UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

~~FORM~~ ~~10-Q~~

FORM 10-Q



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

For the Quarterly Period Ended March 31, ~~2020~~2021



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

For the transition period from to

ARMOUR RESIDENTIAL REIT, INC.

(Exact name of registrant as specified in its charter)



Maryland	001-34766	26-1908763
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

3001 Ocean Drive, Suite 201,, Vero Beach,, FL32963

(Address of principal executive offices)(zip code)

(~~772~~) (772) 617-4340

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading symbols

Name of Exchange on which registered

Preferred Stock, 7.00% Series C Cumulative Redeemable

ARR-PRC

New York Stock Exchange

Common Stock, $0.001 par value

ARR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

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

The number of outstanding shares of the Registrant’s common stock as of April ~~30, 2020~~20, 2021 was ~~64,586,296.~~

71,244,026.

ARMOUR Residential REIT, Inc.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ARMOUR Residential REIT, Inc.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share)


	March 31, 2020			December 31, 2019				March 31, 2021		December 31, 2020
Assets							Assets
Cash	$	333,884		$	181,395		Cash	$	277,554	$	167,671
Cash collateral posted to counterparties	350,348			91,771			Cash collateral posted to counterparties	52,796		3,997
Investments in securities, at fair value							Investments in securities, at fair value
Agency Securities (including pledged securities of $2,764,806 at March 31, 2020 and $11,188,502 at December 31, 2019, net of allowance for credit losses of $1,012 at March 31, 2020)	2,786,962			11,941,766
Credit Risk and Non-Agency Securities (including pledged securities of $761,537 at March 31, 2020 and $810,549 at December 31, 2019)	765,553			883,601
Receivable for unsettled sales (including pledged securities of $220,543 at March 31, 2020)	688,183			—
Agency Securities (including pledged securities of $3,955,310 at March 31, 2021 and $4,726,584 at December 31, 2020)							Agency Securities (including pledged securities of $3,955,310 at March 31, 2021 and $4,726,584 at December 31, 2020)	4,318,397		5,178,322

Receivable for unsettled sales (including pledged securities of $342,482 at March 31, 2021)							Receivable for unsettled sales (including pledged securities of $342,482 at March 31, 2021)	358,670		0
Derivatives, at fair value	24,099			24,751			Derivatives, at fair value	216,297		54,686

Accrued interest receivable	9,545			35,085			Accrued interest receivable	11,094		12,833
Prepaid and other	1,605			9,051			Prepaid and other	9,692		1,977
Subordinated loan to BUCKLER	105,000			105,000			Subordinated loan to BUCKLER	105,000		105,000
Total Assets	$	5,065,179		$	13,272,420		Total Assets	$	5,349,500	$	5,524,486
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Liabilities:							Liabilities:
Repurchase agreements	$	3,465,472		$	11,354,547		Repurchase agreements	$	3,810,790	$	4,536,065

Cash collateral posted by counterparties	130,297			14,958			Cash collateral posted by counterparties	165,130		44,704
Payable for unsettled purchases	470,441			358,712			Payable for unsettled purchases	295,991		0
Derivatives, at fair value	200,275			71,974			Derivatives, at fair value	45,015		1,217
Accrued interest payable- repurchase agreements	3,490			31,932			Accrued interest payable- repurchase agreements	1,015		1,625

Accounts payable and other accrued expenses	8,954			3,590			Accounts payable and other accrued expenses	4,373		2,571

Total Liabilities	$	4,278,929		$	11,835,713		Total Liabilities	$	4,322,314	$	4,586,182

Commitments and contingencies (Note 9)							Commitments and contingencies (Note 9)	0		0

Stockholders’ Equity:							Stockholders’ Equity:
Preferred stock, $0.001 par value, 50,000 shares authorized;							Preferred stock, $0.001 par value, 50,000 shares authorized;
7.875% Series B Cumulative Preferred Stock; 8,383 shares issued and outstanding ($209,583 aggregate liquidation preference) at December 31, 2019	—			8
7.00% Series C Cumulative Preferred Stock; 5,303 shares issued and outstanding ($132,588 aggregate liquidation preference) at March 31, 2020	5			—
Common stock, $0.001 par value, 125,000 shares authorized, 58,881 and 58,877 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	59			59
7.00% Series C Cumulative Preferred Stock; 6,501 and 5,347 shares issued and outstanding ($162,525 and $133,675 aggregate liquidation preference) at March 31, 2021 and December 31. 2020, respectively							7.00% Series C Cumulative Preferred Stock; 6,501 and 5,347 shares issued and outstanding ($162,525 and $133,675 aggregate liquidation preference) at March 31, 2021 and December 31. 2020, respectively	6		5
Common stock, $0.001 par value, 125,000 shares authorized, 69,748 and 65,290 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively							Common stock, $0.001 par value, 125,000 shares authorized, 69,748 and 65,290 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively	69		65
Additional paid-in capital	2,974,469			3,054,604			Additional paid-in capital	3,115,352		3,033,025
Accumulated deficit	(2,413,300		)	(1,973,437		)	Accumulated deficit	(2,225,038)		(2,273,822)
Accumulated other comprehensive income	225,017			355,473			Accumulated other comprehensive income	136,797		179,031
Total Stockholders’ Equity	$	786,250		$	1,436,707		Total Stockholders’ Equity	$	1,027,186	$	938,304
Total Liabilities and Stockholders’ Equity	$	5,065,179		$	13,272,420		Total Liabilities and Stockholders’ Equity	$	5,349,500	$	5,524,486

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share)


	For the Three Months Ended March 31,
		2021		2020
Interest Income:
Agency Securities, net of amortization of premium and fees		$	18,558	$	79,776
Credit Risk and Non-Agency Securities, including discount accretion		0		12,355

U.S. Treasury Securities		0		469
BUCKLER Subordinated loan		17		258
Total Interest Income		$	18,575	$	92,858
Interest expense- repurchase agreements		(2,427)		(51,520)
Interest expense- U.S. Treasury Securities sold short		(87)		0
Net Interest Income		$	16,061	$	41,338
Other Income (Loss):
Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive loss)		7,354		93,325
Credit loss expense		0		(1,012)
Loss on Agency Securities, trading		(62,586)		0
Loss on Credit Risk and Non-Agency Securities		0		(183,111)

Gain on U.S. Treasury Securities		0		21,771
Loss on short sale of U.S. Treasury Securities		(28)		0
Subtotal		$	(55,260)	$	(69,027)
Realized loss on derivatives (1)		(27,360)		(235,148)
Unrealized gain (loss) on derivatives		145,980		(133,887)
Subtotal		$	118,620	$	(369,035)
Total Other Income (Loss)		$	63,360	$	(438,062)
Expenses:
Management fees		7,437		7,458
Professional fees		738		846
Insurance		193		183
Compensation		1,676		1,465
Other		450		(17)
Total Expenses		$	10,494	$	9,935
Less management fees waived		(2,400)		0
Total Expenses after fees waived		$	8,094	$	9,935
Net Income (Loss)		$	71,327	$	(406,659)
Dividends on preferred stock		(2,486)		(2,827)
Net Income (Loss) available (related) to common stockholders		$	68,841	$	(409,486)
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share)

For the Three Months Ended March 31,
2020 2019
Interest Income:
Agency Securities, net of amortization of premium and fees $ 79,776
$ 79,832
Credit Risk and Non-Agency Securities, including discount accretion 12,355
13,592
Interest-Only Securities —
345
U.S. Treasury Securities 469
482
BUCKLER Subordinated loan 258
539
Total Interest Income $ 92,858
$ 94,790
Interest expense- repurchase agreements (51,520 ) (60,978 )
Net Interest Income
$ 41,338

$ 33,812
Other Income (Loss):
Realized gain (loss) on sale of Agency Securities (reclassified from Other comprehensive income (loss)) 93,325
(2,910 )
Credit loss expense (1,012 ) —
Gain (loss) on Credit Risk and Non-Agency Securities (183,111 ) 496
Loss on Interest-Only Securities —
(368 )
Gain (loss) on U.S. Treasury Securities 21,771
(693 )
Subtotal
$ (69,027 )
$ (3,475 )
Realized loss on derivatives ⁽¹⁾
(235,148 ) (22,131 )
Unrealized loss on derivatives (133,887 ) (113,067 )
Subtotal
$ (369,035 ) $ (135,198 )
Total Other Loss
$ (438,062 ) $ (138,673 )
Expenses:
Management fees 7,458
7,258
Professional fees 846
1,035
Insurance 183
165
Compensation 1,465
787
Other (17 ) 275
Total Expenses
$ 9,935

$ 9,520
Net Loss
$ (406,659 ) $ (114,381 )
Dividends on preferred stock (2,827 ) (4,259 )
Net Loss related to common stockholders
$ (409,486 ) $ (118,640 )
Net Loss per share related to common stockholders (Note 12):
Basic $ (6.95 ) $ (2.21 )
Diluted $ (6.95 ) $ (2.21 )
Dividends declared per common share $ 0.51
$ 0.57
Weighted average common shares outstanding:
Basic 58,884
53,630
Diluted 58,884
53,630


	For the Three Months Ended March 31,
		2021		2020
Net Income (Loss) per share available (related) to common stockholders (Note 12):
Basic		$	1.04	$	(6.95)
Diluted		$	1.03	$	(6.95)
Dividends declared per common share		$	0.30	$	0.51
Weighted average common shares outstanding:
Basic		65,964		58,884
Diluted		67,018		58,884

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

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

For the Three Months Ended March 31,
2020 2019
Net Loss $ (406,659 ) $ (114,381 )
Other comprehensive income (loss):
Reclassification adjustment for realized (gain) loss on sale of available for sale Agency Securities (93,325 ) 2,910
Reclassification adjustment for credit loss expense on available for sale Agency Securities 1,012
—
Net unrealized gain (loss) on available for sale Agency Securities (38,143 ) 184,248
Other comprehensive income (loss) $ (130,456 ) $ 187,158
Comprehensive Income (Loss) $ (537,115 ) $ 72,777


	For the Three Months Ended March 31,
		2021		2020
Net Income (Loss)		$	71,327	$	(406,659)
Other comprehensive income (loss):
Reclassification adjustment for realized gain on sale of available for sale Agency Securities		(7,354)		(93,325)
Reclassification adjustment for credit loss expense on available for sale Agency Securities		0		1,012
Net unrealized loss on available for sale Agency Securities		(34,880)		(38,143)
Other comprehensive loss		$	(42,234)	$	(130,456)
Comprehensive Income (Loss)		$	29,093	$	(537,115)

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)


	Preferred Stock			Common Stock
	7.00% Series C
	Shares	Par		Shares	Par		Total Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total
Balance, December 31, 2020	5,347	$	5	65,290	$	65	$	3,033,025	$	(2,273,822)	$	179,031	$	938,304
Series C Preferred dividends	—	—		—	—		—		(2,486)		—		(2,486)
Common stock dividends	—	—		—	—		—		(20,057)		—		(20,057)
Issuance of Series C Preferred stock, net of expenses	1,154	1		—	—		28,172		—		—		28,173
Issuance of common stock, net	—	—		4,400	4		52,956		—		—		52,960
Stock based compensation, net of withholding requirements	—	—		58	—		1,199				—		1,199

Net Income	—	—		—	—		—		71,327		—		71,327
Other comprehensive loss	—	—��		—	—		—		—		(42,234)		(42,234)
Balance, March 31, 2021	6,501	$	6	69,748	$	69	$	3,115,352	$	(2,225,038)	$	136,797	$	1,027,186

Preferred Stock Common Stock
7.875% Series B 7.00% Series C
Shares Par Shares Par Shares Par
Total
Additional Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive Income (Loss)
Total
Balance, December 31, 2019 8,383
$ 8
—
$ —
58,877
$ 59
$ 3,054,604
$ (1,973,437 ) $ 355,473
$ 1,436,707
Series B Preferred dividends —
—
—
—
—
—
—
(1,375 ) —
(1,375 )
Series C Preferred dividends —
—
—
—
—
—
—
(1,452 ) —
(1,452 )
Common stock dividends —
—
—
—
—
—
—
(30,377 ) —
(30,377 )
Series B Preferred stock, called for redemption (8,383 ) (8 ) —
—
—
—
(209,575 ) —
—
(209,583 )
Issuance of Series C Preferred stock, net of expenses —
—
5,303
5
—
—
129,216
—
—
129,221
Stock based compensation, net of withholding requirements —
—
—
—
44
—
1,001

—
1,001
Common stock repurchased, net —
—
—
—
(40 ) —
(777 ) —
—
(777 )
Net Loss —
—
—
—
—
—
—
(406,659 ) —
(406,659 )
Other comprehensive loss —
—
—
—
—
—
—
—
(130,456 ) (130,456 )
Balance, March 31, 2020 —
$ —
5,303
$ 5
58,881
$ 59
$ 2,974,469
$ (2,413,300 ) $ 225,017
$ 786,250

See financial statement notes (unaudited).

~~ARMOUR Residential REIT, Inc.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

~~(in thousands)~~

For the Three Months Ended March 31,
2020 2019
Cash Flows From Operating Activities:
Net Loss $ (406,659 ) $ (114,381 )
Adjustments to reconcile net income (loss) to net cash and cash collateral posted to counterparties provided by (used in) operating activities:
Net amortization of premium on Agency Securities 14,130
6,347
Accretion of net discount on Credit Risk and Non-Agency Securities (1,078 ) (932 )
Net amortization of Interest-Only Securities —
936
Net amortization of U.S. Treasury Securities 84
(453 )
Realized (gain) loss on sale of Agency Securities (93,325 ) 2,910
Credit loss expense 1,012
—
(Gain) loss on Credit Risk and Non-Agency Securities 183,111
(496 )
Loss on Interest-Only Securities —
368
(Gain) loss on U.S. Treasury Securities (21,771 ) 693
Stock based compensation 1,001
644
Changes in operating assets and liabilities:
Increase (decrease) in accrued interest receivable 25,728
(17,178 )
Increase in prepaid and other assets 7,446
459
Change in derivatives, at fair value 128,953
95,796
Increase (Decrease) in accrued interest payable- repurchase agreements (28,442 ) 11,522
Increase in accounts payable and other accrued expenses 5,364
2,431
Net cash and cash collateral posted to counterparties used in operating activities $ (184,446 ) $ (11,334 )
Cash Flows From Investing Activities:
Purchases of Agency Securities (1,657,148 ) (6,608,566 )
Purchases of Credit Risk and Non-Agency Securities (237,928 ) —
Purchases of U.S. Treasury Securities (3,763,561 ) (101,039 )
Principal repayments of Agency Securities 475,766
145,777
Principal repayments of Credit Risk and Non-Agency Securities 31,404
6,335
Proceeds from sales of Agency Securities 9,777,373
1,017,396
Proceeds from sales of Credit Risk and Non-Agency Securities 72,437
—
Proceeds from sales of U.S. Treasury Securities 3,785,248
199,445
(Decrease) increase in cash collateral posted by counterparties 115,339
(47,387 )
Net cash and cash collateral posted to counterparties provided by (used in) investing activities $ 8,598,930
$ (5,388,039 )
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Three Months Ended March 31,
	2021		2020
Cash Flows From Operating Activities:
Net Income (Loss)	$	71,327	$	(406,659)
Adjustments to reconcile net loss to net cash and cash collateral posted to counterparties provided by (used in) operating activities:
Net amortization of premium on Agency Securities	15,795		14,130
Accretion of net discount on Credit Risk and Non-Agency Securities	0		(1,078)

Net amortization of U.S. Treasury Securities	0		84
Realized gain on sale of Agency Securities, available for sale	(7,354)		(93,325)
Credit loss expense	0		1,012
Loss on Agency Securities, trading	62,586		0
Loss on Credit Risk and Non-Agency Securities	0		183,111

Gain on U.S. Treasury Securities	0		(21,771)
Loss on short sale of U.S. Treasury Securities	28		0
Stock based compensation	1,199		1,001
Changes in operating assets and liabilities:
Increase in accrued interest receivable	1,952		25,728
Increase (decrease) in prepaid and other assets	(7,715)		7,446
Change in derivatives, at fair value	(117,813)		128,953
Decrease in accrued interest payable- repurchase agreements	(610)		(28,442)

Increase in accounts payable and other accrued expenses	1,802		5,364
Net cash and cash collateral posted to counterparties provided by (used in) operating activities	$	21,197	$	(184,446)
Cash Flows From Investing Activities:
Purchases of Agency Securities	0		(1,657,148)
Purchases of Credit Risk and Non-Agency Securities	0		(237,928)

Purchases of U.S. Treasury Securities	(390,126)		(3,763,561)
Principal repayments of Agency Securities	278,722		475,766
Principal repayments of Credit Risk and Non-Agency Securities	0		31,404
Proceeds from sales of Agency Securities	405,050		9,777,373
Proceeds from sales of Credit Risk and Non-Agency Securities	0		72,437

Proceeds from sales of U.S. Treasury Securities	390,098		3,785,248
Disbursements on reverse repurchase agreements	(391,125)		0
Receipts from reverse repurchase agreements	391,125		0
Decrease in cash collateral posted by counterparties	120,426		115,339

Net cash and cash collateral posted to counterparties provided by investing activities	$	804,170	$	8,598,930
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


								For the Three Months Ended March 31,
								2021		2020
Cash Flows From Financing Activities:							Cash Flows From Financing Activities:
Redemption of Series B Preferred stock, net of expenses	(209,583		)	—			Redemption of Series B Preferred stock, net of expenses	0		(209,583)
Issuance of Series C Preferred stock, net of expenses	129,221			—			Issuance of Series C Preferred stock, net of expenses	28,173		129,221
Issuance of common stock, net of expenses	—			321,992			Issuance of common stock, net of expenses	52,960		0
Proceeds from repurchase agreements	42,459,521			50,656,945			Proceeds from repurchase agreements	7,044,307		42,459,521
Principal repayments on repurchase agreements	(50,348,596		)	(45,551,322		)	Principal repayments on repurchase agreements	(7,769,582)		(50,348,596)
Series A Preferred stock dividends paid	—			(1,124		)
Series B Preferred stock dividends paid	(1,375		)	(3,135		)	Series B Preferred stock dividends paid	0		(1,375)
Series C Preferred stock dividends paid	(1,452		)	—			Series C Preferred stock dividends paid	(2,486)		(1,452)
Common stock dividends paid	(30,377		)	(29,814		)	Common stock dividends paid	(20,057)		(30,377)
Common stock repurchased, net	(777		)	—			Common stock repurchased, net	0		(777)
Net cash and cash collateral posted to counterparties provided by (used in) financing activities	$	(8,003,418	)	$	5,393,542
Net Increase (decrease) in cash and cash collateral posted to counterparties	411,066			(5,831		)
Net cash and cash collateral posted to counterparties used in financing activities							Net cash and cash collateral posted to counterparties used in financing activities	$	(666,685)	$	(8,003,418)
Net Increase in cash and cash collateral posted to counterparties							Net Increase in cash and cash collateral posted to counterparties	158,682		411,066
Cash and cash collateral posted to counterparties - beginning of period	273,166			232,199			Cash and cash collateral posted to counterparties - beginning of period	171,668		273,166
Cash and cash collateral posted to counterparties - end of period	$	684,232		226,368			Cash and cash collateral posted to counterparties - end of period	$	330,350	$	684,232
Supplemental Disclosure:							Supplemental Disclosure:
Cash paid during the period for interest	$	139,313		98,627			Cash paid during the period for interest	$	4,193	139,313
Non-Cash Investing Activities:							Non-Cash Investing Activities:
Receivable for unsettled sales	$	688,183		—			Receivable for unsettled sales	$	358,670	688,183
Payable for unsettled purchases	$	470,441		198,172			Payable for unsettled purchases	$	295,991	470,441
Net unrealized gain (loss) on available for sale Agency Securities	$	(38,143	)	184,248
Net unrealized loss on available for sale Agency Securities							Net unrealized loss on available for sale Agency Securities	$	(34,880)	(38,143)

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Note 1 - Organization and Nature of Business Operations

References to "we," "us," "our," or the "Company" are to ARMOUR Residential REIT, Inc. ("ARMOUR") and its subsidiaries. References to "ACM" are to ARMOUR Capital Management LP, a Delaware limited partnership. ARMOUR owns a ~~10%~~10.0% equity interest in BUCKLER Securities LLC ("BUCKLER"). BUCKLER is a Delaware limited liability company and a FINRA-regulated broker-dealer, controlled by ACM and certain executive officers of ARMOUR. Refer to the Glossary of Terms for definitions of capitalized terms and abbreviations used in this report.

ARMOUR is an externally managed Maryland corporation incorporated in 2008. The Company is managed by ACM, an investment advisor registered with the Securities and Exchange Commission (the "SEC"), (see Note 9 - Commitments and Contingencies and Note 15 - Related Party Transactions ~~for additional discussion)~~). We have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Our qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes. As a REIT, we will generally not be subject to federal income tax on the REIT taxable income that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.

~~We invest~~ At March 31, 2021 and December 31, 2020, we invested exclusively in mortgage backed securities ("MBS")~~. Some MBS are~~ issued or guaranteed by a United States ("U.S.") Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or a government agency such as Government National Mortgage Administration ("Ginnie Mae") (collectively, "Agency Securities"). Our Agency Securities consist primarily of fixed rate loans. The remaining are either backed by hybrid adjustable rate or adjustable rate loans. Other MBS in which we invest, for which the payment of principal and interest is not guaranteed by a GSE or government agency, may benefit from credit enhancement derived from structural elements such as subordination, over collateralization or insurance (collectively, "Credit Risk and Non-Agency Securities"). From time to time we may also invest in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and money market instruments.

Note 2 - Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the SEC. Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, ~~2020.~~2021. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, ~~2019.~~2020.

The unaudited consolidated financial statements include the accounts of ARMOUR Residential REIT, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying condensed consolidated financial statements include the valuation of MBS, including an assessment of the allowance for credit losses, and derivative instruments.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Note 3 - Summary of Significant Accounting Policies

Cash

Cash includes cash on deposit with financial institutions. We may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes we are not exposed to significant credit risk due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

Cash Collateral Posted To/By Counterparties

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

Investments in Securities, at Fair Value

Our investments in securities are generally classified as either available for sale or trading securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date.

