Enhanced Investments - Financial Portal

Published: 2023-10-25 16:23:42 ET

arr-20230930

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 September 30, 2023


☐			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 October 24, 2023 was 48,995,384.

ARMOUR Residential REIT, Inc.

TABLE OF CONTENTS


PART I. Financial Information			1
Item 1. Financial Statements			1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures about Market Risk			53
Item 4. Controls and Procedures			56
PART II. Other Information			57
Item 1. Legal Proceedings			57
Item IA. Risk Factors			57
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Mine Safety Disclosures			57
Item 5. Other Information			57
Item 6. Exhibits			59
Signatures			60

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARMOUR Residential REIT, Inc.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share)


	September 30, 2023		December 31, 2022
Assets
Cash	$	133,459	$	87,284
Cash collateral posted to counterparties	13,635		30,806
Investments in securities, at fair value
Agency Securities (including pledged securities of $12,094,792 ($6,156,345 with BUCKLER) at September 30, 2023 and $7,249,039 at December 31, 2022 ($3,920,706 with BUCKLER))	12,384,137		8,198,591

Receivable for unsettled sales (including pledged securities of $76,243 at September 30, 2023)	96,490		—
Derivatives, at fair value	1,231,057		984,456
Accrued interest receivable	54,434		28,809
Prepaid and other	983		2,101
Subordinated loan to BUCKLER	—		105,000

Total Assets	$	13,914,195	$	9,437,047
Liabilities and Stockholders’ Equity
Liabilities:
Repurchase agreements, net (including $5,767,098 and $3,247,474, respectively with BUCKLER)	$	11,504,192	$	6,463,058
Obligations to return securities received as collateral, at fair value (including $100,531, with BUCKLER at December 31, 2022)	—		502,656
Cash collateral posted by counterparties	1,133,327		963,591

Payable for unsettled purchases	—		353,436
Derivatives, at fair value	—		13,016
Accrued interest payable- repurchase agreements (including $16,403 and $9,908, respectively with BUCKLER)	30,764		19,096
Accrued interest payable- U.S. Treasury Securities sold short (including $0 and $684, respectively with BUCKLER)	—		3,418
Accounts payable and other accrued expenses	9,863		6,404
Total Liabilities	$	12,678,146	$	8,324,675

Commitments and contingencies (Note 8 and Note 14)

Stockholders’ Equity:
Preferred stock, $0.001 par value, 50,000 shares authorized; 7.00% Series C Cumulative Preferred Stock; 6,847 shares issued and outstanding ($25.00 per share liquidation preference)	7		7
Common stock, $0.001 par value, 90,000 and 60,000 shares authorized; 48,995 shares and 32,582 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively.	49		33
Additional paid-in capital	4,320,621		3,874,757
Cumulative distributions to stockholders	(2,158,526)		(1,992,361)
Accumulated net loss	(926,102)		(758,537)
Accumulated other comprehensive loss	—		(11,527)
Total Stockholders’ Equity	$	1,236,049	$	1,112,372
Total Liabilities and Stockholders’ Equity	$	13,914,195	$	9,437,047

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands, except per share)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Interest Income:
Interest Income (including $0 and $521 and $973 and $697, respectively with BUCKLER)	$	153,636	$	73,968	$	406,706	$	155,778
Interest expense (including $72,206 and $21,423 and $180,555 and $28,918, respectively with BUCKLER)	(150,041)		(44,323)		(385,361)		(59,763)
Net Interest Income	$	3,595	$	29,645	$	21,345	$	96,015
Other Income (Loss):
Realized loss on sale of available for sale Agency Securities (reclassified from Comprehensive Income (Loss))	—		—		(7,471)		(7,501)
Credit loss expense	—		(4,183)		—		(4,183)
Loss on Agency Securities, trading	(468,280)		(514,483)		(505,573)		(1,017,894)
Gain (Loss) on U.S. Treasury Securities	5,438		(15,951)		5,517		(128,321)

