Document



 

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, 2016
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 (§232.405 of this chapter) 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 1, 2016 was 36,713,354.




 


ARMOUR Residential REIT, Inc. and Subsidiaries
TABLE OF CONTENTS





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


 PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
 
Cash
 
$
401,825

 
$
289,925

Cash collateral posted to counterparties
 
281,397

 
263,799

Agency Securities, available for sale, at fair value (including pledged securities of $6,913,094 at September 30, 2016 and $12,109,868 at December 31, 2015)
 
7,041,228

 
12,461,556

Non-Agency Securities, trading, at fair value (including pledged securities of $1,001,319 at September 30, 2016 and $0 at December 31, 2015)
 
1,001,319

 
—

Interest-Only Securities, trading, at fair value
 
95,918

 
—

Derivatives, at fair value
 
10,194

 
999

Principal payments receivable
 
—

 
37

Accrued interest receivable
 
19,271

 
34,500

Prepaid and other
 
3,850

 
4,461

Total Assets
 
$
8,855,002

 
$
13,055,277

Liabilities and Stockholders’ Equity
 
 
 
 
Liabilities:
 
 
 
 
Repurchase agreements
 
$
7,360,670

 
$
11,570,481

Cash collateral posted by counterparties
 
15,496

 
—

Derivatives, at fair value
 
243,223

 
233,301

Accrued interest payable- repurchase agreements
 
6,025

 
7,724

Accounts payable and other accrued expenses
 
9,271

 
18,605

Total Liabilities
 
$
7,634,685

 
$
11,830,111

 
 
 
 
 
Commitments and contingencies (Note 10)
 

 

 
 
 
 
 
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)
 
2

 
2

7.875% Series B Cumulative Preferred Stock; 5,650 issued and outstanding ($141,250 aggregate liquidation preference)
 
6

 
6

Common stock, $0.001 par value, 125,000 shares authorized, 36,713 and 36,682 shares issued and outstanding at September 30, 2016 and December 31, 2015
 
37

 
37

Additional paid-in capital
 
2,560,021

 
2,559,361

Accumulated deficit
 
(1,505,020
)
 
(1,266,938
)
Accumulated other comprehensive income (loss)
 
165,271

 
(67,302
)
Total Stockholders’ Equity
 
$
1,220,317

 
$
1,225,166

Total Liabilities and Stockholders’ Equity
 
$
8,855,002

 
$
13,055,277

 
See notes to condensed consolidated financial statements.

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


 
 
For the Quarter
Ended
 
For the Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Interest Income:
 
 
 
 
 
 
 
 
Agency Securities, net of amortization of premium and fees
 
$
44,544

 
$
85,643

 
$
178,733

 
$
276,896

Non-Agency Securities, including discount accretion
 
12,969

 
—

 
23,148

 
—

Interest-Only Securities
 
852

 
—

 
855

 
—

Total Interest Income
 
$
58,365

 
$
85,643

 
$
202,736

 
$
276,896

Interest expense- repurchase agreements
 
(17,040
)
 
(14,431
)
 
(54,464
)
 
(42,539
)
Net Interest Income
 
$
41,325


$
71,212


$
148,272


$
234,357

Other Income (Loss):
 
 
 
 
 
 
 
 
Realized gain on sale of Agency Securities (reclassified from Other comprehensive income (loss))
 
2,421

 
69

 
18,937

 
1,562

Gain on Non-Agency Securities
 
39,522

 
—

 
53,795

 
—

Loss on Interest-Only Securities
 
(1,105
)
 
—

 
(2,348
)
 
—

Bargain purchase price on acquisition of JAVELIN
 
—

 
—

 
6,484

 
—

Subtotal
 
$
40,838


$
69


$
76,868


$
1,562

Realized gain (loss) on derivatives (1)
 
19,816

 
(17,400
)
 
(338,804
)
 
(69,280
)
Unrealized gain (loss) on derivatives
 
25,824

 
(266,074
)
 
2,907

 
(287,905
)
Subtotal
 
$
45,640

 
$
(283,474
)
 
$
(335,897
)
 
$
(357,185
)
Total Other Income (Loss)
 
$
86,478


$
(283,405
)

$
(259,029
)
 
$
(355,623
)
Expenses:
 
 
 
 
 
 
 
 
Management fees
 
6,521

 
6,851

 
19,549

 
20,595

Professional fees
 
1,090

 
878

 
4,756

 
2,329

Insurance
 
283

 
174

 
727

 
516

Compensation
 
530

 
543

 
1,636

 
1,731

Other
 
691

 
914

 
2,188

 
2,566

Total Expenses
 
$
9,115

 
$
9,360

 
$
28,856

 
$
27,737

Net Income (Loss)
 
$
118,688


$
(221,553
)

$
(139,613
)
 
$
(149,003
)
Dividends on preferred stock
 
(3,905
)
 