Available for Sale Securities represent investments that we intend to hold for extended periods of time and are reported at their estimated fair values with unrealized gains and losses excluded from earnings and reported as part of the consolidated statements of comprehensive income (loss).

Trading Securities are reported at their estimated fair values with gains and losses included in Other Income (Loss) as a component of the consolidated statements of operations.

Receivables and Payables for Unsettled Sales and Purchases

We account for purchases and sales of securities on the trade date, including purchases and sales for forward settlement. Receivables and payables for unsettled trades represent the agreed trade price multiplied by the outstanding balance of the securities at the balance sheet date.

Accrued Interest Receivable and Payable

Accrued interest receivable includes interest accrued between payment dates on securities and interest on unsettled sales of securities. Accrued interest payable includes interest on unsettled purchases of securities and interest on repurchase ~~agreements and may, at~~agreements. At certain times, ~~contain~~we may have interest payable on U.S. Treasury Securities sold short.

Repurchase Agreements

We finance the acquisition of the majority of our MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and short-term London Interbank Offered Rate ("LIBOR"). Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender, which accrues over the life of the repurchase agreement. A repurchase agreement operates as a financing arrangement under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

In addition to the repurchase agreement financing discussed above, at certain times we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day. We did not have any reverse repurchase agreements outstanding at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Derivatives, at Fair Value

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

We also may utilize forward contracts for the purchase or sale of TBA Agency Securities. We account for TBA Agency Securities as derivative instruments if it is reasonably possible that we will not take or make physical delivery of the Agency Security upon settlement of the contract. We account for TBA dollar roll transactions as a series of derivative transactions. We may also purchase and sell TBA Agency Securities as a means of investing in and financing Agency Securities (thereby increasing our “at risk” leverage) or as a means of disposing of or reducing our exposure to Agency Securities (thereby reducing our “at risk” leverage). We agree to purchase or sell, for future delivery, Agency Securities with certain principal and interest terms and certain types of collateral, but the particular Agency Securities to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA Agency Security for a later settlement date. This transaction is commonly referred to as a “dollar roll.” When it is reasonably possible that we will pair off a TBA Agency Security, we account for that contract as a derivative.

Impairment of Assets

We assess impairment of available for sale securities at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment if we (1) intend to sell the available for sale securities, or (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) and a credit impairment exists where fair value is ~~greater~~less than amortized cost. Impairment losses recognized establish a new cost basis for the related available for sale securities.

Revenue Recognition

~~Available for Sale Securities~~ - Interest income is earned and recognized on Agency Securities based on their unpaid principal amounts and their contractual terms. Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction. Premiums and discounts associated with the purchase of Multi-Family MBS, which are generally not subject to prepayment, are amortized or accreted into interest income over the contractual lives of the securities using a level yield method. Premiums and discounts associated with the purchase of other Agency Securities are amortized or accreted into interest income over the actual lives of the securities, reflecting actual prepayments as they occur. Purchase and sale transactions (including TBA Agency Securities) are recorded on the trade date to the extent it is probable that we will take or make timely physical delivery of the related securities. Gains or losses

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

realized from ~~the~~sales of available for sale of securities are reclassified into income from other comprehensive income and are determined using the specific identification method.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

~~Trading Securities~~ - Interest income on Credit Risk and Non-Agency Securities and Interest-Only Securities is recognized using the effective yield method over the life of the securities based on the future cash flows expected to be received. Future cash flow projections and related effective yields are determined for each security and updated quarterly. Impairment losses establish a new cost basis in the security for purposes of calculating effective yields, recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security. Interest income on U.S. Treasury Securities is recognized based on their unpaid principal amounts and their contractual terms. Recognition of interest income commences on the settlement date of the purchase transaction and continues through the settlement date of the sale transaction.

Comprehensive Income (Loss)

Comprehensive income (loss) refers to changes in equity during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.

Note 4 - Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standards Updates ("ASU") issued by the Financial Accounting Standards Board. ~~Those~~We have not ~~listed below were~~identified any ASUs that we deemed to be ~~either not~~ applicable or that are ~~not~~ expected to have a significant impact on our consolidated financial statements when ~~adopted, or did not have a significant impact on our consolidated financial statements upon adoption.~~adopted.



~~Accounting Standard~~		~~Description~~

~~ASU 2018–07,~~ ~~Improvements to Non-employee Share –Based Payment Accounting (Topic 718)~~		The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The standard largely aligns the accounting for share-based payment awards issued to employees and non-employees. Equity-classified share-based payment awards issued to non-employees are measured on the grant date, instead of being remeasured through the performance completion date (generally the vesting date). The standard was applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year when adopted. The cumulative effective adjustment was recorded in our consolidated statement of stockholders' equity as of January 1, 2019, and did not have a material impact on the Company's financial condition or results of operations.

~~ASU 2016-13,~~ ~~Financial Instruments–Credit Losses (Topic 326)~~		The standard introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The standard applies to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off–balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The standard was effective for fiscal years beginning after December 15, 2019. The adoption of the standard on January 1, 2020 did not have a significant impact on the Company, since at that time we did not intend to sell our investments in available for sale Agency Securities. The Company determined that it was not more likely than not that we would be required to sell the investments before recovery of their amortized cost bases as the contractual cash flows of these federal agency mortgage backed securities are guaranteed by an agency of the U.S. government and we expected that all securities would not be settled at a price less than their amortized cost.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

Note 5 - Fair Value of Financial Instruments

Our valuation techniques for financial instruments use observable and unobservable inputs. Observable inputs reflect readily obtainable data from third party sources, while unobservable inputs reflect management’s market assumptions. The Accounting Standards Codification Topic No. 820, "Fair Value Measurement," classifies these inputs into the following hierarchy:

Level 1 Inputs - Quoted prices for identical instruments in active markets.

Level 2 Inputs - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs - Prices determined using significant unobservable inputs. Unobservable inputs may be used in situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period). Unobservable inputs reflect management’s assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.

At the beginning of each quarter, we assess the assets and liabilities that are measured at fair value on a recurring basis to determine if any transfers between levels in the fair value hierarchy are needed.

The following describes the valuation methodologies used for our assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Any transfers between levels are assumed to occur at the beginning of the reporting period.

~~Agency Securities, Credit Risk and Non-Agency Securities, Interest-Only Securities and U.S. Treasury~~

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Investments in Securities:

Fair value for ~~these~~our investments in securities are based on obtaining a valuation for each security from third party pricing services and/or dealer quotes. The third party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of a security is not available from the third party pricing services or such data appears unreliable, we obtain pricing indications from up to 3 dealers who make markets in similar securities. Management reviews pricing used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third party pricing services, dealer pricing indications and comparisons to a third party pricing model. Fair values obtained from the third party pricing services for similar instruments are classified as Level 2 securities if the inputs to the pricing models used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the third party pricing service, but dealer pricing indications are, the security will be classified as a Level 2 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information and classify it as a Level 3 security. U.S. Treasury Securities are classified as Level 1, as quoted unadjusted prices are available in active markets for identical assets.

Derivatives:

The fair values of our interest rate swap contracts, interest rate swaptions and basis swaps are valued using information provided by third party pricing services that incorporate common market pricing methods that may include current interest rate curves, forward interest rate curves and market spreads to interest rate curves. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. Management compares the pricing information received to dealer quotes to ensure that the current market conditions are properly reflected. The fair values of our derivatives are classified as Level 2.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

The following tables provide a summary of our assets and liabilities that are measured at fair value on a recurring basis at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, 2020 (Level 1) (Level 2) (Level 3) Balance
Assets at Fair Value:
Agency Securities $ —
$ 2,786,962
$ —
$ 2,786,962
Credit Risk and Non-Agency Securities $ —
$ 765,553
$ —
$ 765,553
Derivatives $ —
$ 24,099
$ —
$ 24,099
Liabilities at Fair Value:
Derivatives $ —
$ 200,275
$ —
$ 200,275

December 31, 2019 (Level 1) (Level 2) (Level 3) Balance
Assets at Fair Value:
Agency Securities $ —
$ 11,941,766
$ —
$ 11,941,766
Credit Risk and Non-Agency Securities $ —
$ 883,601
$ —
$ 883,601
Derivatives $ —
$ 24,751
$ —
$ 24,751
Liabilities at Fair Value:

Derivatives $ —
$ 71,974
$ —
$ 71,974


March 31, 2021	(Level 1)		(Level 2)		(Level 3)		Balance
Assets at Fair Value:
Agency Securities	$	0	$	4,318,397	$	0	$	4,318,397



Derivatives	$	0	$	216,297	$	0	$	216,297
Liabilities at Fair Value:
Derivatives	$	0	$	45,015	$	0	$	45,015

December 31, 2020	(Level 1)		(Level 2)		(Level 3)		Balance
Assets at Fair Value:
Agency Securities	$	0	$	5,178,322	$	0	$	5,178,322



Derivatives	$	0	$	54,686	$	0	$	54,686
Liabilities at Fair Value:
Derivatives	$	0	$	1,217	$	0	$	1,217

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the three months ended March 31, ~~2020~~2021 or for the year ended December 31, ~~2019.~~2020.

Excluded from the tables above are financial instruments, including cash, cash collateral posted to/by counterparties, receivables, the Subordinated loan to BUCKLER, payables and borrowings under repurchase agreements, which are presented in our consolidated financial statements at cost which approximates fair value. The estimated fair value of these instruments is measured using "Level 1" or "Level 2" inputs at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Note 6 - Investments in Securities

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, our securities portfolio consisted of ~~$3,552,515~~$4,318,397 and ~~$12,825,367~~$5,178,322 of investment securities, at fair value, respectively, and ~~$1,292,462~~$3,564,067 and ~~$1,006,280~~$2,711,977 of TBA Agency Securities, at fair value, respectively. Our TBA Agency Securities are reported at net carrying value of ~~$22,044~~$(45,001) and ~~$(592),~~$19,747, at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 - Derivatives ~~for additional information)~~). The net carrying value of our TBA Agency Securities represents the difference between the fair value of the underlying Agency Security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying Agency Security.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

The following ~~table~~tables summarizes our investments in securities as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, excluding TBA Agency Securities (see Note 8 - Derivatives ~~for additional information)~~).

Available for Sale
Securities
Trading Securities
Agency Credit Risk and Non-Agency Interest-Only U.S. Treasuries Totals
March 31, 2020
Beginning balance $ 11,941,766
$ 883,601
$ —
$ —
$ 12,825,367
Purchases ⁽¹⁾
1,768,689
237,928
—
3,763,561
5,770,178
Proceeds from sales
(9,777,373 ) (72,437 ) —
(3,785,248 ) (13,635,058 )
Receivable for unsettled sales (618,081 ) (70,102 ) —
—
(688,183 )
Principal repayments (475,766 ) (31,404 ) —
—
(507,170 )
Gains (losses) (37,131 ) (183,111 ) —
21,771
(198,471 )
Credit loss expense (1,012 ) —
—
—
(1,012 )
Amortization/accretion (14,130 ) 1,078
—
(84 ) (13,136 )
Ending balance $ 2,786,962
$ 765,553
$ —
$ —
$ 3,552,515
Percentage of Portfolio 78.45 % 21.55 % — % — % 100.00 %

December 31, 2019
Beginning balance $ 7,051,954
$ 819,915
$ 20,623
$ 98,646
$ 7,991,138
Purchases ⁽¹⁾
9,130,512
138,767
—
1,685,058
$ 10,954,337
Sales (2,894,339 ) —
(18,822 ) (1,786,090 ) $ (4,699,251 )
Principal Repayments (1,701,406 ) (53,641 ) —
—
$ (1,755,047 )
Gains (losses) 408,954
(24,396 ) 123
2,024
$ 386,705
Amortization/accretion (53,909 ) 2,956
(1,924 ) 362
$ (52,515 )
Ending balance $ 11,941,766
$ 883,601
$ —
$ —
$ 12,825,367
Percentage of Portfolio 93.11 % 6.89 % — % — % 100.00 %


~~(1)~~	~~Purchases include cash paid during the period, plus payable for investment securities purchased during the period as~~ Beginning in the second quarter of ~~period end. At~~ ~~March 31, 2020~~ ~~and~~ ~~December 31, 2019, we had investment related payables with respect to unsettled purchases of Agency Securities of~~ ~~$470,441~~ ~~and~~ ~~$358,712, respectively.~~

~~Available for Sale Securities:~~

~~At March 31,~~ 2020, we ~~evaluated~~designated Agency MBS purchased as “trading securities” for financial reporting purposes, and consequently, fair value changes for these investments will be reported in net income. We anticipate continuing this designation for newly acquired Agency MBS positions because it is more representative of our ~~available sale securities to determine if an allowance~~results of operations insofar as the fair value changes for ~~credit losses was required for securities which were in an unrealized loss position and determined that, as we may be be required to sell~~ these securities are presented in a manner consistent with the ~~near future we recognized an impairment~~presentation and timing of ~~$1,012 in~~the fair value changes of our ~~consolidated statements of operations.~~

~~At March 31, 2019 and December 31, 2019, we evaluated our~~hedging instruments. Fair value changes for the legacy Agency Securities designated as available for sale will continue to be reported in other comprehensive income as required by GAAP.


	Available for Sale Securities			Trading Securities
	Agency			Agency			Credit Risk and Non-Agency			U.S. Treasuries			Totals
March 31, 2021
Balance, December 31, 2020	$	1,970,902		$	3,207,420		$	0		$	0		$	5,178,322
Purchases (1)	0			295,778			0			390,126			685,904
Proceeds from sales	(87,875)			(317,175)			0			(390,098)			(795,148)
Receivable for unsettled sales	0			(358,670)			0			0			(358,670)
Principal repayments	(98,342)			(180,380)			0			0			(278,722)
Gains (losses)	(34,880)			(62,586)			0			(28)			(97,494)

Amortization/accretion	(4,492)			(11,303)			0			0			(15,795)
Balance, March 31, 2021	$	1,745,313		$	2,573,084		$	0		$	0		$	4,318,397
Percentage of Portfolio	40.42		%	59.58		%	0		%	0		%	100.00		%

December 31, 2020
Balance, December 31, 2019	$	11,941,766		$	0		$	883,601		$	0		$	12,825,367
Purchases (1)	1,768,688			3,711,961			237,928			4,621,776			10,340,353
Proceeds from sales	(10,800,879)			(158,708)			(889,057)			(4,643,049)			(16,491,693)
Principal repayments	(873,650)			(343,514)			(45,766)			0			(1,262,930)
Gains (losses)	(32,565)			19,557			(189,555)			21,357			(181,206)
Credit loss expense	(1,012)			0			0			0			(1,012)
Amortization/accretion	(31,446)			(21,876)			2,849			(84)			(50,557)
Balance, December 31, 2020	$	1,970,902		$	3,207,420		$	0		$	0		$	5,178,322
Percentage of Portfolio	38.06		%	61.94		%	0		%	0		%	100.00		%

(1)Purchases include cash paid during the period, plus payable for investment securities with unrealized losses to determine whether there was an OTTI. At those dates, we also considered whether we intended to sell available for sale securities and whether it was more likely than not that we could meet our liquidity requirements and contractual obligations without selling available for sale securities. NaN OTTI was recognized forpurchased during the ~~three months ended March 31, 2019 or for the year ended December 31, 2019.~~period as of period end.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Available for Sale Securities:

At March 31, 2021, we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. As a result of this evaluation, 0 credit loss expense was required. We do not have an allowance for credit losses as all of our available for sale securities consist of Agency MBS.

During the year ended December 31, 2020, we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. In the first quarter of 2020, we recognized an impairment of $1,012 in our consolidated statements of operations as we had determined that we may have been required to sell certain securities in the near future. NaN credit loss expense was required for the remainder of 2020.

The table below presents the components of the carrying value and the unrealized gain or loss position of our ~~Agency Securities~~available for sale securities at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. Our ~~Agency Securities~~available for sale securities had a weighted average coupon of ~~3.98%~~3.14% and ~~3.76%~~3.25% at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
March 31, 2020
Total Fannie Mae $ 1,930,475
$ 1,981,977
$ —
$ 202,987
$ 2,184,964
Total Freddie Mac 536,387
558,004
—
22,023
580,027
Total Ginnie Mae 21,418
21,964
—
7
21,971
Total $ 2,488,280
$ 2,561,945
$ —
$ 225,017
$ 2,786,962

December 31, 2019
Total Fannie Mae $ 8,779,331
$ 8,975,140
$ (291 ) $ 294,937
$ 9,269,786
Total Freddie Mac 2,522,870
2,587,512
(40 ) 61,323
2,648,795
Total Ginnie Mae 22,504
23,641
(461 ) 5
23,185
Total $ 11,324,705
$ 11,586,293
$ (792 ) $ 356,265
$ 11,941,766


Agency Securities	Principal Amount		Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Fair Value
March 31, 2021
Total Fannie Mae	$	1,279,088	$	1,314,096	$	(29)	$	121,729	$	1,435,796
Total Freddie Mac	267,184		277,793		0		14,933		292,726
Total Ginnie Mae	16,215		16,627		(7)		171		16,791
Total	$	1,562,487	$	1,608,516	$	(36)	$	136,833	$	1,745,313

December 31, 2020
Total Fannie Mae	$	1,359,136	$	1,397,206	$	(1)	$	159,603	$	1,556,808
Total Freddie Mac	354,382		368,686		0		19,246		387,932
Total Ginnie Mae	25,388		25,979		(43)		226		26,162
Total	$	1,738,906	$	1,791,871	$	(44)	$	179,075	$	1,970,902

The following table presents the unrealized losses and estimated fair value of our ~~Agency Securities~~available for sale securities by length of time that such securities have been in a continuous unrealized loss position at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. All of our ~~Agency Securities~~available for sale securities are issued and guaranteed by GSEs or Ginnie Mae. The GSEs have a long term credit rating of AA+.

Unrealized Loss Position For:
< 12 Months ≥ 12 Months Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
March 31, 2020 $ —
$ —
$ —
$ —
$ —
$ —
December 31, 2019 $ 2,136
$ (10 ) $ 43,939
$ (782 ) $ 46,075
$ (792 )


	Unrealized Loss Position For:
	< 12 Months				≥ 12 Months				Total
Agency Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2021	$	7,071	$	(36)	$	0	$	0	$	7,071	$	(36)
December 31, 2020	$	8,811	$	(44)	$	0	$	0	$	8,811	$	(44)

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Actual maturities of ~~Agency Securities~~available for sale securities are generally shorter than stated contractual maturities because actual maturities of ~~Agency Securities~~available for sale securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following table summarizes the weighted average lives of our ~~Agency Securities~~available for sale securities at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, 2020 December 31, 2019
Weighted Average Life of all Agency Securities Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
< 1 year $ 55
$ 55
$ —
$ —
≥ 1 year and < 3 years 44,473
43,320
22,237
22,254
≥ 3 years and < 5 years 1,194,131
1,148,197
6,542,389
6,365,623
≥ 5 years 1,548,303
1,370,373
5,377,140
5,198,416
Total Agency Securities $ 2,786,962
$ 2,561,945
$ 11,941,766
$ 11,586,293


	March 31, 2021				December 31, 2020
Weighted Average Life of Available for Sale Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
< 1 year	$	72	$	72	$	71	$	72
≥ 1 year and < 3 years	21,717		20,883		548,352		520,657
≥ 3 years and < 5 years	655,870		622,694		282,739		269,716
≥ 5 years	1,067,654		964,867		1,139,740		1,001,426
Total Available for Sale Securities	$	1,745,313	$	1,608,516	$	1,970,902	$	1,791,871

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

We use a third party model to calculate the weighted average lives of our ~~Agency Securities.~~available for sale securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our ~~Agency Securities.~~available for sale securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of our ~~Agency Securities~~available for sale securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 in the table above are based upon market factors, assumptions, models and estimates from the third party model and also incorporate management’s judgment and experience. The actual weighted average lives of our ~~Agency Securities~~available for sale securities could be longer or shorter than estimated.

Trading Securities:

Our Credit Risk Transfer securities are collateralized by residential mortgage loans meeting agency criteria. However, our securities principal and interest are not guaranteed by the agencies. Credit Risk Transfer securities include tranches issued since 2014. Our Non-Agency Securities are collateralized by residential mortgage loans not guaranteed by any agency and include legacy securities issued between 2005 and 2007.

The components of the carrying value of our ~~Trading Securities~~trading securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are presented in the table below. We did not have any Credit Risk and Non-Agency Securities, U.S. Treasury Securities or Interest-Only Securities at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
March 31, 2020
Credit Risk Transfer $ 821,060
$ 808,091
$ (112,182 ) $ 132
$ 696,041
Non-Agency Securities 90,721
70,154
(1,675 ) 1,033
69,512
Total Credit Risk and Non-Agency Securities $ 911,781
$ 878,245
$ (113,857 ) $ 1,165
$ 765,553

December 31, 2019
Credit Risk Transfer $ 754,729
$ 751,940
$ —
$ 52,024
$ 803,964
Non-Agency Securities 93,723
72,904
(3 ) 6,736
79,637
Total Credit Risk and Non-Agency Securities $ 848,452
$ 824,844
$ (3 ) $ 58,760
$ 883,601


	Principal Amount		Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Fair Value
March 31, 2021
Agency Securities:
Total Fannie Mae	$	1,958,951	$	2,078,710	$	(37,761)	$	2,891	$	2,043,840
Total Freddie Mac	507,962		533,065		(5,666)		1,845		529,244







Total Trading Securities	$	2,466,913	$	2,611,775	$	(43,427)	$	4,736	$	2,573,084

December 31, 2020
Agency Securities:
Total Fannie Mae	$	2,420,828	$	2,585,409	$	(1,441)	$	18,211	$	2,602,179
Total Freddie Mac	570,654		601,320		(430)		4,351		605,241
Total Trading Securities	$	2,991,482	$	3,186,729	$	(1,871)	$	22,562	$	3,207,420

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following table presents the unrealized losses and estimated fair value of our Trading Securities by length of time that such securities have been in a continuous unrealized loss position at March 31, 2020 and December 31, 2019. Our Credit Risk and Non-Agency Securities are subject to risk of loss with regard to principal and interest payments. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies.