Gain on derivatives, net (1)	291,142		370,234		350,932		820,752
Total Other Loss	$	(171,700)	$	(164,383)	$	(156,595)	$	(337,147)
Expenses:
Management fees	9,719		8,534		28,355		24,971
Compensation	1,262		1,409		3,682		4,228
Other operating	1,732		1,584		5,228		4,859
Total Expenses	$	12,713	$	11,527	$	37,265	$	34,058
Less management fees waived	(1,650)		(1,950)		(4,950)		(5,850)
Total Expenses after fees waived	$	11,063	$	9,577	$	32,315	$	28,208
Net Loss	$	(179,168)	$	(144,315)	$	(167,565)	$	(269,340)
Dividends on preferred stock	(2,995)		(2,995)		(8,986)		(8,986)
Net Loss related to common stockholders	$	(182,163)	$	(147,310)	$	(176,551)	$	(278,326)

Net Loss	$	(179,168)	$	(144,315)	$	(167,565)	$	(269,340)
Reclassification adjustment for realized loss on sale of available for sale Agency Securities	—		—		7,471		7,501
Reclassification adjustment for credit loss expense on available for sale Agency Securities	—		4,183		—		4,183
Net unrealized gain (loss) on available for sale Agency Securities	—		(12,583)		4,056		(133,272)
Other Comprehensive Income (loss)	—		(8,400)		11,527		(121,588)
Comprehensive Loss	$	(179,168)	$	(152,715)	$	(156,038)	$	(390,928)
Dividends on preferred stock	(2,995)		(2,995)		(8,986)		(8,986)
Comprehensive Loss related to common stockholders	$	(182,163)	$	(155,710)	$	(165,024)	$	(399,914)

Net Loss per share related to common stockholders (Note 11):
Basic	$	(3.92)	$	(5.98)	$	(4.30)	$	(12.80)
Diluted	$	(3.92)	$	(5.98)	$	(4.30)	$	(12.80)
Dividends declared per common share	$	1.20	$	1.50	$	3.80	$	4.50
Weighted average common shares outstanding:
Basic	46,506		24,650		41,089		21,752
Diluted	46,506		24,650		41,089		21,752

(1) Interest income and expense related to our interest rate swap contracts is recorded in gain on derivatives, net on the consolidated statements of operations and comprehensive income (loss). For additional information, see financial statement Note 7.

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)


	Shares		Par
	Preferred Stock	Common Stock	Preferred Stock		Common Stock		Additional Paid-in Capital		Cumulative Distributions to Stockholders		Accumulated Net Loss		Accumulated Other Comprehensive Income (Loss)		Total Stockholders'Equity
Balance, June 30, 2022	6,847	22,117	$	7	$	22	$	3,537,687	$	(1,905,211)	$	(653,632)	$	(6,215)	$	972,658
Comprehensive loss	—	—	—		—		—		—		(144,315)		(8,400)		(152,715)

Issuance of common stock, net	—	4,546	—		5		167,241		—		—		—		167,246
Stock based compensation, net of withholding requirements	—	10	—		—		964		—		—		—		964
Common stock repurchased	—	(156)	—		—		(3,866)		—		—		—		(3,866)
Preferred stock dividends	—	—	—		—		—		(2,995)		—		—		(2,995)
Common stock dividends	—	—	—		—		—		(37,145)		—		—		(37,145)
Balance, September 30, 2022	6,847	26,517	$	7	$	27	$	3,702,026	$	(1,945,351)	$	(797,947)	$	(14,615)	$	944,147

Balance, June 30, 2023	6,847	41,362	7		41		4,128,568		(2,098,693)		(746,934)		—		1,282,989
Comprehensive loss	—	—	—		—		—		—		(179,168)		—		(179,168)
Issuance of common stock, net	—	7,630	—		8		191,458		—		—		—		191,466
Stock based compensation, net of withholding requirements	—	14	—		—		828		—		—		—		828
Common stock repurchased	—	(11)	—		—		(233)		—		—		—		(233)
Preferred stock dividends	—	—	—		—		—		(2,995)		—		—		(2,995)
Common stock dividends	—	—	—		—		—		(56,838)		—		—		(56,838)
Balance, September 30, 2023	6,847	48,995	$	7	$	49	$	4,320,621	$	(2,158,526)	$	(926,102)	$	—	$	1,236,049
Continued

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)


