ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2012
¨
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Maryland | 001-34766 | 26-1908763 |
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(State or other jurisdiction of | (Commission File Number) | (I.R.S. Employer Identification No.) |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
234,226,342
.PART I. FINANCIAL INFORMATION | 3 |
Item 1. Financial Statements | 3 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
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Item 1A. Risk Factors |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. Defaults Upon Senior Securities |
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Item 4. Mine Safety Disclosures | 35 |
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Item 5. Other Information |
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Item 6. Exhibits |
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ARMOUR Residential REIT, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets |
| (Unaudited) June 30, 2011 |
| December 31, 2010 |
Cash | $ | 188,233,866 | $ | 35,343,907 |
Restricted cash |
| 55,311,283 |
| 4,680,603 |
Agency securities, available for sale, at fair value (including pledged assets of $4,884,190,551 and $1,023,749,488) |
| 5,258,400,274 |
| 1,161,850,680 |
Principal payments receivable |
| 3,516,060 |
| 2,642,149 |
Accrued interest receivable |
| 15,956,541 |
| 3,892,834 |
Receivable from transfer agent |
| 8,224,723 |
| - |
Prepaid and other assets |
| 383,636 |
| 266,203 |
Refundable income taxes |
| - |
| 547,574 |
Total Assets | $ | 5,530,026,383 | $ | 1,209,223,950 |
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Liabilities and Stockholders’ Equity |
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Liabilities: |
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Repurchase agreements | $ | 4,655,226,247 | $ | 971,675,658 |
Payable for unsettled securities |
| 302,680,242 |
| 125,418,369 |
Interest rate contracts, at fair value |
| 36,008,818 |
| 2,530,645 |
Accounts payable and accrued expenses |
| 1,964,352 |
| 454,379 |
Dividends payable |
| 116,467 |
| 436,322 |
Total Liabilities |
| 4,995,996,126 |
| 1,100,515,373 |
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Stockholders’ Equity: |
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Preferred stock, $0.001 par value, 25,000,000 shares authorized, none outstanding at June 30, 2011 and December 31, 2010 |
| - |
| - |
Common stock, $0.001 par value, 500,000,000 shares authorized, 74,781,174 and 16,441,554 shares issued and outstanding |
| 74,781 |
| 16,442 |
Additional paid-in capital |
| 533,807,928 |
| 116,748,175 |
Accumulated deficit |
| (32,164,751) |
| (3,826,510) |
Accumulated other comprehensive income (loss) |
| 32,312,299 |
| (4,229,530) |
Total Stockholders’ Equity |
| 534,030,257 |
| 108,708,577 |
Total Liabilities and Stockholders’ Equity | $ | 5,530,026,383 | $ | 1,209,223,950 |
Assets | June 30, 2012 | December 31, 2011 | ||||||
Cash | $ | 326,736 | $ | 252,372 | ||||
Restricted cash | 193,086 | 147,199 | ||||||
Agency securities, available for sale, at fair value (including pledged assets of $12,758,125 and $5,225,234) | 13,328,514 | 5,393,675 | ||||||
Receivable for unsettled securities | - | 382,931 | ||||||
Derivatives, at fair value | 9,600 | - | ||||||
Principal payments receivable | 9,190 | 12,493 | ||||||
Accrued interest receivable | 38,544 | 18,637 | ||||||
Prepaid and other assets | 823 | 440 | ||||||
Total Assets | $ | 13,906,493 | $ | 6,207,747 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Repurchase agreements | $ | 12,112,586 | $ | 5,335,962 | ||||
Payable for unsettled securities | 272,863 | 117,885 | ||||||
Derivatives, at fair value | 156,515 | 121,727 | ||||||
Accrued interest payable | 3,373 | 2,154 | ||||||
Accounts payable and accrued expenses | 2,790 | 2,663 | ||||||
Dividends payable | 276 | 750 | ||||||
Total Liabilities | 12,548,403 | 5,581,141 | ||||||
Stockholders’ Equity: | ||||||||
Preferred stock, $0.001 par value, 25,000,000 shares authorized, 1,400,000 8.250% Series A Cumulative Preferred Stock issued and outstanding at June 30, 2012 and none issued and outstanding at December 31, 2011 | 1 | - | ||||||
Common stock, $0.001 par value, 500,000,000 shares authorized, 188,185,880 and 95,436,949 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively | 188 | 95 | ||||||
Additional paid-in capital | 1,340,403 | 678,641 | ||||||
Accumulated deficit | (150,152 | ) | (100,878 | ) | ||||
Accumulated other comprehensive income | 167,650 | 48,748 | ||||||
Total Stockholders’ Equity | 1,358,090 | 626,606 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 13,906,493 | $ | 6,207,747 |
3
Subsidiary
For the Quarters Ended | For the Six Months Ended | |||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||
Interest Income: | ||||||||||||||
Interest income, net of amortization of premium | $ | 86,204 | $ | 29,105 | $ | 148,967 | $ | 42,629 | ||||||
Interest expense: | ||||||||||||||
Repurchase agreements | (11,106 | ) | (2,351 | ) | (18,036 | ) | (3,707 | ) | ||||||
Net interest income | 75,098 | 26,754 | 130,931 | 38,922 | ||||||||||
Other (Loss) Income: | ||||||||||||||
Realized (loss) gain on sale of agency securities | (1,268 | ) | - | 5,048 | - | |||||||||
Other income | 1,043 | - | 1,043 | - | ||||||||||
Subtotal | (225 | ) | - | 6,091 | - | |||||||||
Realized loss on derivatives (1) | (12,400 | ) | (6,078 | ) | (22,140 | ) | (8,004 | ) | ||||||
Unrealized loss on derivatives | (70,394 | ) | (25,817 | ) | (52,780 | ) | (26,083 | ) | ||||||
Subtotal | (82,794 | ) | (31,895 | ) | (74,920 | ) | (34,087 | ) | ||||||
Total other (loss) | (83,019 | ) | (31,895 | ) | (68,829 | ) | (34,087 | ) | ||||||
Expenses: | ||||||||||||||
Management fee | 4,298 | 1,495 | 7,811 | 2,251 | ||||||||||
Professional fees | 425 | 242 | 936 | 613 | ||||||||||
Insurance | 55 | 51 | 104 | 103 | ||||||||||
Compensation | 498 | 140 | 992 | 272 | ||||||||||
Other | 407 | 200 | 672 | 260 | ||||||||||
Total expenses | 5,683 | 2,128 | 10,515 | 3,499 | ||||||||||
Net (loss) income before taxes | (13,604 | ) | (7,269 | ) | 51,587 | 1,336 | ||||||||
Income tax (expense) benefit | (3 | ) | (3 | ) | 29 | (12 | ) | |||||||
Net (Loss) Income | $ | (13,607 | ) | $ | (7,272 | ) | $ | 51,616 | $ | 1,324 | ||||
Dividends on preferred stock | (160 | ) | - | (160 | ) | - | ||||||||
Net (Loss) Income (related) available to common stockholders | $ | (13,767 | ) | $ | (7,272 | ) | $ | 51,456 | $ | 1,324 | ||||
Net (loss) income (related) available per share to common stockholders: | ||||||||||||||
Basic | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.33 | $ | 0.03 | ||||
Diluted | $ | (0.08 | ) | $ | (0.14 | ) | $ | 0.32 | $ | 0.03 | ||||
Dividends per common share | $ | 0.30 | $ | 0.36 | $ | 0.62 | $ | 0.70 | ||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 180,773 | 53,259 | 157,838 | 39,903 | ||||||||||
Diluted | 180,773 | 53,259 | 158,553 | 40,062 |
(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. |
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| Three months Ended June 30, 2011 |
| Three months Ended June 30, 2010 |
| Six months Ended June 30, 2011 |
| Six months Ended June 30, 2010 |
Interest Income: |
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Interest income, net of amortization of premium | $ | 29,461,571 | $ | 1,415,686 | $ | 43,196,400 | $ | 2,523,761 |
Interest expense: |
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Repurchase agreements |
| (2,351,430) |
| (173,082) |
| (3,706,911) |
| (293,728) |
Interest rate swap contracts |
| (6,107,390) |
| - |
| (8,128,648) |
| - |
Total interest expense |
| (8,458,820) |
| (173,082) |
| (11,835,559) |
| (293,728) |
Net interest income |
| 21,002,751 |
| 1,242,604 |
| 31,360,841 |
| 2,230,033 |
Other Income: |
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Change in fair value of interest rate contracts |
| (25,816,511) |
| (1,456,525) |
| (26,082,734) |
| (2,053,450) |
Realized (loss) gain on interest rate contracts |
| (326,980) |
| 6,611 |
| (443,139) |
| (43) |
Realized gain on sale of agency securities |
| - |
| - |
| - |
| 208,094 |
Total net revenues |
| (5,140,740) |
| (207,310) |
| 4,834,968 |
| 384,634 |
Expenses: |
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Professional fees |
| 241,654 |
| 80,982 |
| 612,668 |
| 227,012 |
Insurance |
| 51,725 |
| 51,107 |
| 102,881 |
| 103,020 |
Management fee |
| 1,494,979 |
| 85,398 |
| 2,250,799 |
| 142,996 |
Other |
| 340,145 |
| 275,546 |
| 532,789 |
| 304,139 |
Total expenses |
| 2,128,503 |
| 493,033 |
| 3,499,137 |
| 777,167 |
(Loss) Income before income taxes |
| (7,269,243) |
| (700,343) |
| 1,335,831 |
| (392,533) |
Income tax expense |
| (3,213) |
| - |
| (12,213) |
| (2,400) |
Net (Loss)/income | $ | (7,272,456) | $ | (700,343) | $ | 1,323,618 | $ | (394,933) |
Weighted average shares outstanding: |
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Basic and diluted |
| 53,258,925 |
| 3,146,362 |
| 39,902,981 |
| 2,727,535 |
Net (loss) income per share |
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Basic and diluted | $ | (0.14) | $ | (0.22) | $ | 0.03 | $ | (0.14) |
Dividends per share | $ | 0.36 | $ | 0.40 | $ | 0.70 | $ | 0.80 |
4
Subsidiary
OF COMPREHENSIVE INCOME
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| Accumulated Other Comprehensive income (loss) |
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| Additional Paid-In Capital |
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| Common Stock |
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| Accumulated Deficit |
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| Comprehensive Income |
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| Shares |
| Amount |
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| Total | ||||
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Balance, December 31, 2010 | 16,441,554 | $ | 16,442 | $ | 116,748,175 | $ | (3,826,510) | $ | (4,229,530) | $ | - | $ | 108,708,577 |
Dividends declared |
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| - |
| - |
| (29,661,859) |
| - |
| - |
| (29,661,859) |
Issuance of common stock | 58,333,597 |
| 58,333 |
| 417,003,398 |
| - |
| - |
| - |
| 417,061,731 |
Stock based compensation, net of cash settlement | 9,442 |
| 9 |
| 82,234 |
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| - |
| 82,243 |
Shares forfeited to pay taxes | (3,419) |
| (3) |
| (25,879) |
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| (25,882) |
Net income |
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| 1,323,618 |
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| 1,323,618 |
| 1,323,618 |
Net change in unrealized gain on available for sale securities | - |
| - |
| - |
| - |
| 36,541,829 |
| 36,541,829 |
| 36,541,829 |
Comprehensive income | - |
| - |
| - |
| - |
| - | $ | 37,865,447 |
| - |
Balance, June 30, 2011 | 74,781,174 | $ | 74,781 | $ | 533,807,928 | $ | (32,164,751) | $ | 32,312,299 |
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| $ | 534,030,257 |
For the Quarters Ended | For the Six Months Ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||
Net (Loss) Income | $ | (13,607 | ) | $ | (7,272 | ) | $ | 51,616 | $ | 1,324 | ||||||
Other comprehensive income : | ||||||||||||||||
Reclassification adjustment for realized loss (gain) on sale of Agency Securities | 1,268 | - | (5,048 | ) | - | |||||||||||
Net unrealized gain on available for sale securities | 112,328 | 36,787 | 123,950 | 36,542 | ||||||||||||
Other comprehensive income | 113,596 | 36,787 | 118,902 | 36,542 | ||||||||||||
Comprehensive Income | $ | 99,989 | $ | 29,515 | $ | 170,518 | $ | 37,866 |
5
Subsidiary
STOCKHOLDERS’ EQUITY
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 | - | - | - | - | - | - | - | (160 | ) | - | (160 | ) | ||||||||||||||||||||||||||
Common dividends declared | - | - | - | - | - | - | - | (100,730 | ) | - | (100,730 | ) | ||||||||||||||||||||||||||
Issuance of Preferred stock, net | 1,400 | 1 | 33,778 | - | - | - | 33,778 | - | - | 33,779 | ||||||||||||||||||||||||||||
Issuance of common stock, net | - | - | - | 92,705 | 92 | 627,724 | 627,724 | - | - | 627,816 | ||||||||||||||||||||||||||||
Stock based compensation, net of withholding requirements | - | - | - | 44 | 1 | 260 | 260 | - | - | 261 | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 51,616 | - | 51,616 | ||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | - | - | 118,902 | 118,902 | ||||||||||||||||||||||||||||
Balance, June 30, 2012 | 1,400 | $ | 1 | $ | 33,778 | 188,186 | $ | 188 | $ | 1,306,625 | $ | 1,340,403 | $ | (150,152 | ) | $ | 167,650 | $ | 1,358,090 |
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| Six months Ended June 30, 2011 |
| Six months Ended June 30, 2010 |
Cash Flows From Operating Activities: |
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Net income (loss) | $ | 1,323,618 | $ | (394,933) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Net amortization of premium on Agency Securities |
| 7,932,276 |
| 1,376,198 |
Change in fair value of interest rate contract liabilities |
| 33,478,173 |
| 2,053,449 |
Gain on sale of Agency Securities |
| - |
| (208,094) |
Stock based compensation |
| 145,280 |
| - |
Changes in operating assets and liabilities: |
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Increase in accrued interest receivable |
| (12,063,707) |
| (1,136,564) |
Decrease in prepaid income taxes and other assets |
| 430,141 |
| 47,564 |
Increase in accounts payable and accrued expenses |
| 1,421,056 |
| 160,613 |
Net cash provided by operating activities |
| 32,666,837 |
| 1,898,233 |
Cash Flows From Investing Activities: |
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Purchases of Agency Securities |
| (4,254,339,075) |
| (418,550,949) |
Principal repayments of Agency Securities |
| 183,354,894 |
| 27,318,471 |
Proceeds from sales of Agency Securities |
| - |
| 31,531,266 |
Increase in payable for unsettled security purchases |
| 179,432,101 |
| 57,149,785 |
Net cash used in investing activities |
| (3,891,552,080) |
| (302,551,427) |
Cash Flows From Financing Activities: |
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Issuance of common stock, net of expenses |
| 408,837,008 |
| 32,125,373 |
Proceeds from repurchase agreements |
| 13,771,872,953 |
| 891,030,868 |
Principal repayments on repurchase agreements |
| (10,088,322,364) |
| (602,716,146) |
Increase in restricted cash |
| (50,630,680) |
| (3,560,896) |
Dividends paid |
| (29,981,715) |
| (992,068) |
Net cash provided by financing activities |
| 4,011,775,202 |
| 315,887,131 |
Net Increase in cash |
