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```11111
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2022
OR
|
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 001-34374
ARLINGTON ASSET INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
|
Virginia
|
|
54-1873198
|
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
6862 Elm Street, Suite 320
McLean, VA
|
|
22101
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(703) 373-0200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
|
Trading
Symbol(s)
|
|
Name of each exchange on which registered
|
|
Class A Common Stock
|
|
AAIC
|
|
NYSE
|
|
7.00% Series B Cumulative Perpetual Redeemable Preferred Stock
|
|
AAIC PrB
|
|
NYSE
|
|
8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable
Preferred Stock
|
|
AAIC PrC
|
|
NYSE
|
|
6.000% Senior Notes due 2026
|
|
AAIN
|
|
NYSE
|
|
6.75% Senior Notes due 2025
|
|
AIC
|
|
NYSE
|
|
|
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
Yes ☒
No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large accelerated filer
|
|
☐
|
|
Accelerated filer
|
|
☐
|
|
|
|
|
|
|
Non-accelerated filer
|
|
☒
|
|
Small reporting company
|
|
☒
|
|
|
|
|
|
|
|
|
|
Emerging growth company
|
|
☐
|
|
|
|
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act):
Yes ☐
No ☒
Number of shares outstanding of each of the registrant’s classes of
common stock, as of April 29, 2022:
|
Title
|
|
Outstanding
|
|
Class A Common Stock
|
|
29,662,512 shares
|
ARLINGTON ASSET INVESTMENT CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
INDEX
i
PART I
FINANCIAL
INFORMATION
Item 1.
Financial Statements
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED
BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
|
|
|
March 31, 2022
|
|
|
December 31, 2021
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (includes $73 and $2,118, respectively,
from
consolidated VIEs)
|
|
$
|
21,715
|
|
|
$
|
20,543
|
|
|
Restricted cash
|
|
|
851
|
|
|
|
1,132
|
|
|
Restricted cash of consolidated VIEs
|
|
|
9,292
|
|
|
|
111
|
|
|
Sold securities receivable
|
|
|
—
|
|
|
|
28,219
|
|
|
Agency mortgage-backed securities, at fair value
|
|
|
292,318
|
|
|
|
483,927
|
|
|
MSR financing receivables, at fair value
|
|
|
139,225
|
|
|
|
125,018
|
|
|
Credit securities, at fair value
|
|
|
25,360
|
|
|
|
26,222
|
|
|
Mortgage loans, at fair value
|
|
|
29,592
|
|
|
|
29,697
|
|
|
Mortgage loans of consolidated VIEs, at fair value
|
|
|
261,976
|
|
|
|
7,442
|
|
|
Single-family residential real estate (net of $1,010 and $299,
respectively, of
accumulated depreciation)
|
|
|
120,952
|
|
|
|
60,889
|
|
|
Deposits
|
|
|
4,607
|
|
|
|
4,549
|
|
|
Other assets (includes $1,461 and $547, respectively, from
consolidated VIEs)
|
|
|
14,995
|
|
|
|
15,287
|
|
|
Total assets
|
|
$
|
920,883
|
|
|
$
|
803,036
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
284,862
|
|
|
$
|
446,624
|
|
|
Secured debt of consolidated VIEs, at fair value
|
|
|
244,365
|
|
|
|
508
|
|
|
Long-term unsecured debt
|
|
|
86,096
|
|
|
|
85,994
|
|
|
Long-term debt secured by single-family properties
|
|
|
77,824
|
|
|
|
39,178
|
|
|
Other liabilities (includes $293 and $2, respectively, from
consolidated VIEs)
|
|
|
9,639
|
|
|
|
6,605
|
|
|
Total liabilities
|
|
|
702,786
|
|
|
|
578,909
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, $0.01 par value, 379,668 and 373,610,
shares issued
and outstanding, respectively (liquidation preference
of $9,492 and $9,340,
respectively)
|
|
|
9,001
|
|
|
|
8,852
|
|
|
Series C Preferred stock, $0.01 par value, 1,117,034 shares
issued
and outstanding (liquidation preference of
$27,926)
|
|
|
27,356
|
|
|
|
27,356
|
|
|
Class A common stock, $0.01 par value, 450,000,000 shares
authorized, 30,059,944
and 30,676,931 shares issued and outstanding,
respectively
|
|
|
301
|
|
|
|
307
|
|
|
Additional paid-in capital
|
|
|
2,027,585
|
|
|
|
2,030,315
|
|
|
Accumulated deficit
|
|
|
(1,846,146
|
)
|
|
|
(1,842,703
|
)
|
|
Total stockholders’ equity
|
|
|
218,097
|
|
|
|
224,127
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
920,883
|
|
|
$
|
803,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022
|
|
|
December 31, 2021
|
|
|
Assets and liabilities of consolidated VIEs
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash
|
|
$
|
9,365
|
|
|
$
|
2,229
|
|
|
Mortgage loans, at fair value
|
|
|
261,976
|
|
|
|
7,442
|
|
|
Other assets
|
|
|
1,461
|
|
|
|
547
|
|
|
Secured debt, at fair value
|
|
|
(244,365
|
)
|
|
|
(508
|
)
|
|
Other liabilities
|
|
|
(293
|
)
|
|
|
(2
|
)
|
|
Net investment in consolidated VIEs
|
|
$
|
28,144
|
|
|
$
|
9,708
|
|
See notes to consolidated financial statements.
