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 ~~June~~September 30, 2020



☐			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 ~~July 21,~~October 20, 2020 was ~~64,689,664.~~

64,730,155.

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)


	June 30, 2020			December 31, 2019				September 30, 2020		December 31, 2019
Assets							Assets
Cash	$	153,258		$	181,395		Cash	$	250,942	$	181,395
Cash collateral posted to counterparties	27,460			91,771			Cash collateral posted to counterparties	16,686		91,771
Investments in securities, at fair value							Investments in securities, at fair value
Agency Securities (including pledged securities of $4,421,226 at June 30, 2020 and $11,188,502 at December 31, 2019)	5,186,224			11,941,766
Credit Risk and Non-Agency Securities (including pledged securities of $0 at June 30, 2020 and $810,549 at December 31, 2019)	65,970			883,601
Agency Securities (including pledged securities of $4,706,610 at September 30, 2020 and $11,188,502 at December 31, 2019)							Agency Securities (including pledged securities of $4,706,610 at September 30, 2020 and $11,188,502 at December 31, 2019)	5,545,765		11,941,766
Credit Risk and Non-Agency Securities (including pledged securities of $810,549 at December 31, 2019)							Credit Risk and Non-Agency Securities (including pledged securities of $810,549 at December 31, 2019)	0		883,601

Derivatives, at fair value	10,620			24,751			Derivatives, at fair value	10,557		24,751

Accrued interest receivable	13,007			35,085			Accrued interest receivable	13,215		35,085
Prepaid and other	2,448			9,051			Prepaid and other	2,336		9,051
Subordinated loan to BUCKLER	105,000			105,000			Subordinated loan to BUCKLER	105,000		105,000
Total Assets	$	5,563,987		$	13,272,420		Total Assets	$	5,944,501	$	13,272,420
Liabilities and Stockholders’ Equity							Liabilities and Stockholders’ Equity
Liabilities:							Liabilities:
Repurchase agreements	$	4,237,603		$	11,354,547		Repurchase agreements	$	4,510,795	$	11,354,547

Cash collateral posted by counterparties	8,189			14,958			Cash collateral posted by counterparties	4,100		14,958
Payable for unsettled purchases	443,523			358,712			Payable for unsettled purchases	518,552		358,712
Derivatives, at fair value	18,198			71,974			Derivatives, at fair value	13,388		71,974
Accrued interest payable- repurchase agreements	676			31,932			Accrued interest payable- repurchase agreements	1,289		31,932

Accounts payable and other accrued expenses	4,567			3,590			Accounts payable and other accrued expenses	4,108		3,590

Total Liabilities	$	4,712,756		$	11,835,713		Total Liabilities	$	5,052,232	$	11,835,713

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

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			7.875% Series B Cumulative Preferred Stock; 8,383 shares issued and outstanding ($209,583 aggregate liquidation preference) at December 31, 2019	0		8
7.00% Series C Cumulative Preferred Stock; 5,303 shares issued and outstanding ($132,588 aggregate liquidation preference) at June 30, 2020	5			—
Common stock, $0.001 par value, 125,000 shares authorized, 64,689 and 58,877 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	65			59
7.00% Series C Cumulative Preferred Stock; 5,303 shares issued and outstanding ($132,588 aggregate liquidation preference) at September 30, 2020							7.00% Series C Cumulative Preferred Stock; 5,303 shares issued and outstanding ($132,588 aggregate liquidation preference) at September 30, 2020	5		0
Common stock, $0.001 par value, 125,000 shares authorized, 64,730 and 58,877 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively							Common stock, $0.001 par value, 125,000 shares authorized, 64,730 and 58,877 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively	65		59
Additional paid-in capital	3,024,246			3,054,604			Additional paid-in capital	3,025,274		3,054,604
Accumulated deficit	(2,369,748		)	(1,973,437		)	Accumulated deficit	(2,333,272)		(1,973,437)
Accumulated other comprehensive income	196,663			355,473			Accumulated other comprehensive income	200,197		355,473
Total Stockholders’ Equity	$	851,231		$	1,436,707		Total Stockholders’ Equity	$	892,269	$	1,436,707
Total Liabilities and Stockholders’ Equity	$	5,563,987		$	13,272,420		Total Liabilities and Stockholders’ Equity	$	5,944,501	$	13,272,420

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Interest Income:
Agency Securities, net of amortization of premium and fees	$	25,188	$	102,134	$	128,612	$	295,405
Credit Risk and Non-Agency Securities, including discount accretion	518		13,158		17,746		40,134
Interest-Only Securities	0		0		0		596
U.S. Treasury Securities	0		128		469		1,353
BUCKLER Subordinated loan	24		479		312		1,562
Total Interest Income	$	25,730	$	115,899	$	147,139	$	339,050
Interest expense- repurchase agreements	(2,954)		(80,293)		(59,863)		(228,775)
Interest expense- U.S. Treasury Securities sold short	0		0		(32)		0
Net Interest Income	$	22,776	$	35,606	$	87,244	$	110,275
Other Income (Loss):
Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive income (loss))	9,468		4,569		138,802		1,615
Credit loss expense	0		0		(1,012)		0
Gain on Agency Securities, trading	12,149		0		20,060		0
Loss on Credit Risk and Non-Agency Securities	(6,633)		(8,842)		(189,555)		(26,045)
Gain on Interest-Only Securities	0		0		0		123
Gain (loss) on U.S. Treasury Securities	0		(736)		21,771		2,024
Loss on short sale of U.S. Treasury Securities	0		0		(414)		0
Subtotal	$	14,984	$	(5,009)	$	(10,348)	$	(22,283)
Realized gain (loss) on derivatives ⁽¹⁾	20,866		(85,076)		(394,850)		(200,198)
Unrealized gain (loss) on derivatives	6,866		3,845		46,304		(216,526)
Subtotal	$	27,732	$	(81,231)	$	(348,546)	$	(416,724)
Total Other Income (Loss)	$	42,716	$	(86,240)	$	(358,894)	$	(439,007)
Expenses:
Management fees	7,393		7,418		22,234		22,162
Professional fees	559		922		3,058		2,869
Insurance	183		183		549		531
Compensation	1,387		1,094		4,210		2,877
Other	537		704		724		1,415
Total Expenses	$	10,059	$	10,321	$	30,775	$	29,854
Less management fees waived	(2,953)		0		(5,900)		0
Total Expenses after fees waived	$	7,106	$	10,321	$	24,875	$	29,854
Net Income (Loss)	$	58,386	$	(60,955)	$	(296,525)	$	(358,586)
Dividends on preferred stock	(2,320)		(3,410)		(7,467)		(11,943)
Net Income (Loss) available (related) to common stockholders	$	56,066	$	(64,365)	$	(303,992)	$	(370,529)
(Continued)

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Interest Income:
Agency Securities, net of amortization of premium and fees $ 23,648
$ 113,438
$ 103,424
$ 193,270
Credit Risk and Non-Agency Securities, including discount accretion 4,873
13,383
17,228
26,975
Interest-Only Securities —
251
—
596
U.S. Treasury Securities —
744
469
1,226
BUCKLER Subordinated loan 29
544
287
1,083
Total Interest Income $ 28,550
$ 128,360
$ 121,408
$ 223,150
Interest expense- repurchase agreements (5,389 ) (87,504 ) (56,909 ) (148,482 )
Interest expense- U.S. Treasury Securities sold short (32 ) —
(32 ) —
Net Interest Income $ 23,129

$ 40,856

$ 64,467

$ 74,668
Other Income (Loss):
Realized gain (loss) on sale available for sale Agency Securities (reclassified from Other comprehensive income (loss)) 36,008
(44 ) 129,333
(2,953 )
Credit loss expense —
—
(1,012 ) —
Gain on Agency Securities, trading 7,911
—
7,911
—
Gain (loss) on Credit Risk and Non-Agency Securities 190
(17,699 ) (182,922 ) (17,203 )
Gain on Interest-Only Securities —
490
—
123
Gain on U.S. Treasury Securities —
3,453
21,771
2,760
Loss on short sale of U.S. Treasury Securities (414 ) —
(414 ) —
Subtotal $ 43,695

$ (13,800 )
$ (25,333 )
$ (17,273 )
Realized loss on derivatives ⁽¹⁾
(180,567 ) (92,990 ) (415,716 ) (115,122 )
Unrealized gain (loss) on derivatives 173,325
(107,304 ) 39,438
(220,371 )
Subtotal $ (7,242 )
$ (200,294 )
$ (376,278 ) $ (335,493 )
Total Other Income (Loss) $ 36,453

$ (214,094 )
$ (401,611 ) $ (352,766 )
Expenses:
Management fees 7,382
7,485
14,840
14,743
Professional fees 1,654
912
2,499
1,947
Insurance 183
183
366
348
Compensation 1,357
995
2,822
1,782
Other 205
437
187
713
Total Expenses $ 10,781

$ 10,012

$ 20,714

$ 19,533
Less management fees waived (2,947 )
—

(2,947 )
—
Total Expenses after fees waived $ 7,834
$ 10,012

$ 17,767
$ 19,533
Net Income (Loss) $ 51,748

$ (183,250 )
$ (354,911 ) $ (297,631 )
Dividends on preferred stock (2,320 ) (4,274 ) (5,147 ) (8,533 )
Net Income (Loss) available (related) to common stockholders $ 49,428

$ (187,524 )
$ (360,058 ) $ (306,164 )
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Net Income (Loss) per share available (related) to common stockholders (Note 12):
Basic	$	0.87	$	(1.09)	$	(4.87)	$	(6.45)
Diluted	$	0.86	$	(1.09)	$	(4.87)	$	(6.45)
Dividends declared per common share	$	0.30	$	0.51	$	0.90	$	1.65
Weighted average common shares outstanding:
Basic	64,724		59,077		62,458		57,473
Diluted	65,272		59,077		62,458		57,473

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Net Income (Loss) per share available (related) to common stockholders (Note 12):
Basic $ 0.78
$ (3.14 ) $ (5.87 ) $ (5.40 )
Diluted $ 0.77
$ (3.14 ) $ (5.87 ) $ (5.40 )
Dividends declared per common share $ 0.09
$ 0.57
$ 0.60
$ 1.14
Weighted average common shares outstanding:
Basic 63,741
59,654
61,312
56,658
Diluted 64,340
59,654
61,312
56,658

(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 June 30,						For the Six Months Ended June 30,							For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020			2019			2020			2019				2020		2019		2020		2019
Net Income (Loss)	$	51,748		$	(183,250	)	$	(354,911	)	$	(297,631	)	Net Income (Loss)	$	58,386	$	(60,955)	$	(296,525)	$	(358,586)
Other comprehensive income (loss):													Other comprehensive income (loss):
Reclassification adjustment for realized (gain) loss on sale of available for sale Agency Securities	(36,008		)	44			(129,333		)	2,953
Reclassification adjustment for realized gain on sale of available for sale Agency Securities													Reclassification adjustment for realized gain on sale of available for sale Agency Securities	(9,468)		(4,569)		(138,802)		(1,615)
Reclassification adjustment for credit loss expense on available for sale Agency Securities	—			—			1,012			—			Reclassification adjustment for credit loss expense on available for sale Agency Securities	0		0		1,012		0
Net unrealized gain (loss) on available for sale Agency Securities	7,654			173,015			(30,489		)	357,264			Net unrealized gain (loss) on available for sale Agency Securities	13,002		93,910		(17,486)		451,173
Other comprehensive income (loss)	$	(28,354	)	$	173,059		$	(158,810	)	$	360,217		Other comprehensive income (loss)	$	3,534	$	89,341	$	(155,276)	$	449,558
Comprehensive Income (Loss)	$	23,394		$	(10,191	)	$	(513,721	)	$	62,586		Comprehensive Income (Loss)	$	61,920	$	28,386	$	(451,801)	$	90,972

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)


	Preferred Stock											Common Stock
	7.875% Series B				7.000% 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	0	$	0	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	—	—		—	—		—	—		—		(6,092)		—		(6,092)
Common stock dividends	—	—		—	—		—	—		—		(55,843)		—		(55,843)
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		—	—		129,091		—		—		129,096
Issuance of common stock, net	—	—		—	—		5,767	6		48,880		—		—		48,886
Stock based compensation, net of withholding requirements	—	—		—	—		126	—		3,051				—		3,051
Common stock repurchased, net	—	—		—	—		(40)	0		(777)		—		—		(777)
Net Loss	—	—		—	—		—	—		—		(296,525)		—		(296,525)
Other comprehensive loss	—	—		—	—		—	—		—		—		(155,276)		(155,276)
Balance, September 30, 2020	0	$	0	5,303	$	5	64,730	$	65	$	3,025,274	$	(2,333,272)	$	200,197	$	892,269

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 —
—
—
—
—
—
—
(3,772 ) —
(3,772 )
Common stock dividends —
—
—
—
—
—
—
(36,253 ) —
(36,253 )
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
—
—
129,091
—
—
129,096
Issuance of common stock, net —
—
—
—
5,767
6
48,880
—
—
48,886
Stock based compensation, net of withholding requirements —
—
—
—
85
—
2,023

—
2,023
Common stock repurchased, net —
—
—
—
(40 ) —
(777 ) —
—
(777 )
Net Loss —
—
—
—
—
—
—
(354,911 ) —
(354,911 )
Other comprehensive loss —
—
—
—
—
—
—
—
(158,810 ) (158,810 )
Balance, June 30, 2020 —
$ —
5,303
$ 5
64,689
$ 65
$ 3,024,246
$ (2,369,748 ) $ 196,663
$ 851,231

See financial statement notes (unaudited).