| 152,889,959 |
| 15,233,937 |
Cash - beginning of period |
| 35,343,907 |
| 6,653,331 |
Cash - end of period | $ | 188,233,866 | $ | 21,887,268 |
Supplemental Disclosure: |
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Cash paid for income taxes (not including tax refunds received) | $ | 15,213 | $ | 3,025 |
Cash paid during the period for interest | $ | 2,970,102 | $ | 200,223 |
Non-Cash Investing and Financing Activities: |
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Net unrealized gain on investment in available for sale securities | $ | 36,541,829 | $ | 2,941,071 |
Amounts receivable for issuance of common stock | $ | 8,224,723 | $ | - |
6
Subsidiary
For the Six Months Ended June 30, 2012 | For the Six Months Ended June 30, 2011 | |||||||
Cash Flows From Operating Activities: | ||||||||
Net income | $ | 51,616 | $ | 1,324 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Net amortization of premium on Agency Securities | 33,737 | 7,933 | ||||||
Unrealized loss on derivatives | 25,188 | 33,478 | ||||||
Realized gain on sale of Agency Securities | (5,048 | ) | - | |||||
Stock based compensation | 261 | 145 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in accrued interest receivable | (19,919 | ) | (12,064 | ) | ||||
(Increase) decrease in prepaid income taxes and other assets | (678 | ) | 430 | |||||
Increase in accrued interest payable | 1,218 | 428 | ||||||
Increase in accounts payable and accrued expenses | 1,498 | 993 | ||||||
Net cash provided by operating activities | 87,873 | 32,667 | ||||||
Cash Flows From Investing Activities: | ||||||||
Purchases of Agency Securities | (8,745,763 | ) | (4,074,907 | ) | ||||
Principal repayments of Agency Securities | 777,772 | 183,355 | ||||||
Proceeds from sales of Agency Securities | 664,588 | - | ||||||
Decrease in restricted cash | (45,887 | ) | (50,631 | ) | ||||
Net cash used in investing activities | (7,349,290 | ) | (3,942,183 | ) | ||||
Cash Flows From Financing Activities: | ||||||||
Issuance of preferred stock, net of expenses | 33,779 | - | ||||||
Issuance of common stock, net of expenses | 627,813 | 408,837 | ||||||
Proceeds from repurchase agreements | 57,438,695 | 13,771,873 | ||||||
Principal repayments on repurchase agreements | (50,663,141 | ) | (10,088,322 | ) | ||||
Common dividends paid | (101,365 | ) | (29,982 | ) | ||||
Net cash provided by financing activities | 7,335,781 | 4,062,406 | ||||||
Net increase in cash | 74,364 | 152,890 | ||||||
Cash - beginning of period | 252,372 | 35,344 | ||||||
Cash - end of period | $ | 326,736 | $ | 188,234 | ||||
Supplemental Disclosure: | ||||||||
Cash paid for income taxes (not including tax refunds received) | $ | 12 | $ | 15 | ||||
Cash paid during the period for interest | $ | 46,012 | $ | 2,970 | ||||
Non-Cash Investing and Financing Activities: | ||||||||
Payable for unsettled security purchases | $ | 272,863 | $ | 302,680 | ||||
Unrealized gain on investment in available for sale securities | $ | 123,950 | $ | 36,542 | ||||
Amounts receivable for issuance of common stock | $ | 3 | $ | 8,225 | ||||
Common dividends declared, to be paid in subsequent period | $ | 8 | $ | 9 | ||||
Preferred dividends declared, to be paid in subsequent period | $ | 160 | $ | - |
June 30, 2011
presented in accordance with GAAP. The Company’scondensed consolidated financial statements include the accounts of ARMOUR and its subsidiary, all intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management is responsible for this interim financial information. Interim results may not be indicativeto 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 that may be expected forcould differ from those estimates. Significant estimates affecting the year. However, we believe that all adjustments considered necessary for a fair presentationaccompanying financial statements include the valuation of this financial information have been includedAgency Securities and are of a normal and recurring nature.
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.
Basis of Presentation and Consolidation and Use of Estimates
Our
reclassified into realized gain or loss on those contracts. The preparationunrealized gains and losses on our derivatives previously classified on our condensed consolidated statement of financial informationoperations as an adjustment to arrive at “net interest income after change in conformity with GAAP requires managementfair value of interest rate contracts” is no longer presented as an adjustment to make estimates that affect the reported assetsinterest income and liabilities at the datehas been reclassified into “other income” as part of the balance sheetunrealized gain or loss on derivatives. This reclassification had no effect on previously reported net income or comprehensive income. This reclassification caused interest income to decrease by $0.4 million and $0.6 million, respectively and interest expense to decrease by $6.1 million and $8.1 million, respectively for the reported amountsquarter and six months ended June 30, 2011. Realized loss on derivatives increased by the net amount of revenues$5.7 million and expenses during$7.5 million, respectively for the reporting period. Actual results could differ from those estimates.
7
Subsidiary
June 30, 2011
third-party pricing services and dealer quotes.
Fair Value of Financial Instruments
The carrying amounts of cash, restricted cash, accrued interest receivable and accounts payable approximate their fair value due to the short maturities of these instruments. See Notes 5 and 6, respectively, for discussion of the fair value of Agency Securities, Available for Sale and Interest Rate Contracts. The carrying amount of repurchase agreements and accrued interest payable is deemed to approximate fair value due to the short-term maturities of these instruments.
Agency Security Valuation
Agency Securities are valued using third-party pricing services and dealer quotes. The third-party pricing services use common market pricing methods including pricing models that 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 independent pricing service, or such data appears unreliable, we obtain valuations from up to three dealers who make markets in similar financial instruments. The dealers will 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 may include, but is not limited to, comparisons of similar market transactions, alternative third-party pricing services and dealer quotes, or comparisons to a pricing model. The resulting unrealized gains and losses are reflected in our condensed consolidated balance sheets as accumulated other comprehensive income (loss).
8
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
2011.
We seek to mitigate the exposure to potential interest rate mismatches between the interest earned on investments and the borrowing costs caused by fluctuations in short-term interest rates. In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. During the term of the interest rate swap, we make or receive periodic payments and unrealized gains or losses are recorded as a result of marking the swaps to their fair value. If a swap is terminated prior to maturity, we record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and our cost basis in the contract, if any. Any realized gains or losses are reported under realized gain (loss) on interest rate contracts in our condensed consolidated statement of operations. All unrealized gains or losses are reported under change in fair value of interest rate contracts in our condensed consolidated statements of operations. Periodic payments are reported in Interest rate swap contracts on our condensed consolidated statement of operations. Swaps involve a risk that interest rates will move contrary to our expectations, which may reduce the periodic payments we receive or increase our payment obligations.
We are exposed to credit loss in the event of nonperformance by the counterparty to the swap, limited to any gains recognized. However, as of June 30, 2011, we did not anticipate nonperformance by any counterparty. Should interest rates move unexpectedly, we may not achieve the anticipated benefits of the interest rate swaps and may realize a loss.
9
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
We are
On June 6, 2012, we filed with the State Department of Assessments and Taxation of the State of Maryland 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. At June 30, 2012, we had issued and outstanding 1,400,000 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 the 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 restricted 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.
Basic
For the Quarters Ended | For the Six Months Ended | |||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||
Net (Loss) Income (related) available to common stockholders | $ | (13,767 | ) | $ | (7,272 | ) | $ | 51,456 | $ | 1,324 | ||||||
Weighted average common shares outstanding - basic | 180,773 | 53,259 | 157,838 | 39,903 | ||||||||||||
Add: Effect of dilutive non-vested restricted stock awards, assumed vested | - | - | 715 | 159 | ||||||||||||
Weighted average common shares outstanding- diluted | 180,773 | 53,259 | 158,553 | 40,062 |
quarters and six months ended June 30, 2012 and June 30, 2011.
Other comprehensive
investments by owners and distributions to owners.
securities using the effective interest method.
10
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
In January 2010,
In April 2011 the FASB issued amendments to authoritative guidance 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. These amendments eliminate the criteria to assess whether a transferor must have the ability to repurchase or redeem the financial assets in order to demonstrate effective control over the transferred asset. Transferors that maintain effective control over a transferred asset are required to account for the transaction as a secured borrowing rather than a sale. These amendments are effective for annual and interim periods beginning after December 15, 2011, and are to be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.
In May 2011, the FASB issuedadopted recent amendments to authoritative guidancetoguidance issued by FASB in May 2011 to establish common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”). TheseStandards.
In June 2011, the FASB issued an amendment to authoritative guidance which allows an entityissued 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.
11
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
AsSecurities as of June 30, 2012 are also presented below.
June 30, 2012 | Fannie Mae | Freddie Mac | Ginnie Mae | Total Agency Securities | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Principal Amount | $ | 8,253,755 | $ | 3,963,691 | $ | 344,154 | $ | 12,561,600 | ||||||||
Net unamortized premium | 393,551 | 189,778 | 15,935 | 599,264 | ||||||||||||
Amortized cost | 8,647,306 | 4,153,469 | 360,089 | 13,160,864 | ||||||||||||
Unrealized gains | 111,484 | 53,084 | 5,488 | 170,056 | ||||||||||||
Unrealized losses | (1,912 | ) | (491 | ) | (3 | ) | (2,406 | ) | ||||||||
Fair value | $ | 8,756,878 | $ | 4,206,062 | $ | 365,574 | $ | 13,328,514 |
June 30, 2012 | Adjustable Rate | Fixed Rate | Total Agency Securities | |||||||||
(dollars in thousands) | ||||||||||||
Principal Amount | $ | 2,685,281 | $ | 9,876,319 | $ | 12,561,600 | ||||||
Net unamortized premium | 113,379 | 485,885 | 599,264 | |||||||||
Amortized cost | 2,798,660 | 10,362,204 | 13,160,864 | |||||||||
Unrealized gains | 39,755 | 130,301 | 170,056 | |||||||||
Unrealized losses | (687 | ) | (1,719 | ) | (2,406 | ) | ||||||
Fair value | $ | 2,837,728 | $ | 10,490,786 | $ | 13,328,514 |
|
| Amortized Cost |
| Fair Market Value |
| Unrealized Loss |
| Unrealized Gain |
| Net Unrealized Gain |
Fannie Mae Certificates | $ | 3,538,556,926 | $ | 3,558,501,091 | $ | (6,066,426) | $ | 26,010,591 | $ | 19,944,165 |
Freddie Mac Certificates |
| 1,122,196,621 |
| 1,128,893,007 |
| (2,055,659) |
| 8,752,045 |
| 6,696,386 |
Ginnie Mae Certificates |
| 565,334,428 |
| 571,006,176 |
| (155,488) |
| 5,827,236 |
| 5,671,748 |
Total Agency Securities | $ | 5,226,087,975 | $ | 5,258,400,274 | $ | (8,277,573) | $ | 40,589,872 | $ | 32,312,299 |
As of December 31, 2010, we had the following securities in an unrealized (loss)gain position as presented below. The table below includes $125.3 million of current carrying value of forward settle security purchases.
|
| Amortized Cost |
| Fair Market Value |
| Unrealized Loss |
| Unrealized Gain |
| Net Unrealized Gain(Loss) |
Fannie Mae Certificates | $ | 847,473,686 | $ | 843,872,174 | $ | (5,767,276) | $ | 2,165,764 | $ | (3,601,512) |
Freddie Mac Certificates |
| 258,457,021 |
| 257,316,342 |
| (2,060,057) |
| 919,378 |
| (1,140,679) |
Ginnie Mae Certificates |
| 60,149,503 |
| 60,662,164 |
| (45,676) |
| 558,337 |
| 512,661 |
Total Agency Securities | $ | 1,166,080,210 | $ | 1,161,850,680 | $ | (7,873,009) | $ | 3,643,479 | $ | (4,229,530) |
The components of the carrying value of available for sale Agency Securities at June 30, 2011, are presented below.
|
| June 30, 2011 |
Principal balance settled securities | $ | 4,738,159,134 |
Principal balance forward settle securities |
| 290,063,661 |
Unamortized premium settled securities |
| 185,281,210 |
Unamortized premium forward settle securities |
| 12,583,970 |
Gross unrealized gains |
| 40,589,872 |
Gross unrealized losses |
| (8,277,573) |
Carrying value/estimated fair value | $ | 5,258,400,274 |
The components of the carrying value of available for sale Agency Securities at December 31, 2010, are presented below.
|
| December 31, 2010 |
Principal balance settled securities | $ | 995,994,552 |
Principal balance forward settle securities |
| 120,473,239 |
Unamortized premium settled securities |
| 44,724,477 |
Unamortized premium forward settle securities |
| 4,887,942 |
Gross unrealized gains |
| 3,643,479 |
Gross unrealized losses |
| (7,873,009) |
Carrying value/estimated fair value | $ | 1,161,850,680 |
As of June 30, 2011, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities,as of 103.94%, due to the average interest rates on these securities being higher than prevailing market rates. As of June 30,December 31, 2011 we had approximately $197.9 million of unamortized premium included in the cost basis of our investments, inclusive of both settled and forward settle securities. As of June 30, 2011, our investment portfolio of securities consisted of Agency Securities as follows:
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 |
Subsidiary
June 30, 2011
Adjustable Rate Settled
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 |
2012 and December 31, 2011.
