Published: 2022-10-26 00:00:00 ET

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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 8 - Commitments and Contingencies and Note 14 - 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 September 30, 2022 and December 31, 2021, we invested 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 have also invested 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 and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2022. 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, 2021.

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.

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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, interest rate swaptions, basis swap contracts, futures contracts, 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 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 and comprehensive income (loss).

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") (prior to its dissolution), and more recently the Secured Overnight Funding Rate ("SOFR"). 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 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.

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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 September 30, 2022 and December 31, 2021.

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 and comprehensive income (loss). 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, basis swap contracts and futures 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 realized from sales of available for sale securities are reclassified into income from Comprehensive Loss and are determined using the specific identification method.

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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)

Note 4 - 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.    

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.

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Derivatives

The fair values of our interest rate swap contracts, interest rate swaptions, basis swaps and futures contracts 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 and are classified as Level 2. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities and they are classified as Level 2. Management compares the pricing information received to dealer quotes to ensure that the current market conditions are properly reflected.

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021.

September 30, 2022						Level 1						Level 2						Level 3						Balance
Assets at Fair Value:
Agency Securities						$	—					$	8,014,139					$	—					$	8,014,139
U.S. Treasury Securities						$	274,172					$	—					$	—					$	274,172
Derivatives						$	—					$	1,087,490					$	—					$	1,087,490
Liabilities at Fair Value:
Derivatives						$	—					$	7,105					$	—					$	7,105
December 31, 2021						Level 1						Level 2						Level 3						Balance
Assets at Fair Value:
Agency Securities						$	—					$	4,406,521					$	—					$	4,406,521
U.S. Treasury Securities						$	198,833					$	—					$	—					$	198,833
Derivatives						$	—					$	199,073					$	—					$	199,073
Liabilities at Fair Value:
Derivatives						$	—					$	10,900					$	—					$	10,900

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the nine months ended September 30, 2022 or for the year ended December 31, 2021.

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 September 30, 2022 and December 31, 2021.

Note 5 - Investments in Securities

As of September 30, 2022 and December 31, 2021, our securities portfolio consisted of $8,288,311 and $4,605,354 of investment securities, at fair value, respectively, and $(928,125) and $4,575,060 of TBA Agency Securities, at fair value, respectively. Our TBA Agency Securities were reported at net carrying value of $(4,546) and $7,697, at September 30, 2022 and December 31, 2021, respectively, and were reported in Derivatives, at fair value on our consolidated balance sheets (see Note 7 - 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.

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

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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 are reported in other comprehensive income as required by GAAP.

Available for Sale Securities

At least quarterly, we evaluate our available for sale securities to determine if the available for sale securities in an unrealized loss position are impaired. During the three and nine months ended September 30, 2022, we recognized an impairment of $4,183 in our consolidated statements of operations and comprehensive income (loss), as we had decided to sell as of September 30, 2022 certain available for sale securities before they recovered in value. No credit loss expense was incurred for the three and nine months ended September 30, 2021.

The table below presents the components of the carrying value and the unrealized gain or loss position of our available for sale securities at September 30, 2022 and December 31, 2021. Our available for sale securities had a weighted average coupon of 4.34% and 3.83% at September 30, 2022 and December 31, 2021, respectively.

Agency Securities						Principal Amount						Amortized Cost						Gross Unrealized Loss						Gross Unrealized Gain						Fair Value
September 30, 2022
Total Fannie Mae						$	110,870					$	113,889					$	(7,008)					$	—					$	106,881
Total Freddie Mac						134,952						137,187						(7,602)						—						129,585
Total Ginnie Mae						80						84						(5)						—						79
Total						$	245,902					$	251,160					$	(14,615)					$	—					$	236,545
December 31, 2021
Total Fannie Mae						$	1,063,403					$	1,088,209					$	(21)					$	99,138					$	1,187,326
Total Freddie Mac						172,550						179,385						(4)						7,797						187,178
Total Ginnie Mae						12,957						13,278						(20)						83						13,341
Total						$	1,248,910					$	1,280,872					$	(45)					$	107,018					$	1,387,845

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 September 30, 2022 and December 31, 2021. 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
September 30, 2022						$	190,795					$	(14,599)					$	244					$	(16)					$	191,039					$	(14,615)
December 31, 2021						$	2,924					$	(17)					$	5,185					$	(28)					$	8,109					$	(45)

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.

