ARMOUR RESIDENTIAL REIT, INC. References to "we," "us," "our," or the "Company" are toARMOUR Residential REIT, Inc. ("ARMOUR") and its subsidiaries. References to "ACM" are toARMOUR Capital Management LP , aDelaware limited partnership. ARMOUR owns a 10% equity interest inBUCKLER Securities LLC ("BUCKLER"), aDelaware limited liability company and aFINRA -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 aMaryland corporation formed in 2008 and managed by ACM, an investment advisor registered with theSEC (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 aU.S. GSE, such as Fannie Mae, Freddie Mac, or a government agency such asGinnie Mae (collectively, "Agency Securities "). OurAgency 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 inInterest-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, fromAgency Securities , for which the principal and interest payments are guaranteed by a GSE, toCredit 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 [[Image Removed:
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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.
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:
Third Quarter 2020 Trends
The Coronavirus ("COVID-19") pandemic 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.
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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.
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 and Non-Agency Securities that we commenced during
the second quarter of 2020, as we determined that securities that exhibit these
characteristics did not fit with our current investment strategy.
Developments at Fannie Mae and Freddie Mac
The payments we receive on theAgency 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 theU.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 forAgency Securities in the long term. Accordingly, if the GSEs defaulted on their guaranteed obligations, suffered losses or ceased to exist, the value of ourAgency 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 andFreddie Mac Agency Securities . The foregoing could materially adversely affect the pricing, supply, liquidity and value of theAgency 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 fromSeptember 2018 toSeptember 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 %
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.
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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.
The following graph shows 30-day LIBOR as compared to the Effective Federal
Funds Rate on a monthly average from
[[Image Removed: arr-20200930_g2.jpg]]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 netTBA 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 ourTBA Agency Securities short positions to perform well compared to our related mortgage securities, there can be no assurance as to their relative performance. [[Image Removed:
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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:
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Our results for the nine months ended September 30, 2020 were significantly
impacted by the 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 41% from December 31, 2019 .
During the three months ended September 30, 2020 , we completed the liquidation
of our remaining Credit Risk and Non-Agency Securities and are now focused
exclusively on an all Agency Securities portfolio. The net income (loss) for the
nine months ended September 30, 2020 reflected losses on derivatives due to the
termination of interest rate swap contracts and losses on Credit Risk Transfer
and Non-Agency Securities that were offset by gains on sales of Agency
Securities and gains on TBA Agency Securities .
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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, includingTBA Agency Securities , decreased 36.7% from$12,786,113 for the nine months endedSeptember 30, 2019 to$8,088,346 for the nine months endedSeptember 30, 2020 . •Our average securities portfolio yield decreased 1.35% and our cost of funds decreased 1.99% quarter over quarter. •Net interest income decreased from 2019 to 2020 due to a lower average securities portfolio balance. This was partially offset by the increase in our portfolio yield. Our net interest rate spread was 1.95% and 1.31% atSeptember 30, 2020 andSeptember 30, 2019 , respectively. For the Three Months Ended For the Nine Months September 30, Ended September 30, 2020 2019 2020 2019 Interest Income:Agency Securities , net of amortization of premium and fees$ 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
(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:
Interest Expense on
Asset Yield Cost of Funds Net Interest Margin Repurchase Agreements
September 2020 2.21 % 0.26 % 1.95 % 0.26 %
June 2020 2.53 % 0.90 % 1.63 % 0.55 %
March 2020 3.18 % 1.95 % 1.23 % 1.94 %
December 2019 3.63 % 2.14 % 1.49 % 2.14 %
September 2019 3.56 % 2.25 % 1.31 % 2.55 %
June 2019 3.70 % 2.30 % 1.40 % 2.69 %
March 2019 3.65 % 2.03 % 1.62 % 2.71 %
December 2018 3.59 % 1.92 % 1.67 % 2.55 %
September 2018 3.46 % 1.82 % 1.64 % 2.30 %
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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
[[Image Removed: arr-20200930_g4.jpg]]Other Income (Loss)
2020 vs. 2019 •Gains (losses) onAgency Securities , available for sale, resulted from sales during the three and nine months endedSeptember 30, 2020 of$61,746 and$10,762,842 compared to$1,116,256 and$2,230,377 during the three and nine months endedSeptember 30, 2019 . •During the three and nine months endedSeptember 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 onAgency Securities , trading, resulted from the change in fair value of the securities as well as losses on sales during the nine months endedSeptember 30, 2020 . The change in fair value of the securities was$21,194 for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2020 , we sold$154,369 securities which resulted in a loss of$1,134 . •Gain (loss) onCredit Risk and Non-Agency Securities resulted from the sale of securities as well as the change in fair value of the securities. We did not have anyCredit Risk and Non-Agency Securities atSeptember 30, 2020 . [[Image Removed:
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ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
•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 .
