``` 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 September 30, 20172023
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.) |
|
| |
(Address of Principal Executive Offices) | (Zip Code) |
(703) (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 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 (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes . 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 October 31, 2017:2023:
Title | Outstanding | |
Class A Common Stock |
|
ARLINGTON ASSET INVESTMENT CORP.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 20172023
INDEX
Page | ||||||
PART I — FINANCIAL INFORMATION | ||||||
Item 1. | Consolidated Financial Statements and Notes — (unaudited) | 1 | ||||
Consolidated Balance Sheets | 1 | |||||
2 | ||||||
3 | ||||||
Consolidated Statements of Cash Flows | 4 | |||||
5 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ||||
Item 3. |
| |||||
Item 4. |
| |||||
PART II — OTHER INFORMATION | ||||||
Item 1. |
| |||||
Item 1A. |
| |||||
Item 2. |
| |||||
Item 3. |
| |||||
Item 4. |
| |||||
Item 5. |
| |||||
Item 6. |
| |||||
|
i
ARLINGTON ASSET INVESTMENT CORP.
(Dollars in thousands)
(Unaudited)
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 26,368 |
|
| $ | 54,794 |
|
Interest receivable |
|
| 12,428 |
|
|
| 11,646 |
|
Sold securities receivable |
|
| 92,882 |
|
|
| — |
|
Mortgage-backed securities, at fair value |
|
|
|
|
|
|
|
|
Agency |
|
| 3,994,515 |
|
|
| 3,911,375 |
|
Private-label |
|
| 54 |
|
|
| 1,266 |
|
Derivative assets, at fair value |
|
| 4,177 |
|
|
| 74,889 |
|
Deferred tax assets, net |
|
| 23,453 |
|
|
| 48,829 |
|
Deposits, net |
|
| 59,317 |
|
|
| 11,149 |
|
Other assets |
|
| 2,405 |
|
|
| 3,003 |
|
Total assets |
| $ | 4,215,599 |
|
| $ | 4,116,951 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Repurchase agreements |
| $ | 3,694,838 |
|
| $ | 3,649,102 |
|
Interest payable |
|
| 2,813 |
|
|
| 3,434 |
|
Accrued compensation and benefits |
|
| 4,210 |
|
|
| 5,406 |
|
Dividend payable |
|
| 17,044 |
|
|
| 15,739 |
|
Derivative liabilities, at fair value |
|
| 7,146 |
|
|
| 9,554 |
|
Purchased securities payable |
|
| 21,962 |
|
|
| — |
|
Other liabilities |
|
| 1,190 |
|
|
| 1,247 |
|
Long-term unsecured debt |
|
| 73,824 |
|
|
| 73,656 |
|
Total liabilities |
|
| 3,823,027 |
|
|
| 3,758,138 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 25,000,000 shares authorized, 294,993 and -0- shares issued and outstanding, respectively (liquidation preference of $7,375 and $-0-, respectively) |
|
| 6,904 |
|
|
| — |
|
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 28,038,275 and 23,607,111 shares issued and outstanding, respectively |
|
| 280 |
|
|
| 236 |
|
Class B common stock, $0.01 par value, 100,000,000 shares authorized, -0- and 20,256 shares issued and outstanding, respectively |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 1,972,463 |
|
|
| 1,910,284 |
|
Accumulated deficit |
|
| (1,587,075 | ) |
|
| (1,551,707 | ) |
Total stockholders’ equity |
|
| 392,572 |
|
|
| 358,813 |
|
Total liabilities and stockholders’ equity |
| $ | 4,215,599 |
|
| $ | 4,116,951 |
|
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
ASSETS |
|
|
|
| ||||
Cash and cash equivalents (includes $49 and $296, respectively, from |
| $ | 8,900 |
|
| $ | 28,021 |
|
Restricted cash of consolidated VIEs |
|
| 3 |
|
|
| 2,191 |
|
Agency mortgage-backed securities, at fair value |
|
| 520,851 |
|
|
| 443,540 |
|
MSR financing receivables, at fair value |
|
| 191,800 |
|
|
| 180,365 |
|
Credit securities, at fair value |
|
| 101,546 |
|
|
| 104,437 |
|
Mortgage loans, at fair value |
|
| 25,216 |
|
|
| 29,264 |
|
Mortgage loans of consolidated VIEs, at fair value |
|
| 237 |
|
|
| 193,957 |
|
Deposits |
|
| 1,624 |
|
|
| 1,823 |
|
Other assets (includes $1,528 and $2,067, respectively, from consolidated VIEs) |
|
| 17,081 |
|
|
| 18,720 |
|
Total assets |
| $ | 867,258 |
|
| $ | 1,002,318 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
| ||||
Liabilities: |
|
|
|
| ||||
Repurchase agreements |
| $ | 554,707 |
|
| $ | 515,510 |
|
Secured debt of consolidated VIEs, at fair value |
|
| 91 |
|
|
| 169,345 |
|
Long-term unsecured debt |
|
| 86,713 |
|
|
| 86,405 |
|
Other liabilities (includes $-0- and $262, respectively, from consolidated VIEs) |
|
| 12,396 |
|
|
| 13,718 |
|
Total liabilities |
|
| 653,907 |
|
|
| 784,978 |
|
Commitments and contingencies |
|
|
|
| ||||
Stockholders’ Equity: |
|
|
|
| ||||
Series B Preferred stock, $0.01 par value, 379,668 shares issued and outstanding |
|
| 9,001 |
|
|
| 9,001 |
|
Series C Preferred stock, $0.01 par value, 957,133 shares issued and outstanding |
|
| 23,820 |
|
|
| 23,820 |
|
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 28,360,447 |
|
| 284 |
|
|
| 282 |
|
Additional paid-in capital |
|
| 2,026,250 |
|
|
| 2,024,298 |
|
Accumulated deficit |
|
| (1,846,004 | ) |
|
| (1,840,061 | ) |
Total stockholders’ equity |
|
| 213,351 |
|
|
| 217,340 |
|
Total liabilities and stockholders’ equity |
| $ | 867,258 |
|
| $ | 1,002,318 |
|
|
|
|
|
|
|
| ||
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Assets and liabilities of consolidated VIEs |
|
|
|
|
|
| ||
Cash and restricted cash |
| $ | 52 |
|
| $ | 2,487 |
|
Mortgage loans, at fair value |
|
| 237 |
|
|
| 193,957 |
|
Other assets |
|
| 1,528 |
|
|
| 2,067 |
|
Secured debt, at fair value |
|
| (91 | ) |
|
| (169,345 | ) |
Other liabilities |
|
| — |
|
|
| (262 | ) |
Net investment in consolidated VIEs |
| $ | 1,726 |
|
| $ | 28,904 |
|
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 September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
| $ | 28,771 |
|
| $ | 23,917 |
|
| $ | 90,454 |
|
| $ | 72,980 |
|
Private-label mortgage-backed securities |
|
| 2 |
|
|
| 1,655 |
|
|
| 82 |
|
|
| 7,437 |
|
Other |
|
| 62 |
|
|
| 82 |
|
|
| 103 |
|
|
| 342 |
|
Total interest income |
|
| 28,835 |
|
|
| 25,654 |
|
|
| 90,639 |
|
|
| 80,759 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term secured debt |
|
| 12,748 |
|
|
| 6,193 |
|
|
| 32,921 |
|
|
| 17,202 |
|
Long-term unsecured debt |
|
| 1,220 |
|
|
| 1,197 |
|
|
| 3,641 |
|
|
| 3,584 |
|
Total interest expense |
|
| 13,968 |
|
|
| 7,390 |
|
|
| 36,562 |
|
|
| 20,786 |
|
Net interest income |
|
| 14,867 |
|
|
| 18,264 |
|
|
| 54,077 |
|
|
| 59,973 |
|
Investment gain (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on trading investments, net |
|
| 13,996 |
|
|
| 2,468 |
|
|
| 25,632 |
|
|
| 81,083 |
|
(Loss) gain from derivative instruments, net |
|
| (572 | ) |
|
| 15,196 |
|
|
| (29,945 | ) |
|
| (119,945 | ) |
Realized gain on sale of available-for-sale investments, net |
|
| — |
|
|
| 2,439 |
|
|
| — |
|
|
| 1,846 |
|
Other-than-temporary impairment charges |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,737 | ) |
Other, net |
|
| (56 | ) |
|
| 619 |
|
|
| (51 | ) |
|
| 638 |
|
Total investment gain (loss), net |
|
| 13,368 |
|
|
| 20,722 |
|
|
| (4,364 | ) |
|
| (38,115 | ) |
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
| 3,449 |
|
|
| 3,430 |
|
|
| 9,698 |
|
|
| 8,750 |
|
Other general and administrative expenses |
|
| 1,095 |
|
|
| 1,200 |
|
|
| 3,925 |
|
|
| 7,887 |
|
Total general and administrative expenses |
|
| 4,544 |
|
|
| 4,630 |
|
|
| 13,623 |
|
|
| 16,637 |
|
Income before income taxes |
|
| 23,691 |
|
|
| 34,356 |
|
|
| 36,090 |
|
|
| 5,221 |
|
Income tax provision |
|
| 823 |
|
|
| 15,543 |
|
|
| 25,896 |
|
|
| 5,132 |
|
Net income |
|
| 22,868 |
|
|
| 18,813 |
|
|
| 10,194 |
|
|
| 89 |
|
Dividend on preferred stock |
|
| (83 | ) |
|
| — |
|
|
| (118 | ) |
|
| — |
|
Net income available to common stock |
| $ | 22,785 |
|
| $ | 18,813 |
|
| $ | 10,076 |
|
| $ | 89 |
|
Basic earnings per common share |
| $ | 0.86 |
|
| $ | 0.82 |
|
| $ | 0.41 |
|
| $ | — |
|
Diluted earnings per common share |
| $ | 0.85 |
|
| $ | 0.81 |
|
| $ | 0.40 |
|
| $ | — |
|
Weighted-average common shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 26,377 |
|
|
| 23,038 |
|
|
| 24,793 |
|
|
| 23,011 |
|
Diluted |
|
| 26,856 |
|
|
| 23,349 |
|
|
| 25,143 |
|
|
| 23,154 |
|
Other comprehensive income (loss), net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on available-for-sale securities (net of taxes of $-0-, $(141), $-0- and $(3,946), respectively) |
| $ | — |
|
| $ | (221 | ) |
| $ | — |
|
| $ | (6,197 | ) |
Reclassification |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in investment gain (loss), net, related to sales of available-for-sale securities (net of taxes of $-0-, $(639), $-0-, and $(783), respectively) |
|
| — |
|
|
| (2,324 | ) |
|
| — |
|
|
| (2,550 | ) |
Included in investment gain (loss), net, related to other-than-temporary impairment charges on available-for-sale securities (net of taxes of $-0-, $-0-, $-0- and $676, respectively) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,061 |
|
Comprehensive income (loss) |
| $ | 22,868 |
|
| $ | 16,268 |
|
| $ | 10,194 |
|
| $ | (7,597 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Interest income |
|
|
|
|
|
|
|
| ||||||||
MSR financing receivables |
| $ | 5,247 |
|
| $ | 3,608 |
|
| $ | 14,641 |
|
| $ | 10,973 |
|
Agency mortgage-backed securities |
|
| 5,417 |
|
|
| 3,631 |
|
|
| 15,433 |
|
|
| 7,188 |
|
Credit securities and loans |
|
| 2,849 |
|
|
| 2,736 |
|
|
| 8,413 |
|
|
| 4,580 |
|
Mortgage loans of consolidated VIEs |
|
| — |
|
|
| 2,303 |
|
|
| 1,454 |
|
|
| 5,268 |
|
Other |
|
| 62 |
|
|
| 110 |
|
|
| 350 |
|
|
| 548 |
|
Total interest and other income |
|
| 13,575 |
|
|
| 12,388 |
|
|
| 40,291 |
|
|
| 28,557 |
|
Rent revenues from single-family properties |
|
| — |
|
|
| 2,103 |
|
|
| — |
|
|
| 5,304 |
|
Interest expense |
|
|
|
|
|
|
|
| ||||||||
Repurchase agreements |
|
| 7,183 |
|
|
| 2,863 |
|
|
| 19,912 |
|
|
| 3,902 |
|
Long-term debt secured by single-family properties |
|
| — |
|
|
| 741 |
|
|
| — |
|
|
| 1,867 |
|
Long-term unsecured debt |
|
| 1,576 |
|
|
| 1,456 |
|
|
| 4,678 |
|
|
| 4,226 |
|
Secured debt of consolidated VIEs |
|
| — |
|
|
| 912 |
|
|
| 681 |
|
|
| 3,678 |
|
Total interest expense |
|
| 8,759 |
|
|
| 5,972 |
|
|
| 25,271 |
|
|
| 13,673 |
|
Single-family property operating expenses |
|
| — |
|
|
| 1,872 |
|
|
| — |
|
|
| 5,318 |
|
Net operating income |
|
| 4,816 |
|
|
| 6,647 |
|
|
| 15,020 |
|
|
| 14,870 |
|
Investment and derivative (loss) gain, net |
|
| (7,997 | ) |
|
| 1,235 |
|
|
| (5,431 | ) |
|
| 778 |
|
General and administrative expenses |
|
|
|
|
|
|
|
| ||||||||
Compensation and benefits |
|
| 2,091 |
|
|
| 2,256 |
|
|
| 6,383 |
|
|
| 6,645 |
|
Other general and administrative expenses |
|
| 1,142 |
|
|
| 1,121 |
|
|
| 5,474 |
|
|
| 3,803 |
|
Total general and administrative expenses |
|
| 3,233 |
|
|
| 3,377 |
|
|
| 11,857 |
|
|
| 10,448 |
|
(Loss) income before income taxes |
|
| (6,414 | ) |
|
| 4,505 |
|
|
| (2,268 | ) |
|
| 5,200 |
|
Income tax provision |
|
| 199 |
|
|
| 1,074 |
|
|
| 1,695 |
|
|
| 4,163 |
|
Net (loss) income |
|
| (6,613 | ) |
|
| 3,431 |
|
|
| (3,963 | ) |
|
| 1,037 |
|
Dividend on preferred stock |
|
| (660 | ) |
|
| (675 | ) |
|
| (1,980 | ) |
|
| (2,124 | ) |
Net (loss) income (attributable) available to |
| $ | (7,273 | ) |
| $ | 2,756 |
|
| $ | (5,943 | ) |
| $ | (1,087 | ) |
Basic (loss) earnings per common share |
| $ | (0.26 | ) |
| $ | 0.10 |
|
| $ | (0.21 | ) |
| $ | (0.04 | ) |
Diluted (loss) earnings per common share |
| $ | (0.26 | ) |
| $ | 0.10 |
|
| $ | (0.21 | ) |
| $ | (0.04 | ) |
Weighted-average common shares outstanding |
|
|
|
|
|
|
|
| ||||||||
Basic |
|
| 28,081 |
|
|
| 28,338 |
|
|
| 28,055 |
|
|
| 28,973 |
|
Diluted |
|
| 28,081 |
|
|
| 28,913 |
|
|
| 28,055 |
|
|
| 28,973 |
|
See notes to consolidated financial statements.
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
(Unaudited)
|
| Preferred Stock (#) |
|
| Preferred Amount ($) |
|
| Class A Common Stock (#) |
|
| Class A Amount ($) |
|
| Class B Common Stock (#) |
|
| Class B Amount ($) |
|
| Additional Paid-In Capital |
|
| Accumulated Other Comprehensive Income |
|
| Accumulated Deficit |
|
| Total |
| ||||||||||
Balances, December 31, 2015 |
|
| — |
|
| $ | — |
|
|
| 22,874,819 |
|
| $ | 229 |
|
|
| 102,216 |
|
| $ | 1 |
|
| $ | 1,898,085 |
|
| $ | 12,371 |
|
| $ | (1,451,258 | ) |
| $ | 459,428 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (41,347 | ) |
|
| (41,347 | ) |
Conversion of Class B common stock to Class A common stock |
|
| — |
|
|
| — |
|
|
| 81,960 |
|
|
| 1 |
|
|
| (81,960 | ) |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of Class A common stock |
|
| — |
|
|
| — |
|
|
| 595,342 |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 9,669 |
|
|
| — |
|
|
| — |
|
|
| 9,675 |
|
Issuance of Class A common stock under stock-based compensation plans |
|
| — |
|
|
| — |
|
|
| 73,457 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase of Class A common stock under stock-based compensation plans |
|
| — |
|
|
| — |
|
|
| (18,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (269 | ) |
|
| — |
|
|
| — |
|
|
| (269 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,974 |
|
|
| — |
|
|
| — |
|
|
| 2,974 |
|
Income tax provision from stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (175 | ) |
|
| — |
|
|
| — |
|
|
| (175 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,371 | ) |
|
| — |
|
|
| (12,371 | ) |
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (59,102 | ) |
|
| (59,102 | ) |
Balances, December 31, 2016 |
|
| — |
|
|
| — |
|
|
| 23,607,111 |
|
|
| 236 |
|
|
| 20,256 |
|
|
| — |
|
|
| 1,910,284 |
|
|
| — |
|
|
| (1,551,707 | ) |
|
| 358,813 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,194 |
|
|
| 10,194 |
|
Conversion of Class B common stock to Class A common stock |
|
| — |
|
|
| — |
|
|
| 20,256 |
|
|
| — |
|
|
| (20,256 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of Class A common stock |
|
| — |
|
|
| — |
|
|
| 4,369,637 |
|
|
| 44 |
|
|
| — |
|
|
| — |
|
|
| 59,869 |
|
|
| — |
|
|
| — |
|
|
| 59,913 |
|
Issuance of Class A common stock under stock-based compensation plans |
|
| — |
|
|
| — |
|
|
| 74,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Issuance of Series B preferred stock |
|
| 294,993 |
|
|
| 6,904 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,904 |
|
Repurchase of Class A common stock under stock-based compensation plans |
|
| — |
|
|
| — |
|
|
| (32,729 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (437 | ) |
|
| — |
|
|
| — |
|
|
| (437 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,747 |
|
|
| — |
|
|
| — |
|
|
| 2,747 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45,562 | ) |
|
| (45,562 | ) |
Balances, September 30, 2017 |
|
| 294,993 |
|
| $ | 6,904 |
|
|
| 28,038,275 |
|
| $ | 280 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,972,463 |
|
| $ | — |
|
| $ | (1,587,075 | ) |
| $ | 392,572 |
|
|
| Series B |
|
| Series B |
|
| Series C |
|
| Series C |
|
| Class A |
|
| Class A |
|
| Additional |
|
| Accumulated |
|
| 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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 404,746 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
Forfeiture of Class A common |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,167 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase of Class A |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (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 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 307 |
|
|
| 307 |
|
Repurchase of Class A |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (947,570 | ) |
|
| (10 | ) |
|
| (3,232 | ) |
|
| — |
|
|
| (3,242 | ) |
Repurchase of preferred stock |
|
| — |
|
|
| — |
|
|
| (72,363 | ) |
|
| (1,749 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,749 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 992 |
|
|
| — |
|
|
| 992 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (707 | ) |
|
| (707 | ) |
Balances, June 30, 2022 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 1,044,671 |
|
| $ | 25,607 |
|
|
| 29,112,374 |
|
| $ | 291 |
|
| $ | 2,025,345 |
|
| $ | (1,846,546 | ) |
| $ | 213,698 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,431 |
|
|
| 3,431 |
|
Repurchase of Class A common |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (472,357 | ) |
|
| (5 | ) |
|
| (1,488 | ) |
|
| — |
|
|
| (1,493 | ) |
Repurchase of preferred stock |
|
| — |
|
|
| — |
|
|
| (79,848 | ) |
|
| (1,640 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,640 | ) |
Repurchase of Class A common |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,058 | ) |
|
| — |
|
|
| (30 | ) |
|
| — |
|
|
| (30 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 919 |
|
|
| — |
|
|
| 919 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (675 | ) |
|
| (675 | ) |
Balances, September 30, 2022 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 964,823 |
|
| $ | 23,967 |
|
|
| 28,628,959 |
|
| $ | 286 |
|
| $ | 2,024,746 |
|
| $ | (1,843,790 | ) |
| $ | 214,210 |
|
|
| Series B |
|
| Series B |
|
| Series C |
|
| Series C |
|
| Class A |
|
| Class A |
|
| Additional |
|
| Accumulated |
|
| Total |
| |||||||||
Balances, December 31, 2022 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 957,133 |
|
| $ | 23,820 |
|
|
| 28,186,827 |
|
| $ | 282 |
|
| $ | 2,024,298 |
|
| $ | (1,840,061 | ) |
| $ | 217,340 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,218 | ) |
|
| (2,218 | ) |
Issuance of Class A common |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 198,324 |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
Repurchase of Class A |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (24,704 | ) |
|
| — |
|
|
| (74 | ) |
|
| — |
|
|
| (74 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 757 |
|
|
| — |
|
|
| 757 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (660 | ) |
|
| (660 | ) |
Balances, March 31, 2023 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 957,133 |
|
| $ | 23,820 |
|
|
| 28,360,447 |
|
| $ | 284 |
|
| $ | 2,024,979 |
|
| $ | (1,842,939 | ) |
| $ | 215,145 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,868 |
|
|
| 4,868 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 659 |
|
|
| — |
|
|
| 659 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (660 | ) |
|
| (660 | ) |
Balances, June 30, 2023 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 957,133 |
|
| $ | 23,820 |
|
|
| 28,360,447 |
|
| $ | 284 |
|
| $ | 2,025,638 |
|
| $ | (1,838,731 | ) |
| $ | 220,012 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,613 | ) |
|
| (6,613 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 612 |
|
|
| — |
|
|
| 612 |
|
Dividends declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (660 | ) |
|
| (660 | ) |
Balances, September 30, 2023 |
|
| 379,668 |
|
| $ | 9,001 |
|
|
| 957,133 |
|
| $ | 23,820 |
|
|
| 28,360,447 |
|
| $ | 284 |
|
| $ | 2,026,250 |
|
| $ | (1,846,004 | ) |
| $ | 213,351 |
|
See notes to consolidated financial statements.
3
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
| Nine Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2023 |
|
| 2022 |
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 10,194 |
|
| $ | 89 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
| ||||||||
Investment loss, net |
|
| 4,364 |
|
|
| 38,115 |
| ||||||||
Net premium amortization on mortgage-backed securities |
|
| 24,767 |
|
|
| 19,647 |
| ||||||||
Deferred tax provision |
|
| 25,376 |
|
|
| 4,692 |
| ||||||||
Net (loss) income |
| $ | (3,963 | ) |
| $ | 1,037 |
| ||||||||
Adjustments to reconcile net (loss) income to net cash used in operating activities |
|
|
|
| ||||||||||||
Investment and derivative loss (gain), net |
|
| 5,431 |
|
|
| (778 | ) | ||||||||
Net discount accretion |
|
| (14,721 | ) |
|
| (7,607 | ) | ||||||||
Other |
|
| 2,314 |
|
|
| 1,913 |
|
|
| 2,279 |
|
|
| 4,959 |
|
Changes in operating assets |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest receivable |
|
| (782 | ) |
|
| 1,253 |
|
|
| (560 | ) |
|
| (299 | ) |
Other assets |
|
| 412 |
|
|
| 2,246 |
|
|
| (48 | ) |
|
| (1,575 | ) |
Changes in operating liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest payable and other liabilities |
|
| (506 | ) |
|
| (2,786 | ) |
|
| (63 | ) |
|
| 2,641 |
|
Accrued compensation and benefits |
|
| (1,196 | ) |
|
| (855 | ) |
|
| (1,594 | ) |
|
| (739 | ) |
Net cash provided by operating activities |
|
| 64,943 |
|
|
| 64,314 |
| ||||||||
Net cash used in operating activities |
|
| (13,239 | ) |
|
| (2,361 | ) | ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchases of private-label mortgage-backed securities |
|
| — |
|
|
| (5,357 | ) | ||||||||
Purchases of agency mortgage-backed securities |
|
| (2,140,604 | ) |
|
| (2,051,425 | ) |
|
| (150,655 | ) |
|
| (582,111 | ) |
Proceeds from sales of private-label mortgage-backed securities |
|
| 1,268 |
|
|
| 106,052 |
| ||||||||
Purchases of credit securities |
|
| — |
|
|
| (128,779 | ) | ||||||||
Purchases of MSR financing receivables |
|
| (16,201 | ) |
|
| (61,693 | ) | ||||||||
Purchases of single-family residential real estate |
|
| — |
|
|
| (134,391 | ) | ||||||||
Proceeds from sales of agency mortgage-backed securities |
|
| 1,629,698 |
|
|
| 1,950,728 |
|
|
| 26,016 |
|
|
| 654,294 |
|
Receipt of principal payments on private-label mortgage-backed securities |
|
| 14 |
|
|
| 490 |
| ||||||||
Proceeds from sales of credit securities |
|
| 22,578 |
|
|
| 10,395 |
| ||||||||
(Payments) proceeds from sales of single-family residential real estate |
|
| (120 | ) |
|
| 128,784 |
| ||||||||
Receipt of principal payments on agency mortgage-backed securities |
|
| 357,643 |
|
|
| 351,871 |
|
|
| 23,049 |
|
|
| 27,807 |
|
Payments for derivatives and deposits, net |
|
| (9,809 | ) |
|
| (138,402 | ) | ||||||||
Receipt of principal payments on credit securities |
|
| 3,048 |
|
|
| 6,223 |
| ||||||||
Receipt of principal payments on loans |
|
| 8,556 |
|
|
| 321 |
| ||||||||
Receipt of principal payments on mortgage loans of consolidated VIE |
|
| 5,710 |
|
|
| 34,267 |
| ||||||||
Receipt of distributions on MSR financing receivables |
|
| 23,384 |
|
|
| 68,601 |
| ||||||||
Restricted cash balance of VIE upon consolidation |
|
| — |
|
|
| 9,637 |
| ||||||||
Restricted cash balance of VIE upon deconsolidation |
|
| (2,719 | ) |
|
| — |
| ||||||||
Proceeds from derivatives and deposits, net |
|
| 14,597 |
|
|
| 8,559 |
| ||||||||
Other |
|
| 129 |
|
|
| 15,891 |
|
|
| 335 |
|
|
| 6,233 |
|
Net cash (used in) provided by investing activities |
|
| (161,661 | ) |
|
| 229,848 |
|
|
| (42,422 | ) |
|
| 48,147 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from repurchase agreements, net |
|
| 45,736 |
|
|
| 542,118 |
| ||||||||
Repayments of Federal Home Loan Bank advances |
|
| — |
|
|
| (786,900 | ) | ||||||||
Proceeds from issuance of common stock |
|
| 59,913 |
|
|
| — |
| ||||||||
Proceeds from (repayments of) repurchase agreements, net |
|
| 39,197 |
|
|
| (16,714 | ) | ||||||||
Repayments of secured debt of consolidated VIE |
|
| (3,526 | ) |
|
| (38,496 | ) | ||||||||
Repurchase of common stock |
|
| — |
|
|
| (8,232 | ) | ||||||||
Repurchase of preferred stock |
|
| — |
|
|
| (3,389 | ) | ||||||||
Proceeds from issuance of preferred stock |
|
| 6,904 |
|
|
| — |
|
|
| — |
|
|
| 149 |
|
Excess tax benefits associated with stock-based awards |
|
| — |
|
|
| (243 | ) | ||||||||
Proceeds from long-term debt secured by single-family properties |
|
| — |
|
|
| 99,371 |
| ||||||||
Repayments of long-term debt secured by single-family properties |
|
| — |
|
|
| (81,790 | ) | ||||||||
Dividends paid |
|
| (44,261 | ) |
|
| (43,363 | ) |
|
| (1,319 | ) |
|
| (2,124 | ) |
Net cash provided by (used in) financing activities |
|
| 68,292 |
|
|
| (288,388 | ) |
|
| 34,352 |
|
|
| (51,225 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (28,426 | ) |
|
| 5,774 |
| ||||||||
Cash and cash equivalents, beginning of period |
|
| 54,794 |
|
|
| 36,987 |
| ||||||||
Cash and cash equivalents, end of period |
| $ | 26,368 |
|
| $ | 42,761 |
| ||||||||
Net decrease in cash, cash equivalents and restricted cash |
|
| (21,309 | ) |
|
| (5,439 | ) | ||||||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 30,212 |
|
|
| 21,786 |
| ||||||||
Cash, cash equivalents and restricted cash, end of period |
| $ | 8,903 |
|
| $ | 16,347 |
| ||||||||
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash payments for interest |
| $ | 37,015 |
|
| $ | 21,605 |
|
| $ | 24,614 |
|
| $ | 12,134 |
|
Cash payments for taxes |
| $ | — |
|
| $ | 205 |
| ||||||||
Cash payments for income taxes |
| $ | 69 |
|
| $ | 1,641 |
| ||||||||
Non-cash investing activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Receipt of non-public equity securities upon dissolution of investee fund |
| $ | — |
|
| $ | 619 |
| ||||||||
Assets of VIE upon consolidation |
| $ | — |
|
| $ | 287,282 |
| ||||||||
Assets of VIE upon deconsolidation |
| $ | (189,360 | ) |
| $ | — |
| ||||||||
Non-cash financing activity: |
|
|
|
|
|
| ||||||||||
Liabilities of VIE upon consolidation |
| $ | — |
|
| $ | 266,697 |
| ||||||||
Liabilities of VIE upon deconsolidation |
| $ | (166,783 | ) |
| $ | — |
|
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 acquiresfocuses primarily on investing in mortgage related assets and holds residential mortgage-relatedreal estate. The Company’s investment capital is currently allocated between mortgage servicing rights (“MSR”) related assets, primarily comprised of residentialcredit investments 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 include (i)collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsoredU.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) orand the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which are collectively referred.
