Edgar Filing: Armour Residential REIT, Inc.

arr20121025_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

☐	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 ☒ NO ☐

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 ☒ NO ☐

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 "larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The number of outstanding shares of the Registrant's common stock as of October 29, 2012 was 309,004,524.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	37
PART II. OTHER INFORMATION	37
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults Upon Senior Securities	39
Item 4. Mine Safety Disclosures	39
Item 5. Other Information	40
Item 6. Exhibits	40

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share amounts)

(Unaudited)

Assets	September 30, 2012			December 31, 2011
Cash	$	727,306		$	252,372
Restricted cash		237,789			147,199
Agency securities, available for sale, at fair value (including pledged assets of $20,846,817 and $5,225,234)		22,114,875			5,393,675
Receivable for unsettled securities		357,218			382,931
Derivatives, at fair value		8,069			-
Principal payments receivable		10,799			12,493
Accrued interest receivable		60,548			18,637
Prepaid and other assets		742			440
Total Assets	$	23,517,346		$	6,207,747

Liabilities and Stockholders' Equity
Liabilities:
Repurchase agreements	$	19,826,988		$	5,335,962
Payable for unsettled securities		1,036,450			117,885
Derivatives, at fair value		198,398			121,727
Accrued interest payable		9,302			2,154
Accounts payable and accrued expenses		3,157			2,663
Dividends payable		103			750
Total Liabilities		21,074,398			5,581,141

Stockholders' Equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized, 1,785,000 8.250% Series A Cumulative Preferred Stock issued and outstanding at September 30, 2012 and none issued and outstanding at December 31, 2011		2			-
Common stock, $0.001 par value, 500,000,000 shares authorized, 308,972,403 and 95,436,949 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		309			95
Additional paid-in capital		2,220,417			678,641
Accumulated deficit		(180,430	)		(100,878	)
Accumulated other comprehensive income		402,650			48,748
Total Stockholders' Equity		2,442,948			626,606
Total Liabilities and Stockholders' Equity	$	23,517,346		$	6,207,747

See notes to condensed consolidated financial statements.

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

(Unaudited)

	For the Quarters Ended						For the Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest Income:
Interest income, net of amortization of premium	$	116,693		$	39,665		$	265,660		$	82,293
Interest expense:
Repurchase agreements		(19,222	)		(3,451	)		(37,258	)		(7,158	)
Net interest income		97,471			36,214			228,402			75,135
Other (Loss) Income:
Realized gain on sale of agency securities		15,062			6,444			20,110			6,444
Other income		-			-			1,043			-
Subtotal		15,062			6,444			21,153			6,444
Realized loss on derivatives (1)		(18,914	)		(8,421	)		(41,055	)		(16,425	)
Unrealized loss on derivatives		(31,486	)		(65,808	)		(84,265	)		(91,891	)
Subtotal		(50,400	)		(74,229	)		(125,320	)		(108,316	)
Total other (loss)		(35,338	)		(67,785	)		(104,167	)		(101,872	)
Expenses:
Management fee		5,545			2,191			13,356			4,441
Professional fees		472			270			1,408			883
Insurance		85			60			189			164
Compensation		426			135			1,417			406
Other		660			243			1,331			504
Total expenses		7,188			2,899			17,701			6,398
Net income (loss) before taxes		54,945			(34,470	)		106,534			(33,135	)
Income tax (expense) benefit		(3	)		(2	)		27			(14	)
Net Income (Loss)	$	54,942		$	(34,472	)	$	106,561		$	(33,149	)
Dividends declared on preferred stock		(804	)		-			(964	)		-
Net Income (Loss) available (related) to common stockholders	$	54,138		$	(34,472	)	$	105,597		$	(33,149	)
Net income (loss) available (related) per share to common stockholders:
Basic	$	0.20		$	(0.44	)	$	0.54		$	(0.63	)
Diluted	$	0.20		$	(0.44	)	$	0.54		$	(0.63	)
Dividends per common share	$	0.30		$	0.36		$	0.92		$	1.06
Weighted average common shares outstanding:
Basic		269,325			78,360			195,272			52,863
Diluted		270,010			78,360			196,287			52,863

(1)	Interest expense related to our interest rate swap contracts is recorded in 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.