•Gain (losses) on Derivatives resulted from a combination of the following:
•Interest rate swap contracts' aggregate notional balance decreased from
$7,975,000 at December 31, 2019 to $4,937,000 at September 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 $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 For the Nine Months
September 30, 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
20,866 (85,076) (394,850) (200,198)
Unrealized gain (loss) on derivatives 6,866 3,845 46,304 (216,526)
Subtotal $ 27,732 $ 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 atSeptember 30, 2020 , compared to$2,936,347 atSeptember 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$5,900 . 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. [[Image Removed:
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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 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.
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 For the Nine Months
September 30, 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
(2,953) - (5,900) -
Total Expenses after fees waived $ 7,106 $ 10,321 $ 24,875 $ 29,854
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
Our securities portfolio consists primarily ofAgency Securities backed by fixed rate home loans. From time to time, a portion of ourAgency 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. OurTBA 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). [[Image Removed:
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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.
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[[Image Removed: arr-20200930_g6.jpg]]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 purchaseAgency Securities at premium prices. The premium price paid over par value on those assets [[Image Removed:
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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.
Beginning in the second quarter of 2020, we designated Agency MBS purchased as
"trading securities" for financial reporting purposes, and consequently, fair
value changes for these investments will be reported in net income. We
anticipate continuing this designation for newly acquired Agency MBS positions
because it is more representative of our 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.
We account forTBA 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") ofAgency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specificAgency Securities delivered pursuant to the contract upon the settlement date, published each month by theSecurities Industry and Financial Markets Association , are not known at the time of the transaction. We estimate the fair value ofTBA Agency Securities based on similar methods used to value ourAgency 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 inAgency Securities .
We did not have anyCredit Risk and Non-Agency Securities atSeptember 30, 2020 . From time to time, we may purchaseCredit 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 those assets. If actual prepayment speeds, defaults, delinquencies and severities differ from our expectations, actual yields could be higher or lower.Credit Risk and Non-Agency Securities are subject to risk of loss with regard to principal and interest payments. 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. [[Image Removed:
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ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
The table below summarizes the credit ratings of our
Investment Grade Non-Investment Grade Non-Rated Total
December 31, 2019 $ 570,332 $ 233,418 $ 79,851 $ 883,601 The table below summarizes certain characteristics of our investments in
securities at
Weighted
Weighted Average Months Percent of
Asset Type Principal Amount Fair Value Average Coupon CPR (1) to Maturity 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
100.0 %
(1)Weighted average CPR during the quarter for the securities owned at September
30, 2020 and 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).
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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, 16 of which had open repurchase agreements with us atSeptember 30, 2020 and 25 of which had open repurchases agreements with us atDecember 31, 2019 . We had outstanding balances under our repurchase agreements atSeptember 30, 2020 andDecember 31, 2019 of$4,510,795 and$11,354,547 , respectively, consistent with the size of our securities portfolio. Our repurchase agreements require excess collateral, known as a "haircut." AtSeptember 30, 2020 , the average haircut percentage was 3.43% compared to 5.16% atDecember 31, 2019 . The change in the average haircut percentage is a reflection of the decrease in our securities portfolio and the disposition of ourCredit Risk and Non-Agency Securities which had higher haircut levels than ourAgency 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-termU.S. Treasury Securities compared toAgency 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. [[Image Removed:
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ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
The following graphs present the notional and weighted average interest rate of our interest rate swap contracts by year of maturity.
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At September 30, 2020 and December 31, 2019 , we had derivatives with a net
fair value of $(2,831) and $(47,223) , respectively. At September 30, 2020 and
December 31, 2019 , we had interest rate swap contracts with an aggregate
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47
ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
notional balance of $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 (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
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 toU.S. Treasury and interest rate swap contract rates makes achieving high levels of off-set difficult. We recognized net gains (losses) of$27,732 and$(348,546) and$(81,231) and$(416,724) , for the three and nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively, related to our derivatives. As required by the Dodd-Frank Act, theCommodity 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 ourTBA 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 useTBA 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
Payments Due By Period
? 1 and ? 3 > 3 and ? 5
Obligations Total < 1 Year Years 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
(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).
