gaap:SeriesCPreferredStockMembersrt:ScenarioForecastMember2021-04-272021-04-270001428205us-gaap:SeriesCPreferredStockMembersrt:ScenarioForecastMember2021-06-282021-06-280001428205us-gaap:SeriesCPreferredStockMembersrt:ScenarioForecastMember2021-05-272021-05-270001428205us-gaap:SeriesCPreferredStockMemberus-gaap:SubsequentEventMember2021-04-012021-04-090001428205srt:ScenarioForecastMember2021-04-292021-04-290001428205srt:ScenarioForecastMember2021-05-272021-05-270001428205us-gaap:SubsequentEventMemberus-gaap:CommonStockMember2021-04-012021-04-09


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the Quarterly Period Ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                      to                     
 
ARMOUR RESIDENTIAL REIT, INC.
(Exact name of registrant as specified in its charter) 
Maryland 001-34766 26-1908763
(State or other jurisdiction of incorporation or organization) (Commission File Number) (I.R.S. Employer Identification No.)
3001 Ocean Drive, Suite 201, Vero Beach, FL  32963
(Address of principal executive offices)(zip code)
(772) 617-4340
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading symbols Name of Exchange on which registered
Preferred Stock, 7.00% Series C Cumulative Redeemable ARR-PRC New York Stock Exchange
Common Stock, $0.001 par value ARR New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company  
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No
The number of outstanding shares of the Registrant’s common stock as of April 20, 2021 was 71,244,026.





ARMOUR Residential REIT, Inc.
TABLE OF CONTENTS



1
Item 1. Financial Statements
1
30
53
56
57
Item 1. Legal Proceedings
57
Item IA. Risk Factors
57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
57
Item 3. Defaults Upon Senior Securities
57
Item 4. Mine Safety Disclosures
57
Item 5. Other Information
57
57
58




1
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARMOUR Residential REIT, Inc.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share)

March 31, 2021 December 31, 2020
Assets
Cash $ 277,554  $ 167,671 
Cash collateral posted to counterparties 52,796  3,997 
Investments in securities, at fair value
Agency Securities (including pledged securities of $3,955,310 at March 31, 2021 and $4,726,584 at December 31, 2020)
4,318,397  5,178,322 
Receivable for unsettled sales (including pledged securities of $342,482 at March 31, 2021)
358,670  — 
Derivatives, at fair value 216,297  54,686 
Accrued interest receivable 11,094  12,833 
Prepaid and other 9,692  1,977 
Subordinated loan to BUCKLER 105,000  105,000 
Total Assets $ 5,349,500  $ 5,524,486 
Liabilities and Stockholders’ Equity    
Liabilities:    
Repurchase agreements $ 3,810,790  $ 4,536,065 
Cash collateral posted by counterparties 165,130  44,704 
Payable for unsettled purchases 295,991  — 
Derivatives, at fair value 45,015  1,217 
Accrued interest payable- repurchase agreements 1,015  1,625 
Accounts payable and other accrued expenses 4,373  2,571 
Total Liabilities $ 4,322,314  $ 4,586,182 
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, $0.001 par value, 50,000 shares authorized;
7.00% Series C Cumulative Preferred Stock; 6,501 and 5,347 shares issued and outstanding ($162,525 and $133,675 aggregate liquidation preference) at March 31, 2021 and December 31. 2020, respectively
Common stock, $0.001 par value, 125,000 shares authorized, 69,748 and 65,290 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively
69  65 
Additional paid-in capital 3,115,352  3,033,025 
Accumulated deficit (2,225,038) (2,273,822)
Accumulated other comprehensive income 136,797  179,031 
Total Stockholders’ Equity $ 1,027,186  $ 938,304 
Total Liabilities and Stockholders’ Equity $ 5,349,500  $ 5,524,486 
See financial statement notes (unaudited).
ARR-20210331_G1.JPG


2
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share)


For the Three Months Ended March 31,
2021 2020
Interest Income:
Agency Securities, net of amortization of premium and fees $ 18,558  $ 79,776 
Credit Risk and Non-Agency Securities, including discount accretion —  12,355 
U.S. Treasury Securities —  469 
BUCKLER Subordinated loan 17  258 
Total Interest Income $ 18,575  $ 92,858 
Interest expense- repurchase agreements (2,427) (51,520)
Interest expense- U.S. Treasury Securities sold short (87) — 
Net Interest Income $ 16,061  $ 41,338 
Other Income (Loss):
Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive loss) 7,354  93,325 
Credit loss expense —  (1,012)
Loss on Agency Securities, trading (62,586) — 
Loss on Credit Risk and Non-Agency Securities —  (183,111)
Gain on U.S. Treasury Securities —  21,771 
Loss on short sale of U.S. Treasury Securities (28) — 
Subtotal $ (55,260) $ (69,027)
Realized loss on derivatives (1)
(27,360) (235,148)
Unrealized gain (loss) on derivatives 145,980  (133,887)
Subtotal $ 118,620  $ (369,035)
Total Other Income (Loss) $ 63,360  $ (438,062)
Expenses:
Management fees 7,437  7,458 
Professional fees 738  846 
Insurance 193  183 
Compensation 1,676  1,465 
Other 450  (17)
Total Expenses $ 10,494  $ 9,935 
Less management fees waived (2,400) — 
Total Expenses after fees waived $ 8,094  $ 9,935 
Net Income (Loss) $ 71,327  $ (406,659)
Dividends on preferred stock (2,486) (2,827)
Net Income (Loss) available (related) to common stockholders $ 68,841  $ (409,486)
(Continued)
ARR-20210331_G1.JPG


3
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share)


For the Three Months Ended March 31,
2021 2020
Net Income (Loss) per share available (related) to common stockholders (Note 12):
Basic $ 1.04  $ (6.95)
Diluted $ 1.03  $ (6.95)
Dividends declared per common share $ 0.30  $ 0.51 
Weighted average common shares outstanding:
Basic 65,964  58,884 
Diluted 67,018  58,884 

(1) Interest expense related to our interest rate swap contracts is recorded in realized loss on derivatives on the consolidated statements of operations. For additional information, see financial statement Note 8.

See financial statement notes (unaudited).
ARR-20210331_G1.JPG


4
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)

For the Three Months Ended March 31,
2021 2020
Net Income (Loss) $ 71,327  $ (406,659)
Other comprehensive income (loss):
Reclassification adjustment for realized gain on sale of available for sale Agency Securities (7,354) (93,325)
Reclassification adjustment for credit loss expense on available for sale Agency Securities —  1,012 
Net unrealized loss on available for sale Agency Securities (34,880) (38,143)
Other comprehensive loss $ (42,234) $ (130,456)
Comprehensive Income (Loss) $ 29,093  $ (537,115)
 
See financial statement notes (unaudited).

ARR-20210331_G1.JPG


5
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
Preferred Stock Common Stock
7.00% Series C
Shares Par Shares Par Total
Additional Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive Income (Loss)
Total
Balance, December 31, 2020 5,347  $ 65,290  $ 65  $ 3,033,025  $ (2,273,822) $ 179,031  $ 938,304 
Series C Preferred dividends —  —  —  —  —  (2,486) —  (2,486)
Common stock dividends —  —  —  —  —  (20,057) —  (20,057)
Issuance of Series C Preferred stock, net of expenses 1,154  —  —  28,172  —  —  28,173 
Issuance of common stock, net —  —  4,400  52,956  —  —  52,960 
Stock based compensation, net of withholding requirements —  —  58  —  1,199  —  1,199 
Net Income —  —  —  —  —  71,327  —  71,327 
Other comprehensive loss —  —  —  —  —  —  (42,234) (42,234)
Balance, March 31, 2021 6,501  $ 69,748  $ 69  $ 3,115,352  $ (2,225,038) $ 136,797  $ 1,027,186 