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(Unaudited)

	For the Quarters Ended						For the Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net Income (Loss)	$	54,942		$	(34,472	)	$	106,561		$	(33,149	)
Other comprehensive income :
Reclassification adjustment for realized gain on sale of Agency Securities		(15,062	)		(6,444	)		(20,110	)		(6,444	)
Net unrealized gain on available for sale securities		250,062			37,438			374,012			73,981
Other comprehensive income		235,000			30,994			353,902			67,537
Comprehensive Income (Loss)	$	289,942		$	(3,478	)	$	460,463		$	34,388

See notes to condensed consolidated financial statements

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock						Common Stock
	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		Total
Balance, December 31, 2011		-	$	-	$	-		95,437	$	95	$	678,641	$	678,641	$	(100,878	)	$	48,748	$	626,606
Preferred dividends declared		-		-		-		-		-		-		-		(964	)		-		(964	)
Common dividends declared		-		-		-		-		-		-		-		(185,149	)		-		(185,149	)
Issuance of Preferred stock, net		1,785		2		43,302		-		-		-		43,302		-			-		43,304
Issuance of common stock, net		-		-		-		213,460		213		1,497,949		1,497,949		-			-		1,498,162
Stock based compensation, net of withholding requirements		-		-		-		75		1		525		525		-			-		526
Net income		-		-		-		-		-		-		-		106,561			-		106,561
Other comprehensive income		-		-		-		-		-		-		-		-			353,902		353,902
Balance, September 30, 2012		1,785	$	2	$	43,302		308,972	$	309	$	2,177,115	$	2,220,417	$	(180,430	)	$	402,650	$	2,442,948

See notes to condensed consolidated financial statements

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

(dollars in thousands)

(Unaudited)

	For the Nine Months Ended September 30, 2012			For the Nine Months Ended September 30, 2011
Cash Flows From Operating Activities:
Net income (loss)	$	106,561		$	(33,149	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization of premium on Agency Securities		71,168			17,636
Unrealized loss on derivatives		68,603			91,891
Realized gain on sale of Agency Securities		(20,110	)		(6,444	)
Stock based compensation		526			102
Changes in operating assets and liabilities:
Increase in accrued interest receivable		(41,660	)		(15,012	)
(Increase) decrease in prepaid income taxes and other assets		(333	)		388
Increase in accrued interest payable		7,148			16,823
Increase in accounts payable and accrued expenses		1,861			994
Net cash provided by operating activities		193,764			73,229
Cash Flows From Investing Activities:
Purchases of Agency Securities		(18,916,083	)		(5,352,969	)
Principal repayments of Agency Securities		1,574,116			426,474
Proceeds from sales of Agency Securities		1,869,332			512,657
Increase in restricted cash		(90,590	)		(125,244	)
Net cash used in investing activities		(15,563,225	)		(4,539,082	)
Cash Flows From Financing Activities:
Issuance of preferred stock, net of expenses		43,041			-
Issuance of common stock, net of expenses		1,498,157			489,401
Proceeds from repurchase agreements		92,966,646			28,660,677
Principal repayments on repurchase agreements		(78,476,690	)		(24,410,828	)
Preferred dividends paid		(964	)		-
Common dividends paid		(185,795	)		(58,255	)
Net cash provided by financing activities		15,844,395			4,680,995
Net increase in cash		474,934			215,142
Cash - beginning of period		252,372			35,344
Cash - end of period	$	727,306		$	250,486
Supplemental Disclosure:
Cash paid during the period for interest	$	61,245		$	5,844
Non-Cash Investing and Financing Activities:
Receivable for unsettled security sales	$	357,218		$	-
Payable for unsettled security purchases	$	1,036,450		$	475,109
Unrealized gain on investment in available for sale securities	$	374,012		$	67,536
Amounts receivable for issuance of common stock	$	5		$	4
Amounts receivable for issuance of preferred stock	$	263		$	-
Common dividends declared, to be paid in subsequent period	$	-		$	9

See notes to condensed consolidated financial statements

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2012. 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, 2011.

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 and derivative instruments.

Note 2 - Organization and Nature of Business Operations

Business

References to “we”, “us”, “our”, "ARMOUR" or the “Company” are to ARMOUR Residential REIT, Inc. References to "ARRM" are to ARMOUR Residential Management LLC, a Delaware limited liability company. References to “Enterprise” are to Enterprise Acquisition Corp., which is a wholly-owned subsidiary of ARMOUR.