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Nine Months Ended September 30,
	2020		2019
Cash Flows From Operating Activities:
Net Loss	$	(296,525)	$	(358,586)
Adjustments to reconcile net loss to net cash and cash collateral posted to counterparties used in operating activities:
Net amortization of premium on Agency Securities	36,922		35,260
Accretion of net discount on Credit Risk and Non-Agency Securities	(2,849)		(2,266)
Net amortization of Interest-Only Securities	0		1,922
Net amortization of U.S. Treasury Securities	84		(361)
Realized gain on sale of Agency Securities, available for sale	(138,802)		(1,615)
Credit loss expense	1,012		0
Gain on Agency Securities, trading	(20,060)		0
Loss on Credit Risk and Non-Agency Securities	189,555		26,045
Gain on Interest-Only Securities	0		(123)
Gain on U.S. Treasury Securities	(21,771)		(2,024)
Loss on short sale of U.S. Treasury Securities	414		0
Stock based compensation	3,051		2,039
Changes in operating assets and liabilities:
Increase (decrease) in accrued interest receivable	21,836		(14,220)
Increase (decrease) in prepaid and other assets	6,715		(111)
Change in derivatives, at fair value	(44,392)		195,421
Increase (decrease) in accrued interest payable- repurchase agreements	(30,643)		3,736

Increase in accounts payable and other accrued expenses	518		2,570
Net cash and cash collateral posted to counterparties used in operating activities	$	(294,935)	$	(112,313)
Cash Flows From Investing Activities:
Purchases of Agency Securities	(5,317,832)		(7,971,429)
Purchases of Credit Risk and Non-Agency Securities	(237,928)		(10,537)

Purchases of U.S. Treasury Securities	(4,621,776)		(1,685,058)
Principal repayments of Agency Securities	922,148		1,036,135
Principal repayments of Credit Risk and Non-Agency Securities	45,766		29,186
Proceeds from sales of Agency Securities	10,917,211		2,230,377
Proceeds from sales of Credit Risk and Non-Agency Securities	889,057		0
Proceeds from sales of Interest-only Securities	0		18,822
Proceeds from sales of U.S. Treasury Securities	4,643,049		1,786,090
Disbursements on reverse repurchase agreements	(858,156)		0
Receipts from reverse repurchase agreements	858,156		0
Decrease in cash collateral posted by counterparties	(10,858)		(71,903)


Net cash and cash collateral posted to counterparties provided by (used in) investing activities	$	7,228,837	$	(4,638,317)
(Continued)

For the Six Months Ended June 30,
2020 2019
Cash Flows From Operating Activities:
Net Loss $ (354,911 ) $ (297,631 )
Adjustments to reconcile net loss to net cash and cash collateral posted to counterparties used in operating activities:
Net amortization of premium on Agency Securities 23,364
17,470
Accretion of net discount on Credit Risk and Non-Agency Securities (2,529 ) (1,505 )
Net amortization of Interest-Only Securities —
1,923
Net amortization of U.S. Treasury Securities 84
(379 )
Realized (gain) loss on sale of Agency Securities, available for sale (129,333 ) 2,953
Credit loss expense 1,012
—
Gain on Agency Securities, trading (7,911 ) —
Loss on Credit Risk and Non-Agency Securities 182,922
17,203
Gain on Interest-Only Securities —
(123 )
Gain on U.S. Treasury Securities (21,771 ) (2,760 )
Loss on short sale of U.S. Treasury Securities 414
—
Stock based compensation 2,023
1,302
Changes in operating assets and liabilities:
Increase (decrease) in accrued interest receivable 22,030
(20,024 )
Increase (decrease) in prepaid and other assets 6,603
(337 )
Change in derivatives, at fair value (39,645 ) 202,829
Increase (decrease) in accrued interest payable- repurchase agreements (31,256 ) 33,081
Increase in accounts payable and other accrued expenses 977
2,452
Net cash and cash collateral posted to counterparties used in operating activities $ (347,927 ) $ (43,546 )
Cash Flows From Investing Activities:
Purchases of Agency Securities (4,727,162 ) (7,971,429 )
Purchases of Credit Risk and Non-Agency Securities (237,928 ) —
Purchases of U.S. Treasury Securities (4,621,776 ) (1,427,320 )
Principal repayments of Agency Securities 666,156
459,784
Principal repayments of Credit Risk and Non-Agency Securities 43,768
15,646
Proceeds from sales of Agency Securities 10,855,465
1,114,121
Proceeds from sales of Credit Risk and Non-Agency Securities 831,398
—
Proceeds from sales of Interest-only Securities —
18,822
Proceeds from sales of U.S. Treasury Securities 4,643,049
1,529,105
Disbursements on reverse repurchase agreements (858,156 ) —
Receipts from reverse repurchase agreements 858,156
—
Decrease in cash collateral posted by counterparties (6,769 ) (78,512 )
Net cash and cash collateral posted to counterparties provided by (used in) investing activities $ 7,446,201
$ (6,339,783 )
(Continued)

ARMOUR Residential REIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	For the Nine Months Ended September 30,
	2020		2019
Cash Flows From Financing Activities:
Redemption of Series A Preferred stock, net of expenses	0		(54,514)
Redemption of Series B Preferred stock, net of expenses	(209,583)		0
Issuance of Series B Preferred stock, net of expenses	0		19,725
Issuance of Series C Preferred stock, net of expenses	129,096		0
Issuance of common stock, net of expenses	48,886		321,860
Proceeds from repurchase agreements	62,518,438		143,170,110
Principal repayments on repurchase agreements	(69,362,190)		(138,528,667)


Series A Preferred stock dividends paid	0		(2,249)
Series B Preferred stock dividends paid	(1,375)		(9,694)
Series C Preferred stock dividends paid	(6,092)		0
Common stock dividends paid	(55,843)		(94,300)
Common stock repurchased, net	(777)		(16,965)
Net cash and cash collateral posted to counterparties provided by (used in) financing activities	$	(6,939,440)	$	4,805,306
Net Increase (decrease) in cash and cash collateral posted to counterparties	(5,538)		54,676
Cash and cash collateral posted to counterparties - beginning of period	273,166		232,199
Cash and cash collateral posted to counterparties - end of period	$	267,628	$	286,875
Supplemental Disclosure:
Cash paid during the period for interest	$	178,719	342,374
Non-Cash Investing Activities:

Payable for unsettled purchases	$	(518,552)	0
Net unrealized gain (loss) on available for sale Agency Securities	$	(17,486)	451,173
Non-Cash Financing Activities:

Amounts receivable for issuance of Preferred B stock	$	0	753

Cash Flows From Financing Activities:
Redemption of Series B Preferred stock, net of expenses (209,583 ) —
Issuance of Series B Preferred stock, net of expenses —
2,750
Issuance of Series C Preferred stock, net of expenses 129,096
—
Issuance of common stock, net of expenses 48,886
321,892
Proceeds from repurchase agreements 53,582,910
96,704,891
Principal repayments on repurchase agreements (60,699,854 ) (90,445,696 )
Series A Preferred stock dividends paid —
(2,249 )
Series B Preferred stock dividends paid (1,375 ) (6,284 )
Series C Preferred stock dividends paid (3,772 ) —
Common stock dividends paid (36,253 ) (64,012 )
Common stock repurchased, net (777 ) (11,340 )
Net cash and cash collateral posted to counterparties provided by (used in) financing activities $ (7,190,722 ) $ 6,499,952
Net Increase (decrease) in cash and cash collateral posted to counterparties (92,448 ) 116,623
Cash and cash collateral posted to counterparties - beginning of period 273,166
232,199
Cash and cash collateral posted to counterparties - end of period $ 180,718
$ 348,822
Supplemental Disclosure:
Cash paid during the period for interest $ 166,358
187,005
Non-Cash Investing Activities:
Payable for unsettled purchases $ (443,523 ) —
Net unrealized gain (loss) on available for sale Agency Securities $ (30,489 ) 357,264
Non-Cash Financing Activities:
Amounts payable for Series A Preferred stock, called for redemption $ —
(54,514 )
Amounts receivable for issuance of Preferred B stock $ —
604

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 primarily in mortgage backed securities ("MBS"), 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 may 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 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 and ~~six~~nine months ended ~~June~~September 30, 2020 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2020. 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.

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 certain times, contain 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 ~~June~~September 30, 2020 and December 31, 2019.

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 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

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 sales of available for sale 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)~~

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 not listed below were deemed to be either not applicable, 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.



Accounting Standard						Description

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.

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.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

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.

Investments in Securities:

Fair value for 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 ~~June~~September 30, 2020 and December 31, 2019.

June 30, 2020 (Level 1) (Level 2) (Level 3) Balance
Assets at Fair Value:
Agency Securities $ —
$ 5,186,224
$ —
$ 5,186,224
Credit Risk and Non-Agency Securities $ —
$ 65,970
$ —
$ 65,970
Derivatives $ —
$ 10,620
$ —
$ 10,620
Liabilities at Fair Value:
Derivatives $ —
$ 18,198
$ —
$ 18,198

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


September 30, 2020	(Level 1)		(Level 2)		(Level 3)		Balance
Assets at Fair Value:
Agency Securities	$	0	$	5,545,765	$	0	$	5,545,765



Derivatives	$	0	$	10,557	$	0	$	10,557
Liabilities at Fair Value:
Derivatives	$	0	$	13,388	$	0	$	13,388

December 31, 2019	(Level 1)		(Level 2)		(Level 3)		Balance
Assets at Fair Value:
Agency Securities	$	0	$	11,941,766	$	0	$	11,941,766
Credit Risk and Non-Agency Securities	$	0	$	883,601	$	0	$	883,601


Derivatives	$	0	$	24,751	$	0	$	24,751
Liabilities at Fair Value:
Derivatives	$	0	$	71,974	$	0	$	71,974

There were no transfers of assets or liabilities between the levels of the fair value hierarchy during the ~~six~~nine months ended ~~June~~September 30, 2020 or for the year ended December 31, 2019.

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 ~~June~~September 30, 2020 and December 31, 2019.

Note 6 - Investments in Securities

As of ~~June~~September 30, 2020 and December 31, 2019, our securities portfolio consisted of ~~$5,252,194~~$5,545,765 and $12,825,367 of investment securities, at fair value, respectively, and ~~$1,978,196~~$2,075,905 and $1,006,280 of TBA Agency Securities, at fair value, respectively. Our TBA Agency Securities are reported at net carrying value of ~~$10,298~~$1,474 and $(592), at ~~June~~September 30, 2020 and December 31, 2019, 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.