1
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
(Unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
1,492
|
|
|
$
|
2,784
|
|
|
MSR financing receivables
|
|
|
3,382
|
|
|
|
358
|
|
|
Credit securities and loans
|
|
|
853
|
|
|
|
1,269
|
|
|
Mortgage loans of consolidated VIEs
|
|
|
1,354
|
|
|
|
1,687
|
|
|
Other
|
|
|
325
|
|
|
|
161
|
|
|
Total interest and other income
|
|
|
7,406
|
|
|
|
6,259
|
|
|
Rent revenues from single-family properties
|
|
|
1,064
|
|
|
|
—
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
276
|
|
|
|
488
|
|
|
Long-term debt secured by single-family properties
|
|
|
408
|
|
|
|
—
|
|
|
Long-term unsecured debt
|
|
|
1,370
|
|
|
|
1,151
|
|
|
Secured debt of consolidated VIEs
|
|
|
1,188
|
|
|
|
862
|
|
|
Total interest expense
|
|
|
3,242
|
|
|
|
2,501
|
|
|
Single-family property operating expenses
|
|
|
1,531
|
|
|
|
—
|
|
|
Net operating income
|
|
|
3,697
|
|
|
|
3,758
|
|
|
Investment and derivative loss, net
|
|
|
(827
|
)
|
|
|
(6,763
|
)
|
|
General and administrative expenses
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
2,065
|
|
|
|
1,395
|
|
|
Other general and administrative expenses
|
|
|
1,219
|
|
|
|
1,242
|
|
|
Total general and administrative expenses
|
|
|
3,284
|
|
|
|
2,637
|
|
|
Loss before income taxes
|
|
|
(414
|
)
|
|
|
(5,642
|
)
|
|
Income tax provision
|
|
|
2,287
|
|
|
|
398
|
|
|
Net loss
|
|
|
(2,701
|
)
|
|
|
(6,040
|
)
|
|
Dividend on preferred stock
|
|
|
(742
|
)
|
|
|
(723
|
)
|
|
Net loss attributable to common stock
|
|
$
|
(3,443
|
)
|
|
$
|
(6,763
|
)
|
|
Basic loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.20
|
)
|
|
Diluted loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.20
|
)
|
|
Weighted-average common shares outstanding
(in thousands)
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,832
|
|
|
|
33,181
|
|
|
Diluted
|
|
|
29,832
|
|
|
|
33,181
|
|
See notes to consolidated financial statements.
2
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
(Unaudited)
|
|
|
Series B
Preferred
Stock
(#)
|
|
|
Series B
Preferred
Amount
($)
|
|
|
Series C
Preferred
Stock
(#)
|
|
|
Series C
Preferred
Amount
($)
|
|
|
Class A
Common
Stock
(#)
|
|
|
Class A
Amount
($)
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Balances, December 31, 2020
|
|
|
336,273
|
|
|
$
|
7,933
|
|
|
|
1,117,034
|
|
|
$
|
27,356
|
|
|
|
33,517,018
|
|
|
$
|
335
|
|
|
$
|
2,040,918
|
|
|
$
|
(1,830,272
|
)
|
|
$
|
246,270
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,040
|
)
|
|
|
(6,040
|
)
|
|
Issuance of Class A common
stock under stock-based
compensation plans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
101,818
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of Class A
common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,655
|
)
|
|
|
(1
|
)
|
|
|
(522
|
)
|
|
|
—
|
|
|
|
(523
|
)
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
503
|
|
|
|
—
|
|
|
|
503
|
|
|
Dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(723
|
)
|
|
|
(723
|
)
|
|
Balances, March 31, 2021
|
|
|
336,273
|
|
|
$
|
7,933
|
|
|
|
1,117,034
|
|
|
$
|
27,356
|
|
|
|
33,481,181
|
|
|
$
|
335
|
|
|
$
|
2,040,898
|
|
|
$
|
(1,837,035
|
)
|
|
$
|
239,487
|
|
|
|
|
Series B
Preferred
Stock
(#)
|
|
|
Series B
Preferred
Amount
($)
|
|
|
Series C
Preferred
Stock
(#)
|
|
|
Series C
Preferred
Amount
($)
|
|
|
Class A
Common
Stock
(#)
|
|
|
Class A
Amount
($)
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Balances, December 31, 2021
|
|
|
373,610
|
|
|
$
|
8,852
|
|
|
|
1,117,034
|
|
|
$
|
27,356
|
|
|
|
30,676,931
|
|
|
$
|
307
|
|
|
$
|
2,030,315
|
|
|
$
|
(1,842,703
|
)
|
|
$
|
224,127
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,701
|
)
|
|
|
(2,701
|
)
|
|
Issuance of Class A common
stock under stock-based
compensation plans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
404,746
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Forfeiture of Class A common
stock under stock-based
compensation plans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,167
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of Class A
common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,009,566
|
)
|
|
|
(10
|
)
|
|
|
(3,487
|
)
|
|
|
—
|
|
|
|
(3,497
|
)
|
|
Issuance of preferred stock
|
|
|
6,058
|
|
|
|
149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
149
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
761
|
|
|
|
—
|
|
|
|
761
|
|
|
Dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(742
|
)
|
|
|
(742
|
)
|
|
Balances, March 31, 2022
|
|
|
379,668
|
|
|
$
|
9,001
|
|
|
|
1,117,034
|
|
|
$
|
27,356
|
|
|
|
30,059,944
|
|
|
$
|
301
|
|
|
$
|
2,027,585
|
|
|
$
|
(1,846,146
|
)
|
|
$
|
218,097
|
|
See notes to consolidated financial statements.