We are an externally managed Maryland corporation organized in 2008, managed by ARRM (see Note 14 “Related Party Transactions” for additional discussion). We invest primarily in fixed rate, hybrid adjustable rate and adjustable rate residential mortgage backed securities. These securities are issued or guaranteed by a 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"). As of September 30, 2012, Agency Securities account for 100% of our portfolio. It is expected that the percentage will continue to be 100% or close thereto. From time to time, a portion of our portfolio may be invested in unsecured notes and bonds issued by U.S. Government-chartered entities (collectively, “Agency Debt”), 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”). On December 1, 2011, our stockholders approved an amendment to our charter to alter our investment asset class restriction in response to potential changes in Agency Securities to include non-Agency as well as Agency Securities in our investment asset class restriction. While we remain committed to investing in Agency Securities for so long as an adequate supply and pricing exists, we believe it is prudent for us to have the flexibility to invest in non-Agency Securities and respond to changes in GSE policy.

We intend to qualify and have elected to be taxed as a REIT under the Internal Revenue Code (“the Code”). Our qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes.

As a REIT, we will generally not be subject to federal income tax on the REIT taxable income that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.

Note 3 - Summary of Significant Accounting Policies

Cash

Cash includes cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have maturities of three months or less, at time of purchase. 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.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Cash

The following table presents information related to margin collateral (held) posted for Agency Securities, interest rate swap contracts and Eurodollar Futures Contracts (“Futures Contracts”) which are included in restricted cash on the accompanying condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011.

	September 30, 2012			December 31, 2011
	(dollars in thousands)
	Fair Value (1)			Fair Value (1)
Agency Securities	$	(14,426	)	$	-
Interest rate swap contracts		247,278			141,326
Futures Contracts		4,937			5,873
Totals	$	237,789		$	147,199

(1) See Note 6, “Fair Value of Financial Instruments” for additional discussion.

Agency Securities, at Fair Value

We invest primarily in Agency Securities. A portion of our portfolio may be invested in Agency Debt, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a REIT. As of September 30, 2012, all of our financial instrument investments consist of Agency Securities, hedging and other derivative instruments related to the foregoing investments.

We generally intend to hold most of our Agency Securities for long-term periods. We may, from time to time, sell any of our Agency Securities as part of the overall management of our portfolio. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. As of September 30, 2012, all of our Agency Securities were classified as available for sale. Agency securities classified as available for sale are reported at their estimated fair values, based on fair values obtained from third-party sources, with unrealized gains and losses excluded from earnings and reported as part of the separate condensed consolidated statements of comprehensive income. Agency securities transactions are recorded on the trade date and are valued using third-party pricing services and dealer quotes.

We evaluate securities for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We determine 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 or (3) do not expect to recover the entire amortized cost basis of the Agency Securities. There was no other than temporary impairment for the quarters and nine months ended September 30, 2012 and September 30, 2011.

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 agreements, we sell securities to a lender and agree to repurchase the same 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 financing under which we pledge our 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.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Derivatives

We recognize all derivative instruments as either assets or liabilities at fair value on our condensed consolidated balance sheets. We do not designate our derivative activities as cash flow hedges, which, among other factors, would require us to match the pricing dates of both derivative transactions and repurchase agreements. Operational issues and credit market volatility make such matching impractical for us. Since we have not elected cash flow hedge accounting treatment as allowed by GAAP, all changes in the fair values of our derivatives are reflected in our condensed consolidated statements of operations currently. Accordingly, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We will continue to designate derivative activities as hedges for tax purposes and any unrealized derivative gains or losses would not affect our distributable net taxable income.

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.

Credit Risk

We have limited our exposure to credit losses on our portfolio of Agency Securities by only purchasing securities issued by Freddie Mac, Fannie Mae or Ginnie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency Securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae Agency Securities are backed by the full faith and credit of the U.S. Government.

In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the U.S. Government. While it is hoped that the conservatorship will help stabilize Freddie Mac's and Fannie Mae's losses and overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie Mae will be able to satisfy their guarantees of Agency Securities. On August 5, 2011, Standard & Poor's Corporation downgraded the U.S.'s credit rating from AAA to AA+ and on August 8, 2011, Fannie Mae and Freddie Mac's credit ratings were downgraded from AAA to AA+. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, the U.S.'s credit rating downgrade and Fannie Mae and Freddie Mac's credit rating downgrades will impact the credit risk associated with Agency Securities and, therefore, may decrease the value of the Agency Securities in our portfolio.

Market Risk

Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our Agency Securities at an inopportune time when prices are depressed.