Unrealized Loss Position For:
< 12 Months ≥ 12 Months Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
March 31, 2020
Credit Risk and Non-Agency Securities $ 725,547
$ (113,857 ) $ —
$ —
$ 725,547
$ (113,857 )

December 31, 2019
Credit Risk and Non-Agency Securities $ 362
$ (3 ) $ —
$ —
$ 362
$ (3 )

The following table summarizes the weighted average lives of our ~~Trading Securities~~trading securities at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, 2020 December 31, 2019
Estimated Weighted Average Life of Trading Securities Fair Value Amortized Cost Fair Value Amortized Cost
< 1 year $ —
$ —
$ —
$ —
≥ 1 year and < 3 years 556,011
609,386
389,883
369,600
≥ 3 years and < 5 years 25,410
26,162
407,656
375,030
≥ 5 years 184,132
242,697
86,062
80,214
Total $ 765,553
$ 878,245
$ 883,601
$ 824,844


	March 31, 2021				December 31, 2020
Estimated Weighted Average Life of Trading Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
< 1 year	$	0	$	0	$	0	$	0
≥ 1 year and < 3 years	2,028		2,035		649,425		650,328
≥ 3 years and < 5 years	719,487		716,320		1,522,509		1,506,035
≥ 5 years	1,851,569		1,893,420		1,035,486		1,030,366
Total	$	2,573,084	$	2,611,775	$	3,207,420	$	3,186,729

We use a third party model to calculate the weighted average lives of our ~~Credit Risk and Non-Agency Securities.~~trading securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our ~~Credit Risk and Non-Agency Securities.~~trading securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of our ~~Credit Risk and Non-Agency Securities~~trading securities at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 in the tables above are based upon market factors, assumptions, models and estimates from the third party model and also incorporate management’s judgment and experience. The actual weighted average lives of our ~~Credit Risk and Non-Agency Securities~~trading securities could be longer or shorter than estimated.

Note 7 - Repurchase Agreements

At March 31, ~~2020,~~2021, we had active MRAs with 4933 counterparties and had ~~$3,465,472~~$3,810,790 in outstanding borrowings with 18 of those counterparties. At December 31, ~~2019,~~2020, we had ~~MRAs with 49 counterparties and had $11,354,547~~$4,536,065 in outstanding borrowings with ~~25 of those~~18 counterparties.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

The following table represents the contractual repricing regarding our repurchase agreements to finance MBS purchases at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. No amounts below are subject to offsetting. Our repurchase agreements require excess collateral, known as a “haircut.” At March 31, 2021, the average haircut percentage was 3.52% compared to 3.13% at December 31, 2020. The haircut for our repurchase agreements vary by counterparty and therefore, the changes in the average haircut percentage will vary with the changes in our counterparty repurchase agreement balances.


	Balance		Weighted Average Contractual Rate		Weighted Average Maturity in days
March 31, 2021
Agency Securities
≤ 30 days	$	3,470,940	0.18	%	12
> 30 days to ≤ 60 days	89,304		0.17	%	50

> 60 days	250,546		0.19	%	97
Total or Weighted Average	$	3,810,790	0.18	%	18
















December 31, 2020
Agency Securities
≤ 30 days	$	3,618,255	0.23	%	15
> 30 days to ≤ 60 days	917,810		0.23	%	45


Total or Weighted Average	$	4,536,065	0.23	%	21

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Balance Weighted Average Contractual Rate Weighted Average Maturity in days
Haircut⁽¹⁾
March 31, 2020
Agency Securities
≤ 30 days $ 1,926,564
1.35 % 14 3.10 %
> 30 days to ≤ 60 days 776,742
1.76 % 49 3.12 %
Total or Weighted Average $ 2,703,306
1.47 % 24 3.10 %

Credit Risk and Non-Agency Securities
≤ 30 days 762,166
2.02 % 12 22.17 %
Total or Weighted Average $ 3,465,472
1.59 % 21 7.34 %

December 31, 2019
Agency Securities
≤ 30 days $ 10,241,137
2.56 % 8 4.35 %
> 30 days to ≤ 60 days 426,147
1.99 % 34 4.61 %
Total or Weighted Average $ 10,667,284
2.54 % 9 4.36 %

Credit Risk and Non-Agency Securities
≤ 30 days 687,263
2.45 % 15 16.25 %
Total or Weighted Average $ 11,354,547
2.54 % 9 5.16 %


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

Our repurchase agreements require that we maintain adequate pledged collateral. A decline in the value of the MBS pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding 12 times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital. We also may receive cash or securities as collateral from our derivative counterparties which we may use as additional collateral for repurchase agreements. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, BUCKLER accounted for ~~56.2%~~61.9% and ~~45.0%~~66.1%, respectively, of our aggregate borrowings and had an amount at risk of ~~7.7%~~7.2% and ~~14.8%~~8.3%, respectively, of our total stockholders' equity with a weighted average maturity of 2720 days and 721 days, respectively, on repurchase agreements (see Note 15 - Related Party Transactions ~~for additional information)~~).

In addition, at March 31, 2021, we had 1 repurchase agreement counterparty that individually accounted for over 5% of our aggregate borrowings. In total, this counterparty accounted for approximately 10.6% of our repurchase agreement borrowings outstanding at March 31, 2021. At December 31, 2020, we had 1 repurchase agreement counterparty that individually accounted for over 5% of our aggregate borrowings. In total, this counterparty accounted for approximately 11.8% of our repurchase agreement borrowings outstanding at March 31, 2020. At March 31, 2020, we also had 1 repurchase counterparty with an amount at risk of 5.62% of our total stockholders' equity with a weighted average maturity of 10 days on repurchase agreements. At December

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

~~31, 2019, we had 2 repurchase agreement counterparties that individually accounted for between 5% and 10% of our aggregate borrowings. In total, these counterparties accounted for 12.7%~~9.0% of our repurchase agreement borrowings at December 31, ~~2019.~~2020.

Note 8 - Derivatives

We enter into derivative transactions to manage our interest rate risk and agency mortgage rate exposures. We have agreements with our derivative counterparties that provide for the posting of collateral based on the fair values of our derivatives. Through this margin process, either we or our counterparties may be required to pledge cash or securities as collateral. Collateral requirements vary by counterparty and change over time based on the fair value, notional amount and remaining term of the contracts. Certain contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

Interest rate swap contracts are designed to lock in funding costs for repurchase agreements associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg. Basis swap contracts allow us to exchange one floating interest rate basis for another, thereby allowing us to diversify our floating rate basis exposures.

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

We have netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by ~~the International Swap and Derivatives Association.~~ISDA. We are also required to post or hold cash collateral based upon the net underlying market value of our open positions with the counterparty. A decline in the value of the open positions with the counterparty could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. An event of default or termination event under the standard ISDA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately. In addition, certain of our ISDAs contain a restriction that prohibits our leverage from exceeding ~~twelve~~12 times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital. ~~At March 31, 2020, we received waivers from certain ISDA counterparties related to significant reductions in equity capital that would have otherwise caused a default or termination event.~~

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

The following tables present information about the potential effects of netting our derivatives if we were to offset the assets and liabilities on the accompanying consolidated balance sheets. We currently present these financial instruments at their gross amounts and they are included in ~~derivatives,~~Derivatives, at fair value on the accompanying consolidated balance sheets at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


			Gross Amounts Not Offset
Assets	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net
March 31, 2021
Interest rate swap contracts	$	216,283	$	0	$	(159,641)	$	56,642
TBA Agency Securities	14		(14)		0		0
Totals	$	216,297	$	(14)	$	(159,641)	$	56,642

December 31, 2020
Interest rate swap contracts	$	34,588	$	(866)	$	(27,773)	$	5,949
TBA Agency Securities	20,098		(351)		(13,942)		5,805
Totals	$	54,686	$	(1,217)	$	(41,715)	$	11,754

Gross Amounts Not Offset
Assets
Gross Amounts⁽¹⁾

Financial
Instruments
Cash Collateral Total Net
March 31, 2020
Interest rate swap contracts $ 395
$ (395 ) $ —
$ —
TBA Agency Securities 23,704
(1,660 ) (20,195 ) 1,849
Totals $ 24,099
$ (2,055 ) $ (20,195 ) $ 1,849

December 31, 2019
Interest rate swap contracts $ 23,659
$ (70,290 ) $ 83,066
$ 36,435
TBA Agency Securities 1,092
(1,092 ) —
—
Totals $ 24,751
$ (71,382 ) $ 83,066
$ 36,435


~~(1)~~	(1)See Note 5 - Fair Value of Financial Instruments for additional discussion.


				Gross Amounts Not Offset										Gross Amounts Not Offset
Liabilities	Gross Amounts⁽¹⁾			Financial Instruments		Cash Collateral		Total Net			Liabilities	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net
March 31, 2020
March 31, 2021											March 31, 2021
Interest rate swap contracts	$	(198,615	)	$	395	$	195,315	$	(2,905	)	Interest rate swap contracts	$	0	$	0	$	0	$	0
TBA Agency Securities	(1,660		)	1,660		—		—			TBA Agency Securities	(45,015)		14		44,906		(95)
Totals	$	(200,275	)	$	2,055	$	195,315	$	(2,905	)	Totals	$	(45,015)	$	14	$	44,906	$	(95)

December 31, 2019
December 31, 2020											December 31, 2020
Interest rate swap contracts	$	(70,290	)	$	70,290	$	—	$	—		Interest rate swap contracts	$	(866)	$	866	$	0	$	0
TBA Agency Securities	(1,684		)	1,092		377		$	(215	)	TBA Agency Securities	(351)		351		0		0
Totals	$	(71,974	)	$	71,382	$	377	$	(215	)	Totals	$	(1,217)	$	1,217	$	0	$	0

(1)See Note 5 - Fair Value of Financial Instruments for additional discussion.


~~(1)~~	~~See~~ ~~Note 5 - Fair Value of Financial Instruments~~ ~~for additional discussion.~~

2019

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following table represents the location and information regarding our derivatives which are included in Other Income (Loss) in the accompanying consolidated statements of operations for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019.~~2020.

Income (Loss) Recognized
For the Three Months Ended March 31,
Derivatives Location on consolidated statements of operations 2020 2019
Interest rate swap contracts:
Realized loss Realized loss on derivatives $ (261,384 ) $ (39,544 )
Interest income Realized loss on derivatives 26,462
53,745
Interest expense Realized loss on derivatives (32,233 ) (45,109 )
Changes in fair value Unrealized loss on derivatives (151,386 ) (109,343 )
$ (418,541 ) (140,251 )
TBA Agency Securities:
Realized gain Realized loss on derivatives 32,007
8,777
Changes in fair value Unrealized loss on derivatives 17,499
(3,724 )
$ 49,506
5,053
Totals $ (369,035 ) (135,198 )


		Income (Loss) Recognized
		For the Three Months Ended March 31,
Derivatives	Location on consolidated statements of operations	2021		2020
Interest rate swap contracts:
Realized loss	Realized loss on derivatives	$	0	$	(261,384)
Interest income	Realized loss on derivatives	872		26,462
Interest expense	Realized loss on derivatives	(4,448)		(32,233)
Changes in fair value	Unrealized gain (loss) on derivatives	185,960		(151,386)
		$	182,384	(418,541)








TBA Agency Securities:
Realized gain (loss)	Realized loss on derivatives	(23,784)		32,007
Changes in fair value	Unrealized gain (loss) on derivatives	(39,980)		17,499
		$	(63,764)	$	49,506
Totals		$	118,620	$	(369,035)

The following tables present information about our derivatives at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


Interest Rate Swaps (1)	Notional Amount		Weighted Average Remaining Term (Months)	Weighted Average Rate
March 31, 2021
< 3 years	$	1,307,000	19	0.06	%
≥ 3 years and < 5 years	412,000		47	0.16	%
≥ 5 years and < 7 years	889,000		69	0.28	%
≥ 7 years	3,152,000		115	0.88	%

Total or Weighted Average (2)	$	5,760,000	81	0.55	%

December 31, 2020
< 3 years	$	2,230,000	12	0.06	%
≥ 3 years and < 5 years	463,000		45	0.14	%
≥ 5 years and < 7 years	942,000		72	0.28	%
≥ 7 years	1,702,000		113	0.50	%

Total or Weighted Average (3)	$	5,337,000	58	0.24	%

Interest Rate Swaps ⁽¹⁾
Notional Amount Weighted Average Remaining Term (Months) Weighted Average Rate
March 31, 2020
< 3 years $ 2,200,000
14 1.89 %
≥ 3 years and < 5 years
375,000
53 1.64 %
≥ 5 years and < 7 years 850,000
80 1.74 %
< 7 years 575,000
116 1.31 %
Total or Weighted Average⁽²⁾
$ 4,000,000
46 1.75 %

December 31, 2019
< 3 years $ 2,750,000
19 1.66 %
≥ 3 years and < 5 years 2,850,000
47 1.84 %
≥ 5 years and < 7 years 1,200,000
83 1.86 %
< 7 years 1,175,000
118 1.54 %
Total or Weighted Average ⁽³⁾
$ 7,975,000
53 1.74 %
(1)Pay Fixed/Receive Variable.


~~(1)~~	~~Pay Fixed/Receive Variable.~~


~~(2)~~	(2)Of this amount, $4,557,000 notional are Fed Funds based swaps, the last of which matures in 2031 and $1,203,000 notional are SOFR based swaps, the last of which matures in 2023. ~~Of this amount,~~ ~~$525,000~~ ~~notional are LIBOR based swaps, the last of which matures in~~ ~~2023~~ ~~and~~ ~~$3,475,000~~ ~~notional are Fed Funds based swaps, the last of which matures in~~ ~~2030~~.

2120

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

~~(3)~~

(3)Of this amount, $2,230,000 notional are SOFR based swaps, the last of which matures in 2023; and $3,107,000 notional are Fed Funds based swaps, the last of which matures in 2030.~~1,025,000~~ ~~notional are LIBOR based swaps, the last of which matures in~~ ~~2023~~; ~~375,000~~ ~~notional are SOFR based swaps, the last of which matures in~~ ~~2024; and~~ ~~6,575,000~~ ~~notional are Fed Funds based swaps, the last of which matures in~~ ~~2029~~.


TBA Agency Securities	Notional Amount		Cost Basis		Fair Value
March 31, 2021
15 Year Long
1.5%	$	200,000	$	200,523	$	200,527
2.0%	1,700,000		1,751,223		1,741,247
30 Year Long
2.0%	500,000		502,992		497,975
2.5%	1,100,000		1,136,129		1,124,318
Total (1)	$	3,500,000	$	3,590,867	$	3,564,067

December 31, 2020
15 Year Long
1.5%	$	200,000	$	204,758	$	205,781
2.0%	1,200,000		1,248,015		1,253,354
30 Year Long
2.0%	600,000		619,031		622,934
2.5%	800,000		838,047		841,314
3.5%	(200,000)		(211,055)		(211,406)
Total (1)	$	2,600,000	$	2,698,796	$	2,711,977

(1)$1,350,000 and $1,250,000 notional were forward settling at March 31, 2021 and December 31, 2020, respectively.

TBA Agency Securities Notional Amount Cost Basis Fair Value
March 31, 2020
15 Year Long
2.0% 500,000
508,062
513,310
30 Year Long
2.5% 500,000
509,008
517,072
3.0% 250,000
257,481
262,080
Total ⁽¹⁾
$ 1,250,000
$ 1,274,551
$ 1,292,462

December 31, 2019
15 Year Long
3.0% 500,000
511,055
511,885
30 Year Long
2.5% 500,000
494,813
494,395
Total ⁽¹⁾
$ 1,000,000
$ 1,005,868
$ 1,006,280


~~(1)~~	~~$750,000~~ ~~notional are forward settling at~~ ~~March 31, 2020~~ ~~and~~ ~~$1,000,000~~ ~~notional were forward settling at~~ ~~December 31, 2019~~.

Note 9 - Commitments and Contingencies

Management

The Company is managed by ACM, pursuant to a management ~~agreements with ARMOUR and JAVELIN~~agreement (see also Note 15, “Related Party Transactions”). The management ~~agreements entitle~~agreement entitles ACM to receive management fees payable monthly in arrears. Currently, the monthly ~~ARMOUR~~ management fee is 1/12th of the sum of (a) 1.5% of gross equity raised up to $1.0 billion plus (b) 0.75% of gross equity raised in excess of $1.0 billion. The cost of repurchased stock and any dividend representing a return of capital for tax purposes will reduce the amount of gross equity raised used to calculate the monthly management fee. At March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, the effective ~~ARMOUR~~ management fee, prior to management fees waived, was 1.00% and 1.00% based on gross equity raised of $3,026,269 and $2,887,586, respectively. ACM began waiving 40% of its management fee during the second quarter of 2020 and ~~$2,986,934, respectively.~~on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter until further notice (see Note 16 - Subsequent Events). During the three months ended March 31, 2021, ACM waived management fees of $2,400. The ~~ACM~~ monthly management fees are not calculated based on the performance of our assets. Accordingly, the payment of our monthly management fees may not decline in the event of a decline in our earnings and may cause us to incur losses. We are also responsible for any costs and expenses that ACM ~~incurred~~incurs solely on our behalf ~~of ARMOUR or JAVELIN~~ other than the various overhead expenses specified in the terms of the management ~~agreements.~~agreement. ACM is further entitled to receive termination fees from ~~ARMOUR and JAVELIN~~us under certain circumstances.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Indemnifications and Litigation

We enter into certain contracts that contain a variety of indemnifications, principally with ACM and underwriters, against third party claims for errors and omissions in connection with their services to us. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements, as well as the maximum amount attributable to past events, is not material. Accordingly, we have no liabilities recorded for these agreements at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

NaN putative class action lawsuits have been filed in connection with the tender offer (the “Tender Offer”) and merger (the “Merger”) for JAVELIN. The Tender Offer and Merger are collectively defined herein as the “Transactions.” All 9 suits

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

name ARMOUR, the previous members of JAVELIN’s board of directors prior to the Merger (of which 8 are current members of ARMOUR’s board of directors) (the “Individual Defendants”) and JMI Acquisition Corporation (“Acquisition”) as defendants. Certain cases also name ACM and JAVELIN as additional defendants. The lawsuits were brought by purported holders of JAVELIN’s common stock, both individually and on behalf of a putative class of JAVELIN’s stockholders, alleging that the Individual Defendants breached their fiduciary duties owed to the plaintiffs and the putative class of JAVELIN stockholders, including claims that the Individual Defendants failed to properly value JAVELIN; failed to take steps to maximize the value of JAVELIN to its stockholders; ignored or failed to protect against conflicts of interest; failed to disclose material information about the Transactions; took steps to avoid competitive bidding and to give ARMOUR an unfair advantage by failing to adequately solicit other potential acquirors or alternative transactions; and erected unreasonable barriers to other third-party bidders. The suits also allege that ARMOUR, JAVELIN, ACM and Acquisition aided and abetted the alleged breaches of fiduciary duties by the Individual Defendants. The lawsuits seek equitable relief, including, among other relief, to enjoin consummation of the Transactions, or rescind or unwind the Transactions if already consummated, and award costs and disbursements, including reasonable attorneys’ fees and expenses. The sole Florida lawsuit was never served on the defendants, and that case was voluntarily dismissed and closed on January 20, ~~2017~~. 2017. On April 25, 2016, the Maryland court issued an order consolidating the 8 Maryland cases into 1 action, captioned In re JAVELIN Mortgage Investment Corp. Shareholder Litigation (Case No. 24-C-16-001542), and designated counsel for one of the Maryland cases as interim lead co-counsel. On May 26, 2016, interim lead counsel filed the Consolidated Amended Class Action Complaint for Breach of Fiduciary Duty asserting consolidated claims of breach of fiduciary duty, aiding and abetting the breaches of fiduciary duty, and waste. On June 27, 2016, defendants filed a Motion to Dismiss the Consolidated Amended Class Action Complaint for failing to state a claim upon which relief can be granted. A hearing was held on the Motion to Dismiss on March 3, 2017, and the Court reserved ruling. On September 27, 2019, the court further deferred the matter for six months. On June 15, 2020, co-counsel for the plaintiff filed a notice of supplemental authority requesting to move the matter forward. On August 19, 2020, a Notification To Parties of Contemplated Dismissal was sent out by the Clerk of the Circuit Court to all parties. Counsel for the plaintiff responded on August 24, 2020, with a Motion to Defer Dismissal. No further action has been ~~taken.~~taken by the court.

Each of ARMOUR, JAVELIN, ACM and the Individual Defendants intends to defend the claims made in these lawsuits vigorously; however, there can be no assurance that any of ARMOUR, JAVELIN, ACM or the Individual Defendants will prevail in its defense of any of these lawsuits to which it is a party. An unfavorable resolution of any such litigation surrounding the Transactions may result in monetary damages being awarded to the plaintiffs and the putative class of former stockholders of JAVELIN and the cost of defending the litigation, even if resolved favorably, could be substantial. Due to the preliminary nature of all of these suits, ARMOUR is not able at this time to estimate their outcome.

Note 10 - Stock Based Compensation

We adopted the 2009 Stock Incentive Plan, as amended (the “Plan”), to attract, retain and reward directors and other persons who provide services to us in the course of operations. The Plan authorizes the Board to grant awards including common stock, restricted shares of common stock (“RSUs”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively, “Awards”), subject to terms as provided in the Plan. At March 31, ~~2020,~~2021, there were ~~677~~42 shares available for future issuance under the Plan.