The Company also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as “agency MBS,”rental properties. During 2022, the Company sold its portfolio of SFR properties and (ii) residential MBS issuedis currently no longer anticipating allocating capital to its SFR investment strategy.
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 private institutions for which the principal and interest payments are not guaranteed by a GSE, which are referred to as “private-label MBS” or “non-agency MBS.”Internal Revenue Code.
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, 2016. 2022.
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 for prior periodsmay have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, other comprehensive income, total assets or total liabilities.
Proposed Plan of Merger
On May 29, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ellington Financial Inc. (“EFC”), EF Merger Sub Inc., a wholly owned subsidiary of EFC (“Merger Sub”) and, solely for the limited purposes set forth in the Merger Agreement, Ellington Financial Management LLC (“EFC Manager”) pursuant to which the Company will merge with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation of the Merger.
5
Immediately following the Merger, the surviving corporation of the Merger will be contributed to Ellington Financial Operating Partnership LLC, EFC’s operating partnership subsidiary (the “EFC Operating Partnership”), in exchange for limited liability company interests in the EFC Operating Partnership. As a result of the contribution, the surviving corporation of the Merger will become a wholly owned subsidiary of the EFC Operating Partnership. The consummation of the Merger is subject to standard closing conditions, including approval by the Company’s common shareholders. The Company will hold a special meeting of its shareholders on December 12, 2023 to consider and vote on the proposed Merger. If approved by the Company's shareholders, the proposed Merger is expected to close on or about December 14, 2023, or two business days following the satisfaction of all of the conditions and in accordance with the terms of the Merger Agreement.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Company’s common stock will be converted into the right to receive (i) from EFC, 0.3619 shares of common stock of EFC and (ii) from EFC Manager, $0.09 in cash (collectively, the “Per Share Common Merger Consideration”).
Each outstanding share of the Company’s restricted common stock issued under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be considered outstanding for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
Each outstanding Performance-based Stock Award, other than the outstanding Stock Price Awards, issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at maximum performance levels and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. Each outstanding Stock Price Award issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at the actual level of performance in connection with the Merger, and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
Each outstanding award of deferred stock units issued to a non-employee director under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
As of the effective time of the Merger, it is expected that there will be 32,360,432 shares of the Company’s common stock eligible to receive the Per Share Merger Consideration comprised of (i) 28,360,447 outstanding shares of common stock, including 828,127 outstanding shares of restricted common stock, (ii) 3,451,713 shares of common stock earned under outstanding Performance-based Stock Awards, and (iii) 548,272 shares of deferred stock units issued to non-employee directors.
In addition, at the effective time of the Merger, (a) each share of the Company’s Series B Preferred Stock issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of newly designated 7.00% Series D Cumulative Perpetual Redeemable Preferred Stock of EFC and (b) each share of the Company’s Series C Preferred Stock issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of newly designated 8.250% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock of EFC. (See Note 15 – Stockholders’ Equity.)
By virtue of the Merger, all debts, obligations and liabilities of the Company will become the debts, obligations and liabilities of the surviving corporation, including the Company’s outstanding trust preferred securities, 6.75% Senior Notes due 2025 and 6.000% Senior Notes due 2026. (See Note 9 – Borrowings.)
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 September 30, 20172023 and December 31, 2016,2022, approximately 98%98% and 99%84%, 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.
6
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, Mortgage Loans of Consolidated VIEs and Credit Securities of High Credit Quality
The Company recognizes interest income for its investments in agency MBS, mortgage loans of consolidated variable interest entities (“VIEs”) and credit securities that are considered to be of high credit quality (that is, those with a Standard & Poor's rating of AA or higher or an equivalent rating from another rating agency) 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 security’sinvestment’s stated couponinterest rate. The interest method is applied at the individual securityinstrument level based upon each security’sinstrument’s effective interest rate. The Company calculates each security’sinstrument’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 security'sinstrument's remaining contractual cash flows (assuming no principal prepayments) to its purchase price.cost. Because each security’sinstrument’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, to its investments in agency MBS, 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 theany 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 Private-Label MBSOther Credit Securities and MSR Financing Receivables
The Company’sCompany recognizes interest income for its investments in private-label MBS were generally acquiredcredit securities (other than those considered to be of high credit quality) 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 significant discounts to their par values duethe time of acquisition or can be contractually prepaid or otherwise settled in large part to an expectationsuch a way that the Company will be unable to collectwould not recover substantially all of the contractual cash flows of the securities. Investments in private-label MBS acquired prior to 2015 were classified as available-for-sale, all of which had been sold as of December 31, 2016. The Company has elected to classify its investments in private-label MBS acquired in 2015 or later as trading securities. Interest income from investments in private-label MBS is recognized using a prospective level-yield methodology which is based upon each security’s effective interest rate.recorded investment. The amount of periodic interest income recognized is determined by applying the security’sinvestment’s effective interest rate to its amortized cost basis or reference amount.(or “reference amount”). At the time of acquisition, the security’sinvestment’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 securityinvestment to its purchase price.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 mortgage loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses.
For investments in MSR financing receivables, the Company's estimate of cash flows expected to be collected reflects all components of its mortgage servicing counterparty's payment obligation, which is comprised of cash flows referenced to the monthly net cash flows of the underlying reference pool of MSRs net of (i) the counterparty's periodic interest payments and principal repayments related to advances obtained via its third-party secured financing facility collateralized by MSRs to which the Company's MSR financing receivables are referenced and (ii) fees payable to the counterparty. In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the securityinvestment 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 private-label MBS that are classified as available-for-salecredit securities and trading securities, respectively:MSR financing receivables:
Scenario: | Effect on Interest Income Recognition for Investments in
| ||
|
|
7
| ||||
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 | ||
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. |
|
|
Other Comprehensive Income
Comprehensive income includes net income as currently reported by the Company on the consolidated statements of comprehensive income adjusted for other comprehensive income. Other comprehensive income for the Company represents periodic unrealized holding gains and losses related to the Company’s investments in MBS classified as available-for-sale. Accumulated unrealized holding gains and losses for available-for-sale MBS are reclassified into net income as a component of “investment gain
(loss), net” upon (i) sale or realization, or (ii) the occurrence of an other-than-temporary impairment. As of December 31, 2016 all of the Company’s investments in MBS are classified as trading securities. Accordingly, all unrealized gains and losses related to the Company’s investments in MBS during 2017 have been recognized in net income.
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 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 Note 9 |
To-be-announced agency MBS transactions, including “dollar rolls” | Note |
Derivative instruments | Note |
Balance sheet offsetting | Note |
Fair value measurements Income taxes | Note Note 13 |
Stock-based compensation | Note 16 |
Refer to the Company’s 20162022 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
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 September 30, 20172023 and December 31, 2016,2022, the Company had $3,994,515 and $3,911,375, respectively,fair value of fair valuethe Company’s investments in agency MBS classified as trading securities.
was $520,851 and $443,540, respectively.As of September 30, 20172023, all of the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans. As of December 31, 2016, the Company’s portfolio of investments in agency MBS also included investments in inverse interest-only agency MBS with an aggregate fair value of $1,923. The Company’s investments in inverse interest-only agency MBS represented beneficial interests in a portion of the interest cash flows of an underlying pool of pass-through agency MBS collateralized by adjustable-rate mortgage loans.
All periodic changes in the fair value of trading 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 classified as trading securities:MBS:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Agency MBS still held at period end |
| $ | (23,495 | ) |
| $ | (24,430 | ) |
| $ | (24,482 | ) |
| $ | (26,911 | ) |
Agency MBS sold during the period |
|
| — |
|
|
| 1,702 |
|
|
| (245 | ) |
|
| (32,365 | ) |
Total |
| $ | (23,495 | ) |
| $ | (22,728 | ) |
| $ | (24,727 | ) |
| $ | (59,276 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS still held at period end |
| $ | 12,715 |
|
| $ | 2,960 |
|
| $ | 22,178 |
|
| $ | 56,079 |
|
Agency MBS sold during the period |
|
| 1,296 |
|
|
| (428 | ) |
|
| 3,421 |
|
|
| 25,195 |
|
Total |
| $ | 14,011 |
|
| $ | 2,532 |
|
| $ | 25,599 |
|
| $ | 81,274 |
|
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 6.10. Derivative Instruments” for further information about dollar rolls.
Note 4. Investments in Private-Label MBSCredit Securities
The Company has elected to classify its investments in credit securities as trading securities. Accordingly, the Company’s investments in private-label MBScredit securities are reported in the accompanying consolidated balance sheets at fair value. Investments in private-label MBS acquired prior to 2015 were classified as available-for-sale, all of which had been sold as of December 31, 2016. The Company has elected to classify its investments in private-label MBS acquired in 2015 or later as trading securities. As of September 30, 20172023 and December 31, 2016,2022, the Company held investments in private-label MBS with a fair value of $54the Company’s investments in credit securities was $101,546 and $1,266, respectively, all$104,437, respectively. As of which were classified as trading securities.September 30, 2023, the Company’s investments in credit securities primarily consist of non-agency MBS collateralized by commercial mortgage loans or pools of business purpose residential mortgage loans and ABS collateralized by pools of residential solar panel loans.
Available-for-Sale Private-Label MBS
PeriodicAll periodic changes in the fair value of the Company’s available-for-sale private-label MBScredit securities that are not attributed to interest income or other-than-temporary impairments represent unrealized holding gains and losses. Unrealized holding gains and losses are accumulated in other comprehensive income until the securities are sold. As of September 30, 2017 and December 31, 2016, the Company had no available-for-sale private-label MBS.
Upon the sale of available-for-sale private-label MBS, any gains or losses accumulated in other comprehensive income are recognized in earnings as a component of “investment gain (loss), net.” The Company uses the specific identification method to determine the realized gain or loss that is recognized in earnings upon the sale of an available-for-sale private-label MBS.
The following table presents the results of sales of available-for-sale private-label MBS for the periods indicated:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Proceeds from sales | $ | — |
|
| $ | 67,761 |
|
| $ | — |
|
| $ | 96,171 |
|
Gross realized gains |
| — |
|
|
| 2,440 |
|
|
| — |
|
|
| 2,466 |
|
Gross realized losses |
| — |
|
|
| 1 |
|
|
| — |
|
|
| 620 |
|
Accretable Yield
The excess of the Company’s estimate of undiscounted future cash flows expected to be collected over the security’s amortized cost basis represents that security’s accretable yield. The accretable yield is expected to be recognized as interest income over the remaining life of the security on a level-yield basis. The difference between undiscounted future contractual cash flows and undiscounted future expected cash flows represents the non-accretable difference. Based on actual payments received and/or changes in the estimate of future cash flows expected to be collected, the accretable yield and the non-accretable difference can change over time. Actual cash collections that exceed prior estimates and/or positive changes in the Company’s periodic estimate of expected future cash flows result in a reclassification of non-accretable difference to accretable yield. Conversely, actual cash collections that fall short of prior estimates and/or adverse changes in the Company’s periodic estimate of expected future cash flows result in a reclassification of accretable yield to non-accretable difference.
The following table presents the changes in the accretable yield solely for available-for-sale private-label MBS for the periods indicated:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Beginning balance |
| $ | — |
|
| $ | 48,199 |
|
| $ | — |
|
| $ | 85,052 |
|
Accretion |
|
| — |
|
|
| (1,449 | ) |
|
| — |
|
|
| (6,470 | ) |
Reclassifications, net |
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| (11,853 | ) |
Eliminations in consolidation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,515 | ) |
Sales |
|
| — |
|
|
| (37,346 | ) |
|
| — |
|
|
| (53,786 | ) |
Ending balance |
| $ | — |
|
| $ | 9,428 |
|
| $ | — |
|
| $ | 9,428 |
|
Other-than-Temporary Impairments
The Company evaluates available-for-sale MBS for other-than-temporary impairment on a quarterly basis. When the fair value of an available-for-sale security is less than its amortized cost at the quarterly reporting date, the security is considered impaired. Impairments determined to be other-than-temporary are recognized as a direct write-down to the security’s amortized cost basis with a corresponding charge recognized in earnings as a component of “investment gain (loss), net.” An impairment is considered other-than-temporary when (i) the Company intends to sell the impaired security, (ii) the Company more-likely-than not will be required to sell the impaired security prior to the recovery of its amortized cost basis, or (iii) a credit loss exists. A credit loss exists when the present value of the Company’s estimate of the cash flows expected to be collected from the security, discounted at the security’s existing effective interest rate, is less than the security’s amortized cost basis.
If the Company intends to sell an impaired security or it more-likely-than-not will be required to sell an impaired security before recovery of its amortized cost basis, the Company writes-down the amortized cost basis of the security to an amount equal to the security’s fair value and recognizes a corresponding other-than-temporary impairment charge in earnings as a component of “investment gain (loss), net.” If a credit loss exists for an impaired security that the Company does not intend to sell nor will it likely be required to sell prior to recovery, the Company writes-down the amortized cost basis of the security to an amount equal to the present value of cash flows expected to be collected, discounted at the security’s existing effective interest rate, and recognizes a corresponding other-than-temporary impairment charge in earnings as a component of “investment gain (loss), net.”
For the three and nine months ended September 30, 2016, the Company recorded credit related other-than-temporary impairment charges of $-0- and $1,737 as a component of “investment gain (loss), net” on the consolidated statements of comprehensive income on certain available-for-sale private-label MBS. The Company recorded no other-than-temporary impairment charges on available-for-sale private-label MBS during the three and nine months ended September 30, 2017. The following table presents a summary of cumulative credit related other-than-temporary impairment charges recognized on the available-for-sale private-label MBS held as of the dates indicated:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Cumulative credit related other-than-temporary impairments, beginning balance |
| $ | — |
|
| $ | 15,754 |
|
| $ | — |
|
| $ | 14,017 |
|
Additions for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities for which other-than-temporary impairments have not previously occurred |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,737 |
|
Securities with previously recognized other-than- temporary impairments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Reductions for sold or matured securities |
|
| — |
|
|
| (2,035 | ) |
|
| — |
|
|
| (2,035 | ) |
Cumulative credit related other-than-temporary impairments, ending balance |
| $ | — |
|
| $ | 13,719 |
|
| $ | — |
|
| $ | 13,719 |
|
Periodic changes in the fair value of investments in trading private-label MBS that are not attributable 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. The following table provides additional information about the net gains and losses recognized as a component of “investment gain (loss), net”income for the periods indicated with respect to investments in private-label MBScredit securities:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Credit securities still held at period end |
| $ | 63 |
|
| $ | (1,552 | ) |
| $ | (105 | ) |
| $ | (2,227 | ) |
Credit securities sold during the period |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (970 | ) |
Total |
| $ | 63 |
|
| $ | (1,552 | ) |
| $ | (105 | ) |
| $ | (3,197 | ) |
Note 5. Loans Held for Investment
As of September 30, 2023 and December 31, 2022, the Company held a position in a syndicated loan secured by a first lien position in healthcare facilities and guaranteed by the operator of the facilities. As of September 30, 2023 and December 31, 2022, the total outstanding principal balance was $75,805 and $86,579, respectively, of which the Company held a pari-passu position of $25,622 and $29,264, respectively.The loan bears interest at a floating rate equal to one-month term SOFR plus 5.61%. The loan had
9
an original maturity date of March 23, 2023. On March 23, 2023, the loan was amended to grant the borrower a three-month extension of the maturity date to June 23, 2023 and to grant the borrower an option for an additional three-month extension of the maturity date to September 22, 2023. On June 23, 2023, the borrower exercised its three-month extension option resulting in an extended maturity date of September 22, 2023. On September 22, 2023, the lenders and borrower entered into a forbearance agreement for a temporary forbearance period through September 29, 2023. On September 29, 2023, the lenders and borrower entered into an additional forbearance agreement for a temporary forbearance period through October 6, 2023. On October 5, 2023, the loan was amended to grant the borrower a three-month extension of the maturity date to March 22, 2024. As a condition of the amendment to extend the maturity date, the borrower was required to make a principal payment. As of the date of the loan agreement amendment, October 5, 2023, the total outstanding principal balance was $65,205 of which the Company held a pari-passu position of $22,039. The loan has monthly principal amortization with the remaining principal balance due at loan maturity and is current on its monthly debt service.
As of December 31, 2022, the Company was party to a participation agreement pursuant to which the Company had 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 was required to fund the last $30,000 of advances under the revolving credit facility. Any draws under the revolving credit facility bore interest at SOFR plus 3.86% with a SOFR floor of 1.00% and were secured by a first lien on all accounts receivable and a second lien on all other assets of the borrower. The borrower was also required to pay an unused commitment fee of 0.50%. As of December 31, 2022, the Company’s funded loan advances were $4,914, which is included in the line item "other assets" in the accompanying consolidated balance sheets. On February 27, 2023, the Company's $30,000 commitment was terminated.
The Company has elected to account for its loans 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 September 30, 2023 and December 31, 2022, the Company’s investments were $25,216 and $34,178, respectively, at fair value. The Company recognizes interest income on its loans held for investment based upon the effective interest rate of the loans which is equal to the contractual note rate of each loan.
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. During the three month period ended June 30, 2023, the Company's mortgage servicing counterparty agreed to accept an early payment in full satisfaction of the Company's remaining incentive fee payment obligations for the three-year performance periods ending December 31, 2023 and April 1, 2024 (see "Note 12. Fair Value Measurements" for further information). 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. As of September 30, 2023, the Company has fully funded its minimum capital commitment.
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 September 30, 2023 and December 31, 2022, the Company had provided funds of $3,086 and $6,046, 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, it can request the mortgage servicing counterparty utilize leverage on the MSRs to which the Company’s MSR financing receivables are referenced to finance the purchase of additional MSRs. As of September 30, 2023 and December 31, 2022, the Company’s counterparty had drawn $0 and $7,863, respectively, of financing secured by the MSRs to which the Company’s MSR financing receivables are referenced.
10
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 September 30, 2023 and December 31, 2022, the fair value of the Company’s investments in MSR financing receivables was $191,800 and $180,365, 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 September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Balance at period beginning |
| $ | 195,893 |
|
| $ | 120,260 |
|
| $ | 180,365 |
|
| $ | 125,018 |
|
Capital investments |
|
| — |
|
|
| 40,474 |
|
|
| 16,201 |
|
|
| 61,693 |
|
Capital distributions |
|
| (7,800 | ) |
|
| (4,049 | ) |
|
| (23,384 | ) |
|
| (68,601 | ) |
Accretion of interest income |
|
| 5,247 |
|
|
| 3,608 |
|
|
| 14,641 |
|
|
| 10,973 |
|
Changes in valuation inputs and assumptions |
|
| (1,540 | ) |
|
| 4,292 |
|
|
| 3,977 |
|
|
| 35,502 |
|
Balance at period end |
| $ | 191,800 |
|
| $ | 164,585 |
|
| $ | 191,800 |
|
| $ | 164,585 |
|
Note 7. Investments in SFR Properties
The Company previously allocated investment capital to a strategy of investing in SFR properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to an SFR investment strategy. The Company conducted its SFR investment strategy through a wholly-owned subsidiary, McLean SFR Investment, LLC ("McLean SFR").
To execute its strategy of investing in SFR properties, the Company entered into an agreement with a third-party investment advisory firm to identify, acquire and manage investments in SFR properties on behalf of the Company. Under the terms of the agreement, the Company had committed to fund up to $55,000 of capital to fund the acquisition of SFR properties. On January 18, 2023, the Company's capital commitment amount was reduced to zero as a result of its sale of its remaining portfolio of SFR properties on December 1, 2022. Under the terms of the advisory agreement, the Company was 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. The Company terminated its agreement with the third-party investment advisory firm on April 28, 2023. Upon the termination of the agreement, the Company paid a termination fee equal to a fixed amount less inception to date minimum fees paid to the third-party firm as well as the incentive fee earned.
The Company’s investments in SFR properties were initially recognized on the settlement date of their acquisition at cost. The Company allocated 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 used available market data, such as property specific county tax assessment records.
Subsequent to the acquisition of a property, expenditures which improved or extended the life of the property were capitalized as a component of the property’s cost basis. Expenditures for ordinary maintenance and repairs were recognized as an expense as incurred and were reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.
The Company subsequently recognized depreciation of each property’s buildings and capitalized improvements over the expected useful lives of those assets. The Company calculated 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 reported 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 leased its SFR properties to tenants who occupied the properties. The leases generally had terms of one year or more and were classified as trading securities:operating leases. Rental revenue, net of any concessions, was
11
recognized over the term of each lease on a straight-line basis. If the Company determined that collectability of lease payments was not probable, any lease receivables previously recognized were reversed and rental revenue was 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 was obtained, were 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 was 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 included accruals for, but not limited to, third-party property management fees, local real estate tax assessments, utilities, homeowners’ association dues and property insurance.
The Company evaluated its SFR properties for impairment whenever circumstances indicated that their carrying amounts may not be recoverable. Significant indicators of potential impairment included, but were 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 existed, the Company performed 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 exceeded the Company’s estimate of the undiscounted future net cash flows expected to be obtained from the property, the Company would have recognized an impairment loss equal to the amount that the property’s net carrying amount exceeded the property’s estimated fair value.
From time to time, the Company identified SFR properties to be sold. At the time that any such properties were identified, the Company performed an evaluation to determine whether or not such properties should be classified as held for sale. Factors considered as part of the Company's held for sale evaluation process included whether the following conditions had been met: (i) the Company had committed to a plan to sell a property; (ii) the property was immediately available for sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell a property had been initiated; (iv) the sale of a property was probable within one year (generally determined based upon listing for sale); (v) the property was being actively marketed for sale at a price that was reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicated that it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. To the extent that these factors were all present, the Company ceased depreciating the property, measured the property at the lower of its carrying amount or its fair value less estimated costs to sell, and presented the property separately on its consolidated balance sheets.
On August 19, 2022, the Company completed a sale of 371 SFR properties for a gross sale price of $130,026 for a gain of $14,391 that is net of accrued incentive fees to the Company's third-party investment firm.
On December 1, 2022, the Company completed a sale of McLean SFR, which included all of the Company's remaining investments in SFR properties and its long-term debt facility secured by SFR properties, for a gross sale price of $87,050, including the assumption of the debt liability (see Note 9 "Borrowings"), for a gain of $1,789 that is net of accrued incentive fees and termination fees to the Company's third-party investment advisory firm.
During the three and nine months ended September 30, 2022, the Company recognized $632 and $1,951, respectively, of depreciation expense related to its SFR properties.
Note 8. Consolidation of Variable Interest Entities
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label MBS still held at period end |
| $ | (15 | ) |
| $ | (64 | ) |
| $ | (24 | ) |
| $ | (280 | ) |
Private-label MBS sold during the period |
|
| — |
|
|
| — |
|
|
| 57 |
|
|
| 89 |
|
Total |
| $ | (15 | ) |
| $ | (64 | ) |
| $ | 33 |
|
| $ | (191 | ) |
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
12
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 provided 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 had the power to circumvent the loss mitigation activities that would otherwise be performed by the servicer and, therefore, was the party with the most power to impact the economic performance of the trust. As a result of its investments, the Company also had 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 was the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets. On March 7, 2023, the Company sold all of its investments in the securitized pool of "non-qualified" residential mortgage loans and, as a result, deconsolidated the issuing securitization trust.
The carrying values of the assets and liabilities of the consolidated VIEs, net of elimination entries, are as follows as of the dates indicated:
|
| September 30, 2023 |
| |||||||||
|
| VIE of Business Purpose Residential Mortgage Loans |
|
| VIE of Residential Mortgage Loans |
|
| Total |
| |||
Cash of consolidated VIEs |
| $ | 49 |
|
| $ | — |
|
| $ | 49 |
|
Restricted cash of consolidated VIEs (1) |
|
| 3 |
|
|
| — |
|
|
| 3 |
|
Mortgage loans of consolidated VIEs, at fair value |
|
| 237 |
|
|
| — |
|
|
| 237 |
|
Other assets of consolidated VIEs |
|
| 1,528 |
|
|
| — |
|
|
| 1,528 |
|
Secured debt of consolidated VIEs, at fair value |
|
| (91 | ) |
|
| — |
|
|
| (91 | ) |
Other liabilities of consolidated VIEs |
|
| — |
|
|
| — |
|
|
| — |
|
Net investment in consolidated VIEs |
| $ | 1,726 |
|
| $ | — |
|
| $ | 1,726 |
|
|
| December 31, 2022 |
| |||||||||
|
| VIE of Business Purpose Residential Mortgage Loans |
|
| VIE of Residential Mortgage Loans |
|
| Total |
| |||
Cash of consolidated VIEs |
| $ | 296 |
|
| $ | — |
|
| $ | 296 |
|
Restricted cash of consolidated VIEs (1) |
|
| 16 |
|
|
| 2,175 |
|
|
| 2,191 |
|
Mortgage loans of consolidated VIEs, at fair value |
|
| 2,320 |
|
|
| 191,637 |
|
|
| 193,957 |
|
Other assets of consolidated VIEs |
|
| 1,389 |
|
|
| 678 |
|
|
| 2,067 |
|
Secured debt of consolidated VIEs, at fair value |
|
| (200 | ) |
|
| (169,145 | ) |
|
| (169,345 | ) |
Other liabilities of consolidated VIEs |
|
| (1 | ) |
|
| (261 | ) |
|
| (262 | ) |
Net investment in consolidated VIEs |
| $ | 3,820 |
|
| $ | 25,084 |
|
| $ | 28,904 |
|
The debt of the Company’s consolidated VIEs have recourse solely to the assets of the respective VIE; it has no recourse to the general credit of the Company.
Consolidated VIE of Business Purpose Residential Mortgage Loans
The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by
13
first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan.
Consolidated VIE of Residential Mortgage Loans
On March 7, 2023, the Company sold all of its investments in the securitized pool of residential mortgage loans and, as a result, deconsolidated the issuing securitization trust. The pool of mortgage loans of the previously consolidated VIE consisted of performing, first lien “non-qualified” residential mortgage loans. “Non-qualified” residential mortgage loans are loans that do not fully comply with the “ability-to-repay” rule and related guidelines of the Truth-in-Lending Act established by the Consumer Finance Protection Bureau pursuant to the authority granted under the Dodd-Frank Act. A “qualified” residential mortgage loan (i.e., a residential mortgage loan that fully complies with the “ability-to-repay” rule of the Truth-in-Lending Act) must meet certain debt-to-income ratio requirements and cannot have certain features, such as an interest-only period, negative amortization, balloon payments or terms longer than 30 years. Qualified mortgage loans have limited upfront fees and points and, generally, cannot have prepayment penalties except for limited circumstances. Lenders of qualified mortgage loans are afforded certain legal protections not available to non-qualified mortgage loan lenders.
Accounting for Consolidated VIEs
The Company has elected to account for the mortgage loans and debt of its consolidated VIEs at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, 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 the mortgage loans of its consolidated VIEs by applying the “interest method” permitted by GAAP, whereby the premium or discount recognized at the initial recognition of each loan is amortized or accreted as an adjustment to contractual interest income accrued at the loan’s contractual interest rate. The Company ceases the accrual of interest income for a mortgage loan (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.
The following table presents information about the accrual status of the loans of the Company’s consolidated VIE of business purpose residential mortgage loans as of September 30, 2023:
|
| Aggregate Fair Value |
|
| Aggregate Unpaid Principal Balance |
|
| Difference |
| |||
Less than 90 days past due and in accrual status |
| $ | — |
|
| $ | — |
|
| $ | — |
|
90 days or more past due and in non-accrual status |
|
| 237 |
|
|
| 237 |
|
|
| — |
|
Total mortgage loans of consolidated VIE |
| $ | 237 |
|
| $ | 237 |
|
| $ | — |
|
Note 5.9. Borrowings
Repurchase Agreements
The Company finances the purchase of MBSmortgage investments through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells MBSa mortgage investment to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same securityasset at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. MBSMortgage investments sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such securitiesassets throughout the duration of the arrangement. Throughout the contractual term of a repurchase agreement, the Company recognizes a “repurchase agreement” liability on its consolidated balance sheets to reflect the obligation to repay to the counterparty the proceeds received upon the initial transfer of the MBS.mortgage investment. The difference between the proceeds received by the Company upon the initial transfer of the MBSmortgage investment and the contractually agreed-upon repurchase price is recognized as interest expense ratably over the term of the repurchase arrangement on a level-yield basis..
Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase
14
agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.
The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from 30 to 60 days, but may be as short as one day or as long as one year.