June 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 | $ | 2,682 | $ | 2,637 | $ | 179 | $ | 179 | ||||||||
Greater than one year and less than five years | 13,309,810 | 13,142,241 | 5,274,072 | 5,226,255 | ||||||||||||
Greater than or equal to five years | 16,022 | 15,986 | 119,424 | 118,493 | ||||||||||||
Total Agency Securities | $ | 13,328,514 | $ | 13,160,864 | $ | 5,393,675 | $ | 5,344,927 |
Months to Reset |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-18 |
| 2.7 | % | 7 | $ | 126,037,338 |
| 3.46 | % | $ | 104.68 | $ | 131,940,537 | $ | 105.11 | $ | 132,481,554 |
19-36 |
| 3.0 |
| 29 |
| 140,078,261 |
| 4.68 |
|
| 105.02 |
| 147,115,571 |
| 105.69 |
| 148,044,387 |
37-60 |
| 21.5 |
| 51 |
| 1,018,715,688 |
| 3.59 |
|
| 103.48 |
| 1,054,208,921 |
| 104.59 |
| 1,065,473,194 |
61-84 |
| 26.0 |
| 76 |
| 1,236,471,123 |
| 3.59 |
|
| 103.53 |
| 1,280,117,332 |
| 104.06 |
| 1,286,701,073 |
85+ |
| 1.5 |
| 98 |
| 76,888,604 |
| 3.83 |
|
| 104.89 |
| 80,647,118 |
| 103.85 |
| 79,848,005 |
Total/Average |
| 54.7 | % | 61 | $ | 2,598,191,014 |
| 3.65 | % | $ | 103.69 | $ | 2,694,029,479 | $ | 104.40 | $ | 2,712,548,213 |
Fixed Rate SettledWe 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 June 30, 2011
Months to Maturity |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-90 |
| 0.1 | % | 68 | $ | 1,476,715 |
| 5.59 | % | $ | 106.54 | $ | 1,573,326 | $ | 108.13 | $ | 1,596,823 |
91-180 |
| 45.2 |
| 174 |
| 2,137,728,735 |
| 4.12 |
|
| 104.18 |
| 2,227,029,228 |
| 104.85 |
| 2,241,445,656 |
181+ |
| 0.0 |
| 184 |
| 762,670 |
| 5.50 |
|
| 105.98 |
| 808,311 |
| 108.61 |
| 828,358 |
Total/Average |
| 45.3 | % | 174 | $ | 2,139,968,120 |
| 4.12 | % | $ | 104.18 | $ | 2,229,410,865 | $ | 104.86 | $ | 2,243,870,837 |
All Settled Securities as of June 30, 2011
|
| Percentage of Settled Securities Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 4,738,159,134 |
| 3.86 | % | $ | 103.91 | $ | 4,923,440,344 | $ | 104.61 | $ | 4,956,419,050 |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, we had committed to purchase securities for settlements in July and August of 2011. The information below was current as of June 30, 2011, but subject to change due to amortization prior to settlement. In addition, some forward trades of new issue securities are subject to modest changes in delivery size and coupon.
13
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Adjustable Rate Forward Settle Securities as of June 30, 2011
Months to Reset |
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
37-60 |
| 4.7 | % | 52 | $ | 13,310,852 |
| 4.00 | % | $ | 105.78 | $ | 14,080,386 | $ | 106.32 | $ | 14,152,122 |
61-84 |
| 16.7 |
| 83 |
| 48,583,063 |
| 3.50 |
|
| 103.87 |
| 50,464,496 |
| 103.47 |
| 50,270,015 |
85+ |
| 3.8 |
| 115 |
| 11,387,278 |
| 3.90 |
|
| 103.95 |
| 11,836,657 |
| 103.52 |
| 11,787,560 |
Total/Average |
| 25.2 | % | 82 | $ | 73,281,193 |
| 3.65 | % | $ | 104.23 | $ | 76,381,539 | $ | 104.00 | $ | 76,209,697 |
Fixed Rate Forward Settle Securities as of June 30, 2011
Months to Maturity |
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
91-180 |
| 74.8 | % | 179 | $ | 216,782,468 |
| 4.00 | % | $ | 104.37 | $ | 226,266,092 | $ | 104.15 | $ | 225,771,527 |
Total/Average |
| 74.8 | % | 179 | $ | 216,782,468 |
| 4.00 | % | $ | 104.37 | $ | 226,266,092 | $ | 104.15 | $ | 225,771,527 |
All Forward Settle Securities as of June 30, 2011
|
| Percentage of Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 290,063,661 |
| 3.91 | % | $ | 104.34 | $ | 302,647,631 | $ | 104.11 | $ | 301,981,224 |
All Settled and Forward Settle Securities as of June 30, 2011
|
| Percentage of Settled and Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 5,028,222,795 |
| 3.86 | % | $ | 103.94 | $ | 5,226,087,975 | $ | 104.58 | $ | 5,258,400,274 |
|
|
|
|
|
|
|
|
|
|
|
|
14
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
As of December 31, 2010, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities, of 104.44%, due to the average interest rates on these securities being higher than prevailing market rates. As of December 31, 2010, we had approximately $49.6 million of unamortized premium included in the cost basis of our investments, inclusive of both settled and forward settle securities. All unsettled purchases of securities as of December 31, 2010, were settled in January and February 2011. As of December 31, 2010, our investment portfolio of settled securities consisted of Agency Securities as follows:
Adjustable Rate Settled Securities as of December 31, 2010
Months to Reset |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-18 |
| 4.8 | % | 7 | $ | 47,989,156 |
| 3.67 | % | $ | 104.31 | $ | 50,058,987 | $ | 104.45 | $ | 50,126,097 |
19-36 |
| 3.3 |
| 29 |
| 32,967,374 |
| 4.00 |
|
| 103.71 |
| 34,192,034 |
| 104.37 |
| 34,407,131 |
37-60 |
| 25.0 |
| 52 |
| 247,952,187 |
| 4.00 |
|
| 103.96 |
| 257,686,509 |
| 104.44 |
| 258,969,161 |
61-84 |
| 32.5 |
| 78 |
| 325,954,726 |
| 3.87 |
|
| 104.26 |
| 339,833,155 |
| 103.34 |
| 336,849,193 |
85+ |
| 4.4 |
| 114 |
| 44,397,480 |
| 4.07 |
|
| 105.39 |
| 46,789,017 |
| 102.66 |
| 45,578,166 |
Total/Average |
| 70.0 | % | 64 | $ | 699,260,923 |
| 3.92 | % | $ | 104.20 | $ | 728,559,702 | $ | 103.81 | $ | 725,929,748 |
Fixed Rate Settled Securities as of December 31, 2010
Months to Maturity |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-90 |
| 0.1 | % | 63 | $ | 1,171,170 |
| 6.15 | % | $ | 107.23 | $ | 1,255,843 | $ | 108.53 | $ | 1,271,054 |
91-180 |
| 29.9 |
| 172 |
| 295,562,459 |
| 4.33 |
|
| 105.19 |
| 310,903,484 |
| 104.65 |
| 309,319,711 |
Total/Average |
| 30.0 | % | 171 | $ | 296,733,629 |
| 4.34 | % | $ | 105.20 | $ | 312,159,327 | $ | 104.67 | $ | 310,590,765 |
All Settled Securities as of December 31, 2010
|
| Percentage Of Settled Securities Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current |
Total/Average |
| 100.0 | % |
| $ | 995,994,552 |
| 4.04 | % | $ | 104.50 | $ | 1,040,719,029 | $ | 104.07 | $ | 1,036,520,513 |
|
|
|
|
|
|
|
|
|
|
|
|
15
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
As of December 31, 2010, we had committed to purchase securities for settlements in January and February of 2011. The information below was current as of December 31, 2010, but subject to change due to amortization prior to settlement. In addition, some forward trades of new issue securities are subject to modest changes in delivery size and coupon. All, but one, of the forward settling Agency Securities were adjustable rate with a minimum expected reset of 11 months and a maximum expected reset of 71 months.
Adjustable Rate Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current |
Total/Average |
| 63.6 | % | 27 | $ | 76,288,258 |
| 3.22 | % | $ | 104.60 | $ | 79,799,280 | $ | 104.41 | $ | 79,653,941 |
Fixed Rate Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current |
Total/Average |
| 36.4 | % | 179 | $ | 44,184,981 |
| 4.00 | % | $ | 103.12 | $ | 45,561,900 | $ | 103.38 | $ | 45,676,226 |
All Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current |
Total/Average |
| 100.0 | % |
| $ | 120,473,239 |
| 3.51 | % | $ | 104.06 | $ | 125,361,180 | $ | 104.03 | $ | 125,330,167 |
All Settled and Forward Settle Securities as of December 31, 2010
|
| Percentage of Settled and Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current |
Total/Average |
| 100.0 | % |
| $ | 1,116,467,791 |
| 3.98 | % | $ | 104.44 | $ | 1,166,080,209 | $ | 103.73 | $ | 1,161,850,680 |
|
|
|
|
|
|
|
|
|
|
|
|
16
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at June 30, 2011.
Agency Securities |
| June 30, 2011 |
| ||
|
| Estimated Fair Value |
| Percentage of Total |
|
Settled Securities |
|
|
|
|
|
Fannie Mae Certificates | $ | 3,281,339,497 |
| 62.4 | % |
Freddie Mac Certificates |
| 1,118,225,499 |
| 21.2 |
|
Ginnie Mae Certificates |
| 556,854,054 |
| 10.6 |
|
|
|
|
|
|
|
Forward Settle Securities |
|
|
|
|
|
Fannie Mae Certificates |
| 277,161,594 |
| 5.3 |
|
Freddie Mac Certificates |
| 10,667,508 |
| 0.2 |
|
Ginnie Mae Certificates |
| 14,152,122 |
| 0.3 |
|
Total Securities | $ | 5,258,400,274 |
| 100.0 | % |
Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at December 31, 2010.
Agency Securities |
| December 31, 2010 |
| ||
|
| Estimated Fair Value |
| Percentage of Total |
|
Settled Securities |
|
|
|
|
|
Fannie Mae Certificates | $ | 718,542,007 |
| 61.8 | % |
Freddie Mac Certificates |
| 257,316,342 |
| 22.2 |
|
Ginnie Mae Certificates |
| 60,662,164 |
| 5.2 |
|
|
|
|
|
|
|
Forward Settle Securities |
|
|
|
|
|
Fannie Mae Certificates |
| 125,330,167 |
| 10.8 |
|
Freddie Mac Certificates |
| - |
| - |
|
Ginnie Mae Certificates |
| - |
| - |
|
Total Securities | $ | 1,161,850,680 |
| 100.0 | % |
As of June 30, 20112012 and December 31, 2010,2011 in the adjustabletable above are based upon market factors, assumptions, models and hybrid adjustable rate mortgage loans underlying ourestimates from the third party model and also incorporate ARRM’s judgment and experience. The actual weighted average lives of the Agency Securities have fixed interest rates for an average period of approximately 61 months and 64 months respectively, after which time the interest rates reset and become adjustable. After a reset date, interest rates on our adjustable and hybrid adjustable Agency Securities float based on spreads over various indices, typically LIBORcould be longer or the one-year Constant Maturity Treasury (“CMT”), rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap, and through the maturity of the security, known as a lifetime cap.
shorter than estimated.
2011.
|
| Less than 12 months |
| 12 Months or More |
| Total | ||||||
As of |
| Estimated Fair Value |
| Unrealized Losses |
| Estimated Fair Value |
| Unrealized Losses |
| Estimated Fair Value |
| Unrealized Losses |
June 30, 2011 | $ | 2,008,618,850 | $ | (8,237,419) | $ | 17,680,163 | $ | (40,154) | $ | 2,026,299,013 | $ | (8,277,573) |
December 31, 2010 |
| 706,575,108 |
| (7,873,009) |
| - |
| - |
| 706,575,108 |
| (7,873,009) |
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 | ||||||||||||||||||
June 30, 2012 | $ | 804,479 | $ | (2,390 | ) | $ | 1,653 | $ | (16 | ) | $ | 806,132 | $ | (2,406 | ) | |||||||||
December 31, 2011 | 1,173,098 | (3,560 | ) | 96,684 | (346 | ) | 1,269,782 | (3,906 | ) |
17
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Note 6 - Interest Rate Contracts
2011.
As of June 30, 2011 and December 31, 2010, we had entered into $134.0 million and $214.0 million (notional amount), respectively, of Eurodollar Future swap equivalents traded in 1,301 and 2,361 individual contract transactions, respectively. Our Futures Contracts are traded on the Chicago Mercantile Exchange (“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.
As of June 30, 2011 and December 31, 2010, we had entered into $1.9 billion and $155.0 million (notional amount) of swap contracts, respectively, traded in 50 and 10 individual transactions, respectively. Consistent with market practice, we have agreements with our swap counterparties that provide for the posting of collateral based on the fair values of our interest rate contracts. Through this margining process, either we or our swap counterparty may be required to pledge cash or 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.
As of June 30, 2011, included in restricted cash on the condensed consolidated balance sheet is $5.4 million related to margin posted for futures contracts as well as $50.6 million of restricted cash related to interest rate swap contracts. As of December 31, 2010, we had $4.4 million of restricted cash related to margin posted for futures contracts, and $0.3 million related to interest rate swap contracts.