Preferred Stock

At September 30, 2012, we were authorized to issue up to 25,000,000 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. On June 6, 2012, we filed with the Maryland State Department of Assessments and Taxation to designate 1,610,000 shares of the 25,000,000 authorized preferred stock as 8.250% Series A Cumulative Preferred Shares (“Series A Preferred Stock”) with the powers, designations, preferences and other rights as set forth therein. On July 13, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC, as our agent, to offer and sell, from time to time, up to 6,000,000 shares of Series A Preferred Stock. On July 27, 2012, we entered into an Equity Distribution Agreement with Citadel Securities LLC, as our agent, to offer and sell, from time to time, up to 2,000,000 shares of Series A Preferred Stock. At September 30, 2012 there were 9,610,000 shares designated as Series A Preferred Stock. At September 30, 2012, we had issued and outstanding 1,785,000 shares of Series A Preferred Stock, with a par value $0.001 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends. The Series A Preferred Stock is entitled to a dividend at a rate of 8.250% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends exclusively at our option commencing on June 7, 2017 (subject to our right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve our qualification as a REIT). The Series A Preferred Stock is senior to our common stock and therefore in the event of liquidation, dissolution or winding up, the Series A Preferred Stock will receive a liquidation preference of $25.00 per share plus accumulated and unpaid dividends before distributions are paid to holders of our common stock, with no right or claim to any of our remaining assets thereafter. The Series A Preferred Stock generally does not have voting rights except if we fail to pay dividends on the Series A Preferred Stock for eighteen months, whether or not consecutive. Under such circumstances, the Series A Preferred Stock will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set aside for payment. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by us or converted into our common stock in connection with a change of control by the holders of Series A Preferred Stock.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Common Stock and Warrants

At September 30, 2012, we were authorized to issue up to 500,000,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had 308,972,403 shares of common stock issued and outstanding at September 30, 2012. At September 30, 2012, we had outstanding warrants to purchase 32,500,000 shares of common stock, which are exercisable at $11.00 per share and expire in 2013.

Comprehensive Income

Comprehensive income refers to change 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.

Revenue Recognition

Interest income is earned and recognized based on the unpaid principal amount of the Agency Securities and their contractual terms. Premiums and discounts associated with the purchase of Agency Securities are amortized or accreted into interest income over the actual lives of the securities.

Income Taxes

We intend to qualify and have elected to be taxed as a REIT under the Code. We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our stockholders and as long as we satisfy the ongoing REIT requirements under the Code including meeting certain asset, income and stock ownership tests.

Our management is responsible for determining whether a tax position taken by us is more likely than not to be sustained on its merits. We have no material unrecognized tax benefits and have not recognized in the accompanying condensed consolidated financial statements any interest or penalties related to income taxes. Should any such interest and penalties be recognized, they will be included in interest expense and other expenses, respectively. None of our income tax returns have been examined by federal, state or local authorities; therefore our 2009, 2010 and 2011 federal and state tax returns remain open for examination.

Note 4 - Recent Accounting Pronouncements

Accounting Standards Adopted in 2012

We adopted recent amendments to authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2011 related to the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. We maintain effective control of our assets financed by repurchase agreements therefore, this update had no effect on our condensed consolidated financial statements.

We adopted recent amendments to authoritative guidance issued by FASB in May 2011 to establish common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards. We generally do not hold Level 3 assets and therefore, this update had no significant effect on our condensed consolidated financial statements.

We adopted recent amendments to authoritative guidance issued by FASB in June and December 2011 providing for the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update resulted in additional disclosure but had no significant effect on our condensed consolidated financial statements.

Accounting Standards to be Adopted in Future Periods

In December 2011, the FASB issued amendments to authoritative guidance requiring entities that have financial instruments and derivative instruments to disclose information about offsetting and related arrangements. The disclosures required under this amended guidance are intended to enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of offset associated with certain financial instruments and derivative instruments. The provisions of these amendments are effective for annual periods beginning after January 1, 2013. We anticipate the adoption of these amendments may change the presentation of our financial statements and related disclosures.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Agency Securities, Available for Sale

All of our Agency Securities are classified as available for sale and, as such, are reported at their estimated fair value. As of September 30, 2012 and December 31, 2011, investments in Agency Securities accounted for 100% of our portfolio.

As of September 30, 2012, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of September 30, 2012 are also presented below.

September 30, 2012	Fannie Mae			Freddie Mac			Ginnie Mae		Total Agency Securities
	(dollars in thousands)
Principal Amount	$	14,408,545		$	5,899,771		$	318,873	$	20,627,189
Net unamortized premium		755,692			314,606			14,738		1,085,036
Amortized cost		15,164,237			6,214,377			333,611		21,712,225

Unrealized gains		274,057			122,875			6,985		403,917
Unrealized losses		(1,057	)		(210	)		-		(1,267	)
Fair value	$	15,437,237		$	6,337,042		$	340,596	$	22,114,875

September 30, 2012	Adjustable Rate			Fixed Rate			Total Agency Securities
	(dollars in thousands)
Principal Amount	$	2,234,747		$	18,392,442		$	20,627,189
Net unamortized premium		92,613			992,423			1,085,036
Amortized cost		2,327,360			19,384,865			21,712,225

Unrealized gains		46,143			357,774			403,917
Unrealized losses		(9	)		(1,258	)		(1,267	)
Fair value	$	2,373,494		$	19,741,381		$	22,114,875

As of December 31, 2011, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency Securities as of December 31, 2011 are also presented below.

