10-Q



 

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 September 30, 2015
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 November 5, 2015 was 39,838,120.



 


ARMOUR Residential REIT, Inc. and Subsidiary
TABLE OF CONTENTS


 


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


 PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
 
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
Cash
 
$
276,489

 
$
494,561

Cash collateral posted to counterparties
 
422,736

 
129,004

Agency Securities, available for sale, at fair value (including pledged securities of $13,230,585 and $14,370,847)
 
13,636,947

 
15,297,529

Receivable for unsettled sales (including pledged securities of $0 and $251,251)
 
—

 
260,598

Derivatives, at fair value
 
18,464

 
60,518

Principal payments receivable
 
26

 
93

Accrued interest receivable
 
36,967

 
41,915

Prepaid and other assets
 
4,775

 
1,580

Total Assets
 
$
14,396,404

 
$
16,285,798

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Repurchase agreements
 
$
12,595,573

 
$
13,881,921

Cash collateral posted by counterparties
 
8,869

 
48,240

Payable for unsettled purchases
 
—

 
445,292

Derivatives, at fair value
 
355,679

 
137,393

Accrued interest payable
 
3,930

 
7,012

Accounts payable and other accrued expenses
 
12,901

 
16,649

Total Liabilities
 
$
12,976,952

 
$
14,536,507

 
 
 
 
 
Commitments and contingencies (Note 9)
 

 

 
 
 
 
 
Stockholders’ Equity:
 
 
 
 
Preferred stock, $0.001 par value, 50,000 shares authorized;
 
 
 
 
8.250% Series A Cumulative Preferred Stock; 2,181 issued and outstanding ($54,514 aggregate liquidation preference) at September 30, 2015 and December 31, 2014
 
2

 
2

7.875% Series B Cumulative Preferred Stock; 5,650 issued and outstanding ($141,250 aggregate liquidation preference) at September 30, 2015 and December 31, 2014
 
6

 
6

Common stock, $0.001 par value, 125,000 shares authorized, 42,028 and 44,145 shares issued and outstanding at September 30, 2015 and December 31, 2014
 
42

 
44

Additional paid-in capital
 
2,672,726

 
2,717,854

Accumulated deficit
 
(1,341,357
)
 
(1,052,969
)
Accumulated other comprehensive income
 
88,033

 
84,354

Total Stockholders’ Equity
 
$
1,419,452

 
$
1,749,291

Total Liabilities and Stockholders’ Equity
 
$
14,396,404

 
$
16,285,798


See notes to condensed consolidated financial statements.


1
ARMOUR Residential REIT, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)


 
 
For the Quarters Ended
 
For the Nine Months Ended
 
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Interest income, net of amortization of premium on Agency Securities
 
$
85,643

 
$
107,481

 
$
276,896

 
$
344,455

Interest expense- Repurchase agreements
 
(14,431
)
 
(15,006
)
 
(42,539
)
 
(44,732
)
Interest expense- U.S. Treasury Securities sold short
 
—

 
(160
)
 
—

 
(4,423
)
Net Interest Income
 
$
71,212

 
$
92,315

 
$
234,357

 
$
295,300

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

 
(12,390
)
 
1,562

 
68,646

Gain (loss) on short sale of U.S. Treasury Securities
 
—

 
3,086

 
—

 
(12,695
)
Subtotal
 
$
69

 
$
(9,304
)
 
$
1,562

 
$
55,951

Realized loss on derivatives (1)
 
(17,400
)
 
(34,655
)
 
(69,280
)
 
(80,891
)
Unrealized gain (loss) on derivatives
 
(266,074
)
 
14,708

 
(287,905
)
 
(277,920
)
Subtotal
 
$
(283,474
)
 
$
(19,947
)
 
$
(357,185
)
 
$
(358,811
)
Total Other Loss
 
$
(283,405
)

$
(29,251
)
 
$
(355,623
)
 
$
(302,860
)
Expenses:
 
 
 
 
 
 
 
 
Management fee
 
6,851

 
6,963

 
20,595

 
20,893

Professional fees
 
878

 
616

 
2,329

 
2,791

Insurance
 
174

 
182

 
516

 
551

Compensation
 
543

 
684

 
1,731

 
2,130

Other
 
914

 
527

 
2,566

 
1,950

Total Expenses
 
$
9,360

 
$
8,972

 
$
27,737

 
$
28,315

Net Income (Loss)
 
$
(221,553
)
 
$
54,092

 
$
(149,003
)
 
$
(35,875
)
Dividends declared on preferred stock
 
(3,905
)
 
(3,905
)
 
(11,716
)
 
(11,718
)
Net Income (Loss) available (related) to common stockholders
 
$
(225,458
)
 
