10-Q 1 arr20121025_10q.htm FORM 10-Q arr20121025_10q.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 FORM 10-Q


 

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

For the Quarterly Period Ended September 30, 2012

OR

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

 

For the transition period from                      to                     

 

ARMOUR RESIDENTIAL REIT, INC.

(Exact name of registrant as specified in its charter) 


Maryland

001-34766

26-1908763

(State or other jurisdiction of incorporation or organization)

(Commission File Number)

(I.R.S. Employer Identification No.)

 

3001 Ocean Drive, Suite 201, Vero Beach, FL  32963

(Address of principal executive offices)(zip code)

 

(772) 617-4340

(Registrant's telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES    NO  

 

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

 

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

 

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

 

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

 



 
 

 

  

TABLE OF CONTENTS 

 

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

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

22

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

37

PART II. OTHER INFORMATION

37

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

37

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

39

Item 3. Defaults Upon Senior Securities

39

Item 4. Mine Safety Disclosures

39

Item 5. Other Information

40

Item 6. Exhibits

40

   

 
2

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

 

Assets

September 30, 2012

December 31, 2011

Cash

  $ 727,306   $ 252,372

Restricted cash

    237,789     147,199

Agency securities, available for sale, at fair value (including pledged assets of $20,846,817 and $5,225,234)

    22,114,875     5,393,675

Receivable for unsettled securities

    357,218     382,931

Derivatives, at fair value

    8,069     -

Principal payments receivable

    10,799     12,493

Accrued interest receivable

    60,548     18,637

Prepaid and other assets

    742     440

Total Assets

  $ 23,517,346   $ 6,207,747
                 

Liabilities and Stockholders' Equity

               

Liabilities:

               

Repurchase agreements

  $ 19,826,988   $ 5,335,962

Payable for unsettled securities

    1,036,450     117,885

Derivatives, at fair value

    198,398     121,727

Accrued interest payable

    9,302     2,154

Accounts payable and accrued expenses

    3,157     2,663

Dividends payable

    103     750

Total Liabilities

    21,074,398     5,581,141
                 

Stockholders' Equity:

               

Preferred stock, $0.001 par value, 25,000,000 shares authorized, 1,785,000 8.250% Series A Cumulative Preferred Stock issued and outstanding at September 30, 2012 and none issued and outstanding at December 31, 2011

    2     -

Common stock, $0.001 par value, 500,000,000 shares authorized, 308,972,403 and 95,436,949 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

    309     95

Additional paid-in capital

    2,220,417     678,641

Accumulated deficit

    (180,430

)

    (100,878

)

Accumulated other comprehensive income

    402,650     48,748

Total Stockholders' Equity

    2,442,948     626,606

Total Liabilities and Stockholders' Equity

  $ 23,517,346   $ 6,207,747
 

See notes to condensed consolidated financial statements. 

 

 
3

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

(Unaudited)

 

 

For the Quarters Ended

For the Nine Months Ended

 

September 30,

2012

September 30,

2011

September 30,

2012

September 30,

2011

Interest Income:

                               

Interest income, net of amortization of premium

  $ 116,693   $ 39,665   $ 265,660   $ 82,293

Interest expense:

                               

Repurchase agreements

    (19,222

)

    (3,451

)

    (37,258

)

    (7,158

)

Net interest income

    97,471     36,214     228,402     75,135

Other (Loss) Income:

                               

Realized gain on sale of agency securities

    15,062     6,444     20,110     6,444

Other income

    -     -     1,043     -

Subtotal

    15,062     6,444     21,153     6,444

Realized loss on derivatives (1)

    (18,914

)

    (8,421

)

    (41,055

)

    (16,425

)

Unrealized loss on derivatives

    (31,486

)

    (65,808

)

    (84,265

)

    (91,891

)

Subtotal

    (50,400

)

    (74,229

)

    (125,320

)

    (108,316

)

Total other (loss)

    (35,338

)

    (67,785

)

    (104,167

)

    (101,872

)

Expenses:

                               