3
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,701
|
)
|
|
$
|
(6,040
|
)
|
|
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
|
|
|
|
|
|
|
|
|
|
Investment and derivative loss, net
|
|
|
827
|
|
|
|
6,763
|
|
|
Net (discount) premium (accretion) amortization
|
|
|
(1,820
|
)
|
|
|
(357
|
)
|
|
Other
|
|
|
1,598
|
|
|
|
564
|
|
|
Changes in operating assets
|
|
|
|
|
|
|
|
|
|
Interest receivable
|
|
|
372
|
|
|
|
510
|
|
|
Other assets
|
|
|
(1,016
|
)
|
|
|
(90
|
)
|
|
Changes in operating liabilities
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
2,444
|
|
|
|
1,091
|
|
|
Accrued compensation and benefits
|
|
|
(1,977
|
)
|
|
|
(1,754
|
)
|
|
Net cash (used in) provided by operating activities
|
|
|
(2,273
|
)
|
|
|
687
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of agency mortgage-backed securities
|
|
|
(78,874
|
)
|
|
|
(354,417
|
)
|
|
Purchases of credit securities
|
|
|
(20,585
|
)
|
|
|
—
|
|
|
Purchases of MSR financing receivables
|
|
|
(3,187
|
)
|
|
|
(21,279
|
)
|
|
Purchases of single-family residential real estate
|
|
|
(61,098
|
)
|
|
|
—
|
|
|
Proceeds from sales of agency mortgage-backed securities
|
|
|
259,415
|
|
|
|
517,200
|
|
|
Proceeds from sales of credit securities
|
|
|
—
|
|
|
|
11,978
|
|
|
Proceeds from sales of single-family residential real estate
|
|
|
351
|
|
|
|
—
|
|
|
Receipt of principal payments on agency mortgage-backed
securities
|
|
|
12,717
|
|
|
|
14,305
|
|
|
Receipt of principal payments on credit securities
|
|
|
308
|
|
|
|
—
|
|
|
Receipt of principal payments on loans
|
|
|
105
|
|
|
|
85
|
|
|
Receipt of principal payments on mortgage loans of consolidated
VIE
|
|
|
14,855
|
|
|
|
36,529
|
|
|
Receipt of distributions on MSR financing receivables
|
|
|
15,119
|
|
|
|
—
|
|
|
Restricted cash balance of VIE upon consolidation
|
|
|
9,637
|
|
|
|
—
|
|
|
Proceeds from (payments for) derivatives and deposits, net
|
|
|
3,026
|
|
|
|
(2,543
|
)
|
|
Other
|
|
|
1,351
|
|
|
|
4,154
|
|
|
Net cash provided by investing activities
|
|
|
153,140
|
|
|
|
206,012
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayments of repurchase agreements, net
|
|
|
(161,761
|
)
|
|
|
(149,662
|
)
|
|
Repayments of secured debt of consolidated VIE
|
|
|
(13,576
|
)
|
|
|
(34,994
|
)
|
|
Repurchase of common stock
|
|
|
(3,497
|
)
|
|
|
(523
|
)
|
|
Proceeds from issuance of preferred stock
|
|
|
149
|
|
|
|
—
|
|
|
Proceeds from long-term debt secured by single-family
properties
|
|
|
38,632
|
|
|
|
—
|
|
|
Repurchase of long-term unsecured debt
|
|
|
—
|
|
|
|
(7
|
)
|
|
Dividends paid
|
|
|
(742
|
)
|
|
|
(723
|
)
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
Net cash used in financing activities
|
|
|
(140,795
|
)
|
|
|
(185,909
|
)
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
|
10,072
|
|
|
|
20,790
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
|
|
21,786
|
|
|
|
39,965
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
|
$
|
31,858
|
|
|
$
|
60,755
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash payments for interest
|
|
$
|
3,278
|
|
|
$
|
2,434
|
|
|
Cash payments for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
|
Assets of VIE upon consolidation
|
|
$
|
287,282
|
|
|
$
|
—
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
Liabilities of VIE upon consolidation
|
|
$
|
266,697
|
|
|
$
|
—
|
|
See notes to consolidated financial statements.
4
ARLINGTON ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
Note 1. Organization and Basis of Presentation
Arlington Asset Investment Corp. (“Arlington Asset”) and its
consolidated subsidiaries (unless the context otherwise provides,
collectively, the “Company”) is an investment firm that focuses
primarily on investing in mortgage related assets and residential
real estate. The Company’s investment capital is
currently allocated between mortgage servicing right (“MSR”)
related assets, credit investments, single-family residential
(“SFR”) properties and agency mortgage-backed securities
(“MBS”).