See financial statement notes (unaudited).
ARR-20210331_G1.JPG


6
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Three Months Ended March 31,
2021 2020
Cash Flows From Operating Activities:
Net Income (Loss) $ 71,327  $ (406,659)
Adjustments to reconcile net loss to net cash and cash collateral posted to counterparties provided by (used in) operating activities:
Net amortization of premium on Agency Securities 15,795  14,130 
Accretion of net discount on Credit Risk and Non-Agency Securities —  (1,078)
Net amortization of U.S. Treasury Securities —  84 
Realized gain on sale of Agency Securities, available for sale (7,354) (93,325)
Credit loss expense —  1,012 
Loss on Agency Securities, trading 62,586  — 
Loss on Credit Risk and Non-Agency Securities —  183,111 
Gain on U.S. Treasury Securities —  (21,771)
Loss on short sale of U.S. Treasury Securities 28  — 
Stock based compensation 1,199  1,001 
Changes in operating assets and liabilities:
Increase in accrued interest receivable 1,952  25,728 
Increase (decrease) in prepaid and other assets (7,715) 7,446 
Change in derivatives, at fair value (117,813) 128,953 
Decrease in accrued interest payable- repurchase agreements (610) (28,442)
Increase in accounts payable and other accrued expenses 1,802  5,364 
Net cash and cash collateral posted to counterparties provided by (used in) operating activities $ 21,197  $ (184,446)
Cash Flows From Investing Activities:  
Purchases of Agency Securities —  (1,657,148)
Purchases of Credit Risk and Non-Agency Securities —  (237,928)
Purchases of U.S. Treasury Securities (390,126) (3,763,561)
Principal repayments of Agency Securities 278,722  475,766 
Principal repayments of Credit Risk and Non-Agency Securities —  31,404 
Proceeds from sales of Agency Securities 405,050  9,777,373 
Proceeds from sales of Credit Risk and Non-Agency Securities —  72,437 
Proceeds from sales of U.S. Treasury Securities 390,098  3,785,248 
Disbursements on reverse repurchase agreements (391,125) — 
Receipts from reverse repurchase agreements 391,125  — 
Decrease in cash collateral posted by counterparties 120,426  115,339 
Net cash and cash collateral posted to counterparties provided by investing activities $ 804,170  $ 8,598,930 
(Continued)
ARR-20210331_G1.JPG


7
ARMOUR Residential REIT, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Three Months Ended March 31,
2021 2020
Cash Flows From Financing Activities:
Redemption of Series B Preferred stock, net of expenses —  (209,583)
Issuance of Series C Preferred stock, net of expenses 28,173  129,221 
Issuance of common stock, net of expenses 52,960  — 
Proceeds from repurchase agreements 7,044,307  42,459,521 
Principal repayments on repurchase agreements (7,769,582) (50,348,596)
Series B Preferred stock dividends paid —  (1,375)
Series C Preferred stock dividends paid (2,486) (1,452)
Common stock dividends paid (20,057) (30,377)
Common stock repurchased, net —  (777)
Net cash and cash collateral posted to counterparties used in financing activities $ (666,685) $ (8,003,418)
Net Increase in cash and cash collateral posted to counterparties 158,682  411,066 
Cash and cash collateral posted to counterparties - beginning of period 171,668  273,166 
Cash and cash collateral posted to counterparties - end of period $ 330,350  $ 684,232 
Supplemental Disclosure:
Cash paid during the period for interest $ 4,193  139,313 
Non-Cash Investing Activities:
Receivable for unsettled sales $ 358,670  688,183 
Payable for unsettled purchases $ 295,991  470,441 
Net unrealized loss on available for sale Agency Securities $ (34,880) (38,143)

See financial statement notes (unaudited).
ARR-20210331_G1.JPG


8
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


Note 1 - Organization and Nature of Business Operations

    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 10.0% equity interest in BUCKLER Securities LLC ("BUCKLER"). BUCKLER is 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.
 
    ARMOUR is an externally managed Maryland corporation incorporated in 2008. The Company is managed by ACM, an investment advisor registered with the Securities and Exchange Commission (the "SEC"), (see Note 9 - Commitments and Contingencies and Note 15 - Related Party Transactions). We have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Our qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. 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. As a REIT, we will generally not be subject to federal income tax on the REIT taxable income that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.

    At March 31, 2021 and December 31, 2020, we invested exclusively in mortgage backed securities ("MBS") issued or guaranteed by a United States ("U.S.") Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or a government agency such as Government National Mortgage Administration ("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 may also invest in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and money market instruments.

Note 2 - Basis of Presentation and Consolidation
 
    The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2021. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2020.
 
    The unaudited consolidated financial statements include the accounts of ARMOUR Residential REIT, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying condensed consolidated financial statements include the valuation of MBS, including an assessment of the allowance for credit losses, and derivative instruments.

ARR-20210331_G1.JPG


9
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Note 3 - Summary of Significant Accounting Policies
 
Cash
 
    Cash includes cash on deposit with financial institutions. We may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes we are not exposed to significant credit risk due to the financial position and creditworthiness of the depository institutions in which those deposits are held.
 
Cash Collateral Posted To/By Counterparties

    Cash collateral posted to/by counterparties represents cash posted by us to counterparties or posted by counterparties to us as collateral. Cash collateral posted to/by counterparties may include collateral for interest rate swap contracts (including swaptions and basis swap contracts), and repurchase agreements on our MBS and our Agency Securities purchased or sold on a to-be-announced basis ("TBA Agency Securities").
Investments in Securities, at Fair Value

Our investments in securities are generally classified as either available for sale or trading securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.

    Available for Sale Securities represent investments that we intend to hold for extended periods of time and are reported at their estimated fair values with unrealized gains and losses excluded from earnings and reported as part of the consolidated statements of comprehensive income (loss).

    Trading Securities are reported at their estimated fair values with gains and losses included in Other Income (Loss) as a component of the consolidated statements of operations.

Receivables and Payables for Unsettled Sales and Purchases

    We account for purchases and sales of securities on the trade date, including purchases and sales for forward settlement. Receivables and payables for unsettled trades represent the agreed trade price multiplied by the outstanding balance of the securities at the balance sheet date.

Accrued Interest Receivable and Payable
 
    Accrued interest receivable includes interest accrued between payment dates on securities and interest on unsettled sales of securities. Accrued interest payable includes interest on unsettled purchases of securities and interest on repurchase agreements. At certain times, we may have interest payable on U.S. Treasury Securities sold short.
 
Repurchase Agreements

We finance the acquisition of the majority of our MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and short-term London Interbank Offered Rate ("LIBOR"). Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender, which accrues over the life of the repurchase agreement. A repurchase agreement operates as a financing arrangement under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The
ARR-20210331_G1.JPG


10
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

    In addition to the repurchase agreement financing discussed above, at certain times 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 in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the 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 master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day. We did not have any reverse repurchase agreements outstanding at March 31, 2021 and December 31, 2020.
 
Derivatives, at Fair Value
 
    We recognize all derivatives individually as either assets or liabilities at fair value on our consolidated balance sheets. All changes in the fair values of our derivatives are reflected in our consolidated statements of operations. We designate derivatives as hedges for tax purposes and any unrealized derivative gains or losses would not affect our distributable net taxable income. These transactions may include interest rate swap contracts, interest rate swaptions and basis swap contracts.

    We also may utilize forward contracts for the purchase or sale of 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. We account for TBA dollar roll transactions as a series of derivative transactions. We may also purchase and sell TBA Agency Securities as a means of investing in and financing Agency Securities (thereby increasing our “at risk” leverage) or as a means of disposing of or reducing our exposure to Agency Securities (thereby reducing our “at risk” leverage). We agree to purchase or sell, for future delivery, Agency Securities with certain principal and interest terms and certain types of collateral, but the particular Agency Securities to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA Agency Security for a later settlement date. This transaction is commonly referred to as a “dollar roll.” When it is reasonably possible that we will pair off a TBA Agency Security, we account for that contract as a derivative.
Impairment of Assets
    We assess impairment of available for sale securities at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment if we (1) intend to sell the available for sale securities, or (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 a credit impairment exists where fair value is less than amortized cost. Impairment losses recognized establish a new cost basis for the related available for sale securities.

Revenue Recognition

    Interest income is earned and recognized on Agency Securities based on their unpaid principal amounts and their contractual terms. Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction. Premiums and discounts associated with the purchase of Multi-Family MBS, which are generally not subject to prepayment, are amortized or accreted into interest income over the contractual lives of the securities using a level yield method. Premiums and discounts associated with the purchase of other Agency Securities are amortized or accreted into interest income over the actual lives of the securities, reflecting actual prepayments as they occur. Purchase and sale transactions (including TBA Agency Securities) 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
ARR-20210331_G1.JPG


11
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

realized from sales of available for sale securities are reclassified into income from other comprehensive income and are determined using the specific identification method.

