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Section 1: 10-Q (10-Q) 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 June 30, 2015 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 "large 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 July 28, 2015 was 350,275,496. ARMOUR Residential REIT, Inc. and Subsidiary TABLE OF CONTENTS PART I. FINANCIAL INFORMATION 1 Item 1. Financial Statements 1 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 Item 3. Quantitative and Qualitative Disclosures about Market Risk 43 Item 4. Controls and Procedures 45 PART II. OTHER INFORMATION 45 Item 1. Legal Proceedings 45 Item 1A. Risk Factors 46 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46 Item 3. Defaults Upon Senior Securities 46 Item 4. Mine Safety Disclosures 46 Item 5. Other Information 46 Item 6. Exhibits 47 ARMOUR Residential REIT, Inc. and Subsidiary CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (Unaudited) PART I. FINANCIAL INFORMATION Item 1. Financial Statements December 31, June 30, 2015 2014 Assets Cash $ 363,212 $ 494,561 Cash collateral posted to counterparties 137,657 129,004 Agency Securities, available for sale, at fair value (including pledged securities of $13,285,441 and $14,370,847) 13,795,986 15,297,529 Receivable for unsettled sales (including pledged securities of $741,531 and $251,251) 752,773 260,598 Derivatives, at fair value 32,609 60,518 Principal payments receivable 398 93 Accrued interest receivable 39,935 41,915 Prepaid and other assets 1,123 1,580 Total Assets $ 15,123,693 $ 16,285,798 Liabilities and Stockholders’ Equity Liabilities: Repurchase agreements $ 13,422,795 $ 13,881,921 Cash collateral posted by counterparties 162 48,240 Payable for unsettled purchases — 445,292 Derivatives, at fair value 107,954 137,393 Accrued interest payable 5,050 7,012 Accounts payable and other accrued expenses 938 16,649 Total Liabilities $ 13,536,899 $ 14,536,507 Commitments and contingencies (Note 9) Stockholders’ Equity: Preferred stock, $0.001 par value, 50,000 shares authorized; 8.250% Series A Cumulative Preferred Stock; 2,181 issued and outstanding ($54,514 aggregate liquidation preference) at June 30, 2015 and December 31, 2014 2 2 7.875% Series B Cumulative Preferred Stock; 5,650 issued and outstanding ($141,250 aggregate liquidation preference) at June 30, 2015 and December 31, 2014 6 6 Common stock, $0.001 par value, 1,000,000 shares authorized, 350,271 and 353,159 shares issued and outstanding at June 30, 2015 and December 31, 2014 350 353 Additional paid-in capital 2,708,630 2,717,545 Accumulated deficit (1,072,984) (1,052,969) Accumulated other comprehensive income (loss) (49,210) 84,354 Total Stockholders’ Equity $ 1,586,794 $ 1,749,291 Total Liabilities and Stockholders’ Equity $ 15,123,693 $ 16,285,798 See notes to condensed consolidated financial statements. 1 ARMOUR Residential REIT, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited) For the Quarter Ended For the Six Months Ended June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Interest income, net of amortization of premium on Agency Securities $ 91,703 $ 113,892 $ 191,253 $ 236,974 Interest expense (13,917) (14,979) (28,108) (29,726) Interest expense- U.S. Treasury Securities sold short — (4,263) — (4,263) Net Interest Income $ 77,786 $ 94,650 $ 163,145 $ 202,985 Other Income (Loss): Realized gain (loss) on sale of Agency Securities (reclassified from Other comprehensive income (loss)) (5,051) 11,167 1,493 81,036 Loss on short sale of U.S. Treasury Securities — (15,781) — (15,781) Subtotal $ (5,051) $ (4,614) $1,493 $ 65,255 Realized loss on derivatives (1) (59,978) (34,498) (51,880) (46,236) Unrealized gain (loss) on derivatives 194,507 (116,273) (21,831) (292,629) Subtotal $ 134,529 $ (150,771) $ (73,711) $ (338,865) Total Other Income (Loss) $ 129,478 $ (155,385) $ (72,218) $ (273,610) Expenses: Management fee 6,867 6,964 13,744 13,929 Professional fees 658 901 1,451 2,175 Insurance 172 186 342 369 Compensation 575 734 1,188 1,446 Other 974 670 1,653 1,424 Total Expenses $ 9,246 $ 9,455 $ 18,378 $ 19,343 Net Income (Loss) $ 198,018 $ (70,190) $ 72,549 $ (89,968) Dividends declared on preferred stock (3,905) (3,905) (7,810) (7,812) Net Income (Loss) available (related) to common stockholders $ 194,113 $ (74,095) $ 64,739 $ (97,780) Net income (loss) per share available (related) to common stockholders (Note 12): Basic $0.55 $ (0.21) $0.18 $ (0.27) Diluted $ 0.55 $ (0.21) $ 0.18 $ (0.27) Dividends declared per common share $0.12 $0.15 $0.24 $0.30 Weighted average common shares outstanding: Basic 351,332 357,111 352,134 357,302 Diluted 352,175 357,111 352,977 357,302 Pro Forma for the effect of the pending 1 for 8 reverse stock split (See Note 1) Basic $ 4.40 $ (0.21) $ 1.44 $ (0.27) Diluted $4.40 $ (0.21) $1.44 $ (0.27) Dividends declared per common share $ 0.96 $ 0.15 $ 1.92 $ 0.30 Weighted average common shares outstanding: Basic 43,916 357,111 44,017 357,302 Diluted 44,022 357,111 44,122 357,302 (1) Interest expense related to our interest rate swap contracts is recorded as 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. 2 ARMOUR Residential REIT, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (Unaudited) For the Quarter Ended For the Six Months Ended June 30, 2015 June 30, 2014 June 30, 2015 June 30, 2014 Net Income (Loss) $ 198,018 $ (70,190) $ 72,549 $ (89,968) Other comprehensive income (loss): Reclassification adjustment for realized (gain) loss on sale of available for sale Agency Securities 5,051 (11,167) (1,493) (81,036) Net unrealized gain (loss) on available for sale Agency Securities (221,802) 221,767 (132,071) 337,931 Other comprehensive income (loss) $ (216,751) $ 210,600 $ (133,564) $ 256,895 Comprehensive Income (Loss) $ (18,733) $ 140,410 $ (61,015) $ 166,927 See notes to condensed consolidated financial statements. 3 ARMOUR Residential REIT, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) (Unaudited) Preferred Stock Common Stock 8.250% Series A 7.875% Series B Total A Additional Additional Additional Additional Par Paid-in Par Paid-in Par Paid-in Paid-in Accumulated Co Shares Amount Capital Shares Amount Capital Shares Amount Capital Capital Deficit In Balance, January 1, 2015 2,181 $ 2 $ 53,172 5,650 $ 6 $ 136,547 353,159 $ 353 $2,527,826 $2,717,545 $ (1,052,969) $ Series A Preferred dividends declared — — — — — — — — — — (2,249) Series B Preferred dividends declared — — — — — — — — — — (5,562) Common stock dividends declared — — — — — — — — — — (84,753) Issuance of common stock, net — — — — — — 27 — 85 85 — Stock based compensation, net of withholding requirements — — — — — — 160 — 494 494 — Common stock repurchased — — — — — — (3,075) (3) (9,494) (9,494) — Net Income — — — — — — — — — — 72,549 Other comprehensive loss — — — — — — — — — — — Balance, June 30, 2015 2,181 $ 2 $ 53,172 5,650 $ 6 $ 136,547 350,271 $ 350 $2,518,911 $2,708,630 $ (1,072,984) $ See notes to condensed consolidated financial statements. 4 ARMOUR Residential REIT, Inc. and Subsidiary CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) For the Six Months Ended June 30, 2015 June 30, 2014 Cash Flows From Operating Activities: Net income (loss) $ 72,549 $ (89,968) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net amortization of premium on Agency Securities 56,747 30,668 Realized gain on sale of Agency Securities (1,493) (81,036) Loss on short sale of U.S.
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