The Company’s MSR related assets represent investments for which
the return is based on the economic performance of a pool of
specific MSRs. The Company’s credit investments
generally include investments in mortgage loans secured by either
residential or commercial real property or MBS collateralized by
residential or commercial mortgage loans (“non-agency MBS”) or
asset-backed securities (“ABS”) collateralized by residential solar
panel loans. The Company’s SFR investment strategy is to
acquire, lease and operate single-family residential homes as
rental properties. The Company’s agency MBS consist of residential
mortgage pass-through certificates for which the principal and
interest payments are guaranteed by a U.S. government sponsored
enterprise (“GSE”), such as the Federal National Mortgage
Association (“Fannie Mae”) and the Federal Home Loan Mortgage
Corporation (“Freddie Mac”).
The Company is a Virginia
corporation. The Company is internally managed and does not have an
external investment advisor.
The Company has elected to be taxed as a real estate investment
trust (“REIT”) under the Internal
Revenue Code of 1986, as amended (the “Internal Revenue Code”). As
a REIT, the Company is required to distribute annually 90% of its
REIT taxable income (subject to certain adjustments). So long as
the Company continues to qualify as a REIT, it will generally not
be subject to U.S. Federal or state corporate income taxes on its
taxable income that it distributes to its shareholders on a timely
basis. At present, it is the Company’s intention to distribute 100%
of its taxable income, although the Company will not be required to
do so. The Company intends to make distributions of its taxable
income within the time limits prescribed by the Internal Revenue
Code, which may extend into the subsequent taxable year.
The unaudited interim consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) for interim financial
information and pursuant to the requirements for reporting on Form
10-Q and Article 10 of Regulation S-X. The Company’s unaudited
interim consolidated financial statements and notes thereto should
be read in conjunction with the Company’s audited annual
consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2021.
The Company’s consolidated financial statements include the
accounts of Arlington Asset and all other entities in which the
Company has a controlling financial interest. All intercompany
accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect
amounts reported in the consolidated financial statements. Although
the Company bases these estimates and assumptions on historical
experience and all other reasonably available information that the
Company believes to be relevant under the circumstances, such
estimates frequently require management to exercise significant
subjective judgment about matters that are inherently uncertain.
Actual results may differ materially from these estimates.
Certain prior period amounts in the consolidated financial
statements and the accompanying notes may have been reclassified to
conform to the current year’s presentation. These reclassifications
had no impact on the previously reported net income, total assets
or total liabilities.
Note 2. Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents include demand deposits with banks, money market
accounts and highly liquid investments with original maturities of
three months or less. As of March 31, 2022 and
December 31, 2021, approximately 81% and 67%, respectively, of
the Company’s cash equivalents were invested in money market funds
that invest primarily in U.S. Treasuries and other securities
backed by the U.S. government.
5
Investment Security Purchases and Sales
Purchases and sales of investment securities are recorded on the
settlement date of the transfer unless the trade qualifies as a
“regular-way” trade and the associated commitment qualifies for an
exemption from the accounting guidance applicable to derivative
instruments. A regular-way trade is an investment security purchase
or sale transaction that is expected to settle within the period of
time following the trade date that is prevalent or traditional for
that specific type of security. Any amounts payable or receivable
for unsettled security trades are recorded as “sold securities
receivable” or “purchased securities payable” in the consolidated
balance sheets.
Interest Income Recognition for Investments in Agency MBS and
Mortgage Loans of Consolidated VIEs
The Company recognizes interest income for its investments in
agency MBS and mortgage loans of consolidated variable interest
entities (“VIEs”) by applying the “interest method” permitted by
GAAP, whereby purchase premiums and discounts are amortized and
accreted, respectively, as an adjustment to contractual interest
income accrued at each investment’s stated interest rate. The
interest method is applied at the individual instrument level based
upon each instrument’s effective interest rate. The Company
calculates each instrument’s effective interest rate at the time of
purchase or initial recognition by solving for the discount rate
that equates the present value of that instrument's remaining
contractual cash flows (assuming no principal prepayments) to its
purchase cost. Because each instrument’s effective interest rate
does not reflect an estimate of future prepayments, the Company
refers to this manner of applying the interest method as the
“contractual effective interest method.” When applying the
contractual effective interest method, as principal prepayments
occur, a proportional amount of the unamortized premium or
unaccreted discount is recognized in interest income such that the
contractual effective interest rate on any remaining security or
loan balance is unaffected.
For mortgage loans of consolidated VIEs, the Company ceases the
accrual of interest income (i.e., places the loan in non-accrual
status) when it believes collectability of principal and interest
in full is not reasonably assured, which generally occurs when a
loan is three or more monthly payments past due, unless the loan is
well secured and in the process of collection based upon an
individual loan assessment. Upon placing a loan in
non-accrual status, any previously accrued but uncollected interest
is derecognized and a corresponding reduction to current period
interest income is recorded. While a loan is in
non-accrual status, the Company recognizes interest income only
when interest payments occur.