The following tables present information about interest rate swap contracts which are included in interest rate contracts on the accompanying condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010:
|
| Notional Amount |
| Value as of June 30, 2011 |
| Fixed Rate |
|
Interest rate swaps maturing 12-24 months | $ | 20,000,000 | $ | (117,312) |
| 0.5 | % |
Interest rate swaps maturing 24-36 months |
| 290,000,000 |
| (3,677,088) |
| 1.1 |
|
Interest rate swaps maturing 36-48 months |
| 555,000,000 |
| (6,128,974) |
| 1.4 |
|
Interest rate swaps maturing 48-60 months |
| 1,000,000,000 |
| (21,531,444) |
| 3.6 |
|
Totals | $ | 1,865,000,000 | $ | (31,454,818) |
| 2.6 | % |
18
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
|
| Notional Amount |
| Value as of December 31, 2010 |
| Fixed Rate |
|
Interest rate swaps maturing 12-24 months | $ | 20,000,000 | $ | (9,981) |
| 0.5 | % |
Interest rate swaps maturing 24-36 months |
| 100,000,000 |
| 147,282 |
| 1.0 |
|
Interest rate swaps maturing 36-48 months |
| 10,000,000 |
| (9,195) |
| 1.4 |
|
Interest rate swaps maturing 48-60 months |
| 25,000,000 |
| (26,039) |
| 1.9 |
|
Totals | $ | 155,000,000 | $ | 102,067 |
| 1.1 | % |
The following tables present information about Futures Contracts which are included in interest rate contracts on the accompanying condensed consolidated balance sheet as of June 30, 2011 and December 31, 2010:
|
| Notional Amount |
| Fair Value as of June 30, 2011 |
| Weighted Average Rate |
|
Eurodollar future strips maturing 3/19/12-9/17/12 | $ | 13,000,000 | $ | (128,187) |
| 1.0 | % |
Eurodollar future strips maturing 3/18/13-9/16/13 |
| 47,000,000 |
| (1,304,125) |
| 1.6 |
|
Eurodollar future strips maturing 3/17/14-12/15/14 |
| 64,000,000 |
| (2,762,688) |
| 2.1 |
|
Eurodollar future strips maturing 9/14/15 |
| 10,000,000 |
| (359,000) |
| 2.1 |
|
Totals | $ | 134,000,000 | $ | (4,554,000) |
| 1.8 | % |
|
| Notional Amount |
| Fair Value as of December 31, 2010 |
| Weighted Average Rate |
|
Eurodollar future strips maturing 3/19/12-9/17/12 | $ | 28,000,000 | $ | (137,950) |
| 0.8 | % |
Eurodollar future strips maturing 3/18/13-12/16/13 |
| 107,000,000 |
| (1,114,125) |
| 1.3 |
|
Eurodollar future strips maturing 3/17/14-9/15/14 |
| 64,000,000 |
| (1,193,113) |
| 1.8 |
|
Eurodollar future strips maturing 9/14/15 |
| 15,000,000 |
| (187,524) |
| 2.1 |
|
Totals | $ | 214,000,000 | $ | (2,632,712) |
| 1.6 | % |
June 30, 2012 | Level 1 | Level 2 | Level 3 | Totals | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Agency Securities, available for sale | $ | - | $ | 13,328,514 | $ | - | $ | 13,328,514 | ||||||||
Derivatives, at fair value | $ | - | $ | 9,600 | - | $ | 9,600 | |||||||||
Liabilities: | ||||||||||||||||
Derivatives, at fair value | $ | (4,916 | ) | $ | (151,599 | ) | - | $ | (156,515 | ) |
December 31, 2011 | Level 1 | Level 2 | Level 3 | Totals | ||||||||||||
(dollars in thousands) | ||||||||||||||||
Assets: | ||||||||||||||||
Agency Securities, available for sale | $ | - | $ | 5,393,675 | $ | - | $ | 5,393,675 | ||||||||
Liabilities: | ||||||||||||||||
Derivatives, at fair value | $ | (5,292 | ) | $ | (116,435 | ) | - | $ | (121,727 | ) |
At
June 30, 2011 |
| Balance |
| Weighted Average Contractual Rate |
|
| Contractual Interest Payments |
| Total Contractual Obligation |
Within 30 days | $ | 2,855,137,603 |
| 0.23 | % | $ | 393,082 | $ | 2,855,530,685 |
31 days to 60 days |
| 1,696,005,644 |
| 0.24 |
|
| 216,052 |
| 1,696,221,696 |
61 days to 90 days |
| 104,083,000 |
| 0.24 |
|
| 17,925 |
| 104,100,925 |
Total | $ | 4,655,226,247 |
| 0.23 | % | $ | 627,059 | $ | 4,655,853,306 |
19
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
agreements as of June 30, 2011
(Unaudited)
December 31, 2010 |
| Balance |
| Weighted Average Contractual Rate |
|
| Contractual Interest Payments |
| Total Contractual Obligation |
Within 30 days | $ | 656,601,658 |
| 0.36 | % | $ | 120,965 | $ | 656,722,623 |
31 days to 60 days |
| 123,840,000 |
| 0.33 |
|
| 27,244 |
| 123,867,244 |
61 days to 90 days |
| 191,234,000 |
| 0.32 |
|
| 71,349 |
| 191,305,349 |
Total | $ | 971,675,658 |
| 0.35 | % | $ | 219,558 | $ | 971,895,216 |
At June 30, 2011, our repurchase agreements had the following counterparties, amount at risk2012 and weighted average remaining maturities:
Repurchase Agreement Counterparties |
| Amount Outstanding |
| Amount at Risk (1) |
| Weighted Average Maturity of Repurchase Agreements in Days |
| Percent of Total Amount Outstanding |
|
UBS Securities LLC | $ | 361,449,000 | $ | 17,847,231 |
| 28 |
| 7.8 | % |
Nomura Securities International, Inc. |
| 351,490,644 |
| 17,223,850 |
| 38 |
| 7.6 |
|
BNP Paribas Securities Corp. |
| 351,003,000 |
| 16,456,632 |
| 14 |
| 7.5 |
|
Cantor Fitzgerald & Co. |
| 333,963,000 |
| 20,712,523 |
| 17 |
| 7.2 |
|
Goldman Sachs & Company |
| 286,606,000 |
| 13,468,990 |
| 24 |
| 6.2 |
|
MF Global Inc. |
| 276,242,000 |
| 13,346,958 |
| 24 |
| 5.9 |
|
J.P. Morgan Securities LLC |
| 261,778,000 |
| 13,137,162 |
| 26 |
| 5.6 |
|
South Street Securities, LLC |
| 254,692,000 |
| 11,823,249 |
| 21 |
| 5.5 |
|
Mitsubishi UFJ Securities (USA) |
| 241,876,000 |
| 11,164,925 |
| 37 |
| 5.2 |
|
Merrill Lynch, Pierce, Fenner & Smith Inc. |
| 238,909,000 |
| 10,183,966 |
| 50 |
| 5.1 |
|
Citigroup Global Markets Inc. |
| 221,216,000 |
| 10,878,102 |
| 21 |
| 4.8 |
|
Guggenheim Liquidity Securities, LLC |
| 212,549,000 |
| 10,122,859 |
| 40 |
| 4.6 |
|
RBS Securities Inc. |
| 195,431,000 |
| 9,867,232 |
| 14 |
| 4.2 |
|
Barclays Capital Inc. |
| 191,371,682 |
| 9,598,234 |
| 23 |
| 4.1 |
|
Daiwa Securities America Inc. |
| 176,000,000 |
| 10,290,508 |
| 30 |
| 3.8 |
|
Mizuho Securities USA Inc. |
| 143,281,000 |
| 5,708,003 |
| 23 |
| 3.1 |
|
The Prince Ridge Group LLC |
| 117,410,000 |
| 6,242,776 |
| 40 |
| 2.5 |
|
ING Financial Markets LLC |
| 116,411,000 |
| 5,317,605 |
| 18 |
| 2.5 |
|
Credit Suisse Securities (USA) LLC |
| 109,350,921 |
| 4,174,740 |
| 18 |
| 2.3 |
|
Jefferies and Company, Inc. |
| 94,647,000 |
| 4,675,345 |
| 39 |
| 2.0 |
|
CRT Capital Group LLC |
| 63,994,000 |
| 3,121,631 |
| 11 |
| 1.4 |
|
Wells Fargo Bank, N.A. |
| 55,556,000 |
| 2,974,725 |
| 18 |
| 1.1 |
|
Total | $ | 4,655,226,247 | $ | 228,337,246 |
|
|
| 100.0 | % |
(1)
Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense.
20
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
At December 31, 2010, our repurchase agreements had the following counterparties, amount at risk and weighted average remaining maturities:
2011.
June 30, 2012 | December 31, 2011 | |||||||
(dollars in thousands) | ||||||||
Within 30 days | $ | 7,823,536 | $ | 4,068,197 | ||||
31 days to 60 days | 2,038,459 | 1,111,480 | ||||||
61 days to 90 days | 1,707,767 | 156,285 | ||||||
Greater than 90 days | 542,824 | - | ||||||
Total | $ | 12,112,586 | $ | 5,335,962 |
Repurchase Agreement Counterparties |
| Amount Outstanding |
| Amount at Risk (1) |
| Weighted Average Maturity of Repurchase Agreements in Days |
| Percent of Total Amount Outstanding |
|
Guggenheim Liquidity Securities, LLC | $ | 141,026,000 | $ | 4,425,424 |
| 56 |
| 14.5 | % |
South Street Securities, LLC |
| 135,297,000 |
| 6,204,002 |
| 29 |
| 13.9 |
|
Goldman Sachs & Company |
| 132,638,000 |
| 6,424,071 |
| 19 |
| 13.7 |
|
MF Global Inc. |
| 127,809,000 |
| 4,197,001 |
| 56 |
| 13.2 |
|
Cantor Fitzgerald & Co. |
| 111,982,000 |
| 7,658,536 |
| 16 |
| 11.5 |
|
Nomura Securities International, Inc. |
| 95,228,000 |
| 2,037,191 |
| 40 |
| 9.8 |
|
RBS Securities Inc. |
| 86,535,658 |
| 4,774,360 |
| 18 |
| 8.9 |
|
UBS Securities LLC |
| 46,535,000 |
| 2,805,301 |
| 27 |
| 4.8 |
|
Mizuho Securities USA Inc. |
| 39,826,000 |
| 1,593,285 |
| 10 |
| 4.0 |
|
Jefferies and Company, Inc. |
| 31,822,000 |
| 426,829 |
| 10 |
| 3.3 |
|
Daiwa Securities America Inc. |
| 22,977,000 |
| 1,690,799 |
| 18 |
| 2.4 |
|
Total | $ | 971,675,658 | $ | 42,236,799 |
|
|
| 100.0 | % |
(1)
Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense
As of June 30, 20112012 and December 31, 2010,2011, the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount, which we also refer to as the haircut, under all our repurchase agreements was approximately 5.0%4.8% and 5.3%5.0%, respectively.
June 30, 2012 | December 31, 2011 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||
Notional Amount | Net Fair Value (1) | Notional Amount | Net Fair Value (1) | |||||||||||||
Interest rate Swap contracts | $ | 5,990,000 | $ | (150,650 | ) | $ | 2,765,000 | $ | (116,435 | ) | ||||||
Interest rate swaptions | 800,000 | 8,651 | - | - | ||||||||||||
Futures Contracts | 121,000 | (4,916 | ) | 131,000 | (5,292 | ) | ||||||||||
Totals | $ | 6,911,000 | $ | (146,915 | ) | $ | 2,896,000 | $ | (121,727 | ) |
Loss Recognized in Income (dollars in thousands) | |||||||||||||||||
For the Quarters Ended | For the Six Months Ended | ||||||||||||||||
Derivatives | Location on condensed consolidated statements of operations | June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | ||||||||||||
Interest rate swap contracts: | |||||||||||||||||
Interest income | Realized loss on derivatives | $ | 1,928 | $ | 356 | $ | 2,859 | $ | 567 | ||||||||
Interest expense | Realized loss on derivatives | (13,756 | ) | (6,107 | ) | (23,946 | ) | (8,128 | ) | ||||||||
Realized gain | Realized loss on derivatives | - | - | - | 17 | ||||||||||||
Changes in fair value | Unrealized loss on derivatives | (59,233 | ) | (24,038 | ) | (41,677 | ) | (24,162 | ) | ||||||||
(71,061 | ) | (29,789 | ) | (62,764) | (31,706 | ) | |||||||||||
Interest rate swaptions: | |||||||||||||||||
Realized (loss) | Realized loss on derivatives | - | - | - | - | ||||||||||||
Changes in fair value | Unrealized loss on derivatives | (11,479 | ) | - | (11,479 | ) | - | ||||||||||
(11,479 | ) | - | (11,479 | ) | - | ||||||||||||
Futures Contracts: | |||||||||||||||||
Realized (loss) | Realized loss on derivatives | (572 | ) | (327 | ) | (1,053 | ) | (460 | ) | ||||||||
Changes in fair value | Unrealized loss on derivatives | 318 | (1,779 | ) | 376 | (1,921 | ) | ||||||||||
(254 | ) | (2,106 | ) | (677 | ) | (2,381 | ) | ||||||||||
Totals | $ | (82,794 | ) | $ | (31,895 | ) | $ | (74,920 | ) | $ | (34,087 | ) |
Note 8 - Commitments and Contingencies
Management Agreement with ARRM
As discussed in Note 14 “Related Party Transactions,” we are party to a management agreement with ARRM. Pursuant to the management agreement, as amended, ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of an amount, with a minimum based on 1/12th of $900,000 (inclusive of the original gross merger equity), determined as follows:
·
our gross equity raised up to $50 million, 1% (per annum) of gross equity;
·
our gross equity raised up to $1.0 billion, 1.5% (per annum) of gross equity;
·
our gross equity raised exceeds $1.0 billion, 0.75% (per annum) of gross equity
Operating Leases
We are not party to any agreement for the rental of real property and office space, or any significant leases for office, computer and other equipment or office furnishings.
Indemnifications and Litigation
We enter into certain contracts that contain a variety of indemnifications, principally with ARRM and brokers. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unknown. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2011 and December 31, 2010.
21
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
We are not party to any pending, threatened or contemplated litigation.
2009 Stock Incentive Plan
operations. The Plan provides for grants ofauthorizes 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.”“Awards”), subject to terms as provided in the Plan.