The following table summarizes our investments in securities as of ~~June~~September 30, 2020 and December 31, 2019, excluding TBA Agency Securities (see Note 8 - Derivatives for additional information). We designated Agency MBS purchased in the ~~three months ended June 30,~~second and third quarters of 2020 as “trading securities” for financial reporting purposes, and consequently, fair value changes for these investments are reported in net income. We anticipate continuing this designation for newly acquired Agency MBS positions because it is more representative of our 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 Securities designated as available for sale will continue to be reported in other comprehensive income as required by GAAP.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)


	Available for Sale Securities			Trading Securities
	Agency			Agency			Credit Risk and Non-Agency			Interest-Only			U.S. Treasuries			Totals
September 30, 2020
Balance, December 31, 2019	$	11,941,766		$	0		$	883,601		$	0		$	0		$	12,825,367
Purchases ⁽¹⁾	1,768,688			3,709,017			237,928			0			4,621,776			10,337,409
Proceeds from sales	(10,762,842)			(154,369)			(889,057)			0			(4,643,049)			(16,449,317)

Principal repayments	(751,425)			(170,723)			(45,766)			0			0			(967,914)
Gains (losses)	(16,473)			20,060			(189,555)			0			21,357			(164,611)
Credit loss expense	(1,012)			0			0			0			0			(1,012)
Amortization/accretion	(26,105)			(10,817)			2,849			0			(84)			(34,157)
Balance, September 30, 2020	$	2,152,597		$	3,393,168		$	0		$	0		$	0		$	5,545,765
Percentage of Portfolio	38.82		%	61.18		%	0		%	0		%	0		%	100.00		%

December 31, 2019
Balance, December 31, 2018	$	7,051,954		$	0		$	819,915		$	20,623		$	98,646		$	7,991,138
Purchases ⁽¹⁾	9,130,512			0			138,767			0			1,685,058			10,954,337
Sales	(2,894,339)			0			0			(18,822)			(1,786,090)			(4,699,251)
Principal Repayments	(1,701,406)			0			(53,641)			0			0			(1,755,047)
Gains (losses)	408,954			0			(24,396)			123			2,024			386,705

Amortization/accretion	(53,909)			0			2,956			(1,924)			362			(52,515)
Balance, December 31, 2019	$	11,941,766		$	0		$	883,601		$	0		$	0		$	12,825,367
Percentage of Portfolio	93.11		%				6.89		%	0		%	0		%	100.00		%

(1)Purchases include cash paid during the period, plus payable for investment securities purchased during the period as of period end. At September 30, 2020, we had investment related payables with respect to unsettled purchases of Agency Securities, trading of $518,552 and at December 31, 2019, we had investment related payables with respect to unsettled purchases of Agency Securities, available for sale of $358,712.

Available
for Sale
Securities
Trading Securities
Agency Agency Credit Risk and Non-Agency Interest-Only U.S. Treasuries Totals
June 30, 2020
Balance, December 31, 2019 $ 11,941,766
$ —
$ 883,601
$ —
$ —
$ 12,825,367
Purchases ⁽¹⁾
1,768,688
3,043,333
237,928
—
4,621,776
9,671,725
Proceeds from sales
(10,701,096 ) (154,369 ) (831,398 ) —
(4,643,049 ) (16,329,912 )
Principal repayments (616,654 ) (49,502 ) (43,768 ) —
—
(709,924 )
Gains (losses) (29,477 ) 7,911
(182,922 ) —
21,357
(183,131 )
Credit loss expense (1,012 ) —
—
—
—
(1,012 )
Amortization/accretion (20,268 ) (3,096 ) 2,529
—
(84 ) (20,919 )
Balance, June 30, 2020 $ 2,341,947
$ 2,844,277
$ 65,970
$ —
$ —
$ 5,252,194
Percentage of Portfolio 44.59 % 54.15 % 1.26 % — % — % 100.00 %

December 31, 2019
Balance, December 31, 2018 $ 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 )
Balance, December 31, 2019 $ 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 of period end. At~~ ~~June 30, 2020~~ ~~and~~ ~~December 31, 2019, we had investment related payables with respect to unsettled purchases of Agency Securities, trading of~~ ~~$443,523~~ ~~and Agency Securities, available for sale of~~ ~~$358,712, respectively.~~

Available for Sale Securities:

During three and ~~six~~nine months ended ~~June~~September 30, 2020, we evaluated our available for sale securities to determine if the available sale securities in an unrealized loss position were impaired. ~~It was determined in~~In the first quarter of 2020, we recognized an impairment of $1,012 in our consolidated statements of operations as we had determined that as we may have been required to sell certain securities in the near ~~future, we recognized an impairment of $1,012 in our consolidated statements of operations. No~~future. NaN credit loss expense was required for the second ~~quarter~~or third quarters of 2020. We do not have an allowance for credit losses as all of our available for sale securities consist of Agency MBS.

At ~~June~~September 30, 2019 and December 31, 2019, we evaluated our available for sale securities with unrealized losses to determine whether there was an other than temporary impairment ("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 for the three and ~~six~~nine months ended ~~June~~September 30, 2019 or for the year ended December 31, 2019.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The table below presents the components of the carrying value and the unrealized gain or loss position of our available for sale securities at ~~June~~September 30, 2020 and December 31, 2019. Our available for sale securities had a weighted average coupon of ~~3.4%~~3.3% and 3.8% at ~~June~~September 30, 2020 and December 31, 2019.

Agency Securities Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
June 30, 2020
Total Fannie Mae $ 1,579,419
$ 1,624,933
$ (11 ) $ 174,315
$ 1,799,237
Total Freddie Mac 470,725
489,693
—
22,080
511,773
Total Ginnie Mae 29,969
30,658
(29 ) 308
30,937
Total $ 2,080,113
$ 2,145,284
$ (40 ) $ 196,703
$ 2,341,947

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
September 30, 2020
Total Fannie Mae	$	1,468,314	$	1,510,059	$	(22)	$	181,302	$	1,691,339
Total Freddie Mac	407,397		423,830		0		18,746		442,576
Total Ginnie Mae	18,058		18,511		(12)		183		18,682
Total	$	1,893,769	$	1,952,400	$	(34)	$	200,231	$	2,152,597

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

The following table presents the unrealized losses and estimated fair value of our available for sale securities by length of time that such securities have been in a continuous unrealized loss position at ~~June~~September 30, 2020 and December 31, 2019. All of our 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
Agency Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2020	$	9,383	$	(34)	$	0	$	0	$	9,383	$	(34)
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
June 30, 2020 $ 25,164
$ (40 ) $ —
$ —
$ 25,164
$ (40 )
December 31, 2019 $ 2,136
$ (10 ) $ 43,939
$ (782 ) $ 46,075
$ (792 )

Actual maturities of available for sale securities are generally shorter than stated contractual maturities because actual maturities of 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 available for sale securities at ~~June~~September 30, 2020 and December 31, 2019.


	September 30, 2020						December 31, 2019
Weighted Average Life of Available for Sale Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost
< 1 year	$	45	$	45	$	0	$	0
≥ 1 year and < 3 years	217,345		208,549		22,237		22,254
≥ 3 years and < 5 years	738,231		705,376		6,542,389		6,365,623
≥ 5 years	1,196,976		1,038,430		5,377,140		5,198,416
Total Available for Sale Securities	$	2,152,597	$	1,952,400	$	11,941,766	$	11,586,293

June 30, 2020 December 31, 2019
Weighted Average Life of Available for Sale Securities Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
< 1 year $ 53
$ 53
$ —
$ —
≥ 1 year and < 3 years 175,073
168,758
22,237
22,254
≥ 3 years and < 5 years 925,178
883,968
6,542,389
6,365,623
≥ 5 years 1,241,643
1,092,505
5,377,140
5,198,416
Total Available for Sale Securities $ 2,341,947
$ 2,145,284
$ 11,941,766
$ 11,586,293

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 available for sale securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our 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 available for sale securities at ~~June~~September 30, 2020 and December 31, 2019 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 available for sale securities could be longer or shorter than estimated.

Trading Securities:

The components of the carrying value of our trading securities at ~~June~~September 30, 2020 and December 31, 2019 are presented in the table below. We did not have any Credit Risk and Non-Agency Securities at September 30, 2020. We did not have any U.S. Treasury Securities or Interest-Only Securities at ~~June~~September 30, 2020 and December 31, 2019.


	Principal Amount		Amortized Cost		Gross Unrealized Loss		Gross Unrealized Gain		Fair Value
September 30, 2020
Agency Securities:
Total Fannie Mae	$	2,562,859	$	2,736,811	$	(2,361)	$	18,360	$	2,752,810
Total Freddie Mac	602,722		635,163		(292)		5,487		640,358







Total Trading Securities	$	3,165,581	$	3,371,974	$	(2,653)	$	23,847	$	3,393,168

December 31, 2019
Credit Risk Transfer	$	754,729	$	751,940	$	0	$	52,024	$	803,964
Non-Agency Securities	93,723		72,904		(3)		6,736		79,637
Total Trading Securities	$	848,452	$	824,844	$	(3)	$	58,760	$	883,601

Principal Amount Amortized Cost Gross Unrealized Loss Gross Unrealized Gain Fair Value
June 30, 2020
Agency Securities:
Total Fannie Mae $ 2,151,752
$ 2,296,252
$ (2,345 ) $ 8,648
$ 2,302,555
Total Freddie Mac 510,398
538,979
(145 ) 2,888
541,722
Total Agency Securities $ 2,662,150
$ 2,835,231
$ (2,490 ) $ 11,536
$ 2,844,277
Credit Risk and Non-Agency Securities:
Credit Risk Transfer $ 75,395
$ 70,289
$ (4,319 ) $ —
$ 65,970
Total Trading Securities $ 2,737,545
$ 2,905,520
$ (6,809 ) $ 11,536
$ 2,910,247

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 Trading Securities $ 848,452
$ 824,844
$ (3 ) $ 58,760
$ 883,601

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.

~~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 ~~June~~September 30, 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
September 30, 2020
Agency Securities	$	831,339	$	(2,653)	$	0	$	0	$	831,339	$	(2,653)




December 31, 2019
Credit Risk and Non-Agency Securities	$	362	$	(3)	$	0	$	0	$	362	$	(3)

Unrealized Loss Position For:
< 12 Months ≥ 12 Months Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
June 30, 2020
Agency Securities $ 817,358
$ (2,490 ) $ —
$ —
$ 817,358
$ (2,490 )
Credit Risk and Non-Agency Securities $ 65,970
$ (4,319 ) $ —
$ —
$ 65,970
$ (4,319 )

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following table summarizes the weighted average lives of our trading securities at ~~June~~September 30, 2020 and December 31, 2019.

June 30, 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 567,943
571,872
389,883
369,600
≥ 3 years and < 5 years 1,306,206
1,298,630
407,656
375,030
≥ 5 years 1,036,098
1,035,018
86,062
80,214
Total $ 2,910,247
$ 2,905,520
$ 883,601
$ 824,844


	September 30, 2020						December 31, 2019
Estimated Weighted Average Life of Trading Securities	Fair Value		Amortized Cost		Fair Value		Amortized Cost

≥ 1 year and < 3 years	488,744		488,823		389,883		369,600
≥ 3 years and < 5 years	1,351,241		1,339,604		407,656		375,030
≥ 5 years	1,553,183		1,543,547		86,062		80,214
Total	$	3,393,168	$	3,371,974	$	883,601	$	824,844

We use a third party model to calculate the weighted average lives of our trading securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our 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 trading securities at ~~June~~September 30, 2020 and December 31, 2019 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 trading securities could be longer or shorter than estimated.

Note 7 - Repurchase Agreements

At ~~June~~September 30, 2020, we had active MRAs with 3233 counterparties and had ~~$4,237,603~~$4,510,795 in outstanding borrowings with 1316 of those counterparties. At December 31, 2019, we had $11,354,547 in outstanding borrowings with 25 counterparties.

The following table represents the contractual repricing regarding our repurchase agreements to finance MBS purchases at September 30, 2020 and December 31, 2019. No amounts below are subject to offsetting.


	Balance		Weighted Average Contractual Rate		Weighted Average Maturity in days	Haircut⁽¹⁾
September 30, 2020
Agency Securities
≤ 30 days	$	3,473,523	0.23	%	13	3.25	%
> 30 days to ≤ 60 days	978,808		0.23	%	41	4.02	%

> 60 days	58,464		0.23	%	106	4.51	%
Total or Weighted Average	$	4,510,795	0.23	%	20	3.43	%
















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	%

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

(1)The ~~following table~~Haircut represents the ~~contractual repricing regarding our repurchase agreements to finance MBS purchases at June 30, 2020 and December 31, 2019. No amounts below are subject to offsetting.~~weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

Balance Weighted Average Contractual Rate Weighted Average Maturity in days
Haircut⁽¹⁾
June 30, 2020
Agency Securities
≤ 30 days $ 3,990,312
0.25 % 10 3.37 %
> 30 days to ≤ 60 days 247,291
0.26 % 50 3.55 %
Total or Weighted Average $ 4,237,603
0.25 % 13 3.38 %

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 ~~June~~September 30, 2020 and December 31, 2019, BUCKLER accounted for ~~68.6%~~67.0% and 45.0%, respectively, of our aggregate borrowings and had an amount at risk of ~~10.6%~~10.5% and 14.8%, respectively, of our total stockholders' equity with a weighted average maturity of 914 days and 7 days, respectively, on repurchase agreements (see Note 15 - Related Party Transactions for additional information).

In addition, at ~~June~~September 30, 2020, we had 1 repurchase agreement counterparty that individually accounted for over 5% of our aggregate borrowings. In total, this counterparty accounted for approximately ~~9.6%~~9.0% of our repurchase agreement borrowings outstanding at ~~June~~September 30, 2020. At December 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% of our repurchase agreement borrowings at December 31, 2019.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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 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. During the ~~six~~nine months ended ~~June~~September 30, 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, at fair value on the accompanying consolidated balance sheets at ~~June~~September 30, 2020 and December 31, 2019.


