ARR-03.31.2014-10Q



 

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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the Quarterly Period Ended March 31, 2014
OR
o
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)
 
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 x NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES x NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x          Accelerated filer o          Non-accelerated filer o          Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
 
The number of outstanding shares of the Registrant’s common stock as of May 2, 2014 was 357,110,307.
 


ARMOUR Residential REIT, Inc.
TABLE OF CONTENTS


 


2
ARMOUR Residential REIT, Inc.
CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)


 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
 
March 31, 2014
 
December 31, 2013
Assets
 
 
 
 
Cash
 
$
588,832

 
$
496,478

Cash collateral posted
 
23,873

 
35,917

Agency Securities, available for sale, at fair value (including pledged securities of $15,711,007 and $13,832,482)
 
16,479,734

 
14,648,178

Receivable for unsettled sales (including pledged securities of $257,201 in 2014)
 
296,378

 
—

Derivatives, at fair value
 
310,370

 
508,988

Principal payments receivable
 
39

 
70

Accrued interest receivable
 
45,492

 
42,034

Prepaid and other assets
 
790

 
852

Total Assets
 
$
17,745,508

 
$
15,732,517

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Repurchase agreements
 
$
15,163,375

 
$
13,151,504

Cash collateral held
 
238,852

 
387,845

Payable for unsettled purchases
 
382,833

 
159,159

Derivatives, at fair value
 
82,968

 
102,795

Accrued interest payable
 
6,041

 
6,629

Accounts payable and other accrued expenses
 
3,663

 
23,357

Dividends payable
 
2

 
—

Total Liabilities
 
$
15,877,734

 
$
13,831,289

 
 
 
 
 
Commitments and contingencies (Note 8)
 

 

 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.001 par value, 50,000 shares authorized;
 
 
 
 
8.250% Series A Cumulative Preferred Stock; 2,181 and 2,181 issued and outstanding at March 31, 2014 and December 31, 2013
 
2

 
2

7.875% Series B Cumulative Preferred Stock; 5,650 and 5,650 issued and outstanding at March 31, 2014 and December 31, 2013
 
6

 
6

Common stock, $0.001 par value, 1,000,000 shares authorized, 357,102 and 357,613 shares issued and outstanding at March 31, 2014 and December 31, 2013
 
357

 
358

Additional paid-in capital
 
2,732,269

 
2,734,480

Accumulated deficit
 
(720,676
)
 
(643,138
)
Accumulated other comprehensive loss
 
(144,184
)
 
(190,480
)
Total Stockholders’ Equity
 
$
1,867,774

 
$
1,901,228

Total Liabilities and Stockholders’ Equity
 
$
17,745,508

 
$
15,732,517

 
See notes to condensed financial statements.


3
ARMOUR Residential REIT, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)


 
 
 
For the Quarters
Ended
 
 
March 31, 2014
 
March 31, 2013
Interest income, net of amortization of premium on Agency Securities
 
$
123,082

 
$
130,637

Interest expense
 
(14,747
)
 
(25,475
)
Net interest income
 
$
108,335

 
$
105,162

Other Income (Loss):
 
 
 
 
Realized gain on sale of Agency Securities (reclassified from Other comprehensive income (loss))
 
69,869

 
18,514

Subtotal
 
$
69,869

 
$
18,514

Realized loss on derivatives (1)
 
(11,739
)
 
(29,053
)
Unrealized gain (loss) on derivatives
 
(176,355
)
 
16,301

Subtotal
 
$
(188,094
)
 
$
(12,752
)
Total Other Income (Loss)
 
$
(118,225
)

$
5,762

Expenses:
 
 
 
 
Management fee
 
6,965

 
6,633

Professional fees
 
1,274

 
1,004

Insurance
 
184

 
78

Compensation
 
712

 
257

Other
 
753

 
662

Total expenses
 
$
9,888

 
$
8,634

Net Income (Loss)
 
$
(19,778
)
 
$
102,290

Dividends declared on preferred stock
 
(3,905
)
 
(2,497
)
Net Income (Loss) available (related) to common stockholders
 
$
(23,683
)
 
$
99,793

Net income (loss) available (related) per share to common stockholders (Note 11):
 
 
 
 
Basic
 
$
(0.07
)
 
$
0.30

Diluted
 
$
(0.07
)
 
$
0.29

Dividends declared per common share
 
$
0.15

 
$
0.24

Weighted average common shares outstanding:
 
 
 
 
Basic
 
357,496

 
337,935

Diluted
 
357,496

 
339,722

(1) Interest expense related to our interest rate swap contracts is recorded in realized loss on derivatives on the condensed statements of operations. For additional information, see Note 7 to the condensed financial statements.
 
See notes to condensed financial statements.


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



 
 
For the Quarters
Ended
 
 
March 31, 2014
 
March 31, 2013
Net Income (Loss)
 
$
(19,778
)
 
$
102,290

Other comprehensive income (loss):
 
 
 
 
Reclassification adjustment for realized gain on sale of available for sale Agency Securities
 
(69,869
)
 
(18,514
)
Net unrealized gain (loss) on available for sale Agency Securities
 
116,165

 
(180,055
)
Other comprehensive income (loss)
 
$
46,296

 
$
(198,569
)
Comprehensive Income (Loss)
 
$
26,518

 
$
(96,279
)
 
See notes to condensed financial statements.