$
50,187

 
$
(160,719
)
 
$
(47,593
)
Net income (loss) per share available (related) to common stockholders (Note 12):
 
 
 
 
 
 
 
 
Basic
 
$
(5.18
)
 
$
1.12

 
$
(3.68
)
 
$
(1.04
)
Diluted
 
$
(5.18
)
 
$
1.12

 
$
(3.68
)
 
$
(1.04
)
Dividends declared per common share
 
$
0.98

 
$
1.20

 
$
2.90

 
$
3.60

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
43,561

 
44,650

 
43,709

 
44,658

Diluted
 
43,561

 
44,795

 
43,709

 
44,658

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


2
ARMOUR Residential REIT, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)


 
 
For the Quarters Ended
 
For the Nine Months Ended
 
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Net Income (Loss)
 
$
(221,553
)
 
$
54,092

 
$
(149,003
)
 
$
(35,875
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Reclassification adjustment for realized (gain) loss on sale of available for sale Agency Securities
 
(69
)
 
12,390

 
(1,562
)
 
(68,646
)
Net unrealized gain (loss) on available for sale Agency Securities
 
137,312

 
(124,033
)
 
5,241

 
213,898

Other comprehensive income (loss)
 
$
137,243

 
$
(111,643
)
 
$
3,679

 
$
145,252

Comprehensive Income (Loss)
 
$
(84,310
)
 
$
(57,551
)
 
$
(145,324
)
 
$
109,377

 
See notes to condensed consolidated financial statements.


3
ARMOUR Residential REIT, Inc. and Subsidiary
CONDENSED CONSOLIDATED 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 Income (Loss)
 
Total
Balance, January 1, 2015
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
44,145

 
$
44

 
$
2,528,135

 
$
2,717,854

 
$
(1,052,969
)
 
$
84,354

 
$
1,749,291

Series A Preferred dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,373
)
 
—

 
(3,373
)
Series B Preferred dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,343
)
 
—

 
(8,343
)
Common stock dividends declared
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(127,669
)
 
—

 
(127,669
)
Issuance of common stock, net
—

 
—

 
—

 
—

 
—

 
—

 
5

 
—

 
124

 
124

 
—

 
—

 
124

Stock based compensation, net of withholding requirements
—

 
—

 
—

 
—

 
—

 
—

 
31

 
—

 
717

 
717

 
—

 
—

 
717

Common stock repurchased
—

 
—

 
—

 
—

 
—

 
—

 
(2,153
)
 
(2
)
 
(45,969
)
 
(45,969
)
 
—

 
—

 
(45,971
)
Net Income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(149,003
)
 
—

 
(149,003
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,679

 
3,679

Balance, September 30, 2015
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
42,028

 
$
42

 
$
2,483,007

 
$
2,672,726

 
$
(1,341,357
)
 
$
88,033

 
$
1,419,452

 
See notes to condensed consolidated financial statements.

4
ARMOUR Residential REIT, Inc. and Subsidiary
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 
For the Nine Months Ended
 
 
September 30, 2015
 
September 30, 2014
Cash Flows From Operating Activities:
 
 
 
 
Net loss
 
$
(149,003
)
 
$
(35,875
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
Net amortization of premium on Agency Securities
 
85,203

 
56,895

Realized gain on sale of Agency Securities
 
(1,562
)
 
(68,646
)
Loss on short sale of U.S. Treasury Securities
 
—

 
12,695

Stock based compensation
 
717

 
879

Changes in operating assets and liabilities:
 
 
 
 
(Increase) decrease in accrued interest receivable
 
4,348

 
(2,417
)
Increase in prepaid and other assets
 
(3,195
)
 
(486
)
Decrease in derivatives, at fair value
 
260,340

 
259,143

Increase (decrease) in accrued interest payable
 
(3,082
)
 
2,935

Decrease in accounts payable and other accrued expenses
 
(13,278
)
 
(19,944
)
Net cash provided by operating activities
 
$
180,488

 
$
205,179

Cash Flows From Investing Activities:
 
 
 
 
Purchases of Agency Securities
 
(3,485,806
)
 
(10,738,277
)
Principal repayments of Agency Securities
 
1,486,497

 
1,288,023

Proceeds from sales of Agency Securities
 
3,395,902

 
7,423,494

Disbursements on reverse repurchase agreements
 
—

 
(4,105,908
)
Receipts from reverse repurchase agreements
 
—

 
4,105,908

Increase in cash collateral posted to/by counterparties
 
(333,103
)
 
(247,503
)
Net cash provided by (used in) investing activities
 
$
1,063,490

 
$
(2,274,263
)
Cash Flows From Financing Activities:
 
 
 