December 31, 2011	Fannie Mae			Freddie Mac			Ginnie Mae			Total Agency Securities
	(dollars in thousands)
Principal Amount	$	3,451,906		$	1,283,848		$	392,476		$	5,128,230
Net unamortized premium		144,337			54,059			18,301			216,697
Amortized cost		3,596,243			1,337,907			410,777			5,344,927

Unrealized gains		33,558			13,657			5,439			52,654
Unrealized losses		(3,269	)		(613	)		(24	)		(3,906	)
Fair value	$	3,626,532		$	1,350,951		$	416,192		$	5,393,675

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 2011	Adjustable Rate			Fixed Rate			Total Agency Securities
	(dollars in thousands)
Principal Amount	$	2,681,911		$	2,446,319		$	5,128,230
Net unamortized premium		107,641			109,056			216,697
Amortized cost		2,789,552			2,555,375			5,344,927

Unrealized gains		26,157			26,497			52,654
Unrealized losses		(2,534	)		(1,372	)		(3,906	)
Fair value	$	2,813,175		$	2,580,500		$	5,393,675

Actual maturities of Agency Securities are generally shorter than stated contractual maturities because actual maturities of Agency Securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.

The following table summarizes the weighted average lives of our Agency Securities as of September 30, 2012 and December 31, 2011.

	September 30, 2012				December 31, 2011
	(dollars in thousands)
Weighted Average Life of all Agency Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
Less than one year	$	11,083	$	10,777	$	179	$	179
Greater than one year and less than five years		22,096,782		21,694,580		5,274,072		5,226,255
Greater than or equal to five years		7,010		6,868		119,424		118,493
Total Agency Securities	$	22,114,875	$	21,712,225	$	5,393,675	$	5,344,927

We use a third-party model to calculate the weighted average life of 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 the Agency Securities as of September 30, 2012 and December 31, 2011 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 the Agency Securities could be longer or shorter than estimated.

The following table presents the unrealized losses and estimated fair value of our Agency Securities by length of time that such securities have been in a continuous unrealized loss position as of September 30, 2012 and December 31, 2011.

	Unrealized Loss Position For: (dollars in thousands)
	Less than 12 months					12 Months or More					Total
As of	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2012	$	666,322	$	(1,257	)	$	1,164	$	(10	)	$	667,486	$	(1,267	)
December 31, 2011		1,173,098		(3,560	)		96,684		(346	)		1,269,782		(3,906	)

The decline in value of these securities is solely due to market conditions and not the credit quality of the assets. All of our Agency Securities are issued by the GSEs. The GSEs have a rating of AA+. The investments are not considered other than temporarily impaired because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments and we are not required to sell for regulatory or other reasons. Also, we are guaranteed payment of the principal amount of the securities by the GSEs that created them.

During the quarter and nine months ended September 30, 2012 we sold $1.6 billion and $1.9 billion of Agency Securities resulting in a realized gain of $15.1 million and $20.1 million, respectively. Of the $20.1 million $1.1 million is a loss due to the bankruptcy of a counterparty to a repurchase agreement. In addition, due to the bankruptcy we also recorded $1.0 million of other income resulting from the non-performance of the counterparty on the related repurchase agreement. During the quarter and nine months ended September 30, 2011 we sold $0.5 billion of Agency Securities resulting in a realized gain of $6.4 million.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 6 - Fair Value of Financial Instruments

Our valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from third-party sources, while unobservable inputs reflect management's market assumptions. The ASC 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- Instruments with primarily unobservable value drivers.

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.

Cash and restricted cash - Cash includes cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have maturities of three months or less, at the time of purchase. The carrying amount of cash is deemed to be its fair value. Restricted cash includes cash held by counterparties as collateral. Our cash balances are classified as Level 1 and our restricted cash balances are classified as Level 2.