Management fee

    5,545     2,191     13,356     4,441

Professional fees

    472     270     1,408     883

Insurance

    85     60     189     164

Compensation

    426     135     1,417     406

Other

    660     243     1,331     504

Total expenses

    7,188     2,899     17,701     6,398

Net income (loss) before taxes

    54,945     (34,470

)

    106,534     (33,135

)

Income tax (expense) benefit

    (3

)

    (2

)

    27     (14

)

Net Income (Loss)

  $ 54,942   $ (34,472

)

  $ 106,561   $ (33,149

)

Dividends declared on preferred stock

    (804

)

    -     (964

)

    -

Net Income (Loss) available (related) to common stockholders

  $ 54,138   $ (34,472

)

  $ 105,597   $ (33,149

)

Net income (loss) available (related) per share

to common stockholders:

                               

Basic

  $ 0.20   $ (0.44

)

  $ 0.54   $ (0.63

)

Diluted

  $ 0.20   $ (0.44

)

  $ 0.54   $ (0.63

)

Dividends per common share

  $ 0.30   $ 0.36   $ 0.92   $ 1.06

Weighted average common shares outstanding:

                               

Basic

    269,325     78,360     195,272     52,863

Diluted

    270,010     78,360     196,287     52,863
 

(1)

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

 

See notes to condensed consolidated financial statements. 

 

 
4

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 (dollars in thousands)

(Unaudited)

 

 

For the Quarters Ended

For the Nine Months Ended

 

September 30, 2012

September 30, 2011

September 30, 2012

September 30, 2011

Net Income (Loss)

  $ 54,942   $ (34,472

)

  $ 106,561   $ (33,149

)

Other comprehensive income :

                               

Reclassification adjustment for realized gain on sale of Agency Securities

    (15,062

)

    (6,444

)

    (20,110

)

    (6,444

)

Net unrealized gain on available for sale securities

    250,062     37,438     374,012     73,981

Other comprehensive income

    235,000     30,994     353,902     67,537

Comprehensive Income (Loss)

  $ 289,942   $ (3,478

)

  $ 460,463   $ 34,388
 

See notes to condensed consolidated financial statements

 

 
5

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY

(dollars in thousands)

(Unaudited)

 


 

Preferred Stock

Common Stock                                
 

Shares

Par Amount

Additional Paid in Capital

Shares

Par Amount

Additional

Paid in

Capital

Total

Additional Paid in

Capital

Accumulated

Deficit

Accumulated

Other

Comprehensive

Income

Total

Balance, December 31, 2011

    -   $ -   $ -     95,437   $ 95   $ 678,641   $ 678,641   $ (100,878

)

  $ 48,748   $ 626,606

Preferred dividends declared

    -     -     -     -     -     -     -     (964

)

    -     (964

)

Common dividends declared

    -     -     -     -     -     -     -     (185,149

)

    -     (185,149

)

Issuance of Preferred stock, net

    1,785     2     43,302     -     -     -     43,302     -     -     43,304

Issuance of common stock, net

    -     -     -     213,460     213     1,497,949     1,497,949     -     -     1,498,162

Stock based compensation, net of withholding requirements

    -     -     -     75     1     525     525     -     -     526

Net income

    -     -     -     -     -     -     -     106,561     -     106,561

Other comprehensive income

    -     -     -     -     -     -     -     -     353,902     353,902

Balance, September 30, 2012

    1,785   $ 2   $ 43,302     308,972   $ 309   $ 2,177,115   $ 2,220,417   $ (180,430

)

  $ 402,650   $ 2,442,948

 

See notes to condensed consolidated financial statements

 

 
6

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

(dollars in thousands)

(Unaudited)

 

 

For the Nine

Months Ended

September 30,

2012

For the Nine

Months Ended

September 30,

2011

Cash Flows From Operating Activities:

               

Net income (loss)

  $ 106,561   $ (33,149

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

Net amortization of premium on Agency Securities

    71,168     17,636

Unrealized loss on derivatives

    68,603     91,891

Realized gain on sale of Agency Securities

    (20,110

)