	Shares		Par
	Preferred Stock	Common Stock	Preferred Stock		Common Stock		Additional Paid-in Capital		Cumulative Distributions to Stockholders		Accumulated Net Loss		Accumulated Other Comprehensive Income (Loss)		Total Stockholders'Equity
Balance, December 31, 2021	6,847	18,830	$	7	$	19	$	3,403,202	$	(1,837,955)	$	(528,607)	$	106,973	1,143,639
Comprehensive loss	—	—	—		—		—		—		(269,340)		(121,588)		(390,928)

Issuance of common stock, net	—	7,864	—		8		301,376		—		—		—		301,384
Stock based compensation, net of withholding requirements	—	29	—		—		2,858		—		—		—		2,858
Common stock repurchased	—	(206)	—		—		(5,410)		—		—		—		(5,410)
Preferred stock dividends	—	—	—		—		—		(8,986)		—		—		(8,986)
Common stock dividends	—	—	—		—		—		(98,410)		—		—		(98,410)
Balance, September 30, 2022	6,847	26,517	$	7	$	27	$	3,702,026	$	(1,945,351)	$	(797,947)	$	(14,615)	$	944,147

Balance, December 31, 2022	6,847	32,582	$	7	$	33	$	3,874,757	$	(1,992,361)	$	(758,537)	$	(11,527)	$	1,112,372
Comprehensive income (loss)	—	—	—		—		—		—		(167,565)		11,527		(156,038)

Issuance of common stock, net	—	16,634	—		16		450,132		—		—		—		450,148
Stock based compensation, net of withholding requirements	—	43	—		—		2,341		—		—		—		2,341
Common stock repurchased	—	(264)	—		—		(6,609)		—		—		—		(6,609)
Preferred stock dividends	—	—	—		—		—		(8,986)		—		—		(8,986)
Common stock dividends	—	—	—		—		—		(157,179)		—		—		(157,179)
Balance, September 30, 2023	6,847	48,995	$	7	$	49	$	4,320,621	$	(2,158,526)	$	(926,102)	$	—	$	1,236,049

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Nine Months Ended September 30,
	2023		2022
Cash Flows From Operating Activities:
Net Loss	$	(167,565)	$	(269,340)
Adjustments to reconcile net loss to net cash and cash collateral posted to counterparties provided by operating activities:
Net amortization of premium on Agency Securities	3,189		16,814
Net amortization (accretion) of U.S. Treasury Securities	132		(1,400)
Realized loss on sale of Agency Securities, available for sale	7,471		7,501
Credit loss expense	—		4,183
Loss on Agency Securities, trading	505,573		1,017,894
(Gain) Loss on U.S. Treasury Securities	(5,517)		128,321

Stock based compensation	2,341		2,858
Changes in operating assets and liabilities:
Increase in accrued interest receivable	(26,129)		(19,344)
Decrease (Increase) in prepaid and other assets	1,118		(1,999)
Change in derivatives, at fair value	(259,617)		(892,212)
Increase in accrued interest payable- repurchase agreements	11,668		19,266
Decrease in accrued interest payable- U.S. Treasury Securities sold short	(3,418)		—
Increase in accounts payable and other accrued expenses	3,226		4,125
Net cash and cash collateral posted to counterparties provided by operating activities	$	72,472	$	16,667
Cash Flows From Investing Activities:
Purchases of Agency Securities (includes $233,048 with BUCKLER at September 30, 2023)	(10,013,127)		(9,304,581)
Purchases of U.S. Treasury Securities (includes $155,857 and $592,600 with BUCKLER, respectively)	(1,111,123)		(3,992,820)
Principal repayments of Agency Securities	622,330		451,849
Proceeds from sales of Agency Securities	4,251,123		3,390,725
Proceeds from sales of U.S. Treasury Securities (includes $154,875 and $767,448 with BUCKLER, respectively)	613,852		4,065,900
Disbursements on reverse repurchase agreements, with BUCKLER	(1,057,803)		—
Receipts from reverse repurchase agreements, with BUCKLER	1,762,079		—
Increase in cash collateral posted by counterparties	169,736		829,347
Proceeds from subordinated loan due from BUCKLER	105,000		—
Net cash and cash collateral posted to counterparties used in investing activities	$	(4,657,933)	$	(4,559,580)
Cash Flows From Financing Activities:

Issuance of common stock, net of expenses	450,148		301,384
Proceeds from repurchase agreements (including $53,152,051 and $32,714,577, respectively with BUCKLER)	89,831,839		56,729,350
Principal repayments on repurchase agreements (including $(51,336,703) and $(30,943,229), respectively with BUCKLER)	(85,494,981)		(52,427,321)
Series C Preferred stock dividends paid	(8,986)		(8,986)
Common stock dividends paid	(157,179)		(98,410)
Common stock repurchased	(6,376)		(1,544)
Net cash and cash collateral posted to counterparties provided by financing activities	$	4,614,465	$	4,494,473
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Nine Months Ended September 30,
	2023		2022

Net increase (decrease) in cash and cash collateral posted to counterparties	29,004		(48,440)
Cash and cash collateral posted to counterparties - beginning of period	118,090		356,216
Cash and cash collateral posted to counterparties - end of period	$	147,094	$	307,776
Supplemental Disclosure:
Cash paid during the period for interest	$	448,735	$	68,016
Non-Cash Investing Activities:
Receivable for unsettled sales	$	96,490	$	1,091,891
Payable for unsettled purchases	$	—	$	(682,605)
Net unrealized gain (loss) on available for sale Agency Securities	$	4,056	$	(133,272)
Non-Cash Financing Activities:



Amounts payable for common stock repurchased	$	(233)	(3,866)

See financial statement notes (unaudited).

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 10.8% 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. U.S. dollar amounts are presented in thousands, except per share amounts or as otherwise noted.

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, 2023 and December 31, 2022, 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 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, 2023 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2023. 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, 2022.

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 consolidated financial statements include the valuation of MBS, including an assessment of the allowance for credit losses, and derivative instruments. Certain prior year amounts have been reclassified to conform to the current year's presentation.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

All per share amounts, common shares outstanding and stock-based compensation amounts for all periods presented reflect our one-for-five reverse stock split (the “Reverse Stock Split”), which was effective September 29, 2023. Interest earned/paid on cash collateral posted/held on interest rate swap contracts was reclassified from Interest Income to Gain (loss) on derivatives, net, in the consolidated financial statements to conform to current presentation. No other reclassifications have been made to previously reported amounts.

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.

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).

Available for Sale Securities represented investments that we intended to hold for extended periods of time and were reported at their estimated fair values with unrealized gains and losses excluded from earnings and reported as part of comprehensive income (loss). During the first quarter of 2023, we sold the remaining balance of our Available for Sale Securities which resulted in a realized loss of $(7,471).

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, net

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 moved in close relationship to the Federal Funds Effective Rate ("Fed Funds Rate") and 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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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.

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. At September 30, 2023, we did not have any reverse repurchase agreements. At December 31, 2022, we had $704,276 in reverse repurchase agreements which are recorded in repurchase agreements, net on our consolidated balance sheet.

Obligations to Return Securities Received as Collateral, at Fair Value

We also sell to third parties the U.S. Treasury Securities received as collateral for reverse repurchase agreements and recognize the resulting obligation to return said U.S. Treasury Securities as a liability on our consolidated balance sheet. Interest is recorded on the repurchase agreements, reverse repurchase agreements and U.S. Treasury Securities on an accrual basis and presented as net interest expense. Both parties to the transaction have the right to make daily margin calls based on changes in the fair value of the collateral received and/or pledged. At September 30, 2023, we did not have any obligations to return securities received as collateral associated with our reverse repurchase agreements. We had obligations to return securities received as collateral associated with our reverse repurchase agreements at December 31, 2022 of $502,656 ($100,531 of which were with BUCKLER).

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.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Impairment of Assets

Impairment of available for sale securities was assessed at least on a quarterly basis and more frequently when economic or market concerns warranted such evaluation. An impairment was considered if we (1) intended to sell the available for sale securities, or (2) believed it was more likely than not that we were required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) and a credit impairment existed where fair value was less than amortized cost. Impairment losses recognized established 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 Income (Loss) and are determined using the specific identification method.

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 the sum of net income and other comprehensive income (loss). It represents all changes in equity during a period from transactions and other events from non-owner sources. It excludes all changes in equity during a period resulting from investments by owners and distributions to owners.

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.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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.