The Plan allows for the Board to expand the types of awards available underand the Plan and determine the maximum number of shares that may underlie these awards in any one year to any Eligible Individual. If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.
Awards Under the Plan
was amended accordingly. During the six months ended June 30, 2011,2012 we allocated 250,000 RSUs subject to various performance conditions and awarded a total of 192,500655,524 RSUs to members of our Board (the “Board Awards”) and employees of ARRM (the “ARRM Awards”). We accountARRM.
June 30, 2012 | ||||||||
Number of Awards | Weighted Average Grant Date Fair Value per Award | |||||||
Unvested Awards Outstanding at January 1, 2012 | 153,980 | $ | 7.91 | |||||
Granted | 655,524 | 7.13 | ||||||
Vested | (96,322 | ) | 7.28 | |||||
Unvested Awards Outstanding at June 30, 2012 | 713,182 | $ | 7.28 |
Subsidiary
RSUdividend transactions for the periodsix months ended June 30, 2011, are summarized below:
2012.
|
| Number of Awards |
| Weighted Average Grant Date Fair Value per Award |
Unvested Awards Outstanding, December 31, 2010 |
| - | $ | - |
Granted |
| 192,500 |
| 7.91 |
Vested |
| (19,260) |
| 7.91 |
Unvested Awards Outstanding June 30, 2011 |
| 173,240 | $ | 7.91 |
Record Date | Payment Date | Rate per common share | Aggregate amount paid to holders of record (in millions) | |||||||
January 15, 2012 | 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 15, 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 |
22
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Note 10 - Shareholders’ Equity
On January 26, 2011, we completed an underwritten secondary public offering of 6,000,000 shares of common stock. The underwriters fully exercised the over-allotment option for 900,000 additional shares at a price of $7.55 per share. Net proceeds were $49.0 million, net of issuance costs of approximately $3.1 million.
On January 28, 2011, a cash dividend of $0.12 per common share, or $2.0 million in the aggregate, was paid to holders of record on January 15, 2011. This
On February 8, 2011, we completed an underwritten secondary public offering of 7,750,0002011.
six months ended June 30, 2012. On February 25, 2011,July 27, 2012, a cash dividend of $0.12$0.2865 per commonoutstanding share of Series A Preferred Stock, or $3.9$0.4 million in the aggregate, was paid to holders of record on February 15, 2011.
On March 30, 2011, a cash dividend of $0.12 per common share, or $3.9 million inJuly 13, 2012 for the aggregate, was paid to holders of record on March 15, 2011.
On April 13, 2011, we completed an underwritten secondary public offering of 17,000,000 shares of common stock. The underwriters partially exercised the over-allotment option for 1,000,000 additional shares at a price of $7.40 per share. Net proceeds were $121.1 million, net of issuance costs of approximately $4.7 million.
On April 28, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on April 15, 2011.
On May 27, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on May 15, 2011.
On June 6, 2011, we completed an underwritten secondary public offering of 16,000,000 shares of common stock. The underwriters fully exercised the over-allotment option for 2,400,000 additional shares at a price of $7.40 per share. Net proceeds were $131.0 million, net of issuance costs of approximately $5.2 million.
On June 29, 2011, a cash dividend of $0.12 per common share, or $8.3 million in the aggregate, was paid to holders of record on June 15, 2011.
On February 28, 2011, we entered into sales agreements with JMP Securities LLC and Ladenburg Thalmann Financial Services Inc. to, from time to time, publicly offer and sell up to 6,500,000 shares of our common stock in at-the-market transactions and/or privately negotiated transactions. Asperiod of June 7, 2012 through July 30, 2011, we have not sold any common stock under the sales agreements.
Dividend Reinvestment and Stock Purchase Plan
On April 7, 2011, we implemented a Dividend Reinvestment and Stock Purchase Plan through which investors may purchase additional shares2012. Our condensed consolidated financial statements reflect an accrual of our common stock by reinvesting some or all of the cash dividends received on shares of our common stock. Shareholders may also make optional cash purchases of shares of our common stock subject to certain limitations detailed in the plan prospectus. Since inception, we have issued 7,121,097 shares under the plan for net cash proceeds of $52.0 million.
Note 11 - Fair Value of Financial Instruments
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable$0.2 million for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
23
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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 for interest rate contracts.
payable.
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 including pricing models that 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. The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury curves or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. Management reviews pricing used to ensure that current market conditions are properly represented. This review may include, but is not limited to, comparisons of similar market transactions, alternative third-party pricing services and dealer quotes, or comparisons to a pricing model. Values obtained from the independent pricing service 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 re-classified as a Level 3 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 June 30, 2011 and December 31, 2010, all of our Agency Security values were based solely on third-party sources.
Derivative Transactions - The fair value of our Eurodollar Futures Contracts are based on closing prices on the CME. The fair value of our interest rate swap contracts are valued using a third-party.Our Futures Contracts are classified as Level 1 and the value of our interest rate swap contracts are 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 carrying amount of repurchase agreements is deemed to be their fair value.
2012.
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
Assets (liabilities) carried at fair value: |
|
|
|
|
|
|
|
|
Agency Securities, available for sale | $ | - | $ | 5,257,542,001 | $ | 858,273 | $ | 5,258,400,274 |
Interest rate contracts |
| (4,554,000) |
| (31,454,818) |
| - |
| (36,008,818) |
Total | $ | (4,554,000) | $ | 5,226,087,183 | $ | 858,273 | $ | 5,222,391,456 |
Transaction Type | Completion Date | Number of Shares (1) | 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 8, 2012 | 35,650,000 | 6.72 | 239.2 | ||||||||||
Issuance of preferred stock | June 7, 2012 | 1,400,000 | 25.00 | 33.8 | ||||||||||
Equity distribution agreement | January 1, 2012 to June 30, 2012 | 15,500,000 | 7.02 | (2) | 106.5 | |||||||||
Dividend Reinvestment and Stock Purchase Plan | January 1, 2012 to June 30, 2012 | 17,758 | 6.95 | (2) | 0.1 |
The following table presents our financial instruments measured at fair value as
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
Assets (liabilities) carried at fair value: |
|
|
|
|
|
|
|
|
Agency Securities, available for sale | $ | - | $ | 1,114,175,921 | $ | 47,674,759 | $ | 1,161,850,680 |
Interest rate contracts |
| (2,632,712) |
| - |
| 102,067 |
| (2,530,645) |
Total | $ | (2,632,712) | $ | 1,114,175,921 | $ | 47,776,826 | $ | 1,159,320,035 |
24
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
Whenover allotment option
weighted average price
The following table presents detail of our Level 3 financial instruments measured at fair value as of June 30, 2011.
|
| Level 3 |
Balance as of December 31, 2010 | $ | 47,776,826 |
Reclassification of agency securities |
| (47,674,759) |
Reclassification of interest rate contracts |
| (102,067) |
Purchases of agency securities, at cost |
| 849,582 |
Unrealized gain on agency securities included in other comprehensive income |
| 8,691 |
Balance as of June 30, 2011 | $ | 858,273 |
The following table presents detail of our Level 3 financial instruments measured at fair value as of December 31, 2010.
|
| Level 3 |
Balance as of January 1, 2010 | $ | - |
Purchases of agency securities, at cost |
| 47,681,986 |
Unrealized loss on agency securities included in other comprehensive income |
| (7,227) |
Unrealized gain on interest rate contracts included in change in fair value of interest rate contracts on the condensed consolidated statements of operations |
| 102,067 |
Balance as of December 31, 2010 | $ | 47,776,826 |
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 shareholders, and as long as we satisfy the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.
filed and all income tax amounts due were paid. Our provision for income taxes for the threequarter and six months ended June 30, 2011, included $3,213was nominal.
· | Advising us with respect to, arrange for and manage the acquisition, financing, management and disposition of, elements of our investment portfolio, |
· | Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies, |
· | Coordinating capital raising activities, |
· | Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets and providing administrative and managerial services in connection with our day-to-day operations and |
· | Providing executive and administrative personnel, office space and other appropriate services required in rendering management services to us. |
25
ARMOUR Residential REIT, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)
We seek to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable rate assets with variable rate borrowings. We seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of Agency Securities by entering into interest rate agreements such as interest rate swaps. As of June 30, 2011 and December 31, 2010, we had entered into interest rate swap contracts to pay a fixed rate and receive a floating rate of interest, with a total notional amount of $1.9 billion and $155.0 million, respectively. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Agency Securities. Prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments.
Note 14 - Related Party Transactions
Management Fees
We are externally managed by ARRM pursuant to our Management Agreement (see Note 8). All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board. The Management Agreement expires on November 6, 2014 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ARRM must provide 180 days prior notice of any such termination.
Under the terms of the Management Agreement, ARRM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ARRM is responsible for the following primary roles:
·
Advising us with respect to, arrange for, and manage the acquisition, financing, management and disposition of, elements of our investment portfolio,
·
Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies,
·
Coordinating capital raising activities,
·
Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets, arranging for various types of financing and hedging strategies, and providing administrative and managerial services in connection with our day-to-day operations, and
·
Providing executive personnel along with administrative personnel, office space, and other appropriate services required in rendering management services to us.
For the three and six months ended June 30, 2011, we incurred $1.5 million and $2.3 million in management fees to ARRM, respectively. For the three and six months ended June 30, 2010, we incurred $ 0.09 million and $0.1 million in management fees to ARRM, respectively.
On June 7, 2011, our Board approved an amendment
the prices and other terms on which we will sell them, in a prospectus supplement. We may offer and sell these securities to or through one or more underwriters, dealers and agents, or directly to purchasers, on a continuous or delayed basis.
13, 2012.
·
our business and investment strategy;
·
our anticipated results of operations;
·
statements about future dividends;
·
our ability to obtain financing arrangements;
·
our understanding of our competition and ability to compete effectively;
·
market, industry and economic trends; and
·
interest rates.
· | our business and investment strategy; |
· | our anticipated results of operations; |
· | statements about future dividends; |
· | our ability to obtain financing arrangements; |
· | our understanding of our competition and ability to compete effectively; |
· | market, industry and economic trends; and |
· | interest rates. |
(“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.
Our Manager
We are externally managed by ARRM pursuant to our Management Agreement (see Note 8). All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board of Directors (“Board”). The Management Agreement expires on November 6, 2014 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ARRM must provide 180 days prior notice of any such termination.
ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of an amount, with a minimum based on 1/12th of $900,000, determined as follows:
·
our gross equity raised up to $50 million, 1% (per annum) of gross equity;
·
our gross equity raised up to $1.0 billion, 1.5% (per annum) of gross equity;
·
our gross equity raised in excess of $1.0 billion, 0.75% (per annum) of gross equity
Factors that Affect our Results of Operations and Financial Condition
stockholders.
·
our degree of leverage;
·
our access to funding and borrowing capacity;
·
our use of derivatives to mitigate interest rate risk; and
·
the REIT requirements, include,
· | our degree of leverage; |
· | our access to funding and borrowing capacity; |
· | our use of derivatives to hedge interest rate risk; |
· | the REIT requirements; and |
· | the requirements to qualify for an exemption under the Investment Company Act and other regulatory and accounting policies related to our business. |
For a discussion of additional risks relating to our business see “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010.
Market and Interest Rate Trends and the Effect on our Portfolio
Credit Market Disruption and Current Conditions
During the past few years, the residential housing and mortgage markets in the United States have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the Agency Securities we purchase and an increase in the average collateral requirements under our repurchase agreements. While these markets recovered a great deal in 2010, further increased volatility and deterioration in the broader residential mortgage and Residential Mortgage Back Securities (“RMBS”) markets may adversely affect the performance and market value of the Agency Securities and other high quality RMBS.
The uncertainty in the U.S. interest rate markets in 2011 has produced volatility and opportunities in our markets. Early in 2011, optimism about an economic acceleration caused many economists to increase their U.S. GDP forecast, with some predicting a U.S. Federal Reserve tightening in early 2012. However, due to (i) recent U.S. Department of Labor payroll data, (ii) states continued paring of payrolls and the potential of the federal government implementing deficit reduction measures, and (iii) the cautious pace of private sector job growth, most economists are now expecting continued lackluster economic growth in the U.S. Additionally, inflation and wage pressure expectations are low. Several foreign central banks have aggressively tightened
monetary policy in their countries to moderate growth and commodity inflation; these measures appear to be working as global commodity prices have moderated. As a result, many economists have pushed out their forecasts for a tightening of monetary policy in the U.S. to late 2012 or 2013 at the earliest. This environment has created strong demand for Agency Securities and has also reduced the costs of our financing and hedging.
The current U.S. debt ceiling and budget deficit concerns have increased the possibility of the credit-rating agencies downgrading the U.S.'s credit rating for the first time in history. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, if the U.S.'s credit rating was downgraded it would likely impact the credit risk associated with Agency Securities and, therefore, decrease the value of the Agency Securities in our portfolio. In addition, a downgrade of the U.S.'s credit rating would create broader financial turmoil and uncertainty, which could have significant impact on the global banking system and, consequently, our investment operations and results.
Payments on
In response to the credit market disruption and the deteriorating financial condition of Fannie Mae and Freddie Mac, Congress and the U.S. Treasury undertook a series of actionscurrent business model in 2008 aimed at stabilizing the financial markets in general, and the mortgage market in particular. These actions include the large-scale buying of mortgage backed securities, significant equity infusions into banks and aggressive monetary policy.
In addition, the U.S. Federal Reserve initiated a program in 2008 to purchase $200.0 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and $1.3 trillion in Agency Securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The U.S. Federal Reserve stated that its actions were intended to reduce the cost and increase the availability of credit for the purchase of houses, which in turn was expected to support housing markets and foster improved conditions in financial markets more generally. This purchase program was completed on March 31, 2010. We are unable to predict the timing or manner in which the U.S. Treasury or the Federal Reserve will liquidate their holdings or make further interventions in the Agency Securities markets, or what impact, if any, such action could have on the Agency Securities market, the Agency Securities we hold, our business, results of operations and financial condition.