(3,905
)
 
(11,716
)
 
(11,716
)
Net Income (Loss) related to common stockholders
 
$
114,783


$
(225,458
)

$
(151,329
)
 
$
(160,719
)
Net Income (Loss) per share related to common stockholders
 (Note 13):
 
 
 
 
 
 
 
 
Basic
 
$
3.13

 
$
(5.18
)
 
$
(4.12
)
 
$
(3.68
)
Diluted
 
$
3.12

 
$
(5.18
)
 
$
(4.12
)
 
$
(3.68
)
Dividends declared per common share
 
$
0.66

 
$
0.98

 
$
2.36

 
$
2.90

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
36,703

 
43,561

 
36,693

 
43,709

Diluted
 
36,746

 
43,561

 
36,693

 
43,709

(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 9 to the condensed consolidated financial statements.
 
See notes to condensed consolidated financial statements.


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


 
 
For the Quarter
Ended
 
For the Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net Income (Loss)
 
$
118,688

 
$
(221,553
)
 
$
(139,613
)
 
$
(149,003
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Reclassification adjustment for realized gain on sale of available for sale Agency Securities
 
(2,421
)
 
(69
)
 
(18,937
)
 
(1,562
)
Net unrealized gain (loss) on available for sale Agency Securities
 
(7,526
)
 
137,312

 
251,510

 
5,241

Other comprehensive income (loss)
 
$
(9,947
)
 
$
137,243

 
$
232,573

 
$
3,679

Comprehensive Income (Loss)
 
$
108,741

 
$
(84,310
)
 
$
92,960

 
$
(145,324
)
 
See notes to the condensed consolidated financial statements.


5
ARMOUR Residential REIT, Inc. and Subsidiaries
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, 2016
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
36,682

 
$
37

 
$
2,369,642

 
$
2,559,361

 
$
(1,266,938
)
 
$
(67,302
)
 
$
1,225,166

Series A Preferred dividends
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,373
)
 
—

 
(3,373
)
Series B Preferred dividends
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,343
)
 
—

 
(8,343
)
Common stock dividends
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(86,753
)
 
—

 
(86,753
)
Stock based compensation, net of withholding requirements
—

 
—

 
—

 
—

 
—

 
—

 
31

 
—

 
660

 
660

 
—

 
—

 
660

Net Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(139,613
)
 
—

 
(139,613
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
232,573

 
232,573

Balance, September 30, 2016
2,181

 
$
2

 
$
53,172

 
5,650

 
$
6

 
$
136,547

 
36,713

 
$
37

 
$
2,370,302

 
$
2,560,021

 
$
(1,505,020
)
 
$
165,271

 
$
1,220,317

 
See notes to condensed consolidated financial statements.

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

 
 
For the Nine Months Ended
 
 
September 30, 2016
 
September 30, 2015
Cash Flows From Operating Activities:
 
 
 
 
Net Loss
 
$
(139,613
)
 
$
(149,003
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Net amortization of premium on Agency Securities
 
60,127

 
85,203

Accretion of net discount on Non-Agency Securities
 
(1,336
)
 
—

Net amortization of Interest-Only Securities
 
3,682

 
—

Realized gain on sale of Agency Securities
 
(18,937
)
 
(1,562
)
Gain on Non-Agency Securities
 
(53,795
)
 
—

Loss on Interest-Only Securities
 
2,348

 
—

Stock based compensation
 
660

 
717

Bargain purchase price on acquisition of JAVELIN
 
(6,484
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
Decrease in accrued interest receivable
 
16,597

 
4,348

(Increase) decrease in prepaid and other assets
 
1,440

 
(3,195
)
(Increase) decrease in derivatives, at fair value
 
(16,825
)
 
260,340

Decrease in accrued interest payable- repurchase agreements
 
(2,612
)
 
(3,082
)
Decrease in accounts payable and other accrued expenses
 
(16,951
)
 
(13,278
)
Net cash provided by (used in) operating activities
 
$
(171,699
)
 
$
180,488

Cash Flows From Investing Activities:
 
 
 
 
Purchases of Agency Securities
 
(391,277
)
 
(3,485,806
)
Purchases of Non-Agency Securities
 
(760,666
)
 
—

Purchases of Interest-Only Securities
 
(101,947
)
 
—

Principal repayments of Agency Securities
 
1,020,179

 
1,486,497

Principal repayments of Non-Agency Securities
 
37,698

 
—

Proceeds from sales of Agency Securities
 
5,428,174

 
3,395,902

Increase (decrease) in cash collateral
 
22,499

 
(333,103
)
Net cash used in the acquisition of JAVELIN
 
(73,174
)
 
—

Net cash provided by investing activities
 
$
5,181,486

 
$
1,063,490

Cash Flows From Financing Activities:
 
 
 