(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.
We had contractual commitments under derivatives at September 30, 2020 . We had
interest rate swap contracts with an aggregate notional balance of $4,937,000 , a
weighted average swap rate of 0.21% and a weighted average term of 55 months at
September 30, 2020 . We also had $2,000,000 notional of TBA Agency Securities at
September 30, 2020 .
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ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
Liquidity and Capital Resources
AtSeptember 30, 2020 , our liquidity totaled$570,796 , consisting of$250,942 of cash plus$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 purchaseU.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell suchU.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 inU.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 atSeptember 30, 2020 andDecember 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. AtSeptember 30, 2020 andDecember 31, 2019 , we financed our securities portfolio with$4,510,795 and$11,354,547 of borrowings under repurchase agreements. Our leverage ratios atSeptember 30, 2020 andDecember 31, 2019 , were 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 nine months endedSeptember 30, 2020 , we purchased$10,696,088 of securities using proceeds from repurchase agreements and principal repayments. During the nine months endedSeptember 30, 2020 , we received cash of$967,914 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of$6,843,752 for the nine months endedSeptember 30, 2020 and made cash interest payments of approximately$178,719 on our liabilities for the nine months endedSeptember 30, 2020 . During the nine months endedSeptember 30, 2019 , we purchased$9,667,024 of securities using proceeds from repurchase agreements and principal repayments. During the nine months endedSeptember 30, 2019 , we received cash of$1,065,321 from principal payments on our MBS. We had a net cash decrease from our repurchase agreements of$4,641,443 for the nine months endedSeptember 30, 2019 and made cash interest payments of approximately$342,374 on our liabilities for the nine months endedSeptember 30, 2019 . Cash and cash collateral posted to counterparties used in operating activities was$(294,935) and$(112,313) , respectively, for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 . The decrease in cash and cash collateral posted to counterparties related to operating activities was primarily due to the liquidation of ourCredit 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$8,088,346 and$12,786,113 for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. During the nine months endedSeptember 30, 2020 , we sold 5,303 of Series C Preferred stock for an increase in equity of$129,096 . During the nine months endedSeptember 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 [[Image Removed:
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ARMOUR Residential REIT, Inc.
Management's Discussion and Analysis (continued)
in the aggregate liquidation preference). During the nine months ended September
30, 2020 we sold 5,767 shares of our common stock, 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.
[[Image Removed: arr-20200930_g9.jpg]]
See Note 7 and Note 15 to the consolidated financial statements for additional
information.
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50
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 nine months endedSeptember 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. AtSeptember 30, 2020 andDecember 31, 2019 , we financed our securities portfolio with$4,510,795 and$11,354,547 of borrowings under repurchase agreements. Our leverage ratios atSeptember 30, 2020 andDecember 31, 2019 , were 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
AtSeptember 30, 2020 andDecember 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, atSeptember 30, 2020 andDecember 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. [[Image Removed:
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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 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 theTreasury 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
Realized Gains and Losses
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.
Available for
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.
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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.
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;
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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 potential for Buckler's inability to access attractive repurchase financing
on our behalf or secure profitable third party business;
•our management's competing duties to other affiliated entities, which could
result in decisions that are not in the best interest of our stockholders;
•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.
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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 repurchasefinancing, 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 andScott Ulm . Code The Internal Revenue Code of 1986. CPR Constant prepayment rate. Credit Risk and Securities backed by residential mortgages in which we may invest, whichNon-Agency Securities are not issued or guaranteed by Fannie Mae, Freddie Mac orGinnie 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 TheU.S. Federal Reserve .FINRA TheFinancial 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 inthe United States of America .Ginnie Mae the Government National Mortgage
Administration.
GSE AU.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 The interest portion ofAgency Securities , which is separated and sold Securities individually from the principal portion of the same payment. ISDAInternational Swaps and Derivatives Association . JAVELINJAVELIN Mortgage Investment Corp. , formerly a publicly-traded REIT. Since its acquisition onApril 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.
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ARMOUR Residential REIT, Inc.
GLOSSARY OF TERMS (continued)
Merger The merger of JMI AcquisitionCorporation with and into JAVELIN on April
6, 2016.
MGCL Maryland General Corporation Law
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 specialpurpose 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
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. Ameasure 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 impliedfinancing cost, which would have
been earned by the buyer if the TBA
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
Securities contract and the spot price
of similar
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
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.
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