In February 2010, Fannie Mae and Freddie Mac announced that they would execute wholesale repurchases of loans which they considered seriously delinquent from existing mortgage pools. This action temporarily decreased the value of these securities until complete details of the programs and the timing were announced and reduced our yield in the months of repayment. Freddie Mac implemented its purchase program in February 2010 with actual purchases beginning in March 2010. Fannie Mae began their process in March 2010 and announced it would implement the initial purchases over a period of three months, beginning in April 2010. Further, both agencies announced that on an ongoing basis they would purchase loans from the pools of mortgage loans underlying their mortgage pass-through certificates that became 120 days delinquent.
One of the main factors impacting market prices was the
On September 21, 2011, the U.S. Federal Reserve announced that it will begin reinvesting principal payments from its holdings of Agency Debt and Agency Securities.
In February 2011, the U.S. Treasury, along with the U.S. Department of Housing and Urban Development,Fed released a report titled “Reforming America’s“The U.S. Housing Finance Market”Market: Current Conditions and Policy Considerations” to Congress outlining recommendationsproviding a framework for reforming the U.S. housing system, specifically Fannie Maecontemplating certain issues and Freddie Mac and transforming the government’s involvement in the housing market.tradeoffs that policy makers might consider. It is unclear how future legislation may impact the housing finance market and the investing environment for agency securitiesAgency Securities as the method of reform is undecided and has not yet been defined by the regulators.
In July 2011, debate
will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings. Quarter ended 30-Day LIBOR Effective Federal Funds Rate June 30, 2011 0.19 % 0.07 % March 31, 2011 0.24 0.10 December 31, 2010 0.26 0.13 September 30, 2010 0.26 0.15 June 30, 2010 0.35 0.09 March 31, 2010 0.25 0.09 December 31, 2009 0.23 0.05 Agency Securities:U.S. Federal ReserveFed has lowered the target for the Federal Funds Rate nine times from 4.75% to 1.0%1.00% in October 2008. In December 2008, the Federal Reserve stated that it was adopting a policy of “quantitative easing” and would target keeping the Federal Funds Rate between 0.00% and 0.25%. To date, the Federal Reserve has maintained that target range. Our funding costs, which traditionally have tracked the 30-day London Interbank Offered Rate (“LIBOR”) have generally benefited by this easing of monetary policy, although to a somewhat lesser extent. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.balancebalances at the Federal Reserve to other depository institutions overnight (actual transactions, rather than target rate).So traditionally,Traditionally, a lower Federal Funds Rate has indicated a time of increased net interest margin and higher asset values. However, since July 2007 (prior to our commencement of operations) LIBOR and repurchase market rates have varied greatly and often have been significantly higher than the target and the Effective Federal Funds Rate. The difference between 30-day LIBOR and the Effective Federal Funds rateRate has also been quite volatile, with the spread alternately returning to more normal levels and then widening out again. The volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our portfolio. If this were to occur, our net interest margin and the value of our portfolio might suffer as a result.Quarter ended June 30, 2012 0.25 % 0.09 % March 31, 2012 0.24 0.09 December 31, 2011 0.30 0.04 September 30, 2011 0.24 0.06 June 30, 2011 0.19 0.07 Quarter Ended Asset Yield Interest Expense on Repurchase Agreements June 30, 2012 2.97 % 0.82 % 2.15 % 0.39 % March 31, 2012 3.04 0.81 2.23 0.34 December 31, 2011 2.60 0.98 1.62 0.35 September 30, 2011 3.11 0.93 2.18 0.27 June 30, 2011 3.35 0.99 2.36 0.28 eachrates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. The Federal Funds Rate was 0.09% and LIBOR was 0.25% at June 30, 2012. During the quarter and six months ended June 30, 2012 we realized losses of $12.4 million and $22.1 million, respectively, related to our derivatives. During the quarter and six months ended June 30, 2011 we realized losses of $6.1 million and $8.0 million, respectively, related to our derivatives. We increased our total interest rate swap contracts aggregate notional balance from $2.8 billion at December 31, 2011 to $6.0 billion at June 30, 2012, with, a weighted average swap rate of 1.1% and a weighted average term of 51 months. During the quarter ended June 30, 2012 we entered into interest rate swaptions with an aggregate notional balance of $0.8 billion, with an underlying weighted average swap rate of 1.9% and a weighted average term of 10 months. We had not entered into any interest rate swaptions as of December 31, 2011. We decreased our total Eurodollar Future Contracts (“Futures Contracts”) notional amount from $131.0 million at December 31, 2011 to $121.0 million at June 30, 2012, with a weighted average swap equivalent rate of 1.8% and weighted average term of 23 months as of June 30, 2012.end:Principal RepaymentQuarter ended Principal Amount Amortized Cost Fair Value June 30. 2012 $ 12,561,600 $ 599,264 $ 13,160,864 104.77 % $ 13,328,514 106.11 % March 31, 2012 11,550,912 532,588 12,083,500 104.61 12,137,554 105.08 December 31, 2011 5,128,230 216,697 5,344,927 104.23 5,393,675 105.18 September 30, 2011 5,675,822 236,695 5,912,517 105.29 5,975,823 105.29 June 30, 2011 5,028,223 197,865 5,226,088 103.94 5,258,400 104.58 Quarter ended Principal Amount Weighted Average Coupon Weighted Average Months to Reset Percentage of Total Agency Securities June 30, 2012 $ 2,685,281 $ 3.71 $ 75 21.4 % March 31, 2012 2,514,725 3.72 73 21.8 December 31, 2011 2,681,911 3.72 76 52.2 September 30, 2011 2,858,964 3.71 75 50.2 June 30, 2011 2,671,472 3.65 62 53.0 Quarter ended Principal Amount Weighted Average Coupon Weighted Average Months to Maturity Percentage of Total Agency Securities June 30, 2012 $ 9,876,319 $ 3.62 217 78.6 % March 31, 2012 9,036,187 3.64 219 78.2 December 31, 2011 2,446,319 3.97 188 47.8 September 30, 2011 2,816,858 4.00 172 49.8 June 30, 2011 2,356,751 4.11 174 47.0 Quarter ended June 30, 2012 9.1 % March 31, 2012 11.4 December 31, 2011 19.3 September 30, 2011 12.4 June 30, 2011 9.3
The following table shows the average principal repayment rate for those securities which have settled for each quarter since our commencement of operations (as our operations commenced in November 2009, there is only one month of prepayment data for 2009 for our portfolio of settled Agency Securities):
|
| ||
|
|
| |
|
| ||
|
| ||
|
| ||
|
| ||
|
| ||
|
|
We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the constant prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset, and earnings, are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.
Book Value per Share
Investments
Agency Securities
As of June 30, 2011, our Agency Security portfolio, both trades that have settled and forward settle trades that we have committed to settle, consisted of approximately $5.3 billion, in market value, of Agency Securities with initial fixed-interest rate periods of three years, five years, seven years, ten years and fifteen years.
The following table represents key data regarding our results of operations since the beginning of operations on November 6, 2009:
As of |
| Agency Securities |
| Repurchase Agreements |
| Payable for Unsettled Security Purchases |
| Equity |
| Shares Outstanding |
| Book Value Per Share |
| Quarterly Dividends Declared |
| Quarterly Diluted Earnings (Loss) Per Share |
June 30, 2011 | $ | 5,258,400,274 | $ | 4,655,226,247 | $ | 302,680,242 | $ | 534,030,257 |
| 74,781,174 | $ | 7.14 | $ | 0.36 | $ | (0.14) |
March 31, 2011 |
| 2,273,914,732 |
| 2,099,366,245 |
| 19,941,430 |
| 220,612,375 |
| 32,254,054 |
| 6.84 |
| 0.34 |
| 0.33 |
December 31, 2010 |
| 1,161,850,680 |
| 971,675,658 |
| 125,418,369 |
| 108,708,577 |
| 16,441,554 |
| 6.61 |
| 0.38 |
| 0.71 |
September 30, 2010 |
| 540,070,197 |
| 490,727,022 |
| 11,130,519 |
| 54,035,550 |
| 7,414,054 |
| 7.29 |
| 0.36 |
| (0.06) |
June 30, 2010 |
| 477,579,500 |
| 334,703,323 |
| 114,870,537 |
| 54,319,365 |
| 7,414,054 |
| 7.33 |
| 0.40 |
| (0.22) |
March 31, 2010 |
| 164,583,811 |
| 168,525,093 |
| - |
| 21,417,725 |
| 2,304,054 |
| 9.30 |
| 0.40 |
| 0.13 |
December 31, 2009 |
| 118,648,724 |
| 46,388,602 |
| 58,559,479 |
| 21,491,096 |
| 2,304,054 |
| 9.33 |
| - |
| (0.08) |
As of June 30, 2011, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities, of 103.94%, due to the average interest rates on these securities being higher than prevailing market rates. As of June 30, 2011, we had approximately $197.9 million of unamortized premium included in the cost basis of our investments, inclusive of both settled and forward settle securities. As of June 30, 2011, our investment portfolio of securities consisted of Agency Securities as follows:
Adjustable Rate Settled Securities as of June 30, 2011
Months to Reset |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-18 |
| 2.7 | % | 7 | $ | 126,037,338 |
| 3.46 | % | $ | 104.68 | $ | 131,940,537 | $ | 105.11 | $ | 132,481,554 |
19-36 |
| 3.0 |
| 29 |
| 140,078,261 |
| 4.68 |
|
| 105.02 |
| 147,115,571 |
| 105.69 |
| 148,044,387 |
37-60 |
| 21.5 |
| 51 |
| 1,018,715,688 |
| 3.59 |
|
| 103.48 |
| 1,054,208,921 |
| 104.59 |
| 1,065,473,194 |
61-84 |
| 26.0 |
| 76 |
| 1,236,471,123 |
| 3.59 |
|
| 103.53 |
| 1,280,117,332 |
| 104.06 |
| 1,286,701,073 |
85+ |
| 1.5 |
| 98 |
| 76,888,604 |
| 3.83 |
|
| 104.89 |
| 80,647,118 |
| 103.85 |
| 79,848,005 |
Total/Average |
| 54.7 | % | 61 | $ | 2,598,191,014 |
| 3.65 | % | $ | 103.69 | $ | 2,694,029,479 | $ | 104.40 | $ | 2,712,548,213 |
Fixed Rate Settled Securities as of June 30, 2011
Months to Maturity |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-90 |
| 0.1 | % | 68 | $ | 1,476,715 |
| 5.59 | % | $ | 106.54 | $ | 1,573,326 | $ | 108.13 | $ | 1,596,823 |
91-180 |
| 45.2 |
| 174 |
| 2,137,728,735 |
| 4.12 |
|
| 104.18 |
| 2,227,029,228 |
| 104.85 |
| 2,241,445,656 |
181+ |
| 0.0 |
| 184 |
| 762,670 |
| 5.50 |
|
| 105.98 |
| 808,311 |
| 108.61 |
| 828,358 |
Total/Average |
| 45.3 | % | 174 | $ | 2,139,968,120 |
| 4.12 | % | $ | 104.18 | $ | 2,229,410,865 | $ | 104.86 | $ | 2,243,870,837 |
All Settled Securities as of June 30, 2011
|
| Percentage Of Settled Securities Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 4,738,159,134 |
| 3.86 | % | $ | 103.91 | $ | 4,923,440,344 | $ | 104.61 | $ | 4,956,419,050 |
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, we had committed to purchase securities for settlements in July and August of 2011. The information below was current as of June 30, 2011, but subject to change due to amortization prior to settlement. In addition, some forward trades of new issue securities are subject to modest changes in delivery size and coupon.
Adjustable Rate Forward Settle Securities as of June 30, 2011
Months to Reset |
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
37-60 |
| 4.7 | % | 52 | $ | 13,310,852 |
| 4.00 | % | $ | 105.78 | $ | 14,080,386 |
| 106.32 | $ | 14,152,122 |
61-84 |
| 16.7 |
| 83 |
| 48,583,063 |
| 3.50 |
|
| 103.87 |
| 50,464,496 |
| 103.47 |
| 50,270,015 |
85+ |
| 3.8 |
| 115 |
| 11,387,278 |
| 3.90 |
|
| 103.95 |
| 11,836,657 |
| 103.52 |
| 11,787,560 |
Total/Average |
| 25.2 | % | 82 | $ | 73,281,193 |
| 3.65 | % | $ | 104.23 | $ | 76,381,539 | $ | 104.00 | $ | 76,209,697 |
Fixed Rate Forward Settle Securities as of June 30, 2011
Months to Maturity |
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
91-180 |
| 74.8 | % | 179 | $ | 216,782,468 |
| 4.00 | % | $ | 104.37 | $ | 226,266,092 | $ | 104.15 | $ | 225,771,527 |
Total/Average |
| 74.8 | % | 179 | $ | 216,782,468 |
| 4.00 | % | $ | 104.37 | $ | 226,266,092 | $ | 104.15 | $ | 225,771,527 |
All Forward Settle Securities as of June 30, 2011
|
| Percentage of Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 290,063,661 |
| 3.91 | % | $ | 104.34 | $ | 302,647,631 | $ | 104.11 | $ | 301,981,224 |
All Settled and Forward Settle Securities as of June 30, 2011
|
| Percentage of Settled and Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 5,028,222,795 |
| 3.86 | % | $ | 103.94 | $ | 5,226,087,975 | $ | 104.58 | $ | 5,258,400,274 |
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities, of 104.44%, due to the average interest rates on these securities being higher than prevailing market rates. As of December 31, 2010, we had approximately $49.6 million of unamortized premium included in the cost basis of our investments, inclusive of both settled and forward settle securities. All unsettled purchases of securities as of December 31, 2010, were settled in January and February 2011. As of December 31, 2010, our investment portfolio of settled securities consisted of Agency Securities as follows:
Adjustable Rate Settled Securities as of December 31, 2010
Months to Reset |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-18 |
| 4.8 | % | 7 | $ | 47,989,156 |
| 3.67 | % | $ | 104.31 | $ | 50,058,987 | $ | 104.45 | $ | 50,126,097 |
19-36 |
| 3.3 |
| 29 |
| 32,967,374 |
| 4.00 |
|
| 103.71 |
| 34,192,034 |
| 104.37 |
| 34,407,131 |
37-60 |
| 25.0 |
| 52 |
| 247,952,187 |
| 4.00 |
|
| 103.96 |
| 257,686,509 |
| 104.44 |
| 258,969,161 |
61-84 |
| 32.5 |
| 78 |
| 325,954,726 |
| 3.87 |
|
| 104.26 |
| 339,833,155 |
| 103.34 |
| 336,849,193 |
85+ |
| 4.4 |
| 114 |
| 44,397,480 |
| 4.07 |
|
| 105.39 |
| 46,789,017 |
| 102.66 |
| 45,578,166 |
Total/Average |
| 70.0 | % | 64 | $ | 699,260,923 |
| 3.92 | % | $ | 104.20 | $ | 728,559,702 | $ | 103.81 | $ | 725,929,748 |
Fixed Rate Settled Securities as of December 31, 2010
Months to Maturity |
| Percentage of Settled Securities Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
0-90 |
| 0.1 | % | 63 | $ | 1,171,170 |
| 6.15 | % | $ | 107.23 | $ | 1,255,843 | $ | 108.53 | $ | 1,271,054 |
91-180 |
| 29.9 |
| 172 |
| 295,562,459 |
| 4.33 |
|
| 105.19 |
| 310,903,484 |
| 104.65 |
| 309,319,711 |
Total/Average |
| 30.0 | % | 171 | $ | 296,733,629 |
| 4.34 | % | $ | 105.20 | $ | 312,159,327 | $ | 104.67 | $ | 310,590,765 |
All Settled Securities as of December 31, 2010
|
| Percentage Of Settled Securities Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 995,994,552 |
| 4.04 | % | $ | 104.50 | $ | 1,040,719,029 | $ | 104.07 | $ | 1,036,520,513 |
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, we had committed to purchase securities for settlements in January and February of 2011. The information below was current as of December 31, 2010, but subject to change due to amortization prior to settlement. In addition, some forward trades of new issue securities are subject to modest changes in delivery size and coupon. All, but one, of the forward settling Agency Securities were adjustable rate with a minimum expected reset of 11 months and a maximum expected reset of 71 months.