Interest Income Recognition for Investments in Credit Securities
and MSR Financing Receivables
The Company recognizes interest income for its investments in
credit securities and MSR financing receivables by applying the
prospective level-yield methodology required by GAAP for financial
assets that are either not of high credit quality at the time of
acquisition or can be contractually prepaid or otherwise settled in
such a way that the Company would not recover substantially all of
its recorded investment. The amount of periodic interest
income recognized is determined by applying the investment’s
effective interest rate to its amortized cost basis (or “reference
amount”). At the time of acquisition, the investment’s effective
interest rate is calculated by solving for the single discount rate
that equates the present value of the Company’s best estimate of
the amount and timing of the cash flows expected to be collected
from the investment to its purchase cost. To prepare its best
estimate of cash flows expected to be collected, the Company
develops a number of assumptions about the future performance of
the pool of loans that serve as collateral for its investment,
including assumptions about the timing and amount of prepayments
and credit losses. In each subsequent quarterly
reporting period, the amount and timing of cash flows expected to
be collected from the investment are re-estimated based upon
current information and events. The following table provides a
description of how periodic changes in the estimate of cash flows
expected to be collected affect interest income recognition
prospectively for investments in credit securities and MSR
financing receivables:
|
Scenario:
|
|
|
Effect on Interest Income Recognition for Investments
in Credit Securities and MSR Financing Receivables:
|
|
|
|
|
A positive change in cash flows occurs.
Actual cash flows exceed prior estimates and/or a positive change
occurs in the estimate of expected remaining cash flows.
|
|
|
A revised effective interest rate is calculated and applied
prospectively such that the positive change in cash flows is
recognized as incremental interest income over the remaining life
of the investment.
|
|
|
|
|
The amount of periodic interest income recognized over the
remaining life of the investment will be reduced accordingly.
Generally, the investment’s effective interest rate is reduced
accordingly and applied on a prospective basis. However,
if the revised effective interest rate is negative, the
investment’s existing effective interest rate is retained while the
reference amount to which the existing effective interest rate will
be prospectively applied is reduced to the present value of cash
flows expected to be collected, discounted at the investment’s
existing effective interest rate.
|
|
An adverse change in cash flows occurs.
Actual cash flows fall short of prior estimates and/or an adverse
change occurs in the estimate of expected remaining cash flows.
|
|
|
6
Other Significant Accounting Policies
Certain of the Company’s other significant accounting policies are
summarized in the following notes:
|
Investments in agency MBS, subsequent measurement
|
Note 3
|
|
Investments in credit securities, subsequent measurement
Loans held for investment, subsequent measurement
Investments in MSR financing receivables, subsequent
measurement
Investments in SFR properties
|
Note 4
Note 5
Note 6
Note 7
|
|
Consolidation of variable interest entities
Borrowings
|
Note 8
Note 9
|
|
To-be-announced agency MBS transactions, including “dollar
rolls”
|
Note 10
|
|
Derivative instruments
|
Note 10
|
|
Balance sheet offsetting
|
Note 11
|
|
Fair value measurements
Income taxes
|
Note 12
Note 13
|
Refer to the Company’s 2021 Annual Report on Form 10-K for a
complete inventory and summary of the Company’s significant
accounting policies.
Recent Accounting Pronouncements
The following table provides a brief description of recently issued
accounting pronouncements and their actual or expected effect on
the Company’s consolidated financial statements:
|
Standard
|
Description
|
Date of
Adoption
|
Effect on the Consolidated
Financial Statements
|
|
Recently Issued Accounting Guidance Not Yet Adopted
|
|
ASU Nos. 2020-04 and 2021-01, Reference Rate Reform (Topic 848)
|
The amendments in these updates provide optional practical
expedients and exceptions for applying GAAP to the modification of
receivables, debt or lease contracts as well as cash flow and fair
value hedge accounting relationships that reference a rate, such as
the London Interbank Offered Rate (“LIBOR”), that is expected to be
discontinued because of reference rate reform.
The practical expedients and exceptions provided by these updates
are effective from March 12, 2020 through December 31, 2022.
|
Not yet adopted.
|
To date, the Company has not made any modifications to contracts
due to reference rate reform.
The Company has not elected to apply hedge accounting for financial
reporting purposes.
The Company does not currently expect the adoption of ASU Nos.
2020-04 and 2021-01 to have an effect on its consolidated financial
statements.
|
Note 3. Investments in Agency MBS
The Company has elected to classify its investments in agency MBS
as trading securities. Accordingly, the Company’s
investments in agency MBS are reported in the accompanying
consolidated balance sheets at fair value. As of March 31, 2022 and
December 31, 2021, the fair value of the Company’s investments
in agency MBS was $292,318 and $483,927, respectively. As of
March 31, 2022, all the Company’s investments in agency MBS
represent undivided (or “pass-through”) beneficial interests in
specified pools of fixed-rate mortgage loans.
All periodic changes in the fair value of agency MBS that are not
attributed to interest income are recognized as a component of
“investment and derivative gain (loss), net” in the accompanying
consolidated statements of comprehensive income. The following
table provides additional information about the gains and losses
recognized as a component of “investment and derivative gain
(loss), net” in the Company’s consolidated statements of
comprehensive income for the periods indicated with respect to
investments in agency MBS:
7
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Net gains (losses) recognized in earnings for:
|
|
|
|
|
|
|
|
|
|
Agency MBS still held at period end
|
|
$
|
(17,414
|
)
|
|
$
|
(19,035
|
)
|
|
Agency MBS sold during the period
|
|
|
(8,543
|
)
|
|
|
(10,180
|
)
|
|
Total
|
|
$
|
(25,957
|
)
|
|
$
|
(29,215
|
)
|
The Company also invests in and finances fixed-rate agency MBS on a
generic pool basis through sequential series of to-be-announced
security transactions commonly referred to as “dollar rolls.”