Derivatives

The fair values of our interest rate swap contracts, interest rate swaptions and basis swap 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. Futures contracts are traded on the Chicago Mercantile Exchange ("CME") which requires the use of daily mark-to-market collateral and they are classified as Level 1.

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022.


September 30, 2023	Level 1		Level 2		Level 3		Balance
Assets at Fair Value:
Agency Securities	$	—	$	12,384,137	$	—	$	12,384,137

Derivatives	$	—	$	1,231,057	$	—	$	1,231,057
Liabilities at Fair Value:
Derivatives	$	—	$	—	$	—	$	—

December 31, 2022	Level 1		Level 2		Level 3		Balance
Assets at Fair Value:
Agency Securities	$	—	$	8,198,591	$	—	$	8,198,591

Derivatives	$	94	$	984,362	$	—	$	984,456
Liabilities at Fair Value:
Derivatives	$	516	$	12,500	$	—	$	13,016

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the nine months ended September 30, 2023 or for the year ended December 31, 2022.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Excluded from the tables above are financial instruments, including cash, cash collateral posted to/by counterparties, receivables, the Subordinated loan to BUCKLER, payables, borrowings under repurchase agreements, net and obligations to return securities received as collateral, 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, 2023 and December 31, 2022.

Note 5 - Investments in Securities

As of September 30, 2023 and December 31, 2022, our securities portfolio consisted of $12,384,137 and $8,198,591 of investment securities, at fair value, respectively. We also had $(413,906) and $777,469 of TBA Agency Securities, at fair value, which were reported at net carrying value of $11,284 and $(11,797), respectively, at September 30, 2023 and December 31, 2022. TBA Securities are 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.

During the first quarter of 2023, we sold the remaining balance of our Available for Sale Securities which resulted in a realized loss of $(7,471).

The tables below present the components of the carrying value and the unrealized gain or loss position of our investments in securities at September 30, 2023 and December 31, 2022.


September 30, 2023	Principal Amount		Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Fair Value
Agency Securities:
Trading securities	$	13,184,779	$	13,127,896	$	(743,759)	$	—	$	12,384,137
Total Agency Securities	$	13,184,779	$	13,127,896	$	(743,759)	$	—	$	12,384,137

December 31, 2022	Principal Amount		Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Fair Value
Agency Securities:
Available for sale securities	$	191,870	$	199,472	$	(11,527)	$	—	$	187,945
Trading securities	8,519,397		8,553,485		(543,207)		368		8,010,646
Total Agency Securities	$	8,711,267	$	8,752,957	$	(554,734)	$	368	$	8,198,591

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following tables summarize the weighted average lives of our investments in securities at September 30, 2023 and December 31, 2022.


Weighted Average Life	Trading Securities
September 30, 2023	Fair Value		Amortized Cost



≥ 5 years	12,384,137		13,127,896
Totals	$	12,384,137	$	13,127,896


Weighted Average Life	Available for Sale Securities				Trading Securities
December 31, 2022	Fair Value		Amortized Cost		Fair Value		Amortized Cost
< 1 year	$	61	$	64	$	—	$	—
≥ 1 year and < 3 years	2,390		2,525		—		—
≥ 3 years and < 5 years	11,541		12,171		—		—
≥ 5 years	173,953		184,712		8,010,646		8,553,485
Totals	$	187,945	$	199,472	$	8,010,646	$	8,553,485

We use a third-party model to calculate the weighted average lives of our investments in securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our investments in 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 investments in securities at September 30, 2023 and December 31, 2022 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 these securities could be longer or shorter than estimated.

Available for Sale Securities

The following table presents the unrealized losses and estimated fair value of our available for sale securities by length of time that such securities were in a continuous unrealized loss position at December 31, 2022. All of the available for sale securities were issued and guaranteed by GSEs (with a long term credit rating of AA+) or Ginnie Mae at December 31, 2022.


	Unrealized Loss Position For:
	< 12 Months				≥ 12 Months				Total
Agency Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2022	$	187,397	$	(11,497)	$	548	$	(30)	$	187,945	$	(11,527)

Note 6 - Repurchase Agreements, net

At September 30, 2023, we had active MRAs with 38 counterparties and had $11,504,192 in outstanding borrowings with 18 of those counterparties. At December 31, 2022, we had MRAs with 38 counterparties and had $6,463,058 in outstanding borrowings with 16 counterparties.