5
ARMOUR Residential REIT, Inc.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
(Unaudited)


 

Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
8.250% Series A
 
7.875% Series B
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Amount
 
Additional Paid in Capital
 
Shares
 
Par Amount
 
Additional Paid in Capital
 
Shares
 
Par Amount
 
Additional Paid in Capital
 
Total
Additional Paid in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balance, January 1, 2014
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
357,613

 
$
358

 
$
2,544,761

 
$
2,734,480

 
$
(643,138
)
 
$
(190,480
)
 
$
1,901,228

Series A Preferred dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,124
)
 
—

 
(1,124
)
Series B Preferred dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,781
)
 
—

 
(2,781
)
Common stock dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(53,855
)
 
—

 
(53,855
)
Issuance of common stock, net
—

 
—

 
—

 
—

 
—

 
—

 
19

 
—

 
81

 
81

 
—

 
—

 
81

Stock based compensation, net of withholding requirements
—

 
—

 
—

 
—

 
—

 
—

 
70

 
—

 
292

 
292

 
—

 
—

 
292

Common stock repurchased
—

 
—

 
—

 
—

 
—

 
—

 
(600
)
 
(1
)
 
(2,584
)
 
(2,584
)
 
—

 
—

 
(2,585
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(19,778
)
 
—

 
(19,778
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
46,296

 
46,296

Balance, March 31, 2014
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
357,102

 
$
357

 
$
2,542,550

 
$
2,732,269

 
$
(720,676
)
 
$
(144,184
)
 
$
1,867,774

 
See notes to condensed financial statements.

6
ARMOUR Residential REIT, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 
For the Quarters Ended
 
 
March 31, 2014
 
March 31, 2013
Cash Flows From Operating Activities:
 
 
 
 
Net income (loss)
 
$
(19,778
)
 
$
102,290

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Net amortization of premium on Agency Securities
 
10,618

 
60,698

Realized gain on sale of Agency Securities
 
(69,869
)
 
(18,514
)
Stock based compensation
 
292

 
190

Changes in operating assets and liabilities:
 
 
 
 
Increase in accrued interest receivable
 
(3,150
)
 
(16,234
)
(Increase) decrease in prepaid and other assets
 
68

 
(150
)
(Increase) decrease in derivatives, at fair value
 
178,791

 
(32,582
)
Increase (decrease) in accrued interest payable
 
(588
)
 
238

Decrease in accounts payable and other accrued expenses
 
(19,694
)
 
(970
)
Net cash provided by operating activities
 
$
76,690

 
$
94,966

Cash Flows From Investing Activities:
 
 
 
 
Purchases of Agency Securities
 
(7,385,813
)
 
(8,944,656
)
Principal repayments of Agency Securities
 
307,214

 
1,208,551

Proceeds from sales of Agency Securities
 
5,279,609

 
701,476

(Increase) decrease in cash collateral
 
(136,949
)
 
45,256

Net cash used in investing activities
 
$
(1,935,939
)
 
$
(6,989,373
)
Cash Flows From Financing Activities:
 
 
 
 
Issuance of Series A Preferred stock, net of expenses
 
—

 
4,381

Issuance of Series B Preferred stock, net of expenses
 
—

 
136,571

Issuance of common stock, net of expenses
 
75

 
438,481

Proceeds from repurchase agreements
 
23,322,303

 
42,366,300

Principal repayments on repurchase agreements
 
(21,310,432
)
 
(35,903,781
)
Series A Preferred stock dividends paid
 
(1,124
)
 
(1,107
)
Series B Preferred stock dividends paid
 
(2,781
)
 
(1,390
)
Common stock dividends paid
 
(53,853
)
 
(79,829
)
Common stock repurchased
 
(2,585
)
 
—

Net cash provided by financing activities
 
$
1,951,603

 
$
6,959,626

Net increase in cash
 
92,354

 
65,219

Cash - beginning of period
 
496,478

 
771,282

Cash - end of period
 
$
588,832

 
$
836,501

Supplemental Disclosure:
 
 
 
 
Cash paid during the period for interest
 
$
70,351

 
$
55,254

Non-Cash Investing and Financing Activities:
 
 
 
 
Receivable for unsettled sales
 
$
296,378

 
$
2,226,168

Payable for unsettled purchases
 
$
382,833

 
$
—

Net unrealized gain (loss) on available for sale Agency Securities
 
$
116,165

 
$
(180,055
)
Amounts receivable for issuance of common stock
 
$
6

 
$
5

See notes to condensed financial statements

7
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


 
Note 1 – Basis of Presentation
 
The accompanying 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 1001 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they 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 quarter ended March 31, 2014 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2014. These unaudited 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, 2013.
 
The preparation of 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 financial statements include the valuation of Agency Securities (as defined below) and derivative instruments.
 
Note 2 – Organization and Nature of Business Operations
 
References to “we,” “us,” “our,” "ARMOUR" or the “Company” are to ARMOUR Residential REIT, Inc. References to "ARRM" are to ARMOUR Residential Management LLC, a Delaware limited liability company.
 
We are an externally managed Maryland corporation organized in 2008, managed by ARRM (see Note 13, “Related Party Transactions” for additional discussion), an investment advisor registered with the SEC. We invest in residential mortgage backed securities 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 guaranteed by the Government National Mortgage Administration (Ginnie Mae) (collectively, "Agency Securities"). We also may invest in other securities backed by residential mortgages for which the payment of principal and interest is not guaranteed by a GSE or government agency (collectively, "Non-Agency Securities"). While we remain committed to investing in Agency Securities for so long as an adequate supply and pricing exists, we have the flexibility to invest in Non-Agency Securities and respond to changes in GSE policy as needed. As of March 31, 2014 and December 31, 2013, Agency Securities accounted for 100% of our securities portfolio. It is expected that the percentage will continue to be 100% or close thereto. Our securities portfolio consists primarily of Agency Securities backed by fixed rate home loans. From time to time, a portion of our assets may be invested in Agency Securities backed by hybrid adjustable rate and adjustable rate home loans as well as unsecured notes and bonds issued by GSEs, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust (“REIT”).
 
We have elected to be taxed as a REIT under the Internal Revenue Code (“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 federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.
 
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.
 