Agency Securities Available for Sale - Fair value for the Agency Securities in our portfolio is based on obtaining a valuation for each Agency Security from third-party pricing services and dealer quotes. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of a security is not available from the third-party pricing services or such data appears unreliable, we obtain valuations from up to three dealers who make markets in similar financial instruments. In general, the dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. Management reviews pricing used to ensure that current market conditions are properly represented. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. Values obtained from the third-party pricing services for similar instruments are classified as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, the security will be classified as a Level 2 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information received from dealers and classify it as a Level 3 security. At September 30, 2012 and December 31, 2011, all of our Agency Security values were based solely on third-party sources and therefore were classified as Level 2.

Repurchase Agreements - The fair value of repurchase agreements reflects the present value of the contractual cash flows discounted at the estimated LIBOR based market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term to interest rate repricing, which may be at maturity, of our repurchase agreements. The fair value of the repurchase agreements approximates their carrying amount due to the short-term nature of these financial instruments. Our repurchase agreements are classified as Level 1.

Derivative Transactions - The fair values of our Futures Contracts are based on closing prices on the Chicago Mercantile Exchange (“CME”). The fair values of our interest rate swap contracts and interest rate swaptions are valued using third-party pricing services that incorporates common market pricing methods that may include current interest rate curves, forward interest rate curves and market spreads to interest rate curves. Management compares pricing used to dealer quotes to ensure that the current market conditions are properly represented. Our Futures Contracts are classified as Level 1 and the fair values of our interest rate swap contracts and our interest rate swaptions are classified as Level 2.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2012
	(dollars in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	22,114,875	$	-	$	22,114,875
Derivatives, at fair value	$	-	$	8,069	$	-	$	8,069
Liabilities at Fair Value:
Derivatives, at fair value	$	4,656	$	193,742	$	-	$	198,398

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2011
	(dollars in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	5,393,675	$	-	$	5,393,675
Liabilities at Fair Value:
Derivatives, at fair value	$	5,292	$	116,435	$	-	$	121,727

The following tables provide a summary of the carrying values and fair values of our financial assets and liabilities as of September 30, 2012 and December 31, 2011.

	At September 30, 2012				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)
	(dollars in thousands)
Financial Assets:
Cash	$	727,306	$	727,306	$	727,306	$	-	$	-
Restricted Cash		237,789		237,789		-		237,789		-
Receivable for unsettled securities		357,218		357,218		-		357,218		-
Principal payments receivable		10,799		10,799		-		10,799		-
Accrued interest receivable		60,548		60,548		-		60,548		-
Financial Liabilities:
Repurchase agreements	$	19,826,988	$	19,826,988	$	-	$	19,826,988	$	-
Payable for unsettled securities		1,036,450		1,036,450		-		1,036,450		-
Accrued interest payable		9,302		9,302		-		9,302		-

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	At December 31, 2011				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)
	(dollars in thousands)
Financial Assets:
Cash	$	252,372	$	252,372	$	252,372	$	-	$	-
Restricted Cash		147,199		147,199		-		147,199		-
Receivable for unsettled securities		382,931		382,931		-		382,931		-
Principal payments receivable		12,493		12,493		-		12,493		-
Accrued interest receivable		18,637		18,637		-		18,637		-
Financial Liabilities:
Repurchase agreements	$	5,335,962	$	5,335,962	$	-	$	5,335,962	$	-
Payable for unsettled securities		117,885		117,885		-		117,885		-
Accrued interest payable		2,154		2,154		-		2,154		-

Note 7 - Repurchase Agreements

The following table represents the contractual repricing regarding our repurchase agreements to finance Agency Security purchases as of September 30, 2012 and December 31, 2011.

	September 30, 2012		December 31, 2011
	(dollars in thousands)
Within 30 days	$	9,925,408	$	4,068,197
31 days to 60 days		5,679,332		1,111,480
61 days to 90 days		2,933,517		156,285
Greater than 90 days		1,288,731		-
Total	$	19,826,988	$	5,335,962

The following table represents the Master Repurchase Agreements (“MRAs”) and other information regarding our repurchase agreements to finance Agency Security purchases as of September 30, 2012 and December 31, 2011.

	September 30, 2012			December 31, 2011
	(dollars in thousands)
Number of MRA's		32			29
Number of counterparties with repurchase agreements outstanding		26			23
Weighted average maturity in days		39			18
Weighted average contractual rate		0.43	%		0.37	%
Haircut for repurchase agreements (1)		4.8	%		5.0	%

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

Note 8 - Derivatives

We enter into 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 financing activities associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Our derivative instruments are carried on our condensed consolidated balance sheets, as assets or as liabilities at their fair value. We do not designate our activities as cash flow hedges and as such, we recognize changes in the market value of these transactions through earnings. For the quarter and nine months ended September 30, 2012, we recognized unrealized losses of $31.5 million and $84.3 million, respectively related to our derivatives. For the quarter and nine months ended September 30, 2011, we recognized unrealized losses of $65.8 million and $91.9 million, respectively related to our derivatives.