Interest income on Credit Risk and Non-Agency Securities and Interest-Only Securities is recognized using the effective yield method over the life of the securities based on the future cash flows expected to be received. Future cash flow projections and related effective yields are determined for each security and updated quarterly. Impairment losses establish a new cost basis in the security for purposes of calculating effective yields, recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security. Interest income on U.S. Treasury Securities is recognized based on their unpaid principal amounts and their contractual terms. Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction.

Comprehensive Income (Loss)
 
    Comprehensive income (loss) refers to changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.

Note 4 - Recent Accounting Pronouncements

    We consider the applicability and impact of all Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board. We have not identified any ASUs that we deemed to be applicable or that are expected to have a significant impact on our consolidated financial statements when adopted.

Note 5 - Fair Value of Financial Instruments
 
    Our valuation techniques for financial instruments use observable and unobservable inputs. Observable inputs reflect readily obtainable data from third party sources, while unobservable inputs reflect management’s market assumptions. The Accounting Standards Codification Topic No. 820, "Fair Value Measurement," classifies these inputs into the following hierarchy:
 
    Level 1 Inputs - Quoted prices for identical instruments in active markets.

    Level 2 Inputs - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
    Level 3 Inputs - Prices determined using significant unobservable inputs. Unobservable inputs may be used in situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period). Unobservable inputs reflect management’s assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.

    At the beginning of each quarter, we assess the assets and liabilities that are measured at fair value on a recurring basis to determine if any transfers between levels in the fair value hierarchy are needed.

The following describes the valuation methodologies used for our assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Any transfers between levels are assumed to occur at the beginning of the reporting period.
    
ARR-20210331_G1.JPG


12
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Investments in Securities:

    Fair value for our investments in securities are based on obtaining a valuation for each security from third party pricing services and/or dealer quotes. The third party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of a security 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 securities. 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. Fair values obtained from the third party pricing services for similar instruments are classified as Level 2 securities if the inputs to the pricing models used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the third party pricing service, but dealer pricing indications are, the security will be classified as a Level 2 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information and classify it as a Level 3 security. U.S. Treasury Securities are classified as Level 1, as quoted unadjusted prices are available in active markets for identical assets.

Derivatives:

    The fair values of our interest rate swap contracts, interest rate swaptions and basis swaps are valued using information provided by third party pricing services that incorporate common market pricing methods that may include current interest rate curves, forward interest rate curves and market spreads to interest rate curves. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. Management compares the pricing information received to dealer quotes to ensure that the current market conditions are properly reflected. The fair values of our derivatives are classified as Level 2.
    The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020.

March 31, 2021 (Level 1) (Level 2) (Level 3) Balance
Assets at Fair Value:
Agency Securities $ —  $ 4,318,397  $ —  $ 4,318,397 
Derivatives $ —  $ 216,297  $ —  $ 216,297 
Liabilities at Fair Value:
Derivatives $ —  $ 45,015  $ —  $ 45,015 
December 31, 2020 (Level 1) (Level 2) (Level 3) Balance
Assets at Fair Value:
Agency Securities $ —  $ 5,178,322  $ —  $ 5,178,322 
Derivatives $ —  $ 54,686  $ —  $ 54,686 
Liabilities at Fair Value:
Derivatives $ —  $ 1,217  $ —  $ 1,217 

    There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the three months ended March 31, 2021 or for the year ended December 31, 2020.

    Excluded from the tables above are financial instruments, including cash, cash collateral posted to/by counterparties, receivables, the Subordinated loan to BUCKLER, payables and borrowings under repurchase agreements, which are presented in our consolidated financial statements at cost which approximates fair value. The estimated fair value of these instruments is measured using "Level 1" or "Level 2" inputs at March 31, 2021 and December 31, 2020.

ARR-20210331_G1.JPG


13
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Note 6 - Investments in Securities
 
    As of March 31, 2021 and December 31, 2020, our securities portfolio consisted of $4,318,397 and $5,178,322 of investment securities, at fair value, respectively, and $3,564,067 and $2,711,977 of TBA Agency Securities, at fair value, respectively. Our TBA Agency Securities are reported at net carrying value of $(45,001) and $19,747, at March 31, 2021 and December 31, 2020, respectively, and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 - Derivatives). The net carrying value of our TBA Agency Securities represents the difference between the fair value of the underlying Agency Security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying Agency Security.

    The following tables summarizes our investments in securities as of March 31, 2021 and December 31, 2020, excluding TBA Agency Securities (see Note 8 - Derivatives). 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 Securities designated as available for sale will continue to be reported in other comprehensive income as required by GAAP.

Available
for Sale
Securities
Trading Securities
Agency Agency Credit Risk and Non-Agency U.S. Treasuries Totals
March 31, 2021
Balance, December 31, 2020 $ 1,970,902  $ 3,207,420  $ —  $ —  $ 5,178,322 
Purchases (1)
—  295,778  —  390,126  685,904 
Proceeds from sales
(87,875) (317,175) —  (390,098) (795,148)
Receivable for unsettled sales —  (358,670) —  —  (358,670)
Principal repayments (98,342) (180,380) —  —  (278,722)
Gains (losses) (34,880) (62,586) —  (28) (97,494)
Amortization/accretion (4,492) (11,303) —  —  (15,795)
Balance, March 31, 2021 $ 1,745,313  $ 2,573,084  $   $   $ 4,318,397 
Percentage of Portfolio 40.42  % 59.58  % —  % —  % 100.00  %
December 31, 2020
Balance, December 31, 2019 $ 11,941,766  $ —  $ 883,601  $ —  $ 12,825,367 
Purchases (1)
1,768,688  3,711,961  237,928  4,621,776  10,340,353 
Proceeds from sales (10,800,879) (158,708) (889,057) (4,643,049) (16,491,693)
Principal repayments (873,650) (343,514) (45,766) —  (1,262,930)
Gains (losses) (32,565) 19,557  (189,555) 21,357  (181,206)
Credit loss expense (1,012) —  —  —  (1,012)
Amortization/accretion (31,446) (21,876) 2,849  (84) (50,557)
Balance, December 31, 2020 $ 1,970,902  $ 3,207,420  $   $   $ 5,178,322 
Percentage of Portfolio 38.06  % 61.94  % —  % —  % 100.00  %
(1)Purchases include cash paid during the period, plus payable for investment securities purchased during the period as of period end.
ARR-20210331_G1.JPG


14
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


Available for Sale Securities:

    At March 31, 2021, we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. As a result of this evaluation, no credit loss expense was required. We do not have an allowance for credit losses as all of our available for sale securities consist of Agency MBS.
    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. In the first quarter of 2020, we recognized an impairment of $1,012 in our consolidated statements of operations as we had determined that we may have been required to sell certain securities in the near future. No credit loss expense was required for the remainder of 2020.

    The table below presents the components of the carrying value and the unrealized gain or loss position of our available for sale securities at March 31, 2021 and December 31, 2020. Our available for sale securities had a weighted average coupon of 3.14% and 3.25% at March 31, 2021 and December 31, 2020.

Agency Securities Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
March 31, 2021
Total Fannie Mae $ 1,279,088  $ 1,314,096  $ (29) $ 121,729  $ 1,435,796 
Total Freddie Mac 267,184  277,793  —  14,933  292,726 
Total Ginnie Mae 16,215  16,627  (7) 171  16,791 
Total $ 1,562,487  $ 1,608,516  $ (36) $ 136,833  $ 1,745,313 
December 31, 2020
Total Fannie Mae $ 1,359,136  $ 1,397,206  $ (1) $ 159,603  $ 1,556,808 
Total Freddie Mac 354,382  368,686  —  19,246  387,932 
Total Ginnie Mae 25,388  25,979  (43) 226  26,162 
Total $ 1,738,906  $ 1,791,871  $ (44) $ 179,075  $ 1,970,902 

    The following table presents the unrealized losses and estimated fair value of our available for sale securities by length of time that such securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020. All of our available for sale securities are issued and guaranteed by GSEs or Ginnie Mae. The GSEs have a long term credit rating of AA+.

Unrealized Loss Position For:
< 12 Months ≥ 12 Months Total
Agency Securities Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
March 31, 2021 $ 7,071  $ (36) $ —  $ —  $ 7,071  $ (36)
December 31, 2020 $ 8,811  $ (44) $ —  $ —  $ 8,811  $ (44)

ARR-20210331_G1.JPG


15
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

    Actual maturities of available for sale securities are generally shorter than stated contractual maturities because actual maturities of available for sale securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following table summarizes the weighted average lives of our available for sale securities at March 31, 2021 and December 31, 2020.