			Gross Amounts Not Offset
Assets	Gross Amounts⁽¹⁾		Financial Instruments		Cash Collateral		Total Net
September 30, 2020
Interest rate swap contracts	$	5,223	$	(9,528)	$	15,942	$	11,637
TBA Agency Securities	5,334		(3,860)		(1,445)		29
Totals	$	10,557	$	(13,388)	$	14,497	$	11,666

December 31, 2019
Interest rate swap contracts	$	23,659	$	(70,290)	$	83,066	$	36,435
TBA Agency Securities	1,092		(1,092)		0		0
Totals	$	24,751	$	(71,382)	$	83,066	$	36,435

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

Gross Amounts Not Offset
Assets
Gross Amounts⁽¹⁾

Financial
Instruments
Cash Collateral Total Net
June 30, 2020
Interest rate swap contracts $ 322
$ (18,198 ) $ 27,460
$ 9,584
TBA Agency Securities 10,298
—
(6,779 ) 3,519
Totals $ 10,620
$ (18,198 ) $ 20,681
$ 13,103

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


			Gross Amounts Not Offset
Liabilities	Gross Amounts⁽¹⁾		Financial Instruments		Cash Collateral		Total Net
September 30, 2020
Interest rate swap contracts	$	(9,528)	$	9,528	$	0	$	0
TBA Agency Securities	(3,860)		3,860		0		0
Totals	$	(13,388)	$	13,388	$	0	$	0

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

Gross Amounts Not Offset
Liabilities
Gross Amounts⁽¹⁾

Financial
Instruments
Cash Collateral Total Net
June 30, 2020
Interest rate swap contracts $ (18,198 ) $ 18,198
$ —
$ —
Totals $ (18,198 ) $ 18,198
$ —
$ —

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

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


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

2120

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 and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019.


		Income (Loss) Recognized
		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Derivatives	Location on consolidated statements of operations	2020		2019		2020		2019
Interest rate swap contracts:
Realized loss	Realized gain (loss) on derivatives	$	0	$	(93,378)	(461,374)		(237,725)
Interest income	Realized gain (loss) on derivatives	1,136		43,021		28,937		154,813
Interest expense	Realized gain (loss) on derivatives	(2,603)		(35,520)		(43,172)		(128,983)
Changes in fair value	Unrealized gain (loss) on derivatives	13,478		10,376		43,030		(205,759)
		$	12,011	(75,501)		$	(432,579)	$	(417,654)








TBA Agency Securities:
Realized gain	Realized gain (loss) on derivatives	22,333		801		80,759		11,697
Changes in fair value	Unrealized gain (loss) on derivatives	(6,612)		(6,531)		3,274		(10,767)
		$	15,721	$	(5,730)	$	84,033	$	930
Totals				$	27,732	$	(81,231)	$	(348,546)	$	(416,724)

Income (Loss) Recognized
For the Three Months Ended June 30, For the Six Months Ended June 30,
Derivatives Location on consolidated statements of operations 2020 2019 2020 2019
Interest rate swap contracts:
Realized loss Realized loss on derivatives $ (199,990 ) $ (104,801 ) (461,374 ) (144,347 )
Interest income Realized loss on derivatives 1,339
58,047
27,801
111,792
Interest expense Realized loss on derivatives (8,335 ) (48,355 ) (40,569 ) (93,463 )
Changes in fair value Unrealized gain (loss) on derivatives 180,938
(106,791 ) 29,552
(216,135 )
$ (26,048 ) (201,900 ) $ (444,590 ) $ (342,153 )
TBA Agency Securities:
Realized gain Realized loss on derivatives 26,419
2,119
58,426
10,896
Changes in fair value Unrealized gain (loss) on derivatives (7,613 ) (513 ) 9,886
(4,236 )
$ 18,806
$ 1,606
$ 68,312
$ 6,660
Totals $ (7,242 ) $ (200,294 ) $ (376,278 ) $ (335,493 )

The following tables present information about our derivatives at ~~June~~September 30, 2020 and December 31, 2019.


Interest Rate Swaps ⁽¹⁾	Notional Amount		Weighted Average Remaining Term (Months)	Weighted Average Rate
September 30, 2020
< 3 years	$	2,230,000	15	0.06	%
≥ 3 years and < 5 years	463,000		48	0.14	%
≥ 5 years and < 7 years	942,000		75	0.28	%
≥ 7 years	1,302,000		113	0.44	%

Total or Weighted Average⁽²⁾	$	4,937,000	55	0.21	%

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.

Interest Rate Swaps ⁽¹⁾
Notional Amount Weighted Average Remaining Term (Months) Weighted Average Rate
June 30, 2020
< 3 years $ 2,605,000
16 0.26 %
≥ 3 years and < 5 years
463,000
51 0.14 %
≥ 5 years and < 7 years 942,000
78 0.28 %
> 7 years 1,102,000
115 0.43 %
Total or Weighted Average⁽²⁾
$ 5,112,000
52 0.29 %

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 %
(2)Of this amount, $2,707,000 notional are Fed Funds based swaps, the last of which matures in 2030 and $2,230,000 notional are SOFR based swaps, the last of which matures in 2023.


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

~~(2)~~

(3)Of this amount, $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.

~~Of this amount,~~ ~~$2,882,000~~ ~~notional are Fed Funds based swaps, the last of which matures in~~ ~~2030~~ ~~and~~ ~~$2,230,000~~ ~~notional are SOFR based swaps, the last of which matures in~~ ~~2023~~.

2221

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)


~~(3)~~	~~Of this amount,~~ ~~$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
September 30, 2020
15 Year Long
1.5%	$	200,000	$	204,410	$	204,641
2.0%	1,000,000		1,035,020		1,037,000

30 Year Long
2.0%	200,000		206,351		206,781
2.5%	600,000		626,438		627,483

Total ⁽¹⁾	$	2,000,000	$	2,072,219	$	2,075,905

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)$1,800,000 and $1,000,000 notional were forward settling at September 30, 2020 and December 31, 2019, respectively.

TBA Agency Securities Notional Amount Cost Basis Fair Value
June 30, 2020
15 Year Long
2.0% $ 500,000
$ 513,488
$ 516,446
2.5% 800,000
834,058
836,250
30 Year Long
2.5% 600,000
620,352
625,500
Total $ 1,900,000
$ 1,967,898
$ 1,978,196

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)~~	~~$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 management agreements with ARMOUR and JAVELIN (see also Note 15, “Related Party Transactions”). The management agreements entitle 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 ~~June~~September 30, 2020 and ~~June~~September 30, 2019, the effective ARMOUR management fee was 1.01% and ~~1.00%~~1.01% based on gross equity raised of $2,937,354 and ~~$2,979,026,~~$2,936,347, respectively. ACM began waiving 40% of its management fee during the second quarter of 2020 and will continue to do so until further notice from ACM. 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 solely on behalf of ARMOUR or JAVELIN other than the various overhead expenses specified in the terms of the management agreements. ACM is further entitled to receive termination fees from ARMOUR and JAVELIN under certain circumstances.

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 ~~June~~September 30, 2020 and December 31, 2019.

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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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. 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 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 ~~June~~September 30, 2020, there were 677 shares available for future issuance under the Plan.

Transactions related to awards for the ~~six~~nine months ended ~~June~~September 30, 2020 are summarized below:


	September 30, 2020
	Number of Awards	Weighted Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period	247	$	24.82
Granted ⁽¹⁾	502	$	17.85
Vested	(153)	$	20.52
Forfeited	(48)	$	23.14
Unvested RSU Awards Outstanding end of period	548	$	19.80

June 30, 2020

Number of
Awards

Weighted
Average Grant Date Fair Value per Award
Unvested RSU Awards Outstanding beginning of period 247
$ 24.82
Granted ⁽¹⁾
502
$ 17.85
Vested (102 ) $ 20.74
Forfeited (48 ) $ 23.14
Unvested RSU Awards Outstanding end of period 599
$ 19.82

(1)During the nine months ended September 30, 2020, we granted 358 RSUs to ACM and 144 RSUs to the Board.


~~(1)~~	~~During the~~ ~~six months endedJune 30, 2020, we granted~~ ~~358~~ ~~RSUs to ACM and~~ ~~144~~ ~~RSUs to the Board.~~

2423

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

At ~~June~~September 30, 2020, there was approximately ~~$11,880~~$10,848 of unvested stock based compensation related to the Awards (based on a weighted average grant date price of ~~$19.82~~$19.80 per share), ~~that~~which we expect to recognize as an expense over the remaining average service period of ~~2.8~~2.6 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 is 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 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.

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		June 30, 2020		September 30, 2020		March 31, 2019		June 30, 2019		September 30, 2019
Balance, beginning of quarter	$	1,436,707	$	786,250	$	851,231	$	1,125,313	$	1,486,553	$	1,376,048
Series A Preferred dividends ($0.171875 per share)	0		0		0		(1,124)		(1,125)		0
Series B Preferred dividends ($0.1640625 per share)	(1,375)		0		0		(3,135)		(3,149)		(3,410)
Series C Preferred dividends ($0.14583 per share)	(1,452)		(2,320)		(2,320)		0		0		0
Common stock dividends ⁽¹⁾	(30,377)		(5,876)		(19,590)		(29,814)		(34,198)		(30,288)
Series A Preferred Stock, called for redemption	0		0		0		0		(54,514)		0
Series B Preferred Stock, called for redemption	(209,583)		0		0		0		0		0
Issuance of Series B Preferred Stock	0		0		0		0		3,354		17,124
Issuance of Series C Preferred Stock	129,221		(125)		0		0		0		0
Issuance of Common stock, net	0		48,886		0		321,892		0		(32)
Stock based compensation, net of withholding requirements	1,001		1,022		1,028		644		658		737
Common Stock repurchased, net	(777)		0		0		0		(11,340)		(5,625)
Net income (loss)	(406,659)		51,748		58,386		(114,381)		(183,250)		(60,955)
Other comprehensive income (loss)	(130,456)		(28,354)		3,534		187,158		173,059		89,341
Balance, end of quarter	$	786,250	$	851,231	$	892,269	$	1,486,553	$	1,376,048	$	1,382,940

(1) See the below table for common stock dividends per share for the nine months ended September 30, 2020. Monthly common stock dividends were $0.19 per share from January 2019 through June 2019, and $0.17 per share from July 2019 through September 2019.

Stockholders' Equity March 31, 2020 June 30, 2020 March 31, 2019 June 30, 2019
Balance, beginning of quarter $ 1,436,707
$ 786,250
$ 1,125,313
$ 1,486,553
Series B Preferred dividends ($0.1640625 per share) (1,375 ) —
(1,124 ) (1,125 )
Series C Preferred dividends ($0.14583 per share)
(1,452 ) (2,320 ) (3,135 ) (3,149 )
Common stock dividends ⁽¹⁾
(30,377 ) (5,876 ) (29,814 ) (34,198 )
Series B Preferred Stock, called for redemption (209,583 ) —
—
(54,514 )
Issuance of Series B Preferred Stock —
—
—
3,354
Issuance of Series C Preferred Stock 129,221
(125 ) —
—
Issuance of Common stock, net —
48,886
321,892
—
Stock based compensation, net of withholding requirements 1,001
1,022
644
658
Common Stock repurchased, net (777 ) —
—
(11,340 )
Net income (loss) (406,659 ) 51,748
(114,381 ) (183,250 )
Other comprehensive income (loss) (130,456 ) (28,354 ) 187,158
173,059
Balance, end of quarter $ 786,250
$ 851,231
$ 1,486,553
$ 1,376,048


~~(1)~~	~~See the below table for common stock dividends per share for the six months ended June 30, 2020. Common stock dividends were $0.19 per share for each month for the six months ended June 30, 2019.~~

Preferred Stock

At ~~June~~September 30, 2020 and December 31, 2019, 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, we filed Articles

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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. Shares designated as Series B Preferred Stock but unissued totaled 9,587 at December 31, 2019. 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 ~~June~~September 30, 2020, a total of 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 B Cumulative Preferred Stock - Called for redemption, (February 27, 2020) “Series B Preferred Stock”

On January 24, 2020, the Company mailed a notice of full redemption (the “Notice”) of all 8,383 issued and outstanding 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 share 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 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, in the aggregate. Shares designated as Series B Preferred Stock but unissued totaled 9,587 at December 31, 2019. At December 31, 2019, 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

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Series C Preferred Stock. On January 28, 2020, the Company completed the sale of 3,450 total shares. Total proceeds were $83,282, net of issuance costs and commissions of $2,968.