The following tables represent the contractual repricing regarding our repurchase agreements to finance MBS purchases at September 30, 2023 and December 31, 2022. Our repurchase agreements require excess collateral, known as a “haircut.” At September 30, 2023, the average haircut percentage was 2.73% compared to 3.85% at December 31, 2022.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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.


September 30, 2023	Balance		Weighted Average Contractual Rate		Weighted Average Maturity in days
Agency Securities
≤ 30 days	$	7,704,103	5.47	%	15
> 30 days to ≤ 90 days	3,800,089		5.48	%	36


Total or Weighted Average	$	11,504,192	5.47	%	22


December 31, 2022	Balance		Weighted Average Contractual Rate		Weighted Average Maturity in days
Agency Securities
≤ 30 days (1)	$	5,912,572	4.43	%	15
> 30 days to ≤ 60 days	550,486		4.48	%	34
Total or Weighted Average	$	6,463,058	4.43	%	16

(1)Net of reverse repurchase agreements of $704,276. Obligations to return securities received as collateral of $502,656 associated with the reverse repurchase agreements all matured in January 2023.

The following table presents information about the gross and net securities purchased and sold under our repurchase agreements, net on the accompanying consolidated balance sheets at December 31, 2022. At September 30, 2023, we did not have any reverse repurchase agreements.


December 31, 2022							Gross Amounts Not Offset
	Gross Amounts		Gross Amounts offset in the Consolidated Balance Sheet		Net Amounts Presented in the Consolidated Balance Sheet		Financial Instruments (1)		Cash Collateral		Total Net
Assets
Reverse Repurchase Agreements	$	704,276	$	(704,276)	$	—	$	—	$	189	$	189
Totals	$	704,276	$	(704,276)	$	—	$	—	$	189	$	189

Liabilities
Repurchase Agreements	$	(7,167,334)	$	704,276	$	(6,463,058)	$	6,463,058	$	—	$	—
Totals	$	(7,167,334)	$	704,276	$	(6,463,058)	$	6,463,058	$	—	$	—

(1)The fair value of securities pledged against our repurchase agreements was $7,249,039 at December 31, 2022.

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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, 2023 and December 31, 2022, BUCKLER accounted for 50.1% and 50.2%, respectively, of our aggregate borrowings and had an amount at risk of 9.5% and 12.9%, respectively, of our total stockholders' equity with a weighted average maturity of 19 days and 15 days, respectively, on repurchase agreements, net (see Note 14 - Related Party Transactions).

At September 30, 2023, we had 2 additional repurchase agreement counterparties that individually accounted for over 5% of our aggregate borrowings. In total, these counterparties accounted for approximately 15.9% of our repurchase agreement borrowings outstanding at September 30, 2023. At December 31, 2022, we had 3 additional repurchase agreement counterparties that individually accounted for over 5% of our aggregate borrowings. In total, these counterparties accounted for 28.1% of our repurchase agreement borrowings at December 31, 2022.

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.

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.

All of our interest rate contracts have floating leg interest rate indexes of either the Fed Funds Rate or SOFR. The Fed Funds Rate is published daily by the New York Federal Reserve and is a measure of unsecured borrowings by depository institutions from other depository institutions or GSEs. SOFR is published daily by the New York Federal Reserve and is the average overnight rate for borrowings secured by U.S. Treasury securities. We enter into interest rate swap contracts either directly with a counterparty (a “bilateral” contract) or through a centrally-cleared swap contract. In a bilateral contract, we exchange margin collateral with the counterparty and have exposure to counterparty risk. In a centrally-cleared contract, we exchange margin collateral with a Futures Clearing Merchant, with whom we have opened an account. Our counterparty risk is limited to the clearing exchange itself. All of our centrally-cleared swaps are cleared by the CME. In general, centrally-cleared interest rate swap contracts require us to post higher initial margin than bilateral contracts.

Futures contracts are traded on the CME which requires the use of daily mark-to-market collateral and the CME provides substantial credit support. The collateral requirements of the CME require us to pledge assets under a bi-lateral margin arrangement, including either cash or Agency Securities and these requirements may vary and change over time based on the market value, notional amount and remaining term of the futures contracts. In the event we are unable to meet a margin call under one of our futures contracts, the counterparty to such agreement may have the option to terminate or close-out all of the outstanding futures contracts with us. In addition, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by us pursuant to the applicable agreement.