March 31, 2021 December 31, 2020
Weighted Average Life of Available for Sale Securities Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
< 1 year $ 72  $ 72  $ 71  $ 72 
≥ 1 year and < 3 years 21,717  20,883  548,352  520,657 
≥ 3 years and < 5 years 655,870  622,694  282,739  269,716 
≥ 5 years 1,067,654  964,867  1,139,740  1,001,426 
Total Available for Sale Securities $ 1,745,313  $ 1,608,516  $ 1,970,902  $ 1,791,871 

    We use a third party model to calculate the weighted average lives of our available for sale securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our available for sale securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of our available for sale securities at March 31, 2021 and December 31, 2020 in the table above are based upon market factors, assumptions, models and estimates from the third party model and also incorporate management’s judgment and experience. The actual weighted average lives of our available for sale securities could be longer or shorter than estimated.

Trading Securities:

    The components of the carrying value of our trading securities at March 31, 2021 and December 31, 2020 are presented in the table below. We did not have any Credit Risk and Non-Agency Securities, U.S. Treasury Securities or Interest-Only Securities at March 31, 2021 and December 31, 2020.

Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
March 31, 2021
Agency Securities:
Total Fannie Mae $ 1,958,951  $ 2,078,710  $ (37,761) $ 2,891  $ 2,043,840 
Total Freddie Mac 507,962  533,065  (5,666) 1,845  529,244 
Total Trading Securities $ 2,466,913  $ 2,611,775  $ (43,427) $ 4,736  $ 2,573,084 
December 31, 2020
Agency Securities:
Total Fannie Mae $ 2,420,828  $ 2,585,409  $ (1,441) $ 18,211  $ 2,602,179 
Total Freddie Mac 570,654  601,320  (430) 4,351  605,241 
Total Trading Securities $ 2,991,482  $ 3,186,729  $ (1,871) $ 22,562  $ 3,207,420 
ARR-20210331_G1.JPG


16
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


The following table summarizes the weighted average lives of our trading securities at March 31, 2021 and December 31, 2020.

  March 31, 2021 December 31, 2020
Estimated Weighted Average Life of Trading Securities Fair Value Amortized Cost Fair Value Amortized Cost
< 1 year $ —  $ —  $ —  $ — 
≥ 1 year and < 3 years 2,028  2,035  649,425  650,328 
≥ 3 years and < 5 years 719,487  716,320  1,522,509  1,506,035 
≥ 5 years 1,851,569  1,893,420  1,035,486  1,030,366 
Total $ 2,573,084  $ 2,611,775  $ 3,207,420  $ 3,186,729 
    
    We use a third party model to calculate the weighted average lives of our trading securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our trading securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of our trading securities at March 31, 2021 and December 31, 2020 in the tables above are based upon market factors, assumptions, models and estimates from the third party model and also incorporate management’s judgment and experience. The actual weighted average lives of our trading securities could be longer or shorter than estimated.

 Note 7 - Repurchase Agreements

    At March 31, 2021, we had active MRAs with 33 counterparties and had $3,810,790 in outstanding borrowings with 18 of those counterparties. At December 31, 2020, we had $4,536,065 in outstanding borrowings with 18 counterparties.

    The following table represents the contractual repricing regarding our repurchase agreements to finance MBS purchases at March 31, 2021 and December 31, 2020. No amounts below are subject to offsetting. Our repurchase agreements require excess collateral, known as a “haircut.” At March 31, 2021, the average haircut percentage was 3.52% compared to 3.13% at December 31, 2020. The haircut for our repurchase agreements vary by counterparty and therefore, the changes in the average haircut percentage will vary with the changes in our counterparty repurchase agreement balances.

Balance Weighted Average Contractual Rate Weighted Average Maturity in days
March 31, 2021
Agency Securities
≤ 30 days $ 3,470,940  0.18  % 12
> 30 days to ≤ 60 days 89,304  0.17  % 50
> 60 days 250,546  0.19  % 97
Total or Weighted Average $ 3,810,790  0.18  % 18
December 31, 2020
Agency Securities
≤ 30 days $ 3,618,255  0.23  % 15
> 30 days to ≤ 60 days 917,810  0.23  % 45
Total or Weighted Average $ 4,536,065  0.23  % 21
ARR-20210331_G1.JPG


17
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


    Our repurchase agreements require that we maintain adequate pledged collateral. A decline in the value of the MBS pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. 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. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital. We also may receive cash or securities as collateral from our derivative counterparties which we may use as additional collateral for repurchase agreements. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

    At March 31, 2021 and December 31, 2020, BUCKLER accounted for 61.9% and 66.1%, respectively, of our aggregate borrowings and had an amount at risk of 7.2% and 8.3%, respectively, of our total stockholders' equity with a weighted average maturity of 20 days and 21 days, respectively, on repurchase agreements (see Note 15 - Related Party Transactions).

    In addition, at March 31, 2021, we had 1 repurchase agreement counterparty that individually accounted for over 5% of our aggregate borrowings. In total, this counterparty accounted for approximately 10.6% of our repurchase agreement borrowings outstanding at March 31, 2021. At December 31, 2020, we had 1 repurchase agreement counterparty that individually accounted for over 5% of our aggregate borrowings. In total, this counterparty accounted for 9.0% of our repurchase agreement borrowings at December 31, 2020.
    
Note 8 - Derivatives

    We enter into derivative transactions to manage our interest rate risk and agency mortgage rate exposures. We have agreements with our derivative counterparties that provide for the posting of collateral based on the fair values of our derivatives. Through this margin process, either we or our counterparties may be required to pledge cash or securities as collateral. Collateral requirements vary by counterparty and change over time based on the fair value, notional amount and remaining term of the contracts. Certain contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

    Interest rate swap contracts are designed to lock in funding costs for repurchase agreements associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg. Basis swap contracts allow us to exchange one floating interest rate basis for another, thereby allowing us to diversify our floating rate basis exposures.
 
    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 into 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 may enter into TBA Agency Securities as a means of hedging against short-term changes in interest rates. We may also enter into TBA Agency Securities as a means of acquiring or disposing of Agency Securities and we may from time to time utilize TBA dollar roll transactions to finance Agency Security purchases. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities.

    We have netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by ISDA. We are also required to post or hold cash collateral based upon the net underlying market value of our open positions with the counterparty. A decline in the value of the open positions with the counterparty could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing
ARR-20210331_G1.JPG


18
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. An event of default or termination event under the standard ISDA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately. In addition, certain of our ISDAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital.

    The following tables present information about the potential effects of netting our derivatives if we were to offset the assets and liabilities on the accompanying consolidated balance sheets. We currently present these financial instruments at their gross amounts and they are included in Derivatives, at fair value on the accompanying consolidated balance sheets at March 31, 2021 and December 31, 2020.

Gross Amounts Not Offset
Assets
Gross Amounts(1)
Financial
Instruments
Cash Collateral Total Net
March 31, 2021
Interest rate swap contracts $ 216,283  $ —  $ (159,641) $ 56,642 
TBA Agency Securities 14  (14) —  — 
Totals $ 216,297  $ (14) $ (159,641) $ 56,642 
December 31, 2020
Interest rate swap contracts $ 34,588  $ (866) $ (27,773) $ 5,949 
TBA Agency Securities 20,098  (351) (13,942) 5,805 
Totals $ 54,686  $ (1,217) $ (41,715) $ 11,754 
(1)See Note 5 - Fair Value of Financial Instruments for additional discussion.

  Gross Amounts Not Offset  
Liabilities
Gross Amounts(1)
Financial
Instruments
Cash Collateral Total Net
March 31, 2021
Interest rate swap contracts $ —  $ —  $ —  $ — 
TBA Agency Securities (45,015) 14  44,906  (95)
Totals $ (45,015) $ 14  $ 44,906  $ (95)
December 31, 2020
Interest rate swap contracts $ (866) $ 866  $ —  $ — 
TBA Agency Securities (351) 351  —  — 
Totals $ (1,217) $ 1,217  $ —  $ — 
(1)See Note 5 - Fair Value of Financial Instruments for additional discussion.
ARR-20210331_G1.JPG


19
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

    The following table represents the location and information regarding our derivatives which are included in Other Income (Loss) in the accompanying consolidated statements of operations for the three months ended March 31, 2021 and March 31, 2020.