As of September 30, 20172023 and December 31, 2016,2022, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10% of equity. The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated:
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Agency MBS repurchase financing: |
|
|
|
|
|
| ||
Repurchase agreements outstanding |
| $ | 475,109 |
|
| $ | 406,072 |
|
Agency MBS collateral, at fair value |
|
| 499,324 |
|
|
| 425,023 |
|
Net amount (1) |
|
| 24,215 |
|
|
| 18,951 |
|
Weighted-average rate |
|
| 5.48 | % |
|
| 4.47 | % |
Weighted-average term to maturity |
| 12.0 days |
|
| 12.0 days |
| ||
Non-agency MBS repurchase financing: |
|
|
|
|
|
| ||
Repurchase agreements outstanding |
| $ | 79,598 |
|
| $ | 88,953 |
|
MBS collateral, at fair value |
|
| 88,524 |
|
|
| 98,933 |
|
Net amount (1) |
|
| 8,926 |
|
|
| 9,980 |
|
Weighted-average rate |
|
| 6.08 | % |
|
| 5.02 | % |
Weighted-average term to maturity |
| 18.0 days |
|
| 20.0 days |
| ||
Mortgage loans repurchase financing: |
|
|
|
|
|
| ||
Repurchase agreements outstanding |
| $ | — |
|
| $ | 20,485 |
|
Mortgage loans collateral, at fair value |
|
| — |
|
|
| 29,264 |
|
Net amount (1) |
|
| — |
|
|
| 8,779 |
|
Weighted-average rate |
|
|
|
|
| 6.84 | % | |
Weighted-average term to maturity |
|
|
|
| 235.0 days |
| ||
Total mortgage investments repurchase financing: |
|
|
|
|
|
| ||
Repurchase agreements outstanding |
| $ | 554,707 |
|
| $ | 515,510 |
|
Mortgage investments collateral, at fair value |
|
| 587,848 |
|
|
| 553,220 |
|
Net amount (1) |
|
| 33,141 |
|
|
| 37,710 |
|
Weighted-average rate |
|
| 5.57 | % |
|
| 4.66 | % |
Weighted-average term to maturity |
| 12.9 days |
|
| 22.2 days |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Pledged with agency MBS: |
|
|
|
|
|
|
|
|
Repurchase agreements outstanding |
| $ | 3,694,838 |
|
| $ | 3,649,102 |
|
Agency MBS collateral, at fair value |
|
| 3,873,154 |
|
|
| 3,851,269 |
|
Net amount (1) |
|
| 178,316 |
|
|
| 202,167 |
|
Weighted-average rate |
|
| 1.33 | % |
|
| 0.96 | % |
Weighted-average term to maturity |
| 11.9 days |
|
| 19.3 days |
|
|
|
The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three and nine months ended September 30, 20172023 and 2016:2022:
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2023 |
|
| September 30, 2022 |
| ||||
Weighted-average outstanding balance during the three months ended |
| $ | 3,819,095 |
|
| $ | 3,519,719 |
|
| $ | 504,467 |
|
| $ | 430,792 |
|
Weighted-average rate during the three months ended |
|
| 1.31 | % |
|
| 0.69 | % |
|
| 5.57 | % |
|
| 2.60 | % |
Weighted-average outstanding balance during the nine months ended |
| $ | 3,956,579 |
|
| $ | 3,345,259 |
|
| $ | 500,120 |
|
| $ | 351,960 |
|
Weighted-average rate during the nine months ended |
|
| 1.10 | % |
|
| 0.67 | % |
|
| 5.25 | % |
|
| 1.46 | % |
15
Long-Term Unsecured Debt
As of September 30, 20172023 and December 31, 2016,2022, the Company had $73,824$86,713 and $73,656,$86,405, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $1,476$968 and $1,644,$1,276, respectively. The Company’s long-term unsecured debentures consisted of the following as of the dates indicated:
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Senior Notes Due 2025 |
|
| Senior Notes Due 2023 |
|
| Trust Preferred Debt |
|
| Senior Notes Due 2025 |
|
| Senior Notes Due 2023 |
|
| Trust Preferred Debt |
| ||||||
Outstanding Principal |
| $ | 35,300 |
|
| $ | 25,000 |
|
| $ | 15,000 |
|
| $ | 35,300 |
|
| $ | 25,000 |
|
| $ | 15,000 |
|
Annual Interest Rate |
|
| 6.75 | % |
|
| 6.625 | % |
| LIBOR+ 2.25 - 3.00 % |
|
|
| 6.75 | % |
|
| 6.625 | % |
| LIBOR+ 2.25 - 3.00 % |
| ||
Interest Payment Frequency |
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
| ||||||
Weighted-Average Interest Rate |
|
| 6.75 | % |
|
| 6.625 | % |
|
| 4.05 | % |
|
| 6.75 | % |
|
| 6.625 | % |
|
| 3.63 | % |
Maturity |
| March 15, 2025 |
|
| May 1, 2023 |
|
| 2033 - 2035 |
|
| March 15, 2025 |
|
| May 1, 2023 |
|
| 2033 - 2035 |
| ||||||
Early Redemption Date |
| March 15, 2018 |
|
| May 1, 2016 |
|
| 2008 - 2010 |
|
| March 15, 2018 |
|
| May 1, 2016 |
|
| 2008 - 2010 |
|
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||||||||||||||||||
|
| Senior |
|
| Senior |
|
| Trust |
|
| Senior |
|
| Senior |
|
| Trust |
| ||||||
Outstanding |
| $ | 34,931 |
|
| $ | 37,750 |
|
| $ | 15,000 |
|
| $ | 34,931 |
|
| $ | 37,750 |
|
| $ | 15,000 |
|
Annual |
|
| 6.75 | % |
|
| 6.000 | % |
| Three Month Term SOFR + |
|
|
| 6.75 | % |
|
| 6.000 | % |
| Three Month LIBOR+ |
| ||
Interest Payment |
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
|
| Quarterly |
| ||||||
Weighted-Average |
|
| 6.75 | % |
|
| 6.000 | % |
|
| 8.32 | % |
|
| 6.75 | % |
|
| 6.000 | % |
|
| 6.83 | % |
Maturity |
| March 15, 2025 |
|
| August 1, 2026 |
|
| 2033 - 2035 |
|
| March 15, 2025 |
|
| August 1, 2026 |
|
| 2033 - 2035 |
|
The Senior Notes due 20232025 and the Senior Notes due 20252026 are publicly traded on the New York Stock Exchange under the ticker symbols “AIW”“AIC” and “AIC,“AAIN,” respectively. The Senior Notes due 2023 and2025, the Senior Notes due 20252026 and the Trust Preferred Debt may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after May 1, 2016 and March 15, 2018, respectively, at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing thesethe Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.
Long-Term Debt Secured by Single-family Properties
On September 28, 2021, McLean SFR, a wholly-owned subsidiary of Arlington Asset, entered into a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. As a result of the sale of McLean SFR on December 1, 2022, the obligations under the loan agreement were assumed by the acquiror of McLean SFR (see Note 7 "Investments in Single-Family Residential Properties").
Under the terms of the loan agreement, loan advances were available to be drawn up to 74% of the fair value of eligible SFR properties up to a maximum loan amount of $150,000. Advances under the loan agreement were able to be drawn during the advance period, which would end on the earlier of the date the outstanding principal balance equals the maximum loan amount or March 28, 2023. The outstanding principal balance was due on October 9, 2026 and advances under the loan agreement bore interest at a fixed rate of 2.76%. The loan was secured by a first priority interest in all the assets of McLean SFR and a first priority pledge of the equity interest of McLean SFR.
Note 6.10. Derivative Instruments
In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either “derivative“other assets” or “derivative“other liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment and derivative gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.
Types and Uses of Derivative Instruments
Interest Rate DerivativesHedging Instruments
Most of the Company’s derivative instruments areThe Company is party to interest rate derivativeshedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in certainagency MBS and MSR financing receivable fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate derivativeshedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures U.S. Treasury note futures and options on futures, and nonexchange-tradednon-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate derivatives hedging instruments
16
to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.
The Company exchanges cash “variation margin” with the counterparties to its interest rate derivativehedging instruments at least on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those derivativesinstruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts.
However, futures commission merchants may require “initial margin” in excess of the CME’s requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivativehedging instruments are included in the line item “deposits, net”“deposits” in the accompanying consolidated balance sheets. Prior to January 1, 2017, the daily exchange of variation margin associated with centrally cleared derivative instruments was considered a pledge of collateral. For these prior periods, receivables recognized for the right to reclaim cash variation margin posted in respect of interest rate derivative instruments are included in the line item “deposits, net” in the accompanying consolidated balance sheets.
The Company elected to offset any payables recognized for the obligation to return cash variation margin received from an interest rate derivative instrument counterparty against receivables recognized for the right to reclaim cash initial margin posted by the Company to that same counterparty.
Beginning on January 1, 2017, as a result of a CME amendment to their rule book which governs their central clearing activities, the daily exchange of variation margin associated with a centrally cleared derivativeor exchange-traded hedging instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, beginning in 2017, the Company accounts for the daily receipt or payment of variation margin associated with its centrally cleared interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. Beginning in 2017, theThe carrying amount of centrally cleared interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last trading day of the reporting period.
To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”
In addition to interest rate derivativeshedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward contractscommitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) contracts.securities. A TBA contractsecurity is a forward contractcommitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA contractssecurities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA contractcommitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA contractcommitment will not settle in the shortest time period possible.
The Company’s agency MBS investment portfolio includesmay include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of economically relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.
In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.
Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of TBA transactions is included in the line item “deposits, net” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to return cash collateral received by the Company in respect of TBA transactions is included in the line item “other liabilities” in the accompanying consolidated balance sheets.
In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.
Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to
17
return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.
Derivative Instrument Population and Fair Value
The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:
|
| September 30, 2017 |
|
| December 31, 2016 |
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||||||||||||||||||||
|
| Assets |
|
| Liabilities |
|
| Assets |
|
| Liabilities |
|
| Assets |
|
| Liabilities |
|
| Assets |
|
| Liabilities |
| ||||||||
Interest rate swaps |
| $ | 3,348 |
|
| $ | — |
|
| $ | 63,315 |
|
| $ | (1,949 | ) |
| $ | 82 |
|
| $ | (4 | ) |
| $ | 8 |
|
| $ | — |
|
10-year U.S. Treasury note futures |
|
| 820 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||
Options on 10-year U.S. Treasury note futures |
|
| 1 |
|
|
| — |
|
|
| 4,289 |
|
|
| (3,906 | ) | ||||||||||||||||
Options on agency MBS |
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||
TBA commitments |
|
| — |
|
|
| (7,146 | ) |
|
| 7,285 |
|
|
| (3,699 | ) |
|
| 9,421 |
|
|
| — |
|
|
| 5,652 |
|
|
| (22 | ) |
Total |
| $ | 4,177 |
|
| $ | (7,146 | ) |
| $ | 74,889 |
|
| $ | (9,554 | ) |
| $ | 9,503 |
|
| $ | (4 | ) |
| $ | 5,660 |
|
| $ | (22 | ) |
Interest Rate Swaps
The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make semiannual(or receive) annual interest payments based upon a fixed interest rate and receive quarterly(or make) annual variable interest payments based upon the prevailing three-month LIBOR ondaily SOFR over the date of reset.preceding annual period.
The following table presents information about the Company’s interest rate swap agreements that were in effect as of September 30, 2017:2023:
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||||||||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Variable Receive Rate |
|
| Net Receive (Pay) Rate |
|
| Remaining Life (Years) |
|
| Fair Value |
| ||||||
Years to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3 years |
| $ | 1,300,000 |
|
|
| 1.26 | % |
|
| 1.32 | % |
|
| 0.06 | % |
|
| 1.7 |
|
| $ | 447 |
|
3 to less than 7 years |
|
| 700,000 |
|
|
| 1.87 | % |
|
| 1.32 | % |
|
| (0.55 | )% |
|
| 4.1 |
|
|
| 844 |
|
7 to 10 years |
|
| 1,600,000 |
|
|
| 1.90 | % |
|
| 1.32 | % |
|
| (0.58 | )% |
|
| 8.5 |
|
|
| 1,963 |
|
Total / weighted-average |
| $ | 3,600,000 |
|
|
| 1.66 | % |
|
| 1.32 | % |
|
| (0.34 | )% |
|
| 5.2 |
|
| $ | 3,254 |
|
|
|
|
|
| Weighted-average: |
|
|
|
| |||||||||||||||
|
| Notional |
|
| Fixed Receive |
|
| Variable (Pay) |
|
| Net (Pay) |
|
| Remaining |
|
| Fair |
| ||||||
Receive-fixed |
| $ | 60,000 |
|
|
| 3.58 | % |
|
| (5.31 | )% |
|
| (1.73 | )% |
|
| 4.2 |
|
| $ | 82 |
|
Pay-fixed |
|
| 25,000 |
|
|
| (4.20 | )% |
|
| 5.31 | % |
|
| 1.11 | % |
|
| 1.3 |
|
|
| (4 | ) |
Total / weighted-average |
| $ | 85,000 |
|
|
| 1.29 | % |
|
| (2.19 | )% |
|
| (0.90 | )% |
|
| 3.4 |
|
| $ | 78 |
|
The following table presents information about the Company’s forward-starting interest rate swap agreements that had yet to take effect as of September 30, 2017:
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Term After Effective Date (Years) |
|
| Fair Value |
| ||||
Effective in October 2017 |
| $ | 250,000 |
|
|
| 1.12 | % |
|
| 2.0 |
|
| $ | 94 |
|
The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2016:2022:
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||||||||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Variable Receive Rate |
|
| Net (Pay) Rate |
|
| Remaining Life (Years) |
|
| Fair Value |
| ||||||
Years to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3 years |
| $ | 1,375,000 |
|
|
| 1.10 | % |
|
| 0.97 | % |
|
| (0.13 | )% |
|
| 1.7 |
|
| $ | 6,470 |
|
3 to less than 7 years |
|
| 350,000 |
|
|
| 1.84 | % |
|
| 1.00 | % |
|
| (0.84 | )% |
|
| 3.7 |
|
|
| (769 | ) |
7 to 10 years |
|
| 1,600,000 |
|
|
| 1.93 | % |
|
| 0.96 | % |
|
| (0.97 | )% |
|
| 9.2 |
|
|
| 50,511 |
|
Total / weighted-average |
| $ | 3,325,000 |
|
|
| 1.58 | % |
|
| 0.97 | % |
|
| (0.61 | )% |
|
| 5.5 |
|
| $ | 56,212 |
|
|
|
|
|
| Weighted-average: |
|
|
|
| |||||||||||||||
|
| Notional |
|
| Fixed Receive |
|
| Variable (Pay) |
|
| Net (Pay) |
|
| Remaining |
|
| Fair |
| ||||||
Receive-fixed |
| $ | 60,000 |
|
|
| 3.58 | % |
|
| (4.30 | )% |
|
| (0.72 | )% |
|
| 4.9 |
|
| $ | 8 |
|
The following table presents information about the Company’s forward-starting interest rate swap agreements that had yet to take effect as of December 31, 2016:
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Term After Effective Date (Years) |
|
| Fair Value |
| ||||
Effective in September / October 2017 |
| $ | 375,000 |
|
|
| 1.13 | % |
|
| 2.0 |
|
| $ | 5,154 |
|
10-year U.S. Treasury Note Futures
The Company’s 10-year U.S. Treasury note futures held as of September 30, 2017, are short positions with an aggregate notional amount of $350,000 that mature in December 2017. Upon the maturity date of these futures contracts, the Company has the option to either net settle each contract in cash in an amount equal to the difference between the then-current fair value of the
underlying 10-year U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by delivering the underlying 10-year U.S. Treasury note.
Options on 10-year U.S. Treasury Note Futures
The Company purchases and sells exchange-traded options on 10-year U.S. Treasury note futures contracts with the objective of economically hedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The Company may purchase put options which provide the Company with the right to sell 10-year U.S. Treasury note futures to a counterparty, and the Company may also write call options that provide a counterparty with the option to buy 10-year U.S. Treasury note futures from the Company. In order to limit its exposure on its interest rate derivative instruments from a significant decline in long-term interest rates, the Company may also purchase contracts that provide the Company with the option to buy, or call, 10-year U.S. Treasury note futures from a counterparty. The options may be exercised at any time prior to their expiry, and if exercised, may be net settled in cash or through physical receipt or delivery of the underlying futures contracts. Information about the Company’s outstanding options on 10-year U.S. Treasury note futures contracts as of September 30, 2017 is as follows:
|
| Notional Amount |
|
| Weighted-average Strike Price |
|
| Implied Strike Rate (1) |
|
| Net Fair Value |
| ||||
Purchased call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
| $ | 150,000 |
|
|
| 133.0 |
|
|
| 1.49 | % |
| $ | 1 |
|
|
|
Information about the Company’s outstanding options on 10-year U.S. Treasury note futures contracts as of December 31, 2016 is as follows:
|
| Notional Amount |
|
| Weighted-average Strike Price |
|
| Implied Strike Rate (1) |
|
| Net Fair Value |
| ||||
Purchased put options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017 expiration |
| $ | 950,000 |
|
|
| 120.8 |
|
|
| 2.87 | % |
| $ | 539 |
|
February 2017 expiration |
|
| 700,000 |
|
|
| 122.6 |
|
|
| 2.64 | % |
|
| 3,281 |
|
Total / weighted average for purchased put options |
| $ | 1,650,000 |
|
|
| 121.6 |
|
|
| 2.77 | % |
| $ | 3,820 |
|
Sold call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017 expiration |
| $ | (100,000 | ) |
|
| 126.0 |
|
|
| 2.25 | % |
| $ | (141 | ) |
February 2017 expiration |
|
| (900,000 | ) |
|
| 126.0 |
|
|
| 2.24 | % |
|
| (3,765 | ) |
Total / weighted average for sold call options |
| $ | (1,000,000 | ) |
|
| 126.0 |
|
|
| 2.24 | % |
| $ | (3,906 | ) |
Purchased call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017 expiration |
| $ | 1,000,000 |
|
|
| 127.1 |
|
|
| 2.12 | % |
| $ | 469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 383 |
|
|
|
Options on Agency MBS
The Company may purchase put options which provide the Company with the right to sell TBA-eligible agency MBS to a counterparty at a fixed price in the event that agency MBS prices decline. The options can only be exercised at their expiry, and if exercised, may be net settled in cash or through physical delivery of the underlying agency MBS. Information about the Company’s outstanding options on agency MBS as of September 30, 2017 is as follows:
| Notional Amount |
|
| Weighted-average Strike Price |
|
| Underlying Agency MBS Coupon |
|
| Net Fair Value |
| |||||
Purchased put options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
| $ | 500,000 |
|
|
| 102.5 |
|
|
| 4.00 | % |
| $ | - |
|
November 2017 expiration |
|
| 200,000 |
|
|
| 103.5 |
|
|
| 4.00 | % |
|
| 8 |
|
Total / weighted average for purchased put options |
| $ | 700,000 |
|
|
| 102.8 |
|
|
| 4.00 | % |
| $ | 8 |
|
TBA Commitments
The following tables present information about the Company’s TBA commitments as of the dates indicated:
|
| September 30, 2017 |
| |||||||||||||
|
| Notional Amount: Net Purchase (Sale) Commitment |
|
| Contractual Forward Price |
|
| Market Price |
|
| Fair Value |
| ||||
Dollar roll positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0% coupon purchase commitments |
| $ | 200,000 |
|
| $ | 202,258 |
|
| $ | 200,563 |
|
| $ | (1,695 | ) |
3.5% coupon purchase commitments |
|
| 1,005,000 |
|
|
| 1,040,762 |
|
|
| 1,036,092 |
|
|
| (4,670 | ) |
4.0% coupon purchase commitments |
|
| 250,000 |
|
|
| 263,929 |
|
|
| 263,164 |
|
|
| (765 | ) |
4.0% coupon sale commitments |
|
| (100,000 | ) |
|
| (105,250 | ) |
|
| (105,266 | ) |
|
| (16 | ) |
Total TBA commitments, net |
| $ | 1,355,000 |
|
| $ | 1,401,699 |
|
| $ | 1,394,553 |
|
| $ | (7,146 | ) |
|
| September 30, 2023 |
| |||||||||||||
|
| Notional Amount: |
|
| Contractual Forward Price |
|
| Market Price |
|
| Fair Value |
| ||||
3.0% 30-year MBS sale commitments |
| $ | (67,000 | ) |
| $ | (57,104 | ) |
| $ | (55,453 | ) |
| $ | 1,651 |
|
4.0% 30-year MBS sale commitments |
|
| (73,000 | ) |
|
| (66,681 | ) |
|
| (65,044 | ) |
|
| 1,637 |
|
4.5% 30-year MBS sale commitments |
|
| (311,000 | ) |
|
| (291,840 | ) |
|
| (285,707 | ) |
|
| 6,133 |
|
Total TBA commitments, net |
| $ | (451,000 | ) |
| $ | (415,625 | ) |
| $ | (406,204 | ) |
| $ | 9,421 |
|
|
| December 31, 2022 |
| |||||||||||||
|
| Notional Amount: |
|
| Contractual Forward Price |
|
| Market Price |
|
| Fair Value |
| ||||
3.0% 30-year MBS sale commitments |
| $ | (70,000 | ) |
| $ | (62,828 | ) |
| $ | (61,516 | ) |
| $ | 1,312 |
|
4.0% 30-year MBS sale commitments |
|
| (150,000 | ) |
|
| (142,255 | ) |
|
| (140,830 | ) |
|
| 1,425 |
|
4.5% 30-year MBS sale commitments |
|
| (205,000 | ) |
|
| (200,365 | ) |
|
| (197,472 | ) |
|
| 2,893 |
|
Total TBA commitments, net |
| $ | (425,000 | ) |
| $ | (405,448 | ) |
| $ | (399,818 | ) |
| $ | 5,630 |
|
18
|
| December 31, 2016 |
| |||||||||||||
|
| Notional Amount: Net Purchase (Sale) Commitment |
|
| Contractual Forward Price |
|
| Market Price |
|
| Fair Value |
| ||||
Dollar roll positions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0% coupon purchase commitments |
| $ | 725,000 |
|
| $ | 718,887 |
|
| $ | 720,027 |
|
| $ | 1,140 |
|
3.5% coupon purchase commitments |
|
| 25,000 |
|
|
| 25,586 |
|
|
| 25,613 |
|
|
| 27 |
|
3.5% coupon sale commitments |
|
| (25,000 | ) |
|
| (25,602 | ) |
|
| (25,613 | ) |
|
| (11 | ) |
Total dollar roll positions, net |
|
| 725,000 |
|
|
| 718,871 |
|
|
| 720,027 |
|
|
| 1,156 |
|
TBA commitments serving as economic hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% coupon purchase commitments |
|
| 600,000 |
|
|
| 608,601 |
|
|
| 614,719 |
|
|
| 6,118 |
|
3.5% coupon sale commitments |
|
| (600,000 | ) |
|
| (611,031 | ) |
|
| (614,719 | ) |
|
| (3,688 | ) |
Total economic hedges, net |
|
| — |
|
|
| (2,430 | ) |
|
| — |
|
|
| 2,430 |
|
Total TBA commitments, net |
| $ | 725,000 |
|
| $ | 716,441 |
|
| $ | 720,027 |
|
| $ | 3,586 |
|
Derivative Instrument Gains and Losses
The following tables provide information about the derivative gains and losses recognized within the periods indicated:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest (expense) income (1) | $ | (183 | ) |
| $ | 258 |
|
| $ | (473 | ) |
| $ | (315 | ) |
Unrealized (losses) gains, net |
| (908 | ) |
|
| (1,420 | ) |
|
| (1,230 | ) |
|
| 5,277 |
|
Gains realized upon early termination, net |
| — |
|
|
| 5,238 |
|
|
| 385 |
|
|
| 8,687 |
|
Total interest rate swap (losses) gains, net |
| (1,091 | ) |
|
| 4,076 |
|
|
| (1,318 | ) |
|
| 13,649 |
|
U.S. Treasury note futures, net |
| — |
|
|
| — |
|
|
| — |
|
|
| (782 | ) |
Options on U.S. Treasury note futures, net |
| — |
|
|
| — |
|
|
| — |
|
|
| (4 | ) |
Total interest rate derivative (losses) gains, net |
| (1,091 | ) |
|
| 4,076 |
|
|
| (1,318 | ) |
|
| 12,863 |
|
TBA commitments: |
|
|
|
|
|
|
|
|
|
|
| ||||
TBA dollar roll income (expense) (2) |
| 722 |
|
|
| (421 | ) |
|
| 1,479 |
|
|
| 682 |
|
Other gains (losses) on TBA commitments, net |
| 18,079 |
|
|
| 2,998 |
|
|
| 18,100 |
|
|
| (1,971 | ) |
Total gains (losses) on TBA commitments, net |
| 18,801 |
|
|
| 2,577 |
|
|
| 19,579 |
|
|
| (1,289 | ) |
Total derivative gains, net | $ | 17,710 |
|
| $ | 6,653 |
|
| $ | 18,261 |
|
| $ | 11,574 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense (1) | $ | (4,198 | ) |
| $ | (5,126 | ) |
| $ | (14,900 | ) |
| $ | (13,499 | ) |
Unrealized gains (losses), net |
| 10,833 |
|
|
| 15,426 |
|
|
| (7,991 | ) |
|
| (65,519 | ) |
Losses realized upon early termination |
| (14,137 | ) |
|
| (300 | ) |
|
| (13,441 | ) |
|
| (300 | ) |
Total interest rate swap (losses) gains, net |
| (7,502 | ) |
|
| 10,000 |
|
|
| (36,332 | ) |
|
| (79,318 | ) |
U.S. Treasury note futures, net |
| (133 | ) |
|
| — |
|
|
| (2,174 | ) |
|
| (63,285 | ) |
Options on U.S. Treasury note futures, net |
| (147 | ) |
|
| (1,631 | ) |
|
| (6,300 | ) |
|
| (7,880 | ) |
Other, net |
| (221 | ) |
|
| — |
|
|
| (221 | ) |
|
| (25 | ) |
Total interest rate derivative (losses) gains, net |
| (8,003 | ) |
|
| 8,369 |
|
|
| (45,027 | ) |
|
| (150,508 | ) |
TBA and specified agency MBS commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income (2) |
| 6,424 |
|
|
| 5,321 |
|
|
| 14,120 |
|
|
| 12,835 |
|
Other gains on agency MBS commitments, net |
| 1,007 |
|
|
| 1,506 |
|
|
| 962 |
|
|
| 17,728 |
|
Total gains on agency MBS commitments, net |
| 7,431 |
|
|
| 6,827 |
|
|
| 15,082 |
|
|
| 30,563 |
|
Total derivative (losses) gains, net | $ | (572 | ) |
| $ | 15,196 |
|
| $ | (29,945 | ) |
| $ | (119,945 | ) |
|
|
|
|
Derivative Instrument Activity
The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:
|
| For the Three Months Ended September 30, 2017 |
| |||||||||||||||||
|
| Beginning of Period |
|
| Additions |
|
| Scheduled Settlements |
|
| Early Terminations |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 3,850,000 |
|
| $ | 500,000 |
|
| $ | — |
|
| $ | (500,000 | ) |
| $ | 3,850,000 |
|
10-year U.S. Treasury note futures |
|
| 350,000 |
|
|
| 351,000 |
|
|
| (351,000 | ) |
|
| — |
|
|
| 350,000 |
|
Purchased call options on 10-year U.S. Treasury note futures |
|
| 700,000 |
|
|
| 950,000 |
|
|
| (1,500,000 | ) |
|
| — |
|
|
| 150,000 |
|
Purchased put options on agency MBS |
|
| — |
|
|
| 700,000 |
|
|
| — |
|
|
| — |
|
|
| 700,000 |
|
Commitments to purchase (sell) MBS, net |
|
| 1,110,000 |
|
|
| 4,160,000 |
|
|
| (3,915,000 | ) |
|
| — |
|
|
| 1,355,000 |
|
|
| For the Three Months Ended September 30, 2023 |
| |||||||||||||||||
|
| Beginning of |
|
| Additions |
|
| Scheduled |
|
| Early |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 85,000 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 85,000 |
|
TBA commitments, net |
|
| 364,000 |
|
|
| 1,243,000 |
|
|
| (1,156,000 | ) |
|
| — |
|
|
| 451,000 |
|
|
| For the Three Months Ended September 30, 2022 |
| |||||||||||||||||
|
| Beginning of |
|
| Additions |
|
| Scheduled Settlements |
|
| Early |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 230,000 |
|
| $ | 90,000 |
|
| $ | — |
|
| $ | (125,000 | ) |
| $ | 195,000 |
|
TBA commitments, net |
|
| 155,000 |
|
|
| 535,000 |
|
|
| (435,000 | ) |
|
| — |
|
|
| 255,000 |
|
|
| For the Nine Months Ended September 30, 2023 |
| |||||||||||||||||
|
| Beginning of |
|
| Additions |
|
| Scheduled |
|
| Early |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 60,000 |
|
| $ | 50,000 |
|
| $ | — |
|
| $ | (25,000 | ) |
| $ | 85,000 |
|
TBA commitments, net |
|
| 425,000 |
|
|
| 3,801,000 |
|
|
| (3,775,000 | ) |
|
| — |
|
|
| 451,000 |
|
19
|
| For the Nine Months Ended September 30, 2022 |
| |||||||||||||||||
|
| Beginning of |
|
| Additions |
|
| Scheduled Settlements |
|
| Early |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 150,000 |
|
| $ | 235,000 |
|
| $ | — |
|
| $ | (190,000 | ) |
| $ | 195,000 |
|
10-year U.S. Treasury note futures |
|
| 25,000 |
|
|
| 50,000 |
|
|
| (50,000 | ) |
|
| (25,000 | ) |
|
| — |
|
Purchased call options on 10-year U.S. |
|
| 25,000 |
|
|
| — |
|
|
| (25,000 | ) |
|
| — |
|
|
| — |
|
TBA commitments, net |
|
| — |
|
|
| 1,290,000 |
|
|
| (1,035,000 | ) |
|
| — |
|
|
| 255,000 |
|
|
| For the Three Months Ended September 30, 2016 |
| |||||||||||||||||
|
| Beginning of Period |
|
| Additions |
|
| Scheduled Settlements |
|
| Early Terminations |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 2,250,000 |
|
| $ | 1,250,000 |
|
| $ | — |
|
| $ | (375,000 | ) |
| $ | 3,125,000 |
|
10-year U.S. Treasury note futures |
|
| — |
|
|
| 15,000 |
|
|
| (15,000 | ) |
|
| — |
|
|
| — |
|
Purchased put options on 10-year U.S. Treasury note futures |
|
| 2,000,000 |
|
|
| 2,100,000 |
|
|
| (3,500,000 | ) |
|
| — |
|
|
| 600,000 |
|
Sold call options on 10-year U.S. Treasury note futures |
|
| — |
|
|
| 1,000,000 |
|
|
| (400,000 | ) |
|
| — |
|
|
| 600,000 |
|
Purchased call options on 10-year U.S. Treasury note futures |
|
| — |
|
|
| 500,000 |
|
|
| (200,000 | ) |
|
| — |
|
|
| 300,000 |
|
Commitments to purchase (sell) MBS, net |
|
| 875,441 |
|
|
| 2,675,000 |
|
|
| (2,425,441 | ) |
|
| — |
|
|
| 1,125,000 |
|
|
| For the Nine Months Ended September 30, 2017 |
| |||||||||||||||||
|
| Beginning of Period |
|
| Additions |
|
| Scheduled Settlements |
|
| Early Terminations |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 3,700,000 |
|
| $ | 1,275,000 |
|
| $ | — |
|
| $ | (1,125,000 | ) |
| $ | 3,850,000 |
|
10-year U.S. Treasury note futures |
|
| — |
|
|
| 1,196,100 |
|
|
| (846,100 | ) |
|
| — |
|
|
| 350,000 |
|
Purchased put options on 10-year U.S. Treasury note futures |
|
| 1,650,000 |
|
|
| 2,540,000 |
|
|
| (4,190,000 | ) |
|
| — |
|
|
| — |
|
Sold call options on 10-year U.S. Treasury note futures |
|
| 1,000,000 |
|
|
| 2,450,000 |
|
|
| (3,450,000 | ) |
|
| — |
|
|
| — |
|
Purchased call options on 10-year U.S. Treasury note futures |
|
| 1,000,000 |
|
|
| 3,350,000 |
|
|
| (4,200,000 | ) |
|
| — |
|
|
| 150,000 |
|
Purchased put options on agency MBS |
|
| — |
|
|
| 700,000 |
|
|
| — |
|
|
| — |
|
|
| 700,000 |
|
Commitments to purchase (sell) MBS, net |
|
| 725,000 |
|
|
| 8,475,000 |
|
|
| (7,845,000 | ) |
|
| — |
|
|
| 1,355,000 |
|
|
| For the Nine Months Ended September 30, 2016 |
| |||||||||||||||||
|
| Beginning of Period |
|
| Additions |
|
| Scheduled Settlements |
|
| Early Terminations |
|
| End of Period |
| |||||
Interest rate swaps |
| $ | 1,500,000 |
|
| $ | 2,000,000 |
|
| $ | — |
|
| $ | (375,000 | ) |
| $ | 3,125,000 |
|
10-year U.S. Treasury note futures |
|
| 1,335,000 |
|
|
| 1,386,000 |
|
|
| (2,133,500 | ) |
|
| (587,500 | ) |
|
| — |
|
Purchased put options on 10-year U.S. Treasury note futures |
|
| — |
|
|
| 8,100,000 |
|
|
| (7,500,000 | ) |
|
| — |
|
|
| 600,000 |
|
Sold call options on 10-year U.S. Treasury note futures |
|
| — |
|
|
| 1,000,000 |
|
|
| (400,000 | ) |
|
| — |
|
|
| 600,000 |
|
Purchased call options on 10-year U.S. Treasury note futures |
|
| — |
|
|
| 500,000 |
|
|
| (200,000 | ) |
|
| — |
|
|
| 300,000 |
|
Put options on Eurodollar futures |
|
| 4,000,000 |
|
|
| — |
|
|
| (4,000,000 | ) |
|
| — |
|
|
| — |
|
Commitments to purchase (sell) MBS, net |
|
| 375,000 |
|
|
| 6,225,441 |
|
|
| (5,475,441 | ) |
|
| — |
|
|
| 1,125,000 |
|
Cash Collateral Posted and Received for Derivative and Other Financial Instruments
The following table presents information about the cash collateral posted and received by the Company in respect of its derivative and other financial instruments, which is included in the line item “deposits, net”“deposits” in the accompanying consolidated balance sheets, for the dates indicated:
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Cash collateral posted for: |
|
|
|
|
|
| ||
Interest rate swaps (cash initial margin) |
| $ | 1,624 |
|
| $ | 1,823 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Cash collateral posted for: |
|
|
|
|
|
|
|
|
Interest rate swaps (cash initial margin) |
| $ | 49,518 |
|
| $ | 65,728 |
|
U.S. Treasury note futures and options on U.S. Treasury note futures (cash initial margin) |
|
| 4,035 |
|
|
| 5,314 |
|
Unsettled MBS trades and TBA commitments, net |
|
| 5,764 |
|
|
| 1,474 |
|
Total cash collateral posted |
|
| 59,317 |
|
|
| 72,516 |
|
Cash collateral received for interest rate swaps (1) |
|
| — |
|
|
| (61,367 | ) |
Total cash collateral posted, net |
| $ | 59,317 |
|
| $ | 11,149 |
|
|
|
Note 7.11. Offsetting of Financial Assets and Liabilities
The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as collateralized short-term financing arrangements on a gross basis.
Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the line item “deposits, net”“deposits” in the accompanying consolidated balance sheets. Prior to January 1, 2017, the daily exchange
of variation margin associated with centrally cleared derivative instruments was considered a pledge of collateral. For these prior periods, receivables recognized for the right to reclaim cash variation margin posted in respect of interest rate derivative instruments are included in the line item “deposits, net” in the accompanying consolidated balance sheets. The Company elected to offset any payables recognized for the obligation to return cash variation margin received from an interest rate derivative instrument counterparty against receivables recognized for the right to reclaim cash initial margin posted by the Company to that same counterparty.
Beginning on January 1, 2017, as a result of a CME amendment to their rule book which governs their central clearing activities, theThe daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, beginning in 2017, the Company accounts for the daily receipt or payment of variation margin associated with its centrally cleared interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. Beginning in 2017, theThe carrying amount of centrally cleared interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.
The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements, and associated collateral, including those subject to master netting (or similar) arrangements:
|
| As of September 30, 2023 |
| |||||||||||||||||||||
|
| Gross Amount |
|
| Amount Offset |
|
| Net Amount |
|
| Gross Amount Not Offset in the |
|
| Net |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| Financial |
|
| Cash |
|
|
|
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps |
| $ | 82 |
|
| $ | — |
|
| $ | 82 |
|
| $ | (4 | ) |
| $ | — |
|
| $ | 78 |
|
TBA commitments |
|
| 9,421 |
|
|
| — |
|
|
| 9,421 |
|
|
| — |
|
|
| — |
|
|
| 9,421 |
|
Total derivative instruments |
|
| 9,503 |
|
|
| — |
|
|
| 9,503 |
|
|
| (4 | ) |
|
| — |
|
|
| 9,499 |
|
Total assets |
| $ | 9,503 |
|
| $ | — |
|
| $ | 9,503 |
|
| $ | (4 | ) |
| $ | — |
|
| $ | 9,499 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps |
| $ | 4 |
|
| $ | — |
|
| $ | 4 |
|
| $ | (4 | ) |
| $ | — |
|
| $ | — |
|
Total derivative instruments |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
Repurchase agreements |
|
| 554,707 |
|
|
| — |
|
|
| 554,707 |
|
|
| (554,707 | ) |
|
| — |
|
|
| — |
|
Total liabilities |
| $ | 554,711 |
|
| $ | — |
|
| $ | 554,711 |
|
| $ | (554,711 | ) |
| $ | — |
|
| $ | — |
|
20
|
| As of December 31, 2022 |
| |||||||||||||||||||||
|
| Gross Amount |
|
| Amount Offset |
|
| Net Amount |
|
| Gross Amount Not Offset in the |
|
| Net |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| Financial |
|
| Cash |
|
|
|
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
TBA commitments |
| $ | 5,652 |
|
| $ | — |
|
| $ | 5,652 |
|
| $ | (22 | ) |
| $ | — |
|
| $ | 5,630 |
|
Interest rate swaps |
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| 8 |
|
Total derivative instruments |
|
| 5,660 |
|
|
| — |
|
|
| 5,660 |
|
|
| (22 | ) |
|
| — |
|
|
| 5,638 |
|
Total assets |
| $ | 5,660 |
|
| $ | — |
|
| $ | 5,660 |
|
| $ | (22 | ) |
| $ | — |
|
| $ | 5,638 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
TBA commitments |
| $ | 22 |
|
| $ | — |
|
| $ | 22 |
|
| $ | (22 | ) |
| $ | — |
|
| $ | — |
|
Total derivative instruments |
|
| 22 |
|
|
| — |
|
|
| 22 |
|
|
| (22 | ) |
|
| — |
|
|
| — |
|
Repurchase agreements |
|
| 515,510 |
|
|
| — |
|
|
| 515,510 |
|
|
| (515,510 | ) |
|
| — |
|
|
| — |
|
Total liabilities |
| $ | 515,532 |
|
| $ | — |
|
| $ | 515,532 |
|
| $ | (515,532 | ) |
| $ | — |
|
| $ | — |
|
|
| As of September 30, 2017 |
| |||||||||||||||||||||
|
| Gross Amount Recognized |
|
| Amount Offset in the Consolidated Balance Sheets |
|
| Net Amount Presented in the Consolidated Balance Sheets |
|
| Gross Amount Not Offset in the Consolidated Balance Sheets |
|
| Net Amount |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Instruments (1) |
|
| Cash Collateral (2) |
|
|
|
|
| ||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on U.S. Treasury note futures |
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
| $ | — |
|
| $ | — |
|
| $ | 1 |
|
U.S. Treasury note futures |
|
| 820 |
|
|
| — |
|
|
| 820 |
|
|
| — |
|
|
| (820 | ) |
|
| — |
|
Interest rate swaps |
|
| 3,348 |
|
|
| — |
|
|
| 3,348 |
|
|
| — |
|
|
| (3,348 | ) |
|
| — |
|
Options on agency MBS |
|
| 8 |
|
|
| — |
|
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| 8 |
|
Total derivative instruments |
|
| 4,177 |
|
|
| — |
|
|
| 4,177 |
|
|
| — |
|
|
| (4,168 | ) |
|
| 9 |
|
Total assets |
| $ | 4,177 |
|
| $ | — |
|
| $ | 4,177 |
|
| $ | — |
|
| $ | (4,168 | ) |
| $ | 9 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsettled MBS trades and TBA commitments, net (3) |
| $ | 7,146 |
|
| $ | — |
|
| $ | 7,146 |
|
| $ | — |
|
| $ | (5,764 | ) |
| $ | 1,382 |
|
Repurchase agreements |
|
| 3,694,838 |
|
|
| — |
|
|
| 3,694,838 |
|
|
| (3,694,838 | ) |
|
| — |
|
|
| — |
|
Total liabilities |
| $ | 3,701,984 |
|
| $ | — |
|
| $ | 3,701,984 |
|
| $ | (3,694,838 | ) |
| $ | (5,764 | ) |
| $ | 1,382 |
|
|
| As of December 31, 2016 |
| |||||||||||||||||||||
|
| Gross Amount Recognized |
|
| Amount Offset in the Consolidated Balance Sheets |
|
| Net Amount Presented in the Consolidated Balance Sheets |
|
| Gross Amount Not Offset in the Consolidated Balance Sheets |
|
| Net Amount |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Financial Instruments (1) |
|
| Cash Collateral (2) |
|
|
|
|
| ||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on U.S. Treasury note futures |
| $ | 4,289 |
|
| $ | — |
|
| $ | 4,289 |
|
| $ | (3,906 | ) |
| $ | — |
|
| $ | 383 |
|
Interest rate swaps |
|
| 63,315 |
|
|
| — |
|
|
| 63,315 |
|
|
| (1,949 | ) |
|
| (61,366 | ) |
|
| — |
|
TBA commitments |
|
| 7,285 |
|
|
| — |
|
|
| 7,285 |
|
|
| — |
|
|
| — |
|
|
| 7,285 |
|
Total derivative instruments |
|
| 74,889 |
|
|
| — |
|
|
| 74,889 |
|
|
| (5,855 | ) |
|
| (61,366 | ) |
|
| 7,668 |
|
Deposits, net |
|
| 72,516 |
|
|
| (61,367 | ) |
|
| 11,149 |
|
|
| — |
|
|
| — |
|
|
| 11,149 |
|
Total assets |
| $ | 147,405 |
|
| $ | (61,367 | ) |
| $ | 86,038 |
|
| $ | (5,855 | ) |
| $ | (61,366 | ) |
| $ | 18,817 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on U.S. Treasury note futures |
| $ | 3,906 |
|
| $ | — |
|
| $ | 3,906 |
|
| $ | (3,906 | ) |
| $ | — |
|
| $ | — |
|
Interest rate swaps |
|
| 1,949 |
|
|
| — |
|
|
| 1,949 |
|
|
| (1,949 | ) |
|
| — |
|
|
| — |
|
TBA commitments |
|
| 3,699 |
|
|
| — |
|
|
| 3,699 |
|
|
| — |
|
|
| (1,474 | ) |
|
| 2,225 |
|
Total derivative instruments |
|
| 9,554 |
|
|
| — |
|
|
| 9,554 |
|
|
| (5,855 | ) |
|
| (1,474 | ) |
|
| 2,225 |
|
Deposits, net |
|
| 61,367 |
|
|
| (61,367 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchase agreements |
|
| 3,649,102 |
|
|
| — |
|
|
| 3,649,102 |
|
|
| (3,649,102 | ) |
|
| — |
|
|
| — |
|
Total liabilities |
| $ | 3,720,023 |
|
| $ | (61,367 | ) |
| $ | 3,658,656 |
|
| $ | (3,654,957 | ) |
| $ | (1,474 | ) |
| $ | 2,225 |
|
|
|
|
|
|
|
Note 8.12. Fair Value Measurements
Fair Value of Financial Instruments
The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:
Level 1 Inputs - | Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company at the measurement date; |
Level 2 Inputs - | Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and |
Level 3 Inputs - | Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use. |
The Company measures the fair value of the following assets and liabilities:
Investments in Financial Assets
Mortgage-backed securities
Agency MBS - – The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources and reviews their documented valuation methodologies to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement date.
Private-label21
Credit securities – The Company's investments in commercial MBS - are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company's investments in commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow measurement. The Company’s investments in private-labelnon-agency MBS collateralized by a pool of business purpose residential mortgage loans and ABS collateralized by residential solar panel loans are classified within Level 3 of the fair value hierarchy as private-label MBS trade infrequently and, therefore,hierarchy.
To measure the measurement of their fair value requiresof the useCompany’s non-agency MBS investment secured by a pool of significant unobservable inputs. In determining fair value,business purpose residential mortgage loans, the Company primarily uses an income approach as well as market approaches. The Company utilizesby preparing an estimate of the present value techniquesof the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business purpose residential mortgage loans that serve as collateral, including loan-level probabilities of default and loss-given-default. As of September 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans serving as collateral to the Company's non-agency MBS investment represented less than one percent of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the estimatedability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. The following table presents the weighted-average of the significant inputs to the fair value measurement of the Company’s non-agency MBS secured by business purpose residential mortgage loans as of dates indicated:
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Probability of default |
| 100.0 | % |
|
| 27.8 | % |
Loss-given-default |
| 0.0 | % |
|
| 18.3 | % |
Inputs to fair value measurements of the Company’s investments in ABS collateralized by residential solar panel loans includes either quoted prices obtained from dealers or an internally derived discounted future cash flow measurement.
Loans – The Company’s commercial mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the instrument taking into consideration various assumptions derived by managementloan over its expected remaining life, discounted at a current market rate. The significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment are the estimated probability of default and the discount rate, which is based on their observationscurrent market yields and interest rate spreads for a similar loan. As of September 30, 2023, the estimated probability of default and discount rate for the Company’s mortgage loan investment were 0% and 12.4%, respectively. As of December 31, 2022, the estimated probability of default and discount rate for the Company’s mortgage loan investment were 0% and 10.0%, respectively.
Mortgage loans and secured debt of consolidated VIEs – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated VIEs. The fair value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE.
As of September 30, 2023 and December 31, 2022, pursuant to the practical expedient, the Company measured the fair value of both the mortgage loans and the debt obligations of its consolidated VIE of business purpose residential mortgage loans based upon the fair value of the mortgage loans of the VIE. As of December 31, 2022, the senior debt obligations of the consolidated VIE had been fully extinguished and only the subordinate debt obligation of the consolidated VIE remained. The business purpose residential mortgage loans and subordinate debt obligation of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the business purpose residential mortgage loans of the consolidated VIE as of September 30, 2023 and December 31, 2022, the Company used significant judgment to develop assumptions used by market participants. These assumptionsabout the future performance of each business purpose residential mortgage loan, which included determining loan-level probabilities of default and loss-given-default. As of September 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans represented less than two percent of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are corroborated by evidence such as historical collateral performance data, evaluationcommon and expected attributes of historical collateral performance data for other securities with comparable or similar risk characteristics, and observed completed or pending transactions in similar instruments, when available. this asset class. The following table presents the weighted-average of the significant inputs to the fair value measurement of the business purpose residential mortgage loans of the Company’s valuation process include collateral default, loss severity, prepayment, and discount rates (i.e., the rate of return demanded by market participantsconsolidated VIE as of the measurement date). In general, significant increases (decreases)periods indicated:
22
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Probability of default |
| 100.0 | % |
|
| 44.1 | % |
Loss-given-default |
| 24.3 | % |
|
| 11.3 | % |
On March 7, 2023, the Company sold all of its investments in default, loss severity, or discount rate assumptions, in isolation, wouldits previously consolidated VIE of residential mortgage loans and, as a result, in a significantly lower (higher)deconsolidated the VIE. As of December 31, 2022, the Company measured the fair value measurement. However, significant increases (decreases) in prepayment rate assumptions, in isolation, may result in a significantly higher (lower)of both the residential mortgage loans and the debt obligations of its consolidated VIE of residential mortgage loans based upon the fair value measurement dependingof the debt obligations as the fair value of the debt securities issued by the VIE were more observable to the Company than the fair value of the underlying mortgage loans.
The senior and mezzanine debt obligations of the consolidated VIE of residential mortgage loans were classified within Level 2 of the fair value hierarchy. Inputs to the fair value measurements of the senior and mezzanine debt obligations of the consolidated VIE included quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources, including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources were based upon the instrument’s specific characteristicsobservable transactions for securities with similar characteristics.
The residential mortgage loans and the overall payment structuresubordinate and excess interest-only debt obligations of the issuing securitization vehicle. It is difficult to generalizeconsolidated VIE of residential mortgage loans (held by the interrelationships between these significant inputsCompany as investments and eliminated against the actual results could differ considerably on an individual security basis. Therefore, each significant input is closely analyzed to ascertain its reasonableness forassociated debt of the Company’s purposesVIE in consolidation) were classified within Level 3 of the fair value measurement.
Measuringhierarchy. To measure the fair value is inherently subjective givenof the volatilesubordinate and sometimes illiquid markets for these private-label MBSexcess interest-only debt obligations of the consolidated VIE of residential mortgage loans, the Company used an income approach by preparing an estimate of the present value of the amount and requires managementtiming of the cash flows expected to make a numberbe collected from each security over its expected remaining life. To prepare the estimate of judgmentscash flows expected to be collected, the Company used significant judgment to develop assumptions about the assumptionsfuture performance of the pool of residential mortgage loans that a market participant would use,served as collateral, including assumptions about the timing and amount of future cash flowscredit losses and prepayments. The significant unobservable inputs to the fair value measurement included the estimated rate of prepayment, rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represented a market participant’s current required rate of return required by market participants.for a similar instrument. The assumptionsfollowing table presents the weighted-average of the significant inputs to the fair value measurement of the subordinate and excess interest-only debt obligations of its consolidated VIE of residential mortgage loans as of December 31, 2022:
| Subordinate Debt Obligation |
|
| Excess Interest-Only Debt Obligations |
| ||
Annualized voluntary prepayment rate |
| 10.0 | % |
|
| 10.0 | % |
Annualized default rate |
| 0.5 | % |
|
| 0.5 | % |
Loss-given-default |
| 17.5 | % |
|
| 17.5 | % |
Discount rate |
| 7.8 | % |
|
| 17.7 | % |
MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company applies are specific to each security. Although the Company relies on its internal calculationsuses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of these private-label MBS,the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:
The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of the periods indicated:
|
| September 30, 2023 |
|
| December 31, 2022 |
| ||
Discount rate |
|
| 10.0 | % |
|
| 8.5 | % |
Annualized prepayment rate |
|
| 6.2 | % |
|
| 7.0 | % |
Annual per-loan cost of servicing (current loans) |
| $ | 60.00 |
|
| $ | 65.00 |
|
23
Pursuant to the Company’s MSR financing receivable arrangements, upon the consummation of three-year performance periods ending December 31, 2023 and April 1, 2024, the Company’s mortgage servicing counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its counterparty. The present value of the expected incentive fee payment is estimated based upon the timing and amount of capital contributions from (and cash distributions to) the Company considers indicationsto (from) its mortgage servicing counterparty to date as well as the future expected cash flows from the MSR financing receivables over the remaining performance periods, which is derived from the current fair value of the underlying reference MSRs. As of September 30, 2023 and December 31, 2022, the present value from actual sales of similar private-label MBS to assistexpected future incentive fee payments reflected in the valuation process and to calibratefair value of the Company’s models.MSR financing receivables was $0 and $12,568, respectively. During the three month period ended June 30, 2023, the Company's mortgage servicing counterparty agreed to accept an early payment of $9,650 in full satisfaction of the Company's remaining incentive fee payment obligations for the three-year performance periods ending December 31, 2023 and April 1, 2024. Cumulatively, the Company paid $10,794 in incentive fee payments to the Company's mortgage servicing counterparty, all of which were paid during the six months ended June 30, 2023.
Derivative instruments
Exchange-traded derivative instruments - – Exchange-traded derivative instruments, which include Eurodollar futures, U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices for identical instruments in liquid markets.
Interest rate swaps - – Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally cleared interest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, three-month LIBORSOFR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the overnight index swap rateSOFR curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value. The Company reviews the valuations reported by the clearinghouse on an ongoing basis and performs procedures using readily available market data to independently verify their reasonableness.
Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the contractcommitment under measurement.
Other
Long-term unsecured debt - As of September 30, 20172023 and December 31, 2016,2022, the carrying value of the Company’s long-term unsecured debt was $73,824$86,713 and $73,656,$86,405, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’s estimate of the fair value of long-term unsecured debt is $71,152$79,613 and $66,489$79,900 as of September 30, 20172023 and December 31, 2016,2022, respectively. The Company’s Senior Notes, which are publicly traded on the New York Stock Exchange, are classified within Level 1 of the fair value hierarchy. Trust preferred debt is classified within Level 2 of the fair value hierarchy as the fair value is estimated based on the quoted prices of the Company’s publicly traded Senior Notes.
Investments in equity securities of publicly-traded companies –As of December 31, 2022, the Company had investments in equity securities of publicly-traded companies at fair value of $234, which is included in the line item “other assets” in the accompanying consolidated balance sheets. Investments in publicly traded stock are classified within Level 1 of the fair value hierarchy as their fair value is measured based on unadjusted quoted prices in active exchange markets for identical assets.
Investments in equity securities of non-public companies and investment funds - – As of September 30, 20172023 and December 31, 2016,2022, the Company had investments in equity securities of non-public companies and investment funds with a carrying amountmeasured at fair value of $1,701$2,724 and $1,918,$2,964, respectively, which are included in the line item “other assets” in the accompanying consolidated balance sheets. As of September 30, 2017 and December 31, 2016, $444 and $533, respectively, of these investments represent securities for which the Company elected the “fair value option” at the time that the securities were initially recognized on the Company’s consolidated balance sheets; the Company measures the fair value of these securities on a recurring basis, recognizing the periodic change in fair value in earnings. The remaining $1,257 and $1,385 in investments
Investments in equity securities of non-public companies and investment funds as of September 30, 2017 and December 31, 2016, respectively, were measured at cost, net of impairments. The Company’s estimate of the fair value of investments in equity securities and investment funds is $6,205 and $6,034 as of September 30, 2017 and December 31, 2016, respectively. Investments in equity securities and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, for its investments in equity securities, the Company estimates fair value by estimating the enterprise value of the investee andwhich it then waterfalls the enterprise value overallocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration
24
of recent investments in, or tender offers for, the equity securities of the investee. For its investmentsinvestee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in investment funds,estimating the Company estimates fair value based upon the investee’sof an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value per share.the equity cash flows available for distribution and the terminal value of the entity. As of September 30, 2023, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 100 percent, 20 percent, and 17 percent, respectively. As of December 31, 2022, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 97 percent, 15 percent, and 16 percent, respectively.
Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, restricted cash, deposits, receivables, repurchase agreements, payables, and other assets (aside from those previously discussed) and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.
Fair Value Hierarchy
Financial Instruments Measured at Fair Value on a Recurring Basis
The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of September 30, 20172023 and December 31, 2016.2022. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
| September 30, 2017 |
| |||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS |
| $ | 3,994,515 |
|
| $ | — |
|
| $ | 3,994,515 |
|
| $ | — |
|
Private-label MBS |
|
| 54 |
|
|
| — |
|
|
| — |
|
|
| 54 |
|
Total MBS |
|
| 3,994,569 |
|
|
| — |
|
|
| 3,994,515 |
|
|
| 54 |
|
Derivative assets |
|
| 4,177 |
|
|
| 821 |
|
|
| 3,356 |
|
|
| — |
|
Derivative liabilities |
|
| (7,146 | ) |
|
| — |
|
|
| (7,146 | ) |
|
| — |
|
Other assets |
|
| 444 |
|
|
| — |
|
|
| — |
|
|
| 444 |
|
Total |
| $ | 3,992,044 |
|
| $ | 821 |
|
| $ | 3,990,725 |
|
| $ | 498 |
|
|
| September 30, 2023 |
| |||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Agency MBS |
| $ | 520,851 |
|
| $ | — |
|
| $ | 520,851 |
|
| $ | — |
|
MSR financing receivables |
|
| 191,800 |
|
|
| — |
|
|
| — |
|
|
| 191,800 |
|
Loans |
|
| 25,216 |
|
|
| — |
|
|
| — |
|
|
| 25,216 |
|
Credit securities |
|
| 101,546 |
|
|
| — |
|
|
| 99,434 |
|
|
| 2,112 |
|
Mortgage loans of consolidated VIEs |
|
| 237 |
|
|
| — |
|
|
| — |
|
|
| 237 |
|
Derivative assets |
|
| 9,503 |
|
|
| — |
|
|
| 9,503 |
|
|
| — |
|
Other assets |
|
| 2,724 |
|
|
| — |
|
|
| — |
|
|
| 2,724 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured debt of consolidated VIEs |
|
| 91 |
|
|
| — |
|
|
| — |
|
|
| 91 |
|
Derivative liabilities |
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| December 31, 2022 |
| |||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Agency MBS |
| $ | 443,540 |
|
| $ | — |
|
| $ | 443,540 |
|
| $ | — |
|
MSR financing receivables |
|
| 180,365 |
|
|
| — |
|
|
| — |
|
|
| 180,365 |
|
Loans |
|
| 29,264 |
|
|
| — |
|
|
| — |
|
|
| 29,264 |
|
Credit securities |
|
| 104,437 |
|
|
| — |
|
|
| 98,933 |
|
|
| 5,504 |
|
Mortgage loans of consolidated VIE |
|
| 193,957 |
|
|
| — |
|
|
| — |
|
|
| 193,957 |
|
Derivative assets |
|
| 5,660 |
|
|
| — |
|
|
| 5,660 |
|
|
| — |
|
Other assets |
|
| 3,198 |
|
|
| 234 |
|
|
| — |
|
|
| 2,964 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Secured debt of consolidated VIE |
|
| 169,345 |
|
|
| — |
|
|
| 159,464 |
|
|
| 9,881 |
|
Derivative liabilities |
|
| 22 |
|
|
| — |
|
|
| 22 |
|
|
| — |
|
|
| December 31, 2016 |
| |||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
MBS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS |
| $ | 3,911,375 |
|
| $ | — |
|
| $ | 3,911,375 |
|
| $ | — |
|
Private-label MBS |
|
| 1,266 |
|
|
| — |
|
|
| — |
|
|
| 1,266 |
|
Total MBS |
|
| 3,912,641 |
|
|
| — |
|
|
| 3,911,375 |
|
|
| 1,266 |
|
Derivative assets |
|
| 74,889 |
|
|
| 4,289 |
|
|
| 70,600 |
|
|
| — |
|
Derivative liabilities |
|
| (9,554 | ) |
|
| (3,906 | ) |
|
| (5,648 | ) |
|
| — |
|
Other assets |
|
| 533 |
|
|
| — |
|
|
| — |
|
|
| 533 |
|
Total |
| $ | 3,978,509 |
|
| $ | 383 |
|
| $ | 3,976,327 |
|
| $ | 1,799 |
|
There were no transfers of financial instruments into or out of Levels 1, 2 or 3 during the three and nine months ended September 30, 2017 or the year ended December 31, 2016.25
Level 3 Financial Assets and Liabilities
The following table provides information about the significant unobservable inputs used to measure the fair value of the Company’s private-label MBS as of the dates indicated:
|
| |||||||||||||
|
|
|
| |||||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
(1)Based on face value.