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The following table summarizes the weighted average lives of our available for sale securities at September 30, 2022 and December 31, 2021.

						September 30, 2022												December 31, 2021
Weighted Average Life of Available for Sale Securities						Fair Value						Amortized Cost						Fair Value						Amortized Cost
< 1 year						$	88					$	94					$	179					$	174
≥ 1 year and < 3 years						2,589						2,767						27,110						26,731
≥ 3 years and < 5 years						11,815						12,648						333,598						319,762
≥ 5 years						222,053						235,651						1,026,958						934,205
Total Available for Sale Securities						$	236,545					$	251,160					$	1,387,845					$	1,280,872

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 September 30, 2022 and December 31, 2021 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.

For the nine months ended September 30, 2022, we sold $943,314 of Agency Securities, available for sale, which resulted in a loss of $(7,501). The gain on sales of Agency Securities, available for sale, for the three and nine months ended September 30, 2021 of $3,724 and $11,078 resulted from the first quarter sales of $87,875, and the third quarter receivable for sales of $82,100, respectively.

Trading Securities

The components of the carrying value of our trading securities at September 30, 2022 and December 31, 2021 are presented in the tables below.

						Principal Amount						Amortized Cost						Gross Unrealized Loss						Gross Unrealized Gain						Fair Value
September 30, 2022
Agency Securities:
Total Fannie Mae						$	5,648,405					$	5,722,619					$	(565,610)					$	—					$	5,157,009
Total Freddie Mac						2,809,899						2,812,270						(191,685)						—						2,620,585
Total Agency Securities						$	8,458,304					$	8,534,889					$	(757,295)					$	—					$	7,777,594
U.S. Treasury Securities						300,000						275,340						(1,168)						—						274,172
Total Trading Securities						$	8,758,304					$	8,810,229					$	(758,463)					$	—					$	8,051,766

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						Principal Amount						Amortized Cost						Gross Unrealized Loss						Gross Unrealized Gain						Fair Value
December 31, 2021
Agency Securities:
Total Fannie Mae						$	2,253,393					$	2,382,146					$	(47,079)					$	1,056					$	2,336,123
Total Freddie Mac						656,775						690,053						(7,546)						46						682,553
Total Agency Securities						$	2,910,168					$	3,072,199					$	(54,625)					$	1,102					$	3,018,676
U.S. Treasury Securities						200,000						198,987						(154)						—						198,833
Total Trading Securities						$	3,110,168					$	3,271,186					$	(54,779)					$	1,102					$	3,217,509

The following table summarizes the weighted average lives of our trading securities at September 30, 2022 and December 31, 2021.

						September 30, 2022												December 31, 2021
Estimated Weighted Average Life of Trading Securities						Fair Value						Amortized Cost						Fair Value						Amortized Cost
< 1 year						$	—					$	—					$	99,973					$	99,978
≥ 1 year and < 3 years						—						—						5,323						5,365
≥ 3 years and < 5 years						—						—						472,774						475,600
≥ 5 years						8,051,766						8,810,229						2,639,439						2,690,243
Total						$	8,051,766					$	8,810,229					$	3,217,509					$	3,271,186

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 September 30, 2022 and December 31, 2021 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.

At September 30, 2022, we had active MRAs with 37 counterparties and had $8,250,066 in outstanding borrowings with 20 of those counterparties. At December 31, 2021, we had MRAs with 34 counterparties and had $3,948,037 in outstanding borrowings with 18 counterparties.

The following table represents the contractual repricing regarding our repurchase agreements to finance MBS purchases at September 30, 2022 and December 31, 2021. No amounts below are subject to offsetting. Our repurchase agreements require excess collateral, known as a “haircut.” At September 30, 2022, the average haircut percentage was 3.32% compared to 3.45% at December 31, 2021. 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.