Income (Loss) Recognized
For the Three Months Ended March 31,
Derivatives Location on consolidated statements of operations 2021 2020
Interest rate swap contracts:
Realized loss Realized loss on derivatives $ —  $ (261,384)
Interest income Realized loss on derivatives 872  26,462 
Interest expense Realized loss on derivatives (4,448) (32,233)
Changes in fair value Unrealized gain (loss) on derivatives 185,960  (151,386)
$ 182,384  (418,541)
TBA Agency Securities:
Realized gain (loss) Realized loss on derivatives (23,784) 32,007 
Changes in fair value Unrealized gain (loss) on derivatives (39,980) 17,499 
$ (63,764) $ 49,506 
Totals $ 118,620  $ (369,035)

    The following tables present information about our derivatives at March 31, 2021 and December 31, 2020.

Interest Rate Swaps (1)
Notional Amount Weighted Average Remaining Term (Months) Weighted Average Rate
March 31, 2021
< 3 years
$ 1,307,000  19 0.06  %
≥ 3 years and < 5 years
412,000  47 0.16  %
≥ 5 years and < 7 years
889,000  69 0.28  %
≥ 7 years
3,152,000  115 0.88  %
Total or Weighted Average (2)
$ 5,760,000  81 0.55  %
December 31, 2020
< 3 years
$ 2,230,000  12 0.06  %
≥ 3 years and < 5 years
463,000  45 0.14  %
≥ 5 years and < 7 years
942,000  72 0.28  %
≥ 7 years
1,702,000  113 0.50  %
Total or Weighted Average (3)
$ 5,337,000  58 0.24  %
(1)Pay Fixed/Receive Variable.
(2)Of this amount, $4,557,000 notional are Fed Funds based swaps, the last of which matures in 2031 and $1,203,000 notional are SOFR based swaps, the last of which matures in 2023.
ARR-20210331_G1.JPG


20
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

(3)Of this amount, $2,230,000 notional are SOFR based swaps, the last of which matures in 2023; and $3,107,000 notional are Fed Funds based swaps, the last of which matures in 2030.

TBA Agency Securities Notional Amount Cost Basis Fair Value
March 31, 2021
15 Year Long
1.5%
$ 200,000  $ 200,523  $ 200,527 
2.0%
1,700,000  1,751,223  1,741,247 
30 Year Long
2.0%
500,000  502,992  497,975 
2.5%
1,100,000  1,136,129  1,124,318 
Total (1)
$ 3,500,000  $ 3,590,867  $ 3,564,067 
December 31, 2020
15 Year Long
1.5%
$ 200,000  $ 204,758  $ 205,781 
2.0%
1,200,000 1,248,015 1,253,354
30 Year Long
2.0%
600,000  619,031  622,934 
2.5%
800,000  838,047  841,314 
3.5%
(200,000) (211,055) (211,406)
Total (1)
$ 2,600,000  $ 2,698,796  $ 2,711,977 
(1)$1,350,000 and $1,250,000 notional were forward settling at March 31, 2021 and December 31, 2020, respectively.
Note 9 - Commitments and Contingencies
 
Management
 
     The Company is managed by ACM, pursuant to a management agreement (see also Note 15, “Related Party Transactions”). The management agreement entitles ACM to receive management fees payable monthly in arrears. Currently, the monthly management fee is 1/12th of the sum of (a) 1.5% of gross equity raised up to $1.0 billion plus (b) 0.75% of gross equity raised in excess of $1.0 billion. The cost of repurchased stock and any dividend representing a return of capital for tax purposes will reduce the amount of gross equity raised used to calculate the monthly management fee. At March 31, 2021 and March 31, 2020, the effective management fee, prior to management fees waived, was 1.00% and 1.00% based on gross equity raised of $3,026,269 and $2,887,586, 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 until further notice (see Note 16 - Subsequent Events). During the three months ended March 31, 2021, ACM waived management fees of $2,400. The monthly management fees are not calculated based on the performance of our assets. Accordingly, the payment of our monthly management fees may not decline in the event of a decline in our earnings and may cause us to incur losses. We are also responsible for any costs and expenses that ACM incurs solely on our behalf other than the various overhead expenses specified in the terms of the management agreement. ACM is further entitled to receive termination fees from us under certain circumstances.

ARR-20210331_G1.JPG


21
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Indemnifications and Litigation
 
    We enter into certain contracts that contain a variety of indemnifications, principally with ACM and underwriters, against third party claims for errors and omissions in connection with their services to us. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements, as well as the maximum amount attributable to past events, is not material. Accordingly, we have no liabilities recorded for these agreements at March 31, 2021 and December 31, 2020.
 
    Nine putative class action lawsuits have been filed in connection with the tender offer (the “Tender Offer”) and merger (the “Merger”) for JAVELIN. The Tender Offer and Merger are collectively defined herein as the “Transactions.” All nine suits name ARMOUR, the previous members of JAVELIN’s board of directors prior to the Merger (of which eight are current members of ARMOUR’s board of directors) (the “Individual Defendants”) and JMI Acquisition Corporation (“Acquisition”) as defendants. Certain cases also name ACM and JAVELIN as additional defendants. The lawsuits were brought by purported holders of JAVELIN’s common stock, both individually and on behalf of a putative class of JAVELIN’s stockholders, alleging that the Individual Defendants breached their fiduciary duties owed to the plaintiffs and the putative class of JAVELIN stockholders, including claims that the Individual Defendants failed to properly value JAVELIN; failed to take steps to maximize the value of JAVELIN to its stockholders; ignored or failed to protect against conflicts of interest; failed to disclose material information about the Transactions; took steps to avoid competitive bidding and to give ARMOUR an unfair advantage by failing to adequately solicit other potential acquirors or alternative transactions; and erected unreasonable barriers to other third-party bidders. The suits also allege that ARMOUR, JAVELIN, ACM and Acquisition aided and abetted the alleged breaches of fiduciary duties by the Individual Defendants. The lawsuits seek equitable relief, including, among other relief, to enjoin consummation of the Transactions, or rescind or unwind the Transactions if already consummated, and award costs and disbursements, including reasonable attorneys’ fees and expenses. The sole Florida lawsuit was never served on the defendants, and that case was voluntarily dismissed and closed on January 20, 2017. On April 25, 2016, the Maryland court issued an order consolidating the eight Maryland cases into one action, captioned In re JAVELIN Mortgage Investment Corp. Shareholder Litigation (Case No. 24-C-16-001542), and designated counsel for one of the Maryland cases as interim lead co-counsel. On May 26, 2016, interim lead counsel filed the Consolidated Amended Class Action Complaint for Breach of Fiduciary Duty asserting consolidated claims of breach of fiduciary duty, aiding and abetting the breaches of fiduciary duty, and waste. On June 27, 2016, defendants filed a Motion to Dismiss the Consolidated Amended Class Action Complaint for failing to state a claim upon which relief can be granted. A hearing was held on the Motion to Dismiss on March 3, 2017, and the Court reserved ruling. On September 27, 2019, the court further deferred the matter for six months. On June 15, 2020, co-counsel for the plaintiff filed a notice of supplemental authority requesting to move the matter forward. On August 19, 2020, a Notification To Parties of Contemplated Dismissal was sent out by the Clerk of the Circuit Court to all parties. Counsel for the plaintiff responded on August 24, 2020, with a Motion to Defer Dismissal. No further action has been taken by the court.

Each of ARMOUR, JAVELIN, ACM and the Individual Defendants intends to defend the claims made in these lawsuits vigorously; however, there can be no assurance that any of ARMOUR, JAVELIN, ACM or the Individual Defendants will prevail in its defense of any of these lawsuits to which it is a party. An unfavorable resolution of any such litigation surrounding the Transactions may result in monetary damages being awarded to the plaintiffs and the putative class of former stockholders of JAVELIN and the cost of defending the litigation, even if resolved favorably, could be substantial. Due to the preliminary nature of all of these suits, ARMOUR is not able at this time to estimate their outcome.

Note 10 - Stock Based Compensation
 
    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 March 31, 2021, there were 42 shares available for future issuance under the Plan.
 
ARR-20210331_G1.JPG


22
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

    Transactions related to awards for the three months ended March 31, 2021 are summarized below:

  March 31, 2021
 
Number of
Awards
Weighted
Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period 496  $ 19.77 
Granted (1)
635  $ 11.08 
Vested (77) $ 17.10 
Unvested RSU Awards Outstanding end of period 1,054  $ 14.73 
(1)During the three months ended March 31, 2021, 535 RSUs were granted to certain officers of ARMOUR through ACM and 100 RSUs were granted to the Board.