~~Transactions related to awards for the three months ended March 31, 2020 are summarized below:~~

March 31, 2020

Number of
Awards

Weighted
Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period 247
$ 24.82
Granted ⁽¹⁾
454
$ 18.90
Vested (51 ) $ 21.13
Unvested RSU Awards Outstanding end of period 650
$ 20.97


~~(1)~~	~~In January 2020, we granted~~ ~~310~~ ~~RSUs to ACM and~~ ~~144~~ ~~RSUs to the Board.~~

2322

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Transactions related to awards for the three months ended March 31, 2021 are summarized below:


	March 31, 2021
	Number of Awards	Weighted Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period	496	$	19.77
Granted (1)	635	$	11.08
Vested	(77)	$	17.10

Unvested RSU Awards Outstanding end of period	1,054	$	14.73

(1)During the three months ended March 31, 2021, 535 RSUs were granted to certain officers of ARMOUR through ACM and 100 RSUs were granted to the Board.

At March 31, ~~2020,~~2021, there was approximately ~~$13,643~~$15,539 of unvested stock based compensation related to the Awards (based on a weighted average grant date price of ~~$20.97~~$14.73 per share), ~~that~~which we expect to recognize as an expense over the remaining average service period of ~~3.1~~3.3 years. Our policy is to account for forfeitures as they occur. We also pay each of our non-executive Board members quarterly fees of $33, which isare payable in cash, common stock, RSUs or a combination of common stock, RSUs and cash at the option of the director. Non-executive Board members ~~had~~have the option to participate in the Company's ~~Management~~Non-Management Director Compensation and Deferral Program (the "Deferral Program")~~, beginning with their quarterly fees paid for services through March 31, 2020.~~. The Deferral Program permits non-executive Board members to elect to receive either common stock or RSUs or a combination of common stock and RSUs at the option of the director, instead of all or part of their quarterly cash ~~compensation.~~compensation and/or all or part of their committee and chairperson cash retainers.

Note 11 - Stockholders' Equity

Changes in Stockholders' Equity

The following table presents the changes in Stockholders' Equity for the following interim periods.

Stockholders' Equity March 31, 2020 March 31, 2019
Balance, beginning of quarter $ 1,436,707
$ 1,125,313
Series B Preferred dividends ($0.1640625 per share) (1,375 ) (1,124 )
Series C Preferred dividends ($0.14583 per share)
(1,452 ) (3,135 )
Common stock dividends ⁽¹⁾
(30,377 ) (29,814 )
Series B Preferred Stock, called for redemption (209,583 ) —
Issuance of Series C Preferred Stock 129,221
—
Issuance of Common stock, net —
321,992
Stock based compensation, net of withholding requirements 1,001
644
Common Stock repurchased, net (777 ) —
Net loss (406,659 ) (114,381 )
Other comprehensive income (loss) (130,456 ) 187,158
Balance, end of quarter $ 786,250
$ 1,486,653


~~(1)~~	See the below table for common stock dividends per share for the three months ended March 31, 2020. Common stock dividends were $0.19 per share for each month for the three months ended March 31, 2019.


Stockholders' Equity	March 31, 2021		March 31, 2020
Balance, beginning of quarter	$	938,304	$	1,436,707
Series B Preferred dividends ($0.1640625 per share)	0		(1,375)
Series C Preferred dividends ($0.14583 per share)	(2,486)		(1,452)
Common stock dividends (1)	(20,057)		(30,377)
Series B Preferred Stock, called for redemption	0		(209,583)
Issuance of Series C Preferred Stock	28,173		129,221
Issuance of Common stock, net	52,960		0
Stock based compensation, net of withholding requirements	1,199		1,001
Common Stock repurchased, net	0		(777)
Net income (loss)	71,327		(406,659)
Other comprehensive loss	(42,234)		(130,456)
Balance, end of quarter	$	1,027,186	$	786,250

(1) See the below table for common stock dividends per share for the three months ended March 31, 2021. Common stock dividends were $0.17 per share each month for the three months ended March 31, 2020.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Preferred Stock

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we were authorized to issue up to 50,000 shares of preferred stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board of Directors (“Board”) or a committee thereof. On ~~June 24, 2019,~~January 28, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of the State of Maryland to designate 10,320 shares of the Company’s authorized preferred stock, par value $0.001 per share, as additional shares of 7.875% Series B Preferred Stock, thereby increasing the aggregate number of shares of preferred stock designated as Series B Preferred Stock to 17,970 shares. On January 28, 2020, we filed Articles Supplementary with the Department to designate 10,000 shares of the Company’s authorized preferred stock, par value $0.001 per share, as shares of 7.00% Series C Preferred Stock with the powers, designations, preferences and other rights as set forth therein. At March 31, ~~2020,~~2021, a total of ~~22,030~~31,617 shares of our authorized preferred stock remain available for designation as future series.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

Series BC Cumulative Redeemable Preferred Stock ~~- Called for redemption, (February 27, 2020) “Series B~~"Series C Preferred ~~Stock”~~Stock"

~~On January 24,~~At March 31, 2021 and December 31, 2020, ~~the Company mailed a notice of full redemption (the “Notice”) of all 8,383 issued~~we had 6,501 and ~~outstanding~~5,347 shares, of its 7.875% Series B Preferred Stock ($25.00 per share, $209,583 in the aggregate liquidation preference) to the holders of record of its Series B Preferred Stock as of January 13, 2020. Pursuant to this redemption, each sharerespectively, of Series B Preferred Stock was canceled and represented solely the right to receive cash in the amount of $25.00 per share of Series B Preferred Stock on February 27, 2020. Pursuant to the terms of the Series B Preferred Stock, holders of record of the Series B Preferred Stock on February 15, 2020 received the full monthly dividend for February. The final dividend amount of $1,375 was paid on February 27, 2020 and was recorded as other expense in our consolidated statements of operations.

~~At December 31, 2019, we had 8,383 shares of Series B~~C Preferred Stock issued and outstanding with a par value of $0.001 per share and a liquidation preference of $25.00 per share, or ~~$209,583,~~$162,525 and $133,675 in the aggregate. Shares designated as Series BC Preferred Stock but unissued totaled ~~9,587~~3,499 and 4,653 at March 31, 2021 and December 31, ~~2019.~~2020, respectively. At March 31, 2021 and December 31, ~~2019,~~2020, there were no accrued or unpaid dividends on the Series B Preferred Stock. The Series B Preferred Stock was entitled to a dividend at a rate of 7.875% per year based on the $25.00 per share liquidation preference before the common stock was entitled to receive any dividends.

On March 2, 2020, we terminated the Equity Sales Agreement (the “Preferred B ATM Sales Agreement”) with BUCKLER and B. Riley FBR, Inc., as sales agents, relating to an "at-the-market" offering program for our Series B Preferred Stock, dated as of June 24, 2019. The Preferred B ATM Sales Agreement, allowed us to offer and sell, over a period of time and from time to time, up to 9,000 shares of our Series B Preferred Stock. At the date of termination, we sold 1,914 shares under this agreement for proceeds of $47,306, net of issuance costs and commissions of approximately $689. We did not incur any termination penalties as a result of this termination.

On March 4, 2020, we terminated the 2019 Series B Preferred Stock Dividend Reinvestment and Stock Purchase Plan (the “2019 Plan”) relating to the offer and sale of up to 2,500 shares of our Series B Preferred Stock pursuant to the terms of the 2019 Plan (the “DRIP Offering”) dated June 24, 2019. The 2019 Plan permitted (i) current holders of our Series B Preferred Stock to reinvest all or a portion of the cash dividends on their shares of Series B Preferred Stock into shares of Series B Preferred Stock and to separately purchase additional shares of Series B Preferred Stock and (ii) other interested investors to purchase shares of Series B Preferred Stock. At the date of termination, we issued 16 shares under the DRIP Offering.

~~Series C Cumulative Redeemable Preferred Stock "Series C Preferred Stock"~~

On January 23, 2020, the Company and ACM, entered into an Underwriting Agreement (the “Underwriting Agreement”) with B. Riley FBR, Inc., as representative of the several underwriters named therein (collectively, the “Underwriters”), including, but not limited to, BUCKLER, with respect to (i) the sale by the Company of 3,000 shares (the “Firm Shares”) of the Company’s new 7.00% Series C Preferred Stock ($25.00 liquidation preference per share), $0.001 par value, to the Underwriters with an offering price to the public of $25.00 per share, and (ii) the grant by the Company to the Underwriters of an option to purchase all or part of 450 additional shares of the Series C Preferred Stock during the 30-day period following the execution of the Underwriting Agreement with the same offering price per share to the public to cover over-allotments. On January 24, 2020, the Underwriters exercised the option to purchase all 450 additional shares of the Series C Preferred Stock. ~~On January 28, 2020, the Company completed the sale of 3,450 total shares for proceeds of $83,322, net of issuance costs and commissions of $2,928.~~

On January 29, 2020, the Company entered into an Equity Sales Agreement (the “Preferred C ATM Sales Agreement”) with B. Riley Securities, Inc. (formerly B. Riley FBR, Inc.) and BUCKLER, as sales agents (individually and collectively, the ~~“Agents’~~“Agents"), and ACM, pursuant to which the Company may offer and sell, over a period of time and from time to time, through one ofor more of the Agents, as the Company’s agents, up to 6,550 of Series C Preferred Stock. The ~~Equity~~Preferred C ATM Sales Agreement relates to a proposed “at-the-market” ~~offering. The Company used~~offering program. Under the ~~net proceeds from~~agreement, we will pay the ~~offering as a portion~~agent designated to sell our shares an aggregate commission of up to 2.0% of the ~~funds to redeem 100%~~gross sales price per share of our common stock sold through the ~~outstanding Series B Preferred Stock as described above.~~designated agent under the agreement. During the three months ended March 31, ~~2020,~~2021, we sold ~~1,853~~1,154 shares under this agreement for proceeds of ~~$45,899,~~$28,173, net of issuance costs and commissions of approximately ~~$630.~~$296.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

Common Stock

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we were authorized to issue up to 125,000 shares of common stock, par value $0.001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had ~~58,881~~69,748 shares of common stock issued and outstanding at March 31, ~~2020~~2021 and ~~58,877~~65,290 shares of common stock issued and outstanding at December 31, ~~2019.~~2020.

On February 15, 2019, we entered into an Equity Sales Agreement (the “Common stock ATM Sales Agreement”) with BUCKLER, JMP Securities LLC and Ladenburg Thalmann & Co. Inc., as sales agents, relating to the shares of our common stock. On April 3, 2020, the Common stock ATM Sales Agreement was amended to add B. Riley Securities, Inc. (formerly B. Riley FBR, Inc.) as a sales agent. On May 4, 2020 the Common stock ATM Sales Agreement was further amended to increase the number of shares available for sale pursuant to the terms of the Common Stock ATM Sales Agreement. In accordance with the terms of the Common ~~stock~~Stock ATM Sales ~~Agreement,~~agreement, as amended, we may offer and sell over a period of time and from time to time, up to ~~7,000~~17,000 shares of our common stock, par value $0.001 per share. The Common stock ATM Sales Agreement relates to an "at-the-market" offering program. Under the agreement, we will pay the agent designated to sell our shares an aggregate commission of up to 2.0% of the gross sales price per share of our common stock sold through the designated agent, under the agreement. ~~We did not sell any shares or pay any fees under this agreement during~~During the three months ended March 31, ~~2020.~~

2021, we sold 4,400 shares under this agreement for proceeds of $52,960, net of issuance costs and commissions of approximately $670.

See Note 15 - Related Party Transactions for discussion of additional transactions with BUCKLER.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Common Stock Repurchased

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, there were 8,210 ~~and 8,250~~ authorized shares remaining under the current repurchase authorization. Under the Repurchase Program, shares may be purchased in the open market, including block trades, through privately negotiated transactions, or pursuant to a trading plan separately adopted in the future. The timing, manner, price and amount of any repurchases will be at our discretion, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. We are not required to repurchase any shares under the Repurchase Program and it may be modified, suspended or terminated at any time for any reason. We do not intend to purchase shares from our Board or other affiliates. Under Maryland law, such repurchased shares are treated as authorized but unissued.

Equity Capital Raising Activities

The following tables present our equity transactions for the three months ended March 31, ~~2020~~2021 and for the year ended December 31, ~~2019.~~2020.


Transaction Type	Completion Date	Number of Shares	Per Share price (1)		Net Proceeds (Costs)
March 31, 2021
Preferred C ATM Sales Agreement	January 19, 2021 - March 31, 2021	1,154	$	24.40	$	28,173
Common stock ATM Sales Agreement	March 3, 2021 - March 31, 2021	4,400	$	12.04	$	52,960

December 31, 2020
Preferred C Underwritten Offering	January 28, 2020	3,450	$	24.14	$	83,282
Preferred C ATM Sales Agreement	January 30, 2020 - December 23, 2020	1,897	$	24.70	$	46,856
Common stock ATM Sales Agreement	April 7, 2020 - December 15, 2020	6,287	$	8.68	$	54,575
Common stock repurchases, net	February 26, 2020 - March 3, 2020	(40)	$	19.42	$	(777)

Transaction Type Completion Date Number of Shares
Per Share price ⁽¹⁾
Net Proceeds
March 31, 2020
Preferred C Underwritten Offering January 28, 2020 3,450
$ 24.15
$ 83,322
Preferred C ATM Sales Agreement January 30, 2020-March 31, 2020 1,853
$ 24.76
$ 45,899
Common stock repurchases, net February 26, 2020-March 3, 2020 (40 ) $ 19.42
$ (777 )

December 31, 2019
Preferred B ATM Sales Agreement June 6, 2019-June 19, 2019 100
$ 24.81
$ 2,489
Preferred B ATM Sales Agreement June 25, 2019-December 31, 2019 1,914
$ 24.74
$ 47,306
Common Stock ATM Sales Agreement January 4, 2019-January 11, 2019 884
$ 20.98
$ 18,540
January Public Offering January 17, 2019 6,900
$ 20.00
$ 137,946
February Public Offering February 22, 2019-February 27, 2019 8,280
$ 19.98
$ 165,374
Common stock repurchases May 31, 2019-December 31, 2019 (1,000 ) $ 17.77
$ (17,768 )


~~(1)~~	~~Weighted average price~~

(1)Weighted average price

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

Dividends

The following table presents our Series B Preferred Stock dividend transactions prior to full redemption. The table below does not include the final dividend amount of $1,375 that was paid on February 27, 2020 to holders of record on February 15, 2020. This amount is recorded in other expense in our consolidated statements of operations.

Record Date Payment Date
Rate per
Series B
Preferred
Share

Aggregate
amount paid
to holders of record
January 15, 2020 January 27, 2020 $ 0.16
$ 1,375

The following table presents our Series C Preferred Stock dividend transactions for the three months ended March 31, ~~2020.~~2021.


Record Date	Payment Date	Rate per Series C Preferred Share		Aggregate amount paid to holders of record
January 15, 2021	January 27, 2021	$	0.14583	$	779.7
February 15, 2021	February 26, 2021	$	0.14583	$	836.9
March 15, 2021	March 29, 2021	$	0.14583	$	869.6






Total dividends paid				$	2,486.2

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Record Date Payment Date
Rate per
Series C
Preferred
Share

Aggregate
amount paid
to holders of record
February 15, 2020 February 27, 2020 $ 0.15
$ 678
March 15, 2020 March 27, 2020 $ 0.15
774
Total dividends paid $ 1,452

The following table presents our common stock dividend transactions for the three months ended March 31, ~~2020.~~2021.

Record Date Payment Date Rate per common share
Aggregate
amount paid
to holders of record
January 15, 2020 January 30, 2020 $ 0.17
$ 10,126
February 14, 2020 February 27, 2020 $ 0.17
10,131
March 16, 2020 March 27, 2020 $ 0.17
10,120
Total dividends paid $ 30,377

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~


Record Date	Payment Date	Rate per common share		Aggregate amount paid to holders of record
January 15, 2021	January 28, 2021	$	0.10	$	6,646
February 16, 2021	February 26, 2021	$	0.10	6,645
March 15, 2021	March 29, 2021	$	0.10	6,766






Total dividends paid				$	20,057

Note 12 - Net ~~Loss~~Income (Loss) per Common Share

The following table presents a reconciliation of net ~~loss~~income (loss) and the shares used in calculating weighted average basic and diluted earnings per common share for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019.~~2020.

For the Three Months Ended March 31,
2020 2019
Net Loss $ (406,659 ) $ (114,381 )
Less: Preferred dividends (2,827 ) (4,259 )
Net Loss related to common stockholders $ (409,486 ) $ (118,640 )

Weighted average common shares outstanding – basic 58,884
53,630
Add: Effect of dilutive non-vested awards, assumed vested —
—
Weighted average common shares outstanding – diluted 58,884
53,630


	For the Three Months Ended March 31,
		2021		2020
Net Income (Loss)		$	71,327	$	(406,659)
Less: Preferred dividends		(2,486)		(2,827)
Net Income (Loss) available (related) to common stockholders		$	68,841	$	(409,486)

Weighted average common shares outstanding – basic		65,964		58,884
Add: Effect of dilutive non-vested awards, assumed vested		1,054		0
Weighted average common shares outstanding – diluted		67,018		58,884

For the three months ended March 31, 2020, 650 of potentially dilutive non-vested awards outstanding were excluded from the computation of diluted Net Income (Loss) available (related) to common stockholders because to have included them would have been anti-dilutive for the period.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Note 13 - Comprehensive Income (Loss) per Common Share

The following table presents a reconciliation of comprehensive net income (loss) and the shares used in calculating weighted average basic and diluted comprehensive income (loss) per common share for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019.~~2020.

For the Three Months Ended March 31,
2020 2019
Comprehensive Income (Loss) $ (537,115 ) $ 72,777
Less: Preferred dividends (2,827 ) (4,259 )
Comprehensive Income (Loss) available (related) to common stockholders $ (539,942 ) $ 68,518
Net Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic $ (9.17 ) $ 1.28
Diluted $ (9.17 ) $ 1.27
Weighted average common shares outstanding:

Basic 58,884
53,630
Add: Effect of dilutive non-vested awards, assumed vested —
333
Diluted 58,884
53,963


	For the Three Months Ended March 31,
		2021		2020
Comprehensive Income (Loss)		$	29,093	$	(537,115)
Less: Preferred dividends		(2,486)		(2,827)
Comprehensive Income (Loss) available (related) to common stockholders		$	26,607	$	(539,942)
Net Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic		$	0.40	$	(9.17)
Diluted		$	0.40	$	(9.17)
Weighted average common shares outstanding:
Basic		65,964		58,884
Add: Effect of dilutive non-vested awards, assumed vested		1,054		0
Diluted		67,018		58,884

For the three months ended March 31, 2020, 650 of potentially dilutive non-vested awards outstanding were excluded from the computation of diluted Net Comprehensive Income (Loss) available (related) to common stockholders because to have included them would have been anti-dilutive for the period.

Note 14 - Income Taxes

The following table reconciles our GAAP net income (loss) to estimated REIT taxable income (loss) for the three months ended March 31, 2021 and March 31, 2020.


	For the Three Months Ended March 31,
		2021		2020
GAAP net income (loss)		$	71,327	$	(406,659)
Book to tax differences:
TRS (income) loss		(7)		63
Premium amortization expense		(48)		0
Agency Securities, trading		62,586		0
Credit Risk and Non-Agency Securities		0		182,247

U.S. Treasury Securities		28		(21,771)
Changes in interest rate contracts		(122,195)		363,265
Credit loss expense		0		1,012
Gain on Security Sales		(7,354)		(93,325)
Amortization of deferred hedging costs		(41,867)		(19,874)
Series B Cumulative Preferred Stock dividend - Called for redemption		0		1,375
Other		417		4
Estimated REIT taxable income (loss)		$	(37,113)	$	6,337

2827

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

~~Note 14 - Income Taxes~~

~~The following table reconciles our GAAP net loss to estimated REIT taxable income for the three months ended March 31, 2020 and March 31, 2019.~~

For the Three Months Ended March 31,
2020 2019
GAAP net loss $ (406,659 ) $ (114,381 )
Book to tax differences:
TRS (income) loss 63
(231 )
Credit Risk and Non-Agency Securities 182,247
(1,272 )
Interest-Only Securities —
548
U.S. Treasury Securities (21,771 ) 693
Changes in interest rate contracts 363,265
143,835
Credit loss expense 1,012
—
(Gain) loss on Security Sales (93,325 ) 2,910
Amortization of deferred hedging costs (19,874 ) (13,647 )
Series B Cumulative Preferred Stock dividend - Called for redemption 1,375
—
Other 4
4
Estimated REIT taxable income
$ 6,337
$ 18,459

Interest rate contracts are treated as hedging transactions for ~~U. S.~~U.S. federal income tax purposes. Unrealized gains and losses on open interest rate contracts are not included in the determination of REIT taxable income. Realized gains and losses on interest rate contracts terminated before their maturity are deferred and amortized over the remainder of the original term of the contract for REIT taxable income. At March 31, 2021 and at December 31, 2020, we had approximately $675,000 and $717,000, respectively, in interest rate swap expense amortizing through the year 2029. We had $91,961 of net operating loss carryforwards available for use indefinitely.

Net capital losses realized Amount Available to offset capital gains through
2015 $ (5,182 ) 2020
2016 $ (31,204 ) 2021
2017 $ (7,375 ) 2022
2018 $ (216,634 ) 2023


Net capital losses realized	Amount		Available to offset capital gains through
2018	$	(136,388)	2023
2019	$	(13,819)	2024

The Company's subsidiary, ARMOUR TRS, Inc. has made an election as a taxable REIT subsidiary (“TRS”). As such, the TRS is taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.

The aggregate tax basis of our assets and liabilities was greater than our total Stockholders’ Equity at March 31, ~~2020~~2021 by approximately ~~$661,300,~~$264,192, or approximately ~~$11.23~~$3.79 per common share (based on the ~~58,881~~69,748 common shares then outstanding).

We are required and intend to timely distribute substantially all of our REIT taxable income in order to maintain our REIT status under the Code. Total dividend payments to stockholders were $22,543 and $34,579 (including the final dividend on the Series B Preferred Stock, called for ~~redemption of $1,375 paid on February 27, 2020 to holders of record on February 15, 2020) and $34,073~~redemption) for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, respectively. Our estimated REIT taxable income (loss) available for distribution as dividends was ~~$6,337~~$(37,113) and ~~$18,459~~$6,337 for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, respectively. Our REIT taxable income and dividend requirements to maintain our REIT status are determined on an annual basis. Dividends paid in excess of current tax earnings and profits for the year will generally not be taxable to common stockholders.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

Our management is responsible for determining whether tax positions taken by us are more likely than not to be sustained on their merits. We have no material unrecognized tax benefits or material uncertain tax positions.