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 investmentsfinancial assets that are measured at fair value on a recurring basis for the periods indicated:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Beginning balance | $ | 228,201 |
|
| $ | 393,501 |
|
| $ | 412,054 |
|
| $ | 195,767 |
|
Net (loss) gains included in "Investment and derivative |
| (1,940 | ) |
|
| (13,199 | ) |
|
| 2,300 |
|
|
| (11,583 | ) |
Additions from consolidation of VIEs |
| — |
|
|
| — |
|
|
| — |
|
|
| 276,594 |
|
Transfers to real estate owned by consolidated VIE |
| (504 | ) |
|
| (78 | ) |
|
| (1,163 | ) |
|
| (277 | ) |
Purchases |
| — |
|
|
| 40,474 |
|
|
| 16,201 |
|
|
| 61,693 |
|
Sales |
| — |
|
|
| — |
|
|
| — |
|
|
| (12,406 | ) |
Payments, net |
| (8,965 | ) |
|
| (14,671 | ) |
|
| (35,872 | ) |
|
| (110,052 | ) |
Subtractions from deconsolidation of VIEs |
| — |
|
|
| — |
|
|
| (185,820 | ) |
|
| — |
|
Accretion of discount, net |
| 5,297 |
|
|
| 4,090 |
|
|
| 14,389 |
|
|
| 10,381 |
|
Ending balance | $ | 222,089 |
|
| $ | 410,117 |
|
| $ | 222,089 |
|
| $ | 410,117 |
|
Net unrealized gains (losses) included in earnings for the | $ | (1,940 | ) |
| $ | (13,199 | ) |
| $ | 2,987 |
|
| $ | (10,552 | ) |
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the periods indicated:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Beginning balance | $ | 113 |
|
| $ | 11,521 |
|
| $ | 9,881 |
|
| $ | 508 |
|
Net (gain) loss included in "Investment and derivative |
| (10 | ) |
|
| (808 | ) |
|
| 23 |
|
|
| (2,140 | ) |
Additions from consolidation of VIEs |
| — |
|
|
| — |
|
|
| — |
|
|
| 14,278 |
|
Payments, net |
| (12 | ) |
|
| (374 | ) |
|
| (316 | ) |
|
| (2,170 | ) |
Subtractions from deconsolidation of VIEs |
| — |
|
|
| — |
|
|
| (9,481 | ) |
|
| — |
|
Amortization of premium, net |
| — |
|
|
| (15 | ) |
|
| (16 | ) |
|
| (152 | ) |
Ending balance | $ | 91 |
|
| $ | 10,324 |
|
| $ | 91 |
|
| $ | 10,324 |
|
Net unrealized (gains) losses included in earnings for the | $ | (10 | ) |
| $ | (808 | ) |
| $ | (29 | ) |
| $ | (2,140 | ) |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Beginning balance | $ | 618 |
|
| $ | 89,186 |
|
| $ | 1,799 |
|
| $ | 130,553 |
|
Total net gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in investment gain (loss), net |
| (116 | ) |
|
| 2,994 |
|
|
| (55 | ) |
|
| 537 |
|
Included in other comprehensive income |
| — |
|
|
| (3,325 | ) |
|
| — |
|
|
| (11,739 | ) |
Purchases |
| — |
|
|
| — |
|
|
| — |
|
|
| 5,357 |
|
Sales |
| — |
|
|
| (67,761 | ) |
|
| (1,268 | ) |
|
| (106,052 | ) |
Payments, net |
| (6 | ) |
|
| (826 | ) |
|
| (60 | ) |
|
| (4,170 | ) |
Accretion of discount |
| 2 |
|
|
| 1,655 |
|
|
| 82 |
|
|
| 7,437 |
|
Ending balance | $ | 498 |
|
| $ | 21,923 |
|
| $ | 498 |
|
| $ | 21,923 |
|
Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date | $ | (116 | ) |
| $ | (64 | ) |
| $ | (113 | ) |
| $ | (280 | ) |
Note 9.13. Income Taxes
Arlington Asset is subjectThe Company has elected to taxationbe taxed as a corporationREIT under Subchapter C of the Internal Revenue Code commencing upon filing its tax return for its taxable year ended December 31, 2019. As a REIT, the Company is required to distribute annually 90% of 1986,its REIT taxable income. So long as amended (the “Code”). 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 to the extent that it distributes all of its annual taxable income 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 REIT taxable income within the time limits prescribed by the Internal Revenue Code.
As of September 30, 2017,2023, the Company had estimated federal net operating loss (“NOL”) carry-forwardscarryforwards of $69,720$163,814 that can be used to offset future taxable ordinary income. The Company’sincome and reduce its REIT distribution requirements. NOL carry-forwards begin tocarryforwards totaling $14,485 expire in 2027.2028 and NOL carryforwards totaling $149,329 have no expiration period. For the NOL carryforwards that have no expiration period, the Company is limited to utilizing NOL carryforwards to 80% of the taxable income in any one year. As of September 30, 2017,2023, the Company had estimated federal net capital loss (“NCL”) carry-forwardscarryforwards of $309,751$136,084 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carry-forwardscarryforwards are $136,505$105,014 in 2019, $102,9272023, $14,187 in 2020,2026 and $70,319$16,883 in 2021. 2027. The Company’s estimated NOL and NCL carryforwards as of September 30, 2023 are subject to potential adjustments up to the time of filing of the Company’s income tax returns.
26
The Company and subsidiaries have made joint elections to treat such subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business, subject to certain exceptions. As such, each of these TRSs is taxable as a C corporation and subject to federal, alternative minimum tax (“AMT”) and state and local taxes on its taxable income and gains
that are not offset by its NOL and NCL carry-forwards. As of September 30, 2017, the Company had estimated AMT credit carry-forwards of $8,952 that can be used to offset future taxable ordinary income. The AMT credit carry-forwards do not expire.
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities reflect the impact of temporary differences between the carrying amount of assets and liabilities pursuant to the application of GAAP and their respective tax bases and are stated at tax rates expected to be in effect when the taxes are actually paid or recovered. Deferred tax assets are also recognized for NOL carry-forwards, NCL carry-forwards and any tax credit carry-forwards.
A valuation allowance is provided against the deferred tax asset if, based upon the Company’s evaluation, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is incorporated into the determination of whether a valuation allowance for deferred tax assets is appropriate. Items considered in the valuation allowance determination include expectations of future earnings of the appropriate tax character, recent historical financial results, tax planning strategies, the length of statutory carry-forward periods and the expected timing of the reversal of temporary differences. As of September 30, 2017, the Company determined that it should record a full valuation allowance against its deferred tax assets that are capital in nature, which consists of its NCL carry-forwards and temporary GAAP to tax differences that are expected to result in capital losses in future periods. As of September 30, 2017, the Company determined that it should not record any valuation allowance against its deferred tax assets that are ordinary in nature, which consists of its NOL carry-forwards, tax credit carry-forwards and temporary GAAP to tax differences that are expected to result in deductions from ordinary income in future periods.their taxable income. For the three months ended September 30, 2017,2023 and 2022, the Company recordedrecognized a decrease toprovision for income taxes of $199 and $1,074, respectively, on the pre-tax net income of its valuation allowance of $8,417, and forTRSs. For the nine months ended September 30, 2017,2023 and 2022, the Company recorded an increase torecognized a provision for income taxes of $1,695 and $4,163, respectively, on the pre-tax income of its valuation allowance of $11,541.TRSs.
DeferredThe Company recognizes uncertain tax assets and liabilities consistedpositions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the followingposition. A position that meets this standard is measured at the largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return and the financial statements. As of September 30, 2023 and December 31, 2022, the Company assessed the need for recording a provision for any uncertain tax position and has made the determination that such provision is not necessary. If the Company were to incur income tax related interest and penalties, the Company’s policy is to classify them as a component of provision for income taxes.
The Company is subject to examination by the dates indicated:Internal Revenue Service (“IRS”) and state and local authorities in jurisdictions where the Company has significant business operations. The Company’s federal tax returns for 2020 and forward remain subject to examination by the IRS.
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Ordinary deferred tax assets: |
|
|
|
|
|
|
|
NOL carry-forward | $ | 27,121 |
|
| $ | 37,238 |
|
AMT credit carry-forward |
| 8,952 |
|
|
| 8,427 |
|
Deferred net loss on designated derivatives |
| 6,717 |
|
|
| 1,386 |
|
Stock-based compensation |
| 2,563 |
|
|
| 2,426 |
|
Other, net |
| 137 |
|
|
| 208 |
|
Total ordinary deferred tax assets |
| 45,490 |
|
|
| 49,685 |
|
Ordinary deferred tax liabilities: |
|
|
|
|
|
|
|
Net unrealized gain on designated derivatives |
| (22,037 | ) |
|
| (25,145 | ) |
Ordinary deferred tax assets, net |
| 23,453 |
|
|
| 24,540 |
|
|
|
|
|
|
|
|
|
Capital deferred tax assets: |
|
|
|
|
|
|
|
NCL carry-forward |
| 120,493 |
|
|
| 120,939 |
|
Net unrealized loss on investments |
| 31,951 |
|
|
| 44,253 |
|
Valuation allowance |
| (152,444 | ) |
|
| (140,903 | ) |
Total capital deferred tax assets, net |
| — |
|
|
| 24,289 |
|
Total deferred tax assets, net | $ | 23,453 |
|
| $ | 48,829 |
|
Note 10.14. Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested shares of restricted stock, restricted stock units, and performance share units. The following tables presenttable presents the computations of basic and diluted earnings (loss) per share for the periods indicated:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Shares in thousands) | 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Basic weighted-average common shares outstanding |
| 28,081 |
|
|
| 28,338 |
|
|
| 28,055 |
|
|
| 28,973 |
|
Performance share units, unvested restricted stock units, |
| — |
|
|
| 575 |
|
|
| — |
|
|
| — |
|
Diluted weighted-average common shares outstanding |
| 28,081 |
|
|
| 28,913 |
|
|
| 28,055 |
|
|
| 28,973 |
|
Net (loss) income (attributable) available to common stock | $ | (7,273 | ) |
| $ | 2,756 |
|
| $ | (5,943 | ) |
| $ | (1,087 | ) |
Basic (loss) earnings per common share | $ | (0.26 | ) |
| $ | 0.10 |
|
| $ | (0.21 | ) |
| $ | (0.04 | ) |
Diluted (loss) earnings per common share | $ | (0.26 | ) |
| $ | 0.10 |
|
| $ | (0.21 | ) |
| $ | (0.04 | ) |
The diluted loss per share for the three and nine months ended September 30, 2023 did not include the antidilutive effect of 1,877,566 and 995,098 shares, respectively, of unvested shares of restricted stock, restricted stock units, and performance share units. The diluted loss per share for the nine months ended September 30, 2022 did not include the antidilutive effect of 530,673 shares of unvested shares of restricted stock, restricted stock units, and performance share units.
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(Shares in thousands) | 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Basic weighted-average common shares outstanding |
| 26,377 |
|
|
| 23,038 |
|
|
| 24,793 |
|
|
| 23,011 |
|
Performance share units and unvested restricted stock |
| 479 |
|
|
| 311 |
|
|
| 350 |
|
|
| 143 |
|
Diluted weighted-average common shares outstanding |
| 26,856 |
|
|
| 23,349 |
|
|
| 25,143 |
|
|
| 23,154 |
|
Net income attributable to common stock | $ | 22,785 |
|
| $ | 18,813 |
|
| $ | 10,076 |
|
| $ | 89 |
|
Basic earnings per common share | $ | 0.86 |
|
| $ | 0.82 |
|
| $ | 0.41 |
|
| $ | - |
|
Diluted earnings per common share | $ | 0.85 |
|
| $ | 0.81 |
|
| $ | 0.40 |
|
| $ | - |
|
Note 11.15. Stockholders’ Equity
Common Stock
The Company has authorized common share capital of 450,000,000 shares of Class A common stock, par value $0.01$0.01 per share, and 100,000,000 shares of Class B common stock, par value $0.01$0.01 per share. Holders of the Class A and Class B common stock are entitled to one vote and three votes per share, respectively, on all matters voted upon by the shareholders. Shares of Class B common stock are convertible into shares of Class A common stock on a one-for-one basis at the option of the Company in certain circumstances including either (i) upon sale or other transfer, or (ii) at the time the holder of such shares of Class B common stock ceases to be employed by the Company.
During the nine months endedAs of September 30, 20172023 and during the year ended December 31, 2016, holders of the Company's Class B common stock converted an aggregate of 20,256 and 81,9602022, there were no outstanding shares of Class B common stock into 20,256 and 81,960 shares ofstock. The Class A common stock respectively. As of September 30, 2017, all remaining shares of Class B common stock had been exchanged for shares of the Company’s Class A common stock.
Preferred Stock
The Company has authorized share capital of 2,000,000 shares of 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”), par value of $.01 per share, and 100,000 authorized and unissued shares designated as Series A Preferred Stock, and 22,900,000 shares of undesignated preferred stock. The Company’s Board of Directors has the authority, without further action by the shareholders, to issue additional preferred stock in one or more series and to fix the terms and rights of the preferred stock.
In May 2017, the Company completed a public offering in which 135,000 shares of its Series B Preferred Stock were issued to the public at a public offering price of $24.00 per share for proceeds net of underwriting discounts and commissions and expenses of $3,018. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AI PrB.“AAIC.”
The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference before holders of common stock are entitled to receive any dividends. Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly in arrears on the 30th day of each December, March, June and September. As of September 30, 2017, we had declared and paid all required quarterly dividends on our Series B Preferred Stock.27
Common Stock Dividends
Pursuant to the Company’s variable dividend policy for its common stock, the Board of Directors evaluates common stock dividends on a quarterly basis and, in its sole discretion, approves the payment of dividends. The Company’s common stock dividend payments, if any, may vary significantly from quarter to quarter. The Board of Directors has approved and the Company has declared and paid the following dividends on its common stock to date in 2017:
Quarter Ended |
| Dividend Amount |
|
| Declaration Date |
| Record Date |
| Pay Date | |
September 30 |
| $ | 0.550 |
|
| September 14 |
| September 29 |
| October 31 |
June 30 |
|
| 0.550 |
|
| June 16 |
| June 30 |
| July 31 |
March 31 |
|
| 0.625 |
|
| March 14 |
| March 31 |
| April 28 |
The Board of Directors approved and the Company declared and paid the following dividends for 2016:
Quarter Ended |
| Dividend Amount |
|
| Declaration Date |
| Record Date |
| Pay Date | |
December 31 |
| $ | 0.625 |
|
| December 16 |
| December 30 |
| January 31, 2017 |
September 30 |
|
| 0.625 |
|
| September 15 |
| September 30 |
| October 31 |
June 30 |
|
| 0.625 |
|
| June 17 |
| June 30 |
| July 29 |
March 31 |
|
| 0.625 |
|
| March 15 |
| March 31 |
| April 29 |
Equity Distribution Agreements
On May 24, 2013,August 10, 2018, the Company entered into separate common equity distribution agreements (the “Prior Equity Distribution Agreements”) with each of RBC Capital Markets, LLC,equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC (the “Prior Equity Sales Agents”), pursuant to which the Company may offer and sell, from time to time, up to 1,750,00012,597,423 shares of the Company’s Class A common stock.
Pursuant to the Prior Equity Distribution Agreements,common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the Prior Equity Sales Agentsequity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
During the three and nine months ended MarchSeptember 30, 2023 and the year ended December 31, 2017, the Company issued 800 shares of Class A common stock at a weighted average public offering price of $15.16 per share for proceeds net of underwriting discounts and commissions and expenses of $12 under the Prior Equity Distribution Agreements. On February 23, 2017, the Company terminated the Prior Equity Distribution Agreements.
On February 22, 2017, the Company entered into new separate equity distribution agreements (the “New Equity Distribution Agreements”) with each of JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. (the “New Equity Sales Agents”), pursuant to which the Company may offer and sell, from time to time, up to 6,000,000 shares of the Company’s Class A common stock. Pursuant to the New Equity Distribution Agreements, shares of the Company’s common stock may be offered and sold through the New Equity Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
The following table provides information about the2022, there were no issuances of common stock under the New Equity Distribution Agreements:common equity distribution agreements.
Class A Common Stock Issuances |
| Three Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2017 |
| ||
Shares issued |
|
| 2,037,348 |
|
|
| 4,368,837 |
|
Weighted average public offering price |
| $ | 13.21 |
|
| $ | 13.90 |
|
Net proceeds (1) |
| $ | 26,567 |
|
| $ | 59,901 |
|
|
|
As of September 30, 2017,2023, the Company had 1,631,16311,302,160 shares of Class A common stock available for sale under the New Equity Distribution Agreements.common equity distribution agreements.
Common Share Repurchase Program
On May 16, 2017,July 31, 2020, the Company entered into an equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC (the “Series B Preferred Equity Agent”), pursuant to which the Company may offer and sell, from time to time, up to 1,865,000 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B Preferred Equity Distribution Agreement, shares of the Company’s Series B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agent in transactionsannounced that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
The following table provides information about the issuances of preferred stock under the Series B Preferred Equity Distribution Agreement:
Series B Preferred Stock Issuances |
| Three Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2017 |
| ||
Shares issued |
|
| 138,683 |
|
|
| 159,993 |
|
Weighted average public offering price |
| $ | 25.03 |
|
| $ | 24.95 |
|
Net proceeds (1) |
| $ | 3,404 |
|
| $ | 3,886 |
|
|
|
As of September 30, 2017, the Company had 1,705,007 shares of Series B Preferred stock available for sale under the Series B Preferred Equity Distribution Agreement.
Share Repurchase Program
The Company’sits Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2,000,00018,000,000 shares of Class A common stock (the “Repurchase Program”"Repurchase Program"). Repurchases under the Repurchase Program may be made from time to time on the open market and in private transactions at management’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of Class A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded using the Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspended or terminated at any time without prior notice.
There were no shares of Class A common stock repurchased by the Company during the three and nine months ended September 30, 2023. During the year ended December 31, 2022, the Company repurchased 2,794,574 shares of Class A common stock for a total purchase price of $9,316. As of September 30, 2017,2023, there remain available for repurchase 1,951,30510,195,704 shares of Class A common stock under the Repurchase Program.
Preferred Stock
Shareholder Rights Agreement
The Company has authorized preferred share capital of (i) 100,000 shares designated as Series A Preferred Stock that is unissued; (ii) 2,000,000 shares designated as 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”), par value of $0.01 per share; (iii) 2,500,000 shares designated as 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”), par value of $0.01 per share; and (iv) 20,400,000 shares of undesignated preferred stock. The Company’s Board of Directors adoptedhas the authority, without further action by the shareholders, to issue additional preferred stock in one or more series and to fix the terms and rights of the preferred stock. The Company’s preferred stock ranks senior to its common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution, or winding up of the Company. The Company’s shareholderspreferred stock ranks on parity with each other. The Series B Preferred Stock and Series C Preferred Stock are publicly traded on the New York Stock Exchange under the ticker symbols “AAIC PrB” and “AAIC PrC,” respectively.
The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series B Preferred Stock to date in 2023.
The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series C Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum of the $25.00 per share liquidation preference. As of June 30, 2023, references to LIBOR were replaced by CME Term
28
SOFR plus the applicable statutory spread adjustment. Shares of Series C Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve the Company’s qualification as a REIT. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series C Preferred Stock to date in 2023.
Preferred Equity Distribution Agreements
The Company is party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which the Company may offer and sell, from time to time, up to 1,647,370 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of the Company’s Series B Preferred Stock may be offered and sold through the preferred equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
There were no issuances of Series B Preferred Stock during the three and nine months ended September 30, 2023. During the year ended December 31, 2022, the Company issued 6,058 shares of Series B Preferred Stock at a weighted average public offering price of $24.87 per share for proceeds net of selling commissions and expenses of $149 under the Series B preferred equity distribution agreement. As of September 30, 2023, the Company had 1,602,566 shares of Series B Preferred Stock available for sale under the preferred equity distribution agreement.
Shareholder Rights Agreement
On June 1, 2009, the Board of Directors approved a shareholder rights agreement (“Rights Plan”) and the Company’s shareholders approved the Rights Plan at its annual meeting of shareholders on June 2, 2010. On April 9, 2018, the Board of Directors approved a first amendment to the Rights Plan (“First Amendment”) to extend the term for an additional three years and the Company’s shareholders approved the First Amendment at its annual meeting of shareholders on June 14, 2018. On April 11, 2022, the Board of Directors approved a second amendment to the Rights Plan (“Second Amendment”) to further extend the term until June 4, 2025 and the Company's shareholders approved the Second Amendment at its annual meeting of shareholders on June 16, 2022. The Second Amendment also decreased the Purchase Price (as defined under the Rights Plan) from $70.00 to $21.30.
Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of 4.9%4.9% or more of the outstanding shares of our Class A common stock upon a determination by our Board of Directors (an “Acquiring Person”), all of our other Class A and Class B common shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person.
The Board of Directors adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOL carry-forwards,carryforwards, NCL carry-forwards,carryforwards, and built-in losses under Sections 382 and 383 of the Internal Revenue Code. The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if it experienced an “ownership change” under Section 382 of the Internal Revenue Code. In general, an “ownership change” would occur if there is a cumulative change in the ownership of the Company’s common stock of more than 50% by one or more “5% shareholders” during a three-year period. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock, each, an Acquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.
The Rights Plan, as amended by the Second Amendment, and any outstanding rights will expire at the earliest of (i) June 4, 2019,2025, (ii) the time at which the rights are redeemed or exchanged pursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Internal Revenue Code or any successor statute if the
Board of Directors determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, andor (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.
Note 16. Long-Term Incentive Plan
The Company provides its employees and its non-employee directors with long-term incentive compensation in the form of stock-based awards. On April 29, 2021, the Board of Directors adopted the Arlington Asset Investment Corp. 2021 Long-Term Incentive Plan (the “2021 Plan”), which was approved by the Company’s shareholders and became effective on July 15, 2021. The
Note 12. Revisions29
2021 Plan replaced the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (the “2014 Plan”). No additional grants will be made under the 2014 Plan. However, previous grants under the 2014 Plan and any long-term incentive plans prior to Previously Reported Financial Statementsthe 2014 Plan (collectively, the “Prior Plans”) will remain in effect subject to the terms of the Prior Plans and the applicable award agreement.
DuringUnder the second quarter2021 Plan, a maximum number of 2017,5,256,076 shares of Class A common stock of the Company, concluded thatsubject to adjustment as set forth in the previously reported deferred2021 Plan, were authorized for issuance and may be issued to employees, directors, consultants, advisors and independent contractors who provide bona fide services to the Company and its affiliates. If an award under the 2021 Plan or Prior Plans is canceled, terminated, forfeited or otherwise settled without the issuance of shares subject to such award, those shares will be available for future grants under the 2021 Plan. In addition, shares delivered or withheld for tax assets, net, and accumulated deficit were incorrectobligations arising from an award, other than a stock option or stock appreciation right (“SAR”), will be available for future grants under the 2021 Plan. As of September 30, 2023, 4,265,184 shares remained available for issuance under the 2021 Plan; however, the shares remaining available for issuance would be reduced by the potential future issuance of shares of common stock for the three months ended March 31, 2017settlement of outstanding performance-based stock awards and dividend equivalents for such awards. If these outstanding performance-based stock awards are earned at “target” level performance, an additional 1,625,783 shares would be issued resulting in 2,639,401 shares remaining available for issuance under the 2021 Plan as of September 30, 2023.
Under the 2021 Plan, the Compensation Committee of the Company’s Board of Directors may grant restricted stock, restricted stock units (“RSUs”), stock options, SARs and/or other stock-based awards. Under the 2021 Plan, shares issued upon the exercise of a stock option or SAR or shares subject to a restricted stock award and any shares issued in settlement of restricted stock unit award, reduced by the number of any shares withheld to satisfy withholding taxes, may not be sold or transferred before the earlier of (i) the first anniversary of the exercise of the option or SAR or vesting of the restricted stock award or the settlement of restricted stock unit award, or (ii) the date the participant is no longer employed by or providing services to the Company or an affiliate. Non-employee members of the Board of Directors may not be granted awards under the 2021 Plan during any twelve-month period with respect to the number of shares that have a fair market value on the date of grant that exceeds $160. The 2021 Plan will terminate on the tenth anniversary of its effective date unless sooner terminated by the Board of Directors.
Stock-based compensation costs are initially measured at the estimated fair value of the awards on the grant date developed using appropriate valuation methodologies, as adjusted for estimates of future award forfeitures. Valuation methodologies used and subsequent expense recognition is dependent upon each award’s service and performance conditions.
Performance-based Stock Awards
The Company has granted performance-based RSUs and performance stock units (collectively, “Performance-based Stock Awards”) to employees of the Company that are convertible into shares of Class A common stock following the achievement of performance goals over the applicable performance periods. Compensation costs for Performance-based Stock Awards subject to nonmarket-based performance conditions (i.e., performance not predicated on changes in the Company’s stock price) are measured at the closing stock price on the dates of grant, adjusted for the five fiscal years ended December 31, 2016probability of achieving certain benchmarks included in the performance metrics. These initial cost estimates are recognized as expense over the requisite performance periods, as adjusted for changes in estimated, and ultimately actual, performance and forfeitures. Compensation costs for components of Performance-based Stock Awards subject to market-based performance conditions (i.e., performance predicated on changes in the Company’s stock price) are measured at the dates of grant using a Monte Carlo simulation model which incorporates into the valuation the inherent uncertainty regarding the achievement of the market-based performance metrics. These initial valuation amounts are recognized as expense over the requisite performance periods, subject only to adjustments for changes in estimated, and ultimately actual, forfeitures.
The Compensation Committee has granted Performance-based Stock Awards with performance goals based on (i) the compound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during the applicable performance period (“Absolute TSR Awards”), (ii) the compound annualized total shareholder return relative to a peer index during the applicable performance period (“Relative TSR Awards”), (iii) the compound annualized growth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committee plus dividends on a reinvested basis) during the applicable performance period (“Book Value Awards”), and (iv) the share price of the Company's common stock during the applicable performance period ("Stock Price Awards").
The Compensation Committee of the Board of Directors of the Company approved the following Performance-based Stock Award grants for the periods indicated:
30
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
Absolute TSR Awards granted |
|
| — |
|
|
| 174,581 |
|
Absolute TSR Award grant date fair value per share |
| $ | — |
|
| $ | 6.03 |
|
Relative TSR Awards granted |
|
| — |
|
|
| 87,291 |
|
Relative TSR Award grant date fair value per share |
| $ | — |
|
| $ | 5.83 |
|
Book Value Awards granted |
|
| — |
|
|
| 103,000 |
|
Book Value Award grant date fair value per share |
| $ | — |
|
| $ | 3.37 |
|
Stock Price Awards granted |
|
| — |
|
|
| 1,225,490 |
|
Stock Price Award grant date fair value per share |
| $ | — |
|
| $ | 1.72 |
|
For the Company’s Book Value Awards, the grant date fair value per share is based on the close price on the date of grant. For the Company’s Absolute TSR Awards, Relative TSR Awards and Stock Price Awards, the grant date fair value per share is based on a Monte Carlo simulation model. The following assumptions, determined as of the date of grant, were used in the Monte Carlo simulation model to measure the grant date fair value per share of the Company’s Absolute TSR Awards, Relative TSR Awards and Stock Price Awards for the periods indicated:
|
| Absolute TSR Awards |
|
| Relative TSR Awards |
|
| Stock Price Awards |
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||||
Closing stock price on date of grant |
| $ | — |
|
| $ | 3.58 |
|
| $ | — |
|
| $ | 3.58 |
|
| $ | — |
|
| $ | 3.06 |
|
Beginning average stock price on |
| $ | — |
|
| $ | 3.60 |
|
| $ | — |
|
| $ | 3.60 |
|
| $ | — |
|
| N/A |
| |
Expected volatility (2) |
|
| — |
|
|
| 69.20 | % |
|
| — |
|
|
| 69.20 | % |
|
| — |
|
|
| 51.17 | % |
Dividend yield (3) |
|
| — |
|
|
| 0.00 | % |
|
| — |
|
|
| 0.00 | % |
|
| — |
|
|
| 0.00 | % |
Risk-free rate (4) |
|
| — |
|
|
| 1.01 | % |
|
| — |
|
|
| 1.01 | % |
|
| — |
|
|
| 2.97 | % |
Discount for illiquidity (5) |
|
| — |
|
|
| 0.00 | % |
|
| — |
|
|
| 0.00 | % |
|
| — |
|
|
| 8.42 | % |
The vesting of the previously reported income tax benefitPerformance-based Stock Awards is subject to both continued employment under the terms of the award agreement and net income for the fiscalachievement of the Company performance goals established by the Compensation Committee.