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						Balance						Weighted Average Contractual Rate						Weighted Average Maturity in days
September 30, 2022
Agency Securities
≤ 30 days						$	7,247,587					2.72		%				11
> 30 days to ≤ 90 days						1,002,479						3.15		%				34
Total or Weighted Average						$	8,250,066					2.78		%				14
December 31, 2021
Agency Securities
≤ 30 days						$	2,565,743					0.13		%				13
> 30 days to ≤ 60 days						647,584						0.13		%				35
> 60 days to ≤ 90 days						635,710						0.11		%				89
Total or Weighted Average						$	3,849,037					0.13		%				29
U.S. Treasury Securities
≤ 30 days						99,000						0.12		%				3
Total or Weighted Average						$	3,948,037					0.12		%				29

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 September 30, 2022 and December 31, 2021, BUCKLER accounted for 45.3% and 49.7%, respectively, of our aggregate borrowings and had an amount at risk of 12.2% and 5.0%, respectively, of our total stockholders' equity with a weighted average maturity of 13 days and 35 days, respectively, on repurchase agreements (see Note 14 - Related Party Transactions for other transactions with BUCKLER).

Note 7 - 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.

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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 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 September 30, 2022 and December 31, 2021.

												Gross Amounts Not Offset
Assets						Gross Amounts(1)						Financial Instruments						Cash Collateral						Total Net
September 30, 2022
Interest rate swap contracts						$	1,025,180					$	—					$	(976,332)					$	48,848
Futures contracts						59,751						—						(12,522)						47,229
TBA Agency Securities						2,559						(2,559)						—						—
Totals						$	1,087,490					$	(2,559)					$	(988,854)					$	96,077
December 31, 2021
Interest rate swap contracts						$	187,661					$	(7,185)					$	(161,529)					$	18,947
TBA Agency Securities						11,412						(3,715)						4,036						11,733
Totals						$	199,073					$	(10,900)					$	(157,493)					$	30,680

(1)See Note 4 - Fair Value of Financial Instruments for additional discussion.

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												Gross Amounts Not Offset
Liabilities						Gross Amounts(1)						Financial Instruments						Cash Collateral						Total Net
September 30, 2022
TBA Agency Securities						(7,105)						2,559						36						(4,510)
Totals						$	(7,105)					$	2,559					$	36					$	(4,510)
December 31, 2021
Interest rate swap contracts						$	(7,185)					$	7,185					$	—					$	—
TBA Agency Securities						(3,715)						3,715						—						—
Totals						$	(10,900)					$	10,900					$	—					$	—

(1)See Note 4 - Fair Value of Financial Instruments for additional discussion.

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 and comprehensive income (loss) for the three and nine months ended September 30, 2022 and September 30, 2021.

												Income (Loss) Recognized
												For the Three Months Ended September 30,												For the Nine Months Ended September 30,
Derivatives						Location on consolidated statements of operations and comprehensive income (loss)						2022						2021						2022						2021
Interest rate swap contracts						Gain on derivatives, net						$	304,751					$	24,014					$	870,606					$	66,735
Futures contracts						Gain on derivatives, net						81,488						2						83,639						2
TBA Agency Securities						Gain on derivatives, net						(11,505)						6,293						(128,605)						(14,200)
Total Derivatives												$	374,734					$	30,309					$	825,640					$	52,537

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The following tables present information about our derivatives at September 30, 2022 and December 31, 2021.

Interest Rate Swap Contracts (1)						Notional Amount						Weighted Average Remaining Term (Months)						Weighted Average Rate
September 30, 2022
< 3 years						$	1,066,000					13						0.10		%
≥ 3 years and < 5 years						1,342,000						52						0.59		%
≥ 5 years and < 7 years						250,000						84						1.15		%
≥ 7 years						3,852,000						100						0.88		%
Total or Weighted Average (2)						$	6,510,000					75						0.70		%
December 31, 2021
< 3 years						$	1,593,000					15						0.08		%
≥ 3 years and < 5 years						708,000						57						0.24		%
≥ 5 years and < 7 years						707,000						64						0.88		%
≥ 7 years						4,202,000						107						0.87		%
Total or Weighted Average (3)						$	7,210,000					77						0.63		%

(1)Pay Fixed/Receive Variable.