    (6,444

)

Stock based compensation

    526     102

Changes in operating assets and liabilities:

               

Increase in accrued interest receivable

    (41,660

)

    (15,012

)

(Increase) decrease in prepaid income taxes and other assets

    (333

)

    388

Increase in accrued interest payable

    7,148     16,823

Increase in accounts payable and accrued expenses

    1,861     994

Net cash provided by operating activities

    193,764     73,229

Cash Flows From Investing Activities:

               

Purchases of Agency Securities

    (18,916,083

)

    (5,352,969

)

Principal repayments of Agency Securities

    1,574,116     426,474

Proceeds from sales of Agency Securities

    1,869,332     512,657

Increase in restricted cash

    (90,590

)

    (125,244

)

Net cash used in investing activities

    (15,563,225

)

    (4,539,082

)

Cash Flows From Financing Activities:

               

Issuance of preferred stock, net of expenses

    43,041     -

Issuance of common stock, net of expenses

    1,498,157     489,401

Proceeds from repurchase agreements

    92,966,646     28,660,677

Principal repayments on repurchase agreements

    (78,476,690

)

    (24,410,828

)

Preferred dividends paid

    (964

)

    -

Common dividends paid

    (185,795

)

    (58,255

)

Net cash provided by financing activities

    15,844,395     4,680,995

Net increase in cash

    474,934     215,142

Cash - beginning of period

    252,372     35,344

Cash - end of period

  $ 727,306   $ 250,486

Supplemental Disclosure:

               

Cash paid during the period for interest

  $ 61,245   $ 5,844

Non-Cash Investing and Financing Activities:

               

Receivable for unsettled security sales

  $ 357,218   $ -

Payable for unsettled security purchases

  $ 1,036,450   $ 475,109

Unrealized gain on investment in available for sale securities

  $ 374,012   $ 67,536

Amounts receivable for issuance of common stock

  $ 5   $ 4

Amounts receivable for issuance of preferred stock

  $ 263   $ -

Common dividends declared, to be paid in subsequent period

  $ -   $ 9
 

See notes to condensed consolidated financial statements

 

 
7

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2012. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.

 

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

 

Note 2 - Organization and Nature of Business Operations

 

Business

 

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

 

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

 

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

 

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

 

Note 3 - Summary of Significant Accounting Policies

 

Cash

 

Cash includes cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have maturities of three months or less, at time of purchase. We may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes we are not exposed to significant credit risk due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

 

 
8

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Restricted Cash

 

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

 

 

September 30, 2012

December 31, 2011

 

(dollars in thousands)

 

Fair Value (1)

Fair Value (1)

Agency Securities

  $ (14,426

)

  $ -

Interest rate swap contracts

    247,278     141,326

Futures Contracts

    4,937     5,873

Totals

  $ 237,789   $ 147,199
 

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

 

Agency Securities, at Fair Value

 

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

 

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

  

We evaluate securities for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We determine if we (1) have the intent to sell the Agency Securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery or (3) do not expect to recover the entire amortized cost basis of the Agency Securities. There was no other than temporary impairment for the quarters and nine months ended September 30, 2012 and September 30, 2011.

 

Repurchase Agreements

 

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

 

 
9

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 Derivatives

 

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

 

Accrued Interest Receivable and Payable

 

Accrued interest receivable includes interest accrued between payment dates on Agency Securities. Accrued interest payable includes interest payable on our repurchase agreements.