Note 15 - Related Party Transactions

ACM

~~Management:~~

The Company is managed by ACM, pursuant to a management ~~agreements with ARMOUR and JAVELIN.~~agreement. All of our executive officers are also employees of ACM. ACM manages our day-to-day operations, subject to the direction and oversight of the Board. The ~~ARMOUR~~ management agreement runs through June 18, ~~2024~~2027 and is thereafter automatically renewed for an additional five-year term unless terminated under certain circumstances. The JAVELIN management agreement renewed on October 5, 2017, for a one-year period, with the base management fee thereunder reduced to 1 dollar for the entirety of the renewal term.It will automatically renew for successive one-year terms unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.

Under the terms of the management ~~agreements,~~agreement, ACM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ACM is responsible for the following primary roles:

•Advising us with respect to, arranging for and managing 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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

•Providing executive and administrative personnel, office space and other appropriate services required in rendering management services to us.

In The following table reconciles the fees incurred in accordance with the ~~ARMOUR~~ management agreement ~~we incurred $7,444 and $7,244 in management fees~~ for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019, respectively. Commencing with~~2020. ACM began waiving 40% of its management fee during the second quarter of 2020 and ~~continuing~~on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter until further notice ~~ACM is waiving 40% of its management fee.~~(see Note 16 - Subsequent Events).


	For the Three Months Ended March 31,
		2021		2020
Management fees		$	7,428	$	7,444
Less management fees waived		(2,400)		0
Total Management fee expense		$	5,028	$	7,444

We are required to take actions as may be reasonably required to permit and enable ACM to carry out its duties and obligations. We are also responsible for any costs and expenses that ACM incurred solely on our behalf other than the various overhead expenses specified in the terms of the management ~~agreements.~~agreement. For the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, we reimbursed ACM ~~$117~~$7 and ~~$27~~$117 for other expenses incurred on our behalf. In 2013, 2017, 2020 and January ~~2020,~~2021, we elected to grant restricted stock unit awards to our executive officers and other ACM employees through ACM that generally vest over 5 years. In ~~November~~ 2017, 2020 and January ~~2020,~~2021, we elected to grant restricted stock unit awards to the Board. We recognized stock based compensation expense of ~~$186~~$207 and ~~$97~~$186 for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, respectively.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

BUCKLER

In March 2017, we contributed $352 for a 10% ownership interest in BUCKLER. The investment is included in prepaid and other assets in our consolidated balance sheet and is accounted for using the equity method as BUCKLER maintains specific ownership accounts. The value of the investment was ~~$465~~$650 at March 31, ~~2020~~2021 and ~~$381~~$634 at December 31, ~~2019,~~2020, reflecting our total investment plus our share of BUCKLER’s operating results, in accordance with the terms of the operating agreement of BUCKLER that our independent directors negotiated. The primary purpose of our investment in BUCKLER is to facilitate our access to repurchase financing on potentially attractive terms (considering rate, term, size, haircut, relationship and funding commitment) compared to other suitable repurchase financing counterparties.

Our operating agreement with BUCKLER contains certain provisions to benefit and protect the Company, including (1) sharing in any (a) defined profits realized by BUCKLER from the anticipated financing spreads resulting from repurchase financing facilitated by BUCKLER, and (b) distributions from BUCKLER to its members of net cash receipts, and (2) the realization of anticipated savings from reduced clearing, brokerage, trading and administrative fees. In addition, the independent directors of the Company must approve, in their sole discretion, any third-party business engaged by BUCKLER and may cause BUCKLER to wind up and dissolve and promptly return certain subordinated loans we provide to BUCKLER as regulatory capital (as described more fully below) if the independent directors reasonably determine that BUCKLER’s ability to provide attractive securities transactions for the Company is materially adversely affected. For the three months ended March 31, 2021 and March 31, 2020, we ~~have~~ earned $0 and $363, respectively, from BUCKLER as an allocated share of Financing Gross Profit for a reduction of interest on repurchase agreements charged to the Company. Financing Gross Profit is defined in the operating agreement, subject to a contractually required reduction in our share of the Financing Gross Profit of $306 per annum until the end of the first quarter of ~~2020.~~2022. See Note 11 - Stockholders' Equity for discussion of equity transactions with BUCKLER.

We ~~previously entered into~~ ~~three~~have 1 subordinated loan ~~agreements~~agreement with BUCKLER, totaling $105.0 ~~million. On March 18, 2019, these~~ ~~three~~ ~~subordinated loan agreements were consolidated into~~ ~~one~~ ~~loan of $105.0~~ million and maturing on ~~April 1, 2022. Subsequent to March 31, 2020, we agreed to extend the maturity of the loan to~~ May 1, 2025. BUCKLER may, at its option after obtaining regulatory approval, repay all or a portion of the principal amount of the loan.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The loan has a stated interest rate of 0, plus additional interest payable to the Company in an amount equal to the amount of interest earned by BUCKLER on the investment of the loan proceeds, generally in government securities funds. For the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, the Company earned ~~$258~~$17 and ~~$539~~$258, respectively, of ~~interest.~~interest on this loan.

The table below summarizes other transactions with BUCKLER atas of and for the three months ended March 31, ~~2020~~2021 and as of and for the year ended December 31, ~~2019.~~2020.


Transactions with BUCKLER	March 31, 2021		December 31, 2020
Repurchase agreements (1)	$	2,360,264	$	2,998,111
Interest on repurchase agreements	$	1,805	$	38,663
Collateral posted on repurchase agreements	$	2,450,044	$	3,117,929
U.S. Treasury Securities Purchased	$	200,000	$	0
U.S. Treasury Securities Sold	$	200,000	$	0

(1)See also Note 7, Repurchase Agreements for transactions with BUCKLER.

Transactions with BUCKLER March 31, 2020 December 31, 2019
Repurchase agreements ⁽¹⁾
$ 1,947,604
$ 5,107,101
Interest on repurchase agreements $ 31,216
$ 120,090
Collateral posted on repurchase agreements $ 2,097,560
$ 5,341,487


~~(1)~~	~~See also~~ ~~Note 7~~, ~~Repurchase Agreements~~ ~~for transactions with BUCKLER.~~

Note 16 - Subsequent Events

ACM Management Agreement

~~Coronavirus ("COVID-19") pandemic~~

The novel COVID-19 pandemic has been unprecedented and continues to have a real-time impact on all business sectors. The extent of the ultimate impact of the COVID-19 pandemic on the Company's operational and financial performance will depend on various developments, including the duration of the outbreak and the spread of the virus and the federal government's and states' responses to the virus, which cannot be reasonably predicted at this time. While the Company is not able to estimate the future impact of the COVID-19 pandemic at this time, it could continue to materially affect the Company’s future financial and operational results.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

~~(in thousands, except per share)~~

~~Portfolio Purchases and Sales~~

Subsequent to March 31, 2020, we purchased Agency Securities and reduced our Credit Risk Transfer securities. Accordingly, as of April 30, 2020, our securities portfolio was valued at approximately $5,600,000 consisting primarily of approximately $5,300,000 of Agency Securities (including approximately $1,300,000 of TBA Agency Securities).

~~Common Stock~~

On April ~~2, 2020, we announced~~20, 2021, ACM notified ARMOUR that ~~we will move~~it intended to ~~a quarterly dividend on our common stock~~adjust the fee waiver to the rate of $2,100 for the second quarter of ~~2020. We expect~~2021 and $700 per month thereafter until ACM provides further notice to ~~announce our decision regarding~~ARMOUR. ACM may terminate this waiver for any month by providing notice to ARMOUR on or before the ~~amount~~25th day of ~~second quarter dividends on common stock in~~ the ~~latter part~~preceding month. This waiver does not constitute a waiver of ~~June 2020 as well as whether we will return~~any other amounts due to ~~our prior monthly dividend policy.~~ACM from ARMOUR under the Agreement or otherwise, including but not limited to any expense reimbursements, any amounts calculated by reference to the contractual Base Management Fee, or any awards under the Second Amended and Restated 2009 Stock Incentive Plan.

~~Between April 7, 2020 and April 24, 2020, we issued 5,704 shares under our Common stock ATM Sales Agreement for proceeds of $48,393, net of issuance costs and commissions of approximately $738.~~

Series C Preferred Stock

A cash dividend of ~~$0.15~~$0.14583 per outstanding share of Series C Preferred Stock, or ~~$773~~$998 in the aggregate, ~~was~~will be paid on April 27, ~~2020~~2021 to holders of record on April 15, ~~2020.~~2021. We have also declared cash dividends of ~~$0.15~~$0.14583 per outstanding share of Series C Preferred Stock payable May 27, ~~2020~~2021 to holders of record on May 15, ~~2020.~~2021 and payable June 28, 2021 to holders of record on June 15, 2021.

Between April 1, 2021 and April 9, 2021, we issued 346 shares under our Preferred C ATM Sales Agreement for proceeds of $8,475 net of issuance costs and commissions of $86.

Common Stock

A cash dividend of $0.10 per outstanding common share, or $7,234 in the aggregate, will be paid on April 29, 2021 to holders of record on April 15, 2021. We have also declared a cash dividend of $0.10 per outstanding common share payable May 27, 2021 to holders of record on May 17, 2021.

Between April 1, 2021 and April 9, 2021, we issued 1,495 shares under our Common Stock ATM Sales Agreement for proceeds of $18,082 net of issuance costs and commissions of $229.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

ARMOUR Residential REIT, Inc.

References to “we,” “us,” “our,” or the “Company” are to ARMOUR Residential REIT, Inc. (“ARMOUR”) and its subsidiaries. References to “ACM” are to ARMOUR Capital Management LP, a Delaware limited partnership. ARMOUR owns a 10% equity interest in BUCKLER Securities LLC ("BUCKLER"), a Delaware limited liability company and a FINRA-regulated broker-dealer, controlled by ACM and certain executive officers of ARMOUR. Refer to the Glossary of Terms for definitions of capitalized terms and abbreviations used in this report.

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. U.S. dollar amounts are presented in thousands, except per share amounts or as otherwise noted.

Overview

~~ARMOUR is~~ We are a Maryland corporation ~~formed in 2008 and~~ managed by ACM, an investment advisor registered with the SEC (see Note 9 and Note 15 to the consolidated financial statements). We have elected to be taxed as a REIT under the ~~Code. We~~Code and believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and that our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes.

Our strategy is to create shareholder value through thoughtful investment and risk management that produces current yield and superior risk adjusted returns over the long term. Our focus on residential real estate finance supports home ownership for a broad and diverse spectrum of Americans by bringing private capital into the mortgage markets. We are deeply committed to implementing sustainable environmental, responsible social, and prudent governance practices that improve our work and our world.

We strive to contribute to a healthy, sustainable environment by utilizing resources efficiently. As an organization, we create a relatively small environmental footprint. Still, we are focused on minimizing the environmental impact of our business where possible.

~~We invest~~ At March 31, 2021 and December 31, 2020, we invested exclusively in ~~MBS. Some~~ MBS, ~~are~~ issued or guaranteed by a U.S. GSE, such as Fannie Mae, Freddie Mac, or a government agency such as Ginnie Mae (collectively, ~~"Agency Securities")~~Agency Securities). Our Agency Securities consist primarily of fixed rate loans. The remaining ~~MBS in which we invest~~ are either backed by hybrid adjustable rate or adjustable rate loans. Other MBS in which we invest, for which the payment of principal and interest is not guaranteed by a GSE or government agency, may benefit from credit enhancement derived from structural elements such as subordination, over collateralization or insurance (collectively, "Credit Risk and Non-Agency Securities"). From time to time we may also invest in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and money market instruments.

We earn returns on the spread between the yield on our assets and our costs, including the interest cost of the funds we borrow, after giving effect to our hedges. We identify and acquire MBS, finance our acquisitions with borrowings under a series of short-term repurchase agreements and then hedge certain risks based on our entire portfolio of assets and liabilities and our management’s view of the market.

Factors that Affect our Results of Operations and Financial Condition

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Recent events, such as those discussed below, can affect our business in ways that are difficult to predict and may produce results outside of typical operating variances. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. We ~~look to~~currently invest ~~across the spectrum of mortgage investments, from~~exclusively in Agency Securities, for which the principal and interest payments are guaranteed by a ~~GSE,~~GSE. From time to time we may also invest in Credit Risk and Non-Agency Securities, Interest-Only Securities, U.S. Treasury Securities and ~~non-prime mortgage loans.~~money market instruments. As such, we expect our investments to be subject to risks arising from delinquencies and foreclosures, thereby exposing our investment portfolio to potential losses. We are exposed to changing credit spreads, which could result in declines in the fair value of our investments. We believe ACM’s in-depth investment expertise across multiple sectors of the mortgage market, prudent asset selection and our hedging strategy enable us to minimize our credit losses, our market value losses and financing costs.

3331

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Interest Rates - Changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets, generally of a longer term than those of our liabilities, interest rate increases will tend to decrease our net interest income and the market value of our assets (and therefore our book value). Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our stockholders. Our operating results depend, in large part, upon our ability to manage interest rate risks effectively while maintaining our status as a REIT.

Prepayment Rates - Prepayments on MBS and the underlying mortgage loans may be influenced by changes in market interest rates and a variety of economic and geographic factors, policy decisions by regulators, as well as other factors beyond our control. To the extent we hold MBS acquired at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our MBS will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may decline. Our operating results depend, in large part, upon our ability to manage prepayment risks effectively while maintaining our status as a REIT.

While we use strategies to economically hedge some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our securities portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our securities portfolio. Also, since we have not elected to use cash flow hedge accounting, earnings reported in accordance with GAAP will fluctuate even in situations where our derivatives are operating as intended. As a result of this mark-to-market accounting treatment, our results of operations are likely to fluctuate far more than if we were to designate our derivative activities as cash flow hedges. Comparisons with companies that use cash flow hedge accounting for all or part of their derivative activities may not be meaningful. For these and other reasons more fully described under the section captioned “Derivative Instruments” below, no assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition.

In addition to the use of derivatives to hedge interest rate risk, a variety of other factors relating to our business may also impact our financial condition and operating performance; these factors ~~include~~include:

•our degree of leverage;

•our access to funding and borrowing capacity;

•the REIT requirements under the Code; and

•the requirements to qualify for an exclusion under the 1940 Act and other regulatory and accounting policies related to our business.

Management

See Note 9 and Note 15 to the consolidated financial statements.

Market and Interest Rate Trends and the Effect on our Securities Portfolio:

First Quarter ~~2020~~2021 Trends

~~The novel Coronavirus ("COVID-19") pandemic has been unprecedented and continues~~COVID-19 continued to have a ~~real-time~~material impact on all business ~~sectors.~~sectors during the first quarter. The extent of the ongoing impact on the Company’s operational and financial performance will depend on various developments, including the rate of vaccination and virus caseloads, as well as additional federal, state and local actions including progress in completely reopening businesses, schools and public services.

The continued strong intervention byof the Federal Reserve ~~helped stabilize~~that began in 2020 has stabilized and increased the price of agency residential and commercial mortgage-backed ~~securities and recover a large amount of the spread widening that took place during the month of March.~~securities. ARMOUR ~~has acted aggressively~~continues to mitigate risk, use moderate leverage, and maximize liquidity within the scope of its business plan. The Company has carefully selected new investments within the context of the historically high prices currently of our target assets. The agency mortgage backed securities

ARMOUR Residential REIT, Inc.

Management’s Discussion and ~~activated its remote work environment protocol to minimize health~~Analysis (continued)

market remains highly dependent on the future course and ~~operational risks.~~ timing of the Federal Reserves’ actions on interest rate and market purchases of our target assets.

The ~~Company's~~Company’s remote work environment protocol has allowed our operations to remain fully functional while we ~~work~~worked remotely. ~~The Company remains focused on prioritizing liquidity through this period~~With increased vaccinations and the potential significant reduction of ~~increased market volatility and financial risks. The rapid spread of COVID-19 around the globe has set off an immediate flight~~infections, we expect that we will be able to ~~cash and cash-equivalent products, causing turmoil~~plan a safe return to the ~~U.S. Treasuries and~~office environment over the ~~U.S. Agency MBS markets. The Company has met all of its obligations to repurchase agreement counterparties in a timely manner, while prudently~~

next two quarters.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

managing the risk of its assets and hedges portfolios. Trading activity in agency Credit Risk Transfer securities has resumed and prices are stabilizing. See Item 1A. "Risk Factors" for further discussion of the possible impact of COVID-19 pandemic on our business.

Developments at Fannie Mae and Freddie Mac

The payments we receive on the Agency Securities in which we invest depend upon a steady stream of payments by borrowers on the underlying mortgages and the fulfillment of guarantees by GSEs. There can be no assurance that the U.S. Government's intervention in Fannie Mae and Freddie Mac will continue to be adequate or assured for the longer-term viability of these GSEs. These uncertainties may lead to concerns about the availability of and market for Agency Securities in the long term. Accordingly, if the GSEs defaulted on their guaranteed obligations, suffered losses or ceased to exist, the value of our Agency Securities and our business, operations and financial condition could be materially and adversely affected.

The passage of any new federal legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by them. If Fannie Mae and Freddie Mac were reformed or wound down, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac Agency Securities. The foregoing could materially adversely affect the pricing, supply, liquidity and value of the Agency Securities in which we invest and otherwise materially adversely affect our business, operations and financial condition.

On June 3, 2019, Fannie Mae and Freddie Mac started issuing a new common security, the Uniform MBS, in place of their previous offerings of MBS. The new Uniform MBS was issued using a new Common Securitization Platform ("CSP"). The Uniform MBS more closely resembles the previous Fannie Mae MBS and has become the basis for the TBA MBS market place. Previously existing Freddie Mac MBS are eligible for exchange into the new Uniform MBS. The introduction of the new Uniform MBS did not have a material impact on our existing MBS and we do not expect our securities portfolio to be materially impacted in the future.

Short-term Interest Rates and Funding Costs

Changes in Fed policy affect our financial results, since our cost of funds is largely dependent on short-term rates. An increase in our cost of funds without a corresponding increase in interest income earned on our MBS would cause our net income to decline. Below is the Fed's target range for the Federal Funds Rate at each Fed meeting where a change was made ~~from~~since March ~~2018 to March 2020.~~2019.


Meeting Date	Lower Bound		Higher Bound
March 16, 2020	0.00	%	0.25	%
March 3, 2020	1.00	%	1.25	%
December 2019	1.50	%	1.75	%
October 2019	1.50	%	1.75	%
September 2019	1.75	%	2.00	%
July 2019	2.00	%	2.25	%


March 2019	2.25	%	2.50	%

Meeting Date Lower Bound Higher Bound
March 15, 2020 0.00 % 0.25 %
March 3, 2020 1.00 % 1.25 %
December 2019 1.50 % 1.75 %
October 2019 1.50 % 1.75 %
September 2019 1.75 % 2.00 %
July 2019 2.00 % 2.25 %
December 2018 2.25 % 2.50 %
September 2018 2.00 % 2.25 %
June 2018 1.75 % 2.00 %
March 2018 1.50 % 1.75 %

Our borrowings in the repurchase market have historically closely tracked the Federal Funds Rate and ~~LIBOR.~~LIBOR, and more recently SOFR. Traditionally, a lower Federal Funds Rate has indicated a time of increased net interest margin and higher asset values. Volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our securities portfolio. If rates were to increase as a result, our net interest margin and the value of our securities portfolio might suffer as a result. The expected discontinuation of LIBOR in 2021 may impact our liquidity and the value of our ~~MBS.~~

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

MBS, although we don't expect it to be material at this time. SOFR is currently scheduled to replace LIBOR as a reference rate. We ~~are currently assessing~~continue to assess the impact on our securities portfolio and will continue to do so ~~until~~throughout 2021.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

The following graph shows 30-day LIBOR as compared to the Effective Federal Funds Rate and SOFR Rate on a monthly ~~average~~basis from March 31, ~~2018~~2019 to March 31, ~~2020.~~2021.

Long-term Interest Rates and Mortgage Spreads

Our securities are valued at an interest rate spread versus long-term interest rates (mortgage spread). This mortgage spread varies over time and can be above or below long-term averages, depending upon market participants' current desire to own MBS over other investment alternatives. When the mortgage spread gets smaller (or negative) versus long-term interest rates, our book value will be positively affected. When this spread gets larger (or positive), our book value will be negatively affected.

Mortgage spreads can vary due to movements in securities valuations, movements in long-term interest rates or a combination of both. We mainly use interest rate swap contracts (including swaptions) to economically hedge against changes in the valuation of our securities. We do not use such hedging contracts for speculative purposes.

We may reduce our net TBA Agency Securities exposure by entering in to certain TBA short positions. The TBA short positions represent different securities and maturities than our TBA Agency Security long positions, and accordingly, may perform somewhat differently. While we expect our TBA Agency Securities short positions to perform well compared to our related mortgage securities, there can be no assurance as to their relative performance.

3634

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Results of Operations

Net Income (Loss) Summary

The following is a summary of our consolidated results of operations for the periods presented:

Our results for the ~~quarter~~three months ended March 31, 2020 were significantly impacted by ~~the novel Coronavirus outbreak that occurred in the second and third week of March 2020.~~COVID-19. To increase liquidity, ~~in March,~~ we significantly reduced our portfolio of Agency Securities (including TBA Agency Securities) by 68% from December 31, 2019. We also terminated $3,975,000 in notional interest rate ~~swaps.~~swap contracts. The net loss for the ~~quarter~~three months ended March 31, 2020 reflected realized and unrealized losses on our interest rate swaps due to declines in interest rates in the quarter and exiting notional positions as well as fair value losses on our Credit Risk Transfer securities. We are now focused exclusively on an all Agency Securities portfolio. Net income for the three months ended March 31, 2021 reflected net interest income from a smaller average securities portfolio as well as gains on our derivatives.