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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, 2023 and December 31, 2022.


			Gross Amounts Not Offset
Assets	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net
September 30, 2023
Interest rate swap contracts (2)	$	1,219,773	$	—	$	(1,112,429)	$	107,344

TBA Agency Securities	11,284		—		(7,263)		4,021
Totals	$	1,231,057	$	—	$	(1,119,692)	$	111,365

December 31, 2022
Interest rate swap contracts	$	983,659	$	—	$	(955,941)	$	27,718
Futures contracts	94		(516)		9,334		8,912
TBA Agency Securities	703		(12,500)		13,633		1,836
Totals	$	984,456	$	(13,016)	$	(932,974)	$	38,466

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

(2)Includes $92,885 of centrally-cleared interest rate swap contracts.


			Gross Amounts Not Offset
Liabilities	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net






December 31, 2022
Futures contracts	$	(516)	$	516	$	—	$	—
TBA Agency Securities	(12,500)		12,500		—		—
Totals	$	(13,016)	$	13,016	$	—	$	—

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following table represents the information regarding our derivatives which are included in Gain on derivatives, net in the accompanying consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2023 and September 30, 2022.


	Income (Loss) Recognized
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Derivatives	2023		2022		2023		2022
Interest rate swap contracts (1)	$	262,057	$	300,139	$	335,587	$	865,597
Futures contracts	2,227		81,563		(11,070)		83,716
TBA Agency Securities	26,858		(11,468)		26,415		(128,561)
Total Gain on Derivatives, net	$	291,142	$	370,234	$	350,932	$	820,752

(1)Includes $93,035 and $115,026 of centrally-cleared interest rate swap contracts for the three and nine months ended September 30, 2023.

The following tables present information about our derivatives at September 30, 2023 and December 31, 2022.


Interest Rate Swap Contracts (1)	Notional Amount		Weighted Average Remaining Term (Months)	Weighted Average Rate
September 30, 2023
< 3 years	$	680,000	11	2.43	%
≥ 3 years and < 5 years	1,629,000		46	1.60	%
≥ 5 years and < 7 years	1,452,000		76	0.56	%
≥ 7 years	4,575,000		103	2.24	%

Total or Weighted Average (2)	$	8,336,000	80	1.84	%

December 31, 2022
< 3 years	$	1,066,000	10	0.10	%
≥ 3 years and < 5 years	1,182,000		50	0.63	%
≥ 5 years and < 7 years	754,000		82	0.62	%
≥ 7 years	3,348,000		99	0.96	%
Total or Weighted Average (3)	$	6,350,000	73	0.72	%

(1)Pay Fixed/Receive Variable.

(2)Of this amount, $3,025,000 notional are SOFR based swaps, the last of which matures in 2033; and $5,311,000 notional are Fed Funds based swaps, the last of which matures in 2032. Of this amount, $2,825,000 notional are centrally-cleared interest rate swap contracts, the last of which matures in 2033.

(3)Of this amount, $803,000 notional are SOFR based swaps, the last of which matures in 2032; and $5,547,000 notional are Fed Funds based swaps, the last of which matures in 2032.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)


TBA Agency Securities	Notional Amount		Cost Basis		Fair Value
September 30, 2023




30 Year Short, 3.0%	$	(500,000)	$	(425,190)	$	(413,906)


Total	$	(500,000)	$	(425,190)	$	(413,906)

December 31, 2022

30 Year Long, 4.5%	$	500,000	$	489,805	$	481,641
30 Year Long, 5.0%	300,000		300,164		295,828
Totals (1)	$	800,000	$	789,969	$	777,469

(1) $400,000 notional were forward settling at December 31, 2022.

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. Gross equity raised includes the total amounts of paid in capital relating to both our common and preferred stock, plus brokerage commissions and other costs of capital raising. Amounts paid to shareholders to repurchase stock, before any brokerage commissions and costs, reduces gross equity raised. Dividends specifically designated by the Board as liquidation dividends will reduce the amount of gross equity raised. To date, the Board has not so designated any of the dividends paid by the Company. Realized and unrealized gains and losses do not affect the amount of gross equity raised. At September 30, 2023, the average management fee rate, prior to management fees waived, was 0.93% based on gross equity raised of $4,235,238 and effectively a rate of 3.18% based on total stockholders' equity.