Adjustable Rate Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Reset |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 63.6 | % | 27 | $ | 76,288,258 |
| 3.22 | % | $ | 104.60 | $ | 79,799,280 | $ | 104.41 | $ | 79,653,941 |
Fixed Rate Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
| Weighted Average Months to Maturity |
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 36.4 | % | 179 | $ | 44,184,981 |
| 4.00 | % | $ | 103.12 | $ | 45,561,900 | $ | 103.38 | $ | 45,676,226 |
All Forward Settle Securities as of December 31, 2010
|
| Percentage of Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 120,473,239 |
| 3.51 | % | $ | 104.06 | $ | 125,361,180 | $ | 104.03 | $ | 125,330,167 |
All Settled and Forward Settle Securities as of December 31, 2010
|
| Percentage of Settled and Forward Settle Portfolio |
|
|
| Current Face Value(1) |
| Weighted Average Coupon(2) |
|
| Weighted Average Amortized Purchase Price(3) |
| Expected Amortized Cost(4) |
| Weighted Average Market Price(5) |
| Current Market Value(6) |
Total/Average |
| 100.0 | % |
| $ | 1,116,467,791 |
| 3.98 | % | $ | 104.44 | $ | 1,166,080,209 | $ | 103.73 | $ | 1,161,850,680 |
|
|
|
|
|
|
|
|
|
|
|
|
Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at June 30, 2011.
Agency Securities |
| June 30, 2011 |
| ||
|
| Estimated Fair Value |
| Percentage of Total |
|
Settled Securities |
|
|
|
|
|
Fannie Mae Certificates | $ | 3,281,339,497 |
| 62.4 | % |
Freddie Mac Certificates |
| 1,118,225,499 |
| 21.2 |
|
Ginnie Mae Certificates |
| 556,854,054 |
| 10.6 |
|
|
|
|
|
|
|
Forward Settle Securities |
|
|
|
|
|
Fannie Mae Certificates |
| 277,161,594 |
| 5.3 |
|
Freddie Mac Certificates |
| 10,667,508 |
| 0.2 |
|
Ginnie Mae Certificates |
| 14,152,122 |
| 0.3 |
|
Total Securities | $ | 5,258,400,274 |
| 100.0 | % |
Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at December 31, 2010.
Agency Securities |
| December 31, 2010 |
| ||
|
| Estimated Fair Value |
| Percentage of Total |
|
Settled Securities |
|
|
|
|
|
Fannie Mae Certificates | $ | 718,542,007 |
| 61.8 | % |
Freddie Mac Certificates |
| 257,316,342 |
| 22.2 |
|
Ginnie Mae Certificates |
| 60,662,164 |
| 5.2 |
|
|
|
|
|
|
|
Forward Settle Securities |
|
|
|
|
|
Fannie Mae Certificates |
| 125,330,167 |
| 10.8 |
|
Freddie Mac Certificates |
| - |
| - |
|
Ginnie Mae Certificates |
| - |
| - |
|
Total Securities | $ | 1,161,850,680 |
| 100.0 | % |
As of June 30, 20112012 and December 31, 2010,2011, the adjustable and hybrid adjustable rate mortgage loans underlying our Agency Securities have fixed interestfixed-interest rates for an average period of approximately 6175 months and 6476 months, respectively, after which time the interest rates reset and become adjustable. After a reset date, interest rates on our adjustable and hybrid adjustable Agency Securities float based on spreads over various indices, typically LIBOR or the one-year Constant Maturity Treasury (“CMT”), rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap and through the maturity of the security, known as a lifetime cap.
·
available interest rate contracts may not correspond directly with the interest rate risk for which protection is sought;
·
the duration of the interest rate contracts may not match the duration of the related liability;
·
the party owing money on the interest rate contracts may default on its obligation to pay;
·
the credit quality of the party owing money on the interest rate contracts may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
·
the value of interest rate contracts may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss.
·
Because we are unable to designate our interest rate risk mitigation activities as cash flow hedges, realized as well as unrealized losses from these transactions will impact our GAAP income.
· | available derivatives may not correspond directly with the interest rate risk for which protection is sought; |
· | the duration of the derivatives may not match the duration of the related liability; |
· | the party owing money on the derivatives may default on its obligation to pay; |
· | the credit-quality of the party owing money on the derivatives may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
· | the value of derivatives may be adjusted from time to time in accordance with GAAP to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss. |
Results of Operations
Three and Six Months Ended June 30, 2011, Compared to Three and Six Months Ended June 30, 2010
We commenced our operations in November 2009, upon completion ofAgency Securities increased by $124.0 million. For the merger with Enterprise. We raised equity capital four times during the periodsix months ended June 30, 2011, issuing 51,212,500the unrealized change in the fair value of our derivative positions decreased by $33.5 million and the unrealized change in the fair value of our Agency Securities increased by $36.5 million.
Our primary source of income is the interest income we earn on our investment portfolio. Our net (loss) income for the three and six months ended June 30, 2011, was ($7.3) million and $1.3 million or ($0.14) and $0.03, per weighted average share, respectively. These results compare to a net loss of ($0.7) million and ($0.4) million or ($0.22) and ($0.14), per weighted average share, respectively for the three and six months ended June 30, 2010. The main drivers of the difference were the increased capital resources from the public offerings completed in 2010 and the first and second quarter of 2011 and the implementation of ARMOUR’s investment strategy, offset by unrealized losses from our interest rate contracts and increasing management fees. As discussed elsewhere in this document, management fees are calculated on gross equity raised, therefore, as we complete additional equity offerings, the management fee expense will continue to increase.
Our net interest income for the three and six months ended June 30, 2011, was $21.0 million and $31.4 million compared to $1.2 million and $2.2 million for the three and six months ended June 30, 2010. As of June 30, 2011, our Agency Securities portfolio consisted of $5.3 billion of securities, including $302.0 million of current carrying value of forward settle security sales. As of December 31, 2010, our Agency Securities portfolio consisted of $1.2 billion of securities, including $125.3 million of current carrying value of forward settle security sales.
The following table presents the components of the yield earned on our Agency Security portfolio:
Quarter Ended |
| Asset Yield |
| Cost of Funds |
| Net Interest Margin |
| Interest Expense on Repurchase Agreements |
|
June 30, 2011 |
| 3.35 | % | 0.99 | % | 2.36 | % | 0.28 | % |
March 31, 2011 |
| 3.20 |
| 0.80 |
| 2.40 |
| 0.33 |
|
December 31, 2010 |
| 3.42 |
| 0.47 |
| 2.95 |
| 0.34 |
|
September 30, 2010 |
| 3.32 |
| 0.44 |
| 2.88 |
| 0.27 |
|
June 30, 2010 |
| 2.98 |
| 0.37 |
| 2.61 |
| 0.30 |
|
March 31, 2010 |
| 3.06 |
| 0.38 |
| 2.68 |
| 0.27 |
|
December 31, 2009 |
| 4.59 |
| 0.72 |
| 3.86 |
| 0.26 |
|
The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. Our rate of portfolio repayment for the three and six months ended June 30, 2011, was 9.3% and 10.5% on a Constant Prepayment Basis (“CPR”) compared to 15.4% and 15.0% for the three and six months ended June 30, 2010.
As of June 30, 2011, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities, of 103.94%, due to the average interest rates on these securities being higher than prevailing market rates.
The main indicator of our borrowing costs is 30-day LIBOR, which generally closely parallels the rates we pay on our repurchase agreements. LIBOR was 0.19% at June 30, 2011. During the three and six months ended June 30, 2011, we realized losses of $0.3 million and $0.4 million related to our interest rate contracts. During the three and six months ended June 30, 2010, we realized gains of $6,611 and losses of $43, respectively. We decreased our total Eurodollar future swap equivalent notional amount from $214.0 million at December 31, 2010, to $134.0 million at June 30, 2011, with a weighted average swap equivalent rate of 1.8% and weighted average term of 34 months. In addition, during the period ended June 30, 2011, we increased our total interest rate swap contracts aggregate notional balance from $155.0 million to $1.9 billion with, a weighted average swap rate of 2.6% and a weighted average term of 74 months.
Our total operating expenses for the three and six months ended June 30, 2011, were $2.1 million and $3.5 million, respectively, as compared to $0.5 million and $0.8 million, respectively, for the three and six months ended June 30, 2010. The respective period increases are a combination of increased management fees related to our successful equity capital raising initiatives as well as increased professional fees and operating costs to support our current portfolio.
We have negative retained earnings (titled “Accumulated deficit” in the stockholders’ equity section of our accompanying condensed consolidated financial statements) as of June 30, 2011, due to the consequences of our tax qualification as a REIT. Our dividends are based on our REIT taxable income, as determined for federal income tax purposes, and not our net income computed in accordance with GAAP as reported in our condensed consolidated financial statements.
For the three and six months ended June 30, 2011, our estimated REIT taxable income was approximately $18.6 million and $27.4 million, respectively. The most significant difference was the unrealized loss on interest rate contracts which is reflected in GAAP earnings but does not reduce REIT taxable income.
Liquidity and Capital Resources
2012.
Dividends
On January 28, 2011, a cash dividend
On February 25, 2011, a cash dividend of $0.12 per common share, or $3.9 million in the aggregate, was paid to holders of record on February 15, 2011.
On March 30, 2011, a cash dividend of $0.12 per common share, or $3.9 million in the aggregate, was paid to holders of record on March 15, 2011.
On April 28, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on April 15, 2011.
On May 27, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on May 15, 2011.
On June 29, 2011, a cash dividend of $0.12 per common share, or $8.3 million in the aggregate, was paid to holders of record on June 15, 2011.
Our Board will continue to evaluate our dividend policy each quarter and will make adjustments as necessary, based on a variety of factors, including, among other things, the need to maintain our REIT status, our financial condition, liquidity, earnings projections and business prospects. Our dividend policy does not constitute an obligation to pay dividends, which only occurs when our Board declares a dividend.
We intend to make distributions to our stockholders to comply with the various requirements to maintain our REIT status and to minimize corporate income tax and the nondeductible excise tax. However, REIT taxable income is calculated according to the requirements of the Code rather than GAAP which can cause differences between GAAP income reported by us and taxable income calculated to determine distribution requirements to stockholders. These differences are primarily due to non-taxable unrealized changes in the value of our interest rate contracts. These differences may be large and can be either positive or negative variances from GAAP income. In addition, differences in timing between the recognition of REIT taxable income and the actual receipt of cash could require us to sell assets or to borrow funds on a short-term basis to meet the REIT distribution requirements and to minimize corporate income tax and the nondeductible excise tax.
Equity Capital Raising Activities
On January 26, 2011, we completed an underwritten secondary public offering of 6,000,000 shares of common stock. The underwriters fully exercised the over-allotment option for 900,000 additional shares at a price of $7.55 per share. Net proceeds were $49.0 million, net of issuance costs of approximately $3.1 million.
On February 8, 2011, we completed an underwritten secondary public offering of 7,750,000 shares of common stock. The underwriters fully exercised the over-allotment option for 1,162,500 additional shares at a price of $7.60 per share. Net proceeds were $64.0 million, net of issuance costs of approximately $3.7 million.
On April 13, 2011, we completed an underwritten secondary public offering of 17,000,000 shares of common stock. The underwriters partially exercised the over-allotment option for 1,000,000 additional shares at a price of $7.40 per share. Net proceeds were $121.1 million, net of issuance costs of approximately $4.7 million.
On June 6, 2011, we completed an underwritten secondary public offering of 16,000,000 shares of common stock. The underwriters fully exercised the over-allotment option for 2,400,000 additional shares at a price of $7.40 per share. Net proceeds were $131.0 million, net of issuance costs of approximately $5.2 million.
Dividend Reinvestment and Stock Purchase Plan
On April 7, 2011, we implemented a Dividend Reinvestment and Stock Purchase Plan through which investors may purchase additional shares of our common stock by reinvesting some or all of the cash dividends received on shares of our common stock. Investors may also make optional cash purchases of shares of our common stock subject to certain limitations detailed in the plan prospectus. Since inception, we have issued 7,121,097 million shares under the plan for net cash proceeds of $52.0 million.