Dollar rolls are accounted for as a sequential series of derivative
instruments. Refer to “Note 10. Derivative Instruments” for further
information about dollar rolls.
Note 4. Investments in Credit Securities
The Company has elected to classify its investments in credit
securities as trading securities. Accordingly, the
Company’s investments in credit securities are reported in the
accompanying consolidated balance sheets at fair
value. As of March 31, 2022 and December 31,
2021, the fair value of the Company’s investments in credit
securities was $25,360 and $26,222, respectively. As of
March 31, 2022, the Company’s
investments in credit securities primarily consist of non-agency
MBS collateralized by pools of business purpose residential
mortgage loans and ABS collateralized by pools of residential solar
panel loans.
All periodic changes in the fair value of credit securities that
are not attributed to interest income are recognized as a component
of “investment and derivative gain (loss), net” in the accompanying
consolidated statements of comprehensive income. The following table provides additional
information about the gains and losses recognized as a component of
“investment and derivative gain (loss), net” in the Company’s
consolidated statements of comprehensive income for the periods
indicated with respect to investments in credit
securities:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Net gains (losses) recognized in earnings for:
|
|
|
|
|
|
|
|
|
|
Credit securities still held at period end
|
|
$
|
(842
|
)
|
|
$
|
551
|
|
|
Credit securities sold during the period
|
|
|
—
|
|
|
|
840
|
|
|
Total
|
|
$
|
(842
|
)
|
|
$
|
1,391
|
|
Note 5. Loans Held for Investment
As of March 31, 2022 and December 31, 2021, the Company
held a loan secured by a first lien position in healthcare
facilities and guaranteed by the operator of the facilities with an
outstanding principal outstanding principal balance of $29,592 and
$29,697, respectively. The loan bears
interest at a floating note rate equal to SOFR plus 5.61%. The original
maturity date of the loan was March 23, 2022 with a
one-year extension
available at the option of the borrower. On March 23,
2022, the borrower exercised its one-year extension option
resulting in a new maturity date of March 23, 2023. The
loan has monthly principal amortization based upon a 30-year
amortization schedule with the remaining principal balance due at
loan maturity.
The Company has elected to account for its loan held for investment
at fair value on a recurring basis with periodic changes in fair
value recognized as a component of “investment and derivative gain
(loss), net” in the accompanying consolidated statements of
comprehensive income. As of March 31, 2022 and
December 31, 2021, the Company’s investment was $29,592 and
$29,697, respectively, at fair value. The Company
recognizes interest income on its loan investment based upon the
effective interest rate of the loan which, as of March 31,
2022 and December 31, 2021, was
equal to the contractual note rate of the loan.
As of March 31, 2022 and December 31, 2021, the Company
was party to a participation agreement pursuant to which the
Company has committed to fund up to $30,000 of a $130,000 revolving
credit facility that matures on July 7, 2024. Under the
terms of the participation agreement, the Company funds the last
$30,000 of advances under the revolving credit
facility. Any draws under the revolving credit facility
bear interest at one-month LIBOR plus 3.75% with a LIBOR floor of
1.00% and are secured by a first lien on all accounts receivable
and a second lien on all other assets of the
borrower. The borrower is also required to pay an unused
commitment fee of 0.50%. As of March 31, 2022 and
December 31, 2021, the Company’s unfunded commitment was
$30,000.
8
Note 6. Investments in MSR Financing Receivables
The Company does not hold the
requisite licenses to purchase or hold MSRs
directly. However, the Company has entered into
agreements with a licensed, GSE approved residential mortgage loan
servicer that enable the Company to garner the economic return of
an investment in an MSR purchased by the mortgage servicing
counterparty through an MSR financing transaction. Under
the terms of the arrangement, for an MSR acquired by the mortgage
servicing counterparty (i) the Company purchases the “excess
servicing spread” from the mortgage servicer counterparty,
entitling the Company to monthly distributions of the servicing
fees collected by the mortgage servicing counterparty in excess
of 12.5 basis points per annum (and to distributions of
corresponding proceeds of sale of the MSRs), and (ii) the Company
funds the balance of the MSR purchase price to the parent company
of the mortgage servicing counterparty and, in exchange, has an
unsecured right to payment of certain amounts determined by
reference to the MSR, generally equal to the servicing fee revenue
less the excess servicing spread and the costs of servicing (and to
distributions of corresponding proceeds of sale of the MSRs), net
of fees earned by the mortgage servicing counterparty and its
affiliates including an incentive fee equal to a percentage of the
total return of the MSR in excess of a hurdle rate of
return. The Company has committed to invest a total
minimum of $50,000 in capital with the counterparty with $25,000 of
the minimum commitment expiring on December 31, 2023 and $25,000 of
the minimum commitment expiring on April 1, 2024.