3735

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Net Interest Income

Net interest income is a function of both our securities portfolio size and net interest rate spread.

2021 vs. 2020

•Our average securities portfolio, including TBA Agency Securities, decreased 42.7% from $12,056,794 for the three months ended March 31, 2020 ~~vs. 2019~~to $6,902,777 for the three months ended March 31, 2021.


•	~~Our average securities portfolio increased~~ ~~10.5%~~ ~~from~~ ~~$10,909,345~~ ~~for the~~ ~~three months endedMarch 31, 2019~~ to ~~$12,056,794~~ ~~for the~~ ~~three months endedMarch 31, 2020~~.


•	~~Our average securities portfolio yield decreased~~ ~~0.47%~~ ~~and our cost of funds decreased~~ ~~0.08%~~ ~~quarter over quarter.~~


•	~~Net interest income increased from~~ ~~2019~~ to ~~2020~~ ~~due to a higher average securities portfolio balance for the first two months of the quarter. This was partially offset by the decrease in our portfolio yield. Our net interest rate spread was~~ ~~1.23%~~ ~~and~~ ~~1.62%~~ at ~~March 31, 2020~~ ~~and~~ ~~March 31, 2019, respectively.~~

•38Our average securities portfolio yield decreased 1.34% and our cost of funds decreased 1.60% quarter over quarter.

~~ARMOUR Residential REIT, Inc.~~•Our net interest rate spread increased by 0.26% quarter over quarter. However net interest income decreased due to a lower average securities portfolio balance.

~~Management’s Discussion and Analysis (continued)~~


	For the Three Months Ended March 31,
		2021		2020
Interest Income:
Agency Securities, net of amortization of premium and fees		$	18,558	$	79,776
Credit Risk and Non-Agency Securities, including discount accretion		—		12,355

U.S. Treasury Securities		—		469
BUCKLER Subordinated loan		17		258
Total Interest Income		$	18,575	$	92,858
Interest expense- repurchase agreements		(2,427)		(51,520)
Interest expense- U.S. Treasury Securities sold short		(87)		—
Net Interest Income		$	16,061	$	41,338

The following table presents the components of the yield earned on our securities portfolio for the quarterly periods ended on the dates shown below:


										Asset Yield		Cost of Funds		Net Interest Margin		Interest Expense on Repurchase Agreements
	Asset Yield		Cost of Funds		Net Interest Margin		Interest Expense on Repurchase Agreements
March 2021									March 2021	1.84	%	0.35	%	1.49	%	0.23	%
December 2020									December 2020	1.99	%	0.27	%	1.72	%	0.26	%
September 2020									September 2020	2.21	%	0.26	%	1.95	%	0.26	%
June 2020									June 2020	2.53	%	0.90	%	1.63	%	0.55	%
March 2020	3.18	%	1.95	%	1.23	%	1.94	%	March 2020	3.18	%	1.95	%	1.23	%	1.94	%
December 2019	3.63	%	2.14	%	1.49	%	2.14	%	December 2019	3.63	%	2.14	%	1.49	%	2.14	%
September 2019	3.56	%	2.25	%	1.31	%	2.55	%	September 2019	3.56	%	2.25	%	1.31	%	2.55	%
June 2019	3.70	%	2.30	%	1.40	%	2.69	%	June 2019	3.70	%	2.30	%	1.40	%	2.69	%
March 2019	3.65	%	2.03	%	1.62	%	2.71	%	March 2019	3.65	%	2.03	%	1.62	%	2.71	%
December 2018	3.59	%	1.92	%	1.67	%	2.55	%
September 2018	3.46	%	1.82	%	1.64	%	2.30	%
June 2018	3.13	%	1.57	%	1.56	%	2.10	%
March 2018	3.05	%	1.53	%	1.52	%	1.77	%

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. The following graph shows the annualized CPR on a monthly basis for the quarterly periods ended on the dates shown below.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

Other Income (Loss)

2021 vs. 2020

~~2020 vs. 2019~~•

•

~~Gains (losses) on Agency Securities resulted from the sales of Agency Securities during the~~ ~~three months endedMarch 31, 2020~~ of ~~$10,395,454~~ ~~(including~~ ~~$618,081~~ ~~receivable for unsettled sales) compared to~~ ~~$1,017,396~~ ~~during the~~ ~~three months endedMarch 31, 2019~~Gains (losses) on Agency Securities, available for sale, resulted from sales during the three months ended March 31, 2021 of $87,875 compared to $10,395,454 (including $618,081 receivable for unsettled sales) during the three months ended March 31, 2020).

•

At ~~March 31, 2020~~, we evaluated our available sale securities to determine if an allowance for credit losses was required for securities which were in an unrealized loss position and determined that, as we may be required to sell these securities in the near future we recognized an impairment of ~~$1,012~~ ~~in our consolidated statements of operations.~~ No ~~OTTI was recognized for the~~ ~~three months endedMarch 31, 2019~~.

•

Gain (loss) on Credit Risk and Non-Agency Securities results from the the change in fair value of the securities as well as sales of Credit Risk and Non-Agency Securities. The change in the fair value of the securities was ~~$(181,879)~~ ~~for the three months ended~~ ~~March 31, 2020. We did not sell any Credit Risk and Non-Agency Securities for the three months ended~~ ~~March 31, 2019. For the three months ended~~ ~~March 31, 2020, we sold~~ ~~$142,539~~ ~~(including~~ ~~$70,102~~ ~~receivable for unsettled sales) of Credit Risk and Non-Agency Securities, which resulted in losses of~~ ~~$(1,232)~~.


•	~~Loss on Interest-Only Securities for the three months ended~~ ~~March 31, 2019~~ ~~resulted from the change in the fair value of these securities. We did not have Interest-Only Securities at~~ ~~March 31, 2020~~.


•	~~Sales of U.S. Treasury Securities of~~ ~~$3,785,248, resulted in a realized gain of~~ ~~$21,771~~ ~~for the three months ended~~ ~~March 31, 2020. Sales of U.S. Treasury Securities of~~ ~~$199,445~~ ~~during the three months ended~~ ~~March 31, 2019~~ ~~resulted~~

•40During the three months ended March 31, 2021, we evaluated our available for sale securities to determine if the available for sale securities in an unrealized loss position were impaired. It was determined that no credit loss expense was required. In the first quarter of 2020, we recognized an impairment of $1,012 in our consolidated statements of operations as we had determined that we may have been required to sell certain securities in the near future.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

•Loss on Agency Securities, trading, resulted from the change in ~~a realized loss~~fair value of ~~$(750)~~.the securities as well as losses on sales during the three months ended March 31, 2021. The change in fair value of the securities was ~~$57~~$59,381 for the three months ended March 31, ~~2019~~.2021. For the three months ended March 31, 2021, we sold $675,845 of Agency Securities which resulted in a loss of $3,205.

~~Losses~~•Loss on Credit Risk and Non-Agency Securities resulted from the sale of securities as well as the change in fair value of the securities. We did not have any Credit Risk and Non-Agency Securities at March 31, 2021. The change in the fair value of the securities was $(181,879) for the three months ended March 31, 2020.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

For the three months ended March 31, 2020, we sold $142,539 (including $70,102 receivable for unsettled sales) of Credit Risk and Non-Agency Securities, which resulted in losses of $(1,232).

•We did not have any U.S. Treasury Securities at March 31, 2021. Sales of U.S. Treasury Securities of $3,785,248 resulted in realized gain of $21,771 for the three months ended March 31, 2020.

•Gain (losses) on Derivatives resulted from a combination of the following:


◦	~~Changes in interest rates and TBA prices.~~

◦

~~The decrease in our total interest~~

◦Interest rate swap contracts' aggregate notional balance increased from $5,337,000 at December 31, 2020 to $5,760,000 at March 31, 2021.

◦The majority of the realized loss on derivatives for the three months ended March 31, 2020 was due to exiting notional positions on our interest rate swap contracts of $3,975,000. For the three months ended March 31, 2021 we did not early terminate any interest rate swap contracts.

◦The decrease in TBA prices and the increase of our total TBA Agency Securities aggregate notional balance from $2,600,000 at December 31, 2020 to $3,500,000 at March 31, 2021 resulted in a $(63,764) loss for the three months ended March 31, 2021 compared to the prior period income of $49,506.


	For the Three Months Ended March 31,
		2021		2020
Other Income (Loss):
Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive loss)		7,354		93,325
Credit loss expense		—		(1,012)
Loss on Agency Securities, trading		(62,586)		—
Loss on Credit Risk and Non-Agency Securities		—		(183,111)

Gain on U.S. Treasury Securities		—		21,771
Loss on short sale of U.S. Treasury Securities		(28)		—
Subtotal		$	(55,260)	$	(69,027)
Realized loss on derivatives		(27,360)		(235,148)
Unrealized gain (loss) on derivatives		145,980		(133,887)
Subtotal		$	118,620	$	(369,035)
Total Other Income (Loss)		$	63,360	$	(438,062)

~~$7,975,000~~ at ~~December 31, 2019~~ to ~~$4,000,000~~ at ~~March 31, 2020~~.


◦	~~The increase in our total TBA Agency Securities aggregate notional balance from~~ ~~$1,000,000~~ at ~~December 31, 2019~~ to ~~$1,250,000~~ at ~~March 31, 2020~~.

Expenses

The Company is managed by ACM, pursuant to a management ~~agreements with ARMOUR and JAVELIN.~~agreement. The ~~ARMOUR~~ management fees are determined based on gross equity raised. Therefore, management fees increase when we raise capital and decline when we repurchase previously issued stock and liquidate distributions as approved and so designated by a majority of the Board. However, because the ~~ARMOUR~~ management fee rate decreased to 0.75% per annum for gross equity raised in excess of $1.0 billion, ~~pursuant to the ARMOUR management agreement,~~ the effective average management fee rate declines as equity is raised. Gross equity raised was $3,026,269 at March 31, 2021, compared to $2,887,586 at March 31, ~~2020, compared to $2,986,934 at March 31, 2019, respectively. Commencing with~~2020. ACM began waiving 40% of its management fee during the second quarter of 2020 and ~~continuing~~on January 13, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,400 for the first quarter of 2021 and $800 per month thereafter. On April 20, 2021, ACM notified ARMOUR that it intended to adjust the fee waiver to the rate of $2,100 for the second quarter of 2021 and $700 per month thereafter until further notice (see Note 16 to the consolidated financial statements). During the three months ended March 31, 2021, ACM ~~is waiving 40%~~waived management fees of ~~its management fee.~~$2,400.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Professional fees include securities clearing, legal, audit and consulting costs and are generally driven by the size and complexity of our securities portfolio, the volume of transactions we execute and the extent of research and due diligence activities we undertake on potential transactions.

Insurance includes premiums for both general business and directors and officers liability coverage. The fluctuation from year to year is due to changes in premiums.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

Compensation includes ~~both~~ non-executive director compensation as well as the restricted stock units awarded to our Board, executive officers and other ACM employees through ACM. The fluctuation from year to year is due to ~~a combination of the change in our stock price and~~ the number of awards ~~vesting to our executive officers and other ACM employees.~~vesting.

Other expenses include fees for market and pricing data, analytics and risk management systems and portfolio related data processing costs as well as stock exchange listing fees and similar stockholder related expenses, net of other miscellaneous income.


	For the Three Months Ended March 31,
		2020		2019
Expenses:
Management fees		7,437		7,458
Professional fees		738		846
Insurance		193		183
Compensation		1,676		1,465
Other		450		(17)
Total Expenses		$	10,494	$	9,935
Less management fees waived		(2,400)		—
Total Expenses after fees waived		$	8,094	$	9,935

Taxable Income

As a REIT that regularly distributes all of its taxable income, we are generally not required to pay federal income tax (see Note 14 to the consolidated financial statements).

Realized gains and losses on interest rate contracts terminated before their maturity are deferred and amortized over the remainder of the original term of the contract for REIT taxable income. At March 31, 2021 and at December 31, 2020, we had approximately $675,000 and $717,000, respectively, in interest rate swap expense amortizing through the year 2029. We currently project that such amortization will exceed the Company's other taxable income for 2021. As a result, we currently project that all 2021 dividends on the Company's common stock and Series C Preferred Stock will be treated as basis adjustments rather than currently taxable income for stockholder tax purposes. This is consistent with the treatment of dividends for 2020.

We had $91,961 of net operating loss carryforwards available for use indefinitely.

Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners (see Note 13 to the consolidated financial statements).

Financial Condition

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Investments In Securities

Our securities portfolio consists primarily of Agency Securities backed by fixed rate home loans. From time to time, a portion of our Agency Securities may be backed by hybrid adjustable rate and adjustable rate home loans as well as unsecured notes and bonds issued by GSEs, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a REIT. Our charter permits us to invest in MBS. Our TBA Agency Securities are reported at net carrying value and are reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).

The charts below present our investments in securities by percentage of our total investments in securities, at fair value as of the dates indicated.

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ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

~~Available for Sale Securities:~~

Agency Securities

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

Our net interest income is primarily a function of the difference between the yield on our assets and the financing (borrowing and hedging) cost of owning those assets. Since we tend to purchase Agency Securities at a premium to par, the main item that can affect the yield on our Agency Securities after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the homeowners’ regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage but can also result from repurchases of delinquent, defaulted, or modified loans, are less so. Being able to accurately estimate and manage these repayment rates is a critical portion of the management of our securities portfolio, not only for estimating current yield but also for considering the rate of reinvestment of those proceeds into new securities, the yields on those new securities and the impact of the repayments on our hedging strategy.

Adjustable and hybrid adjustable rate mortgage loans underlying some of our Agency Securities have ~~fixed-interest~~fixed interest rates 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 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.

Beginning in the second quarter of 2020, we designated Agency MBS purchased as “trading securities” for financial reporting purposes, and consequently, fair value changes for these investments will be reported in net income. We anticipate continuing this designation for newly acquired Agency MBS positions because it is more representative of our

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ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

results of operations insofar as the fair value changes for these securities are presented in a manner consistent with the presentation and timing of the fair value changes of our hedging instruments. Fair value changes for the legacy Agency MBS positions designated as “available for sale” will continue to be reported in other comprehensive income as required by GAAP.

TBA Agency ~~Securities:~~Securities

We account for TBA Agency Securities as derivative instruments if it is reasonably possible that we will not take or make physical delivery of the Agency Security upon settlement of the contract. TBA Agency Securities are forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered pursuant to the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities. TBA Agency Securities are included in the table below on a gross basis as they can be used to establish and finance portfolio positions in Agency Securities.

The ~~table~~tables below ~~summarizes~~summarize certain characteristics of our ~~Agency Securities and TBA Agency Securities~~investments in securities at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


Asset Type	Principal Amount		Fair Value		Weighted Average Coupon		CPR (1)		Weighted Average Months to Maturity	Percent of Total
March 31, 2021
Agency Securities:
Total Fannie Mae	$	3,238,039	$	3,479,636	3.1	%	9.8	%	247	44.1	%
Total Freddie Mac	775,146		821,970		3.2	%	24.0	%	255	10.4
Total Ginnie Mae	16,215		16,791		2.2	%	8.0	%	217	0.3
Total Agency Securities	$	4,029,400	$	4,318,397	3.1	%	12.5	%	249	54.8	%
TBA Agency Securities:
15 Year Long (2)	1,900,000		1,941,774		2.0	%	n/a		n/a	24.6
30 Year Long (2)	1,600,000		1,622,293		2.4	%	n/a		n/a	20.6
Total TBA Agency Securities	$	3,500,000	$	3,564,067	2.1	%	n/a		n/a	45.2	%






Total Investments in Securities	$	7,529,400	$	7,882,464						100.0	%

December 31, 2020
Agency Securities:
Total Fannie Mae	$	3,779,964	$	4,158,987	3.2	%	14.8	%	255	52.7	%
Total Freddie Mac	925,036		993,173		3.3	%	23.9	%	262	12.6
Total Ginnie Mae	25,388		26,162		2.9	%	7.6	%	206	0.3
Total Agency Securities	$	4,730,388	$	5,178,322	3.3	%	16.6	%	256	65.6	%
TBA Agency Securities:
15 Year Long (2)	1,400,000		1,459,136		1.9	%	n/a		n/a	18.5
30 Year Long (2)	1,200,000		1,252,842		2.1	%	n/a		n/a	15.9
Total TBA Agency Securities	$	2,600,000	$	2,711,978	2.0	%	n/a		n/a	34.4	%
Total Investments in Securities	$	7,330,388	$	7,890,300						100.0	%

Asset Type Principal Amount Fair Value Weighted Average Coupon
CPR ⁽¹⁾
Weighted Average Months to Maturity Percent of Total
March 31, 2020
Agency Securities:
Total Fannie Mae $ 1,930,475
$ 2,184,964
3.9 % 6.7 % 168 53.6 %
Total Freddie Mac 536,387
580,027
4.3 % 20.3 % 333 14.2
Total Ginnie Mae 21,418
21,971
3.4 % 10.8 % 230 0.5
Total Agency Securities $ 2,488,280
$ 2,786,962
4.0 % 9.6 % 203 68.3 %
TBA Agency Securities:
15 Year Long⁽²⁾
500,000
513,310
2.0 % n/a
n/a 12.6
30 Year Long ⁽²⁾
750,000
779,152
2.7 % n/a
n/a 19.1
Total TBA Agency Securities $ 1,250,000
$ 1,292,462
2.4 % n/a
n/a 31.7 %
Total $ 3,738,280
$ 4,079,424
100.0 %

December 31, 2019
Agency Securities:
Total Fannie Mae $ 8,779,331
$ 9,269,786
3.7 % 14.4 % 239 71.6 %
Total Freddie Mac 2,522,870
2,648,795
3.9 % 20.7 % 329 20.5
Total Ginnie Mae 22,504
23,185
3.7 % 11.6 % 233 0.1
Total Agency Securities $ 11,324,705
$ 11,941,766
3.8 % 15.8 % 259 92.2 %
TBA Agency Securities:
15 Year Long ⁽²⁾
500,000
511,885
3.0 % n/a
n/a 4.0 %
30 Year Long ⁽²⁾
500,000
494,395
2.5 % n/a
n/a 3.8 %
Total TBA Agency Securities $ 1,000,000
$ 1,006,280
2.8 % n/a
n/a 7.8 %
Total $ 12,324,705
$ 12,948,046
100.0 %
(1)Weighted average CPR during the quarter for the securities owned at March 31, 2021 and December 31, 2020.


~~(1)~~	~~Weighted average CPR during the quarter for the securities owned at~~ ~~March 31, 2020~~ ~~and~~ ~~December 31, 2019~~.

~~(2)~~

~~Our TBA Agency Securities are recorded as derivative instruments in our accompanying consolidated financial statements. Our TBA Agency Securities are reported at net carrying value of~~ ~~$22,044~~ ~~and~~ ~~$(592), at~~ ~~March 31, 2020~~ ~~and~~ ~~December 31, 2019, respectively, and are reported in Derivatives, at fair value on our consolidated balance sheets (see~~ ~~Note 8~~ ~~to the consolidated financial statements).~~

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ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

~~Trading Securities:~~

~~Credit Risk~~(2)Our TBA Agency Securities were recorded as derivative instruments in our accompanying consolidated financial statements. Our TBA Agency Securities were reported at net carrying values of $(45,001) and ~~Non-Agency Securities~~

We purchase Credit Risk and Non-Agency Securities at prices which incorporate our expectations for prepayment speeds, defaults, delinquencies and severities. These expectations determine the yields we receive on our assets. If actual prepayment speeds, defaults, delinquencies and severities are different from our expectations, our actual yields could be higher or lower. Our Credit Risk and Non-Agency Securities are subject to risk of loss with regard to principal and interest payments. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies.

~~The table below summarizes the credit ratings of our Credit Risk and Non-Agency Securities.~~

Investment Grade Non-Investment Grade Non-Rated Total
March 31, 2020 $ 448,186
$ 166,389
$ 150,978
$ 765,553
December 31, 2019 $ 570,332
$ 233,418
$ 79,851
$ 883,601

~~Interest-Only Securities~~

~~From time to time we may purchase Interest-Only Securities to tailor the overall risk characteristics of our investment securities portfolio. We did not have any Interest-Only Securities~~$19,747, at March 31, ~~2020 or December 31, 2019.~~

~~U.S. Treasury Securities~~

From time to time we may purchase U.S. Treasury Securities to tailor the overall risk characteristics of our investment securities portfolio. While U.S. Treasury Securities provide overall interest rate exposure, they are generally not sensitive to the other risks inherent in MBS. We did not have any U.S. Treasury Securities at March 31, 2020 or December 31, 2019.

~~The table below summarizes certain characteristics of our Trading Securities at March 31, 2020~~2021 and December 31, ~~2019. We did not have any Interest-Only Securities or U.S. Treasury Securities~~2020, respectively, and were reported in Derivatives, at ~~March 31, 2020 or December 31, 2019.~~

Asset Type Principal Amount Fair Value Weighted Average Coupon Weighted Average Months to Maturity Percent of Total
March 31, 2020
Credit Risk Transfer $ 821,060
$ 696,041
4.7 % 162 90.9 %
Non-Agency Securities 90,721
69,512
5.2 % 224 9.1
Total for Credit Risk and Non-Agency Securities $ 911,781
$ 765,553
4.8 % 167 100.0 %

December 31, 2019
Credit Risk Transfer $ 754,729
$ 803,964
5.9 % 114 91.0 %
Non-Agency Securities 93,723
79,637
5.2 % 226 9.0
Total for Credit Risk and Non-Agency Securities $ 848,452
$ 883,601
5.8 % 124 100.0 %

fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

Repurchase Agreements

We have entered into repurchase agreements to finance the majority of our MBS. Our repurchase agreements are secured by our MBS and bear interest at rates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. We have established borrowing relationships with numerous investment banking firms and other lenders, 18 of which had open repurchase agreements with us at March 31, ~~2020~~2021 and ~~25 of which had open repurchases agreements with us at~~ December 31, ~~2019.~~2020. We had outstanding balances under our repurchase agreements at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 of ~~$3,465,472~~$3,810,790 and ~~$11,354,547,~~$4,536,065, respectively, consistent with the ~~increase in our MBS in~~size of our securities portfolio.