8
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


Cash Collateral Posted/Held

Cash collateral posted (held) represents cash posted by us to counterparties or (held) by us from counterparties as collateral for our interest rate swap contracts, Eurodollar Futures Contracts (“Futures Contracts”) and repurchase agreements on our Agency Securities.
Agency Securities, at Fair Value
 
We generally intend to hold most of our Agency Securities for extended periods of time. We may, from time to time, sell any of our Agency Securities as part of the overall management of our securities portfolio. 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. As of March 31, 2014 and December 31, 2013, all of our Agency Securities were classified as available for sale. Agency Securities classified as available for sale are reported at their estimated fair values with unrealized gains and losses excluded from earnings and reported as part of the condensed statements of comprehensive income (loss).
 
We evaluate Agency Securities for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment to be other than temporary if we (1) have the intent to sell the Agency Securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) or (3) a credit loss exists. Impairment losses recognized establish a new cost basis for the related Agency Securities.
 
Accrued Interest Receivable and Payable
 
Accrued interest receivable includes interest accrued between payment dates on Agency Securities. Accrued interest payable includes interest payable on our repurchase agreements.
 
Repurchase Agreements
 
We finance the acquisition of our Agency Securities through the use of repurchase agreements. Our repurchase agreements are secured by our Agency Securities and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the London Interbank Offered Rate (“LIBOR”). Under these repurchase agreements, we sell Agency Securities to a lender and agree to repurchase the same Agency Securities 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. A repurchase agreement operates as a financing arrangement under which we pledge our Agency Securities 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. We did not have any reverse repurchase agreements outstanding during the quarters ended or at March 31, 2014 and March 31, 2013 or at December 31, 2013.
 
Obligations to Return Securities Received as Collateral, at Fair Value
 
At certain times, 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 condensed balance sheets. 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. We did not have any reverse repurchase agreements outstanding during the quarters ended or at March 31, 2014 and March 31, 2013 or at December 31, 2013.

9
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


 
Derivatives, at Fair Value
 
We recognize all derivatives as either assets or liabilities at fair value on our condensed balance sheets. Since we have not elected cash flow hedge accounting treatment as allowed by GAAP, all changes in the fair values of our derivatives are reflected in our condensed statements of operations. Accordingly, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We will continue to designate derivatives as hedges for tax purposes and any unrealized derivative gains or losses would not affect our distributable net taxable income.
 
Credit Risk
 
We have limited our exposure to credit losses on our securities portfolio of Agency Securities. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency Securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae Agency Securities are backed by the full faith and credit of the U.S. Government.
 
Fannie Mae and Freddie Mac remain in conservatorship of the U.S. Government. There can be no assurances as to how or when the U.S. Government will end these conservatorships or how the future profitability of Fannie Mae and Freddie Mac and any future credit rating actions may impact the credit risk associated with Agency Securities and, therefore, the value of the Agency Securities in our securities portfolio.
 
Market Risk

Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our Agency Securities at an inopportune time when prices are depressed.
 
Preferred Stock
 
At March 31, 2014, 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.
 
Series A Cumulative Preferred Shares (“Series A Preferred Stock”)
 
On June 6, 2012, we filed with the Maryland State Department of Assessments and Taxation to designate 1,610 shares of the 50,000 authorized preferred stock as 8.250% Series A Preferred Stock with the powers, designations, preferences and other rights as set forth therein. On July 13, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC, as our agent, to offer and sell, from time to time, up to 6,000 shares of Series A Preferred Stock. On July 27, 2012, we entered into an Equity Distribution Agreement with Citadel Securities LLC, as our agent, to offer and sell, from time to time, up to 2,000 shares of Series A Preferred Stock. At March 31, 2014, there were 9,610 shares designated as Series A Preferred Stock.
 
We had 2,181 shares of Series A Preferred Stock issued and outstanding at March 31, 2014 and December 31, 2013. Our Series A Preferred Stock has a par value of $0.001 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends. The Series A Preferred Stock is entitled to a dividend at a rate of 8.250% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends exclusively at our option commencing on June 7, 2017 (subject to our right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve our qualification as a REIT). The Series A Preferred Stock is senior to our common stock and therefore in the event of liquidation, dissolution or winding up, the Series A Preferred Stock will receive a liquidation preference of $25.00 per share plus accumulated and unpaid dividends before distributions are paid to holders of our common stock, with no right or claim to any of our remaining assets thereafter. The Series A Preferred Stock generally does not have voting rights except if we fail to pay dividends on the Series A Preferred Stock for eighteen months, whether or not consecutive. Under such circumstances, the Series A Preferred Stock will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set aside for payment. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by us or converted into our common stock in connection with a change of control by the holders of Series A Preferred Stock.

10
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


 
Series B Cumulative Preferred Shares (”Series B Preferred Stock”)
 
On February 11, 2013, we filed with the Maryland State Department of Assessments and Taxation to designate 6,210 shares of the 50,000 authorized preferred stock as 7.875% Series B Preferred Stock with the powers, designations, preferences and other rights as set forth therein.
 
We had 5,650 shares of Series B Preferred Stock issued and outstanding at March 31, 2014 and December 31, 2013. Our Series B Preferred Stock has a par value of $0.001 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends. The Series B Preferred Stock is entitled to a dividend at a rate of 7.875% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series B Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends exclusively at our option commencing on February 12, 2018 (subject to our right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve our qualification as a REIT). The Series B Preferred Stock is senior to our common stock and rank on parity with the Series A Preferred Stock. In the event of liquidation, dissolution or winding up, the Series B Preferred Stock will receive a liquidation preference of $25.00 per share plus accumulated and unpaid dividends before distributions are paid to holders of our common stock, with no right or claim to any of our remaining assets thereafter. The Series B Preferred Stock generally does not have voting rights except if we fail to pay dividends on the Series B Preferred Stock for eighteen months, whether or not consecutive. Under such circumstances, the Series B Preferred Stock will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set aside for payment. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by us or converted into our common stock in connection with a change of control by the holders of Series B Preferred Stock.
 