For Absolute TSR Awards and Relative TSR Awards granted, the Compensation Committee established a three-year performance period. The actual number of shares of Class A common stock that will be issued to each participant at the end of the applicable performance period will vary between 0% and 250% of the number of the Absolute TSR Awards and Relative TSR Awards granted, depending on performance results. If the minimum threshold level of performance goals is not achieved, no awards are earned. To the extent the performance results are between the minimum threshold level and maximum level of performance goals, between 50% to 250% of the number of Absolute TSR Awards and Relative TSR Awards are earned. Upon settlement, vested Absolute TSR Awards and Relative TSR Awards are converted into shares of the Company’s Class A common stock on a one-for-one basis. As of September 30, 2023, there are a total 400,293 Absolute TSR Awards and Relative TSR Awards outstanding.
For Book Value Awards granted during the year ended December 31, 2012. Although2022, the impactCompensation Committee established a one-year performance period that ended on December 31, 2022. The actual number of this change wasshares of Class A common stock that could be issued to each participant at the end of the performance period varied between 0% and 100% of the number of Book Value Awards granted, depending on performance results. Based on the actual performance measurements, 41,410 shares of the 103,000 Book Value Awards granted were earned and were converted into an equal number of shares of restricted stock in February 2023 that will vest on the third anniversary of the original Book Value Award grant date subject to continued employment under the terms of the award agreements. As of September 30, 2023, there are no remaining outstanding Book Value Awards.
For Stock Price Awards granted, the Compensation Committee established a three-year performance period. If the market price of the Company's common stock is equal to or greater than a stock price performance goal for 45 consecutive trading days at any time
31
during the performance period, between 75% to 300% of the number of Stock Price Awards are earned and become restricted stock units that will vest ratably over a three-year period beginning on the third anniversary of the date of grant subject to continued employment under the terms of the award agreements. As of September 30, 2023, the market price of the Company's common stock met the performance goal for 100% of the Stock Price Awards totaling 1,225,490 performance stock units that will vest ratably and be settled through the issuance of shares of the Company's common stock on May 9, 2025, May 9, 2026 and May 9, 2027, subject to continued employment under the terms of the award agreements. As of September 30, 2023, between 0% and 200% of the original 1,225,490 Stock Price Awards could still be earned if the performance goals are met during the remaining performance period.
Performance-based Stock Awards do not materialhave any voting rights. No dividends are paid on outstanding Performance-based Stock Awards during the applicable performance period. Instead, dividend equivalents are accrued on outstanding Performance-based Stock Awards during the applicable performance period, deemed invested in shares of Class A common stock and are paid out in shares of Class A common stock at the end of the performance period to the consolidated financial statementsextent that the underlying Performance-based Stock Awards vest.
For the nine months ended September 30, 2023 and 2022, the Company recognized $991 and $902, respectively, of compensation expense related to Performance-based Stock Awards. As of September 30, 2023, the Company had 1,625,783 Performance-based Stock Awards outstanding. As disclosed above, the actual number of shares of common stock that could be issued for settlement of the Performance-based Stock Awards can be greater or less than the amount of Performance-based Stock Awards outstanding depending upon the actual results compared to the performance goals. As of September 30, 2023 and December 31, 2022, the Company had unrecognized compensation expense related to Performance-based Stock Awards of $2,357 and $3,314, respectively. The unrecognized compensation expense as of September 30, 2023 is expected to be recognized over a weighted average period of 2.7 years.
During the nine months ended September 30, 2023, Relative TSR Awards that had a performance period ending in that period were earned at 60% of target resulting in the issuance of 19,914 shares of Class A common stock at an intrinsic value of $60. Also during the nine months ended September 30, 2023, Book Value Awards that had a performance period ending on December 31, 2022 were earned at 40% of target resulting in the issuance of 41,410 shares of restricted stock that will vest on the third anniversary of the original Book Value Award grant date. During the nine months ended September 30, 2022, there were no Performance-based Stock Awards that had performance periods ending in that period.
Employee Restricted Stock Awards
Compensation costs for restricted stock awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the five fiscal yearsawards, as adjusted for changes in estimated, and ultimately actual, forfeitures.
The Company grants restricted common shares to employees that either vest ratably over a three-year period or cliff vest at the end of a three-year period based on continued employment over these specified periods. A summary of these unvested restricted stock awards is presented below:
|
| Number of Shares |
|
| Weighted-average |
|
| Weighted- |
| |||
Share Balance as of December 31, 2021 |
|
| 759,035 |
|
| $ | 4.16 |
|
|
| 1.5 |
|
Granted |
|
| 384,291 |
|
|
| 3.42 |
|
|
| — |
|
Forfeitures |
|
| (12,167 | ) |
|
| 3.57 |
|
|
| — |
|
Vestitures |
|
| (300,317 | ) |
|
| 4.44 |
|
|
|
| |
Share Balance as of December 31, 2022 |
|
| 830,842 |
|
|
| 3.72 |
|
|
| 1.2 |
|
Granted |
|
| 137,000 |
|
|
| 3.01 |
|
|
| — |
|
Conversion of Book Value Awards |
|
| 41,410 |
|
|
| 3.37 |
|
|
| — |
|
Vestitures |
|
| (181,125 | ) |
|
| 4.40 |
|
|
| — |
|
Share Balance as of September 30, 2023 |
|
| 828,127 |
|
| $ | 3.44 |
|
|
| 0.8 |
|
For the nine months ended September 30, 2023 and 2022, the Company recognized $870 and $1,470, respectively, of compensation expense related to restricted stock awards. As of September 30, 2023 and December 31, 20162022, the Company had unrecognized compensation expense related to restricted stock awards of $804 and $1,262, respectively. The unrecognized compensation expense as of September 30, 2023 is expected to be recognized over a weighted average period of 0.8 years. For the nine months ended September 30, 2023 and 2022, the intrinsic value of restricted stock awards that vested were $547 and $328 respectively.
32
Director Restricted Stock Units
Compensation costs for RSU awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the three months ended Marchawards, as adjusted for changes in estimated, and ultimately actual, forfeitures. Compensation costs for RSUs that do not require future service conditions are expensed immediately.
The Company’s non-employee directors are compensated in both cash and RSUs. RSUs awarded to non-employee directors vest immediately on the award grant date and are convertible into shares of Class A common stock. For RSUs granted under the Company’s 2021 Plan, 2014 Plan, and certain of the Prior Plans, the RSUs are convertible into shares of Class A common stock at the later of the date the non-employee director ceases to be a member of the Company’s Board or the first anniversary of the grant date. For RSUs granted under certain Prior Plans, the RSUs are convertible into shares of Class A common stock one year after the non-employee director ceases to be a member of the Company’s Board. The non-employee director RSUs do not have any voting rights but are entitled to cash dividend equivalent payments. As of September 30, 2023 and December 31, 2017,2022, the Company has revised its previously reported consolidated financial statements for those periods to reflect the cumulative impacthad 548,272 of non-employee director RSUs outstanding. A summary of the errors. The following tables set forth the affected line items within the Company’s previously reported consolidated financial statementsnon-employee director RSUs grants is presented below for the periods indicated:
|
| Nine Months Ended |
|
| Nine Months Ended |
| ||
RSUs granted |
|
| — |
|
|
| 132,450 |
|
Grant date fair value |
| $ | — |
|
| $ | 3.02 |
|
The grant date fair value of a non-employee director RSU grant is based on the closing price of the Class A common stock on the New York Stock Exchange on the date of grant. For the nine months ended September 30, 2023 and 2022, the Company recognized $167 and $300, respectively, of director fees related to non-employee director RSUs. There were no non-employee director RSUs that were converted into shares of Class A common stock for the nine months ended September 30, 2023 and 2022.
|
| As of March 31, 2017 |
| |||||||||
|
| As Previously Reported |
|
| Adjustment |
|
| As Revised |
| |||
Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 65,149 |
|
| $ | (24,603 | ) |
| $ | 40,546 |
|
Total assets |
|
| 4,720,492 |
|
|
| (24,603 | ) |
|
| 4,695,889 |
|
Accumulated deficit |
|
| (1,536,949 | ) |
|
| (24,603 | ) |
|
| (1,561,552 | ) |
Total stockholders' equity |
|
| 374,481 |
|
|
| (24,603 | ) |
|
| 349,878 |
|
Total liabilities and stockholders' equity |
|
| 4,720,492 |
|
|
| (24,603 | ) |
|
| 4,695,889 |
|
33
|
| As of December 31, 2016 |
| |||||||||
|
| As Previously Reported |
|
| Adjustment |
|
| As Revised |
| |||
Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 73,432 |
|
| $ | (24,603 | ) |
| $ | 48,829 |
|
Total assets |
|
| 4,141,554 |
|
|
| (24,603 | ) |
|
| 4,116,951 |
|
Accumulated deficit |
|
| (1,527,104 | ) |
|
| (24,603 | ) |
|
| (1,551,707 | ) |
Total stockholders' equity |
|
| 383,416 |
|
|
| (24,603 | ) |
|
| 358,813 |
|
Total liabilities and stockholders' equity |
|
| 4,141,554 |
|
|
| (24,603 | ) |
|
| 4,116,951 |
|
|
| As of December 31, 2015 |
| |||||||||
|
| As Previously Reported |
|
| Adjustment |
|
| As Revised |
| |||
Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 97,530 |
|
| $ | (24,603 | ) |
| $ | 72,927 |
|
Total assets |
|
| 4,202,939 |
|
|
| (24,603 | ) |
|
| 4,178,336 |
|
Accumulated deficit |
|
| (1,426,655 | ) |
|
| (24,603 | ) |
|
| (1,451,258 | ) |
Total stockholders' equity |
|
| 484,031 |
|
|
| (24,603 | ) |
|
| 459,428 |
|
Total liabilities and stockholders' equity |
|
| 4,202,939 |
|
|
| (24,603 | ) |
|
| 4,178,336 |
|
Item 2. Management’s Discussion and Analysis ofof Financial Condition and Results of Operations
Unless the context otherwise requires or provides, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” refer to Arlington Asset Investment Corp. (“Arlington Asset”) and its subsidiaries. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
The discussion of our consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, please see “Cautionary Statement About Forward-Looking Information” in Item 3 of Part I of this Quarterly Report on Form 10-Q and the risk factors included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.2022 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
Our Company
We are a principalan investment firm that currently acquires and holds a levered portfolio of residentialfocuses primarily on investing in mortgage related assets. Our investment capital is currently allocated between the following asset classes:
Our MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. Our 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. Our agency MBS and private-label MBS. Agency MBS includeconsist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government agency or government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Private-label MBS, or non-agency MBS, include residential MBS that are not guaranteed by a GSE or the U.S. government. As of September 30, 2017, nearly all of our
We also previously allocated investment capital was allocated to agency MBS. a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, we sold our portfolio of SFR properties and are currently no longer anticipating allocating capital to an SFR investment strategy.
We may also invest in other asset classes that our management team believes may offer attractive risk adjusted returns outside the real estate or mortgage asset classes.
We leverage prudently our investment portfolio so as to increase potential returns to our shareholders. We fund our investments primarily through short-term financing arrangements, principally through repurchase agreements. We enter into various hedging transactions to mitigate the interest rate sensitivity of our cost of borrowing and the value of our MBS portfolio.
We are a Virginia corporation and taxed as a C corporation for U.S. federal tax purposes. We are an internally managed company and do not have an external investment advisor.
Factors that Affect our Results of Operations and Financial Condition
Our business is materially affected by a variety of industry and economic factors, including:
conditions in the global financial markets and economic conditions generally;
changes in interest rates and prepayment rates;
conditions in the residential real estate and mortgage markets;
actions taken by the U.S. government, U.S. Federal Reserve, the U.S. Treasury and foreign central banks;
changes in laws and regulations and industry practices; and
other market developments.
Current Market Conditions and Trends
Up until mid-September 2017, weakening inflation expectations, waning likelihood of potential pro-economic growth policies, rising geopolitical risks from North Korea and uncertainty of the economic impact from hurricane damage contributed to market participants lowering their expectations that the Federal Reserve would be able to raise interest rates one more time this calendar year, which collectively led to a bond market rally. Although the Federal Reserve kept the target federal funds rate unchanged following its September 20 meeting, the markets generally viewed the Federal Reserve’s commentary as hawkish based on the Federal Reserve’s commitment to raising the target federal funds rate in the near future and beginning its balance sheet normalization policy in October, which drove interest rates higher following the meeting with significantly increased expectations for an additional rate hike. Subsequent to September 30, 2017, a U.S. congressional path towards potential income tax reform has raised economic growth expectations driving interest rates higher.
During the third quarter of 2017, theThe 10-year U.S. Treasury rate rallied to a low of 2.04% in early September before ending at 2.33%was 4.57% as of September 30, 2017,2023, a two73 basis point increase from June 30, 2017.the prior quarter end. The U.S. Treasuryinterest rate curve, continued to flatten during the third quartermeasured as the spread between the 2-year and 10-year U.S. Treasury, rate narrowed eightremained inverted at 47 basis points. The spread
betweenpoints as of September 30, 2023. With the increase in the 10-year U.S. Treasury rate, residential mortgage rates and interest rate swaps tightened modestly by one basis pointincreased during the third quarter of 2017 with2023 evidenced by the Freddie Mac average primary mortgage rate increasing by 60 basis points to 7.31% as of September 30, 2023. The spread between the current coupon agency MBS and the 10-year swap rate widened by 73 basis points during the third
34
quarter of 2023. The rate of inflation increased during the third quarter but remained below its peak reached during 2022 with the Consumer Price Index reaching 3.7% for the twelve-month period ending at 2.29% on September 30, 2017. 2023.
In this environment,order to address persistently high inflation, the priceU.S. Federal Reserve has continued to take actions with the objective of agency MBS outperformed U.S. Treasuries andlowering inflation by significantly raising interest rate swaps resulting in spread tightening.
On September 20, 2017,rates. At its scheduled July 2023 meeting, the Federal Open Market Committee (“FOMC”) announced that it was maintainingraised its target range for the target federal funds rate range at 1.00% to 1.25%. The FOMC commented that recent storm-related disruptions and rebuilding will affect economic activity in the near term, but past experiences suggest that the storms are unlikely to materially alter the course of the national economy over the medium term. In its September 20, 2017 statement, the FOMC stated that it continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. The FOMC also stated that it continues to expect inflation to remain somewhat below 2% in the near term but to stabilize around 2% over the medium term. The FOMC commented further that it expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, and will likely remain, for some time, below levels that are expected to prevail in the longer run. Based on federal fund futures prices, market participants currently believe that there is a greater than 80% chance that the FOMC will raise the targeted federal funds rate by 25 basis points in December 2017. Into a target range of 5.25% to 5.50%. At its scheduled September 20, 2017 statement,2023 meeting, the FOMC also commenteddecided to keep its target range for the federal funds rate unchanged to allow the FOMC time to evaluate the impact of its monetary policy on economic activity and inflation. In addition, the FOMC announced that beginning in October 2017 it will initiate its previously announced balance sheet normalization program of graduallycontinue reducing its reinvestmentholdings of principal payments of U.S. Treasury securities and agency MBS. Under its balance sheet normalization policy, principal payments received by the Federal Reserve would be reinvested only to the extent they exceed gradually rising caps until the FOMC determines that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficientlydebt and effectively. agency MBS.
The Chair of the Board of Governors of the Federal Reserve System has significant influence over monetary policy and is appointed by the U.S. President subject to confirmation by the U.S. Senate. The four-year term of the current Chair, Janet L. Yellen, ends on February 3, 2018. By the end of the calendar year, President Trump is expected to nominate a Chair for a new four-year term and is considering several candidates, including Ms. Yellen. The selection of the Chair is being carefully watched by the market, particularly as it relates to policy rate path and balance sheet normalization pace.
Prepayment speeds in the fixed-rate residential mortgage market decreased during the third quarter of 2023 primarily due to the increase in the 10-year U.S. Treasury rate during 2023 and resulting rise the primary mortgage rate. Pay-up premiums on agency MBS, which represent the price premium of agency MBS backed by specified pools over a TBA security, remained relatively unchanged during the third quarter of 2023. Valuation multiples of MSRs increased slightly during the third quarter of 2023 due in part to the rise in interest rates.
Housing prices rose from the prior quarter driven by several periods of interest rate rallies over the last couple of quarters as well as continued home price appreciation and wage growth. Looking forward, near term prepayment speeds are expected to moderate due to the current interest rate environment and normal seasonal impact.
Housing prices continue to improve asyear evidenced by the S&PStandard & Poor’s CoreLogic Case-Shiller U.S. National Home Price NSA index reporting a 5.9%2.6% annual gainincrease in July 2017 and the overall index reaching a historical high. Housing prices continue to rise faster than inflation as the demand for homes has exceeded the supply of homes driven by low inventories of new or existing homes for sale as well as affordable available financing from historically low mortgage rates. Looking forward, housing prices are expected to face two contradicting challenges in the near future. Rebuilding following hurricanes across Texas, Florida and other parts of the south are expected to lead to further housing supply pressures while Federal Reserve balance sheet normalization policies may pushAugust 2023. While higher mortgage rates upwards.have suppressed housing demand, they have also suppressed supply, ultimately leading to an increase in housing prices.
The following table presents certain key market data as of the dates indicated:
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
|
| September 30, |
|
| Change - Third Quarter 2023 |
| ||||||
30-Year FNMA Fixed Rate MBS (1) |
| ||||||||||||||||||||||
3.0% | $ | 86.81 |
|
| $ | 87.71 |
|
| $ | 89.59 |
|
| $ | 87.91 |
|
| $ | 82.63 |
|
| $ | (5.28 | ) |
3.5% |
| 89.83 |
|
|
| 90.82 |
|
|
| 92.80 |
|
|
| 91.01 |
|
|
| 85.93 |
|
|
| (5.08 | ) |
4.0% |
| 92.68 |
|
|
| 93.77 |
|
|
| 95.56 |
|
|
| 93.73 |
|
|
| 89.02 |
|
|
| (4.71 | ) |
4.5% |
| 95.18 |
|
|
| 96.31 |
|
|
| 97.92 |
|
|
| 96.05 |
|
|
| 91.78 |
|
|
| (4.27 | ) |
5.0% |
| 97.34 |
|
|
| 98.52 |
|
|
| 99.69 |
|
|
| 97.92 |
|
|
| 94.32 |
|
|
| (3.60 | ) |
Investment Spreads |
| ||||||||||||||||||||||
FNMA Current Coupon vs. | 180 bps |
|
| 155 bps |
|
| 158 bps |
|
| 177 bps |
|
| 250 bps |
|
| 73 bps |
| ||||||
30 Year Fixed Mortgage Rate |
| ||||||||||||||||||||||
Freddie Mac Average Primary |
| 6.70 | % |
|
| 6.42 | % |
|
| 6.32 | % |
|
| 6.71 | % |
|
| 7.31 | % |
| 60 bps |
| |
U.S. Treasury Rates ("UST") |
| ||||||||||||||||||||||
2-year UST |
| 4.28 | % |
|
| 4.43 | % |
|
| 4.03 | % |
|
| 4.90 | % |
|
| 5.04 | % |
| 14 bps |
| |
5-year UST |
| 4.09 | % |
|
| 4.00 | % |
|
| 3.57 | % |
|
| 4.16 | % |
|
| 4.61 | % |
| 45 bps |
| |
10-year UST |
| 3.83 | % |
|
| 3.87 | % |
|
| 3.47 | % |
|
| 3.84 | % |
|
| 4.57 | % |
| 73 bps |
| |
2-year UST to 10-year UST spread | -45 bps |
|
| -56 bps |
|
| -56 bps |
|
| -106 bps |
|
| -47 bps |
|
| 59 bps |
| ||||||
Interest Rate Swap Rates |
| ||||||||||||||||||||||
2-year swap |
| 4.55 | % |
|
| 4.71 | % |
|
| 4.36 | % |
|
| 5.10 | % |
|
| 4.97 | % |
| -13 bps |
| |
5-year swap |
| 4.14 | % |
|
| 4.02 | % |
|
| 3.63 | % |
|
| 4.22 | % |
|
| 4.38 | % |
| 16 bps |
| |
10-year swap |
| 3.88 | % |
|
| 3.84 | % |
|
| 3.46 | % |
|
| 3.86 | % |
|
| 4.27 | % |
| 41 bps |
| |
Secured Overnight Financing Rate ("SOFR") |
| ||||||||||||||||||||||
SOFR |
| 3.04 | % |
|
| 4.36 | % |
|
| 4.80 | % |
|
| 5.14 | % |
|
| 5.32 | % |
| 18 bps |
| |
Twelve Month Percent Change in Consumer Price Index ("CPI") |
| ||||||||||||||||||||||
1-month LIBOR |
| 8.20 | % |
|
| 6.50 | % |
|
| 5.00 | % |
|
| 3.00 | % |
|
| 3.70 | % |
| 70 bps |
|
|
|
| September 30, 2016 |
|
| December 31, 2016 |
|
| March 31, 2017 |
|
| June 30, 2017 |
|
| September 30, 2017 |
|
| Change - Third Quarter 2017 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-Year FNMA Fixed Rate MBS (1) |
| |||||||||||||||||||||||||
| 3.0% |
|
| $ | 103.98 |
|
| $ | 99.20 |
|
| $ | 99.23 |
|
| $ | 99.83 |
|
| $ | 100.27 |
|
| $ | 0.44 |
|
| 3.5% |
|
|
| 105.55 |
|
|
| 102.33 |
|
|
| 102.36 |
|
|
| 102.67 |
|
|
| 103.05 |
|
|
| 0.38 |
|
| 4.0% |
|
|
| 107.42 |
|
|
| 104.98 |
|
|
| 104.95 |
|
|
| 105.14 |
|
|
| 105.27 |
|
|
| 0.13 |
|
| 4.5% |
|
|
| 109.55 |
|
|
| 107.39 |
|
|
| 107.30 |
|
|
| 107.27 |
|
|
| 107.33 |
|
|
| 0.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Rates (UST) |
| |||||||||||||||||||||||||
2-year UST |
|
|
| 0.76 | % |
|
| 1.19 | % |
|
| 1.26 | % |
|
| 1.38 | % |
|
| 1.48 | % |
|
| 0.10 | % | |
3-year UST |
|
|
| 0.88 | % |
|
| 1.45 | % |
|
| 1.49 | % |
|
| 1.55 | % |
|
| 1.62 | % |
|
| 0.07 | % | |
5-year UST |
|
|
| 1.15 | % |
|
| 1.93 | % |
|
| 1.92 | % |
|
| 1.89 | % |
|
| 1.94 | % |
|
| 0.05 | % | |
7-year UST |
|
|
| 1.42 | % |
|
| 2.25 | % |
|
| 2.21 | % |
|
| 2.14 | % |
|
| 2.17 | % |
|
| 0.03 | % | |
10-year UST |
|
|
| 1.60 | % |
|
| 2.45 | % |
|
| 2.39 | % |
|
| 2.31 | % |
|
| 2.33 | % |
|
| 0.02 | % | |
2-year UST to 10-year UST spread |
|
|
| 0.84 | % |
|
| 1.26 | % |
|
| 1.13 | % |
|
| 0.93 | % |
|
| 0.85 | % |
|
| (0.08 | )% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap Rates |
| |||||||||||||||||||||||||
2-year swap |
|
|
| 1.01 | % |
|
| 1.45 | % |
|
| 1.62 | % |
|
| 1.62 | % |
|
| 1.74 | % |
|
| 0.12 | % | |
3-year swap |
|
|
| 1.07 | % |
|
| 1.69 | % |
|
| 1.81 | % |
|
| 1.75 | % |
|
| 1.86 | % |
|
| 0.11 | % | |
5-year swap |
|
|
| 1.18 | % |
|
| 1.98 | % |
|
| 2.05 | % |
|
| 1.96 | % |
|
| 2.00 | % |
|
| 0.04 | % | |
7-year swap |
|
|
| 1.30 | % |
|
| 2.16 | % |
|
| 2.22 | % |
|
| 2.11 | % |
|
| 2.14 | % |
|
| 0.03 | % | |
10-year swap |
|
|
| 1.46 | % |
|
| 2.34 | % |
|
| 2.38 | % |
|
| 2.28 | % |
|
| 2.29 | % |
|
| 0.01 | % | |
2-year swap to 2-year UST spread |
|
|
| 0.25 | % |
|
| 0.26 | % |
|
| 0.36 | % |
|
| 0.24 | % |
|
| 0.26 | % |
|
| 0.02 | % | |
10-year swap to 10-year UST spread |
|
|
| (0.14 | )% |
|
| (0.11 | )% |
|
| (0.01 | )% |
|
| (0.03 | )% |
|
| (0.04 | )% |
|
| (0.01 | )% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London Interbank Offered Rates (LIBOR) |
| |||||||||||||||||||||||||
1-month LIBOR |
|
|
| 0.53 | % |
|
| 0.77 | % |
|
| 0.98 | % |
|
| 1.22 | % |
|
| 1.23 | % |
|
| 0.01 | % | |
3-month LIBOR |
|
|
| 0.85 | % |
|
| 1.00 | % |
|
| 1.15 | % |
|
| 1.30 | % |
|
| 1.33 | % |
|
| 0.03 | % |
| Generic 30-year FNMA TBA price information, sourced from Bloomberg, is provided for illustrative purposes only and is not meant to be reflective of the fair value of securities held |
Recent Government Activity
Uncertainty over the new administration’s policies, together with questions regarding the administration’s ability to work with Congress in order to implement such policies, are likely to increase market and credit volatility over the remainder of 2017 and into 2018. We expect vigorous debate and discussion in a number of areas, including residential housing and mortgage reform, taxation, fiscal policy, monetary policy and healthcare, to continue over the next few years; however, we cannot be certain if or when any specific proposal or policy might be announced, emerge from committee or be approved by Congress, and if so, what the effects on us may be.
Executive Summary
As of September 30, 2017, the Company’s book value was $13.71 per common share, an increase of 1.7% from $13.48 per common share as of June 30, 2017. The Company’s tangible book value, which is calculated as shareholders’ equity less the Company’s net deferred tax asset and the liquidation preference of all issued and outstanding shares of preferred stock, was $12.88 per common share as of September 30, 2017, an increase of 2.6% from $12.55 per common share as of June 30, 2017. For the quarter ended September 30, 2017, the Company declared a dividend of $0.55 per common share, resulting in an annualized economic return of 28.0% measured as the change in tangible book value plus dividends declared during the quarter.
For the third quarter of 2017, the Company had net income of $0.85 per diluted common share compared to a net loss of $0.74 per diluted common share in the prior quarter. The Company had non-GAAP core operating income of $0.52 per diluted common share for the third quarter of 2017 compared to $0.58 per diluted common share in the prior quarter. The third quarter 2017 net interest income and non-GAAP core operating income were impacted by higher prepayment speeds resulting in lower asset yields, lower weighted-average leverage and investment volumes and higher net funding costs. For further information on the use of non-GAAP core operating income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Non-GAAP Core Operating Income.”
Since the Company’s fixed-rate agency MBS have generally been purchased at a premium to par value, high prepayments can have a negative impact on the Company’s asset yields and interest income, while slow prepayments can have a positive impact. The actual constant prepayment rate (“CPR”) for the Company’s agency MBS increased to 10.29% for the third quarter of 2017 from
9.03% in the prior quarter. The average agency MBS yield was 2.80% for the third quarter of 2017 compared to 2.85% for the second quarter of 2017.
The Company’s average cost of repurchase agreement funding during the quarter ended September 30, 2017 was 1.31%, an increase of 23 basis points from the prior quarter attributable primarily to the increase in benchmark short-term rates driven by the Federal Reserve 25 basis point rate increase in June 2017. Company.
35
As of September 30, 2017, the Company’s agency investment portfolio totaled $5,389 million, comprised of $3,994 million of specified agency MBS and $1,395 million of net long TBA agency MBS. During the third quarter of 2017, the Company increased its net long TBA agency MBS position while reducing its specified agency MBS position as the implied net interest rate spread return opportunity of TBA dollar rolls was moderately higher than the net spread returns of specified agency MBS financed with repurchase agreements. During the third quarter of 2017, the Company lowered its allocation of agency MBS investments in 4.0% coupon securities while increasing its allocation towards lower 3.0% and 3.5% coupon securities to take advantage of higher expected return opportunities.