 
Issuance of common stock, net of expenses
 
124

 
207

Proceeds from repurchase agreements
 
64,947,629

 
60,158,249

Principal repayments on repurchase agreements
 
(66,233,977
)
 
(57,854,668
)
Proceeds from short sales of U.S. Treasury Securities
 
—

 
1,011,705

Purchases of U.S. Treasury Securities
 
—

 
(1,024,400
)
Series A Preferred stock dividends paid
 
(3,373
)
 
(3,375
)
Series B Preferred stock dividends paid
 
(8,343
)
 
(8,343
)
Common stock dividends paid
 
(127,669
)
 
(161,395
)
Common stock repurchased
 
(36,441
)
 
(2,585
)
Net cash provided by (used in) financing activities
 
$
(1,462,050
)
 
$
2,115,395

Net increase (decrease) in cash
 
(218,072
)
 
46,311

Cash - beginning of period
 
494,561

 
496,478

Cash - end of period
 
$
276,489

 
$
542,789

Supplemental Disclosure:
 
 
 
 
Cash paid during the period for interest
 
$
184,928

 
$
197,100

Non-Cash Investing and Financing Activities:
 
 
 
 
Receivable for unsettled sales
 
$
—

 
$
3,002,570

Net unrealized gain on available for sale Agency Securities
 
$
5,241

 
$
213,898

Amounts receivable for issuance of common stock
 
$
—

 
$
7

Amounts payable for common stock repurchased
 
$
(9,530
)
 
$
—

See notes to condensed consolidated financial statements

5
ARMOUR Residential REIT, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(Unaudited)


 
Note 1 – Basis of Presentation
 
The accompanying condensed 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 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. Certain prior year amounts have been reclassified to conform to the current year's presentation. All per share amounts, common shares outstanding and stock-based compensation amounts for all periods presented reflect our one-for-eight reverse stock split (the “Reverse Stock Split”), which was effective July 31, 2015. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2015. 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, 2014.
 
The condensed consolidated financial statements include the accounts of ARMOUR Residential REIT, Inc. and its subsidiary. All intercompany accounts and transactions have been eliminated. 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 consolidated financial statements include the valuation of Agency Securities (as defined below) and derivative instruments.

References to “we,” “us,” “our,” “ARMOUR” or the “Company” are to ARMOUR Residential REIT, Inc. References to “ACM” are to ARMOUR Capital Management LP, a Delaware limited partnership, formerly known as ARMOUR Residential    Management LLC. On December 19, 2014, ARMOUR Residential Management LLC, our external manager under the Management Agreement (as defined below), changed its name to ARMOUR Capital Management LP and converted from a Delaware limited liability company to a Delaware limited partnership and continued as the manager under the same Management Agreement (the “Conversion”).

Note 2 – Organization and Nature of Business Operations
 
We are an externally managed Maryland corporation organized in 2008, managed by ACM, an investment advisor registered with the SEC (see Note 9, “Commitments and Contingencies” and Note 14, “Related Party Transactions” for additional discussion). 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. At September 30, 2015 and December 31, 2014, 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 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,

6
ARMOUR Residential REIT, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(Unaudited)


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.
 
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 for our interest rate swap contracts (including swaptions and basis swap contracts), Eurodollar Futures Contracts (“Futures Contracts”) and repurchase agreements on our Agency Securities and our Agency Securities purchased or sold on a to-be-announced basis (“TBA Agency Securities”).
Agency Securities, Available For Sale
 
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. At September 30, 2015 and December 31, 2014, all of our Agency Securities were classified as available for sale securities. 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 consolidated statements of 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 Agency Securities. Accrued interest payable includes interest payable on our repurchase agreements and may, at certain times, contain interest payable on U.S. Treasury Securities sold short.
 
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

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


represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day. We did not have any reverse repurchase agreements outstanding at September 30, 2015 and December 31, 2014.
 
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 consolidated balance sheets. Interest is recorded on the repurchase agreements, reverse repurchase agreements and U.S. Treasury Securities sold short on an accrual basis and presented as 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 obligations to return securities received as collateral at September 30, 2015 and December 31, 2014.

Derivatives, at Fair Value
 
We recognize all derivatives as either assets or liabilities at fair value on our condensed consolidated balance sheets. All changes in the fair values of our derivatives are reflected in our condensed consolidated statements of operations. We designate derivatives as hedges for tax purposes and any unrealized derivative gains or losses would not affect our distributable net taxable income. These transactions include interest rate swap contracts, interest rate swaptions and basis swap contracts. We also 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). Pursuant to TBA Agency Securities, 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.

Preferred Stock
 
At September 30, 2015, 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. We have designated 9,610 shares as 8.250% Series A Preferred Stock and 6,210 shares as 7.875% Series B Preferred Stock. At September 30, 2015, a total of 34,180 shares of our authorized preferred stock remain available for designation as future series.
 

