James Mountain - Chief Financial Officer Scott Ulm - Co-CEO, Co-Vice Chairman, CIO & Head of Risk Management Jeffrey Zimmer - Co-CEO, Vice Chairman, President.

Douglas Harter - Credit Suisse LLC Trevor Cranston - JMP Securities.

Ladies and gentlemen, thank you for standing by. Welcome to the ARMOUR Residential REIT Incorporated Second Quarter 2017 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 27, 2017. I would now like to turn the conference over to Jim Mountain, Chief Financial Officer of ARMOUR Residential REIT. Please go ahead..

Thank you, operator, and thank you all for joining ARMOUR’s second quarter 2017 earnings call. This morning, I’m joined by ARMOUR’s co-CEOs, Scott Ulm and Jeff Zimmer; and our Chief Operating Officer, Mark Gruber. By now, everyone has access to ARMOUR’s earnings release and Form 10-Q, which can be found on ARMOUR’s website.

This conference call may contain statements that are not recitations of historical fact and therefore, constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to Safe Harbor protection provided by the Reform Act.

Actual outcomes and results could differ materially from the outcomes and results expressed or implied by the forward-looking statements due to the impact of many factors beyond the control of ARMOUR.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the Risk Factor section of ARMOUR’s periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC’s website at www.sec.gov.

All forward-looking statements included in this conference call are made only as of today’s date and are subject to change without notice. We disclaim any obligation to update our forward-looking statements unless required by law. Also, our discussions today may include reference to certain non-GAAP measures.

A reconciliation of these measures to the most comparable GAAP measures is included in our earnings release, which can be found on ARMOUR’s website. An online replay of this conference call will be available on ARMOUR’s website shortly and will continue for one year. ARMOUR’s Q2 GAAP net income was $29.7 million, or $0.70 per common share.

Core earnings were $29.4 million, or $0.69 per common share. That represents an annualized return on equity of 10.3% based on book value at the beginning of the quarter. Differences between GAAP and core income are mostly due to the treatment of our TBA dropped income and unrealized gains on our interest rate contract.

ARMOUR does not use hedge counting for GAAP reporting, and fluctuations in the fair value of our open interest rate swaps is a dominant factor in GAAP income, while the inversely-related mark-to-market on our Agency Securities flows directly into shareholder’s equity. We paid dividends of $0.19 per common share during each month for Q2.

That’s a total of $21 million, or $0.57 per common share. Today, we also paid common dividends of $0.19 per share for July, and we’ve announced August common dividends of $0.19 per share for shareholders of record on August 15, 2017, which will be payable on August 28, 2017.

As previously announced, on June 30, we completed an offering of 4.5 million shares of ARMOUR common stock, priced to ARMOUR at $25.96 per share. The offering delivered net proceeds of $116.7 million after expenses and lifted ARMOUR’s common equity market capitalization over the $1 billion mark.

At June 30, 2017, ARMOUR’s book value was $26.40 per common share, up 3% for the quarter. The net dilutive effect of Q2 share issuance was $0.06 per common share. Now to put that number in context, the average daily change in book value due to movements in interest rates and mortgage spreads for 2017 to-date has been $0.10.

For the resulting 12% increase in the common share base reduces per share administrative costs, so we expect to earn this dilution back in about eight months. As a reminder, we will include updated estimates of book value per share in our monthly company updates available on our website, www.armourreit.com.

ARMOUR’s quarter-end portfolio consisted of over $6.9 billion of Agency Securities plus another $2.4 billion of agency TBA positions. Our non-agency positions totaled $1 billion at June 30, with a substantial majority being the credit risk transfer securities that have continued their strong performance in Q2.

Our mortgage-backed securities portfolio was financed with approximately $6.3 billion of borrowings under repurchase agreements. Our lending counterparties continue to compete vigorously for our borrowing business. ARMOUR’s interest rate hedge positions were $5.2 billion of notional coverage at the end of June.

Now, let me turn the call over to our Co-Chief Executive Officers, Scott Ulm and Jeff Zimmer to discuss ARMOUR’s portfolio position and current strategy.