We have agreements with our swap counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts. Through this margin process, either we or our swap counterparty may be required to pledge cash or Agency Securities as collateral. Collateral requirements vary by counterparty and change over time based on the market value, notional amount and remaining term of the swap. 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.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents information about interest rate swap contracts, interest rate swaptions and Futures Contracts which are included in derivatives on the accompanying condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011.

	September 30, 2012					December 31, 2011
	(dollars in thousands)
	Notional Amount		Net Fair Value (1)			Notional Amount		Net Fair Value (1)
Interest rate swap contracts	$	8,690,000	$	(192,120	)	$	2,765,000	$	(116,435	)
Interest rate swaptions		1,050,000		6,447			-		-
Futures Contracts		121,000		(4,656	)		131,000		(5,292	)
Totals	$	9,861,000	$	(190,329	)	$	2,896,000	$	(121,727	)

(1)	See Note 6, “Fair Value of Financial Instruments” for additional discussion.

The following table represents the location and information regarding our derivatives which are included in total other loss in the accompanying condensed consolidated statements of operations for the quarters and nine months ended September 30, 2012 and September 30, 2011.

		Loss Recognized in Income (dollars in thousands)
		For the Quarters Ended						For the Nine Months Ended
Derivatives	Location on condensed consolidated statements of operations	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest rate swap contracts:
Interest income	Realized loss on derivatives	$	2,562		$	415		$	5,421		$	983
Interest expense	Realized loss on derivatives		(20,832	)		(8,213	)		(44,779	)		(16,343	)
Realized (loss)	Realized loss on derivatives		-			(256	)		-			(239	)
Changes in fair value	Unrealized loss on derivatives		(25,153	)		(64,581	)		(66,831	)		(88,742	)
			(43,423	)		(72,635	)		(106,189	)		(104,341	)
Interest rate swaptions:
Changes in fair value	Unrealized loss on derivatives		(6,593	)		-			(18,070	)		-
			(6,593	)		-			(18,070	)		-
Futures Contracts:
Realized (loss)	Realized loss on derivatives		(644	)		(366	)		(1,697	)		(826	)
Changes in fair value	Unrealized loss on derivatives		260			(1,228	)		636			(3,149	)
			(384	)		(1,594	)		(1,061	)		(3,975	)
Totals		$	(50,400	)	$	(74,229	)	$	(125,320	)	$	(108,316	)

Note 9 - Share-Based Compensation

We adopted the 2009 Stock Incentive Plan (the "Plan") to attract, retain and reward directors, officers and other employees of ours and other persons who provide services to us in the course of operations. The Plan authorizes the Board to grant awards including common stock, restricted shares of common stock (“RSUs”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively “Awards”), subject to terms as provided in the Plan.

On May 12, 2010, the Board allocated up to 250,000 shares to be available under the Plan. In considering such allocation, the Board considered the size of the Plan relative to our capital base and our current and potential future performance and capitalization. On July 18, 2011, our stockholders approved an amendment to the Plan to increase the number of shares issuable thereunder from 250,000 shares to 2,000,000 shares and the Plan was amended accordingly. During the nine months ended September 30, 2012, we awarded a total of 655,524 RSUs to members of our Board and employees of ARRM.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RSU transactions for the nine months ended September 30, 2012 and September 30, 2011 are summarized below:

	September 30, 2012					September 30, 2011
	Number of Awards			Weighted Average Grant Date Fair Value per Award		Number of Awards			Weighted Average Grant Date Fair Value per Award
Unvested Awards Outstanding beginning of period		153,980		$	7.91		-			-
Granted		655,524			7.13		192,500			7.91
Vested		(138,730	)		7.29		(28,890	)		7.91
Unvested Awards Outstanding end of period		670,774		$	7.28		163,610		$	7.91

As of September 30, 2012, there was approximately $5.3 million of unearned non-cash stock-based compensation related to the Awards (based on the September 30, 2012 stock price), that we expect to recognize as an expense over the remaining average service period of 3.7 years.

Note 10 - Stockholders' Equity

Dividends

The following tables present our common stock dividend transactions for the nine months ended September 30, 2012 and September 30, 2011.