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


Series A Preferred Stock
 
At September 30, 2015 and December 31, 2014, we had 2,181 shares of Series A Preferred Stock issued and outstanding with a par value of $0.001 per share and a liquidation preference of $25.00 per share, or $54,514 in the aggregate. At September 30, 2015 and December 31, 2014, there were no accrued or unpaid dividends on the Series A Preferred Stock. The Series A Preferred Stock is entitled to a dividend at a rate of 8.250% per year based on the $25.00 per share 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.
 
Series B Preferred Stock
 
At September 30, 2015 and December 31, 2014, we had 5,650 shares of Series B Preferred Stock issued and outstanding with a par value of $0.001 per share and a liquidation preference of $25.00 per share, or $141,250 in the aggregate. At September 30, 2015 and December 31, 2014, there were no accrued or unpaid dividends on the Series B Preferred Stock. The Series B Preferred Stock is entitled to a dividend at a rate of 7.875% per year based on the $25.00 per share 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 ranks 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
 
On June 18, 2015, we announced that our Board of Directors had approved a Reverse Stock Split. The Reverse Stock Split took effect at approximately 5:00 p.m. Eastern Time on July 31, 2015 (the “Effective Time”). At the Effective Time, every eight issued and outstanding shares of common stock was converted into one share of common stock, and as a result, the number of outstanding shares of common stock was reduced from approximately 350,000 to approximately 43,750. At the Effective Time, the number of authorized shares of common stock was also reduced, on a one-for-eight basis, from 1,000,000 to 125,000. The par value of each share of common stock remained unchanged. No fractional shares were issued in connection with the Reverse Stock Split.

At September 30, 2015, we were authorized to issue up to 125,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had 42,028 shares of common stock issued and outstanding at September 30, 2015 and 44,145 shares of common stock issued and outstanding at December 31, 2014.
 

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


Common Stock Repurchased
 
On March 5, 2014, our Board increased the authorization under our common stock repurchase program (the "Repurchase Program") to 50,000 shares of our common stock outstanding (on a pre-reverse stock split basis). On July 28, 2015, our Board of Directors increased the number of shares of common stock authorized for repurchase under our Repurchase Program to an aggregate of 9,000 shares on a post-reverse stock split basis, effective August 3, 2015. 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 nine months ended September 30, 2015, we repurchased 2,153 shares of our common stock under the Repurchase Program for an aggregate of $45,971. See also Note 16, "Subsequent Events" for additional discussion.
 
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 mortgage backed securities (“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.

Fair Value of Agency Securities: We invest in Agency Securities representing interests in or obligations backed by pools of fixed rate, hybrid adjustable rate and adjustable rate mortgage loans. The authoritative literature requires us to classify our investments as either trading, available for sale or held to maturity 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. We currently classify all of our Agency Securities 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 statements of comprehensive income (loss).

Security purchase and sale transactions, including purchase of TBA Agency Securities, are recorded on the trade date to the extent it is probable that we will take or make timely physical delivery of the related securities. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method.

Impairment of Assets: 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.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) refers to changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.
 
Note 4 – Recent Accounting Pronouncements

In June 2014, the Financial Accounting Standards Board issued ASU 2014-11, Repurchase-to Maturity Transactions, Repurchase Financing, and Disclosures, Transfers and Servicing (Topic 860). We do not have repurchase-to-maturity transactions or repurchase financing arrangements of the type covered by ASU 2014-11, therefore this amendment to the accounting standards will not affect our condensed consolidated balance sheets or statements of operations. The amendment also required certain additional disclosures about repurchase agreements beginning with the second quarter 2015 financial statements. See Note 7, “Repurchase Agreements.”

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



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

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

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 and is classified as Level 1. Cash balances posted by us to counterparties or posted by counterparties to us as collateral are classified as Level 2 because they are integrally related to the Company's repurchase financing and interest rate swap agreements, which 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 pricing indications from up to three dealers who make markets in similar Agency Securities. Management reviews pricing used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third party pricing services, dealer pricing indications and comparisons to a third party pricing model. Fair values obtained from the third party pricing services for similar instruments are classified as Level 2 securities if the inputs to the pricing models used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the third party pricing service, but dealer pricing indications are, the security will be classified as a Level 2 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information and classify it as a Level 3 security. At September 30, 2015 and December 31, 2014, all of our Agency Security fair values are classified as Level 2 based on the inputs used by our third party pricing services and dealer quotes.

Receivables and Payables for Unsettled Sales and Purchases - The carrying amount is generally deemed to be fair value because of the relatively short time to settlement. Such receivables and payables are classified as Level 2 because they are effectively secured by the related securities and could potentially be subject to counterparty credit considerations.
 