 
Issuance of common stock, net of expenses
 
—

 
124

Proceeds from repurchase agreements
 
108,505,750

 
64,947,629

Principal repayments on repurchase agreements
 
(113,305,168
)
 
(66,233,977
)
Series A Preferred stock dividends paid
 
(3,373
)
 
(3,373
)
Series B Preferred stock dividends paid
 
(8,343
)
 
(8,343
)
Common stock dividends paid
 
(86,753
)
 
(127,669
)
Common stock repurchased
 
—

 
(36,441
)
Net cash used in financing activities
 
$
(4,897,887
)
 
$
(1,462,050
)
Net increase (decrease) in cash
 
111,900

 
(218,072
)
Cash - beginning of period
 
289,925

 
494,561

Cash - end of period
 
$
401,825

 
$
276,489

Supplemental Disclosure:
 
 
 
 
Cash paid during the period for interest
 
$
130,758

 
$
184,928

Non-Cash Investing and Financing Activities:
 
 
 
 
Net unrealized gain on available for sale Agency Securities
 
$
251,510

 
$
5,241

Amounts payable for common stock repurchased
 
$
—

 
$
(9,530
)

See notes to condensed consolidated financial statements

7
ARMOUR Residential REIT, Inc. and Subsidiaries
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 quarter and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2016. 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, 2015.
 
The condensed consolidated financial statements include the accounts of ARMOUR Residential REIT, Inc. and its subsidiaries including the results of JAVELIN Mortgage Investment Corp. ("JAVELIN") since its acquisition on April 6, 2016. All intercompany accounts and transactions have been eliminated. The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying condensed consolidated financial statements include the valuation of MBS (as defined below), including an assessment of whether other-than-temporary impairment (“OTTI”) exists, 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 “ACM” are to ARMOUR Capital Management LP, a Delaware limited partnership.
 
We are a Maryland corporation incorporated in 2008. ARMOUR and its subsidiaries, including JAVELIN are managed by ACM, an investment advisor registered with the SEC (see Note 10 -Commitments and Contingencies and Note 15 -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) or the Federal Home Loan Mortgage Corporation (Freddie Mac), or a government agency such as Government National Mortgage Administration (Ginnie Mae) (collectively, “Agency Securities”). Interest-only Securities are the interest portion of Agency Securities, which is separated and sold individually from the principal portion of the same payment. Other securities backed by residential mortgages in which we invest, for which the payment of principal and interest is not guaranteed by a GSE or government agency may benefit from credit enhancement derived from structural elements such as subordination, over collateralization or insurance (collectively, “Non-Agency Securities”).  Agency Securities, Non-Agency Securities and Interest-only Securities are collectively referred to as “MBS”.

At September 30, 2016 and December 31, 2015, investments in Agency Securities accounted for 86.5% and 100.0% of our MBS portfolio, respectively. During the first quarter of 2016, we began to invest in Non-Agency Securities. At September 30, 2016, investments in Non-Agency Securities accounted for 12.3% of our MBS portfolio. During the second quarter of 2016, we began to invest in Interest-only Securities. At September 30, 2016, investments in Interest-only Securities accounted for 1.2% of our MBS portfolio.

Our charter permits us to invest in Agency Securities, Non-Agency Securities and Interest-only Securities. Our MBS 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

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

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.
 
Cash Collateral Posted To/By Counterparties

Cash collateral posted to/by counterparties represents cash posted by us to counterparties or posted by counterparties to us as collateral. Cash collateral posted to/by counterparties may include collateral for interest rate swap contracts (including swaptions and basis swap contracts), Eurodollar Futures Contracts (“Futures Contracts”) and repurchase agreements on our MBS and our Agency Securities purchased or sold on a to-be-announced basis (“TBA Agency Securities”).
MBS, at Fair Value

We generally intend to hold most of our MBS for extended periods of time. We may, from time to time, sell any of our MBS as part of the overall management of our MBS 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. Purchases and sales of our MBS are recorded on the trade date.

Agency Securities, Available For Sale - At September 30, 2016 and December 31, 2015, 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).

Non-Agency Securities, Trading - At September 30, 2016, all of our Non-Agency Securities were classified as trading securities. Non-Agency Securities classified as trading are reported at their estimated fair values with unrealized gains and losses included in Other Income (Loss) as a component of the condensed consolidated statements of operations. We estimate future cash flows for each Non-Agency Security and then discount those cash flows based on our estimates of current market yield for each individual security. We then compare our calculated price with our pricing services and/or dealer marks. Our estimates for future cash flows and current market yields incorporate such factors as coupons, prepayment speeds, defaults, delinquencies and severities.

Interest-only Securities, Trading - At September 30, 2016, all of our Interest-only Securities were classified as trading securities. Interest-only Securities represent the right to receive a specified proportion of the contractual interest flows of specific Agency MBS. Interest-only Securities classified as trading are reported at their estimated fair values with unrealized gains and losses included in Other Income (Loss) as a component of the condensed consolidated statements of operations.