Under the arrangement, the Company is obligated to provide funds to
the mortgage servicing counterparty to fund the counterparty’s
advances of payments on the serviced pool of mortgage
loans. The mortgage servicing counterparty is required
to return to the Company subsequent servicing advances collected
from the underlying borrowers. The mortgage servicing
counterparty is entitled to reimbursement from the GSEs of any
servicing advances that are not subsequently collected from the
underlying borrowers. As of March 31, 2022 and
December 31, 2021, the Company had provided funds of $2,587
and $3,731, respectively, to its mortgage servicing counterparty
related to the counterparty’s servicing advances made pursuant to
the MSRs to which the Company’s MSR financing receivables are
referenced.
As a means to increase potential returns to the Company, at the
Company’s election, the mortgage servicing counterparty can utilize
leverage on the MSRs to which the Company’s MSR financing
receivables are referenced to finance the purchase of additional
MSRs. As of March 31, 2022 and December 31,
2021, the Company’s counterparty had drawn $43,948 and $40,398,
respectively, of financing secured by the MSRs to which the
Company’s MSR financing receivables are referenced.
Under GAAP, the Company accounts for transactions executed under
its arrangement with the mortgage servicing counterparty as
financing transactions and reflects the associated financing
receivables in the line item “MSR financing receivables” on its
consolidated balance sheets. The Company has elected to account
for its MSR financing receivables at fair value with changes in
fair value that are not attributed to interest income recognized as
a component of “investment and derivative gain (loss), net” in the
accompanying consolidated statements of comprehensive income.
As described in further detail in “Note 2. Summary of Significant
Accounting Policies,” the Company recognizes interest income for
MSR financing receivables by applying the prospective level-yield
methodology required by GAAP for financial assets that are either
not of high credit quality at the time of acquisition or can be
contractually prepaid or otherwise settled in such a way that the
Company would not recover substantially all of its recorded
investment.
As of March 31, 2022 and December 31, 2021, the fair
value of the Company’s investments in MSR financing receivables was
$139,225 and $125,018, respectively. The following table
presents activity related to the carrying value of the Company’s
investments in MSR financing receivables for the periods
indicated:
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2022
|
|
|
2021
|
|
|
Balance at period beginning
|
|
$
|
125,018
|
|
|
$
|
9,346
|
|
|
Capital investments
|
|
|
3,187
|
|
|
|
20,344
|
|
|
Capital distributions
|
|
|
(15,120
|
)
|
|
|
—
|
|
|
Accretion of interest income
|
|
|
3,382
|
|
|
|
358
|
|
|
Changes in valuation inputs and assumptions
|
|
|
22,758
|
|
|
|
5,957
|
|
|
Balance at period end
|
|
$
|
139,225
|
|
|
$
|
36,005
|
|
Note 7. Investments in SFR Properties
The Company owns a portfolio of SFR homes that it operates as
rental properties. The Company is party to an agreement
with a third-party investment firm to identify, acquire and manage
investments in SFR properties on behalf of the
Company. Under the terms of the agreement, the Company
has committed to fund up to $65,000 of capital to fund the
acquisition of SFR properties.
9
The Company’s commitment to fund up to $65,000
of capital may be reduced to $55,000
to the extent the Company utilizes debt financing to fund certain
acquisitions of SFR properties. The
Company is obligated to pay the third-party firm a minimum fee plus
an incentive fee equal to a percentage of the total investment
return in excess of a hurdle rate of return. If the
Company were to terminate the commitment, the Company would incur a
termination fee equal to a fixed amount less inception to date
minimum fees paid to the third-party firm.
The Company’s investments in SFR properties are initially
recognized on the settlement date of their acquisition at
cost. The Company allocates the initial acquisition cost
of each property to land and building on the basis of their
relative fair values at the time of acquisition. To
determine the relative fair value of land and building at the time
of acquisition, the Company uses available market data, such as
property specific county tax assessment records.
Subsequent to the acquisition of a property, expenditures which
improve or extend the life of the property are capitalized as a
component of the property’s cost basis. Expenditures for
ordinary maintenance and repairs are recognized as an expense as
incurred and are reported as a component of “single-family property
operating expenses” in the Company’s consolidated statements of
comprehensive income.
The Company subsequently recognizes depreciation of each property’s
buildings and capitalized improvements over the expected useful
lives of those assets. The Company calculates
depreciation on a straight-line basis over a useful life of 27.5
years for buildings and useful lives ranging from five to 27.5
years for capitalized improvements. The Company reports
depreciation expense as a component of “single-family property
operating expenses” in the Company’s consolidated statements of
comprehensive income.
Pursuant to its SFR investment strategy, the Company leases its SFR
properties to tenants who occupy the properties. The
leases generally have terms of one year or more and are classified
as operating leases. Rental revenue, net of any
concessions, is recognized over the term of each lease on a
straight-line basis. If the Company determines that
collectability of lease payments is not probable, any lease
receivables previously recognized are reversed and rental revenue
is limited to cash received.
Costs directly associated with the origination of a lease, such as
a commission paid to a property manager when a lease agreement is
obtained, are deferred at the commencement of the lease and
subsequently recognized ratably as an expense over the lease term,
consistent with the recognition of rental revenue from the
lease. The ratable expense recognition of lease direct
costs is reported as a component of
“single-family property operating expenses” in the Company’s
consolidated statements of comprehensive
income. In addition to the expense items
previously mentioned, “single-family property operating expenses”
also include accruals for, but not limited to, third-party property
management fees, local real estate tax assessments, utilities,
homeowners’ association dues, insurance and interest expense
incurred in financing secured by SFR properties.