On January 29, 2020, the Company entered into an Equity Sales Agreement with B. Riley FBR, Inc. and BUCKLER, as sales agents (individually and collectively, the “Agents’), and ACM, pursuant to which the Company may offer and sell, over a period of time and from time to time, through one of more of the Agents, as the Company’s agents, up to 6,550 of Series C Preferred Stock. The Equity Sales Agreement relates to a proposed “at-the-market” offering. The Company used the net proceeds from the offering as a portion of the funds to redeem 100% of the outstanding Series B Preferred Stock as described above. During the ~~six~~nine months ended ~~June~~September 30, 2020, we sold 1,853 shares under this agreement for proceeds of $45,814, net of issuance costs and commissions of approximately $715.

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

Common Stock

At ~~June~~September 30, 2020 and December 31, 2019, 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 ~~64,689~~64,730 shares of common stock issued and outstanding at ~~June~~September 30, 2020 and 58,877 shares of common stock issued and outstanding at December 31, 2019.

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, 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 ATM Sales agreement, as amended, we may offer and sell over a period of time and from time to time, up to 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. During the ~~six~~nine months ended ~~June~~September 30, 2020, we sold 5,767 shares under this agreement for proceeds of $48,886, net of issuance costs and commissions of approximately $882.

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

Common Stock Repurchased

At ~~June~~September 30, 2020 and December 31, 2019, 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.

2726

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

Equity Capital Raising Activities

The following tables present our equity transactions for the ~~six~~nine months ended ~~June~~September 30, 2020 and for the year ended December 31, 2019.


Transaction Type	Completion Date	Number of Shares	Per Share price ⁽¹⁾		Net Proceeds
September 30, 2020
Preferred C Underwritten Offering	January 28, 2020	3,450	$	24.14	$	83,282
Preferred C ATM Sales Agreement	January 30, 2020 - March 31, 2020	1,853	$	24.72	$	45,814
Common stock ATM Sales Agreement	April 7, 2020 - June 8, 2020	5,767	$	8.48	$	48,886
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

Transaction Type Completion Date Number of Shares
Per Share price ⁽¹⁾
Net Proceeds
June 30, 2020
Preferred C Underwritten Offering January 28, 2020 3,450
$ 24.14
$ 83,282
Preferred C ATM Sales Agreement January 30, 2020 - March 31, 2020 1,853
$ 24.72
$ 45,814
Common stock ATM Sales Agreement April 7, 2020 - June 8, 2020 5,767
$ 8.48
$ 48,886
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~~

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		Record Date	Payment Date	Rate per Series B Preferred Share		Aggregate amount paid to holders of record
January 15, 2020	January 27, 2020	$	0.164063	$	1,375	January 15, 2020	January 27, 2020	$	0.164063	$	1,375

The following table presents our Series C Preferred Stock dividend transactions for the ~~six~~nine months ended ~~June~~September 30, 2020.


Record Date	Payment Date	Rate per Series C Preferred Share		Aggregate amount paid to holders of record
February 15, 2020	February 27, 2020	$	0.14583	$	678.1
March 15, 2020	March 27, 2020	$	0.14583	773.4
April 15, 2020	April 27, 2020	$	0.14583	773.4
May 15, 2020	May 27, 2020	$	0.14583	773.4
June 15, 2020	June 29, 2020	$	0.14583	773.4
July 15, 2020	July 27, 2020	$	0.14583	773.4
August 15, 2020	August 27, 2020	$	0.14583	773.4
September 15, 2020	September 28, 2020	$	0.14583	773.4
Total dividends paid				$	6,092

Record Date Payment Date
Rate per
Series C
Preferred Share

Aggregate
amount paid to
holders of record
February 15, 2020 February 27, 2020 $ 0.14583
$ 678.1
March 15, 2020 March 27, 2020 $ 0.14583
773.4
April 15, 2020 April 27, 2020 $ 0.14583
773.4
May 15, 2020 May 27, 2020 $ 0.14583
773.4
June 15, 2020 June 29, 2020 $ 0.14583
773.4
Total dividends paid $ 3,771.7

2827

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

The following table presents our common stock dividend transactions for the ~~six~~nine months ended ~~June~~September 30, 2020. There were no common stock dividend transactions for April and May 2020.


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


June 15, 2020	June 29, 2020	$	0.09	5,876
July 15, 2020	July 30, 2020	$	0.10	6,531
August 17, 2020	August 28, 2020	$	0.10	6,530
September 15, 2020	September 29, 2020	$	0.10	6,529
Total dividends paid				$	55,843

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
June 15, 2020 June 29, 2020 $ 0.09
5,876
Total dividends paid $ 36,253

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

The following table presents a reconciliation of net income (loss) and the shares used in calculating weighted average basic and diluted earnings per common share for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Net Income (Loss)	$	58,386	$	(60,955)	$	(296,525)	$	(358,586)
Less: Preferred dividends	(2,320)		(3,410)		(7,467)		(11,943)
Net Income (Loss) available (related) to common stockholders	$	56,066	$	(64,365)	$	(303,992)	$	(370,529)

Weighted average common shares outstanding – basic	64,724		59,077		62,458		57,473
Add: Effect of dilutive non-vested awards, assumed vested	548		0		0		0
Weighted average common shares outstanding – diluted	65,272		59,077		62,458		57,473

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Net Income (Loss) $ 51,748
$ (183,250 ) $ (354,911 ) $ (297,631 )
Less: Preferred dividends (2,320 ) (4,274 ) (5,147 ) (8,533 )
Net Income (Loss) available (related) to common stockholders $ 49,428
$ (187,524 ) $ (360,058 ) $ (306,164 )

Weighted average common shares outstanding – basic 63,741
59,654
61,312
56,658
Add: Effect of dilutive non-vested awards, assumed vested 599
—
—
—
Weighted average common shares outstanding – diluted 64,340
59,654
61,312
56,658

For the nine months ended September 30, 2020 and for the three and nine months ended September 30, 2019, 548 and 282, respectively, 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 and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Comprehensive Income (Loss)	$	61,920	$	28,386	$	(451,801)	$	90,972
Less: Preferred dividends	(2,320)		(3,410)		(7,467)		(11,943)
Comprehensive Income (Loss) available (related) to common stockholders	$	59,600	$	24,976	$	(459,268)	$	79,029
Net Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic	$	0.92	$	0.42	$	(7.35)	$	1.38
Diluted	$	0.91	$	0.42	$	(7.35)	$	1.37
Weighted average common shares outstanding:
Basic	64,724		59,077		62,458		57,473
Add: Effect of dilutive non-vested awards, assumed vested	548		282		0		282
Diluted	65,272		59,359		62,458		57,755

For the nine months ended September 30, 2020, 548 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.

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Comprehensive Income (Loss) $ 23,394
$ (10,191 ) $ (513,721 ) $ 62,586
Less: Preferred dividends (2,320 ) (4,274 ) (5,147 ) (8,533 )
Comprehensive Income (Loss) available (related) to common stockholders $ 21,074
$ (14,465 ) $ (518,868 ) $ 54,053
Net Comprehensive Income (Loss) per share available (related) to common stockholders:
Basic $ 0.33
$ (0.24 ) $ (8.46 ) $ 0.95
Diluted $ 0.33
$ (0.24 ) $ (8.46 ) $ 0.95
Weighted average common shares outstanding:

Basic 63,741
59,654
61,312
56,658
Add: Effect of dilutive non-vested awards, assumed vested 599
—
—
305
Diluted 64,340
59,654
61,312
56,963

Note 14 - Income Taxes

The following table reconciles our GAAP net income (loss) to estimated REIT taxable income (loss) for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
GAAP net income (loss)	$	58,386	$	(60,955)	$	(296,525)	$	(358,586)
Book to tax differences:
TRS (income) loss	145		(27)		76		(180)
Premium amortization expense	(103)		0		(183)		0
Agency Securities, trading	(12,149)		0		(20,060)		0
Credit Risk and Non-Agency Securities	6,510		10,051		188,075		25,973
Interest-Only Securities	0		0		0		85
U.S. Treasury Securities	0		736		(21,357)		(2,024)
Changes in interest rate contracts	(29,199)		88,733		334,312		442,554
Credit loss expense	0		0		1,012		0
Gain on Security Sales	(9,468)		(4,569)		(138,802)		(1,615)
Amortization of deferred hedging costs	(45,458)		(20,817)		(106,618)		(49,868)
Series B Cumulative Preferred Stock dividend - Called for redemption	0		0		1,375		0
Other	561		2		1,032		11
Estimated REIT taxable income (loss)	$	(30,775)	$	13,154	$	(57,663)	$	56,350

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
GAAP net income (loss) $ 51,748
$ (183,250 ) $ (354,911 ) $ (297,631 )
Book to tax differences:
TRS (income) loss (132 ) 79
(69 ) (153 )
Premium amortization expense (80 ) —
(80 ) —
Agency Securities, trading (7,911 ) —
(7,911 ) —
Credit Risk and Non-Agency Securities (682 ) 17,194
181,564
15,922
Interest-Only Securities —
(463 ) —
85
U.S. Treasury Securities 414
(3,453 ) (21,357 ) (2,760 )
Changes in interest rate contracts 245
209,985
363,510
353,821
Credit loss expense —
—
1,012
—
(Gain) loss on Security Sales (36,008 ) 44
(129,333 ) 2,953
Amortization of deferred hedging costs (41,287 ) (15,405 ) (61,160 ) (29,051 )
Series B Cumulative Preferred Stock dividend - Called for redemption —
—
1,375
—
Other 467
5
472
9
Estimated REIT taxable income (loss) $ (33,226 )
$ 24,736

$ (26,888 ) $ 43,195

Interest rate contracts are treated as hedging transactions for 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.


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

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

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

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. During the ~~six~~nine months ended ~~June~~September 30, 2020, we recorded $36 of income tax expense attributable to our TRS.

The aggregate tax basis of our assets and liabilities was greater than our total Stockholders’ Equity at ~~June~~September 30, 2020 by approximately ~~$508,230,~~$412,720, or approximately ~~$7.86~~$6.38 per common share (based on the ~~64,689~~64,730 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 ~~$8,196~~$21,910 and ~~$41,400~~$63,310 for the three and ~~six~~nine months ended ~~June~~September 30, 2020 (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). For the three and ~~six~~nine months ended ~~June~~

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

September 30, 2019, total dividend payments to stockholders were ~~$38,472~~$33,698 and ~~$72,545.~~$106,243. Our estimated REIT taxable income (loss) available for distribution as dividends was ~~$(33,226)~~$(30,775) and ~~$24,736~~$13,154 and ~~$(26,888)~~$(57,663) and ~~$43,195~~$56,350 for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, 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.

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 management agreements with ARMOUR and JAVELIN. 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, 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~~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, 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;

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

•Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets and providing administrative and managerial services in connection with our day-to-day operations; and

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

The following table reconciles the fees incurred in accordance with the ARMOUR management agreement for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019. ACM began waiving 40% of its management fee during the second quarter of 2020 and will continue to do so until further notice from ACM.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
ARMOUR management fees	$	7,383	$	7,402	$	22,195	$	22,118
Less management fees waived	(2,953)		0		(5,900)		0
Total Management fee expense	$	4,430	$	7,402	$	16,295	$	22,118

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
ARMOUR management fees $ 7,368
$ 7,472
$ 14,812
$ 14,716
Less management fees waived (2,947 ) —
(2,947 ) —
Total Management fee expense $ 4,421
$ 7,472
$ 11,865
$ 14,716

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. For the three and ~~six~~nine months ended ~~June~~

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

September 30, 2020 and ~~June~~September 30, 2019, we reimbursed ACM ~~$31~~$2 and ~~$148~~$150 and ~~$39~~$12 and ~~$67~~$78 for other expenses incurred on our behalf. In 2013, 2017 and 2020, 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 and January 2020, we elected to grant restricted stock unit awards to the Board. We recognized stock based compensation expense of ~~$98~~$118 and ~~$284~~$402 and ~~$87~~$82 and ~~$184~~$266 for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively.

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 ~~$629~~$633 at ~~June~~September 30, 2020 and $381 at December 31, 2019, 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 ~~six~~three and nine months ended ~~June~~September 30, 2020, we ~~have~~ earned ~~$1,265~~$117 and $1,382 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 2021. See Note 11 - Stockholders' Equity for discussion of equity transactions with BUCKLER.