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.


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

Accrued Interest Receivable and Payable
 
Accrued interest receivable includes interest accrued between payment dates on MBS. 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 MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the London Interbank Offered Rate (“LIBOR”). Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender. A repurchase agreement operates as a financing arrangement under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.
 
In addition to the repurchase agreement financing discussed above, at certain times we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement (“MRA”), settlement through the same brokerage or clearing account and maturing on the same day. We did not have any reverse repurchase agreements outstanding at September 30, 2016 and December 31, 2015.
 
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, 2016 and December 31, 2015.

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 may utilize forward contracts for the purchase or sale of TBA Agency Securities. We account for TBA Agency Securities as derivative instruments if it is reasonably possible that we will not take or make physical delivery of the Agency Security upon settlement of the contract. We account for TBA dollar roll transactions as a series of derivative transactions.
 
We may also purchase and sell TBA Agency Securities as a means of investing in and financing Agency Securities (thereby increasing our “at risk” leverage) or as a means of disposing of or reducing our exposure to Agency Securities (thereby reducing our “at risk” leverage). 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.

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


Revenue Recognition
 
Agency Securities, Available For Sale - Interest income is earned and recognized on Agency Securities based on their unpaid principal amounts and their contractual terms. Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction. Premiums and discounts associated with the purchase of Multi-Family MBS, which are generally not subject to prepayment, are amortized or accreted into interest income over the contractual lives of the securities using a level yield method. Premiums and discounts associated with the purchase of other Agency Securities are amortized or accreted into interest income over the actual lives of the securities, reflecting actual prepayments as they occur.

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. GAAP 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.

Non-Agency Securities and Interest-only Securities, Trading - Interest income on Non-Agency Securities and Interest-only Securities is recognized using the effective yield method over the life of the securities based on the future cash flows expected to be received. Future cash flow projections and related effective yields are determined for each security and updated quarterly. Other than temporary impairments, which establish a new cost basis in the security for purposes of calculating effective yields, are recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security.

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.

Reclassification

Certain amounts included in other expenses in the first and second quarters of 2016 have been reclassified to Interest Income Agency Securities. All per share amounts, common shares outstanding and stock-based compensation amounts for all periods presented reflect the Reverse Stock Split, which was effective July 31, 2015. No other reclassifications have been made to previously reported amounts.
 

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

Note 4 -Recent Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board issued ASU 2015-16, Business Combinations Simplifying the Accounting for Measurement-Period Adjustments (Topic 805). The amendment simplifies the accounting for measurement-period adjustments. An acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendment also requires acquirers to present separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. The amendment is effective for fiscal years beginning after December 15, 2015 and has not had a significant impact on the consolidated financial statements for the quarter.

In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, Leases (Topic 842). The standard introduces a new lessee model that will require most leases to be recorded on the balance sheet recognizing a right-of-use lease asset and a liability to make lease payments. The standard will be effective for annual periods beginning after December 15, 2018. The Company is assessing the impact of this standard but does not expect it to have a significant impact on the consolidated financial statements.

In July 2016 the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326). The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The standard will apply to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off–balance sheet credit, exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The standard is effective for fiscal years beginning after December 15, 2019. The Company is assessing the impact of this standard but does not expect it to have significant impact on the consolidated financial statements.

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 MBS 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

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

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, 2016 and December 31, 2015, 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.

Non-Agency Securities Trading - The fair value for the Non-Agency Securities in our MBS portfolio is based on estimates prepared by our Portfolio Management group, which organizationally reports to our Chief Investment Officer. In preparing the estimates, our Portfolio Management group uses commercially available and proprietary models and data as well as market intelligence gained from discussions with, and transactions by, other market participants. We estimate the fair value of our Non-Agency Securities by estimating the future cash flows for each Non-Agency Security and then discounting those cash flows based on our estimates of current market yield for each individual security. Our estimates for future cash flows and current market yields incorporate such factors as collateral type, bond structure and priority of payments, coupons, prepayment speeds, defaults, delinquencies and severities. Quarterly, we compare our estimates of fair value of our Non-Agency Securities with pricing from third party pricing services, dealer marks received and recent purchase and financing transaction history to validate our assumptions of cash flow and market yield and calibrate our models. Fair values calculated in this manner are considered Level 3. At September 30, 2016, all of our Non-Agency Security fair values are calculated in this manner and therefore were classified as Level 3.

Interest-Only Securities Trading - The fair value for the Interest-Only Securities in our MBS portfolio is based on obtaining a valuation for each Interest-Only 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 consistent with those models used to price Agency Securities underlying the Interest-Only Securities 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 Interest-Only 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 Interest-Only 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, 2016, all of our Interest-Only 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.