September 30, 2012

Record Date	Payment Date	Rate per common share		Aggregate amount paid to holders of record (in millions)
January 15, 2012 (1)	January 30, 2012	$	0.11	$	11.6
February 15, 2012	February 28, 2012		0.11		15.3
March 15, 2012	March 29, 2012		0.11		19.9
April 16, 2012	April 27, 2012		0.10		17.8
May 15, 2012	May 30, 2012		0.10		18.1
June 15, 2012	June 28, 2012		0.10		18.6
July 16, 2012	July 30, 2012		0.10		23.5
August 15, 2012	August 30, 2012		0.10		30.0
September 14, 2012	September 27, 2012		0.10		31.0

(1) This amount included $0.006 per common share of taxable income related to the year ended December 31, 2011.

September 30, 2011

Record Date	Payment Date	Rate per common share		Aggregate amount paid to holders of record (in millions)
January 15, 2011 (1)	January 28, 2011	$	0.12	$	2.0
February 15, 2011	February 25, 2011		0.12		3.9
March 15, 2011	March 30, 2011		0.12		3.9
April 15, 2011	April 28, 2011		0.12		5.9
May 15, 2011	May 27, 2011		0.12		5.9
June 15, 2011	June 29, 2011		0.12		8.3
July 15, 2011	July 28, 2011		0.12		9.1
August 15, 2011	August 30, 2011		0.12		9.1
September 15, 2011	September 29, 2011		0.12		10.1

(1) This amount included $0.02 per common share of taxable income related to the year ended December 31, 2010.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents our Series A Preferred Stock dividend transactions for the nine months ended September 30, 2012. There were no Series A Preferred Stock dividend transactions for the nine months ended September 30, 2011.

September 30, 2012

Record Date	Payment Date	Rate per Series A Preferred share		Aggregate amount paid to holders of record (in millions)
July 13, 2012 (1)	July 27, 2012	$	0.286500	$	0.4
August 15, 2012	August 27, 2012		0.171875		0.3
September 14, 2012	September 27, 2012		0.171875		0.3

(1) This amount included $0.2 million paid to holders of record on July 13, 2012 for the period of June 7, 2012 through June 30, 2012.

Equity Capital Raising Activities

The following tables present our equity transactions for the nine months ended September 30, 2012 and September 30, 2011.

September 30, 2012

Transaction Type	Completion Date	Number of Shares		Per Share price			Net Proceeds (in millions)
Follow-on public offering	January 13, 2012		10,350,000	$	6.80		$	70.1
Follow-on public offering	February 8, 2012		29,900,000		6.80			203.0
Equity distribution agreement	February 29, 2012		1,287,570		7.06			8.9
Follow-on public offering	March 14, 2012		35,650,000		6.72			239.2
Issuance of Series A Preferred Stock	June 7, 2012		1,400,000		25.00			33.8
Follow-on public offering	July 13, 2012		46,000,000		7.06			324.5
Follow-on public offering	August 8, 2012		63,250,000		7.30			461.4
Common equity distribution agreements	January 1, 2012 to September 30, 2012		19,750,000		7.14	(1)		138.2
Preferred equity distribution agreements	January 1, 2012 to September 30, 2012		385,000		25.56	(1)		9.5
Dividend Reinvestment and Stock Purchase Plan	January 1, 2012 to September 30, 2012		7,273,020		7.28	(1)		52.9

(1) Weighted average price

September 30, 2011

Transaction Type	Completion Date	Number of Shares		Per Share price			Net Proceeds (in millions)
Follow-on public offering	January 26, 2011		6,900,000	$	7.55		$	49.0
Follow-on public offering	February 8, 2011		8,912,500		7.60			64.0
Equity distribution agreement	February 28, 2011 to September 30, 2011		5,212,430		7.39	(1)		37.5
Follow-on public offering	April 13, 2011		17,000,000		7.40			121.1
Follow-on public offering	June 6, 2011		18,400,000		7.40			131.0
Dividend Reinvestment and Stock Purchase Plan	April 7, 2011 to September 30, 2011		11,879,844		7.30	(1)		86.8

(1) Weighted average price

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11 – Income per Common Share

The following table presents a reconciliation of the net income (loss) and the shares used in calculating basic and diluted earnings per share for the quarters and nine months ended September 30, 2012 and September 30, 2011.

	For the Quarters Ended						For the Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Net Income (Loss)	$	54,942		$	(34,472	)	$	106,561		$	(33,149	)
Less: Preferred dividends		(804	)		-			(964	)		-
Net Income (Loss) available (related) to common stockholders	$	54,138		$	(34,472	)	$	105,597		$	(33,149	)

Weighted average common shares outstanding - basic		269,325			78,360			195,272			52,863
Add: Effect of dilutive non-vested restricted stock awards, assumed vested		685			-			1,015