At March 31, 2021, there was approximately $15,539 of unvested stock based compensation related to the Awards (based on a weighted average grant date price of $14.73 per share), which we expect to recognize as an expense over the remaining average service period of 3.3 years. Our policy is to account for forfeitures as they occur. We also pay each of our non-executive Board members quarterly fees of $33, which are payable in cash, common stock, RSUs or a combination of common stock, RSUs and cash at the option of the director. Non-executive Board members have the option to participate in the Company's Non-Management Director Compensation and Deferral Program (the "Deferral Program"). The Deferral Program permits non-executive Board members to elect to receive either common stock or RSUs or a combination of common stock and RSUs at the option of the director, instead of all or part of their quarterly cash compensation and/or all or part of their committee and chairperson cash retainers.
 
Note 11 - Stockholders' Equity

Changes in Stockholders' Equity    

    The following table presents the changes in Stockholders' Equity for the following interim periods.

Stockholders' Equity March 31, 2021 March 31, 2020
Balance, beginning of quarter $ 938,304  $ 1,436,707 
Series B Preferred dividends ($0.1640625 per share)
—  (1,375)
Series C Preferred dividends ($0.14583 per share)
(2,486) (1,452)
Common stock dividends (1)
(20,057) (30,377)
Series B Preferred Stock, called for redemption —  (209,583)
Issuance of Series C Preferred Stock 28,173  129,221 
Issuance of Common stock, net 52,960  — 
Stock based compensation, net of withholding requirements 1,199  1,001 
Common Stock repurchased, net —  (777)
Net income (loss) 71,327  (406,659)
Other comprehensive loss (42,234) (130,456)
Balance, end of quarter $ 1,027,186  $ 786,250 
(1)    See the below table for common stock dividends per share for the three months ended March 31, 2021. Common stock dividends were $0.17 per share each month for the three months ended March 31, 2020.
ARR-20210331_G1.JPG


23
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


Preferred Stock
 
    At March 31, 2021 and December 31, 2020, we were authorized to issue up to 50,000 shares of preferred stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board of Directors (“Board”) or a committee thereof. On January 28, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of the State of Maryland to designate 10,000 shares of the Company’s authorized preferred stock, par value $0.001 per share, as shares of 7.00% Series C Preferred Stock with the powers, designations, preferences and other rights as set forth therein. At March 31, 2021, a total of 31,617 shares of our authorized preferred stock remain available for designation as future series.

Series C Cumulative Redeemable Preferred Stock "Series C Preferred Stock"

At March 31, 2021 and December 31, 2020, we had 6,501 and 5,347 shares, respectively, of Series C Preferred Stock issued and outstanding with a par value of $0.001 per share and a liquidation preference of $25.00 per share, or $162,525 and $133,675 in the aggregate. Shares designated as Series C Preferred Stock but unissued totaled 3,499 and 4,653 at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, there were no accrued or unpaid dividends on the Series C Preferred Stock.

    On January 29, 2020, the Company entered into an Equity Sales Agreement (the “Preferred C ATM Sales Agreement”) with B. Riley Securities, Inc. (formerly B. Riley FBR, Inc.) and BUCKLER, as sales agents (individually and collectively, the “Agents"), and ACM, pursuant to which the Company may offer and sell, over a period of time and from time to time, through one or more of the Agents, as the Company’s agents, up to 6,550 of Series C Preferred Stock. The Preferred C ATM Sales Agreement relates to a proposed “at-the-market” offering program. Under the agreement, we will pay the agent designated to sell our shares an aggregate commission of up to 2.0% of the gross sales price per share of our common stock sold through the designated agent under the agreement. During the three months ended March 31, 2021, we sold 1,154 shares under this agreement for proceeds of $28,173, net of issuance costs and commissions of approximately $296.

Common Stock
 
    At March 31, 2021 and December 31, 2020, we were authorized to issue up to 125,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had 69,748 shares of common stock issued and outstanding at March 31, 2021 and 65,290 shares of common stock issued and outstanding at December 31, 2020.

    On February 15, 2019, we entered into an Equity Sales Agreement (the “Common stock ATM Sales Agreement”) with BUCKLER, JMP Securities LLC and Ladenburg Thalmann & Co. Inc., as sales agents, relating to the shares of our common stock. On April 3, 2020, the Common stock ATM Sales Agreement was amended to add B. Riley Securities, Inc. (formerly B. Riley FBR, Inc.) as a sales agent. On May 4, 2020 the Common stock ATM Sales Agreement was further amended to increase the number of shares available for sale pursuant to the terms of the Common Stock ATM Sales Agreement. In accordance with the terms of the Common Stock ATM Sales agreement, as amended, we may offer and sell over a period of time and from time to time, up to 17,000 shares of our common stock, par value $0.001 per share. The Common stock ATM Sales Agreement relates to an "at-the-market" offering program. Under the agreement, we will pay the agent designated to sell our shares an aggregate commission of up to 2.0% of the gross sales price per share of our common stock sold through the designated agent, under the agreement. During the three months ended March 31, 2021, we sold 4,400 shares under this agreement for proceeds of $52,960, net of issuance costs and commissions of approximately $670.

    See Note 15 - Related Party Transactions for discussion of additional transactions with BUCKLER.

ARR-20210331_G1.JPG


24
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

    Common Stock Repurchased
 
    At March 31, 2021 and December 31, 2020, there were 8,210 authorized shares remaining under the current repurchase authorization. Under the Repurchase Program, shares may be purchased in the open market, including block trades, through privately negotiated transactions, or pursuant to a trading plan separately adopted in the future. The timing, manner, price and amount of any repurchases will be at our discretion, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. We are not required to repurchase any shares under the Repurchase Program and it may be modified, suspended or terminated at any time for any reason. We do not intend to purchase shares from our Board or other affiliates. Under Maryland law, such repurchased shares are treated as authorized but unissued.

Equity Capital Raising Activities
 
    The following tables present our equity transactions for the three months ended March 31, 2021 and for the year ended December 31, 2020.

Transaction Type Completion Date Number of Shares
Per Share price (1)
Net Proceeds (Costs)
March 31, 2021
Preferred C ATM Sales Agreement January 19, 2021 - March 31, 2021 1,154  $ 24.40  $ 28,173 
Common stock ATM Sales Agreement March 3, 2021 - March 31, 2021 4,400  $ 12.04  $ 52,960 
December 31, 2020
Preferred C Underwritten Offering January 28, 2020 3,450  $ 24.14  $ 83,282 
Preferred C ATM Sales Agreement January 30, 2020 - December 23, 2020 1,897  $ 24.70  $ 46,856 
Common stock ATM Sales Agreement April 7, 2020 - December 15, 2020 6,287  $ 8.68  $ 54,575 
Common stock repurchases, net February 26, 2020 - March 3, 2020 (40) $ 19.42  $ (777)
(1)Weighted average price

Dividends
     
    The following table presents our Series C Preferred Stock dividend transactions for the three months ended March 31, 2021.

Record Date Payment Date
Rate per
Series C
Preferred Share
Aggregate
amount paid to
holders of record
January 15, 2021 January 27, 2021 $ 0.14583  $ 779.7 
February 15, 2021 February 26, 2021 $ 0.14583  $ 836.9 
March 15, 2021 March 29, 2021 $ 0.14583  $ 869.6 
Total dividends paid $ 2,486.2 
ARR-20210331_G1.JPG


25
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


    The following table presents our common stock dividend transactions for the three months ended March 31, 2021.

Record Date Payment Date Rate per common share Aggregate
amount paid to
holders of record
January 15, 2021 January 28, 2021 $ 0.10  $ 6,646 
February 16, 2021 February 26, 2021 $ 0.10  6,645 
March 15, 2021 March 29, 2021 $ 0.10  6,766 
Total dividends paid $ 20,057 

Note 12 - Net Income (Loss) per Common Share
 
    The following table presents a reconciliation of net income (loss) and the shares used in calculating weighted average basic and diluted earnings per common share for the three months ended March 31, 2021 and March 31, 2020.