We previously entered into three subordinated loan agreements with BUCKLER, totaling $105.0 million. On March 18, 2019, these three subordinated loan agreements were consolidated into one loan of $105.0 million, maturing on April 1, 2022. During the ~~three months ended June 30,~~second quarter of 2020, we agreed to extend the maturity of the loan to May 1, 2025. BUCKLER

~~ARMOUR Residential REIT, Inc.~~

~~FINANCIAL STATEMENT NOTES (UNAUDITED)~~

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

may at its option after obtaining regulatory approval repay all or a portion of the principal amount of the loan. 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 and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, the Company earned ~~$29~~$25 and ~~$287~~$312 and ~~$544~~$479 and ~~$1,083~~$1,562 respectively, of interest.

The table below summarizes other transactions with BUCKLER ~~at June~~as of and for the nine months ended September 30, 2020 and as of and for the year ended December 31, 2019.


Transactions with BUCKLER	September 30, 2020		December 31, 2019
Repurchase agreements ⁽¹⁾	$	3,022,941	$	5,107,101
Interest on repurchase agreements	$	36,821	$	120,090
Collateral posted on repurchase agreements	$	3,140,204	$	5,341,487

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

Transactions with BUCKLER June 30, 2020 December 31, 2019
Repurchase agreements ⁽¹⁾
$ 2,906,648
$ 5,107,101
Interest on repurchase agreements $ 35,397
$ 120,090
Collateral posted on repurchase agreements $ 3,020,778
$ 5,341,487


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

Note 16 - Subsequent Events

Coronavirus ("COVID-19") pandemic

ARMOUR Residential REIT, Inc.

FINANCIAL STATEMENT NOTES (UNAUDITED)

(in thousands, except per share)

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' future 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.

Common Stock

A cash dividend of $0.10 per outstanding common share, or ~~$6,531~~$6,530 in the aggregate, will be paid on ~~July 30,~~October 29, 2020 to holders of record on ~~July~~October 15, 2020. We have also declared a cash dividend of $0.10 per outstanding common share payable ~~August 28,~~November 27, 2020 to holders of record on ~~August 17,~~November 16, 2020.

Series C Preferred Stock

A cash dividend of $0.14583 per outstanding share of Series C Preferred Stock, or $773 in the aggregate, will be paid on ~~July~~October 27, 2020 to holders of record on ~~July~~October 15, 2020. We have also declared cash dividends of $0.14583 per outstanding share of Series C Preferred Stock payable ~~August~~November 27, 2020 to holders of record on ~~August~~November 15, 2020 and payable ~~September~~December 28, 2020 to holders of record on ~~September~~December 15, 2020.

~~ACM Management Agreement~~

~~On July 21, 2020, the current expiration date of the base term of the management agreement was extended to June 18, 2027.~~

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 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 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.

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 primarily in MBS which 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"). 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 may 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 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 invest across the spectrum of mortgage investments, from Agency Securities, for which the principal and interest payments are guaranteed by a GSE, to Credit Risk and Non-Agency Securities and non-prime mortgage loans. 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

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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.

~~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

•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:

~~Second~~Third Quarter 2020 Trends

The ~~novel~~ Coronavirus ("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' future 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.

Management’s Discussion and Analysis (continued)

The strong intervention by the Federal Reserve helped stabilize the agency residential and commercial mortgage-backed securities and recover a large amount of the spread widening that took place during the month of March. ARMOUR acted aggressively to mitigate risk, moderate leverage and maximize liquidity and activated its remote work environment protocol to minimize health and operational risks. The Company's remote work environment protocol has allowed our operations to remain fully functional while we continue to work remotely. The Company remains focused on prioritizing liquidity through this period of increased market volatility and financial risks. The Company continues to meet all of its obligations to repurchase agreement counterparties in a timely manner, while prudently managing the risk of its assets and hedges portfolios.

~~ARMOUR Residential REIT, Inc.~~

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

See Item 1A. "Risk Factors" for further discussion of the possible impact of COVID-19 pandemic on our business in our Quarterly Report filed on Form 10–Q for the quarter ended March 31, 2020, filed with the SEC on May 1, 2020.

During the three months ended September 30, 2020, we completed the liquidation of our remaining Credit Risk ~~Transfer securities (CRTs) exhibited extreme volatility in March~~ and ~~April~~Non-Agency Securities that we commenced during the second quarter of 2020, amidst a broad market disruption associated with the COVID-19 pandemic and regulatory uncertainty. As a result, the market for CRT exhibited severely reduced liquidity, limited financing availability, and significantly more expensive and more restrictive terms where financing was offered. Weas we determined that securities that ~~can~~ exhibit these characteristics did not fit with our current investment ~~strategy and liquidated substantially all of our CRT positions during the second quarter of 2020.~~strategy.

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.

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 ~~June~~September 2018 to ~~June~~September 2020.


Meeting Date	Lower Bound		Higher Bound
March 16, 2020	0.00	%	0.25	%
March 3, 2020	1.00	%	1.25	%

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	%

Meeting Date Lower Bound Higher Bound
March 16, 2020 0.00 % 0.25 %
March 3, 2020 1.00 % 1.25 %
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 %

Our borrowings in the repurchase market have historically closely tracked the Federal Funds Rate and LIBOR. Traditionally, a lower Federal Funds Rate has indicated a time of increased net interest margin and higher asset values.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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. SOFR is currently scheduled to replace LIBOR as a reference rate. We are currently assessing the impact on our securities portfolio and will continue to do so until 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 on a monthly average from ~~June~~September 30, 2018 to ~~June~~September 30, 2020.

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 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.

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 ~~six~~nine months ended ~~June~~September 30, 2020 were significantly impacted by the ~~novel~~ Coronavirus outbreak that started in the second week of March 2020. To increase liquidity, we significantly reduced our portfolio of Agency Securities (including TBA Agency Securities) by ~~45%~~41% from December 31, 2019. ~~For~~During the three months ended ~~June~~September 30, 2020, we ~~continued to be effected by the novel Coronavirus outbreak and the results of operations reflect~~completed the liquidation of ~~substantially~~our remaining Credit Risk and Non-Agency Securities and are now focused exclusively on an all ~~of our CRT positions and our move to~~ Agency ~~Securities.~~Securities portfolio. The net income (loss) for the ~~six~~nine months ended ~~June~~September 30, 2020 reflected ~~realized~~ losses on ~~our~~derivatives due to the termination of interest rate ~~swaps due to declines in interest rates in the quarter~~swap contracts and ~~our exit from notional positions as well as fair value~~ losses on ~~our~~ Credit Risk Transfer ~~securities.~~and Non-Agency Securities that were offset by gains on sales of Agency Securities and gains on TBA Agency Securities.

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.

2020 vs. 2019


•	~~Our average securities portfolio, including TBA Agency Securities, decreased~~ ~~29.5%~~ ~~from~~ ~~$12,493,537~~ ~~for the~~ ~~six months endedJune 30, 2019~~ to ~~$8,803,773~~ ~~for the~~ ~~six months endedJune 30, 2020~~.


•	~~Our average securities portfolio yield decreased~~ ~~1.17%~~ ~~and our cost of funds decreased~~ ~~1.40%~~ ~~quarter over quarter.~~


•	~~Net interest income decreased from~~ ~~2019~~ to ~~2020~~ ~~due to a lower average securities portfolio balance. This was partially offset by the increase in our portfolio yield. Our net interest rate spread was~~ ~~1.63%~~ ~~and~~ ~~1.40%~~ at ~~June 30, 2020~~ ~~and~~ ~~June 30, 2019, respectively.~~

•38Our average securities portfolio, including TBA Agency Securities, decreased 36.7% from $12,786,113 for the nine months ended September 30, 2019 to $8,088,346 for the nine months ended September 30, 2020.

~~ARMOUR Residential REIT, Inc.~~•Our average securities portfolio yield decreased 1.35% and our cost of funds decreased 1.99% quarter over quarter.

•Net interest income decreased from 2019 to 2020 due to a lower average securities portfolio balance. This was partially offset by the increase in our portfolio yield. Our net interest rate spread was 1.95% and 1.31% at September 30, 2020 and September 30, 2019, respectively.

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Interest Income:
Agency Securities, net of amortization of premium and fees	$	25,188	$	102,134	$	128,612	$	295,405
Credit Risk and Non-Agency Securities, including discount accretion	518		13,158		17,746		40,134
Interest-Only Securities	—		—		—		596
U.S. Treasury Securities	—		128		469		1,353
BUCKLER Subordinated loan	24		479		312		1,562
Total Interest Income	$	25,730	$	115,899	$	147,139	$	339,050
Interest expense- repurchase agreements	(2,954)		(80,293)		(59,863)		(228,775)
Interest expense- U.S. Treasury Securities sold short	—		—		(32)		—
Net Interest Income	$	22,776	$	35,606	$	87,244	$	110,275

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
September 2020									September 2020	2.21	%	0.26	%	1.95	%	0.26	%
June 2020	2.53	%	0.90	%	1.63	%	0.55	%	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	%	December 2018	3.59	%	1.92	%	1.67	%	2.55	%
September 2018	3.46	%	1.82	%	1.64	%	2.30	%	September 2018	3.46	%	1.82	%	1.64	%	2.30	%
June 2018	3.13	%	1.57	%	1.56	%	2.10	%

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.

Other Income (Loss)

2020 vs. 2019

•Gains (losses) on Agency Securities, available for sale, resulted from sales during the three and nine months ended September 30, 2020 of $61,746 and $10,762,842 compared to $1,116,256 and $2,230,377 during the three and nine months ended September 30, 2019.

•

~~Gains (losses) on Agency Securities,~~

•During the three and nine months ended September 30, 2020, 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 in the first quarter that, as we may have been required to sell certain securities in the near future, we recognized an impairment of $1,012 in our consolidated statements of operations. No credit loss expense was required for the second or third quarters of 2020.

•Gains on Agency Securities, trading, resulted from the change in fair value of the securities as well as losses on sales during the nine months ended September 30, 2020. The change in fair value of the securities was $21,194 for the nine months ended September 30, 2020. For the nine months ended September 30, 2020, we sold $154,369 securities which resulted in a loss of $1,134.

•~~three and six months endedJune 30, 2020~~ of ~~$923,723~~ ~~and~~ ~~$10,701,096~~ ~~compared to~~ ~~$96,725~~ ~~and~~ ~~$1,114,121~~ ~~during the~~ ~~three and six months endedJune 30, 2019~~.

•

~~During~~ ~~three and six months endedJune 30, 2020~~, 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 in the first quarter that, as we may have been required to sell certain securities in the near future, we recognized an impairment of ~~$1,012~~ ~~in our consolidated statements of operations. No credit loss expense was required for the second quarter of 2020.~~


•	~~Gains on Agency Securities, trading, resulted from the change in fair value of the securities as well as sales during the three months ended~~ ~~June 30, 2020. The change in fair value of the securities was~~ ~~$9,045~~ ~~for the three months ended~~ ~~June 30, 2020. For the three months ended~~ ~~June 30, 2020, we sold~~ ~~$154,369~~ ~~securities which resulted in a loss of~~ ~~$1,134~~.

Gain (loss) on Credit Risk and Non-Agency Securities ~~results~~resulted from the ~~sales~~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 September 30, 2020.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

•

~~Gain on Interest-Only Securities in Q1 2019, resulted from~~•Gain on Interest-Only Securities for the nine months ended September 30, 2019, resulted from a change in the fair value of these securities of $682 in Q1 2019 as well as a loss of $(805) in Q2 2019 from the sale of $18,822 Interest-Only Securities. We did not have Interest-Only Securities at September 30, 2020 or September 30, 2019.

•Sales of U.S. Treasury Securities of $3,785,248 resulted in a realized gain of $21,771 for the nine months ended September 30, 2020. Sales of U.S. Treasury Securities of $256,984 and $1,786,090 for the three and nine months ended September 30, 2019 resulted in realized (loss) gain of $(736) and $1,967, respectively. The change in fair value of the securities was $57 for the nine months ended September 30, 2019.

•~~$682~~ ~~as well as the sale of~~ ~~$18,822~~ ~~Interest-Only Securities in Q2 2019, which resulted in a loss of~~ ~~$(805). We did not have Interest-Only Securities at~~ ~~June 30, 2020~~.

•

~~Sales of U.S. Treasury Securities of~~ ~~$3,785,248, resulted in a realized gain of~~ ~~$21,771~~ ~~for the six months ended~~ ~~June 30, 2020. Sales of U.S. Treasury Securities of~~ ~~$1,329,660~~ ~~and~~ ~~$1,529,105~~ ~~for the~~ ~~three and six months endedJune 30, 2019~~ ~~resulted in realized gains of~~ ~~$3,453~~ ~~and~~ ~~$2,703, respectively. The change in fair value of the securities was~~ ~~$57~~ ~~for the six months ended~~ ~~June 30, 2019~~.