 

Credit Risk

 

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

 

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

 

Market Risk

 

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

 

Preferred Stock

 

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

 

 
10

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Common Stock and Warrants

 

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

 

Comprehensive Income

 

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

 

Revenue Recognition

 

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

 

Income Taxes

 

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

 

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

 

Note 4 - Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2012

 

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

 

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

 

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

 

Accounting Standards to be Adopted in Future Periods

  

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

 

 
11

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5 - Agency Securities, Available for Sale

 

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

 

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

 

September 30, 2012

Fannie Mae

Freddie

Mac

Ginnie Mae

Total

Agency

Securities

 

(dollars in thousands)

Principal Amount

  $ 14,408,545   $ 5,899,771   $ 318,873   $ 20,627,189

Net unamortized premium

    755,692     314,606     14,738     1,085,036

Amortized cost

    15,164,237     6,214,377     333,611     21,712,225
                                 

Unrealized gains

    274,057     122,875     6,985     403,917

Unrealized losses

    (1,057

)

    (210

)

    -     (1,267

)

Fair value

  $ 15,437,237   $ 6,337,042   $ 340,596   $ 22,114,875
 

September 30, 2012

Adjustable Rate

Fixed

Rate

Total

Agency

Securities

 

(dollars in thousands)

Principal Amount

  $ 2,234,747   $ 18,392,442   $ 20,627,189

Net unamortized premium

    92,613     992,423     1,085,036

Amortized cost

    2,327,360     19,384,865     21,712,225
                         

Unrealized gains

    46,143     357,774     403,917

Unrealized losses

    (9

)

    (1,258

)

    (1,267

)

Fair value

  $ 2,373,494   $ 19,741,381   $ 22,114,875
 

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

 

December 31, 2011

Fannie Mae

Freddie Mac

Ginnie Mae

Total Agency Securities

 

(dollars in thousands)

Principal Amount

  $ 3,451,906   $ 1,283,848   $ 392,476   $ 5,128,230

Net unamortized premium

    144,337     54,059     18,301     216,697

Amortized cost

    3,596,243     1,337,907     410,777     5,344,927
                                 

Unrealized gains

    33,558     13,657     5,439     52,654

Unrealized losses

    (3,269

)

    (613

)

    (24

)

    (3,906

)

Fair value

  $ 3,626,532   $ 1,350,951   $ 416,192   $ 5,393,675
 

 

 
12

 

  

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

December 31, 2011

Adjustable Rate

Fixed

Rate

Total

Agency Securities

 

(dollars in thousands)

Principal Amount

  $ 2,681,911   $ 2,446,319   $ 5,128,230

Net unamortized premium

    107,641     109,056     216,697

Amortized cost

    2,789,552     2,555,375     5,344,927
                         

Unrealized gains

    26,157     26,497     52,654

Unrealized losses

    (2,534

)

    (1,372

)

    (3,906

)

Fair value

  $ 2,813,175   $ 2,580,500   $ 5,393,675
 

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

 

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

 

 

September 30, 2012

December 31, 2011

 

(dollars in thousands)

Weighted Average Life of all Agency Securities

Fair Value

Amortized Cost

Fair Value

Amortized Cost

Less than one year

  $ 11,083   $ 10,777   $ 179   $ 179

Greater than one year and less than five years

    22,096,782     21,694,580     5,274,072     5,226,255

Greater than or equal to five years

    7,010     6,868     119,424     118,493

Total Agency Securities

  $ 22,114,875   $ 21,712,225   $ 5,393,675   $ 5,344,927
 

We use a third-party model to calculate the weighted average life of Agency Securities. Weighted average life is calculated based on expectations for estimated prepayments for the underlying mortgage loans of our Agency Securities. These estimated prepayments are based on assumptions such as interest rates, current and future home prices, housing policy and borrower incentives. The weighted average lives of the Agency Securities as of September 30, 2012 and December 31, 2011 in the table above are based upon market factors, assumptions, models and estimates from the third-party model and also incorporate management's judgment and experience. The actual weighted average lives of the Agency Securities could be longer or shorter than estimated.

 

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

 

 

Unrealized Loss Position For:

(dollars in thousands)

 

Less than 12 months

12 Months or More

Total

As of

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

Fair Value

Unrealized

Losses

September 30, 2012

  $ 666,322   $ (1,257

)

  $ 1,164   $ (10

)

  $ 667,486   $ (1,267

)

December 31, 2011

    1,173,098     (3,560

)

    96,684     (346

)

    1,269,782     (3,906

)

 

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

 

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

 

 
13

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6 - Fair Value of Financial Instruments

 

Our valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from third-party sources, while unobservable inputs reflect management's market assumptions. The ASC Topic No. 820 “Fair Value Measurement” classifies these inputs into the following hierarchy:

 

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

 

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

 

Level 3 Inputs- Instruments with primarily unobservable value drivers.