  For the Three Months Ended March 31,
  2021 2020
Net Income (Loss) $ 71,327  $ (406,659)
Less: Preferred dividends (2,486) (2,827)
Net Income (Loss) available (related) to common stockholders $ 68,841  $ (409,486)
Weighted average common shares outstanding – basic 65,964  58,884 
Add: Effect of dilutive non-vested awards, assumed vested 1,054  — 
Weighted average common shares outstanding – diluted 67,018  58,884 

For the three months ended March 31, 2020, 650 of potentially dilutive non-vested awards outstanding were excluded from the computation of diluted Net Income (Loss) available (related) to common stockholders because to have included them would have been anti-dilutive for the period.

ARR-20210331_G1.JPG


26
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Note 13 - Comprehensive Income (Loss) per Common Share

    The following table presents a reconciliation of comprehensive net income (loss) and the shares used in calculating weighted average basic and diluted comprehensive income (loss) per common share for the three months ended March 31, 2021 and March 31, 2020.

  For the Three Months Ended March 31,
  2021 2020
Comprehensive Income (Loss) $ 29,093  $ (537,115)
Less: Preferred dividends (2,486) (2,827)
Comprehensive Income (Loss) available (related) to common stockholders $ 26,607  $ (539,942)
Net Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic $ 0.40  $ (9.17)
Diluted $ 0.40  $ (9.17)
Weighted average common shares outstanding:
Basic 65,964  58,884 
Add: Effect of dilutive non-vested awards, assumed vested 1,054  — 
Diluted 67,018  58,884 

For the three months ended March 31, 2020, 650 of potentially dilutive non-vested awards outstanding were excluded from the computation of diluted Net Comprehensive Income (Loss) available (related) to common stockholders because to have included them would have been anti-dilutive for the period.

Note 14 - Income Taxes
 
    The following table reconciles our GAAP net income (loss) to estimated REIT taxable income (loss) for the three months ended March 31, 2021 and March 31, 2020.

  For the Three Months Ended March 31,
  2021 2020
GAAP net income (loss) $ 71,327  $ (406,659)
Book to tax differences:
TRS (income) loss (7) 63 
Premium amortization expense (48) — 
Agency Securities, trading 62,586  — 
Credit Risk and Non-Agency Securities —  182,247 
U.S. Treasury Securities 28  (21,771)
Changes in interest rate contracts (122,195) 363,265 
Credit loss expense —  1,012 
Gain on Security Sales (7,354) (93,325)
Amortization of deferred hedging costs (41,867) (19,874)
Series B Cumulative Preferred Stock dividend - Called for redemption —  1,375 
Other 417 
Estimated REIT taxable income (loss) $ (37,113) $ 6,337 
ARR-20210331_G1.JPG


27
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)


    Interest rate contracts are treated as hedging transactions for U.S. federal income tax purposes. Unrealized gains and losses on open interest rate contracts are not included in the determination of REIT taxable income. 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 March 31, 2021 and at December 31, 2020, we had approximately $675,000 and $717,000, respectively, in interest rate swap expense amortizing through the year 2029. We had $91,961 of net operating loss carryforwards available for use indefinitely.

Net capital losses realized Amount Available to offset capital gains through
2018 $ (136,388) 2023
2019 $ (13,819) 2024

The Company's subsidiary, ARMOUR TRS, Inc. has made an election as a taxable REIT subsidiary (“TRS”). As such, the TRS is taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.

    The aggregate tax basis of our assets and liabilities was greater than our total Stockholders’ Equity at March 31, 2021 by approximately $264,192, or approximately $3.79 per common share (based on the 69,748 common shares then outstanding).

    We are required and intend to timely distribute substantially all of our REIT taxable income in order to maintain our REIT status under the Code. Total dividend payments to stockholders were $22,543 and $34,579 (including the final dividend on the Series B Preferred Stock, called for redemption) for the three months ended March 31, 2021 and March 31, 2020, respectively. Our estimated REIT taxable income (loss) available for distribution as dividends was $(37,113) and $6,337 for the three months ended March 31, 2021 and March 31, 2020, respectively. Our REIT taxable income and dividend requirements to maintain our REIT status are determined on an annual basis. Dividends paid in excess of current tax earnings and profits for the year will generally not be taxable to common stockholders.

    Our management is responsible for determining whether tax positions taken by us are more likely than not to be sustained on their merits. We have no material unrecognized tax benefits or material uncertain tax positions.

Note 15 - Related Party Transactions
 
ACM    

    The Company is managed by ACM, pursuant to a management agreement. All of our executive officers are also employees of ACM. ACM manages our day-to-day operations, subject to the direction and oversight of the Board. The management agreement runs through June 18, 2027 and is thereafter automatically renewed for an additional five-year term unless terminated under certain circumstances.
 
    Under the terms of the management agreement, ACM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ACM is responsible for the following primary roles:
Advising us with respect to, arranging for and managing the acquisition, financing, management and disposition of, elements of our investment portfolio;
Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies;
Coordinating capital raising activities;
Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets and providing administrative and managerial services in connection with our day-to-day operations; and
ARR-20210331_G1.JPG


28
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

Providing executive and administrative personnel, office space and other appropriate services required in rendering management services to us.

    The following table reconciles the fees incurred in accordance with the management agreement for the three months ended March 31, 2021 and March 31, 2020. 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 until further notice (see Note 16 - Subsequent Events).

For the Three Months Ended March 31,
2021 2020
Management fees $ 7,428  $ 7,444 
Less management fees waived (2,400) — 
Total Management fee expense $ 5,028  $ 7,444 

    We are required to take actions as may be reasonably required to permit and enable ACM to carry out its duties and obligations. We are also responsible for any costs and expenses that ACM incurred solely on our behalf other than the various overhead expenses specified in the terms of the management agreement. For the three months ended March 31, 2021 and March 31, 2020, we reimbursed ACM $7 and $117 for other expenses incurred on our behalf. In 2013, 2017, 2020 and January 2021, we elected to grant restricted stock unit awards to our executive officers and other ACM employees through ACM that generally vest over 5 years. In 2017, 2020 and January 2021, we elected to grant restricted stock unit awards to the Board. We recognized stock based compensation expense of $207 and $186 for the three months ended March 31, 2021 and March 31, 2020, respectively.

BUCKLER

    In March 2017, we contributed $352 for a 10% ownership interest in BUCKLER. The investment is included in prepaid and other assets in our consolidated balance sheet and is accounted for using the equity method as BUCKLER maintains specific ownership accounts. The value of the investment was $650 at March 31, 2021 and $634 at December 31, 2020, reflecting our total investment plus our share of BUCKLER’s operating results, in accordance with the terms of the operating agreement of BUCKLER that our independent directors negotiated. The primary purpose of our investment in BUCKLER is to facilitate our access to repurchase financing on potentially attractive terms (considering rate, term, size, haircut, relationship and funding commitment) compared to other suitable repurchase financing counterparties.
    Our operating agreement with BUCKLER contains certain provisions to benefit and protect the Company, including (1) sharing in any (a) defined profits realized by BUCKLER from the anticipated financing spreads resulting from repurchase financing facilitated by BUCKLER, and (b) distributions from BUCKLER to its members of net cash receipts, and (2) the realization of anticipated savings from reduced clearing, brokerage, trading and administrative fees. In addition, the independent directors of the Company must approve, in their sole discretion, any third-party business engaged by BUCKLER and may cause BUCKLER to wind up and dissolve and promptly return certain subordinated loans we provide to BUCKLER as regulatory capital (as described more fully below) if the independent directors reasonably determine that BUCKLER’s ability to provide attractive securities transactions for the Company is materially adversely affected. For the three months ended March 31, 2021 and March 31, 2020, we earned $0 and $363, respectively, from BUCKLER as an allocated share of Financing Gross Profit for a reduction of interest on repurchase agreements charged to the Company. Financing Gross Profit is defined in the operating agreement, subject to a contractually required reduction in our share of the Financing Gross Profit of $306 per annum until the end of the first quarter of 2022. See Note 11 - Stockholders' Equity for discussion of equity transactions with BUCKLER.

    We have one subordinated loan agreement with BUCKLER, totaling $105.0 million and maturing on May 1, 2025. BUCKLER may, at its option after obtaining regulatory approval, repay all or a portion of the principal amount of the loan.
ARR-20210331_G1.JPG


29
ARMOUR Residential REIT, Inc.
FINANCIAL STATEMENT NOTES (UNAUDITED)
(in thousands, except per share)

The loan has a stated interest rate of zero, plus additional interest payable to the Company in an amount equal to the amount of interest earned by BUCKLER on the investment of the loan proceeds, generally in government securities funds. For the three months ended March 31, 2021 and March 31, 2020, the Company earned $17 and $258, respectively, of interest on this loan.