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

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

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, 2016 and December 31, 2015.
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at September 30, 2016
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
7,041,228

 
$
—

 
$
7,041,228

Non-Agency Securities, trading
 
$
—

 
$
—

 
$
1,001,319

 
$
1,001,319

Interest-Only Securities, trading
 
$
—

 
$
95,918

 
$
—

 
$
95,918

Derivatives
 
$
—

 
$
10,194

 
$
—

 
$
10,194

Liabilities at Fair Value:
 
 
 
 
 
 
 


Derivatives
 
$
—

 
$
243,223

 
$
—

 
$
243,223

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the quarter and nine months ended September 30, 2016.
 
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) 
 
Significant
Observable
Inputs
(Level 2) 
 
Significant
Unobservable
Inputs
(Level 3) 
 
Balance at December 31, 2015
Assets at Fair Value:
 
 
 
 
 
 
 
 
Agency Securities, available for sale
 
$
—

 
$
12,461,556

 
$
—

 
$
12,461,556

Derivatives
 
$
—

 
$
999

 
$
—

 
$
999

Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Derivatives
 
$
—

 
$
233,301

 
$
—

 
$
233,301

 
There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the year ended December 31, 2015.


14
ARMOUR Residential REIT, Inc. and Subsidiaries
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, 2016 and December 31, 2015.
September 30, 2016
 
 
 
 
 
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
 
$
401,825

 
$
401,825

 
$
401,825

 
$
—

 
$
—

Cash collateral posted to counterparties
 
$
281,397

 
$
281,397

 
$
—

 
$
281,397

 
$
—

Accrued interest receivable
 
$
19,271

 
$
19,271

 
$
—

 
$
19,271

 
$
—

Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
7,360,670

 
$
7,360,670

 
$
—

 
$
7,360,670

 
$
—

Cash collateral posted by counterparties
 
$
15,496

 
$
15,496

 
$
—

 
$
15,496

 
$
—

Accrued interest payable- repurchase agreements
 
$
6,025

 
$
6,025

 
$
—

 
$
6,025

 
$
—


December 31, 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
 
$
289,925

 
$
289,925

 
$
289,925

 
$
—

 
$
—

Cash collateral posted to counterparties
 
$
263,799

 
$
263,799

 
$
—

 
$
263,799

 
$
—

Principal payments receivable
 
$
37

 
$
37

 
$
—

 
$
37

 
$
—

Accrued interest receivable
 
$
34,500

 
$
34,500

 
$
—

 
$
34,500

 
$
—

Financial Liabilities:
 
 
 
 

 
 
 
 

 
 
Repurchase agreements
 
$
11,570,481

 
$
11,570,481

 
$
—

 
$
11,570,481

 
$
—

Accrued interest payable- repurchase agreements
 
$
7,724

 
$
7,724

 
$
—

 
$
7,724

 
$
—



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

The following table provides a summary of the changes in Level 3 assets measured at fair value on a recurring basis at September 30, 2016. We did not have Level 3 assets at December 31, 2015.
 
 
For the Quarter
Ended
 
For the Nine Months Ended
Non-Agency Securities
 
September 30, 2016
 
September 30, 2016
Balance, beginning of period
 
$
916,571

 
$
—

Non-Agency Securities acquired in the acquisition of JAVELIN, at fair value
 
—

 
223,220

Purchases of Non-Agency Securities, at cost
 
68,186

 
760,666

Principal repayments of Non-Agency Securities
 
(23,707
)
 
(37,698
)
Gain on Non-Agency Securities
 
39,522

 
53,795

Discount accretion
 
747

 
1,336

Balance, end of period
 
$
1,001,319

 
$
1,001,319

Gain on Non-Agency Securities
 
$
39,522

 
$
53,795


The significant unobservable inputs used in the fair value measurement of our Level 3 Non-Agency Securities include assumptions for underlying loan collateral, cumulative default rates and loss severities in the event of default, as well as discount rates.

The following table presents the range of our estimates of cumulative default and loss severities, together with the discount rates implicit in our Level 3 Non-Agency Security fair values at September 30, 2016. We did not have Level 3 assets at December 31, 2015.

September 30, 2016
Unobservable Level 3 Input
 
Minimum
 
Weighted
Average
 
Maximum
Cumulative default
 
0.00
%
 
1.74
%
 
40.90
%
Loss severity (life)
 
0.00
%
 
23.00
%
 
75.73
%
Discount rate
 
2.38
%
 
4.08
%
 
7.84
%
Delinquency (life)
 
0.00
%
 
4.14
%
 
47.09
%
Voluntary prepayments (life)
 
1.56
%
 
15.71
%
 
28.14
%

The table above includes the effects of the structural elements of our Non-Agency Securities, such as subordination and over collateralization or insurance. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower or higher fair value measurement. Generally, a change in the assumption used for the probability of cumulative default is accompanied by a directionally similar change in the assumption used for the delinquency and loss severity and a directionally opposite change in the assumption used for voluntary prepayment rates for the life of the security. However, given the interrelationship between loss estimates and the discount rate, overall Non-Agency Security market conditions would likely have a more significant impact on our Level 3 fair values than changes in any one unobservable input.