(2)Of this amount, $5,707,000 notional are Fed Funds based swaps, the last of which matures in 2032 and $803,000 notional are SOFR based swaps, the last of which matures in 2032.

(3)Of this amount, $1,203,000 notional are SOFR based swaps, the last of which matures in 2023; and $6,007,000 notional are Fed Funds based swaps, the last of which matures in 2032.

TBA Agency Securities						Notional Amount						Cost Basis						Fair Value
September 30, 2022
30 Year
4.0%						(1,000,000)						(927,109)						(928,125)
Total (1)						$	(1,000,000)					$	(927,109)					$	(928,125)
December 31, 2021
15 Year
1.5%						$	1,000,000					$	999,840					$	1,003,125
2.0%						1,700,000						1,733,652						1,738,695
30 Year
2.0%						300,000						300,789						299,227
2.5%						1,200,000						1,224,820						1,223,510
3.0%						300,000						309,734						310,503
Total (1)						$	4,500,000					$	4,568,835					$	4,575,060

(1)$(885,000) and $400,000 notional were forward settling at September 30, 2022 and December 31, 2021, respectively.

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Note 8 - Commitments and Contingencies

Management

The Company is managed by ACM, pursuant to a management agreement (see also Note 14 - 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 dividends specifically designated by the Board as liquidation dividends will reduce the amount of gross equity raised used to calculate the monthly management fee. Realized and unrealized gains and losses do not affect the amount of gross equity raised. At September 30, 2022 and September 30, 2021, the effective management fee, prior to management fees waived, was 0.96% and 0.98% based on gross equity raised of $3,613,181 and $3,245,650, respectively.

ACM began waiving 40% of its management fee during the second quarter of 2020 and on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter. On October 25, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver from the rate of $700 per month to $650 per month, effective November 1, 2021, until further notice. During the three and nine months ended September 30, 2022, and September 30, 2021 ACM waived management fees of $1,950 and $5,850 and $2,100 and $6,600, respectively. 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.

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 September 30, 2022 and December 31, 2021.

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

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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 August 16, 2021, the court ordered that the entry of an Order of Dismissal is further deferred until February 1, 2022. On March 1, 2022, the court deferred the Order of Dismissal until September 1, 2022 and if the case is not fully disposed of by that date, the clerk shall enter on the docket "dismissed for lack of prosecution without prejudice." To date, 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 9 - 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 September 30, 2022, there were 2,167 shares available for future issuance under the Plan.

Transactions related to awards for the nine months ended September 30, 2022 are summarized below:

						September 30, 2022
						Number of Awards						Weighted Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period						823						$	14.07
Vested						(190)						$	16.74
Unvested RSU Awards Outstanding end of period						633						$	13.27

Note 10 - Stockholders' Equity

The following table presents the components of cumulative distributions to stockholders at September 30, 2022 and December 31, 2021.

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Cumulative Distributions to Stockholders						September 30,  2022						December 31, 2021
Preferred dividends						$	141,831					$	132,845
Common stock dividends						1,803,520						1,705,110
Total						$	1,945,351					$	1,837,955

Preferred Stock

At September 30, 2022 and December 31, 2021, 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. At September 30, 2022, 10,000 shares of the Company’s authorized preferred stock, par value $0.001 per share are designated as shares of 7.00% Series C Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") with the powers, designations, preferences and other rights as set forth therein and a total of 40,000 shares of our authorized preferred stock remain available for designation as future series.

At September 30, 2022 and December 31, 2021, we had 6,847 shares 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 $171,175 in the aggregate. Shares designated as Series C Preferred Stock but unissued totaled 3,153 at September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, 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 Preferred C ATM Sales 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 Preferred C ATM Sales Agreement. We did not sell any shares under the Preferred C ATM Sales Agreement during the nine months ended September 30, 2022.

Preferred Stock Repurchase Program

On July 26, 2022, the Board authorized a repurchase program of up to an aggregate of 2,000 shares of the Company’s outstanding Series C Preferred Stock ("Series C Preferred Stock Repurchase Program"). Under the Series C Preferred Stock 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, in consultation with the Pricing Committee of the Board, 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 Series C Preferred Stock 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. We did not repurchase any shares under the Series C Preferred Stock Repurchase Program during the nine months ended September 30, 2022.