Off-Balance Sheet Arrangements
June 30, 2012 | December 31, 2011 | |||||||||
(dollars in thousands) | ||||||||||
Within 30 days | $ | 7,823,536 | $ | 4,068,197 | ||||||
31 days | to | 60 days | 2,038,459 | 1,111,480 | ||||||
61 days | to | 90 days | 1,707,767 | 156,285 | ||||||
Greater than 90 days | 542,824 | - | ||||||||
Total | $ | 12,112,586 | $ | 5,335,962 |
Liquidity Sources—Repurchase Facilities
At June 30, 2011, our repurchase agreements had the following counterparties, amount at risk and weighted average remaining maturities:
Repurchase Agreement Counterparties |
| Amount Outstanding |
| Amount at Risk (1) |
| Weighted Average Maturity of Repurchase Agreements in Days |
| Percent of Total Amount Outstanding |
|
UBS Securities LLC | $ | 361,449,000 | $ | 17,847,231 |
| 28 |
| 7.8 | % |
Nomura Securities International, Inc. |
| 351,490,644 |
| 17,223,850 |
| 38 |
| 7.6 |
|
BNP Paribas Securities Corp. |
| 351,003,000 |
| 16,456,632 |
| 14 |
| 7.5 |
|
Cantor Fitzgerald & Co. |
| 333,963,000 |
| 20,712,523 |
| 17 |
| 7.2 |
|
Goldman Sachs & Company |
| 286,606,000 |
| 13,468,990 |
| 24 |
| 6.2 |
|
MF Global Inc. |
| 276,242,000 |
| 13,346,958 |
| 24 |
| 5.9 |
|
J.P. Morgan Securities LLC |
| 261,778,000 |
| 13,137,162 |
| 26 |
| 5.6 |
|
South Street Securities, LLC |
| 254,692,000 |
| 11,823,249 |
| 21 |
| 5.5 |
|
Mitsubishi UFJ Securities (USA) |
| 241,876,000 |
| 11,164,925 |
| 37 |
| 5.2 |
|
Merrill Lynch, Pierce, Fenner & Smith Inc. |
| 238,909,000 |
| 10,183,966 |
| 50 |
| 5.1 |
|
Citigroup Global Markets Inc. |
| 221,216,000 |
| 10,878,102 |
| 21 |
| 4.8 |
|
Guggenheim Liquidity Securities, LLC |
| 212,549,000 |
| 10,122,859 |
| 40 |
| 4.6 |
|
RBS Securities Inc. |
| 195,431,000 |
| 9,867,232 |
| 14 |
| 4.2 |
|
Barclays Capital Inc. |
| 191,371,682 |
| 9,598,234 |
| 23 |
| 4.1 |
|
Daiwa Securities America Inc. |
| 176,000,000 |
| 10,290,508 |
| 30 |
| 3.8 |
|
Mizuho Securities USA Inc. |
| 143,281,000 |
| 5,708,003 |
| 23 |
| 3.1 |
|
The Prince Ridge Group LLC |
| 117,410,000 |
| 6,242,776 |
| 40 |
| 2.5 |
|
ING Financial Markets LLC |
| 116,411,000 |
| 5,317,605 |
| 18 |
| 2.5 |
|
Credit Suisse Securities (USA) LLC |
| 109,350,921 |
| 4,174,740 |
| 18 |
| 2.3 |
|
Jefferies and Company, Inc. |
| 94,647,000 |
| 4,675,345 |
| 39 |
| 2.0 |
|
CRT Capital Group LLC |
| 63,994,000 |
| 3,121,631 |
| 11 |
| 1.4 |
|
Wells Fargo Bank, N.A. |
| 55,556,000 |
| 2,974,725 |
| 18 |
| 1.1 |
|
Total | $ | 4,655,226,247 | $ | 228,337,246 |
|
|
| 100.0 | % |
(1)
Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense.
At December 31, 2010, our repurchase agreements had the following counterparties, amount at risk and weighted average remaining maturities:
Repurchase Agreement Counterparties |
| Amount Outstanding |
| Amount at Risk (1) |
| Weighted Average Maturity of Repurchase Agreements in Days |
| Percent of Total Amount Outstanding |
|
Guggenheim Liquidity Securities, LLC | $ | 141,026,000 | $ | 4,425,424 |
| 56 |
| 14.5 | % |
South Street Securities, LLC |
| 135,297,000 |
| 6,204,002 |
| 29 |
| 13.9 |
|
Goldman Sachs & Company |
| 132,638,000 |
| 6,424,071 |
| 19 |
| 13.7 |
|
MF Global Inc. |
| 127,809,000 |
| 4,197,001 |
| 56 |
| 13.2 |
|
Cantor Fitzgerald & Co. |
| 111,982,000 |
| 7,658,536 |
| 16 |
| 11.5 |
|
Nomura Securities International, Inc. |
| 95,228,000 |
| 2,037,191 |
| 40 |
| 9.8 |
|
RBS Securities Inc. |
| 86,535,658 |
| 4,774,360 |
| 18 |
| 8.9 |
|
UBS Securities LLC |
| 46,535,000 |
| 2,805,301 |
| 27 |
| 4.8 |
|
Mizuho Securities USA Inc. |
| 39,826,000 |
| 1,593,285 |
| 10 |
| 4.0 |
|
Jefferies and Company, Inc. |
| 31,822,000 |
| 426,829 |
| 10 |
| 3.3 |
|
Daiwa Securities America Inc. |
| 22,977,000 |
| 1,690,799 |
| 18 |
| 2.4 |
|
Total | $ | 971,675,658 | $ | 42,236,799 |
|
|
| 100.0 | % |
(1)
Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense
As of June 30, 2011, the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount, which we also refer to as the haircut, under all our repurchase agreements was approximately 4.8% and 5.0%. As of December 31, 2010, the weighted average margin requirement, under all our repurchase agreements was approximately 5.3%., respectively. Declines in the value of our Agency Securities portfolio can trigger margin calls by our lenders under our repurchase agreements. 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.
As discussed above under “Market and Interest Rate Trends and the Effect on our Portfolio,” the
·
increased volatility of many financial assets, including Agency Securities and other high-quality RMBS assets;
·
increased volatility and deterioration inover the broader residential mortgage and RMBS markets; and
·
significant disruption in financing of RMBS.
last several years including:
· | increased volatility of many financial assets, including Agency Securities and other high-quality RMBS assets; |
· | increased volatility and deterioration in the broader residential mortgage and RMBS markets; and |
· | significant disruption in financing of RMBS. |
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and/or equity capital.
We generally seek to borrow (on a recourse basis) betweencommon stock dividend transactions for the six and ten times the amount of our shareholders’ equity, although we are not limited to that range. Atmonths ended June 30, 20112012.
Record Date | Payment Date | Rate per common share | Aggregate amount paid to holders of record (in millions) | ||||||
January 15, 2012 | 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 15, 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 |
Transaction Type | Completion Date | Number of Shares (1) | 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 8, 2012 | 35,650,000 | 6.72 | 239.2 | |||||||||
Issuance of Series A Preferred Stock | June 7, 2012 | 1,400,000 | 25.00 | 33.8 | |||||||||
Equity distribution agreement | January 1, 2012 to June 30, 2012 | 15,500,000 | 7.02(2) | 106.5 | |||||||||
DRIP share issuance | January 1, 2012 to June 30, 2012 | 17,758 | 6.95(2) | 0.1 |
any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.
2012.
adjustable rate mortgages (“ARMs”)ARMs that have a fixed interestfixed-interest rate for an initial period of time (typically three years or greater) and then convert to an adjustable rate for the remaining loan term. Our debt obligations are generally repurchase agreements of limited duration that are periodically refinanced at current market rates.mortgage-relatedmortgage related assets could be limited. This problemexposure would be magnified to the extent we acquire fixed rate Agency Securities or ARM securities that are not fully indexed. Further, some ARM-related assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively impact our liquidity, net income and our ability to make distributions to stockholders.common stock. Most of our adjustable rate assets are based on the one-year CMTconstant maturity treasury rate and the one-year LIBOR rate and our debt obligations are generally based on LIBOR. These indices generally move in the same direction, but there can be no assurance that this will continue to occur.theour assets.six-six-month and twelve-month interest rates, the typical reset term of adjustable rate Agency Securities, varies.hedgingderivative instruments.
2012
Change in Interest Rates |
| Percentage Change in Projected Net Interest Income |
| Percentage Change in Projected Portfolio Value Including Interest Rate Contracts |
|
1.00 | % | (15.78) | % | (2.70) | % |
0.50 |
| (7.29) |
| (1.61) |
|
(0.50) |
| 2.79 |
| 0.15 |
|
(1.00) |
| (5.53) |
| 0.10 |
|
Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value Including Derivatives | ||||||||
1.00 | % | (0.46) | % | (1.17) | % | |||||
0.50 | 6.23 | (0.89) | ||||||||
(0.50) | (2.90) | (1.39) | ||||||||
(1.00) | (22.59) | (1.90) |
2011
Change in Interest Rates |
| Percentage Change in Projected Net Interest Income |
| Percentage Change in Projected Portfolio Value Including Interest Rate Contracts |
|
1.00 | % | (19.58) | % | (2.40) | % |
0.50 |
| (11.55) |
| (1.12) |
|
(0.50) |
| 5.35 |
| 0.93 |
|
(1.00) |
| (1.14) |
| 1.70 |
|
Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value Including Derivatives | ||||||||
1.00 | % | (9.79) | % | 0.08 | % | |||||
0.50 | 1.35 | 0.19 | ||||||||
(0.50) | 8.91 | (0.41) | ||||||||
(1.00) | (7.53) | (0.94) |
stockholders.
Credit RiskWe 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.
There have been noCFO, as appropriate, to allow timely decisions regarding required disclosures. Our Co-CEO and CFO also participated in an evaluation by our management of any changes in our internal controlscontrol over financial reporting that occurred during the six month periodquarter ended June 30, 2011,2012. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On May 2, 2011, our Board adopted a resolution to amend our charter to broaden our investment asset class restriction to include non-Agency Securities as well as Agency Securities. This amendment is subject to stockholder approval. While we are committed to continue investing primarily in Agency Securities for as long as appropriate supply and pricing exist, our Board believes that we need to revise our investment asset class restriction to allow us to continue investing in the high credit-quality RMBS market in the event that Congress acts to eliminate or reduce the role of U.S. Government-chartered entities in the RMBS market. ARRM’s ability to modify or expand our investment strategy in response to changing market conditions may ultimately be constrained by the outcome of our stockholders’ vote on this matter.
On June 7, 2011, our Board approved an amendment to the Plan to increase the number of shares issuable thereunder from 250,000 shares to 2,000,000 shares. At our July 18, 2011, annual stockholders meeting, stockholder approval was received to amend the Plan accordingly. On July 22, 2011, we filed a registration statement on form S-8 to register the additional shares issuable under the amended and restated Plan.
On August 2, 2011, our Board approved an amendment our charter to increase our authorized shares of common stock from 250,000,000 shares to 500,000,000 shares. Pursuant to Maryland corporate law and Section 6.1 of our charter, the amendment was approved by our board and did not require any action by our stockholders. Our charter was amended accordingly on August 3, 2011 to increase our authorized shares of common stock from 250,000,000 shares to 500,000,000 shares.
47
SIGNATURES
Date: August | ARMOUR RESIDENTIAL REIT, INC. | |
/s/ Scott J. Ulm | ||
Scott J. Ulm | ||
Co-Chief Executive Officer, Chief Investment Officer, Head of Risk Management and Co-Vice Chairman (Principal Executive Officer) |
EXHIBIT INDEX
Exhibit Number | Description | |
|
| |
| Amended and Restated | |
3.2 |
| |
| Articles of Amendment to Amended and Restated | |
| Articles of Amendment to Amended and Restated Articles of Incorporation (3) | |
3.4 | Articles Supplementary of 1,610,000 shares of 8.250% Series A Cumulative Redeemable Preferred Stock (4) | |
3.5 | Articles Supplementary of 6,000,000 shares of 8.250% series A Cumulative Redeemable Preferred Stock (5) | |
3.6 | Amended Bylaws (6) | |
10.1 | Second Amended and Restated Management Agreement, dated June 18, 2012, between ARMOUR and ARRM (7) | |
31.1 | Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification of Chief Financial Officer Pursuant to SEC Rule | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. | |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. | |
101.INS# | XBRL Instance Document | |
101.SCH# | XBRL Taxonomy Extension Schema Document | |
101.CAL# | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF# | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB# | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE# | XBRL Taxonomy Extension Presentation Linkbase Document |
* Incorporated by reference to Exhibit 3.5 to ARMOUR’s Current Report on Form 8-K filed with the SEC on November 12, 2009.
** Incorporated by reference to Exhibit 10.1 to ARMOUR’s Registration Statement on form S-8 filed with the SEC on July 22, 2011.
*** Filed herewith
49
(1) | Incorporated by reference to Exhibit 3.4 to ARMOUR’s Current Report on Form 8-K filed with the SEC on November 12, 2009. |
(2) | Incorporated by reference to Exhibit 3.1 to ARMOUR’s Current Report on Form 8-K filed with the SEC on August 8, 2011. |
(3) | Incorporated by reference to Exhibit 3.1 to ARMOUR’s Current report on Form 8-K filed with the SEC on December 1, 2011. |
(4) | Incorporated by reference to Exhibit 3.1 to ARMOUR’s Current report on Form 8-K filed with the SEC on June 6, 2012 |
(5) | Incorporated by reference to Exhibit 3.1 to ARMOUR’s Current report on Form 8-K filed with the SEC on July 13, 2012 |
(6) | Incorporated by reference to Exhibit 3.5 to ARMOUR’s Current Report on Form 8-K filed with the SEC on November 12, 2009. |
(7) | Incorporated by reference to Exhibit 10.1 to ARMOUR’s Current Report on Form 8-K filed with the SEC on June 22, 2012. |
(8) | Filed herewith |
# | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections. |