During the three and nine months ended September 30, 2023, and September 30, 2022 ACM voluntarily waived management fees of $1,650 and $4,950 and $1,950 and $5,850, respectively. ACM is currently waiving $550 per month of its contractual management fee until ACM provides further notice to ARMOUR. 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.

On February 14, 2023, the Company extended the contractual term of the management agreement through December 31, 2029. Based on the management fee base, gross equity raised, as of September 30, 2023, the Company’s contractual management fee commitments are:


Year	Contractual Management Fee
Remainder of 2023	$	9,816
2024	39,264
2025	39,264
2026	39,264
2027	39,264
2028	39,264
2029	39,264
Total	$	245,400

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The Company cannot voluntarily terminate the management agreement without cause before the expiration of its contractual term. If the management agreement is terminated in connection with a liquidation of the Company or certain business combination transactions, the Company is obliged to pay ACM a termination fee equal to 4 times the contractual management fee (before any waiver) for the preceding 12 months.

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, 2023 and December 31, 2022.

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. The Court has deferred ruling on the Motion to Dismiss several times. On August 7, 2023, the Court issued an order deferring the entry of an Order of Dismissal until December 29, 2023, when it will review the status of the case.

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 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-

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

based awards (collectively, “Awards”), subject to terms as provided in the Plan. In connection with the Reverse Stock Split, the number of shares of common stock issuable under the Plan was proportionately adjusted to 173 shares.

Transactions related to awards for the nine months ended September 30, 2023 are summarized below:


	September 30, 2023
	Number of Awards	Weighted Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period	114	$	64.40
Granted (1)	260	$	29.65
Vested	(56)	$	48.22

Unvested RSU Awards Outstanding end of period	318	$	38.81

(1)During the nine months ended September 30, 2023, 196 RSUs were granted to certain officers of ARMOUR and 64 RSUs were granted to the Board.

At September 30, 2023, there was approximately $12,319 of unvested stock based compensation related to the Awards (based on a weighted grant date price of $38.81 per share), which we expect to recognize as an expense as follows: for the remainder of 2023 an expense of $957, in 2024 an expense of $3,626, and thereafter an expense of $7,736. 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 10 - Stockholders' Equity

The following table presents the components of cumulative distributions to stockholders at September 30, 2023 and December 31, 2022.


Cumulative Distributions to Stockholders	September 30, 2023		December 31, 2022
Preferred dividends	$	153,813	$	144,827
Common stock dividends	2,004,713		1,847,534
Totals	$	2,158,526	$	1,992,361

Preferred Stock

At September 30, 2023 and December 31, 2022, 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, 2023, 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, 2023 and December 31, 2022, 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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

aggregate. At September 30, 2023 and December 31, 2022, 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, 2023. Shares designated as Series C Preferred Stock but unissued, which are available under the Preferred C ATM Sales Agreement, totaled 3,153 at September 30, 2023 and December 31, 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, 2023.

Common Stock

On August 29, 2023, we announced that our Board of Directors had approved the Reverse Stock Split. The Reverse Stock Split took effect at approximately 5:00 p.m. Eastern Time on September 29, 2023 (the “Effective Time”). At the Effective Time, every five issued and outstanding shares of common stock was converted into one share of common stock and the number of authorized shares of common stock was also reduced, on a one-for-five basis, from 450,000 to 90,000. The par value of each share of common stock remained unchanged. No fractional shares were issued in connection with the Reverse Stock Split.

On February 14, 2023, we submitted Articles of Amendment with the State of Maryland to increase the number of authorized shares of common stock, from 60,000 shares to 90,000 shares. At September 30, 2023 and December 31, 2022, we were authorized to issue up to 90,000 and 60,000 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 48,995 and 32,582 shares of common stock issued and outstanding at September 30, 2023 and December 31, 2022, respectively.

On May 14, 2021, we entered into an Equity Sales Agreement (the “2021 Common stock ATM Sales Agreement”) 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 3,400 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 5,000 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