Published: 2022-07-27 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 June 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 six months ended June 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

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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. We did not have any reverse repurchase agreements outstanding at June 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

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realized from sales of available for sale securities are reclassified into income from Comprehensive 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)

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

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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, 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 June 30, 2022 and December 31, 2021.

June 30, 2022						Level 1						Level 2						Level 3						Balance
Assets at Fair Value:
Agency Securities						$	—					$	6,697,367					$	—					$	6,697,367
U.S. Treasury Securities						$	596,521					$	—					$	—					$	596,521
Derivatives						$	—					$	772,451					$	—					$	772,451
Liabilities at Fair Value:
Derivatives						$	—					$	3,772					$	—					$	3,772
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 six months ended June 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 June 30, 2022 and December 31, 2021.

Note 5 - Investments in Securities

As of June 30, 2022 and December 31, 2021, our securities portfolio consisted of $7,293,888 and $4,605,354 of investment securities, at fair value, respectively, and $683,352 and $4,575,060 of TBA Agency Securities, at fair value, respectively. Our TBA Agency Securities are reported at net carrying value of $596 and $7,697, at June 30, 2022 and December 31, 2021, respectively, and 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.

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The following tables summarize our investments in securities as of June 30, 2022 and December 31, 2021, excluding TBA Agency Securities (see Note 7 - Derivatives). Beginning in the second quarter of 2020, we designated Agency MBS purchased as “trading securities” for financial reporting purposes, and consequently, fair value changes for these investments will be reported in net income. We anticipate continuing this designation for newly acquired Agency MBS positions because it is more representative of our results of operations insofar as the fair value changes for these securities are presented in a manner consistent with the presentation and timing of the fair value changes of our hedging instruments. Fair value changes for the legacy Agency Securities designated as available for sale are reported in other comprehensive income as required by GAAP.

						Available for Sale Securities						Trading Securities
						Agency						Agency						U.S. Treasuries						Totals
June 30, 2022
Balance, December 31, 2021						$	1,387,845					$	3,018,676					$	198,833					$	4,605,354
Purchases (1)						—						5,840,473						3,441,267						9,281,740
Proceeds from sales						(943,314)						(1,254,089)						(2,932,385)						(5,129,788)
Receivable for unsettled sales						—						(427,203)						—						(427,203)
Principal repayments						(56,569)						(230,888)						—						(287,457)
Losses						(120,689)						(503,411)						(112,370)						(736,470)
(Amortization) accretion						(3,127)						(10,337)						1,176						(12,288)
Balance, June 30, 2022						$	264,146					$	6,433,221					$	596,521					$	7,293,888
Percentage of Portfolio						3.62		%				88.20		%				8.18		%				100.00		%
December 31, 2021
Balance, December 31, 2020						$	1,970,902					$	3,207,420					$	—					$	5,178,322
Purchases (1)						—						1,265,942						987,887						2,253,829
Proceeds from sales						(167,202)						(813,178)						(779,684)						(1,760,064)
Principal repayments						(339,393)						(531,592)						—						(870,985)
Losses						(61,106)						(77,145)						(9,391)						(147,642)
(Amortization) accretion						(15,356)						(32,771)						21						(48,106)
Balance, December 31, 2021						$	1,387,845					$	3,018,676					$	198,833					$	4,605,354
Percentage of Portfolio						30.14		%				65.55		%				4.31		%				100.00		%

(1)Purchases include cash paid during the period, plus payable for investment securities purchased during the period as of period end.

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. No credit loss expense was incurred for the three and six months ended June 30, 2022 or for the three and six months ended June 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 June 30, 2022 and December 31, 2021. Our available for sale securities had a weighted average coupon of 4.34% and 3.83% at June 30, 2022 and December 31, 2021, respectively.

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Agency Securities						Principal Amount						Amortized Cost						Gross Unrealized Loss						Gross Unrealized Gain						Fair Value
June 30, 2022
Total Fannie Mae						$	116,932					$	121,254					$	(2,512)					$	—					$	118,742
Total Freddie Mac						143,345						149,017						(3,702)						—						145,315
Total Ginnie Mae						86						90						(1)						—						89
Total						$	260,363					$	270,361					$	(6,215)					$	—					$	264,146
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 June 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
June 30, 2022						$	264,142					$	(6,215)					$	4					$	—					$	264,146					$	(6,215)
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.

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

						June 30, 2022												December 31, 2021
Weighted Average Life of Available for Sale Securities						Fair Value						Amortized Cost						Fair Value						Amortized Cost
< 1 year						$	126					$	128					$	179					$	174
≥ 1 year and < 3 years						2,992						3,101						27,110						26,731
≥ 3 years and < 5 years						13,662						13,928						333,598						319,762
≥ 5 years						247,366						253,204						1,026,958						934,205
Total Available for Sale Securities						$	264,146					$	270,361					$	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

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future home prices, housing policy and borrower incentives. The weighted average lives of our available for sale securities at June 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.

Trading Securities

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

						Principal Amount						Amortized Cost						Gross Unrealized Loss						Gross Unrealized Gain						Fair Value
June 30, 2022
Agency Securities:
Total Fannie Mae						$	5,237,987					$	5,317,876					$	(326,195)					$	3,140					$	4,994,821
Total Freddie Mac						1,489,290						1,487,800						(50,042)						642						1,438,400
Total Agency Securities						$	6,727,277					$	6,805,676					$	(376,237)					$	3,782					$	6,433,221
U.S. Treasury Securities						605,000						596,361						(392)						552						596,521
Total Trading Securities						$	7,332,277					$	7,402,037					$	(376,629)					$	4,334					$	7,029,742
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 June 30, 2022 and December 31, 2021.

						June 30, 2022												December 31, 2021
Estimated Weighted Average Life of Trading Securities						Fair Value						Amortized Cost						Fair Value						Amortized Cost
< 1 year						$	99,773					$	99,889					$	99,973					$	99,978
≥ 1 year and < 3 years						—						—						5,323						5,365
≥ 3 years and < 5 years						—						—						472,774						475,600
≥ 5 years						6,929,969						7,302,148						2,639,439						2,690,243
Total						$	7,029,742					$	7,402,037					$	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 June 30, 2022 and December 31, 2021 in the tables above are based upon market factors, assumptions, models and estimates from the third-party model

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At June 30, 2022, we had active MRAs with 37 counterparties and had $6,692,547 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 June 30, 2022 and December 31, 2021. No amounts below are subject to offsetting. Our repurchase agreements require excess collateral, known as a “haircut.” At June 30, 2022, the average haircut percentage was 3.01% 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.

						Balance						Weighted Average Contractual Rate						Weighted Average Maturity in days
June 30, 2022
Agency Securities
≤ 30 days						$	4,849,273					1.34		%				16
> 30 days to ≤ 90 days						1,321,582						1.49		%				43
> 60 days to ≤ 90 days						26,605						0.98		%				84
Total or Weighted Average						$	6,197,460					1.37		%				22
U.S. Treasury Securities
≤ 30 days						495,087