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, 2016 and December 31, 2015, investments in Agency Securities accounted for 86.5% and 100.0% of our MBS portfolio.

We evaluated our Agency Securities with unrealized losses at September 30, 2016, September 30, 2015 and December 31, 2015, 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

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

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, 2016 and September 30, 2015 and for the year ended December 31, 2015, 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, 2016, 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, 2016 are also presented below. Our Agency Securities had a weighted average coupon of 3.53% at September 30, 2016.
September 30, 2016
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
 
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
$
39,700

 
$
(93
)
 
$
351

 
$
39,958

 
0.57
%
Multi-Family MBS
 
1,473,296

 
—

 
83,738

 
1,557,034

 
22.11

10 Year Fixed
 
96,512

 
(376
)
 
866

 
97,002

 
1.38

15 Year Fixed
 
2,728,932

 
(10
)
 
45,721

 
2,774,643

 
39.41

20 Year Fixed
 
590,738

 
(6
)
 
5,520

 
596,252

 
8.47

25 Year Fixed
 
11,956

 
—

 
113

 
12,069

 
0.17

30 Year Fixed
 
1,120,524

 
—

 
20,065

 
1,140,589

 
16.20

Total Fannie Mae
 
$
6,061,658

 
$
(485
)
 
$
156,374

 
$
6,217,547

 
88.31
%
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
 
10 Year Fixed
 
50,846

 
(79
)
 
864

 
51,631

 
0.73

15 Year Fixed
 
372,397

 
—

 
7,714

 
380,111

 
5.40

20 Year Fixed
 
218,072

 
(3
)
 
1,322

 
219,391

 
3.12

25 Year Fixed
 
123,857

 
—

 
360

 
124,217

 
1.76

Total Freddie Mac
 
$
765,172

 
$
(82
)
 
$
10,260

 
$
775,350

 
11.01
%
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
 
ARMs & Hybrids
 
48,832

 
(823
)
 
3

 
48,012

 
0.68

15 Year Fixed
 
295

 
—

 
24

 
319

 
0.00

Total Ginnie Mae
 
$
49,127

 
$
(823
)
 
$
27

 
$
48,331

 
0.68
%
Total Agency Securities
 
$
6,875,957

 
$
(1,390
)
 
$
166,661

 
$
7,041,228

 
100.00
%

    


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

At December 31, 2015, 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, 2015 are also presented below. Our Agency Securities had a weighted average coupon of 3.47% at December 31, 2015.
December 31, 2015
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
 
Percent of Total
Fannie Mae
 
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
$
46,512

 
$
(210
)
 
$
486

 
$
46,788

 
0.38
%
Multi-Family MBS
 
2,182,156

 
(30,879
)
 
7,312

 
2,158,589

 
17.32

10 Year Fixed
 
91,752

 
(362
)
 
605

 
91,995

 
0.74

15 Year Fixed
 
4,302,585

 
(10,462
)
 
5,498

 
4,297,621

 
34.49

20 Year Fixed
 
2,692,310

 
(25,429
)
 
5,289

 
2,672,170

 
21.44

25 Year Fixed
 
18,488

 
(128
)
 
—

 
18,360

 
0.15

30 Year Fixed
 
1,447,835

 
(6,645
)
 
492

 
1,441,682

 
11.56

Total Fannie Mae
 
$
10,781,638

 
$
(74,115
)
 
$
19,682

 
$
10,727,205

 
86.08
%
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
12,738

 
(46
)
 
197

 
12,889

 
0.10

10 Year Fixed
 
37,657

 
(92
)
 
652

 
38,217

 
0.31

15 Year Fixed
 
192,982

 
(995
)
 
310

 
192,297

 
1.54

20 Year Fixed
 
1,443,652

 
(16,380
)
 
4,006

 
1,431,278

 
11.49

Total Freddie Mac
 
$
1,687,029

 
$
(17,513
)
 
$
5,165

 
$
1,674,681

 
13.44
%
 
 
 
 
 
 
 
 
 
 
 
Ginnie Mae
 
 
 
 
 
 
 
 
 
 
ARMs&Hybrids
 
59,877

 
(610
)
 
69

 
59,336

 
0.48

15 Year Fixed
 
314

 
—

 
20

 
334

 
0.00

Total Ginnie Mae
 
$
60,191

 
$
(610
)
 
$
89

 
$
59,670

 
0.48
%
Total Agency Securities
 
$
12,528,858

 
$
(92,238
)
 
$
24,936

 
$
12,461,556

 
100.00
%
 
Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction.
    