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.

Obligations to Return Securities Received as Collateral - The fair value of the obligations to return securities received as collateral are based upon the prices of the related U.S. Treasury Securities obtained from a third party pricing service. Such obligations are classified as Level 1.

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



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, interest rate swaptions and basis swaps 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. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. 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, interest rate swaptions, basis swap contracts and TBA Agency Securities are classified as Level 2.

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014.
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at September 30, 2015
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
13,636,947

 
$
—

 
$
13,636,947

Derivatives
 
$
—

 
$
18,464

 
$
—

 
$
18,464

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Derivatives
 
$
—

 
$
355,679

 
$
—

 
$
355,679

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the nine months ended September 30, 2015.
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at December 31, 2014
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
15,297,529

 
$
—

 
$
15,297,529

Derivatives
 
$
—

 
$
60,518

 
$
—

 
$
60,518

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Derivatives
 
$
180

 
$
137,213

 
$
—

 
$
137,393

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the year ended December 31, 2014.


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


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 at September 30, 2015 and December 31, 2014.
 
September 30, 2015
 
 
 
 
 
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
 
$
276,489

 
$
276,489

 
$
276,489

 
$
—

 
$
—

Cash collateral posted to counterparties
 
$
422,736

 
$
422,736

 
$
—

 
$
422,736

 
$
—

Principal payments receivable
 
$
26

 
$
26

 
$
—

 
$
26

 
$
—

Accrued interest receivable
 
$
36,967

 
$
36,967

 
$
—

 
$
36,967

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
12,595,573

 
$
12,595,573

 
$
—

 
$
12,595,573

 
$
—

Cash collateral posted by counterparties
 
$
8,869

 
$
8,869

 
$
—

 
$
8,869

 
$
—

Accrued interest payable- repurchase agreements
 
$
3,930

 
$
3,930

 
$
—

 
$
3,930

 
$
—


December 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
 
$
494,561

 
$
494,561

 
$
494,561

 
$
—

 
$
—

Cash collateral posted to counterparties
 
$
129,004

 
$
129,004

 
$
—

 
$
129,004

 
$
—

Receivable for unsettled sales
 
$
260,598

 
$
260,598

 
$
—

 
$
260,598

 
$
—

Principal payments receivable
 
$
93

 
$
93

 
$
—

 
$
93

 
$
—

Accrued interest receivable
 
$
41,915

 
$
41,915

 
$
—

 
$
41,915

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
13,881,921

 
$
13,881,921

 
$
—

 
$
13,881,921

 
$
—

Cash collateral posted by counterparties
 
$
48,240

 
$
48,240

 
$
—

 
$
48,240

 
$
—

Payable for unsettled purchases
 
$
445,292

 
$
445,292

 
$
—

 
$
445,292

 
$
—

Accrued interest payable- repurchase agreements
 
$
7,012

 
$
7,012

 
$
—

 
$
7,012

 
$
—

 
Note 6 – 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). At September 30, 2015 and December 31, 2014, investments in Agency Securities accounted for 100% of our securities portfolio.


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


We evaluated our Agency Securities with unrealized losses at September 30, 2015, September 30, 2014 and December 31, 2014, to determine whether there was an other than temporary impairment. All of our Agency Securities are issued and guaranteed by GSEs or Ginnie Mae. The GSEs have a long term credit rating of AA+. At those dates, 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. As a result of this evaluation, no other than temporary impairment was recognized for the quarters and nine months ended September 30, 2015 and September 30, 2014 and for the year ended December 31, 2014, respectively, because we determined that we 1) did not have the intent to sell the Agency Securities in an unrealized loss position, 2) did not believe it more likely than not that we were required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations), and/or (3) determined that a credit loss did not exist.

At September 30, 2015, 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 at September 30, 2015 are also presented below. Our Agency Securities had a weighted average coupon of 3.44% at September 30, 2015.
September 30, 2015
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
 
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
$
48,396

 
$
(104
)
 
$
674

 
$
48,966

 
0.36
%
Multi-Family MBS
 
2,484,526

 
(11,697
)
 
34,370

 
2,507,199

 
18.39

10 Year Fixed
 
43,857

 
(43
)
 
638

 
44,452

 
0.33

15 Year Fixed
 
4,738,080

 
(243
)
 
44,923

 
4,782,760

 
35.07

20 Year Fixed
 
2,808,753

 
(10,356
)
 
15,034

 
2,813,431

 
20.63

25 Year Fixed
 
32,546

 
(106
)
 
—

 
32,440

 
0.24

30 Year Fixed
 
1,477,079

 
(62
)
 