Common Stock
 
Common Stock
 
At March 31, 2014, we were authorized to issue up to 1,000,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had 357,102 shares of common stock issued and outstanding at March 31, 2014 and 357,613 shares of common stock issued and outstanding at December 31, 2013.
 
Common Stock Repurchased
 
On December 17, 2012, we announced that our Board had authorized a stock repurchase program of up to $100,000 of shares of our common stock outstanding (the “Repurchase Program”). On March 5, 2014, our Board increased the authorization to 50,000 shares of our common stock outstanding. Under the Repurchase Program shares may be purchased in the open market, including block trades, through privately negotiated transactions, or pursuant to a trading plan separately adopted in the future. The timing, manner, price and amount of any repurchases will be at our discretion, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. We are not required to repurchase any shares under the Repurchase Program and it may be modified, suspended or terminated at any time for any reason. We do not intend to purchase shares from our Board or other affiliates. Under Maryland law, such repurchased shares are treated as authorized but unissued. For the quarter ended March 31, 2014, we repurchased 600 shares of our common stock under the Repurchase Program for an aggregate of $2,585. At March 31, 2014, there were 49,400 remaining shares authorized for repurchase under our Repurchase Program.
 
Revenue Recognition
 
Interest income is earned and recognized on Agency Securities based on their unpaid principal amounts and their contractual terms. Premiums and discounts associated with the purchase of Agency Securities are amortized or accreted into interest income over the actual lives of the securities, reflecting actual prepayments as they occur.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) refers to changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
 

11
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


Note 4 – Fair Value of Financial Instruments
 
Our valuation techniques for financial instruments are based on 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.

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.
 
Cash - Cash includes cash on deposit with financial institutions. The carrying amount of cash is deemed to be its fair value. Our cash balances are classified as Level 1. Cash balances posted by us to counterparties or held by us from counterparties counterparties as collateral are classified as Level 2.
 
Agency Securities, Available for Sale - Fair value for the Agency Securities in our securities portfolio is based on obtaining a valuation for each Agency 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 an Agency Security is not available from the third party pricing services or such data appears unreliable, we obtain quotes from up to three dealers who make markets in similar Agency Securities. In general, the dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular Agency Security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the Agency Security. 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 quotes 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 methods 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 quotes 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 received from dealers and classify it as a Level 3 security. At March 31, 2014 and December 31, 2013, all of our Agency Security fair values were based solely on third party pricing services and dealer quotes and therefore were classified as Level 2.
 
Repurchase Agreements - The fair value of repurchase agreements reflects the present value of the contractual cash flows discounted at the estimated LIBOR based market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term to interest rate repricing, which may be at maturity, of our repurchase agreements. The fair value of the repurchase agreements approximates their carrying amount due to the short-term nature of these financial instruments. Our repurchase agreements are classified as Level 2.
 
Derivative Transactions - Our Futures Contracts are traded on the Chicago Mercantile Exchange (“CME”) and are classified as Level 1. The fair values of our interest rate swap contracts and interest rate swaptions are valued using 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. Management compares pricing used to dealer quotes to ensure that the current market conditions are properly reflected. The fair values of our interest rate swap contracts and our interest rate swaptions are classified as Level 2.

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.

12
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at March 31, 2014
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
16,479,734

 
$
—

 
$
16,479,734

Derivatives
 
$
—

 
$
310,370

 
$
—

 
$
310,370

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,094

 
$
81,874

 
$
—

 
$
82,968

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the quarter ended March 31, 2014.
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at December 31, 2013
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
14,648,178

 
$
—

 
$
14,648,178

Derivatives
 
$
—

 
$
508,988

 
$
—

 
$
508,988

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Derivatives
 
$
1,503

 
$
101,292

 
$
—

 
$
102,795

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the year ended December 31, 2013.

The following tables provide a summary of the carrying values and fair values of our financial assets and liabilities not carried at fair value but for which fair value is required to be disclosed as of March 31, 2014 and December 31, 2013.
 

13
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


 
 
March 31, 2014
 
Fair Value Measurements using:
 
 
Carrying Value
 
Fair
Value 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash
 
$
588,832

 
$
588,832

 
$
588,832

 
$
—

 
$
—

Cash collateral posted
 
$
23,873

 
$
23,873

 
$
—

 
$
23,873

 
$
—

Receivable for unsettled sales
 
$
296,378

 
$
296,378

 
$
—

 
$
296,378

 
$
—

Principal payments receivable
 
$
39

 
$
39

 
$
—

 
$
39

 
$
—

Accrued interest receivable
 
$
45,492

 
$
45,492

 
$
—

 
$
45,492

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
15,163,375

 
$
15,163,375

 
$
—

 
$
15,163,375

 
$
—

Cash collateral held
 
$
238,852

 
$
238,852

 
$
—

 
$
238,852

 
$
—

Payable for unsettled purchases
 
$
382,833

 
$
382,833

 
$
—

 
$
382,833

 
$
—

Accrued interest payable
 
$
6,041

 
$
6,041

 
$
—

 
$
6,041

 
$
—


 
 
December 31, 2013
 
Fair Value Measurements using:
 
 
Carrying Value
 
Fair
Value 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Cash
 
$
496,478

 
$
496,478

 
$
496,478

 
$
—

 
$
—

Cash collateral posted
 
$
35,917

 
$
35,917

 
$
—

 
$
35,917

 
$
—

Principal payments receivable
 
$
70

 
$
70

 
$
—

 
$
70

 
$
—

Accrued interest receivable
 
$
42,034

 
$
42,034

 
$
—

 
$
42,034

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
13,151,504

 
$
13,151,504

 
$
—

 
$
13,151,504

 
$
—

Cash collateral held
 
$
387,845

 
$
387,845

 
$
—

 
$
387,845

 
$
—

Payable for unsettled purchases
 
$
159,159

 
$
159,159

 
$
—

 
$
159,159

 
$
—

Accrued interest payable
 
$
6,629

 
$
6,629

 
$
—

 
$
6,629

 
$
—

 
Note 5 – Agency Securities, Available for Sale
 
All of our Agency Securities are classified as available for sale and, as such, are reported at their estimated fair value and changes in fair value reported as part of the statements of comprehensive income (loss). As of March 31, 2014 and December 31, 2013, investments in Agency Securities accounted for 100% of our securities portfolio.