Common Stock

On July 26, 2022, we submitted Articles of Amendment with the State of Maryland to increase the number of authorized shares of common stock, from 200,000 shares to 300,000 shares. At September 30, 2022 and December 31, 2021, we were authorized to issue up to 300,000 and 200,000 shares of common stock, respectively, 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 132,589 and 94,152 shares of common stock issued and outstanding at September 30, 2022 and December 31, 2021, respectively.

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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 were permitted to 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 related to an "at-the-market" offering program. Under the Common stock ATM Sales Agreement, as amended, we paid 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. Prior to exhausting the Common stock ATM Sales Agreement, as amended, on May 18, 2021, we sold 10,713 shares for proceeds of $129,336, net of issuance costs and commissions of approximately $1,682.

After exhausting the Common stock ATM Sales Agreement, we entered into a new Equity Sales Agreement (the “2021 Common stock ATM Sales Agreement”) on May 14, 2021, with BUCKLER, JMP Securities LLC, Ladenburg Thalmann & Co. Inc. and B. Riley Securities, Inc., as sales agents, relating to the shares of our common stock. In accordance with the terms of the 2021 Common Stock ATM Sales agreement, 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. On November 12, 2021, the 2021 Common stock ATM Sales Agreement was amended to add JonesTrading Institutional Services LLC, as a sales agent and to offer an additional 25,000 shares available for sale pursuant to the terms of the 2021 Common stock ATM Sales Agreement. On June 9, 2022, the 2021 Common stock ATM Sales Agreement was further amended to offer an additional 28,800 shares available for sale pursuant to the terms of the 2021 Common stock ATM Sales Agreement. The 2021 Common stock ATM Sales Agreement relates to an "at-the-market" offering program. The 2021 Common stock ATM Sales Agreement provides that 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 2021 Common stock ATM Sales Agreement. During the nine months ended September 30, 2022, we sold 39,319 shares under this agreement for proceeds of $301,384, net of issuance costs and commissions of approximately $3,216. On October 25, 2022, our Board authorized a 35,000 share increase in the 2021 Common stock ATM Sales Agreement.

See Note 14 - Related Party Transactions for discussion of additional transactions with BUCKLER.

Common Stock Repurchase Program

 At September 30, 2022 and December 31, 2021, there were 7,182 and 8,210 authorized shares remaining under the current repurchase authorization. During the nine months ended September 30, 2022, we repurchased 1,028 common shares under this authorization for a cost of $5,410. Under the Common Stock 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 Common Stock 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 Activities

The following tables present our equity transactions for the nine months ended September 30, 2022 and for the year ended December 31, 2021.

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Transaction Type						Completion Date						Number of Shares						Per Share price (1)						Net Proceeds (costs)
September 30, 2022
2021 Common stock ATM Sales Agreement						January 11, 2022 - September 13, 2022						39,319						$	7.67					$	301,384
Common stock repurchased						June 21, 2022 and September 30, 2022						(1,028)						$	5.26					$	(5,410)
December 31, 2021
Preferred C ATM Sales Agreement						January 19, 2021 - April 9, 2021						1,500						$	24.38					$	36,585
Common stock ATM Sales Agreement						March 3, 2021 - May 18, 2021						10,713						$	12.07					$	129,336
2021 Common stock ATM Sales Agreement						May 19, 2021 - December 10, 2021						17,915						$	11.13					$	199,444

(1)Weighted average price

Dividends

The following table presents our Series C Preferred Stock dividend transactions for the nine months ended September 30, 2022.

Record Date						Payment Date						Rate per Series C Preferred Share						Aggregate amount paid to holders of record
January 15, 2022						January 27, 2022						$	0.14583					$	998.5
February 15, 2022						February 28, 2022						$	0.14583					998.5
March 15, 2022						March 28, 2022						$	0.14583					998.5
April 15, 2022						April 27, 2022						$	0.14583					998.5
May 15, 2022						May 27, 2022						$	0.14583					998.5
June 15, 2022						June 27, 2022						$	0.14583					998.5
July 15, 2022						July 27, 2022						$	0.14583					998.5
August 15, 2022						August 29, 2022						$	0.14583					998.5
September 15, 2022						September 27, 2022						$	0.14583					998.5
Total dividends paid																		$	8,986.5

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The following table presents our common stock dividend transactions for the nine months ended September 30, 2022.