9,789

 
1,486,806

 
10.90

Total Fannie Mae
 
$
11,633,237

 
$
(22,611
)
 
$
105,428

 
$
11,716,054

 
85.92
%
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
13,233

 
(34
)
 
219

 
13,418

 
0.10
%
10 Year Fixed
 
32,896

 
(40
)
 
883

 
33,739

 
0.25

15 Year Fixed
 
210,351

 
(159
)
 
1,535

 
211,727

 
1.55

20 Year Fixed
 
1,595,213

 
(5,406
)
 
8,531

 
1,598,338

 
11.72

Total Freddie Mac
 
$
1,851,693

 
$
(5,639
)
 
$
11,168

 
$
1,857,222

 
13.62
%
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
63,664

 
(463
)
 
128

 
63,329

 
0.46
%
15 Year Fixed
 
320

 
—

 
22

 
342

 
0.00

Total Ginnie Mae
 
$
63,984

 
$
(463
)
 
$
150

 
$
63,671

 
0.46
%
Total Agency Securities
 
$
13,548,914

 
$
(28,713
)
 
$
116,746

 
$
13,636,947

 
100.00
%

There were no unsettled purchases at September 30, 2015.

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


At December 31, 2014, 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 at December 31, 2014 are also presented below. Our Agency Securities had a weighted average coupon of 3.47% at December 31, 2014.
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
$
40,410

 
$
(119
)
 
$
729

 
$
41,020

0.27
%
Multi-Family MBS
 
1,239,227

 
—

 
22,676

 
1,261,903

8.25

10 Year Fixed
 
5,336

 
(3
)
 
201

 
5,534

0.04

15 Year Fixed
 
7,394,694

 
(539
)
 
54,041

 
7,448,196

48.69

20 Year Fixed
 
3,050,676

 
(13,867
)
 
16,756

 
3,053,565

19.96

25 Year Fixed
 
21,194

 
(55
)
 
—

 
21,139

0.14

30 Year Fixed
 
1,249,696

 
(227
)
 
5,765

 
1,255,234

8.21

Total Fannie Mae
 
$
13,001,233

 
$
(14,810
)
 
$
100,168

 
$
13,086,591

85.56
%
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
14,049

 
(33
)
 
246

 
14,262

0.09

10 Year Fixed
 
600

 
(3
)
 
8

 
605

0.00

15 Year Fixed
 
239,438

 
(315
)
 
2,499

 
241,622

1.58

20 Year Fixed
 
1,881,496

 
(12,258
)
 
8,346

 
1,877,584

12.27

Total Freddie Mac
 
$
2,135,583

 
$
(12,609
)
 
$
11,099

 
$
2,134,073

13.94
%
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
75,962

 
(187
)
 
665

 
76,440

0.50

15 Year Fixed
 
397

 
—

 
28

 
425

0.00

Total Ginnie Mae
 
$
76,359

 
$
(187
)
 
$
693

 
$
76,865

0.50
%
Total Agency Securities
 
$
15,213,175

 
$
(27,606
)
 
$
111,960

 
$
15,297,529

100.00
%

Included in the table above are unsettled purchases with an aggregate cost of $445,292 and estimated fair value of $445,527 at December 31, 2014.
 
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 at September 30, 2015 and December 31, 2014.
 
 
September 30, 2015
 
December 31, 2014
Weighted Average Life of all Agency Securities
 
Fair Value
 
Amortized
Cost 
 
Fair Value
 
Amortized
Cost 
Less than one year
 
$
23

 
$
23

 
$
—

 
$
—

Greater than or equal to one year and less than three years
 
33,898

 
33,805

 
48,298

 
47,929

Greater than or equal to three years and less than five years
 
9,051,441

 
8,994,965

 
10,712,331

 
10,667,135

Greater than or equal to five years
 
4,551,585

 
4,520,121

 
4,536,900

 
4,498,111

Total Agency Securities
 
$
13,636,947

 
$
13,548,914

 
$
15,297,529

 
$
15,213,175

 

15
ARMOUR Residential REIT, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED 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 at September 30, 2015 and December 31, 2014 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 at September 30, 2015 and December 31, 2014.
 
 
Unrealized Loss Position For:
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized
Losses 
 
Fair Value
 
Unrealized
Losses 
 
Fair Value
 
Unrealized
Losses 
September 30, 2015
 
$
1,900,795

 
$
(15,319
)
 
$
1,920,118

 
$
(13,394
)
 
$
3,820,913

 
$
(28,713
)
December 31, 2014
 
$
895,382

 
$
(2,324
)
 
$
2,463,523

 
$
(25,282
)
 
$
3,358,905

 
$
(27,606
)
 
During the quarters and nine months ended September 30, 2015, we sold $331,196 and $3,148,831, respectively, of Agency Securities, which resulted in realized gains of $69 and $1,562, respectively. During the quarters and nine months ended September 30, 2014, we sold $3,646,212 and $10,428,693, respectively of Agency Securities, which resulted in realized (loss) gain of $(12,390) and $68,646, respectively. Sales of Agency Securities are done to reposition our securities portfolio and to reach our target level of liquidity.