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, 2016 and December 31, 2015.
 
 
September 30, 2016
 
December 31, 2015
Weighted Average Life of all Agency Securities
 
Fair Value
 
Amortized
Cost 
 
Fair Value
 
Amortized
Cost 
Less than one year
 
$
8

 
$
9

 
$
19

 
$
19

Greater than or equal to one year and less than three years
 
60,891

 
60,792

 
30,189

 
30,375

Greater than or equal to three years and less than five years
 
4,247,064

 
4,184,635

 
6,037,851

 
6,039,218

Greater than or equal to five years
 
2,733,265

 
2,630,521

 
6,393,497

 
6,459,246

Total Agency Securities
 
$
7,041,228

 
$
6,875,957

 
$
12,461,556

 
$
12,528,858



18
ARMOUR Residential REIT, Inc. and Subsidiaries
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, 2016 and December 31, 2015 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, 2016 and December 31, 2015.
 
 
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, 2016
 
$
60,563

 
$
(322
)
 
$
58,538

 
$
(1,068
)
 
$
119,101

 
$
(1,390
)
December 31, 2015
 
$
7,105,363

 
$
(58,799
)
 
$
1,861,211

 
$
(33,439
)
 
$
8,966,574

 
$
(92,238
)
 
During the quarter and nine months ended September 30, 2016, we sold $460,169 and $5,428,174 of Agency Securities, which resulted in realized gains of $2,421 and $18,937, respectively. During the quarter and nine months ended September 30, 2015, we sold $331,196 and $3,148,831 of Agency Securities, which resulted in realized gains of $69 and $1,562, respectively. Sales of Agency Securities are done to reposition our MBS portfolio and to reach our target level of liquidity.

Note 7 -Non-Agency Securities, Trading

All of our Non-Agency Securities are classified as trading securities and reported at their estimated fair value. Fair value changes are reported in the condensed consolidated statements of operations in the period in which they occur. At September 30, 2016, investments in Non-Agency Securities accounted for 12.3% of our MBS portfolio.

The components of the carrying value of our Non-Agency Securities at September 30, 2016 are presented in the table below. 
 
 
Non-Agency Securities
September 30, 2016
 
Fair Value
 
Amortized
 Cost
 
Principal
Amount
 
Weighted
Average
Coupon
Credit Risk Transfer
 
$
753,901

 
$
703,932

 
$
716,916

 
5.08
%
NPL/RPL
 
134,850

 
133,443

 
134,329

 
3.80
%
Legacy Prime Fixed
 
20,868

 
20,029

 
25,381

 
6.01
%
Legacy ALTA Fixed
 
62,114

 
59,619

 
78,901

 
5.85
%
Legacy Prime Hybrid
 
12,098

 
11,567

 
14,198

 
2.65
%
Legacy ALTA Hybrid
 
6,118

 
5,927

 
7,263

 
3.02
%
New Issue Prime Fixed Non-Agency
 
11,370

 
10,802

 
11,405

 
3.66
%
Total Non-Agency Securities
 
$
1,001,319

 
$
945,319

 
$
988,393

 
4.93
%

The following table summarizes the weighted average lives of our Non-Agency Securities at September 30, 2016
 
 
September 30, 2016
Weighted Average Life of all Non-Agency Securities
 
Fair Value
 
Amortized Cost
Less than one year
 
$
—

 
$
—

Greater than or equal to one year and less than three years
 
216,630

 
210,023

Greater than or equal to three years and less than five years
 
460,256

 
433,484

Greater than or equal to five years
 
324,433

 
301,812

Total Non-Agency Securities
 
$
1,001,319

 
$
945,319


19
ARMOUR Residential REIT, Inc. and Subsidiaries
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 Non-Agency Securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our Non-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 Non-Agency Securities at September 30, 2016 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 Non-Agency Securities could be longer or shorter than estimated.

At September 30, 2016, we had no Non-Agency Securities in an unrealized losses position less than or greater than twelve months.

Our Non-Agency Securities are subject to risk of loss with regard to principal and interest payments and at September 30, 2016, have generally either been assigned below investment grade ratings by rating agencies, or have not been rated. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies.

Note 8 -Repurchase Agreements
 
At September 30, 2016, we had MRAs with 42 counterparties and had $7,360,670 in outstanding borrowings with 27 of those counterparties. At December 31, 2015, we had MRAs with 38 counterparties and had $11,570,481 in outstanding borrowings with 26 of those counterparties.

The following table represents the contractual repricing regarding our repurchase agreements to finance our MBS purchases at September 30, 2016 and December 31, 2015. No amounts below are subject to offsetting.
 