 

The following describes the valuation methodologies used for our assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

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

 

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

 

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

 

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

 

 
14

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant

Observable

Inputs

(Level 2)

Significant Unobservable

Inputs

(Level 3)

Balance at

 September 30,

2012

(dollars in thousands)

Assets at Fair Value:

                               

Agency Securities, available for sale

  $ -   $ 22,114,875   $ -   $ 22,114,875

Derivatives, at fair value

  $ -   $ 8,069   $ -   $ 8,069

Liabilities at Fair Value:

                               

Derivatives, at fair value

  $ 4,656   $ 193,742   $ -   $ 198,398


Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant Observable

Inputs

(Level 2)

Significant Unobservable

Inputs

(Level 3)

Balance at December 31,

2011

(dollars in thousands)

Assets at Fair Value:

                               

Agency Securities, available for sale

  $ -   $ 5,393,675   $ -   $ 5,393,675

Liabilities at Fair Value:

                               

Derivatives, at fair value

  $ 5,292   $ 116,435   $ -   $ 121,727

 

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

 

At September 30, 2012

Fair Value Measurements using:

Carrying

Value

Fair

Value

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant

Observable

Inputs

(Level 2)

Significant Unobservable

Inputs

(Level 3)

(dollars in thousands)

Financial Assets:

                                       

Cash

  $ 727,306   $ 727,306   $ 727,306   $ -   $ -

Restricted Cash

    237,789     237,789     -     237,789     -

Receivable for unsettled securities

    357,218     357,218     -     357,218     -

Principal payments receivable

    10,799     10,799     -     10,799     -

Accrued interest receivable

    60,548     60,548     -     60,548     -

Financial Liabilities:

                                       

Repurchase agreements

  $ 19,826,988   $ 19,826,988   $ -   $ 19,826,988   $ -

Payable for unsettled securities

    1,036,450     1,036,450     -     1,036,450     -

Accrued interest payable

    9,302     9,302     -     9,302     -

 

 

 

 
15

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

At December 31, 2011

Fair Value Measurements using:

Carrying

Value

Fair

Value

Quoted Prices

in Active

Markets for

Identical

Assets

(Level 1)

Significant

Observable

 Inputs

(Level 2)

Significant Unobservable

 Inputs

(Level 3)

(dollars in thousands)

Financial Assets:

                                       

Cash

  $ 252,372   $ 252,372   $ 252,372   $ -   $ -

Restricted Cash

    147,199     147,199     -     147,199     -

Receivable for unsettled securities

    382,931     382,931     -     382,931     -

Principal payments receivable

    12,493     12,493     -     12,493     -

Accrued interest receivable

    18,637     18,637     -     18,637     -

Financial Liabilities:

                                       

Repurchase agreements

  $ 5,335,962   $ 5,335,962   $ -   $ 5,335,962   $ -

Payable for unsettled securities

    117,885     117,885     -     117,885     -

Accrued interest payable

    2,154     2,154     -     2,154     -

 

Note 7 - Repurchase Agreements

 

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

 

 

September 30, 2012

December 31, 2011

 

(dollars in thousands)

Within 30 days

  $ 9,925,408   $ 4,068,197

31 days to 60 days

    5,679,332     1,111,480

61 days to 90 days

    2,933,517     156,285

Greater than 90 days

    1,288,731     -

Total

  $ 19,826,988   $ 5,335,962
 

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

 

 

September 30, 2012

December 31, 2011

 

(dollars in thousands)

Number of MRA's

    32     29

Number of counterparties with repurchase agreements outstanding

    26     23

Weighted average maturity in days

    39     18

Weighted average contractual rate

    0.43

%

    0.37

%

Haircut for repurchase agreements (1)

    4.8

%

    5.0

%

 

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

 

Note 8 - Derivatives

 

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

  

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

 

Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg.