Scott?.

rates, spreads and prepayments. In addition, we have the continuing discussion on when and how the Fed may change policy on reinvestment or sale of its MBS portfolio. We anticipate that the Fed will likely begin to taper its reinvestment this fall.

While more than that MBS supply without the Fed suggests higher spreads, we also note that spreads remain relatively wide from a multiyear perspective. More widening in MBS is always possible, but investment-grade and high-yield spreads are quite tight.

While there has been much discussion about the Fed halting reinvestment in its MBS portfolio and even potentially beginning to dispose of assets, we see a variety of constraints there to suggest the Fed will take the utmost care to avoid market disruption. We expect another Fed hike this year, most likely in December.

Prepayments will likely move up a bit this quarter, but should remain within expectations and constrained by our prepayment protected assets on the agency side. We see the U.S. economy is continuing to make progress, but with headwinds from domestic challenges with productivity and weak economies abroad.

The Trump administration’s policies hold the potential for both positive and negative effects on our operations. We feel that the pace of change is likely to be moderate.

We have positioned the portfolio and our hedging to reflect this assessment of heightened risk while still allowing us to earn our dividend, which we feel is sustainable based on current investment opportunities and funding rates. Operator, that concludes our prepared remarks. We’ll now take any questions..

Thank you. [Operator Instructions] Our first question comes from the line of Douglas Harter with Credit Suisse. Please go ahead..

Thanks.

Can you talk about your outlook for volatility and the cost – how you view the cost of – the cost-benefit of reducing risk today?.

Hey, Doug, it’s Jeff. So if you look at the history of our leverage, our leverage, as reported as of June 30, is the lowest it’s ever been. In conjunction with, as Scott mentioned, 30-year OAS spreads are why they have been in the last four or five years going back to beginning of QE3 in September 2012.

So functionally having modestly lower leverage than, at least, that we’ve ever had and maybe versus the peer group and as well as noticing that the primary investment opportunity being in dollar rolls with OAS that are historically very wide, despite what the Fed may do with tapering put us in a position to be defending against increased volatility.

Now, I would also say that volatility can expose itself in other areas. For example, the funding rates could add volatility to earnings, but not necessarily volatility to the book value. And in response to that, the fact that we seem to be very close to opening up BUCKLER Securities will help us in our funding..

On BUCKLER Securities, can you talk about what might be the funding benefit there? And how big that needs to get to to offset the cost of running that?.

Sure. So depending on the net relationship between FICC funding and the funding that we might otherwise get from our normal set of counterparties, you could see 5 to 7 basis points in our business planning model. We anticipate anything above $3 billion of funding, based on our business model would start dropping right down to the bottom line..

Thank you..

Thank you..

[Operator Instructions] Our next question comes from the line of Trevor Cranston with JMP Securities. Please go ahead..

Hi, thanks. I just wanted to follow-up on the comment you just made, Jeff, about thinking about potential for volatility to increase in the future and defending against that.

Given how low the level of and pride volatility is in the interest rate market today, how are you guys thinking about that in terms of your hedge positions and potentially, using some optional hedges in addition to the just regular swaps you have in place now? Thanks..

So with the addition to the CRT position, which started 17 months ago or so, that does not need hedging. We really have to only focus on the non-agency side of our balance sheet, which is a percentage of our equity allocations greatly reduced in over 16 to 18 months ago after the purchase of JMI.

So we have in the past used the different derivatives to give us optionalities, swaptions or forward starting swaps. Our current analysis, despite what we’ve heard some others say is that, the necessity of the expense related to that derivative exceeds their usefulness for our purposes right now..

Got it. Okay, that’s helpful. Thank you..

You’re welcome..

And there are no further questions on the phone lines at this time..

Well, thank you, everybody, for joining us. Please, as we’ve always said at the end of our earnings calls, all four of us are available at the office. So please call with any questions. We’re very pleased to have had another good quarter and look forward to talking to you in three months. Have a good day..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..