Record Date						Payment Date						Rate per common share						Aggregate amount paid to holders of record
January 18, 2022						January 28, 2022						$	0.10					$	9,654
February 15, 2022						February 28, 2022						$	0.10					9,690
March 15, 2022						March 28, 2022						$	0.10					9,764
April 18, 2022						April 29, 2022						$	0.10					10,359
May 16, 2022						May 27, 2022						$	0.10					10,639
June 15, 2022						June 29, 2022						$	0.10					11,159
July 15, 2022						July 29, 2022						$	0.10					11,426
August 15, 2022						August 29, 2022						$	0.10					12,313
September 15, 2022						September 29, 2022						$	0.10					13,406
Total dividends paid																		$	98,410

Note 11 - 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 and nine months ended September 30, 2022 and September 30, 2021.

						For the Three Months Ended September 30,												For the Nine Months Ended September 30,
						2022						2021						2022						2021
Net Income (Loss)						$	(144,315)					$	33,982					$	(269,340)					$	36,135
Less: Preferred dividends						(2,995)						(2,995)						(8,986)						(8,477)
Net Income (loss) available (related) to common stockholders						$	(147,310)					$	30,987					$	(278,326)					$	27,658
Weighted average common shares outstanding – basic						123,251						84,026						108,761						75,417
Add: Effect of dilutive non-vested awards, assumed vested						—						901						—						901
Weighted average common shares outstanding – diluted						123,251						84,927						108,761						76,318

For the three and nine months ended September 30, 2022, 633 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.

Note 12 - 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 and nine months ended September 30, 2022 and September 30, 2021.

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						For the Three Months Ended September 30,												For the Nine Months Ended September 30,
						2022						2021						2022						2021
Comprehensive Income (Loss)						$	(152,715)					$	13,297					$	(390,928)					$	(18,942)
Less: Preferred dividends						(2,995)						(2,995)						(8,986)						(8,477)
Comprehensive Income (Loss) available (related) to common stockholders						$	(155,710)					$	10,302					$	(399,914)					$	(27,419)
Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic						$	(1.26)					$	0.12					$	(3.68)					$	(0.36)
Diluted						$	(1.26)					$	0.12					$	(3.68)					$	(0.36)
Weighted average common shares outstanding:
Basic						123,251						84,026						108,761						75,417
Add: Effect of dilutive non-vested awards, assumed vested						—						901						—						—
Diluted						123,251						84,927						108,761						75,417

For both the three and nine months ended September 30, 2022 and for the nine months ended September 30, 2021, 633 and 901 respectively, of potentially dilutive non-vested awards outstanding were excluded from the computation of diluted Comprehensive Loss related to common stockholders because to have included them would have been anti-dilutive for the period.

Note 13 - Income Taxes

The following table reconciles our GAAP net income (loss) to estimated REIT taxable income (loss) for the three and nine months ended September 30, 2022 and September 30, 2021.

						For the Three Months Ended September 30,												For the Nine Months Ended September 30,
						2022						2021						2022						2021
GAAP net income (loss)						$	(144,315)					$	33,982					$	(269,340)					$	36,135
Book to tax differences:
TRS (income) loss						12						23						5						(43)
Premium amortization expense						(2)						(41)						(80)						(117)
Agency Securities, trading						514,483						2,387						1,017,894						45,790
U.S. Treasury Securities						15,951						9,170						128,321						9,198
Changes in interest rate contracts						(351,203)						(37,384)						(806,847)						(71,037)
Credit loss expense						4,183						—						4,183						—
(Gain) loss on Security Sales						—						(3,724)						7,501						(11,078)
Amortization of deferred hedging costs						(36,482)						(40,664)						(112,778)						(122,529)
Other						625						531						1,785						1,368
Estimated REIT taxable income (loss)						$	3,252					$	(35,720)					$	(29,356)					$	(112,313)

Interest rate contracts and futures 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

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over the remainder of the original term of the contract for REIT taxable income. At September 30, 2022 and at December 31, 2021, we had approximately $454,072 and $607,000 in tax deductible expense relating to previously terminated interest rate swap contracts amortizing through the year 2032. At September 30, 2022, we had $240,428 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
2021						$	(15,605)					2026

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 September 30, 2022 by approximately $459,260, or approximately $3.46 per common share (based on the 132,589 common shares then outstanding). State and federal tax returns for the years 2019 and later remain open and are subject to possible examination.