Our repurchase agreements require excess collateral, known as a “haircut.” At March 31, ~~2020,~~2021, the average haircut percentage was ~~7.34%~~3.52% compared to ~~5.16%~~3.13% at December 31, ~~2019.~~2020. The ~~change~~haircut for our repurchase agreements vary by counterparty and therefore, the changes in the average haircut percentage ~~is a reflection of~~will vary with the ~~response by~~changes in our counterparty repurchase agreement ~~counterparties to increase collateralization haircut levels on our portfolio of Credit Risk and Non-Agency Securities due to the impact of the COVID-19 pandemic.~~balances.

Derivative Instruments

We use various contracts to manage our interest rate risk as we deem prudent in light of market conditions and the associated costs with counterparties that have a high quality credit rating and with futures exchanges. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate, SOFR or LIBOR. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge. No assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition. We have not elected cash flow hedge accounting treatment as allowed by GAAP. Since we do not designate our derivative activities as cash flow hedges, realized as well as unrealized gains/losses from these transactions will impact our GAAP earnings.

Use of derivative instruments may fail to protect or could adversely affect us because, among other things:

•available derivatives may not correspond directly with the interest rate risk for which protection is sought (e.g., the difference in interest rate movements for long-term U.S. Treasury Securities compared to Agency Securities);

•the duration of the derivatives may not match the duration of the related liability;

•the counterparty to a derivative agreement with us may default on its obligation to pay or not perform under the terms of the agreement and the collateral posted may not be sufficient to protect against any consequent loss;

•we may lose collateral we have pledged to secure our obligations under a derivative agreement if the associated counterparty becomes insolvent or files for bankruptcy;

•we may experience a termination event under one or more of our derivative agreements related to our REIT status, equity levels and performance, which could result in a payout to the associated counterparty and a taxable loss to us;

•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.

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ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

The following graphs present the notional and weighted average interest rate of our interest rate swap contracts by year of maturity.

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we had derivatives with a net fair value of ~~$(176,176)~~$171,282 and ~~$(47,223),~~$53,469, respectively. At March 31, ~~2020 and December 31, 2019,~~2021, we had interest rate swap contracts with an aggregate notional balance of $5,760,000, a weighted average swap rate of 0.55% and a weighted average term of 81 months. At December 31, 2020, we had interest rate swap contracts with an aggregate notional balance of $5,337,000, a weighted average swap rate of 0.24% and a

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ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

weighted average term of ~~$4,000,000 and $7,975,000, respectively.~~58 months. Counterparty risk of derivatives ~~are~~is limited to some degree because of daily mark-to-market and collateral requirements. These derivative transactions are designed ~~to;~~to: (1) lock in a portion of funding costs for financing activities associated with our assets in such a way as to help assure the realization of attractive net interest margins and (2) vary inversely in value with our MBS. Such contracts are based on assumptions about prepayments which, if not realized, will cause results to differ from expectations.

We also had TBA Agency Securities with an aggregate notional balance of ~~$1,250,000~~$3,500,000 and ~~1,000,000~~$2,600,000 at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Although we attempt to structure our derivatives to offset the changes in asset prices, the complexity of the actual and expected prepayment characteristics of the underlying mortgages as well as the volatility in mortgage interest rates relative to U.S. Treasury and interest rate swap contract rates makes achieving high levels of ~~off-set~~offset difficult. We recognized net ~~losses~~gains (losses) of ~~$(369,035)~~$118,620 and ~~$(135,198)~~$(369,035), for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, respectively, related to our derivatives.

As required by the Dodd-Frank Act, the Commodity Futures Trading Commission has adopted rules requiring certain interest rate swap contracts to be cleared through a derivatives clearing organization. We are required to clear certain new interest rate swap contracts. Cleared interest rate swaps may have higher margin requirements than un-cleared interest rate swaps we previously had. We have established an account with a futures commission merchant for this purpose. To date, we have not entered into any cleared interest rate swap contracts.

We are required to account for our TBA Agency Securities as derivatives when it is reasonably possible that we will not take or make timely physical delivery of the related securities. However, from time to time, we use TBA Agency Securities primarily to effectively establish portfolio positions. See the section, "TBA Agency Securities" above.

~~Contractual Obligations and Commitments~~

~~We had the following contractual obligations at March 31, 2020:~~

Payments Due By Period
Obligations Total < 1 Year ≥ 1 and ≤ 3 Years > 3 and ≤ 5 Years > 5 Years
Repurchase agreements ⁽¹⁾
$ 3,465,472
$ 3,465,472
$ —
$ —
$ —
Interest expense on repurchase
agreements
6,706
6,706
—
—
—
Related Party Fees ⁽²⁾
204,099
29,157
58,314
58,314
58,314
Board of Directors fees ⁽³⁾
9,457
1,351
2,702
2,702
2,702
Total $ 3,685,734
$ 3,502,686
$ 61,016
$ 61,016
$ 61,016


~~(1)~~	At ~~March 31, 2020, BUCKLER accounted for~~ ~~56.2%~~ ~~of our aggregate borrowings and had an amount at risk of~~ ~~7.7%~~ ~~of our total stockholders' equity with a weighted average maturity of~~ ~~27 days~~ ~~on repurchase agreements (refer to~~ ~~Note 7~~ ~~to the consolidated financial statements).~~


~~(2)~~	~~Represents fees to be paid to ACM under the terms of the management agreements (refer to~~ ~~Note 9~~ ~~and~~ ~~Note 15~~ ~~to the consolidated financial statements).~~


~~(3)~~	~~Represents compensation to be paid to the Board in the form of cash and common equity.~~

We had contractual commitments under derivatives at March 31, 2020. We had interest rate swap contracts with an aggregate notional balance of $4,000,000, a weighted average swap rate of 1.75% and a weighted average term of 46 months at March 31, 2020. We also entered into $1,250,000 notional of TBA Agency Securities during the three months ended March 31, 2020.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

Liquidity and Capital Resources

At March 31, ~~2020,~~2021, our liquidity totaled ~~$360,056,~~$687,317, consisting of ~~$333,884~~$277,554 of cash plus ~~$26,172~~$409,763 of unpledged MBS (including securities received as collateral). Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our MBS and cash generated from our operating results. Other potential sources of ~~funds~~liquidity include our automatic shelf registration filed with the SEC, pursuant to which we may ~~include proceeds from equity~~offer an unspecified amount of shares of our common stock, preferred stock, warrants, depositary shares and debt ~~offerings and asset sales~~securities (refer to Note 11 to the consolidated financial statements). We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of our borrowings can be adjusted on a daily basis, the level of cash carried on our consolidated balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We continue to pursue additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets.

In addition to the repurchase agreement financing discussed above, from time to time we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell such U.S. Treasury Securities to third parties and recognize a liability to return the securities to the original borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same MRA, settlement through the same brokerage or clearing account and maturing on the same day. The practical effect of these transactions is to replace a portion of our repurchase agreement financing of our MBS in our securities portfolio with short positions in U.S. Treasury Securities. We believe that this helps to reduce interest rate risk, and therefore counterparty credit and liquidity risk. Both parties to the repurchase and reverse repurchase transactions have the right to make daily margin calls based on changes in the value of the collateral obtained and/or pledged. We did not have any reverse repurchase agreements outstanding at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Our primary uses of cash are to purchase MBS, pay interest and principal on our borrowings, fund our operations and pay dividends. From time to time, we purchase or sell assets for forward settlement up to 90 days in the future to lock in purchase prices or sales proceeds. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we financed our securities portfolio with ~~$3,465,472~~$3,810,790 and ~~$11,354,547~~$4,536,065 of borrowings under repurchase agreements. Our ~~leverage~~debt to equity ratios at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, were ~~4.41:~~4.21:1 and 7.90:1, respectively. Our leverage ~~ratio is calculated by dividing~~ratios, including notional on our TBA Agency Securities, were 7.12:1 and 7.61:1 at March 31, 2021 and December 31, 2020, respectively.

During the ~~amount outstanding under~~three months ended March 31, 2021, we purchased $686,117 of securities using proceeds from repurchase agreements and principal repayments. During the three months ended March 31, 2021, we received cash of $278,722 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements ~~at period end by total stockholders’ equity at period end.~~of $725,275 for the three months ended March 31, 2021 and made cash interest payments of approximately $4,193 on our liabilities for the three months ended March 31, 2021.

During the three months ended March 31, 2020, we purchased $6,129,078 of securities using proceeds from repurchase agreements and principal repayments. During the three months ended March 31, 2020, we received cash of $507,170 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of $7,889,075 for the three months ended March 31, 2020 and made cash interest payments of approximately $139,313 on our liabilities for the three months ended March 31, 2020.

During the three months ended March 31, 2019, we purchased $6,907,777 of securities using proceeds from repurchase agreements and principal repayments. During the three months ended March 31, 2019, we received cash of $152,112 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of $5,105,623 for the three months ended March 31, 2019 and made cash interest payments of approximately $98,627 on our liabilities for the three months ended March 31, 2019.

Cash and cash collateral posted to counterparties provided by (used in) operating activities was ~~$(184,446)~~$21,197 and ~~$(11,334)~~$(184,446), respectively, for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019.~~2020. The ~~decrease in cash and cash collateral posted to counterparties related to operating activities is related~~increase quarter over quarter was primarily due to the ~~realized loss~~changes in fair value on our ~~derivatives.~~ derivatives of $(369,035) in Q1 2020 compared to gains of $118,620 in Q1 2021.

Our average securities portfolio was ~~$12,056,794~~$6,902,777 and ~~$10,909,345~~$12,056,794 for the three months ended March 31, ~~2020~~2021 and March 31, ~~2019,~~2020, respectively. During the three months ended March 31, ~~2020,~~2021, we sold ~~5,303~~1,154 of Series C Preferred stock ~~under our Preferred C Underwritten Offering and our Preferred C ATM Sales Agreement,~~ for an increase in equity of ~~$129,221.~~$28,173. During the three months ended March 31, ~~2020~~2021, we ~~also fully redeemed all 8,383 issued and outstanding~~sold 4,400 shares of our ~~Series B Preferred Stock ($25.00 per share, $209,583~~common stock, for an increase in equity of $52,960 (see Note 11 to the ~~aggregate liquidation preference)~~consolidated financial statements).

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on repurchase borrowings, reacquisition of securities to be returned to borrowers and the payment of cash dividends as required for continued qualification as a REIT.

Repurchase Agreements

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.

Changing capital or other financial market regulatory requirements may cause our lenders to exit the repurchase market, increase financing rates, tighten lending standards or increase the amount of required equity capital or haircut we post, any of which could make it more difficult or costly for us to obtain financing.

The following graph represents the outstanding balances of our repurchase agreements (before the effect of netting reverse repurchase agreements), which finance most of our MBS. Our repurchase agreements balance will fluctuate based on our change in capital, leverage targets and the market prices of our assets (including the effects of principal paydowns) and the level and timing of investment and reinvestment ~~activity.~~

~~See~~activity (see Note 7 and Note 15 to the consolidated financial ~~statements for additional information.~~statements).

5046

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Effects of Margin Requirements, Leverage and Credit Spreads

Our MBS have values that fluctuate according to market conditions and, as discussed above, the market value of our MBS will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase agreement decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which requires us to pay the difference in cash or pledge additional collateral to meet the obligations under our repurchase agreements. Under our repurchase facilities, our lenders have full discretion to determine the value of the MBS we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled principal repayments are announced monthly. ~~At March 31, 2020, we received waivers from certain ISDA counterparties related to significant reductions in equity capital that would have otherwise caused a default or termination event.~~

We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders’ equity. At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we financed our securities portfolio with ~~$3,465,472~~$3,810,790 and ~~$11,354,547~~$4,536,065 of borrowings under repurchase agreements. Our ~~leverage~~debt to equity ratios at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, were ~~4.41:~~4.21:1 and 7.90:1, respectively. Our leverage ~~ratio is calculated by dividing the amount outstanding under~~ratios, including notional on our ~~repurchase agreements~~TBA Agency Securities, were 7.12:1 and 7.61:1 at ~~period end by total stockholders’ equity at period end.~~March 31, 2021 and December 31, 2020, respectively.

Forward-Looking Statements Regarding Liquidity

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and our ability to make timely portfolio adjustments will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, meet our financing obligations, pay fees under the management ~~agreements~~agreement and fund our distributions to stockholders and pay general corporate expenses.

We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, including classes of preferred stock, common stock and senior or subordinated notes to meet our long-term (greater than one year) liquidity. Such financing will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain any such financing.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Stockholders’ Equity

See Note 11 to the consolidated financial statements.

Off-Balance Sheet Arrangements

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we had not maintained any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Furthermore, at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we had not guaranteed any obligations of any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. All of our transactions with BUCKLER are reflected in our consolidated balance sheets.

Critical Accounting Policies

See Note 3 to the consolidated financial statements for our significant accounting policies.

Valuation

The unrealized changes in fair value on our available for sale securities are reflected in total stockholders' equity as accumulated other comprehensive income or loss. Changes in fair value of our trading securities are reported in the consolidated statements of operations as income or loss. We do not use hedge accounting for our derivatives for financial reporting purposes

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

and therefore changes in fair value are reflected in net income as other gain or loss. To the extent that fair value changes on derivatives offset fair value changes in our MBS, the fluctuation in our stockholders’ equity will be lower. For example, rising interest rates may tend to result in an overall increase in our reported net income even while our total stockholders’ equity declines.

Fair value for our MBS and derivatives ~~are~~is based on obtaining a valuation for each from third party pricing services and/or dealer quotes. The third party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, collateral type, bond structure, prepayment speeds, priority of payments, defaults, delinquencies and severities, spread to the Treasury curve and interest rate swap curves, duration, periodic and life caps and credit enhancement. If the fair value of the MBS is not available from the third party pricing services or such data appears unreliable, we obtain pricing indications from up to three dealers who make markets in similar MBS. Management reviews pricing used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third party pricing services, dealer pricing indications and comparisons to a third party pricing model.

Fair value for our U.S. Treasury Securities is based on obtaining a valuation for each U.S. Treasury ~~Securities~~Security from third party pricing services and/or dealer quotes.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Realized Gains and Losses

Available for Sale Securities

We realize gains and losses on our available for sale securities upon their sale. At that time, previously unrealized amounts included in accumulated other comprehensive income are reclassified and reported in net income as other gain or loss. To the extent that we sell available for sale securities in later periods after changes in the fair value of those available for sale securities have occurred, we may report significant net income or net loss without a corresponding change in our total stockholders' equity.

Declines in the fair values of our available for sale securities that represent credit impairments are also treated as realized losses and reported in net income as other loss. We evaluate available for sale securities for impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider available for sale securities impaired if we (1) intend to sell the available for sale securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations), and (3) a credit loss exists. Impairment losses recognized establish a new cost basis for the related available for sale securities. Gains or losses on subsequent sales are determined by reference to such new cost basis.

Trading Securities

We carry our trading securities at fair value and reflect changes in those fair values in net income as other gains and losses.

Inflation

Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our Board based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

Subsequent Events

See Note 16 to the consolidated financial statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. See Part I, Item 1A. "Risk Factors" of our most recent Annual Report on Form 10-K. You should carefully consider these risks before you make an investment decision with respect to our stock, along with the following factors that could cause actual results to vary from our forward-looking statements:

•the impact of ~~the~~ COVID-19 ~~pandemic~~ on our operations;

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

•the impact of the federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government and the Fed system;

•the possible material adverse effect on our business if the U.S. Congress passed legislation reforming or winding down Fannie Mae or Freddie Mac;

•mortgage loan modification programs and future legislative action;

•actions by the Fed which could cause a change of the yield curve, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders;

•the impact of a delay or failure of the U.S. Government in reaching an agreement on the national debt ceiling;

•availability, terms and deployment of capital;

•extended trade disputes with foreign ~~countries.~~countries;

•changes in economic conditions generally;

•changes in interest rates, interest rate spreads and the yield curve or prepayment rates;

•general volatility of the financial markets, including markets for mortgage securities;

•a downgrade of the U.S. Government's or certain European countries' credit ratings and future downgrades of the U.S. Government's or certain European countries' credit ratings may materially adversely affect our business, financial condition and results of operations;

•our inability to maintain the level of non-taxable returns of capital through the payment of dividends to our stockholders or to pay dividends to our stockholders at all;

•inflation or deflation;

•the impact of a shutdown of the U.S. Government;

•availability of suitable investment opportunities;

•the degree and nature of our competition, including competition for MBS;

•changes in our business and investment strategy;

•our failure to maintain our qualification as a REIT;

•our failure to maintain an exemption from being regulated as a commodity pool operator;

•our dependence on ACM and ability to find a suitable replacement if ACM was to terminate its management relationship with us;

•the existence of conflicts of interest in our relationship with ACM, BUCKLER, certain of our directors and our officers, which could result in decisions that are not in the best interest of our stockholders;

•the potential for Buckler's inability to access attractive repurchase financing on our behalf or secure profitable third party business;

•our management's competing duties to other affiliated entities, which could result in decisions that are not in the best interest of our stockholders;

•53

~~ARMOUR Residential REIT, Inc.~~

~~Management’s Discussion and Analysis (continued)~~

changes in personnel at ACM or the availability of qualified personnel at ACM;

•limitations imposed on our business by our status as a REIT under the Code;

•the potential burdens on our business of maintaining our exclusion from the 1940 Act and possible consequences of losing that exclusion;

•changes in GAAP, including interpretations thereof; and

•changes in applicable laws and regulations.

We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this report. We do not intend and disclaim any

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

duty or obligation to update or revise any industry information or forward-looking statements set forth in this report to reflect new information, future events or otherwise, except as required under the U.S. federal securities laws.

5451

GLOSSARY OF TERMS

ARMOUR Residential REIT, Inc.



Term						Definition
Agency Securities						Securities issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae; interests in or obligations backed by pools of fixed rate, hybrid adjustable rate and adjustable rate mortgage loans.
ARMs						Adjustable Rate Mortgage backed securities.
Basis swap contracts						Derivative contracts that allow us to exchange one floating interest rate basis for another, for example, 3 month LIBOR and Fed Funds Rates, thereby allowing us to diversify our floating rate basis exposures.
Board						ARMOUR’s Board of Directors.
BUCKLER						A Delaware limited liability company, and a FINRA-regulated broker-dealer. The primary purpose of our investment in BUCKLER is to facilitate our access to repurchase financing, on potentially more attractive terms (considering rate, term, size, haircut, relationship and funding commitment) compared to other suitable repurchase financing counterparties.
CFO						Chief Financial Officer of ARMOUR, James Mountain.
Co-CEOs						Co-Chief Executive Officers of ARMOUR, Jeffrey Zimmer and Scott Ulm.
Code						The Internal Revenue Code of 1986.
COVID-19						The Coronavirus pandemic.
CPR						Constant prepayment rate.
Credit Risk and Non-Agency Securities						Securities backed by residential mortgages in which we may invest, which are not issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Dodd-Frank Act						The Dodd-Frank Wall Street Reform and Consumer Protection Act.
Exchange Act						Securities Exchange Act of 1934.
Fannie Mae						The Federal National Mortgage Association.
Fed						The U.S. Federal Reserve.
FINRA						The Financial Industry Regulatory Authority. A private corporation that acts as a self-regulatory organization.
Freddie Mac						The Federal Home Loan Mortgage Corporation.
GAAP						Accounting principles generally accepted in the United States of America.
Ginnie Mae						the Government National Mortgage Administration.
GSE						A U.S. Government Sponsored Entity. Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
Haircut						The weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount. Among other things, it is a measure of our unsecured credit risk to our lenders.
Hybrid						A mortgage that has a fixed rate for an initial term after which the rate becomes adjustable according to a specific schedule.
Interest-Only Securities						The interest portion of Agency Securities, which is separated and sold individually from the principal portion of the same payment.
ISDA						International Swaps and Derivatives Association.
JAVELIN						JAVELIN Mortgage Investment Corp., formerly a publicly-traded REIT. Since its acquisition on April 6, 2016, JAVELIN became a wholly-owned, qualified REIT subsidiary of ARMOUR and continues to be managed by ACM pursuant to the pre-existing management agreement between JAVELIN and ACM.
LIBOR						The London Interbank Offered Rate.

ARMOUR Residential REIT, Inc.

GLOSSARY OF TERMS (continued)


MBS		Mortgage backed securities. A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis.
Merger		The merger of JMI Acquisition Corporation with and into JAVELIN on April 6, 2016.
~~MGCL~~	~~Maryland General Corporation Law~~

~~ARMOUR Residential REIT, Inc.~~

~~GLOSSARY OF TERMS (continued)~~



MRA		Master repurchase agreement. A document that outlines standard terms between the Company and counterparties for repurchase agreement transactions
Multi-Family MBS			MBS issued under Fannie Mae's Delegated Underwriting System (DUS) program.
~~NYSE~~		~~New York Stock Exchange.~~
~~OTTI~~	~~Other than temporary impairment.~~
REIT		Real Estate Investment Trust. A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property.
Repurchase Program			ARMOUR's common stock repurchase program authorized by our Board.
~~Sarbanes-Oxley Act~~		A U.S. federal law that set new or enhanced standards for all U.S. public company boards, management and public accounting firms. Section 302 requires senior management to certify the accuracy of the financial statements. Section 404 requires that management and auditors establish internal controls and reporting methods on the adequacy of those controls.
SEC		The Securities and Exchange Commission.
SOFR			Secured overnight funding rate. A measure of the cost of borrowing cash overnight collateralized by U.S. Treasury Securities.
TBA Agency Securities			Forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date.
TBA Drop Income			The discount associated with TBA Agency Securities contracts which reflects the expected interest income on the underlying deliverable Agency Securities, net of an implied financing cost, which would have been earned by the buyer if the TBA Agency Securities contract had settled on the next regular settlement date instead of the forward settlement date specified. TBA Drop Income is calculated as the difference between the forward settlement price of the TBA Agency Securities contract and the spot price of similar TBA Agency Securities contracts for regular settlement. The Company generally accounts for TBA Agency Securities contracts as derivatives and TBA Drop Income is included as part of the periodic changes in fair value of the TBA Agency Securities that the Company recognizes in the Other Income (Loss) section of its Consolidated Statement of Operations.
TRS			Taxable REIT subsidiary.
U.S.			United States.
1940 Act			The Investment Company Act of 1940.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ARMOUR Residential REIT, Inc.