We evaluated our Agency Securities with unrealized losses as of March 31, 2014, March 31, 2013 and December 31, 2013, to determine whether there was an other than temporary impairment. The decline in value of our Agency Securities in 2013 was solely due to market conditions and not the credit quality of the assets. All of our Agency Securities are issued and guaranteed by GSEs or Ginnie Mae. The GSEs have a long term credit rating of AA+. As of March 31, 2014, March 31, 2013 and December 31, 2013, we also considered whether we intended to sell Agency Securities and whether it was more likely than not that we could meet our liquidity requirements and contractual obligations without selling Agency Securities. There was no other than temporary

14
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


impairment recognized for the quarters ended March 31, 2014 and March 31, 2013. At December 31, 2013, anticipating portfolio repositioning sales in the first quarter of 2014, we concluded that the December 31, 2013 unrealized losses on our 25-year and 30-year fixed rate Agency Securities represented an other than temporary impairment. Accordingly, at December 31, 2013, we recognized losses totaling $401,500 in our 2013 statements of operations, thereby establishing a new cost basis for those Agency Securities with aggregate fair value of $6,800,000 as of December 31, 2013. We also determined that at December 31, 2013, there was no other than temporary impairment of our other Agency Securities, which are primarily 20-year and 15-year fixed rate securities. 

As of March 31, 2014, we had the following Agency Securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of March 31, 2014 are also presented below. Our Agency Securities had a weighted average coupon of 3.42% as of March 31, 2014.
March 31, 2014
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
 
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
$
51,194

 
$
(39
)
 
$
1,197

 
$
52,352

 
0.32
%
Multi-Family MBS
 
212,544

 
(624
)
 
83

 
212,003

 
1.29
%
10 Year Fixed
 
1,105

 
—

 
26

 
1,131

 
0.00
%
15 Year Fixed
 
9,867,088

 
(42,801
)
 
5,342

 
9,829,629

 
59.65
%
20 Year Fixed
 
2,808,118

 
(72,300
)
 
827

 
2,736,645

 
16.61
%
30 Year Fixed
 
863,463

 
—

 
8,262

 
871,725

 
5.29
%
Total Fannie Mae
 
$
13,803,512

 
$
(115,764
)
 
$
15,737

 
$
13,703,485

 
83.16
%
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
16,888

 
(34
)
 
458

 
17,312

 
0.11
%
10 Year Fixed
 
368

 
(5
)
 
2

 
365

 
0.00
%
15 Year Fixed
 
282,343

 
(2,024
)
 
1,414

 
281,733

 
1.71
%
20 Year Fixed
 
2,047,929

 
(50,261
)
 
1,909

 
1,999,577

 
12.13
%
30 Year Fixed
 
337,873

 
—

 
3,180

 
341,053

 
2.07
%
Total Freddie Mac
 
$
2,685,401

 
$
(52,324
)
 
$
6,963

 
$
2,640,040

 
16.02
%
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
134,588

 
(52
)
 
1,233

 
135,769

 
0.82
%
15 Year Fixed
 
417

 
—

 
23

 
440

 
0.00
%
Total Ginnie Mae
 
$
135,005

 
$
(52
)
 
$
1,256

 
$
136,209

 
0.82
%
Total Agency Securities
 
$
16,623,918

 
$
(168,140
)
 
$
23,956

 
$
16,479,734

 
100.00
%

Included in the table above are unsettled purchases with an aggregate cost of $382,833 and estimated fair value of $381,109 at March 31, 2014.
 

15
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


As of December 31, 2013, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of December 31, 2013 are also presented below. Our Agency Securities had a weighted average coupon of 3.52% as of December 31, 2013.
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
$
55,266

 
$
(48
)
 
$
1,174

 
$
56,392

0.40
%
10 Year Fixed
 
1,144

 
—

 
25

 
1,169

0.01
%
15 Year Fixed
 
2,556,986

 
(20,420
)
 
2,257

 
2,538,823

17.33
%
20 Year Fixed
 
2,876,743

 
(104,357
)
 
56

 
2,772,442

18.93
%
25 Year Fixed
 
207,946

 
—

 
—

 
207,946

1.42
%
30 Year Fixed
 
5,230,008

 
—

 
—

 
5,230,008

35.70
%
Total Fannie Mae
 
$
10,928,093

 
$
(124,825
)
 
$
3,512

 
$
10,806,780

73.79
%
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
17,281

 
(29
)
 
428

 
17,680

0.12
%
10 Year Fixed
 
406

 
(6
)
 
2

 
402

0.00
%
15 Year Fixed
 
295,357

 
(3,287
)
 
1,560

 
293,630

2.00
%
20 Year Fixed
 
2,093,482

 
(69,617
)
 
694

 
2,024,559

13.82
%
25 Year Fixed
 
67,436

 
—

 
—

 
67,436

0.46
%
30 Year Fixed
 
1,290,623

 
—

 
—

 
1,290,623

8.81
%
Total Freddie Mac
 
$
3,764,585

 
$
(72,939
)
 
$
2,684

 
$
3,694,330

25.21
%
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
145,558

 
(64
)
 
1,129

 
146,623

1.00
%
15YrFixed
 
422

 
—

 
23

 
445

0.00
%
Total Ginnie Mae
 
$
145,980

 
$
(64
)
 
$
1,152

 
$
147,068

1.00
%
Total Agency Securities
 
$
14,838,658

 
$
(197,828
)
 
$
7,348

 
$
14,648,178

100.00
%

We apply trade date accounting. Included in the table above are unsettled purchases with an aggregate cost of $159,159 and estimated fair value of $158,850 at December 31, 2013.
 