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 for the three and nine months ended September 30, 2022 and September 30, 2021 were $40,140 and $107,396 and $28,456 and $77,192, 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 14 - 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. Either party must provide 180 days prior written notice of any such termination.

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

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

ACM began waiving 40% of its management fee during the second quarter of 2020 and on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter. On October 25, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver from the rate of $700 per month to $650 per month, effective November 1, 2021, until further notice.

The following table reconciles the fees incurred in accordance with the management agreement for the three and nine months ended September 30, 2022 and September 30, 2021.

						For the Three Months Ended September 30,												For the Nine Months Ended September 30,
						2022						2021						2022						2021
ARMOUR management fees						$	8,519					$	7,886					$	24,926					$	23,024
Less management fees waived						(1,950)						(2,100)						(5,850)						(6,600)
Total management fee expense						$	6,569					$	5,786					$	19,076					$	16,424

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 and nine months ended September 30, 2022 and September 30, 2021, we reimbursed ACM $194 and $431 and $92 and $130 for other expenses incurred on our behalf. In 2017, 2020 and 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 2021, we elected to grant RSUs to the Board. We recognized stock based compensation expense of $135 and $437 and $176 and $584 for the three and nine months ended September 30, 2022 and September 30, 2021, respectively.

BUCKLER

In March 2017, we contributed $352 for a 10.0% 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 $338 and $606 at September 30, 2022 and December 31, 2021, respectively, 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 each of the three and nine months ended September 30, 2022 and September 30, 2021, we earned $0 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, which expired at the end of the first quarter of 2022.

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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. 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 and nine months ended September 30, 2022 and September 30, 2021, the Company earned $521 and $697 and $20 and $52, respectively, of interest on this loan.

On February 22, 2021, the Company entered into an uncommitted revolving credit facility and security agreement with BUCKLER. Under the terms of the facility, the Company may, in its sole and absolute discretion, provide drawings to BUCKLER of up to $50,000. Interest on drawings is payable monthly at the Federal Reserve Bank of New York SOFR plus 2% per annum. To date, Buckler has not yet used the facility and therefore no interest expense was payable.

With BUCKLER as the sales agent, under the 2021 Common stock ATM Sales Agreement, we sold 21,805 common shares for proceeds of $171,311, net of commissions of approximately $1,727 during the nine months ended September 30, 2022. We also repurchased 1,028 common shares under the current repurchase authorization which cost $5,410, including commissions of approximately $53 to BUCKLER during the nine months ended September 30, 2022 (see Note 10 - Stockholders' Equity).

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The table below summarizes other transactions with BUCKLER for the nine months ended September 30, 2022 and for the year ended December 31, 2021.

Transactions with BUCKLER						September 30, 2022						December 31, 2021
Repurchase agreements (1)						$	3,735,027					$	1,963,679
Collateral posted on repurchase agreements						$	3,912,476					$	2,036,385
U.S. Treasury Securities Purchased						$	—					$	100,000

Note 15 - Subsequent Events

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 October 27, 2022 to holders of record on October 15, 2022. We have also declared cash dividends of $0.14583 per outstanding share of Series C Preferred Stock payable November 28, 2022 to holders of record on November 15, 2022 and payable December 27, 2022 to holders of record on December 15, 2022.

Common Stock

On October 11, 2022 we repurchased 450 shares under our Common Stock Repurchase Program, with BUCKLER as the agent at a cost of $2,254, including commissions of $22.

A cash dividend of $0.10 per outstanding common share, or $13,277 in the aggregate, will be paid on October 28, 2022 to holders of record on October 17, 2022. We have also declared a cash dividend of $0.10 per outstanding common share payable November 28, 2022 to holders of record on November 15, 2022.

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