We seek to manage our risks related to the credit-quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Interest Rate Risk

Our primary market risk is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on our assets and the interest expense incurred in connection with our liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of MBS and our ability to realize gains from the sale of these assets. A decline in the value of the MBS pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.

A portion of our securities portfolio consists of hybrid adjustable rate and adjustable rate MBS. Hybrid mortgages are ARMs that have a ~~fixed-interest~~fixed 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. ARMs are typically subject to periodic and lifetime interest rate caps that limit the amount the interest rate can change during any given period. Furthermore, some ARMs may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. ARMs are also typically subject to a minimum interest rate payable. Most of our adjustable rate assets are based on the one-year constant maturity treasury rate and the one-year LIBOR rate. Our fixed rate MBS have interest rates that are not variable and are constant for the entire loan term.

Our borrowings are not subject to similar restrictions and are generally repurchase agreements of limited duration that track the Federal Funds Rate and LIBOR and are periodically refinanced at current market rates. Therefore, on average, our cost of funds may rise or fall more quickly than our earnings rate on our assets. Hence, in a period of increasing interest rates, interest rates on our borrowings could increase without limitation, while the changes in the interest rates on our mortgage related assets could be limited. 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.

We anticipate that in most cases the interest rates, interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. These indices generally move in the same direction, but there can be no assurance that this will continue to occur. Furthermore, our net income may vary somewhat as the spread between one-month interest rates, the typical term for our repurchase agreements, and the interest rates on our mortgage assets varies. During periods of changing interest rates, such interest rate mismatches could negatively impact our net interest income, dividend yield and the market price of our stock.

Another component of interest rate risk is the effect changes in interest rates will have on the market value of our MBS. We face the risk that the market value of our MBS will increase or decrease at different rates than that of our liabilities, including our derivative instruments.

We primarily assess our interest rate risk by estimating the effective duration of our assets and the effective duration of our liabilities and by estimating the time difference between the interest rate adjustment of our assets and the interest rate adjustment of our liabilities. Effective duration essentially measures the market price volatility of financial instruments as interest rates change. We generally estimate effective duration using various financial models and empirical data. Different models and methodologies can produce different effective duration estimates for the same securities.

ARMOUR Residential REIT, Inc.

Market Risk Disclosures (continued)

The sensitivity analysis tables presented below reflect the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. It assumes that the mortgage spread on our MBS remains constant. Actual

~~ARMOUR Residential REIT, Inc.~~

~~Market Risk Disclosures (continued)~~

interest rate movements over time will likely be different, and such differences may be material. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on ACM’s expectations. Interest rates for interest rate swaps and repurchase agreements are assumed to remain positive. The analysis presented utilized assumptions, models and estimates of ACM based on ACM's judgment and experience.


	Percentage Change in Projected
Change in Interest Rates	Net Interest Income	Portfolio Including Derivatives	Shareholder's Equity
March 31, 2021
1.00%	50.91%	(1.41)%	(11.10)%
0.50%	26.34%	(0.63)%	(5.00)%
(0.50)%	(0.46)%	0.29%	2.30%
(1.00)%	(3.51)%	0.14%	1.10%

December 31, 2020
1.00%	27.41%	(1.45)%	(12.20)%
0.50%	13.19%	(0.52)%	(4.40)%
(0.50)%	1.48%	0.06%	0.50%
(1.00)%	(2.52)%	(0.30)%	(2.50)%

Percentage Change in Projected
Change in Interest Rates Net Interest Income Portfolio Including Derivatives Shareholder's Equity
March 31, 2020 ⁽¹⁾

1.00% 180.15% (1.36)% (8.03)%
0.50% 91.97% (0.56)% (3.33)%
(0.50)% (94.39)% 0.27% 1.61%
(1.00)% (191.58)% 0.33% 1.92%

December 31, 2019
1.00% (16.52)% (1.54)% (14.77)%
0.50% (7.87)% (0.59)% (5.63)%
(0.50)% 3.58% 0.07% 0.62%
(1.00)% (10.16)% (0.53)% (5.12)%


~~(1)~~	The March 31, 2020 balance sheet has been impacted by the events surrounding the COVID-19 pandemic and is the result of management's efforts and desire to preserve liquidity and manage risk rather than focus on income generation.

While the tables above reflect the estimated immediate impact of interest rate increases and decreases on a static securities portfolio, we rebalance our securities portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the tables above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Mortgage Spread Risk

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

The table below quantifies the estimated changes in the fair value of our securities portfolio and in our shareholders' equity as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. The estimated impact of changes in spreads is in addition to our interest rate sensitivity presented above. Our securities portfolio's sensitivity to mortgage spread changes will vary with changes in interest rates and in the size and composition of our securities portfolio. Therefore, actual results could differ materially from our estimates.

5855

ARMOUR Residential REIT, Inc.

Market Risk Disclosures (continued)


	March 31, 2021		December 31, 2020
	Percentage Change in Projected		Percentage Change in Projected
Change in MBS spread	Portfolio Value	Shareholders' Equity	Portfolio Value	Shareholders' Equity
+25 BPS	(1.43)%	(11.01)%	(1.18)%	(9.88)%
+10 BPS	(0.57)%	(4.40)%	(0.47)%	(3.95)%
-10 BPS	0.57%	4.40%	0.47%	3.95%
-25 BPS	1.43%	11.01%	1.18%	9.88%

March 31, 2020 December 31, 2019
Percentage Change in Projected Percentage Change in Projected
Change in MBS spread Portfolio Value Shareholders' Equity Portfolio Value Shareholders' Equity
+25 BPS (1.23)% (7.58)% (1.21)% (11.64)%
+10 BPS (0.49)% (3.03)% (0.48)% (4.65)%
-10 BPS 0.49% 3.03% 0.48% 4.65%
-25 BPS 1.23% 7.58% 1.21% 11.64%

Prepayment Risk

As we receive payments of principal on our MBS, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income as realized. Premiums arise when we acquire MBS at prices in excess of the principal balance of the mortgage loans underlying such MBS. Conversely, discounts arise when we acquire MBS at prices below the principal balance, adjusted for expected credit losses, of the mortgage loans underlying such MBS. Volatility in actual prepayment speeds will create volatility in the amount of premium amortization we recognize. Higher speeds will reduce our interest income and lower speeds will increase our interest income.

Credit Risk

We have limited our exposure to credit losses on our securities portfolio of Agency Securities. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency Securities are guaranteed by those respective agencies and the payment of principal and interest on the Agency Securities guaranteed by Ginnie Mae are backed by the full faith and credit of the U.S. Government. Fannie Mae and Freddie Mac remain in conservatorship of the U.S. Government. There can be no assurances as to how or when the U.S. Government will end these conservatorships or how the future profitability of Fannie Mae and Freddie Mac and any future credit rating actions may impact the credit risk associated with Agency Securities and, therefore, the value of the Agency Securities. All of our Agency Securities are issued and guaranteed by GSEs or Ginnie Mae. The GSEs have a long term credit rating of AA+.

WeAt March 31, 2021 and December 31, 2020, we did not own any Credit Risk and Non-Agency Securities. From time to time we may purchase Credit Risk and Non-Agency Securities at prices which incorporate our expectations for prepayment speeds, defaults, delinquencies and severities. These expectations determine the yields we receive on our assets. If actual prepayment speeds, defaults, delinquencies and severities are different from our expectations, our actual yields could be higher or lower. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies. ~~Our~~ Credit Risk and Non-Agency Securities are subject to risk of loss with regard to principal and interest payments. At March 31, 2020, 58.5% of our Credit Risk and Non-Agency Securities were assigned an investment grade rating and 41.5%, were assigned below an investment grade rating, or were not rated. At December 31, 2019, 64.5% of our Credit Risk and Non-Agency Securities were assigned an investment grade rating and 35.5% were assigned below an investment grade rating or were not rated.

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity MBS with short-term debt. The interest rates on our borrowings generally adjust more frequently than the interest rates on our ARMs. Accordingly, in a period of rising interest rates, our borrowing costs will usually increase faster than our interest earnings from MBS. Our repurchase agreements require that we maintain adequate pledged collateral. A decline in the value of the MBS pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels.

5956

ARMOUR Residential REIT, Inc.

Market Risk Disclosures (continued)

Operational Risk

We rely on our financial, accounting and other data processing systems. Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems. Although we have not detected a material cybersecurity breach to date, other financial services institutions have reported material breaches of their systems, some of which have been significant. Even with all reasonable security efforts, not every breach can be prevented or even detected. It is possible that we have experienced an undetected breach. There is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance.

ACM has established an Information Technology Steering Committee (“the Committee”) to help mitigate technology risks including cybersecurity. One of the roles of the Committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee the Company’s Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Co-Chief Executive Officers (“Co-CEOs”) and Chief Financial Officer (“CFO”) participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of our fiscal quarter that ended on March 31, ~~2020.~~2021. Based on their participation in that evaluation, our Co-CEOs and CFO concluded that our disclosure controls and procedures were effective as of March 31, ~~2020~~2021 to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Exchange Act, is accumulated and communicated to our management, including our Co-CEOs and CFO, as appropriate, to allow timely decisions regarding required disclosures.

Internal Control Over Financial Reporting

Our Co-CEOs and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, ~~2020.~~2021. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ARMOUR Residential REIT, Inc.

Item 1. Legal Proceedings

There have been no material changes to the legal proceedings disclosed in our Annual Report on Form 10–K for the year ended December 31, ~~2019,~~2020, filed with the SEC on February ~~19, 2020.~~17, 2021.

Item 1A. Risk Factors

~~Except as set forth below, there~~ There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the SEC on February ~~19, 2020.~~

17, 2021.

We expect the novel COVID-19 pandemic to have a significant effect on our results of operations. In addition, it has resulted in significant financial market volatility, and its impact on the global economy appears to be significant. A continuation or worsening of the pandemic will have a material adverse impact on our business, results of operations and financial condition and on the market price of our common stock.

On March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our continuing operations and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common stock. We expect that our results of operations will reflect a negative impact from, among other things, the global pandemic. Depending upon the duration and severity of the pandemic, the continuing effect on our results over the long term is uncertain.

Responding to the COVID-19 pandemic, both Fannie Mae and Freddie Mac have announced mortgage forbearance policies that will allow borrowers to delay their mortgage payments for up to one year. Individual states also have adopted or may adopt forbearance policies addressing loan payments, rent payments, foreclosures and evictions. These policies may impact our investments in many ways, some that are foreseeable, others that are not. The impact of high levels of forbearance on our securities portfolio could range from immaterial to significant depending upon not only actual losses incurred on underlying loans but also future public policy choices and actions by the GSEs, their regulator the Federal Housing Finance Authority ("FHFA"), the Fed, and federal and state governments. The nature and timing of any such future public policy choices and actions are unpredictable. We expect prepayment speeds on Agency Securities to be affected and scenarios suggesting both slowing and increasing prepayment speeds are plausible. Certain classes of our Credit Risk Transfer securities, in our securities portfolio contain contractual provisions that allow the issuing GSE to declare a credit event based solely on payment delays, including forbearance (even if the issuing GSE ultimately sustains no loss on the underlying loans). While similar forbearance during prior natural disasters did not result in CRT credit events, there can be no assurance as to what stance the GSEs and the FHFA will take on this issue regarding the COVID-19 pandemic forbearance.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~ARMOUR Residential REIT, Inc.~~

~~Issuer Purchases of Equity Securities~~

~~The following table presents information regarding our net common stock repurchases made during the three months ended March 31, 2020 (in thousands, except per share price).~~

Total Number of Shares Purchased ⁽¹⁾

Average Price Paid Per Share ⁽²⁾
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs ⁽³⁾
January 1, 2020 through January 31, 2020 —
$ —
—
8,250
February 1, 2020 through February 29, 2020 10
$ 20.02
10
8,260
March 1, 2020 through March 31, 2020 (50 ) $ 19.47
(50 ) 8,210
Total (40 ) (40 ) 8,210


~~(1)~~	~~All shares were repurchased pursuant to our stock repurchase program (the "Repurchase Program") (see~~ ~~Note 11~~ ~~to the consolidated financial statements).~~


~~(2)~~	~~Weighted average share price~~


~~(3)~~	~~On June 4, 2019, the Board increased the repurchase authorization under the Repurchase Program to 9,000 shares. At December 31, 2019, there were~~ ~~8,250~~ ~~authorized shares remaining under the current Repurchase Program.~~

Item 3. Defaults Upon Senior Securities

None.

~~Item~~IItem 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

On April 30, 2020, ARMOUR Capital Management LP ("ACM”) waived 40% of the Base Management Fee due from ARMOUR Residential REIT, Inc. (“ARMOUR”) and payable to ACM pursuant to the Sixth Amended and Restated Management Agreement, effective as of November 17, 2017 (the “Agreement”), between the ACM and ARMOUR, beginning with amounts becoming due and payable on or after May 1, 2020. The waiver will continue from month to month until ACM provides notice to ARMOUR. ACM may terminate this waiver for any month by providing notice to ARMOUR on or before the 25^th day of the preceding month. This waiver does not constitute a waiver of any other amounts due to ACM from ARMOUR under the Agreement or otherwise, including but not limited to any expense reimbursements, any amounts calculated by reference to the contractual Base Management Fee, or any awards under the Second Amended and Restated 2009 Stock Incentive Plan.

~~ARMOUR Residential REIT, Inc.~~

Item 6. Exhibits



EXHIBIT INDEX
Exhibit Number		Description
~~3.1~~31.1		~~Articles Supplementary of 7.00% Series C Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 1.1 to ARMOUR's Current Report on Form 8-K filed with the SEC on April 6,2020)~~
~~4.1~~	Specimen 7.00% Series C Cumulative Redeemable Preferred Stock Certificate of ARMOUR Residential REIT, Inc. (incorporated by reference to Exhibit 4.3 to ARMOUR's Registration Statement on Form 8-A (Reg. No. 001-34766) filed with the SEC on January 28, 2020)
~~31.1~~	Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
31.2		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
31.3		Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a) (1)
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (2)
32.2		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (2)
32.3		Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 (2)

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document (1)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (1)
104		Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101)



(1)						Filed herewith.
(2)						Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



~~May 1, 2020~~April 21, 2021			ARMOUR RESIDENTIAL REIT, INC.

			/s/ James R. Mountain
			James R. Mountain
			Chief Financial Officer, Duly Authorized Officer and Principal Financial Officer



PART I. Financial Information			1
Item 1. Financial Statements			1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			3230
Item 3. Quantitative and Qualitative Disclosures about Market Risk			5653
Item 4. Controls and Procedures			5956
PART II. Other Information			6057
Item 1. Legal Proceedings			6057
Item IA. Risk Factors			6057
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			6057
Item 3. Defaults Upon Senior Securities			6157
Item 4. Mine Safety Disclosures			6157
Item 5. Other Information			6157
Item 6. Exhibits			6257
Signatures			6358



	Preferred Stock								Common Stock
	7.875% Series B					7.00% Series C
	Shares		Par			Shares	Par		Shares		Par		Total Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2019	8,383		$	8		—	$	—	58,877		$	59	$	3,054,604		$	(1,973,437	)	$	355,473		$	1,436,707
Series B Preferred dividends	—		—			—	—		—		—		—			(1,375		)	—			(1,375		)
Series C Preferred dividends	—		—			—	—		—		—		—			(1,452		)	—			(1,452		)
Common stock dividends	—		—			—	—		—		—		—			(30,377		)	—			(30,377		)
Series B Preferred stock, called for redemption	(8,383	)	(8		)	—	—		—		—		(209,575		)	—			—			(209,583		)
Issuance of Series C Preferred stock, net of expenses	—		—			5,303	5		—		—		129,216			—			—			129,221
Stock based compensation, net of withholding requirements	—		—			—	—		44		—		1,001						—			1,001
Common stock repurchased, net	—		—			—	—		(40	)	—		(777		)	—			—			(777		)
Net Loss	—		—			—	—		—		—		—			(406,659		)	—			(406,659		)
Other comprehensive loss	—		—			—	—		—		—		—			—			(130,456		)	(130,456		)
Balance, March 31, 2020	—		$	—		5,303	$	5	58,881		$	59	$	2,974,469		$	(2,413,300	)	$	225,017		$	786,250



	Available for Sale Securities			Trading Securities
	Agency			Credit Risk and Non-Agency			Interest-Only			U.S. Treasuries			Totals
March 31, 2020
Beginning balance	$	11,941,766		$	883,601		$	—		$	—		$	12,825,367
Purchases ⁽¹⁾	1,768,689			237,928			—			3,763,561			5,770,178
Proceeds from sales	(9,777,373		)	(72,437		)	—			(3,785,248		)	(13,635,058		)
Receivable for unsettled sales	(618,081		)	(70,102		)	—			—			(688,183		)
Principal repayments	(475,766		)	(31,404		)	—			—			(507,170		)
Gains (losses)	(37,131		)	(183,111		)	—			21,771			(198,471		)
Credit loss expense	(1,012		)	—			—			—			(1,012		)
Amortization/accretion	(14,130		)	1,078			—			(84		)	(13,136		)
Ending balance	$	2,786,962		$	765,553		$	—		$	—		$	3,552,515
Percentage of Portfolio	78.45		%	21.55		%	—		%	—		%	100.00		%

December 31, 2019
Beginning balance	$	7,051,954		$	819,915		$	20,623		$	98,646		$	7,991,138
Purchases ⁽¹⁾	9,130,512			138,767			—			1,685,058			$	10,954,337
Sales	(2,894,339		)	—			(18,822		)	(1,786,090		)	$	(4,699,251	)
Principal Repayments	(1,701,406		)	(53,641		)	—			—			$	(1,755,047	)
Gains (losses)	408,954			(24,396		)	123			2,024			$	386,705
Amortization/accretion	(53,909		)	2,956			(1,924		)	362			$	(52,515	)
Ending balance	$	11,941,766		$	883,601		$	—		$	—		$	12,825,367
Percentage of Portfolio	93.11		%	6.89		%	—		%	—		%	100.00		%



	March 31, 2020				December 31, 2019
Weighted Average Life of all Agency Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
< 1 year	$	55	$	55	$	—	$	—
≥ 1 year and < 3 years	44,473		43,320		22,237		22,254
≥ 3 years and < 5 years	1,194,131		1,148,197		6,542,389		6,365,623
≥ 5 years	1,548,303		1,370,373		5,377,140		5,198,416
Total Agency Securities	$	2,786,962	$	2,561,945	$	11,941,766	$	11,586,293



Interest Rate Swaps ⁽¹⁾	Notional Amount		Weighted Average Remaining Term (Months)	Weighted Average Rate
March 31, 2020
< 3 years	$	2,200,000	14	1.89	%
≥ 3 years and < 5 years	375,000		53	1.64	%
≥ 5 years and < 7 years	850,000		80	1.74	%
< 7 years	575,000		116	1.31	%
Total or Weighted Average⁽²⁾	$	4,000,000	46	1.75	%

December 31, 2019
< 3 years	$	2,750,000	19	1.66	%
≥ 3 years and < 5 years	2,850,000		47	1.84	%
≥ 5 years and < 7 years	1,200,000		83	1.86	%
< 7 years	1,175,000		118	1.54	%
Total or Weighted Average ⁽³⁾	$	7,975,000	53	1.74	%



Stockholders' Equity	March 31, 2020			March 31, 2019
Balance, beginning of quarter	$	1,436,707		$	1,125,313
Series B Preferred dividends ($0.1640625 per share)	(1,375		)	(1,124		)
Series C Preferred dividends ($0.14583 per share)	(1,452		)	(3,135		)
Common stock dividends ⁽¹⁾	(30,377		)	(29,814		)
Series B Preferred Stock, called for redemption	(209,583		)	—
Issuance of Series C Preferred Stock	129,221			—
Issuance of Common stock, net	—			321,992
Stock based compensation, net of withholding requirements	1,001			644
Common Stock repurchased, net	(777		)	—
Net loss	(406,659		)	(114,381		)
Other comprehensive income (loss)	(130,456		)	187,158
Balance, end of quarter	$	786,250		$	1,486,653



Record Date	Payment Date	Rate per Series B Preferred Share		Aggregate amount paid to holders of record
January 15, 2020	January 27, 2020	$	0.16	$	1,375



Record Date	Payment Date	Rate per Series C Preferred Share		Aggregate amount paid to holders of record
February 15, 2020	February 27, 2020	$	0.15	$	678
March 15, 2020	March 27, 2020	$	0.15	774
Total dividends paid				$	1,452



	Investment Grade		Non-Investment Grade		Non-Rated		Total
March 31, 2020	$	448,186	$	166,389	$	150,978	$	765,553
December 31, 2019	$	570,332	$	233,418	$	79,851	$	883,601



	Payments Due By Period
Obligations	Total		< 1 Year		≥ 1 and ≤ 3 Years		> 3 and ≤ 5 Years		> 5 Years
Repurchase agreements ⁽¹⁾	$	3,465,472	$	3,465,472	$	—	$	—	$	—
Interest expense on repurchase agreements	6,706		6,706		—		—		—
Related Party Fees ⁽²⁾	204,099		29,157		58,314		58,314		58,314
Board of Directors fees ⁽³⁾	9,457		1,351		2,702		2,702		2,702
Total	$	3,685,734	$	3,502,686	$	61,016	$	61,016	$	61,016



	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid Per Share ⁽²⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs ⁽³⁾
January 1, 2020 through January 31, 2020	—		$	—	—		8,250
February 1, 2020 through February 29, 2020	10		$	20.02	10		8,260
March 1, 2020 through March 31, 2020	(50	)	$	19.47	(50	)	8,210
Total	(40	)			(40	)	8,210