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


◦	~~Changes in interest rates resulted in unrealized gains on derivatives for the three and six months ended~~ ~~June 30, 2020~~ ~~compared to unrealized for the three and six months ended~~ ~~June 30, 2019~~.


◦	~~The decrease in our total interest rate swap contracts' aggregate notional balance from~~ ~~$7,975,000~~ at ~~December 31, 2019~~ to ~~$5,112,000~~ at ~~June 30, 2020, resulted in realized losses on interest rate swap terminations for the three and six months ended~~ ~~June 30, 2020~~.


◦	~~The increase in TBA prices and in our total TBA Agency Securities aggregate notional balance from~~ ~~$1,000,000~~ at ~~December 31, 2019~~ to ~~$1,900,000~~ at ~~June 30, 2020~~ ~~resulted in~~ ~~$18,806~~ ~~and~~ ~~$68,312~~ ~~of income for the three and six months ended~~ ~~June 30, 2020~~ ~~compared to the prior periods of~~ ~~$1,606~~ ~~and~~ ~~$6,660~~.

•Interest rate swap contracts' aggregate notional balance decreased from $7,975,000 at December 31, 2019 to $4,937,000 at September 30, 2020.

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Other Income (Loss):
Realized gain (loss) on sale available for sale Agency Securities (reclassified from Other comprehensive income (loss)) 36,008
(44 ) 129,333
(2,953 )
Credit loss expense —
—
(1,012 ) —
Gain on Agency Securities, trading 7,911
—
7,911
—
Gain (loss) on Credit Risk and Non-Agency Securities 190
(17,699 ) (182,922 ) (17,203 )
Gain on Interest-Only Securities —
490
—
123
Gain on U.S. Treasury Securities —
3,453
21,771
2,760
Loss on short sale of U.S. Treasury Securities (414 ) —
(414 ) —
Subtotal $ 43,695
$ (13,800 ) $ (25,333 ) $ (17,273 )
Realized loss on derivatives (180,567 ) (92,990 ) (415,716 ) (115,122 )
Unrealized gain (loss) on derivatives 173,325
(107,304 ) 39,438
(220,371 )
Subtotal $ (7,242 ) $ (200,294 ) $ (376,278 ) $ (335,493 )
Total Other Income (Loss) $ 36,453
$ (214,094 ) $ (401,611 ) $ (352,766 )
•The increase in TBA prices and in our total TBA Agency Securities aggregate notional balance from $1,000,000 at December 31, 2019 to $2,000,000 at September 30, 2020 resulted in $15,721 and $84,033 of income for the three and nine months ended September 30, 2020 compared to the prior period (loss) income of $(5,730) and $930.


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Other Income (Loss):
Realized gain on sale of available for sale Agency Securities (reclassified from Other comprehensive income (loss))	9,468		4,569		138,802		1,615
Credit loss expense	—		—		(1,012)		—
Gain on Agency Securities, trading	12,149		—		20,060		—
Loss on Credit Risk and Non-Agency Securities	(6,633)		(8,842)		(189,555)		(26,045)
Gain on Interest-Only Securities	—		—		—		123
Gain (loss) on U.S. Treasury Securities	—		(736)		21,771		2,024
Loss on short sale of U.S. Treasury Securities	—		—		(414)		—
Subtotal	$	14,984	$	(5,009)	$	(10,348)	$	(22,283)
Realized loss on derivatives	20,866		(85,076)		(394,850)		(200,198)
Unrealized gain (loss) on derivatives	6,866		3,845		46,304		(216,526)
Subtotal	$	27,732	$	(81,231)	$	(348,546)	$	(416,724)
Total Other Income (Loss)	$	42,716	$	(86,240)	$	(358,894)	$	(439,007)

Expenses

The Company is managed by ACM, pursuant to management agreements with ARMOUR and JAVELIN. 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 $2,937,354 at ~~June~~September 30, 2020, compared to ~~$2,979,026~~$2,936,347 at ~~June~~September 30, 2019, respectively. ACM began waiving 40% of its management fee during the second quarter of 2020 and will continue to do so until further notice from ACM. To date, ACM has waived management fees of ~~$2,947.~~

$5,900.

~~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.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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.

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 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 September 30,						For the Nine Months Ended September 30,
	2020		2019		2020		2019
Expenses:
Management fees	7,393		7,418		22,234		22,162
Professional fees	559		922		3,058		2,869
Insurance	183		183		549		531
Compensation	1,387		1,094		4,210		2,877
Other	537		704		724		1,415
Total Expenses	$	10,059	$	10,321	$	30,775	$	29,854
Less management fees waived	(2,953)		—		(5,900)		—
Total Expenses after fees waived	$	7,106	$	10,321	$	24,875	$	29,854

For the Three Months Ended June 30, For the Six Months Ended June 30,
2020 2019 2020 2019
Expenses:
Management fees 7,382
7,485
14,840
14,743
Professional fees 1,654
912
2,499
1,947
Insurance 183
183
366
348
Compensation 1,357
995
2,822
1,782
Other 205
437
187
713
Total Expenses $ 10,781
$ 10,012
$ 20,714
$ 19,533
Less management fees waived (2,947 ) —
(2,947 ) —
Total Expenses after fees waived $ 7,834
$ 10,012
$ 17,767
$ 19,533

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).

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

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).

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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

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~~

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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 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.

We Beginning in the second quarter of 2020, we designated Agency MBS purchased ~~in the three months ended June 30, 2020~~ 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 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

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.

Credit Risk and Non-Agency Securities

We did not have any Credit Risk and Non-Agency Securities at September 30, 2020. 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~~those assets. If actual prepayment speeds, defaults, delinquencies and severities ~~are different~~differ 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~~Each investment is evaluated based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

The table below summarizes the credit ratings of our Credit Risk and Non-Agency ~~Securities.~~Securities at December 31, 2019.

Investment Grade Non-Investment Grade Non-Rated Total
June 30, 2020 $ 65,970
$ —
$ —
$ 65,970
December 31, 2019 $ 570,332
$ 233,418
$ 79,851
$ 883,601


	Investment Grade		Non-Investment Grade		Non-Rated		Total

December 31, 2019	$	570,332	$	233,418	$	79,851	$	883,601

~~ARMOUR Residential REIT, Inc.~~

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

The table below summarizes certain characteristics of our investments in securities at ~~June~~September 30, 2020 and December 31, 2019. ~~We did not have any Interest-Only Securities or U.S. Treasury Securities~~


Asset Type	Principal Amount		Fair Value		Weighted Average Coupon		CPR ⁽¹⁾		Weighted Average Months to Maturity	Percent of Total
September 30, 2020
Agency Securities:
Total Fannie Mae	$	4,031,172	$	4,444,149	3.3	%	11.1	%	259	58.3	%
Total Freddie Mac	1,010,119		1,082,935		3.4	%	23.4	%	266	14.2
Total Ginnie Mae	18,058		18,681		3.1	%	17.6	%	224	0.2
Total Agency Securities	$	5,059,349	$	5,545,765	3.3	%	13.6	%	260	72.8	%
TBA Agency Securities:
15 Year Long⁽²⁾	1,200,000		1,241,641		1.9	%	n/a		n/a	16.3
30 Year Long ⁽²⁾	800,000		834,264		2.4	%	n/a		n/a	10.9
Total TBA Agency Securities	$	2,000,000	$	2,075,905	2.1	%	n/a		n/a	27.2	%






Total Investments in Securities	$	7,059,349	$	7,621,670						100.0	%

December 31, 2019
Agency Securities:
Total Fannie Mae	$	8,779,331	$	9,269,786	3.7	%	14.4	%	239	67.0	%
Total Freddie Mac	2,522,870		2,648,795		3.9	%	20.7	%	329	19.2
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	86.3	%
TBA Agency Securities:
15 Year Long ⁽²⁾	500,000		511,885		3.0	%	n/a		n/a	3.7	%
30 Year Long ⁽²⁾	500,000		494,395		2.5	%	n/a		n/a	3.6
Total TBA Agency Securities	$	1,000,000	$	1,006,280	2.8	%	n/a		n/a	7.3	%
Credit Risk and Non-Agency Securities:
Credit Risk Transfer	$	754,729	$	803,964	5.9	%	n/a		114	5.8	%
Non-Agency Securities	93,723		79,637		5.2	%	n/a		226	0.6
Total for Credit Risk and Non-Agency Securities	$	848,452	$	883,601	5.8	%	n/a		124	6.4	%
Total Investments in Securities	$	13,173,157	$	13,831,647						100.0	%

(1)Weighted average CPR during the quarter for the securities owned at ~~June~~September 30, 2020 orand December 31, 2019.

(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 $1,474 and $(592), at September 30, 2020 and December 31, 2019, respectively, and were reported in Derivatives, at fair value on our consolidated balance sheets (see Note 8 to the consolidated financial statements).

Asset Type Principal Amount Fair Value Weighted Average Coupon
CPR ⁽¹⁾
Weighted Average Months to Maturity Percent of Total
June 30, 2020
Agency Securities:
Total Fannie Mae $ 3,731,171
$ 4,101,792
3.4 % 9.1 % 249 56.7 %
Total Freddie Mac 981,123
1,053,495
3.6 % 21.6 % 261 14.6
Total Ginnie Mae 29,969
30,937
3.5 % 10.1 % 213 0.4
Total Agency Securities $ 4,742,263
$ 5,186,224
3.4 % 11.7 % 251 71.7 %
TBA Agency Securities:
15 Year Long⁽²⁾
1,300,000
1,352,696
2.3 % n/a
n/a 18.7
30 Year Long ⁽²⁾
600,000
625,500
2.5 % n/a
n/a 8.7
Total TBA Agency Securities $ 1,900,000
$ 1,978,196
2.4 % n/a
n/a 27.4 %
Credit Risk and Non-Agency Securities:
Credit Risk Transfer $ 75,395
$ 65,970
3.0 % n/a
47 0.9 %
Total Investments in Securities $ 6,717,658
$ 7,230,390
100.0 %

December 31, 2019
Agency Securities:
Total Fannie Mae $ 8,779,331
$ 9,269,786
3.7 % 14.4 % 239 67.0 %
Total Freddie Mac 2,522,870
2,648,795
3.9 % 20.7 % 329 19.2
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 86.3 %
TBA Agency Securities:
15 Year Long ⁽²⁾
500,000
511,885
3.0 % n/a
n/a 3.7 %
30 Year Long ⁽²⁾
500,000
494,395
2.5 % n/a
n/a 3.6 %
Total TBA Agency Securities $ 1,000,000
$ 1,006,280
2.8 % n/a
n/a 7.3 %
Credit Risk and Non-Agency Securities:
Credit Risk Transfer $ 754,729
$ 803,964
5.9 % n/a
114 5.8 %
Non-Agency Securities 93,723
79,637
5.2 % n/a
226 0.6
Total for Credit Risk and Non-Agency Securities $ 848,452
$ 883,601
5.8 % n/a
124 6.4 %
Total Investments in Securities $ 13,173,157
$ 13,831,647
100.0 %


~~(1)~~	~~Weighted average CPR during the quarter for the securities owned at~~ ~~June 30, 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 values of~~ ~~$10,298~~ ~~and~~ ~~$(592), at~~ ~~June 30, 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).~~

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, 1316 of which had open repurchase agreements with us at ~~June~~September 30, 2020 and 25 of which had open repurchases agreements with us at December 31, 2019. We had outstanding balances under our repurchase agreements at ~~June~~September 30, 2020 and December 31, 2019 of ~~$4,237,603~~$4,510,795 and $11,354,547, 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 ~~June~~September 30, 2020, the average haircut percentage was ~~3.38%~~3.43% compared to 5.16% at December 31, 2019. The change in the average haircut percentage is a reflection of the decrease in our securities portfolio and the ~~level of financing~~disposition of our Credit Risk and Non-Agency Securities which ~~have~~had higher haircut levels than our Agency Securities.

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.