 

Our Futures Contracts are traded on the CME which requires the use of daily mark-to-market collateral and the CME provides substantial credit support. The collateral requirements of the CME require us to pledge assets under a bi-lateral margin arrangement, including either cash or Agency Securities and these requirements may vary and change over time based on the market value, notional amount and remaining term of the Futures Contracts.  In the event we are unable to meet a margin call under one of our Futures Contracts, the counterparty to such agreement may have the option to terminate or close-out all of the outstanding Futures Contracts with us. In addition, any close-out amount due to the counterparty upon termination of the counterparty's transactions would be immediately payable by us pursuant to the applicable agreement.  

 

 
16

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

September 30, 2012

December 31, 2011

 

(dollars in thousands)

 

Notional Amount

Net Fair Value (1)

Notional Amount

Net Fair Value (1)

Interest rate swap contracts

  $ 8,690,000   $ (192,120

)

  $ 2,765,000   $ (116,435

)

Interest rate swaptions

    1,050,000     6,447     -     -

Futures Contracts

    121,000     (4,656

)

    131,000     (5,292

)

Totals

  $ 9,861,000   $ (190,329

)

  $ 2,896,000   $ (121,727

)

 

(1)  

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

 

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

 

   

Loss Recognized in Income

(dollars in thousands)

   

For the Quarters Ended

For the Nine Months Ended

Derivatives

Location on condensed consolidated statements of operations

September 30, 2012

September 30, 2011

September 30, 2012

September 30, 2011

Interest rate swap contracts:

                                 

Interest income

Realized loss on derivatives

  $ 2,562   $ 415   $ 5,421   $ 983

Interest expense

Realized loss on derivatives

    (20,832

)

    (8,213

)

    (44,779

)

    (16,343

)

Realized (loss)

Realized loss on derivatives

    -     (256

)

    -     (239 )

Changes in fair value

Unrealized loss on derivatives

    (25,153

)

    (64,581

)

    (66,831

)

    (88,742

)

        (43,423

)

    (72,635

)

    (106,189

)

    (104,341

)

Interest rate swaptions:

                                 

Changes in fair value

Unrealized loss on derivatives

    (6,593

)

    -     (18,070

)

    -
        (6,593

)

    -     (18,070

)

    -

Futures Contracts:

                                 

Realized (loss)

Realized loss on derivatives

    (644

)

    (366

)

    (1,697

)

    (826

)

Changes in fair value

Unrealized loss on derivatives

    260     (1,228

)

    636     (3,149

)

        (384

)

    (1,594

)

    (1,061

)

    (3,975

)

Totals

  $ (50,400

)

  $ (74,229

)

  $ (125,320

)

  $ (108,316

)

 

Note 9 - Share-Based Compensation

 

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

 

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

 

 
17

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

September 30, 2012

September 30, 2011

 

Number of

Awards

Weighted Average Grant Date Fair Value per Award

Number of

Awards

Weighted Average Grant Date Fair Value per Award

Unvested Awards Outstanding beginning of period

    153,980   $ 7.91     -     -

Granted

    655,524     7.13     192,500     7.91

Vested

    (138,730

)

    7.29     (28,890

)

    7.91

Unvested Awards Outstanding end of period

    670,774   $ 7.28     163,610   $ 7.91
 

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

 

Note 10 - Stockholders' Equity

 

Dividends

 

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

 

September 30, 2012

 

Record Date

Payment Date

Rate per common share

Aggregate amount paid to holders of record (in millions)

January 15, 2012 (1)

January 30, 2012

  $ 0.11   $ 11.6

February 15, 2012

February 28, 2012

    0.11     15.3

March 15, 2012

March 29, 2012

    0.11     19.9

April 16, 2012

April 27, 2012

    0.10     17.8

May 15, 2012

May 30, 2012

    0.10     18.1

June 15, 2012

June 28, 2012

    0.10     18.6

July 16, 2012

July 30, 2012

    0.10     23.5

August 15, 2012

August 30, 2012

    0.10     30.0

September 14, 2012

September 27, 2012

    0.10     31.0
 

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

 