Actual maturities of Agency Securities are generally shorter than stated contractual maturities because actual maturities of Agency 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 Agency Securities as of March 31, 2014 and December 31, 2013.
 
 
 
March 31, 2014
 
December 31, 2013
Weighted Average Life of all Agency Securities
 
Fair Value
 
Amortized
Cost 
 
Fair Value
 
Amortized
Cost 
Less than one year
 
$
1

 
$
1

 
$
2

 
$
2

Greater than or equal to one year and less than three years
 
56,730

 
56,662

 
20,289

 
20,127

Greater than or equal to three years and less than five years
 
11,796,745

 
11,886,476

 
3,809,418

 
3,837,530

Greater than or equal to five years
 
4,626,258

 
4,680,779

 
10,818,469

 
10,980,999

Total Agency Securities
 
$
16,479,734

 
$
16,623,918

 
$
14,648,178

 
$
14,838,658

 

16
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


We use a third party model to calculate the weighted average lives of our Agency Securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our Agency 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 Agency Securities as of March 31, 2014 and December 31, 2013 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 Agency Securities could be longer or shorter than estimated.

The following table presents the unrealized losses and estimated fair value of our Agency Securities by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2014 and December 31, 2013.
 
 
Unrealized Loss Position For:
 
 
Less than 12 Months
 
12 Months or More
 
Total
As of
 
Fair Value
 
Unrealized
Losses 
 
Fair Value
 
Unrealized
Losses 
 
Fair Value
 
Unrealized
Losses 
March 31, 2014
 
$
11,503,901

 
$
(98,162
)
 
$
1,746,638

 
$
(69,978
)
 
$
13,250,539

 
$
(168,140
)
December 31, 2013
 
$
7,175,317

 
$
(197,536
)
 
$
17,737

 
$
(292
)
 
$
7,193,054

 
$
(197,828
)
 
During the quarter ended March 31, 2014, we sold $5,575,987 of Agency Securities to reposition our portfolio, which resulted in realized gains of $69,869. During the quarter ended March 31, 2013, we sold $2,281,616 of Agency Securities resulting in realized gains of $18,514.

Note 6 – Repurchase Agreements
 
The following table represents the contractual repricing regarding our repurchase agreements to finance Agency Security purchases as of March 31, 2014 and December 31, 2013.
 
 
 
March 31, 2014
 
December 31, 2013
 
 
Repurchase Agreements
 
Weighted Average Contractual Rate
 
Repurchase Agreements
 
Weighted Average Contractual Rate
Within 30 days
 
$
(6,112,258
)
 
36.50
%
 
$
3,990,434

 
0.41
%
31 days to 60 days
 
(6,006,880
)
 
36.90
%
 
7,098,298

 
0.41
%
61 days to 90 days
 
(1,552,907
)
 
35.80
%
 
1,226,694

 
0.44
%
Greater than 90 days
 
(1,491,330
)
 
46.10
%
 
836,078

 
0.43
%
Total or Weighted Average
 
$
(15,163,375
)
 
37.50
%
 
$
13,151,504

 
0.42
%
 
 
The following table represents the MRAs and other information regarding our repurchase agreements to finance Agency Security purchases as of March 31, 2014 and December 31, 2013.
 
 
March 31, 2014
 
December 31, 2013
Number of MRAs
 
37

 
35

Number of counterparties with repurchase agreements outstanding
 
29

 
27

Weighted average maturity in days
 
54

 
45

Haircut for repurchase agreements (1)
 
4.9
%
 
5.0
%
(1)
The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

We have 8 repurchase agreement counterparties that individually account for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for approximately 50.82% of our repurchase agreement borrowings outstanding at March 31, 2014.


17
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


Note 7 – Derivatives
 
We enter into derivative transactions to manage our interest rate risk exposure. These transactions include entering into interest rate swap contracts and interest rate swaptions as well as purchasing or selling Futures Contracts. These transactions 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. Our derivatives are carried on our condensed balance sheets, as assets or as liabilities at their fair value. We do not designate our derivatives as cash flow hedges and as such, we recognize changes in the fair value of these derivatives through earnings.
 
We have agreements with our swap (including swaption) counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts. Through this margin process, either we or our swap counterparty may be required to pledge cash or Agency Securities as collateral. Collateral requirements vary by counterparty and change over time based on the market value, notional amount and remaining term of the contracts. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.
 
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.
 
Our 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.
 
The following tables present information about interest rate swap contracts, interest rate swaptions and Futures Contracts which are included in derivatives on the accompanying condensed balance sheets as of March 31, 2014 and December 31, 2013.
 
March 31, 2014

Derivative Type
 
Remaining / Underlying Term
 
Weighted Average Remaining Swap / Option Term (Months)
 
Weighted Average Rate
 
Notional Amount
 
Asset Fair Value (1)
 