The Company continues to maintain a substantial hedge position with the intent to protect the Company’s capital and earnings potential against increased interest rates over the long-term. As of September 30, 2017, the Company’s interest rate hedge position consisted primarily of interest rate swaps along with 10-year U.S. Treasury note futures. The Company’s average notional of its interest rate swaps and 10-year U.S. Treasury futures as a percentage of its average repurchase agreement financing and TBA commitments increased to 78% for the quarter ended September 30, 3017 compared to 74% for the quarter ended June 30, 2017. The Company’s weighted average net pay rate of its interest rate swap agreements was 0.47% during the third quarter of 2017 compared to 0.62% during the second quarter of 2017.
We believe our hedging strategy will continue to enable the Company to maintain an attractive return on its agency MBS portfolio in order to produce resilient and predictable net interest income and non-GAAP core operating income that supports attractive dividends to our shareholders. In a volatile interest rate and wider spread environment, this hedging strategy will likely result in a temporary decline in book value. However, the Company would expect temporary declines in book value to be recovered over time either through higher future spread earnings if spreads remain wide, or through a reversal of temporary declines in book value if future interest rate volatility is low and spreads narrow. The consistent execution of our hedging strategy may also result in an increase in leverage during periods of temporary declines in book value or decreases in leverage during periods of temporary increases in book value.
The Company continues to utilize its tax benefits afforded to it as a C-corporation that allow it to shield substantially all of its income from the payment of cash taxes. As of September 30, 2017, the Company had estimated NOL carry-forwards of $69.7 million, NCL carry-forwards of $309.8 million and alternative minimum tax (“AMT”) credit carry-forwards of $9.0 million. From a GAAP accounting perspective, the Company had a net deferred tax asset of $23.5 million, or $0.83 per share, as of September 30, 2017. As of September 30, 2017, the valuation allowance reflects a full valuation allowance against its deferred tax assets that are expected to be capital in tax nature while its remaining unreserved net deferred tax asset represents its deferred tax assets that are expected to be ordinary in tax nature.
Portfolio Overview
The following table summarizes our MBSasset and capital allocation of our investment portfolio at fair valuestrategies as of September 30, 2017 and December 31, 20162023 (dollars in thousands):
|
| September 30, 2023 |
| |||||||||||||
|
| Assets |
|
| Invested Capital |
|
| Invested Capital |
|
| Leverage (2) |
| ||||
MSR financing receivables |
| $ | 191,800 |
|
| $ | 191,800 |
|
|
| 64 | % |
|
| — |
|
Credit investments (3) |
|
| 128,488 |
|
|
| 49,290 |
|
|
| 17 | % |
|
| 1.6 |
|
Agency MBS (4) |
|
| 114,647 |
|
|
| 57,746 |
|
|
| 19 | % |
|
| 1.0 |
|
Total invested capital |
| $ | 434,935 |
|
|
| 298,836 |
|
|
| 100 | % |
|
|
| |
Cash and other corporate capital, net |
|
|
|
|
| 1,228 |
|
|
|
|
|
|
| |||
Total investable capital |
|
|
|
| $ | 300,064 |
|
|
|
|
| 0.4 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Specified agency MBS |
| $ | 3,994,515 |
|
| $ | 3,909,452 |
|
Inverse interest-only agency MBS |
|
| — |
|
|
| 1,923 |
|
Total agency MBS |
|
| 3,994,515 |
|
|
| 3,911,375 |
|
Net long agency TBA dollar roll positions (1) |
|
| 1,394,553 |
|
|
| 720,027 |
|
Total agency investment portfolio |
|
| 5,389,068 |
|
|
| 4,631,402 |
|
Private-label MBS |
|
| — |
|
|
| 1,173 |
|
Private-label interest-only MBS |
|
| 54 |
|
|
| 93 |
|
Total private-label investment portfolio |
|
| 54 |
|
|
| 1,266 |
|
Total MBS investment portfolio |
| $ | 5,389,122 |
|
| $ | 4,632,668 |
|
MSR Financing Receivables
As of September 30, 2023, we had $191.8 million of MSR financing receivable investments at fair value. We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows us to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. The transactions are accounted for as a financing receivable in our consolidated financial statements. The following tables present further information about our MSR financing receivable investments as of September 30, 2023 (dollars in thousands):
Amortized Cost Basis (1) |
|
| Unrealized Gain |
|
| Fair Value |
| |||
$ | 141,927 |
|
| $ | 49,873 |
|
| $ | 191,800 |
|
MSR Financing Receivable Underlying Reference Amounts: |
|
|
|
|
|
|
| |||||||||||||||||||
MSRs |
|
| Financing |
|
| Advances |
|
| Cash and Other Net Receivables |
|
| Counterparty Incentive Fee Accrual |
|
| MSR Financing Receivables |
|
| Implicit |
| |||||||
$ | 179,265 |
|
| $ | — |
|
| $ | 3,086 |
|
| $ | 9,449 |
|
| $ | — |
|
| $ | 191,800 |
|
|
| — |
|
36
Underlying Reference MSRs: |
| |||||||||||||||||||||||||
Holder of Loans |
| Unpaid Principal Balance |
|
| Weighted-Average Note Rate |
|
| Weighted-Average Servicing Fee |
|
| Weighted-Average Loan Age |
| Price |
|
| Multiple (1) |
|
| Fair Value |
| ||||||
Fannie Mae |
| $ | 11,841,368 |
|
|
| 3.09 | % |
|
| 0.25 | % |
| 35 months |
|
| 1.40 | % |
|
| 5.58 |
|
| $ | 165,449 |
|
Freddie Mac |
|
| 964,775 |
|
|
| 3.71 | % |
|
| 0.25 | % |
| 31 months |
|
| 1.43 | % |
|
| 5.73 |
|
|
| 13,816 |
|
Total/weighted-average |
| $ | 12,806,143 |
|
|
| 3.14 | % |
|
| 0.25 | % |
| 35 months |
|
| 1.40 | % |
|
| 5.59 |
|
| $ | 179,265 |
|
Credit Investment Portfolio
The following table presents information about our credit investments as of September 30, 2023 (dollars in thousands):
|
| Market Price |
|
| Fair Value (1) |
|
| Financing |
|
| Invested |
|
| Leverage |
| |||||
AAA rated commercial MBS |
| $ | 99.43 |
|
| $ | 99,434 |
|
| $ | 79,598 |
|
| $ | 20,002 |
|
|
| 4.0 |
|
Commercial mortgage loan |
|
| 98.42 |
|
|
| 25,216 |
|
|
| — |
|
|
| 25,450 |
|
|
| — |
|
Business purpose residential MBS (3) |
|
| 58.70 |
|
|
| 1,832 |
|
|
| — |
|
|
| 1,832 |
|
|
| — |
|
Solar ABS |
|
| 39.63 |
|
|
| 2,006 |
|
|
| — |
|
|
| 2,006 |
|
|
| — |
|
Total/weighted-average |
|
|
|
| $ | 128,488 |
|
| $ | 79,598 |
|
| $ | 49,290 |
|
|
| 1.6 |
|
|
Our classes of credit investments as of September 30, 2023 are summarized as follows:
Commercial MBS - We hold two AAA rated senior position commercial MBS which are summarized as follows:
Commercial mortgage loan - Our commercial mortgage loan investment is a $25.6 million participation in an unrated $75.8 million syndicated mortgage loan secured by a first lien position in 42 midwestern health care facilities. The mortgage loan is guaranteed by the parent operating company. The loan carries a variable note rate of one-month term SOFR plus 5.61% and matures on March 22, 2024.
Business purpose residential MBS - We hold residual interests in two securitized pools of business purpose residential mortgage loans with a combined fair value of $1.8 million. As of September 30, 2023, the underlying collateral pools are comprised of nine first lien mortgage loans or foreclosed real estate with an unpaid principal balance of $2.5 million. The underlying collateral pools as of September 30, 2023 represented less than two percent of the original collateral pools. We expect substantial realization of the remaining value to occur within the next several quarters.
Solar ABS - We hold a first loss position in a securitized pool of loans for the purchase and installation of solar panels on residential real estate with a fair value of $2.0 million and unpaid principal balance of $5.1 million. As of September 30, 2023, the underlying collateral pool was comprised of 9,300 loans with an unpaid principal balance of $331.8 million and a delinquency rate of 2.0%.
37
Agency MBS Investment Portfolio
Our specifiedagency MBS investment portfolio consisted of the following as of September 30, 2023 (dollars in thousands):
|
| Fair Value |
| |
Agency MBS |
| $ | 520,851 |
|
Net short TBA Position |
|
| (406,204 | ) |
Total agency MBS investment portfolio |
| $ | 114,647 |
|
Our agency MBS consisted of the following as of September 30, 20172023 (dollars in thousands):
|
| Unpaid Principal Balance |
|
| Net Unamortized Purchase Premiums |
|
| Amortized Cost Basis |
|
| Net Unrealized Gain (Loss) |
|
| Fair Value |
|
| Market Price |
|
| Coupon |
|
| Weighted Average Expected Remaining Life |
|
| Unpaid Principal Balance |
|
| Net Unamortized Purchase Premiums (Discounts) |
|
| Amortized Cost Basis |
|
| Net Unrealized Gain (Loss) |
|
| Fair Value |
|
| Market Price |
|
| Coupon |
|
| Weighted |
| ||||||||||||||||
30-year fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
3.5% |
| $ | 1,276,307 |
|
| $ | 61,850 |
|
| $ | 1,338,157 |
|
| $ | (17,101 | ) |
| $ | 1,321,056 |
|
| $ | 103.51 |
|
|
| 3.50 | % |
|
| 6.9 |
| ||||||||||||||||||||||||||||||||
3.0% |
| $ | 66,407 |
|
| $ | (2,345 | ) |
| $ | 64,062 |
|
| $ | (8,873 | ) |
| $ | 55,189 |
|
| $ | 83.11 |
|
|
| 3.00 | % |
|
| 9.9 |
| ||||||||||||||||||||||||||||||||
4.0% |
|
| 2,379,630 |
|
|
| 137,540 |
|
|
| 2,517,170 |
|
|
| 6,242 |
|
|
| 2,523,412 |
|
|
| 106.04 |
|
|
| 4.00 | % |
|
| 6.1 |
|
|
| 201,186 |
|
|
| (1,365 | ) |
|
| 199,821 |
|
|
| (20,156 | ) |
|
| 179,665 |
|
|
| 89.30 |
|
|
| 4.00 | % |
|
| 9.4 |
|
4.5% |
|
| 139,128 |
|
|
| 10,668 |
|
|
| 149,796 |
|
|
| 230 |
|
|
| 150,026 |
|
|
| 107.83 |
|
|
| 4.50 | % |
|
| 4.5 |
|
|
| 311,027 |
|
|
| (9,970 | ) |
|
| 301,057 |
|
|
| (15,067 | ) |
|
| 285,990 |
|
|
| 91.95 |
|
|
| 4.50 | % |
|
| 9.7 |
|
5.5% |
|
| 20 |
|
|
| — |
|
|
| 20 |
|
|
| 1 |
|
|
| 21 |
|
|
| 111.73 |
|
|
| 5.50 | % |
|
| 5.6 |
|
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| — |
|
|
| 7 |
|
|
| 100.38 |
|
|
| 5.50 | % |
|
| 5.7 |
|
Total/weighted-average |
| $ | 3,795,085 |
|
| $ | 210,058 |
|
| $ | 4,005,143 |
|
| $ | (10,628 | ) |
| $ | 3,994,515 |
|
|
| 105.25 |
|
|
| 3.85 | % |
|
| 6.3 |
|
| $ | 578,627 |
|
| $ | (13,680 | ) |
| $ | 564,947 |
|
| $ | (44,096 | ) |
| $ | 520,851 |
|
| $ | 90.01 |
|
|
| 4.15 | % |
|
| 9.6 |
|
|
| Unpaid Principal Balance |
|
| Net Unamortized Purchase Premiums |
|
| Amortized Cost Basis |
|
| Net Unrealized Gain (Loss) |
|
| Fair Value |
|
| Market Price |
|
| Coupon |
|
| Weighted Average Expected Remaining Life |
| Unpaid Principal Balance |
|
| Net Unamortized Purchase Premiums (Discounts) |
|
| Amortized Cost Basis |
|
| Net Unrealized Gain (Loss) |
|
| Fair Value |
|
| Market |
|
| Coupon |
|
| Weighted |
| |||||||||||||||
Fannie Mae |
| $ | 1,853,391 |
|
| $ | 102,395 |
|
| $ | 1,955,786 |
|
| $ | (9,994 | ) |
| $ | 1,945,792 |
|
| $ | 104.99 |
|
|
| 3.80 | % |
| 6.3 |
| $ | 256,838 |
|
| $ | (5,797 | ) |
| $ | 251,041 |
|
| $ | (19,716 | ) |
| $ | 231,325 |
|
| $ | 90.07 |
|
|
| 4.16 | % |
|
| 9.4 |
|
Freddie Mac |
|
| 1,941,694 |
|
|
| 107,663 |
|
|
| 2,049,357 |
|
|
| (634 | ) |
|
| 2,048,723 |
|
|
| 105.51 |
|
|
| 3.90 | % |
| 6.3 |
|
| 321,789 |
|
|
| (7,883 | ) |
|
| 313,906 |
|
|
| (24,380 | ) |
|
| 289,526 |
|
|
| 89.97 |
|
|
| 4.15 | % |
|
| 9.8 |
|
Total/weighted-average |
| $ | 3,795,085 |
|
| $ | 210,058 |
|
| $ | 4,005,143 |
|
| $ | (10,628 | ) |
| $ | 3,994,515 |
|
|
| 105.25 |
|
|
| 3.85 | % |
| 6.3 |
| $ | 578,627 |
|
| $ | (13,680 | ) |
| $ | 564,947 |
|
| $ | (44,096 | ) |
| $ | 520,851 |
|
| $ | 90.01 |
|
|
| 4.15 | % |
|
| 9.6 |
|
The actual CPRannualized prepayment rate for the Company’sour agency MBS was 10.29%5.31% for the three months ended September 30, 2017.2023. As of September 30, 2017, the Company’s2023, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 90%61%, 27% and 12% in specified pools of low balance loans while the remainder includes specified pools of loans originated in certain geographical areas, high loan-to-value loans refinanced throughand low balance loans, respectively. Weighted average pay-up premiums on our agency MBS portfolio, which represent the U.S. Government sponsored Home Affordable Refinance Program (“HARP”) or with other characteristics selected for their relatively lower propensity for prepayment.estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately 0.10 of a percentage point as of September 30, 2023.
OurAs of September 30, 2023, our agency MBS investment portfolio also includes net long TBA positions, which are primarily the result of executing sequential series of “dollar roll” transactions that are settled onincluded a net basis.short TBA position. In accordance with GAAP, we account for our net long TBA positions as derivative instruments. Information about the Company’sour net longshort TBA positions as of September 30, 20172023 is as follows (dollars in thousands):
|
| Notional Amount: |
|
|
|
|
|
|
|
|
|
| ||||
|
| Net Long (Short) |
|
| Implied |
|
| Implied |
|
| Net Carrying |
| ||||
|
| Position (1) |
|
| Cost Basis (2) |
|
| Fair Value (3) |
|
| Amount (4) |
| ||||
3.0% 30-year MBS sale commitments |
| $ | (67,000 | ) |
| $ | (57,104 | ) |
| $ | (55,453 | ) |
| $ | 1,651 |
|
4.0% 30-year MBS sale commitments |
|
| (73,000 | ) |
|
| (66,681 | ) |
|
| (65,044 | ) |
|
| 1,637 |
|
4.5% 30-year MBS sale commitments |
|
| (311,000 | ) |
|
| (291,840 | ) |
|
| (285,707 | ) |
|
| 6,133 |
|
Total net long (short) agency TBA positions |
| $ | (451,000 | ) |
| $ | (415,625 | ) |
| $ | (406,204 | ) |
| $ | 9,421 |
|
|
| Notional Amount: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Net Long (Short) |
|
| Implied |
|
| Implied |
|
| Net Carrying |
| ||||
|
| Position (1) |
|
| Cost Basis (2) |
|
| Fair Value (3) |
|
| Amount (4) |
| ||||
3.0% coupon purchase commitments |
| $ | 200,000 |
|
| $ | 202,258 |
|
| $ | 200,563 |
|
| $ | (1,695 | ) |
3.5% coupon purchase commitments |
|
| 1,005,000 |
|
|
| 1,040,762 |
|
|
| 1,036,092 |
|
|
| (4,670 | ) |
4.0% coupon purchase commitments |
|
| 250,000 |
|
|
| 263,929 |
|
|
| 263,164 |
|
|
| (765 | ) |
4.0% coupon sale commitments |
|
| (100,000 | ) |
|
| (105,250 | ) |
|
| (105,266 | ) |
|
| (16 | ) |
Total net long agency TBA dollar roll positions |
| $ | 1,355,000 |
|
| $ | 1,401,699 |
|
| $ | 1,394,553 |
|
| $ | (7,146 | ) |
|
|
|
|
|
|
|
|
The Company attempts to hedge a portion of its exposure to interest rate fluctuations associated with its agency MBS primarily through the use of interest rate derivatives. Specifically, these interest rate derivatives are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. As of September 30, 2017, the interest rate derivative instruments primarily used by the Company were centrally cleared interest rate swap agreements, exchange-traded 10-year U.S. Treasury note futures and options on 10-year U.S. Treasury note futures, and options on agency MBS.
The Company’s interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receive quarterly variable interest payments based upon
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||||||||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Variable Receive Rate |
|
| Net Receive (Pay) Rate |
|
| Remaining Life (Years) |
|
| Fair Value |
| ||||||
Years to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3 years |
| $ | 1,300,000 |
|
|
| 1.26 | % |
|
| 1.32 | % |
|
| 0.06 | % |
|
| 1.7 |
|
| $ | 447 |
|
3 to less than 7 years |
|
| 700,000 |
|
|
| 1.87 | % |
|
| 1.32 | % |
|
| (0.55 | )% |
|
| 4.1 |
|
|
| 844 |
|
7 to 10 years |
|
| 1,600,000 |
|
|
| 1.90 | % |
|
| 1.32 | % |
|
| (0.58 | )% |
|
| 8.5 |
|
|
| 1,963 |
|
Total / weighted-average |
| $ | 3,600,000 |
|
|
| 1.66 | % |
|
| 1.32 | % |
|
| (0.34 | )% |
|
| 5.2 |
|
| $ | 3,254 |
|
The Company also has forward-starting interest rate swap agreements as of September 30, 2017 which have effective dates in early October 2017 and mature two years from their respective effective dates. The effective dates of these forward-starting interest rate swap agreements were set to occur within reasonable proximity to the maturity dates of certain of the Company’s existing interest rate swap agreements, economically extending the life of the maturing instruments. Information about the Company’s forward-starting interest rate swap agreements as of September 30, 2017 is as follows (dollars in thousands):
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Term After Effective Date (Years) |
|
| Fair Value |
| ||||
Effective in October 2017 |
| $ | 250,000 |
|
|
| 1.12 | % |
|
| 2.0 |
|
| $ | 94 |
|
In addition to interest rate swap agreements, the Company also has exchange-traded 10-year U.S. Treasury note futures that are short positions that mature on a quarterly basis. Upon the maturity date of these futures contracts in December 2017, the Company has the option to either net settle each contract in cash in an amount equal to the difference betweenImplied fair value represents the current fair value of the underlying 10-year U.S. Treasury noteagency MBS.
Maturity Date |
| Notional Amount |
|
| Net Fair Value |
| ||
December 2017 |
| $ | 350,000 |
|
| $ | 820 |
|
In addition to exchange-traded 10-year U.S. Treasury note futures, the Company purchases and sells exchange-traded options on 10-year U.S. Treasury note futures contracts with the objective of economically hedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The Company may purchase put options which provide the Company with the right to sell 10-year U.S. Treasury note futures to a counterparty, and the Company may also write call options that provide a counterparty with the option to buy 10-year U.S. Treasury note futures from the Company. In order to limit its exposure on its interest rate derivative instruments from a significant decline in long-term interest rates, the Company may also purchase contracts that provide the Company with the option to buy, or call, 10-year U.S. Treasury note futures from a counterparty. The options may be exercised at any time prior to their expiry, and if exercised, may be net settled in cash or through physical receipt or delivery of the underlying futures contracts.
Information about the Company’s outstanding options on 10-year U.S. Treasury note futures contracts as of September 30, 2017 is as follows (dollars in thousands):
| Notional Amount |
|
| Weighted-average Strike Price |
|
| Implied Strike Rate (1) |
|
| Net Fair Value |
| |||||
Purchased call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
| $ | 150,000 |
|
|
| 133.0 |
|
|
| 1.49 | % |
| $ | 1 |
|
|
|
The Company may purchase put options which provide the Company with the right to sell TBA-eligible agency MBS to a counterparty at a fixed price in the event that agency MBS prices decline. The options can only be exercised at their expiry, and if exercised, may be net settled in cash or through physical deliveryimplied fair value of the underlying agency MBS. Information aboutThis amount is reflected on the Company’s outstanding options on agency MBSCompany's consolidated balance sheets as a component of September 30, 2017 is as follows:"other assets" and "other liabilities".
38
|
| Notional Amount |
|
| Weighted-average Strike Price |
|
| Underlying Agency MBS Coupon |
|
| Net Fair Value |
| ||||
Purchased put options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
| $ | 500,000 |
|
|
| 102.5 |
|
|
| 4.00 | % |
| $ | - |
|
November 2017 expiration |
|
| 200,000 |
|
|
| 103.5 |
|
|
| 4.00 | % |
|
| 8 |
|
Total / weighted average for purchased put options |
| $ | 700,000 |
|
|
| 102.8 |
|
|
| 4.00 | % |
| $ | 8 |
|
Results of Operations
Net InterestOperating Income
Net interestoperating income determined in accordance with GAAP primarily represents the interest and other income recognized from our investments in specified agency MBSfinancial assets and private-label MBS (including the amortization of purchase premiums and accretion of purchase discounts),rent revenues recognized from SFR properties net of the interest expense incurred from repurchase agreement financing arrangements or other short-short and long-term borrowing transactions. transactions and SFR property operating expenses.
Net interestoperating income determined in accordance with GAAP does not include TBA agency MBS dollar roll income (expense), which we believe represents the economic equivalent of net interest income generated(expense) earned (incurred) from our investments in non-specified fixed-rate agency MBS, nor does it include the implied net interest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In our consolidated statements of comprehensive income, prepared in accordance with GAAP, TBA agency MBS dollar roll income (expense) and the implied net interest income or expense incurred from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from“investment and derivative instruments, net” of the “investment gain (loss), net” section.net.”
Investment and Derivative Gain (Loss), Net
“Investment and derivative gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of our investments in MBS classified as trading securities,financial assets, periodic changes in the fair value (whether realized or unrealized) of derivative instruments gains (losses)and realized upon thegain (loss) on sale of investments in MBS classified as available-for-sale, and other-than-temporary impairment charges for investments in MBS classified as available-for-sale.SFR properties.
General and Administrative Expenses
“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annual cash incentive compensation is based on meeting estimated annual performance measures and discretionary components. Non-cash stock-based compensation includes expenses associated with stock-based awards granted to employees, including the Company’s performance share units to named executive officers that are earned only upon the attainment of Company performance measures over the relevant measurement period.
“Other general and administrative expenses” primarily consists of the following:
professional services expenses, including accounting, legal, and consulting fees;
insurance expenses, including liability and property insurance;
| occupancy and equipment expense, including rental costs for our facilities, and depreciation and amortization of equipment and software; |
fees and commissions related to transactions in interest rate derivative instruments;
Board of Director fees; and
non-recurring expenses related to the sale process of the Company and proposed plan of merger with EFC; and
39
Three and nine months ended September 30, 20172023 compared to the three and nine months ended September 30, 20162022
The following table presents the net income available to common stock reportedsummary financial information for the three and nine months ended September 30, 20172023 and 2016,2022, respectively (dollars in thousands, except per share amounts):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Interest income |
| $ | 28,835 |
|
| $ | 25,654 |
|
| $ | 90,639 |
|
| $ | 80,759 |
|
Interest expense |
|
| 13,968 |
|
|
| 7,390 |
|
|
| 36,562 |
|
|
| 20,786 |
|
Net interest income |
|
| 14,867 |
|
|
| 18,264 |
|
|
| 54,077 |
|
|
| 59,973 |
|
Investment gain (loss), net |
|
| 13,368 |
|
|
| 20,722 |
|
|
| (4,364 | ) |
|
| (38,115 | ) |
General and administrative expenses |
|
| 4,544 |
|
|
| 4,630 |
|
|
| 13,623 |
|
|
| 16,637 |
|
Income before income taxes |
|
| 23,691 |
|
|
| 34,356 |
|
|
| 36,090 |
|
|
| 5,221 |
|
Income tax provision |
|
| 823 |
|
|
| 15,543 |
|
|
| 25,896 |
|
|
| 5,132 |
|
Net income |
|
| 22,868 |
|
|
| 18,813 |
|
|
| 10,194 |
|
|
| 89 |
|
Dividend on preferred stock |
|
| (83 | ) |
|
| — |
|
|
| (118 | ) |
|
| — |
|
Net income available to common stock |
| $ | 22,785 |
|
| $ | 18,813 |
|
| $ | 10,076 |
|
| $ | 89 |
|
Diluted earnings per common share |
| $ | 0.85 |
|
| $ | 0.81 |
|
| $ | 0.40 |
|
| $ | — |
|
Weighted-average diluted common shares outstanding |
|
| 26,856 |
|
|
| 23,349 |
|
|
| 25,143 |
|
|
| 23,154 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Interest and other income |
| $ | 13,575 |
|
| $ | 12,388 |
|
| $ | 40,291 |
|
| $ | 28,557 |
|
Rent revenues from single-family residential properties |
|
| — |
|
|
| 2,103 |
|
|
| — |
|
|
| 5,304 |
|
Interest expense |
|
| (8,759 | ) |
|
| (5,972 | ) |
|
| (25,271 | ) |
|
| (13,673 | ) |
Single-family residential property operating expenses |
|
| — |
|
|
| (1,872 | ) |
|
| — |
|
|
| (5,318 | ) |
Net operating income |
|
| 4,816 |
|
|
| 6,647 |
|
|
| 15,020 |
|
|
| 14,870 |
|
Investment and derivative (loss) gain, net |
|
| (7,997 | ) |
|
| 1,235 |
|
|
| (5,431 | ) |
|
| 778 |
|
General and administrative expenses |
|
| (3,233 | ) |
|
| (3,377 | ) |
|
| (11,857 | ) |
|
| (10,448 | ) |
(Loss) income before income taxes |
|
| (6,414 | ) |
|
| 4,505 |
|
|
| (2,268 | ) |
|
| 5,200 |
|
Income tax provision |
|
| 199 |
|
|
| 1,074 |
|
|
| 1,695 |
|
|
| 4,163 |
|
Net (loss) income |
|
| (6,613 | ) |
|
| 3,431 |
|
|
| (3,963 | ) |
|
| 1,037 |
|
Dividend on preferred stock |
|
| (660 | ) |
|
| (675 | ) |
|
| (1,980 | ) |
|
| (2,124 | ) |
Net (loss) income (attributable) available to |
| $ | (7,273 | ) |
| $ | 2,756 |
|
| $ | (5,943 | ) |
| $ | (1,087 | ) |
Diluted (loss) earnings per common share |
| $ | (0.26 | ) |
| $ | 0.10 |
|
| $ | (0.21 | ) |
| $ | (0.04 | ) |
Weighted-average diluted common shares |
|
| 28,081 |
|
|
| 28,913 |
|
|
| 28,055 |
|
|
| 28,973 |
|
GAAP Net Interest and Other Income
Net interestInterest and other income determined in accordance with GAAP (“GAAP net interest income”) decreased $3.4increased $1.2 million, or 18.6%9.7%, from $18.3$12.4 million for the three months ended September 30, 20162022 to $14.9$13.6 million for the three months ended September 30, 20172023. Interest and decreased $5.9other income increased $11.7 million, or 9.8%40.9%, from $60.0$28.6 million for the nine months ended September 30, 20162022 to $54.1$40.3 million for the nine months ended September 30, 2017.2023. The decreaseincrease from the comparative periods is primarily attributable to 62the result of higher average investment balances in higher yielding agency MBS and 43 basis point increases for the threecredit investments and nine months ended September 30, 2017, respectively,higher average investment balances in the average interest costs of our short-term securedMSR financing arrangements due primarily to an increase in prevailing benchmark short-term interest rates,receivables partially offset by an increaselower average investment balances in the average balance and asset yieldsmortgage loans of our specified agency MBS.consolidated VIEs.