Note 7 – Repurchase Agreements
 
The following table represents the contractual repricing regarding our repurchase agreements to finance Agency Security purchases at September 30, 2015 and December 31, 2014. No amounts below are subject to offsetting.
 
 
September 30, 2015
 
December 31, 2014
 
 
Repurchase Agreements
 
Weighted Average Contractual Rate
 
Repurchase Agreements
 
Weighted Average Contractual Rate
Within 30 days
 
$
6,308,846

 
0.46
%
 
$
3,994,656

 
0.36
%
31 days to 60 days
 
3,437,776

 
0.50
%
 
5,631,858

 
0.37
%
61 days to 90 days
 
2,103,675

 
0.49
%
 
2,348,839

 
0.39
%
Greater than 90 days
 
745,276

 
0.54
%
 
1,906,568

 
0.44
%
Total or Weighted Average
 
$
12,595,573

 
0.48
%
 
$
13,881,921

 
0.38
%
 
 
Our repurchase agreements require that we maintain adequate pledged collateral. A decline in the value of the Agency Securities pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital. We also may receive cash or securities as collateral from our derivative counterparties which we may use as additional collateral for repurchase agreements. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

The following table represents the MRAs and other information regarding our repurchase agreements to finance Agency Security purchases at September 30, 2015 and December 31, 2014.

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


 
 
September 30, 2015
 
December 31, 2014
Number of MRAs
 
37

 
40

Number of counterparties with repurchase agreements outstanding
 
27

 
28

Weighted average maturity in days
 
46

 
60

Haircut for repurchase agreements (1)
 
4.84
%
 
4.81
%
(1)
The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount. Among other things, it is a measure of our unsecured credit risk to our lenders.

At September 30, 2015, 8 repurchase agreement counterparties individually accounted for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for approximately 50.88% of our repurchase agreement borrowings outstanding at September 30, 2015. At December 31, 2014, we had 7 repurchase agreement counterparties that individually accounted for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for approximately 48.11% of our repurchase agreement borrowings outstanding at December 31, 2014. At September 30, 2015 and December 31, 2014, we did not have any repurchase counterparties that individually account for 5% or greater of our stockholders' equity.

Note 8 – 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. Basis swap contracts allow us to exchange one floating interest rate basis for another, for example, 3 month LIBOR and Fed Funds Rates, thereby allowing us to diversify our floating rate basis exposures. We also utilize forward contracts for the purchase or sale of TBA Agency Securities.
 
We have agreements with our derivative counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts, swaptions, basis swap contracts and TBA Agency Securities. 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 fair 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.

TBA Agency Securities are forward contracts for the purchase ("long position") or sale ("short position") of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA Agency Securities as a means of hedging against short-term changes in interest rates. We may also enter into TBA Agency Securities as a means of acquiring or disposing of Agency Securities and we may from time to time utilize TBA dollar roll transactions to finance Agency Security purchases.

We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities.
 

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


The following tables present information about our derivatives on the accompanying condensed consolidated balance sheets at September 30, 2015 and December 31, 2014.
 
September 30, 2015

Derivative Type
 
Remaining / Underlying Term
 
Weighted Average Remaining Swap / Option Term (Months)
 
Weighted Average Rate
 
Notional Amount (3)
 
Asset Fair Value (1)
 
Liability Fair Value (1)
Interest rate swap contracts
 
   0-12 Months
 
6

 
1.24
%
 
$
2,925,000

 
$
—

 
$
(30,992
)
Interest rate swap contracts
 
13-24 Months
 
22

 
0.63
%
 
350,000

 
—

 
(1,013
)
Interest rate swap contracts
 
25-36 Months
 
30

 
1.16
%
 
700,000

 
—

 
(5,134
)
Interest rate swap contracts
 
49-60 Months
 
50

 
1.47
%
 
2,350,000

 
—

 
(43,361
)
Interest rate swap contracts
 
73-84 Months
 
78

 
2.05
%
 
1,025,000

 
—

 
(34,484
)
Interest rate swap contracts
 
85-96 Months
 
89

 
2.13
%
 
1,625,000

 
—

 
(47,028
)
Interest rate swap contracts
 
109-120 Months
 
111

 
2.66
%
 
1,000,000

 
—

 
(101,151
)
Interest rate swap contracts
 
121-132 Months
 
126

 
2.29
%
 
2,350,000

 
—

 
(91,699
)
Basis swap contracts (2)
 