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 ~~June~~September 30, 2020 and December 31, 2019, we had derivatives with a net fair value of ~~$(7,578)~~$(2,831) and $(47,223), respectively. At ~~June~~September 30, 2020 and December 31, 2019, we had interest rate swap contracts with an aggregate ~~notional balance~~

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

notional balance of ~~$5,112,000~~$4,937,000 and $7,975,000, respectively. Counterparty risk of derivatives are 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 ~~$1,900,000~~$2,000,000 and $1,000,000 at ~~June~~September 30, 2020 and December 31, 2019, 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 difficult. We recognized net ~~losses~~gains (losses) of ~~$(7,242)~~$27,732 and ~~$(376,278)~~$(348,546) and ~~$(200,294)~~$(81,231) and ~~$(335,493)~~$(416,724), for the three and ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, 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 ~~June~~September 30, 2020:


	Payments Due By Period
Obligations	Total		< 1 Year		≥ 1 and ≤ 3 Years		> 3 and ≤ 5 Years		> 5 Years
Repurchase agreements ⁽¹⁾	$	4,510,795	$	4,510,795	$	—	$	—	$	—
Interest expense on repurchase agreements	1,844		1,844		—		—		—
Related Party Fees ⁽²⁾	206,710		29,530		59,060		59,060		59,060
Board of Directors fees ⁽³⁾	9,457		1,351		2,702		2,702		2,702
Total	$	4,728,806	$	4,543,520	$	61,762	$	61,762	$	61,762

Payments Due By Period
Obligations Total < 1 Year ≥ 1 and ≤ 3 Years > 3 and ≤ 5 Years > 5 Years
Repurchase agreements ⁽¹⁾
$ 4,237,603
$ 4,237,603
$ —
$ —
$ —
Interest expense on repurchase
agreements
1,027
1,027
—
—
—
Related Party Fees ⁽²⁾
206,710
29,530
59,060
59,060
59,060
Board of Directors fees ⁽³⁾
9,457
1,351
2,702
2,702
2,702
Total $ 4,454,797
$ 4,269,511
$ 61,762
$ 61,762
$ 61,762
(1)At September 30, 2020, BUCKLER accounted for 67.0% of our aggregate borrowings and had an amount at risk of 10.5% of our total stockholders' equity with a weighted average maturity of 14 days on repurchase agreements (refer to Note 7 to the consolidated financial statements).

~~(1)~~

At ~~June 30, 2020, BUCKLER accounted for~~ ~~68.6%~~ ~~of our aggregate borrowings and had an amount at risk of~~ ~~10.6%~~ ~~of our total stockholders' equity with a weighted average maturity of~~ ~~9 days~~ ~~on repurchase agreements (refer to~~ ~~Note 7~~(2)Represents fees to be paid to ACM under the terms of the management agreements, excluding the management fee waived (refer to Note 9 and Note 15 to the consolidated financial statements).


~~(2)~~	~~Represents fees to be paid to ACM under the terms of the management agreements, excluding the management fee waived, (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.~~

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

We had contractual commitments under derivatives at ~~June~~September 30, 2020. We had interest rate swap contracts with an aggregate notional balance of ~~$5,112,000,~~$4,937,000, a weighted average swap rate of ~~0.29%~~0.21% and a weighted average term of 5255 months at ~~June~~September 30, 2020. We also ~~entered into $1,900,000~~had $2,000,000 notional of TBA Agency Securities ~~during the three months ended June~~at September 30, 2020.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

Liquidity and Capital Resources

At ~~June~~September 30, 2020, our liquidity totaled ~~$540,458,~~$570,796, consisting of ~~$153,258~~$250,942 of cash plus ~~$387,200~~$319,854 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 sources of funds may include proceeds from equity and debt offerings and asset sales (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 ~~June~~September 30, 2020 and December 31, 2019.

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 ~~June~~September 30, 2020 and December 31, 2019, we financed our securities portfolio with ~~$4,237,603~~$4,510,795 and $11,354,547 of borrowings under repurchase agreements. Our leverage ratios at ~~June~~September 30, 2020 and December 31, 2019, were ~~4.98:~~5.06:1 and 7.90:1, respectively. Our leverage ratio is calculated by dividing the amount outstanding under our repurchase agreements at period end by total stockholders’ equity at period end.

During the ~~six~~nine months ended ~~June~~September 30, 2020, we purchased ~~$10,030,389~~$10,696,088 of securities using proceeds from repurchase agreements and principal repayments. During the ~~six~~nine months ended ~~June~~September 30, 2020, we received cash of ~~$709,924~~$967,914 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of ~~$7,116,944~~$6,843,752 for the ~~six~~nine months ended ~~June~~September 30, 2020 and made cash interest payments of approximately ~~$166,358~~$178,719 on our liabilities for the ~~six~~nine months ended ~~June~~September 30, 2020.

During the ~~six~~nine months ended ~~June~~September 30, 2019, we purchased ~~$9,398,749~~$9,667,024 of securities using proceeds from repurchase agreements and principal repayments. During the ~~six~~nine months ended ~~June~~September 30, 2019, we received cash of ~~$475,430~~$1,065,321 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of ~~$6,259,195~~$4,641,443 for the ~~six~~nine months ended ~~June~~September 30, 2019 and made cash interest payments of approximately ~~$187,005~~$342,374 on our liabilities for the ~~six~~nine months ended ~~June~~September 30, 2019.

Cash and cash collateral posted to counterparties used in operating activities was ~~$(347,927)~~$(294,935) and ~~$(43,546)~~$(112,313), respectively, for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019. The decrease in cash and cash collateral posted to counterparties related to operating activities was primarily due to the liquidation of our ~~exit from notional interest rate swap positions.~~Credit Risk and Non-Agency Securities as we determined that securities that exhibit these characteristics did not fit with our current investment strategy. Our average securities portfolio was ~~$8,803,773~~$8,088,346 and ~~$12,493,537~~$12,786,113 for the ~~six~~nine months ended ~~June~~September 30, 2020 and ~~June~~September 30, 2019, respectively. During the ~~six~~nine months ended ~~June~~September 30, 2020, we sold 5,303 of Series C Preferred stock ~~under our Preferred C Underwritten Offering and our Preferred C ATM Sales Agreement,~~ for an increase in equity of $129,096. During the ~~six~~nine months ended ~~June~~September 30, 2020 we also fully redeemed all 8,383 issued and outstanding shares of our Series B Preferred Stock ($25.00 per share, $209,583

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

in the aggregate liquidation preference). During the ~~six~~nine months ended ~~June~~September 30, 2020 we sold 5,767 shares ~~under~~

~~ARMOUR Residential REIT, Inc.~~

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

of our ~~Common~~common stock, ~~ATM Sales Agreement,~~ for an increase in equity of $48,886 (see Note 11 to the consolidated financial statements).

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 Note 7 and Note 15 to the consolidated financial statements for additional information.

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. During the ~~six~~nine months ended ~~June~~September 30, 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 ~~June~~September 30, 2020 and December 31, 2019, we financed our securities portfolio with ~~$4,237,603~~$4,510,795 and $11,354,547 of borrowings under repurchase agreements. Our leverage ratios at ~~June~~September 30, 2020 and December 31, 2019, were ~~4.98:~~5.06:1 and 7.90:1, respectively. Our leverage ratio is calculated by dividing the amount outstanding under our repurchase agreements at period end by total stockholders’ equity at period end.

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 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.

Stockholders’ Equity

See Note 11 to the consolidated financial statements.

Off-Balance Sheet Arrangements

At ~~June~~September 30, 2020 and December 31, 2019, 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 ~~June~~September 30, 2020 and December 31, 2019, 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.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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 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 from third party pricing services and/or dealer quotes.

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.

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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;

•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.

•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;

ARMOUR Residential REIT, Inc.

Management’s Discussion and Analysis (continued)

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

•53

~~ARMOUR Residential REIT, Inc.~~

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

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

•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 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.

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.
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.
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.

ARMOUR Residential REIT, Inc.

GLOSSARY OF TERMS (continued)


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 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 ~~June~~September 30, 2020 and December 31, 2019. 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
September 30, 2020
1.00%	25.53%	(1.43)%	(12.20)%
0.50%	11.62%	(0.55)%	(4.70)%
(0.50)%	2.15%	0.24%	2.10%
(1.00)%	(0.46)%	0.22%	1.90%

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)%

Percentage Change in Projected
Change in Interest Rates Net Interest Income Portfolio Including Derivatives Shareholder's Equity
June 30, 2020
1.00% 19.49% (0.87)% (7.41)%
0.50% 9.53% (0.26)% (2.20)%
(0.50)% 2.28% 0.02% 0.20%
(1.00)% 0.04% (0.13)% (1.10)%

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)%

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 ~~June~~September 30, 2020 and December 31, 2019. 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.

ARMOUR Residential REIT, Inc.

Market Risk Disclosures (continued)


	September 30, 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	(1.18)%	(10.10)%	(1.21)%	(11.64)%
+10 BPS	(0.47)%	(4.04)%	(0.48)%	(4.65)%
-10 BPS	0.47%	4.04%	0.48%	4.65%
-25 BPS	1.18%	10.10%	1.21%	11.64%

June 30, 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 (1.12)% (9.51)% (1.21)% (11.64)%
+10 BPS (0.45)% (3.81)% (0.48)% (4.65)%
-10 BPS 0.45% 3.81% 0.48% 4.65%
-25 BPS 1.12% 9.51% 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+.

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. 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 ~~June~~September 30, 2020, ~~100.0% of our~~we did not own any Credit Risk and Non-Agency ~~Securities were assigned an investment grade rating and 0.0%, were assigned below an investment grade rating, or were not rated.~~Securities. 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.

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 ~~June~~September 30, 2020. Based on their participation in that evaluation, our Co-CEOs and CFO concluded that our disclosure controls and procedures were effective as of ~~June~~September 30, 2020 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 ~~June~~September 30, 2020. 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, filed with the SEC on February 19, 2020, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 1, 2020.

Item 1A. Risk Factors

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, filed with the SEC on February 19, 2020, except as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 1, 2020.

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

None.

Item 3. Defaults Upon Senior Securities

None.

~~Item~~IItem 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

On July 21, 2020, ARMOUR Residential REIT, Inc. (“ARMOUR”) and ARMOUR Capital Management LP, the external manager of ARMOUR (“ACM”), further amended and restated the management agreement between ARMOUR and ACM (as further amended and restated, the “Seventh Amended and Restated Management Agreement”) to extend the base term of the management agreement by three (3) additional years from June 18, 2024, the current expiration date of the base term of the management agreement, to June 18, 2027. The termination and extension procedures and all other terms in the management agreement remain unchanged. Such Seventh Amended and Restated Management Agreement replaces in its entirety the existing Sixth Amended and Restated Management Agreement, dated and effective as of November 20, 2017.None.

A copy of the Seventh Amended and Restated Management Agreement is attached to this quarterly report on Form 10-Q as exhibit 10.1 and is incorporated herein by reference. The foregoing description of certain material terms of the Seventh Amended and Restated Management Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to such exhibit.

ARMOUR Residential REIT, Inc.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number

Description

10.1

Seventh Amended and Restated Management Agreement, dated and effective as of July 21, 2020, by and between ARMOUR Residential REIT, Inc. and ARMOUR Capital Management LP ~~(1)~~(Incorporated by reference to Exhibit 10.1 to ARMOUR's Quarterly Report on Form 10-Q filed with the SEC on July 22, 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.



~~July 22,~~October 21, 2020			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			33
Item 3. Quantitative and Qualitative Disclosures about Market Risk			56
Item 4. Controls and Procedures			59
PART II. Other Information			60
Item 1. Legal Proceedings			60
Item IA. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			60
Item 3. Defaults Upon Senior Securities			60
Item 4. Mine Safety Disclosures			60
Item 5. Other Information			60
Item 6. Exhibits			61
Signatures			62



Cash Flows From Financing Activities:
Redemption of Series B Preferred stock, net of expenses	(209,583		)	—
Issuance of Series B Preferred stock, net of expenses	—			2,750
Issuance of Series C Preferred stock, net of expenses	129,096			—
Issuance of common stock, net of expenses	48,886			321,892
Proceeds from repurchase agreements	53,582,910			96,704,891
Principal repayments on repurchase agreements	(60,699,854		)	(90,445,696		)
Series A Preferred stock dividends paid	—			(2,249		)
Series B Preferred stock dividends paid	(1,375		)	(6,284		)
Series C Preferred stock dividends paid	(3,772		)	—
Common stock dividends paid	(36,253		)	(64,012		)
Common stock repurchased, net	(777		)	(11,340		)
Net cash and cash collateral posted to counterparties provided by (used in) financing activities	$	(7,190,722	)	$	6,499,952
Net Increase (decrease) in cash and cash collateral posted to counterparties	(92,448		)	116,623
Cash and cash collateral posted to counterparties - beginning of period	273,166			232,199
Cash and cash collateral posted to counterparties - end of period	$	180,718		$	348,822
Supplemental Disclosure:
Cash paid during the period for interest	$	166,358		187,005
Non-Cash Investing Activities:
Payable for unsettled purchases	$	(443,523	)	—
Net unrealized gain (loss) on available for sale Agency Securities	$	(30,489	)	357,264
Non-Cash Financing Activities:
Amounts payable for Series A Preferred stock, called for redemption	$	—		(54,514		)
Amounts receivable for issuance of Preferred B stock	$	—		604