The Company evaluates its SFR properties for impairment whenever
circumstances indicate that their carrying amounts may not be
recoverable. Significant indicators of potential
impairment include, but are not limited to, declines in home
values, adverse changes in rental or occupancy rates and relevant
unfavorable changes in the broader economy. If
indicators of potential impairment exist, the Company performs a
recoverability test by comparing the property’s net carrying amount
to its estimate of the undiscounted future net cash flows expected
to be obtained from the use and eventual disposition of the
property. If the property’s carrying amount exceeds the
Company’s estimate of the undiscounted future net cash flows
expected to be obtained from the property, the Company recognizes
an impairment loss equal to the amount that the property’s net
carrying amount exceeds the property’s estimated fair
value. As of March 31,
2022 and December 31, 2021, the Company had not recognized any
impairment losses for its investments in SFR properties.
As of March 31, 2022 and December 31, 2021, the Company
had investments in 405 and 214 SFR properties, respectively, for a
total cost of $121,962 and $61,188, respectively. During
the three months ended March 31, 2022, the Company recognized $715
of depreciation expense related to its SFR
properties. The following table summarizes the Company’s
net carrying amount of its SFR properties by component as of the
dates indicated:
|
|
|
March 31, 2022
|
|
|
December 31, 2021
|
|
|
Investments in single-family residential real estate:
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
20,317
|
|
|
$
|
10,128
|
|
|
Buildings and improvements
|
|
|
101,645
|
|
|
|
51,060
|
|
|
Investments in single-family residential real estate, at cost
|
|
|
121,962
|
|
|
|
61,188
|
|
|
Less: accumulated depreciation
|
|
|
(1,010
|
)
|
|
|
(299
|
)
|
|
Investments in single-family residential real estate, net
|
|
$
|
120,952
|
|
|
$
|
60,889
|
|
As of March 31, 2022, the Company had commitments to acquire
49 SFR properties for an aggregate purchase price of $14,616.
10
On May 10, 2022, the Company entered into an agreement under which
it made a binding commitment to sell 378 SFR properties for
$132,750. The 378 SFR properties have an estimated
all-in-cost of $114,874, which includes the purchase price of the
properties, closing costs and initial rehabilitation
costs. Prior to settlement, the buyer can remove up to
5% of the SFR properties from the sale
transaction. Pursuant to the agreement, the buyer may,
for any reason or no reason at all, and in its sole and absolute
discretion, terminate the agreement within 20 days of contract
signing. If ultimately consummated, the sale is expected
to settle late in the second quarter. As of March 31,
2022, the requirements for held-for-sale classification of the SFR
properties had not been met.
Note 8. Consolidation of Variable Interest Entities
The vehicles that issue the Company’s investments in securitized
mortgage assets are considered VIEs. The Company is required to
consolidate any VIE in which it holds a variable interest if it
determines that it holds a controlling financial interest in the
VIE and is, therefore, determined to be the primary beneficiary of
the VIE. The Company is determined to be the primary
beneficiary of a VIE in which it holds a variable interest if it
both (i) holds the power to direct the activities that most
significantly impact the VIE’s economic performance and (ii) has
the obligation to absorb losses or the right to receive benefits
that could potentially be significant to the VIE. The
economic performance of the trusts that issue the Company’s
investments in securitized mortgage assets is most significantly
impacted by the performance of the mortgage loans that are held by
the trusts. The party that is determined to have the
most power to direct the loss mitigation actions that are taken
with respect to delinquent or otherwise troubled mortgage loans
held by the trust is, therefore, deemed to hold the most power to
direct the activities that most significantly impact the trust’s
economic performance. As a passive investor, the Company
does not have the power to direct the loss mitigation activities of
most of the trusts that have issued its securitized mortgage
assets.
On September 30, 2020, the Company acquired for $10,693 an
investment that represents a majority interest in the first loss
position of a securitized pool of business purpose residential
mortgage loans. As majority holder of the first loss position, the
Company is required to approve any material loss mitigation action
proposed by the servicer with respect to a troubled
loan. The Company also has the option (but not the
obligation) to purchase delinquent loans from the
trust. As a result of these contractual rights, the
Company determined that it is the party with the most power to
direct the loss mitigation activities and, therefore, the economic
performance of the trust. As holder of the majority of
the first loss position issued by the trust, the Company has the
obligation to absorb losses or the right to receive benefits that
could potentially be significant to the
trust. Accordingly, the Company determined that it is
the primary beneficiary of the trust and consolidated the trust’s
assets and liabilities owed to third parties onto its consolidated
balance sheets.
On February 3, 2022, the Company acquired for $20,585 investments
in the first loss position and the excess interest-only strip of a
securitized pool of recently originated, performing “non-qualified”
residential mortgage loans. The Company’s investment in
the excess interest-only strip provides it with the option (but not
the obligation) to purchase delinquent loans from the
trust. As a result of this contractual right, the
Company determined that it has the power to circumvent the loss
mitigation activities that would otherwise be performed by the
servicer and, therefore, is the party with the most power to impact
economic performance of the trust. As a result of its
inv