September 30, 2011

 

Record Date

Payment Date

Rate per common share

Aggregate amount paid to holders of record (in millions)

January 15, 2011 (1)

January 28, 2011

  $ 0.12   $ 2.0

February 15, 2011

February 25, 2011

    0.12     3.9

March 15, 2011

March 30, 2011

    0.12     3.9

April 15, 2011

April 28, 2011

    0.12     5.9

May 15, 2011

May 27, 2011

    0.12     5.9

June 15, 2011

June 29, 2011

    0.12     8.3

July 15, 2011

July 28, 2011

    0.12     9.1

August 15, 2011

August 30, 2011

    0.12     9.1

September 15, 2011

September 29, 2011

    0.12     10.1
 

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

 

 
18

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

September 30, 2012

 

Record Date

Payment Date

Rate per Series A Preferred share

Aggregate amount paid to holders of record (in millions)

July 13, 2012 (1)

July 27, 2012

  $ 0.286500   $ 0.4

August 15, 2012

August 27, 2012

    0.171875     0.3

September 14, 2012

September 27, 2012

    0.171875     0.3
 

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

 

Equity Capital Raising Activities

 

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

 

September 30, 2012

 

Transaction Type

Completion Date

Number of

Shares

Per Share price

Net Proceeds

(in millions)

Follow-on public offering

January 13, 2012

    10,350,000   $ 6.80   $ 70.1

Follow-on public offering

February 8, 2012

    29,900,000     6.80     203.0

Equity distribution agreement

February 29, 2012

    1,287,570     7.06     8.9

Follow-on public offering

March 14, 2012

    35,650,000     6.72     239.2

Issuance of Series A Preferred Stock

June 7, 2012

    1,400,000     25.00     33.8

Follow-on public offering

July 13, 2012

    46,000,000     7.06     324.5

Follow-on public offering

August 8, 2012

    63,250,000     7.30     461.4

Common equity distribution agreements

January 1, 2012 to September 30, 2012

    19,750,000     7.14 (1)     138.2

Preferred equity distribution agreements

January 1, 2012 to September 30, 2012

    385,000     25.56 (1)     9.5

Dividend Reinvestment and Stock Purchase Plan

January 1, 2012 to September 30, 2012

    7,273,020     7.28 (1)     52.9
 

(1) Weighted average price

 

September 30, 2011

 

Transaction Type

Completion Date

Number of

Shares

Per Share price

Net Proceeds

(in millions)

Follow-on public offering

January 26, 2011

    6,900,000   $ 7.55   $ 49.0

Follow-on public offering

February 8, 2011

    8,912,500     7.60     64.0

Equity distribution agreement

February 28, 2011 to September 30, 2011

    5,212,430     7.39 (1)     37.5

Follow-on public offering

April 13, 2011

    17,000,000     7.40     121.1

Follow-on public offering

June 6, 2011

    18,400,000     7.40     131.0

Dividend Reinvestment and Stock Purchase Plan

April 7, 2011 to September 30, 2011

    11,879,844     7.30 (1)     86.8
 

(1) Weighted average price

 

 
19

 

 

 

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 11 – Income per Common Share

 

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

 

 

For the Quarters Ended

For the Nine Months Ended

 

September 30,

2012

September 30,

2011

September 30,

2012

September 30,

2011

Net Income (Loss)

  $ 54,942   $ (34,472

)

  $ 106,561   $ (33,149

)

Less: Preferred dividends

    (804

)

    -     (964

)

    -

Net Income (Loss) available (related) to common stockholders

  $ 54,138   $ (34,472

)

  $ 105,597   $ (33,149

)

                                 

Weighted average common shares outstanding - basic

    269,325     78,360     195,272     52,863

Add: Effect of dilutive non-vested restricted stock awards, assumed vested

    685     -     1,015     -

Weighted average common shares outstanding - diluted