September 30, 2016
 
Repurchase Agreements
 
Weighted Average Contractual Rate
 
Weighted Average Maturity in days
 
Haircut for Repurchase Agreements (1)
Agency Securities
 
$
6,601,439

 
0.73
%
 
19
 
4.80
%
Non-Agency Securities
 
735,912

 
2.21
%
 
33
 
23.75
%
U.S. Treasury Securities
 
23,319

 
0.46
%
 
0
 
0.00
%
Total or Weighted Average
 
$
7,360,670

 
0.88
%
 
21
 
6.68
%
(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.
December 31, 2015
 
Repurchase Agreements
 
Weighted Average Contractual Rate
 
Weighted Average Maturity in days
 
Haircut for Repurchase Agreements (1)
Agency Securities
 
$
11,570,481

 
0.57
%
 
38
 
4.79
%
Total or Weighted Average
 
$
11,570,481

 
0.57
%
 
38
 
4.79
%
(1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

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

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

 
 
September 30, 2016
 
December 31, 2015
Maturing or Repricing
 
Repurchase Agreements
 
Weighted Average Contractual Rate
 
Repurchase Agreements
 
Weighted Average Contractual Rate
Within 30 days
 
$
5,819,944

 
0.82
%
 
$
8,089,403

 
0.55
%
31 days to 60 days
 
1,360,336

 
0.96
%
 
2,487,174

 
0.57
%
61 days to 90 days
 
180,390

 
1.87
%
 
343,904

 
0.71
%
Greater than 90 days
 
—

 
—
%
 
650,000

 
0.67
%
Total or Weighted Average
 
$
7,360,670

 
0.88
%
 
$
11,570,481

 
0.57
%

At September 30, 2016, 10 repurchase agreement counterparties individually accounted for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for approximately 61.5% of our repurchase agreement borrowings outstanding at September 30, 2016. At December 31, 2015, we had 8 repurchase agreement counterparties that individually accounted for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for 53.5% of our repurchase agreement borrowings at December 31, 2015. At September 30, 2016 and December 31, 2015, we did not have any repurchase counterparties that individually account for 5% or greater of our stockholders' equity.

Note 9 -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.
 
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 would be unable to meet a margin call under a Futures Contract, 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.


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

The following tables present information about our derivatives at September 30, 2016 and December 31, 2015.
 
September 30, 2016
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
 
9

 
0.54
%
 
$
150,000

 
$
—

 
$
(46
)
Interest rate swap contracts
 
13-24 Months
 
16

 
0.73
%
 
100,000

 
—

 
(446
)
Interest rate swap contracts
 
37-48 Months
 
38

 
1.48
%
 
2,410,000

 
—

 
(78,270
)
Interest rate swap contracts
 
61-72 Months
 
64

 
2.04
%
 
275,000

 
—

 
(20,999
)
Interest rate swap contracts
 
73-84 Months
 
77

 
2.10
%
 
1,425,000

 
—

 
(77,524
)
Interest rate swap contracts
 
109-120 Months
 
113

 
2.24
%
 
550,000

 
—

 
(65,938
)
TBA Agency Securities
 
—
 
—

 
—

 
2,650,000

 
10,194

 
—

Total or Weighted Average
 
 
 
 
 
$
7,560,000


$
10,194


$
(243,223
)
(1)
See Note 5, “Fair Value of Financial Instruments” for additional discussion.

December 31, 2015
Derivative Type (4)
 
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
 
13-24 Months
 
19
 
0.63
%
 
$
350,000

 
$
265

 
$
(87
)
Interest rate swap contracts
 
25-36 Months
 
27
 
1.16
%
 
700,000

 
192

 
(1,633
)
Interest rate swap contracts
 
37-48 Months
 
47
 
1.46
%
 
2,000,000

 
—

 
(18,120
)
Interest rate swap contracts
 
49-60 Months
 
49
 
1.53
%
 
350,000

 
—

 
(3,085
)
Interest rate swap contracts
 
73-84 Months
 
75
 
2.05
%
 
1,025,000

 
—

 
(26,047
)
Interest rate swap contracts
 
85-96 Months
 
86
 
2.11
%
 
1,375,000

 
—

 
(23,543
)
Interest rate swap contracts
 
109-120 Months
 
108
 
2.66
%
 
1,000,000

 
—

 
(92,927
)
Interest rate swap contracts
 
121-132 Months
 
123
 
2.30
%
 
2,000,000

 
—

 
(67,858
)
Basis swap contracts (2)
 
0-60 Months
 
22
 
0.22
%
 
2,000,000

 
542

 
(1
)
Total or Weighted Average
 
 
 
 
 
$
10,800,000

 
$
999

 
$
(233,301
)
(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 $3,775,000 of forward starting interest rate swap contracts which become effective within 6 months.
(4) We did not have any TBA Agency Securities outstanding at December 31, 2015.

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 and basis swap contracts 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, 2016.

22
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(UNAUDITED)

September 30, 2016
 
 
 
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
 
$
—

 
$
(243,223
)
 
$
276,927

 
$
33,704