0-60 Months
 
28

 
0.22
%
 
2,000,000

 
—

 
(817
)
TBA Agency Securities
 
—
 
—

 
—

 
1,600,000

 
18,464

 
—

Total or Weighted Average
 
 
 
 
 
$
15,925,000

 
$
18,464

 
$
(355,679
)
(1)
See Note 5, “Fair Value of Financial Instruments” for additional discussion.
(2)
Weighted average rate is the spread over the pay index.
(3)
Notional amount includes $6,375,000 of forward starting interest rate swap contracts which become effective within 9 months.
 
December 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
 
5
 
1.13
%
 
$
920,000

 
$
—

 
$
(9,349
)
Interest rate swap contracts
 
13-24 Months
 
16
 
1.23
%
 
2,900,000

 
—

 
(54,396
)
Interest rate swap contracts
 
25-36 Months
 
31
 
0.63
%
 
350,000

 
2,083

 
—

Interest rate swap contracts
 
37-48 Months
 
37
 
1.00
%
 
300,000

 
2,090

 
—

Interest rate swap contracts
 
49-60 Months
 
59
 
1.56
%
 
2,000,000

 
—

 
(7,414
)
Interest rate swap contracts
 
61-72 Months
 
61
 
1.48
%
 
300,000

 
2,921

 
—

Interest rate swap contracts
 
85-96 Months
 
91
 
1.47
%
 
2,450,000

 
50,650

 
—

Interest rate swap contracts
 
97-108 Months
 
98
 
2.08
%
 
2,800,000

 
2,774

 
(7,534
)
Interest rate swap contracts
 
121-132 Months
 
120
 
2.66
%
 
1,000,000

 
—

 
(58,520
)
Futures Contracts
 
0-15 Months
 
9
 
2.11
%
 
10,000

 
—

 
(180
)
Total or Weighted Average
 
63
 
1.60
%
 
$
13,030,000

 
$
60,518

 
$
(137,393
)
(1)
See Note 5, “Fair Value of Financial Instruments” for additional discussion.


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


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 our derivatives and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed consolidated 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 consolidated balance sheet at September 30, 2015.
September 30, 2015
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Assets
 
Gross and Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Interest rate swap contracts
 
$
—

 
$
(354,862
)
 
$
406,250

 
$
51,388

TBA Agency Securities
 
$
18,464

 
$
—

 
$
(5,703
)
 
12,761

Totals
 
$
18,464

 
$
(354,862
)
 
$
400,547

 
$
64,149

September 30, 2015
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Liabilities
 
Gross and Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Interest rate swap contracts
 
$
(354,862
)
 
$
354,862

 
$
—

 
$
—

Basis swap contracts
 
(817
)
 
—

 
—

 
(817
)
Totals
 
$
(355,679
)
 
$
354,862

 
$
—

 
$
(817
)
 
The following tables present information about our derivatives and the potential effects of netting if we were to offset the assets and liabilities of these financial instruments on the accompanying condensed consolidated 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 consolidated balance sheet at December 31, 2014.
December 31, 2014
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Assets
 
Gross and Net Amounts of Assets Presented in the Condensed Consolidated
Balance Sheet
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Interest rate swap contracts
 
$
60,518

 
$
(137,213
)
 
$
119,561

 
$
42,866

Totals
 
$
60,518

 
$
(137,213
)
 
$
119,561

 
$
42,866

 

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


December 31, 2014
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Liabilities
 
Gross and Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Financial
Instruments
 
Cash Collateral
 
Net Amount
Interest rate swap contracts
 
$
(137,213
)
 
$
137,213

 
$
—

 
$
—

Futures Contracts
 
(180
)
 
—

 
227

 
47

Totals
 
$
(137,393
)
 
$
137,213

 
$
227

 
$
47

 

20
ARMOUR Residential REIT, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED 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 consolidated statements of operations for the quarters and nine months ended September 30, 2015 and September 30, 2014.
 
 
 
 
Income (Loss) Recognized
 
 
 
 
For the Quarters Ended
 
For the Nine Months Ended
Derivative Type
 
Location on Condensed Consolidated Statements of Operations
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Interest rate swap contracts:
 
 
 
 
 
 
 
 
 
 
Realized gain (loss)
 
Realized loss on derivatives
 
$
—

 
$
—

 
$
28,346

 
$
—

Interest income
 
Realized loss on derivatives
 
2,837

 
3,511

 
10,262

 
10,253

Interest expense
 
Realized loss on derivatives
 
(24,864
)
 
(37,940