Liability Fair Value (1)
Interest rate swap contracts
 
   0-12 Months
 
11
 
1.59
%
 
$
305,000

 
—

 
$
(4,545
)
Interest rate swap contracts
 
13-24 Months
 
21
 
0.94
%
 
2,325,000

 
—

 
(31,644
)
Interest rate swap contracts
 
25-36 Months
 
27
 
1.63
%
 
1,200,000

 
—

 
(45,685
)
Interest rate swap contracts
 
37-48 Months
 
43
 
0.80
%
 
650,000

 
6,578

 
—

Interest rate swap contracts
 
49-60 Months
 
0
 
0.00
%
 
—

 
—

 
—

Interest rate swap contracts
 
61-72 Months
 
70
 
1.48
%
 
300,000

 
9,646

 
—

Interest rate swap contracts
 
73-84 Months
 
0
 
0.00
%
 
—

 
—

 
—

Interest rate swap contracts
 
85-96 Months
 
0
 
0.00
%
 
—

 
—

 
—

Interest rate swap contracts
 
97-108 Months
 
103
 
1.79
%
 
5,250,000

 
274,917

 
—

Interest rate swap contracts
 
109-120 Months
 
0
 
0.00
%
 
—

 
—

 
—

Futures Contracts
 
0-21 Months
 
10
 
1.97
%
 
55,000

 
—

 
(1,094
)
Interest rate swaptions
 
  60 Months
 
6
 
2.73
%
 
4,000,000

 
14,044

 
—

Interest rate swaptions
 
 120 Months
 
6
 
3.63
%
 
1,250,000

 
5,185

 
—

Total or Weighted Average
 
46
 
1.99
%
 
$
15,335,000

 
$
310,370

 
$
(82,968
)
(1)
See Note 4, “Fair Value of Financial Instruments” for additional discussion.

18
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)



 
December 31, 2013

Derivative Type
 
Remaining / Underlying Term
 
Weighted Average Remaining Swap / Option Term (Months)
 
Weighted Average Rate
 
Notional Amount
 
Asset Fair Value (1)
 
Liability Fair Value (1)
Interest rate swap contracts
 
   0-12 Months
 
2
 
1.14
%
 
$
200,000

 
—

 
$
(2,089
)
Interest rate swap contracts
 
13-24 Months
 
17
 
1.13
%
 
920,000

 
—

 
(18,095
)
Interest rate swap contracts
 
25-36 Months
 
28
 
1.23
%
 
2,900,000

 
—

 
(81,108
)
Interest rate swap contracts
 
37-48 Months
 
43
 
0.63
%
 
350,000

 
2,614

 
—

Interest rate swap contracts
 
49-60 Months
 
49
 
1.00
%
 
300,000

 
3,817

 
—

Interest rate swap contracts
 
61-72 Months
 
0
 
0.00
%
 
—

 
—

 
—

Interest rate swap contracts
 
73-84 Months
 
73
 
1.48
%
 
300,000

 
11,112

 
—

Interest rate swap contracts
 
85-96 Months
 
0
 
0.00
%
 
—

 
—

 
—

Interest rate swap contracts
 
97-108 Months
 
103
 
1.47
%
 
2,450,000

 
195,221

 
—

Interest rate swap contracts
 
109-120 Months
 
110
 
2.08
%
 
2,800,000

 
184,456

 
—

Futures Contracts
 
0-21 Months
 
13
 
1.97
%
 
55,000

 
—

 
(1,503
)
Interest rate swaptions
 
  60 Months
 
9
 
2.73
%
 
4,000,000

 
35,937

 
—

Interest rate swaptions
 
 120 Months
 
6
 
3.16
%
 
1,750,000

 
75,831

 
—

Total or Weighted Average
 
47
 
1.98
%
 
$
16,025,000

 
$
508,988

 
$
(102,795
)
(1)
See Note 4, “Fair Value of Financial Instruments” for additional discussion.

We have netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association. We are also required to post or hold cash collateral based upon the net underlying market value of our open positions with the counterparty.

The following tables present information about interest rate swap contracts, interest rate swaptions and Futures Contracts and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed balance sheets. Currently, we present these financial instruments at their gross amounts and they are included in derivatives, at fair value on the accompanying condensed balance sheet as of March 31, 2014.
March 31, 2014
 
 
 
Gross Amounts Not Offset in the Condensed Balance Sheet
 
 
Assets
 
Gross and Net Amounts of Assets Presented in the Condensed Balance Sheet
 
Financial
Instruments
 
Net Cash Collateral
Held
 
Net Amount
Interest rate swap contracts
 
$
291,140

 
$
(81,874
)
 
$
(164,162
)
 
$
45,104

Interest rate swaptions
 
19,230

 
—

 
—

 
19,230

Totals
 
$
310,370

 
$
(81,874
)
 
$
(164,162
)
 
$
64,334


19
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


March 31, 2014
 
 
 
Gross Amounts Not Offset in the Condensed Balance Sheet
 
 
Liabilities
 
Gross and Net Amounts of Liabilities Presented in the Condensed Balance Sheet
 
Financial
Instruments
 
Cash Collateral
Posted
 
Net Amount
Interest rate swap contracts
 
$
(81,874
)
 
$
81,874

 
$
—

 
$
—

Futures Contracts
 
(1,094
)
 
—

 
1,159

 
65

Totals
 
$
(82,968
)
 
$
81,874

 
$
1,159

 
$
65

 
The following tables present information about interest rate swap contracts, interest rate swaptions and Futures Contracts and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed balance sheets. Currently we present these financial instruments at their gross amounts and they are included in derivatives, at fair value on the accompanying condensed balance sheet as of December 31, 2013.
December 31, 2013
 
 
 
Gross Amounts Not Offset in the Condensed Balance Sheet
 
 
Assets
 
Gross and Net Amounts of Assets Presented in the Condensed
Balance Sheet
 
Financial
Instruments
 
Cash Collateral
Held
 
Net Amount
Interest rate swap contracts
 
$
397,219

 
$
(101,292
)
 
$
(313,229
)
 
$
(17,302
)
Interest rate swaptions
 
111,769

 
—

 
—

 
111,769

Totals
 
$
508,988

 
$
(101,292
)
 
$
(313,229
)
 
$
94,467

 
December 31, 2013
 
 
 
Gross Amounts Not Offset in the Condensed Balance Sheet
 
 
Liabilities
 
Gross and Net Amounts of Liabilities Presented in the Condensed Balance Sheet
 
Financial
Instruments
 
Cash Collateral
Posted
 
Net Amount
Interest rate swap contracts
 
$
(101,292
)
 
$
101,292

 
$
—

 
$
—

Futures Contracts
 
(1,503
)
 
—

 
1,599

 
96

Totals
 
$
(102,795
)
 
$
101,292

 
$
1,599

 
$
96

 

20
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


The following table represents the location and information regarding our derivatives which are included in Other Income (Loss) in the accompanying condensed statements of operations for the quarters ended March 31, 2014 and March 31, 2013.
 