    The table below summarizes other transactions with BUCKLER as of and for the three months ended March 31, 2021 and as of and for the year ended December 31, 2020.

Transactions with BUCKLER March 31, 2021 December 31, 2020
Repurchase agreements (1)
$ 2,360,264  $ 2,998,111 
Interest on repurchase agreements $ 1,805  $ 38,663 
Collateral posted on repurchase agreements $ 2,450,044  $ 3,117,929 
U.S. Treasury Securities Purchased $ 200,000  $ — 
U.S. Treasury Securities Sold $ 200,000  $ — 
(1)See also Note 7, Repurchase Agreements for transactions with BUCKLER.

Note 16 - Subsequent Events

ACM Management Agreement

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 until ACM provides further notice to ARMOUR. ACM may terminate this waiver for any month by providing notice to ARMOUR on or before the 25th day of the preceding month. This waiver does not constitute a waiver of any other amounts due to ACM from ARMOUR under the Agreement or otherwise, including but not limited to any expense reimbursements, any amounts calculated by reference to the contractual Base Management Fee, or any awards under the Second Amended and Restated 2009 Stock Incentive Plan.

Series C Preferred Stock

    A cash dividend of $0.14583 per outstanding share of Series C Preferred Stock, or $998 in the aggregate, will be paid on April 27, 2021 to holders of record on April 15, 2021. We have also declared cash dividends of $0.14583 per outstanding share of Series C Preferred Stock payable May 27, 2021 to holders of record on May 15, 2021 and payable June 28, 2021 to holders of record on June 15, 2021.

Between April 1, 2021 and April 9, 2021, we issued 346 shares under our Preferred C ATM Sales Agreement for proceeds of $8,475 net of issuance costs and commissions of $86.

Common Stock

    A cash dividend of $0.10 per outstanding common share, or $7,234 in the aggregate, will be paid on April 29, 2021 to holders of record on April 15, 2021. We have also declared a cash dividend of $0.10 per outstanding common share payable May 27, 2021 to holders of record on May 17, 2021.

Between April 1, 2021 and April 9, 2021, we issued 1,495 shares under our Common Stock ATM Sales Agreement for proceeds of $18,082 net of issuance costs and commissions of $229.

ARR-20210331_G1.JPG

                                                      
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ARMOUR Residential REIT, Inc.

    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
 
    We are a Maryland corporation 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 and believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and that 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 March 31, 2021 and December 31, 2020, we invested exclusively 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 may also invest 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 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 exclusively in Agency Securities, for which the principal and interest payments are guaranteed by a GSE. From time to time we may also invest in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and money market instruments. As such, we expect our investments to be subject to risks arising from delinquencies and foreclosures, thereby exposing our investment portfolio to potential losses. We are exposed to changing credit spreads, which could result in declines in the fair value of our investments. We believe ACM’s in-depth investment expertise across multiple sectors of the mortgage market, prudent asset selection and our hedging strategy enable us to minimize our credit losses, our market value losses and financing costs.

ARR-20210331_G1.JPG


31
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

    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.

Management
 
    See Note 9 and Note 15 to the consolidated financial statements.

Market and Interest Rate Trends and the Effect on our Securities Portfolio:
 
First Quarter 2021 Trends

COVID-19 continued to have a material impact on all business sectors during the first quarter. The extent of the ongoing impact on the Company’s operational and financial performance will depend on various developments, including the rate of vaccination and virus caseloads, as well as additional federal, state and local actions including progress in completely reopening businesses, schools and public services.
The continued strong intervention of the Federal Reserve that began in 2020 has stabilized and increased the price of agency residential and commercial mortgage-backed securities. ARMOUR continues to mitigate risk, use moderate leverage, and maximize liquidity within the scope of its business plan. The Company has carefully selected new investments within the context of the historically high prices currently of our target assets. The agency mortgage backed securities
ARR-20210331_G1.JPG


32
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

market remains highly dependent on the future course and timing of the Federal Reserves’ actions on interest rate and market purchases of our target assets.
The Company’s remote work environment protocol has allowed our operations to remain fully functional while we worked remotely. With increased vaccinations and the potential significant reduction of infections, we expect that we will be able to plan a safe return to the office environment over the next two quarters.

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.
Meeting Date Lower Bound Higher Bound
March 16, 2020 0.00  % 0.25  %
March 3, 2020 1.00  % 1.25  %
December 2019 1.50  % 1.75  %
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 expected discontinuation of LIBOR in 2021 may impact our liquidity and the value of our MBS, although we don't expect it to be material at this time. SOFR is currently scheduled to replace LIBOR as a reference rate. We continue to assess the impact on our securities portfolio and will continue to do so throughout 2021.

ARR-20210331_G1.JPG


33
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

    The following graph shows 30-day LIBOR as compared to the Effective Federal Funds Rate and SOFR Rate on a monthly basis from March 31, 2019 to March 31, 2021.
    
ARR-20210331_G2.JPG

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.

    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 (including swaptions) 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 net TBA Agency Securities exposure by entering in to certain TBA short positions. The TBA short positions represent different securities and maturities than our 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.

ARR-20210331_G1.JPG


34
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Results of Operations

Net Income (Loss) Summary

    The following is a summary of our consolidated results of operations for the periods presented:

ARR-20210331_G3.JPG

    Our results for the three months ended March 31, 2020 were significantly impacted by COVID-19. To increase liquidity, we significantly reduced our portfolio of Agency Securities (including TBA Agency Securities) by 68% from December 31, 2019. We also terminated $3,975,000 in notional interest rate swap contracts. The net loss for the three months ended March 31, 2020 reflected realized and unrealized losses on our interest rate swaps due to declines in interest rates in the quarter and exiting notional positions as well as fair value losses on our Credit Risk Transfer securities. We are now focused exclusively on an all Agency Securities portfolio. Net income for the three months ended March 31, 2021 reflected net interest income from a smaller average securities portfolio as well as gains on our derivatives.
ARR-20210331_G1.JPG


35
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)


Net Interest Income

    Net interest income is a function of both our securities portfolio size and net interest rate spread.

2021 vs. 2020
Our average securities portfolio, including TBA Agency Securities, decreased 42.7% from $12,056,794 for the three months ended March 31, 2020 to $6,902,777 for the three months ended March 31, 2021.
Our average securities portfolio yield decreased 1.34% and our cost of funds decreased 1.60% quarter over quarter.
Our net interest rate spread increased by 0.26% quarter over quarter. However net interest income decreased due to a lower average securities portfolio balance.

For the Three Months Ended March 31,
2021 2020
Interest Income:
Agency Securities, net of amortization of premium and fees $ 18,558  $ 79,776 
Credit Risk and Non-Agency Securities, including discount accretion —  12,355 
U.S. Treasury Securities —  469 
BUCKLER Subordinated loan 17  258 
Total Interest Income $ 18,575  $ 92,858 
Interest expense- repurchase agreements (2,427) (51,520)
Interest expense- U.S. Treasury Securities sold short (87) — 
Net Interest Income $ 16,061  $ 41,338 

    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
March 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  %
September 2019 3.56  % 2.25  % 1.31  % 2.55  %
June 2019 3.70  % 2.30  % 1.40  % 2.69  %
March 2019 3.65  % 2.03  % 1.62  % 2.71  %
    
ARR-20210331_G1.JPG


36
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

    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.

ARR-20210331_G4.JPG

Other Income (Loss)

2021 vs. 2020
Gains (losses) on Agency Securities, available for sale, resulted from sales during the three months ended March 31, 2021 of $87,875 compared to $10,395,454 (including $618,081 receivable for unsettled sales) during the three months ended March 31, 2020).
During the three months ended March 31, 2021, 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 that no credit loss expense was required. In the first quarter of 2020, we recognized an impairment of $1,012 in our consolidated statements of operations as we had determined that we may have been required to sell certain securities in the near future.
Loss on Agency Securities, trading, resulted from the change in fair value of the securities as well as losses on sales during the three months ended March 31, 2021. The change in fair value of the securities was $59,381 for the three months ended March 31, 2021. For the three months ended March 31, 2021, we sold $675,845 of Agency Securities which resulted in a loss of $3,205.
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 March 31, 2021. The change in the fair value of the securities was $(181,879) for the three months ended March 31, 2020.
ARR-20210331_G1.JPG


37
ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

For the three months ended March 31, 2020, we sold $142,