 
 
 
 
Income (Loss) Recognized
 
 
 
 
For the Quarters
Ended
Derivatives
 
Location on condensed statements of operations
 
March 31, 2014
 
March 31, 2013
Interest rate swap contracts:
 
 
 
 
 
 
Interest income
 
Realized loss on derivatives
 
$
3,236

 
$
4,099

Interest expense
 
Realized loss on derivatives
 
(37,852
)
 
(32,501
)
Changes in fair value
 
Unrealized gain (loss) on derivatives
 
(103,306
)
 
16,953

 
 
 
 
$
(137,922
)
 
$
(11,449
)
Interest rate swaptions:
 
 
 
 
 
 
Realized gain
 
Realized loss on derivatives
 
23,317

 
—

Changes in fair value
 
Unrealized gain (loss) on derivatives
 
(73,458
)
 
(1,309
)
 
 
 
 
$
(50,141
)
 
$
(1,309
)
Futures Contracts:
 
 
 
 
 
 
Realized loss
 
Realized loss on derivatives
 
(440
)
 
(651
)
Changes in fair value
 
Unrealized gain (loss) on derivatives
 
409

 
657

 
 
 
 
$
(31
)
 
$
6

Totals
 
$
(188,094
)
 
$
(12,752
)
 
Note 8 – Commitments and Contingencies
 
Management Agreement with ARRM
 
As discussed in Note 13 “Related Party Transactions,” we are externally managed by ARRM pursuant to a management agreement (the “Management Agreement”), which was most recently amended on February 25, 2014. The Management Agreement entitles ARRM to receive a management fee payable monthly in arrears. Currently, the monthly management fee is 1/12th  of the sum of (a) 1.5% of gross equity raised up to $1.0 billion plus (b) 0.75% of gross equity raised in excess of $1.0 billion. The cost of repurchased stock and any dividend representing a return of capital for tax purposes will reduce the amount of gross equity raised used to calculate the monthly management fee. As of March 31, 2014, the effective management fee was 1.026% based on gross equity raised. The ARRM monthly management fee is not calculated based on the performance of our assets. Accordingly, the payment of our monthly management fee 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 ARRM incurred solely on behalf of ARMOUR other than the various overhead expenses specified in the terms of the Management Agreement. ARRM is further entitled to receive a termination fee from us under certain circumstances.

Pursuant to a Sub-Management Agreement between ARMOUR, ARRM and Staton Bell Blank Check LLC (“SBBC”), ARRM is responsible for the monthly payment of a sub-management fee to SBBC in an amount equal to 25% of the monthly management fee earned by ARRM, net of expenses. On November 6, 2014, SBBC has the option of terminating the Sub-Management Agreement. If the Sub-Management Agreement is terminated, we would be required to make a final payment to SBBC in the amount of 6.16 times the annualized rate of the sub-management fee for the prior three months. Thereafter, we will be entitled to receive the sub-management fee or, at the option of ARRM, reimbursement of the final payment by ARRM. The payments from ARRM to SBBC for the three months preceding March 31, 2014 totaled $1,364. If the Sub-Management Agreement had been terminated on March 31, 2014, the payment due from ARMOUR would have been $33,609.
 
Indemnifications and Litigation
 
We enter into certain contracts that contain a variety of indemnifications, principally with ARRM 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

21
ARMOUR Residential REIT, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

(Unaudited)


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 as of March 31, 2014 and December 31, 2013.
 
We are not party to any pending, threatened or contemplated litigation.

Note 9 – Stock Based Compensation
 
We adopted the 2009 Stock Incentive Plan (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 (“Restricted Shares”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively “Awards”), subject to terms as provided in the Plan.
 
On May 12, 2010, the Board allocated up to 250 shares to be available under the Plan. In considering such allocation, the Board considered the size of the Plan relative to our capital base and our current and potential future performance and capitalization. On July 18, 2011, our stockholders approved an amendment to the Plan to increase the number of shares issuable thereunder from 250 shares to 2,000 shares and the Plan was amended accordingly. As of March 31, 2014, all 2,000 shares allocated to the Plan have been awarded. Of these awards, approximately 150 shares vesting in 2017 were awarded subject to stockholder approval by June 30, 2017 of an increase to the number of shares issuable under the Plan.
 
Transactions related to Restricted Shares for the quarter ended March 31, 2014 are summarized below:
 
 
March 31, 2014
 
 
Number of
Awards 
 
Weighted
Average Grant
Date Fair
Value per
Award 
Unvested Awards Outstanding beginning of period
 
1,329

 
$
6.94

Vested
 
(106
)
 
$
7.11

Unvested Awards Outstanding end of period
 
1,223

 
$
6.94

 
As of March 31, 2014, there was approximately $5,332 of unvested non-cash stock based compensation related to the Awards (based on the March 31, 2014 stock price of $4.12 per share), that we expect to recognize as an expense over the remaining average service period of 2.6 years.
 
Note 10 – Stockholders’ Equity
 
Dividends
 
The following table presents our common stock dividend transactions for the quarter ended March 31, 2014.
Record Date
 
Payment Date
 
Rate per common share
 
Aggregate
amount paid to
holders of record
January 15, 2014
 
January 30, 2014
 
$
0.05

 
$
17,954

February 14, 2014
 
February 27, 2014
 
$
0.05

 
$
17,954

March 17, 2014
 
March 28, 2014
 
$
0.05

 
$
17,945