The components of GAAP net interest income from our MBS portfolio, excluding interest expense on long-term unsecured debt, are summarized in the following tables for the periods indicated (dollars in thousands):
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Average |
|
| Income |
|
| Yield |
|
| Average |
|
| Income |
|
| Yield |
| ||||||
|
| Balance |
|
| (Expense) |
|
| (Cost) |
|
| Balance |
|
| (Expense) |
|
| (Cost) |
| ||||||
Agency MBS |
| $ | 4,104,083 |
|
| $ | 28,771 |
|
|
| 2.80 | % |
| $ | 3,683,418 |
|
| $ | 23,917 |
|
|
| 2.60 | % |
Private-label MBS |
|
| 127 |
|
|
| 2 |
|
|
| 6.20 | % |
|
| 57,240 |
|
|
| 1,655 |
|
|
| 11.57 | % |
Other |
|
| — |
|
|
| 62 |
|
|
|
|
|
|
| — |
|
|
| 82 |
|
|
|
|
|
|
| $ | 4,104,210 |
|
|
| 28,835 |
|
|
| 2.81 | % |
| $ | 3,740,658 |
|
|
| 25,654 |
|
|
| 2.74 | % |
Short-term secured debt |
| $ | 3,819,095 |
|
|
| (12,748 | ) |
|
| (1.31 | )% |
| $ | 3,519,719 |
|
|
| (6,193 | ) |
|
| (0.69 | )% |
Net interest income/spread |
|
|
|
|
| $ | 16,087 |
|
|
| 1.50 | % |
|
|
|
|
| $ | 19,461 |
|
|
| 2.05 | % |
Net interest margin |
|
|
|
|
|
|
|
|
|
| 1.57 | % |
|
|
|
|
|
|
|
|
|
| 2.08 | % |
| Nine Months Ended September 30, |
| ||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Average |
|
| Income |
|
| Yield |
|
| Average |
|
| Income |
|
| Yield |
| ||||||
|
| Balance |
|
| (Expense) |
|
| (Cost) |
|
| Balance |
|
| (Expense) |
|
| (Cost) |
| ||||||
Agency MBS |
| $ | 4,253,432 |
|
| $ | 90,454 |
|
|
| 2.84 | % |
| $ | 3,537,307 |
|
| $ | 72,980 |
|
|
| 2.75 | % |
Private-label MBS |
|
| 1,009 |
|
|
| 82 |
|
|
| 10.78 | % |
|
| 96,983 |
|
|
| 7,437 |
|
|
| 10.22 | % |
Other |
|
| — |
|
|
| 103 |
|
|
|
|
|
|
| — |
|
|
| 342 |
|
|
|
|
|
|
| $ | 4,254,441 |
|
|
| 90,639 |
|
|
| 2.84 | % |
| $ | 3,634,290 |
|
|
| 80,759 |
|
|
| 2.96 | % |
Short-term secured debt |
| $ | 3,956,579 |
|
|
| (32,921 | ) |
|
| (1.10 | )% |
| $ | 3,392,078 |
|
|
| (17,202 | ) |
|
| (0.67 | )% |
Net interest income/spread |
|
|
|
|
| $ | 57,718 |
|
|
| 1.74 | % |
|
|
|
|
| $ | 63,557 |
|
|
| 2.29 | % |
Net interest margin |
|
|
|
|
|
|
|
|
|
| 1.81 | % |
|
|
|
|
|
|
|
|
|
| 2.33 | % |
The effects of changes in the composition of our investments on our GAAP net interest income from our MBS investment activities are summarized below (dollars in thousands):
|
| Three Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2017 |
| ||||||||||||||||||
|
| vs. |
|
| vs. |
| ||||||||||||||||||
|
| Three Months Ended September 30, 2016 |
|
| Nine Months Ended September 30, 2016 |
| ||||||||||||||||||
|
| Rate |
|
| Volume |
|
| Total Change |
|
| Rate |
|
| Volume |
|
| Total Change |
| ||||||
Agency MBS |
| $ | 2,123 |
|
| $ | 2,731 |
|
| $ | 4,854 |
|
| $ | 2,700 |
|
| $ | 14,774 |
|
| $ | 17,474 |
|
Private-label MBS |
|
| (2 | ) |
|
| (1,651 | ) |
|
| (1,653 | ) |
|
| 4 |
|
|
| (7,359 | ) |
|
| (7,355 | ) |
Other |
|
| (20 | ) |
|
| — |
|
|
| (20 | ) |
|
| (239 | ) |
|
| — |
|
|
| (239 | ) |
Short-term secured debt |
|
| (6,028 | ) |
|
| (527 | ) |
|
| (6,555 | ) |
|
| (12,856 | ) |
|
| (2,863 | ) |
|
| (15,719 | ) |
|
| $ | (3,927 | ) |
| $ | 553 |
|
| $ | (3,374 | ) |
| $ | (10,391 | ) |
| $ | 4,552 |
|
| $ | (5,839 | ) |
Economic Net Interest Income
Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of the interest expense incurred from all of our interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions. Economic net interest income is comprised of the following: (i) net interest income determined in accordance with GAAP, (ii) TBA agency MBS “dollar roll” income, and (iii) net interest income or expense incurred from interest rate swap agreements. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses. A full description of each of the three aforementioned components of economic net interest income is included within the “Non-GAAP Core Operating Income” section of this document.
The components of our economic net interestother income are summarized in the following tables for the periods indicated (dollars in thousands):
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Average |
|
| Income |
|
| Yield |
|
| Average |
|
| Income |
|
| Yield |
| ||||||
|
| Balance |
|
| (Expense) |
|
| (Cost) |
|
| Balance |
|
| (Expense) |
|
| (Cost) |
| ||||||
Agency MBS |
| $ | 4,104,083 |
|
| $ | 28,771 |
|
|
| 2.80 | % |
| $ | 3,683,418 |
|
| $ | 23,917 |
|
|
| 2.60 | % |
TBA dollar rolls (1) |
|
| 1,225,131 |
|
|
| 6,424 |
|
|
| 2.10 | % |
|
| 861,686 |
|
|
| 5,321 |
|
|
| 2.47 | % |
Private-label MBS |
|
| 127 |
|
|
| 2 |
|
|
| 6.20 | % |
|
| 57,240 |
|
|
| 1,655 |
|
|
| 11.57 | % |
Other |
|
| — |
|
|
| 62 |
|
|
|
|
|
|
| — |
|
|
| 82 |
|
|
|
|
|
Short-term secured debt |
|
| 3,819,095 |
|
|
| (12,748 | ) |
|
| (1.31 | )% |
|
| 3,519,719 |
|
|
| (6,193 | ) |
|
| (0.69 | )% |
Interest rate swaps (2) |
|
| 3,561,667 |
|
|
| (4,198 | ) |
|
| (0.47 | )% |
|
| 2,303,030 |
|
|
| (5,126 | ) |
|
| (0.89 | )% |
Long-term unsecured debt |
|
| 73,796 |
|
|
| (1,220 | ) |
|
| (6.61 | )% |
|
| 73,573 |
|
|
| (1,197 | ) |
|
| (6.51 | )% |
Economic net interest income/margin (3) |
|
|
|
|
| $ | 17,093 |
|
|
| 1.37 | % |
|
|
|
|
| $ | 18,459 |
|
|
| 1.73 | % |
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Average |
|
| Interest & |
|
| Yield |
|
| Average |
|
| Interest & |
|
| Yield |
| ||||||
Agency MBS |
| $ | 498,930 |
|
| $ | 5,417 |
|
|
| 4.34 | % |
| $ | 365,212 |
|
| $ | 3,631 |
|
|
| 3.98 | % |
Credit investments |
|
| 129,747 |
|
|
| 2,849 |
|
|
| 8.78 | % |
|
| 145,485 |
|
|
| 2,736 |
|
|
| 7.52 | % |
Mortgage loans of consolidated VIEs |
|
| 2,422 |
|
|
| — |
|
|
| 0.00 | % |
|
| 248,892 |
|
|
| 2,303 |
|
|
| 3.70 | % |
MSR financing receivables |
|
| 143,449 |
|
|
| 5,247 |
|
|
| 14.63 | % |
|
| 90,490 |
|
|
| 3,608 |
|
|
| 15.95 | % |
Other |
|
|
|
|
| 62 |
|
|
|
|
|
|
|
|
| 110 |
|
|
|
| ||||
Total |
| $ | 774,548 |
|
| $ | 13,575 |
|
|
| 7.01 | % |
| $ | 850,079 |
|
| $ | 12,388 |
|
|
| 5.83 | % |
| Nine Months Ended September 30, |
| ||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
| ||||||||||||||||||
|
| Average |
|
| Income |
|
| Yield |
|
| Average |
|
| Income |
|
| Yield |
| ||||||
|
| Balance |
|
| (Expense) |
|
| (Cost) |
|
| Balance |
|
| (Expense) |
|
| (Cost) |
| ||||||
Agency MBS |
| $ | 4,253,432 |
|
| $ | 90,454 |
|
|
| 2.84 | % |
| $ | 3,537,307 |
|
| $ | 72,980 |
|
|
| 2.75 | % |
TBA dollar rolls (1) |
|
| 830,389 |
|
|
| 14,120 |
|
|
| 2.27 | % |
|
| 688,671 |
|
|
| 12,835 |
|
|
| 2.48 | % |
Private-label MBS |
|
| 1,009 |
|
|
| 82 |
|
|
| 10.78 | % |
|
| 96,983 |
|
|
| 7,437 |
|
|
| 10.22 | % |
Other |
|
| — |
|
|
| 103 |
|
|
|
|
|
|
| — |
|
|
| 342 |
|
|
|
|
|
Short-term secured debt |
|
| 3,956,579 |
|
|
| (32,921 | ) |
|
| (1.10 | )% |
|
| 3,392,078 |
|
|
| (17,202 | ) |
|
| (0.67 | )% |
Interest rate swaps (2) |
|
| 3,372,028 |
|
|
| (14,900 | ) |
|
| (0.59 | )% |
|
| 1,876,106 |
|
|
| (13,499 | ) |
|
| (0.96 | )% |
Long-term unsecured debt |
|
| 73,749 |
|
|
| (3,641 | ) |
|
| (6.58 | )% |
|
| 73,526 |
|
|
| (3,584 | ) |
|
| (6.50 | )% |
Economic net interest income/margin (3) |
|
|
|
|
| $ | 53,297 |
|
|
| 1.49 | % |
|
|
|
|
| $ | 59,309 |
|
|
| 1.98 | % |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Average |
|
| Interest & |
|
| Yield |
|
| Average |
|
| Interest & |
|
| Yield |
| ||||||
Agency MBS |
| $ | 480,607 |
|
| $ | 15,433 |
|
|
| 4.28 | % |
| $ | 345,866 |
|
| $ | 7,188 |
|
|
| 2.77 | % |
Credit investments |
|
| 132,260 |
|
|
| 8,413 |
|
|
| 8.48 | % |
|
| 88,184 |
|
|
| 4,580 |
|
|
| 6.92 | % |
Mortgage loans of consolidated VIEs |
|
| 60,588 |
|
|
| 1,454 |
|
|
| 3.20 | % |
|
| 233,711 |
|
|
| 5,268 |
|
|
| 3.01 | % |
MSR financing receivables |
|
| 138,695 |
|
|
| 14,641 |
|
|
| 14.08 | % |
|
| 101,003 |
|
|
| 10,973 |
|
|
| 14.49 | % |
Other |
|
|
|
|
| 350 |
|
|
|
|
|
|
|
|
| 548 |
|
|
|
| ||||
Total |
| $ | 812,150 |
|
| $ | 40,291 |
|
|
| 6.61 | % |
| $ | 768,764 |
|
| $ | 28,557 |
|
|
| 4.95 | % |
|
|
|
|
|
|
40
The effects of changes in the composition of our investments in financial assets on our economic net interest income from our MBS investment and related funding and hedging activitiesother income are summarized below (dollars in thousands):
|
| Three Months Ended September 30, 2017 |
|
| Nine Months Ended September 30, 2017 |
| ||||||||||||||||||
|
| vs. |
|
| vs. |
| ||||||||||||||||||
|
| Three Months Ended September 30, 2016 |
|
| Nine Months Ended September 30, 2016 |
| ||||||||||||||||||
|
| Rate |
|
| Volume |
|
| Total Change |
|
| Rate |
|
| Volume |
|
| Total Change |
| ||||||
Agency MBS |
| $ | 2,123 |
|
| $ | 2,731 |
|
| $ | 4,854 |
|
| $ | 2,700 |
|
| $ | 14,774 |
|
| $ | 17,474 |
|
TBA dollar rolls |
|
| (1,141 | ) |
|
| 2,244 |
|
|
| 1,103 |
|
|
| (1,357 | ) |
|
| 2,642 |
|
|
| 1,285 |
|
Private-label MBS |
|
| (2 | ) |
|
| (1,651 | ) |
|
| (1,653 | ) |
|
| 4 |
|
|
| (7,359 | ) |
|
| (7,355 | ) |
Other |
|
| (20 | ) |
|
| — |
|
|
| (20 | ) |
|
| (239 | ) |
|
| — |
|
|
| (239 | ) |
Short-term secured debt |
|
| (6,028 | ) |
|
| (527 | ) |
|
| (6,555 | ) |
|
| (12,856 | ) |
|
| (2,863 | ) |
|
| (15,719 | ) |
Interest rate swaps |
|
| 3,730 |
|
|
| (2,802 | ) |
|
| 928 |
|
|
| 9,362 |
|
|
| (10,763 | ) |
|
| (1,401 | ) |
Long-term unsecured debt |
|
| (19 | ) |
|
| (4 | ) |
|
| (23 | ) |
|
| (46 | ) |
|
| (11 | ) |
|
| (57 | ) |
|
| $ | (1,357 | ) |
| $ | (9 | ) |
| $ | (1,366 | ) |
| $ | (2,432 | ) |
| $ | (3,580 | ) |
| $ | (6,012 | ) |
|
| Three Months Ended September 30, 2023 |
|
| Nine Months Ended September 30, 2023 |
| ||||||||||||||||||
|
| vs. |
|
| vs. |
| ||||||||||||||||||
|
| Three Months Ended September 30, 2022 |
|
| Nine Months Ended September 30, 2022 |
| ||||||||||||||||||
|
| Rate |
|
| Volume |
|
| Total Change |
|
| Rate |
|
| Volume |
|
| Total Change |
| ||||||
Agency MBS |
| $ | 456 |
|
| $ | 1,330 |
|
| $ | 1,786 |
|
| $ | 5,444 |
|
| $ | 2,801 |
|
| $ | 8,245 |
|
Credit investments |
|
| 409 |
|
|
| (296 | ) |
|
| 113 |
|
|
| 1,491 |
|
|
| 2,342 |
|
|
| 3,833 |
|
Mortgage loans of consolidated VIEs |
|
| (22 | ) |
|
| (2,281 | ) |
|
| (2,303 | ) |
|
| 89 |
|
|
| (3,903 | ) |
|
| (3,814 | ) |
MSR financing receivables |
|
| (472 | ) |
|
| 2,111 |
|
|
| 1,639 |
|
|
| (426 | ) |
|
| 4,094 |
|
|
| 3,668 |
|
Other |
|
| — |
|
|
| (48 | ) |
|
| (48 | ) |
|
| — |
|
|
| (198 | ) |
|
| (198 | ) |
Total |
| $ | 371 |
|
| $ | 816 |
|
| $ | 1,187 |
|
| $ | 6,598 |
|
| $ | 5,136 |
|
| $ | 11,734 |
|
Economic net interest income forRent Revenues from SFR Properties
We began to acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. The homes we purchased may have required minor refurbishment prior to a tenant occupying the property. In addition, there was typically a lease marketing period prior to a new tenant occupying the home. In general, the time period between the date of settlement of the home purchase and the date the house was occupied by a tenant averaged between 30 to 60 days. Accordingly, the timing of the earnings benefit to us was dictated by the pace of home purchases, the level of any property level refurbishments and the length of the lease marketing period.
During the year ended December 31, 2022, we sold all our SFR rental properties in two separate transactions in August 2022 and December 2022. Going forward, we do not anticipate allocating capital to an SFR investment strategy.
For the three and nine months ended September 30, 2017 decreased relative to the comparative periods2022, we had rental income of $2.1 million and $5.3 million, respectively.
Interest Expense
Interest expense increased $2.8 million, or 46.7%, from the prior year due primarily to:
Higher financing costs of our short-term secured financing arrangements and implied TBA financing driven primarily by an increase in prevailing benchmark short-term interest rates, partially offset by higher variable leg receive rates on our interest rate swap agreements; and
A higher ratio of the weighted average notional amount of interest rate swap agreements relative to the weighted average of our short-term secured borrowings and implied TBA financing balances within those periods (71% and 70%$6.0 million for the three andmonths ended September 30, 2022 to $8.8 million for the three months ended September 30, 2023. Interest expense increased $11.6 million, or 84.7%, from $13.7 million for the nine months ended September 30, 2017, respectively, as compared2022 to 53% and 46%$25.3 million for the three and nine months ended September 30, 2016, respectively). Within2023. The increase from the 2016comparative periods a greater proportionis primarily the result of higher interest rates on repurchase agreement financings, partially offset by lower average balances on secured debt of consolidated VIEs and the subtraction of long-term debt secured by SFR properties.
The components of interest expense are summarized in the following tables for the periods indicated (dollars in thousands):
|
| Three Months Ended September 30, |
| |||||||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Average |
|
| Interest |
|
| Cost |
|
| Average |
|
| Interest |
|
| Cost |
| ||||||
Repurchase agreements |
| $ | 504,467 |
|
| $ | 7,183 |
|
|
| 5.57 | % |
| $ | 430,792 |
|
| $ | 2,863 |
|
|
| 2.60 | % |
Long-term debt secured by SFR properties |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 96,677 |
|
|
| 741 |
|
|
| 3.00 | % |
Long-term unsecured debt |
|
| 86,662 |
|
|
| 1,576 |
|
|
| 7.27 | % |
|
| 86,251 |
|
|
| 1,456 |
|
|
| 6.75 | % |
Secured debt of consolidated VIEs |
|
| 121 |
|
|
| — |
|
|
| 0.00 | % |
|
| 232,657 |
|
|
| 912 |
|
|
| 1.57 | % |
Total |
| $ | 591,250 |
|
| $ | 8,759 |
|
|
| 5.82 | % |
| $ | 846,377 |
|
| $ | 5,972 |
|
|
| 2.79 | % |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Average |
|
| Interest |
|
| Cost |
|
| Average |
|
| Interest |
|
| Cost |
| ||||||
Repurchase agreements |
| $ | 500,120 |
|
| $ | 19,912 |
|
|
| 5.25 | % |
| $ | 351,960 |
|
| $ | 3,902 |
|
|
| 1.46 | % |
Long-term debt secured by SFR properties |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 84,901 |
|
|
| 1,867 |
|
|
| 2.90 | % |
Long-term unsecured debt |
|
| 86,559 |
|
|
| 4,678 |
|
|
| 7.21 | % |
|
| 86,154 |
|
|
| 4,226 |
|
|
| 6.54 | % |
Secured debt of consolidated VIEs |
|
| 54,519 |
|
|
| 681 |
|
|
| 1.67 | % |
|
| 218,021 |
|
|
| 3,678 |
|
|
| 2.25 | % |
Total |
| $ | 641,198 |
|
| $ | 25,271 |
|
|
| 5.21 | % |
| $ | 741,036 |
|
| $ | 13,673 |
|
|
| 2.45 | % |
41
The effects of changes in the composition of our overall hedging instrument population was allocateddebt obligations on interest expense are summarized below (dollars in thousands):
|
| Three Months Ended September 30, 2023 |
|
| Nine Months Ended September 30, 2023 |
| ||||||||||||||||||
|
| vs. |
|
| vs. |
| ||||||||||||||||||
|
| Three Months Ended September 30, 2022 |
|
| Nine Months Ended September 30, 2022 |
| ||||||||||||||||||
|
| Rate |
|
| Volume |
|
| Total Change |
|
| Rate |
|
| Volume |
|
| Total Change |
| ||||||
Repurchase agreements |
| $ | 3,830 |
|
| $ | 490 |
|
| $ | 4,320 |
|
| $ | 14,369 |
|
| $ | 1,641 |
|
| $ | 16,010 |
|
Long-term debt secured by SFR properties |
|
| — |
|
|
| (741 | ) |
|
| (741 | ) |
|
| — |
|
|
| (1,867 | ) |
|
| (1,867 | ) |
Long-term unsecured debt |
|
| 113 |
|
|
| 7 |
|
|
| 120 |
|
|
| 432 |
|
|
| 20 |
|
|
| 452 |
|
Secured debt of consolidated VIEs |
|
| — |
|
|
| (912 | ) |
|
| (912 | ) |
|
| (239 | ) |
|
| (2,758 | ) |
|
| (2,997 | ) |
Total |
| $ | 3,943 |
|
| $ | (1,156 | ) |
| $ | 2,787 |
|
| $ | 14,562 |
|
| $ | (2,964 | ) |
| $ | 11,598 |
|
SFR Properties Operating Expenses
We began to instruments other than interest rate swaps,acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. During the period prior to a lease commencement date as well as subsequently, we incurred property costs such as 10-year U.S. Treasury note futures. The economic cost or benefitreal estate taxes, insurance, homeowner association fees and depreciation. For the three months ended September 30, 2022, we had property operating expenses of hedging instruments other than interest rate swap agreements do not affect$1.9 million, including $0.6 million of depreciation expense. For the computationnine months ended September 30, 2022, we had property operating expenses of economic net interest income; accordingly, economic net interest income computed for$5.3 million, including $2.0 million of depreciation expense. During the 2017 periods is not directly comparable to the amount computed for the 2016 periods.
year ended December 31, 2022, we sold all our SFR rental properties in two separate transactions in August 2022 and December 2022.
Investment and Derivative Gain (Loss), Net
As prevailing longer-term interest rates increase (decrease), the fair value of our investments in fixed rate agency MBSMSR financing receivables and TBA sale commitments generally decreases (increases)increase (decrease). Conversely, the fair value of our interest rate derivative hedging instruments increases (decreases)investments in fixed-rate agency MBS and TBA purchase commitments generally decreases (increases) in response to increases (decreases) in prevailing interest rates. We may enter into interest rate derivative hedging instruments intended to economically hedge changes attributable to changes in benchmark interest rates to either our agency MBS or MSR financing receivables. While our interest rate derivative hedging instruments are designed to mitigate the sensitivity of the fair value of either our agency MBS portfolioor MSR financing receivables to fluctuations in interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, which is the risk of an increase of the market spread between
the market yield on our agency MBS and MSR financing receivables and the benchmark yield on U.S. Treasury securities or interest rate swaps. Accordingly, irrespective of fluctuations in interest rates, an increase (decrease) in MBS spreads will generally resultchanges in the underperformance (outperformance)spread between the market yields of agency MBS relative toor MSR financing receivables and benchmark interest rates may result in a net gain or loss in the fair value of our investments and interest rate hedging instruments.
The following table presents information about the gains and losses recognized due to the changes in the fair value of our agency MBS, TBA transactions,investments and interest rate derivativehedging instruments for the periods indicated (dollars in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Gains on trading investments, net |
| $ | 13,996 |
|
| $ | 2,468 |
|
| $ | 25,632 |
|
| $ | 81,083 |
|
TBA and specified agency MBS commitments, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income |
|
| 6,424 |
|
|
| 5,321 |
|
|
| 14,120 |
|
|
| 12,835 |
|
Other gains from TBA and specified agency MBS commitments, net |
|
| 1,007 |
|
|
| 1,506 |
|
|
| 962 |
|
|
| 17,728 |
|
Total gains on TBA and specified agency MBS commitments, net |
|
| 7,431 |
|
|
| 6,827 |
|
|
| 15,082 |
|
|
| 30,563 |
|
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest expense on interest rate swaps |
|
| (4,198 | ) |
|
| (5,126 | ) |
|
| (14,900 | ) |
|
| (13,499 | ) |
Other (losses) gains from interest rate derivative instruments, net |
|
| (3,805 | ) |
|
| 13,495 |
|
|
| (30,127 | ) |
|
| (137,009 | ) |
Total (losses) gains on interest rate derivatives, net |
|
| (8,003 | ) |
|
| 8,369 |
|
|
| (45,027 | ) |
|
| (150,508 | ) |
Realized gains on sale of available-for-sale investments, net |
|
| — |
|
|
| 2,439 |
|
|
| — |
|
|
| 1,846 |
|
OTTI charges on available-for-sale securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,737 | ) |
Other, net |
|
| (56 | ) |
|
| 619 |
|
|
| (51 | ) |
|
| 638 |
|
Investment gain (loss), net |
| $ | 13,368 |
|
| $ | 20,722 |
|
| $ | (4,364 | ) |
| $ | (38,115 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Loss on agency MBS investments, net |
| $ | (23,495 | ) |
| $ | (22,728 | ) |
| $ | (24,727 | ) |
| $ | (59,276 | ) |
Loss on credit investments, net |
|
| (540 | ) |
|
| (1,246 | ) |
|
| (2,682 | ) |
|
| (639 | ) |
Gain on SFR properties, net |
|
| — |
|
|
| 14,407 |
|
|
| — |
|
|
| 14,438 |
|
(Loss) gain on MSR financing receivables, net |
|
| (1,540 | ) |
|
| 4,292 |
|
|
| 3,977 |
|
|
| 35,502 |
|
TBA commitments, net: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
TBA dollar roll income (expense) |
|
| 722 |
|
|
| (421 | ) |
|
| 1,479 |
|
|
| 682 |
|
Other gain (loss) from TBA commitments, net |
|
| 18,079 |
|
|
| 2,998 |
|
|
| 18,100 |
|
|
| (1,971 | ) |
Total gain (loss) on TBA commitments, net |
|
| 18,801 |
|
|
| 2,577 |
|
|
| 19,579 |
|
|
| (1,289 | ) |
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest (expense) income on interest rate swaps |
|
| (183 | ) |
|
| 258 |
|
|
| (473 | ) |
|
| (315 | ) |
Other (loss) gain from interest rate derivative |
|
| (908 | ) |
|
| 3,818 |
|
|
| (845 | ) |
|
| 13,178 |
|
Total (loss) gain on interest rate derivatives, net |
|
| (1,091 | ) |
|
| 4,076 |
|
|
| (1,318 | ) |
|
| 12,863 |
|
Other investments, net |
|
| (132 | ) |
|
| (143 | ) |
|
| (260 | ) |
|
| (821 | ) |
Investment and derivative (loss) gain, net |
| $ | (7,997 | ) |
| $ | 1,235 |
|
| $ | (5,431 | ) |
| $ | 778 |
|
During the three months ended September 30, 2017 and 2016, MBS spreads narrowed which resulted in the outperformance of our investments in agency MBS and TBA commitments relative to our interest rate hedging instruments. During the nine months ended September 30, 2017 and 2016, MBS spreads widened which resulted in the underperformance of our investments in agency MBS and TBA commitments relative to our interest rate hedging instruments. 42
General and Administrative Expenses
General and administrative expenses decreased by $0.1$0.2 million or 2.2%, from $4.6$3.4 million for the three months ended September 30, 20162022 to $4.5$3.2 million for the three months ended September 30, 2017.2023. General and administrative expenses decreasedincreased by $3.0$1.5 million or 18.1%, from $16.6$10.4 million for the nine months ended September 30, 20162022 to $13.6$11.9 million for the nine months ended September 30, 2017.
Compensation and benefits expenses remained unchanged at $3.4 million for both the three months ended September 30, 2016 and 2017. Compensation and benefits expenses increased by $0.9 million, or 10.3%, from $8.8 million for the nine months ended September 30, 2016, to $9.7 million for the nine months ended September 30, 2017.2023. The increase in compensation and benefits expenses for the nine months ended September 30, 2017 is mostly attributable to an increase in long-term performance oriented stock-based compensation.
Other general and administrative expenses decreased by $0.1 million, or 8.3%, from $1.2 million for the three months ended September 30, 2016 to $1.1 million for the three months ended September 30, 2017. Other general and administrative expenses decreased by $4.0 million, or 50.6%, from $7.9 million for the nine months ended September 30, 2016 to $3.9 million for the nine months ended September 30, 2017. The decrease in other general and administrative expenses for the nine months ended September 30, 20172023 from the prior comparable period is attributable primarily due to $4.0 millionnon-recurring legal and professional service fees related to the sale process of non-recurring expenses incurred during the Company and proposed plan of merger with EFC. During the three and nine months ended September 30, 2016 stemming from2023, the 2016 proxy contest that were in excessCompany incurred non-recurring general and administrative expenses of the level of expenses normally incurred for an annual meeting of shareholders.$0.3 million and $2.8 million, respectively.
Income Tax Provision
We recognized anOur TRSs are subject to U.S. federal and state corporate income tax provision of $0.8 million and $15.5 milliontaxes. As a result, for the three months ended September 30, 20172023 and 2016, respectively. The income tax2022, we recognized a provision for the three months ended September 30, 2017 includes the effectincome taxes of a decrease in the valuation allowance against the deferred tax assets of $8.4 million. We recognized an income tax provision of $25.9$0.2 million and $5.1$1.1 million, forrespectively, on the pre-tax net income of our TRSs. For the nine months ended September 30, 20172023 and 2016, respectively. The2022, we recognized a provision for income taxes of $1.7 million and $4.2 million, respectively, on the pre-tax net income of our TRSs. As noted in “Non-GAAP Earnings Available for Distribution” below, our computation of non-GAAP earnings available for distribution includes a provision for income taxes on the earnings available for distribution of our TRSs. TRS earnings available for distribution is comprised of net interest income generated by TRSs net of the TRSs’ general and administrative expenses. In our consolidated financial consolidated statements of comprehensive income prepared in accordance with GAAP, the “income tax provision (benefit)” includes (i) the income tax provision for the nine months ended
September 30, 2017 includes the effect ofTRS earnings available for distribution and (ii) an increaseincome tax provision for (or benefit from) periodic increases (or decreases) in the valuation allowance against the deferred tax assets of $11.5 million. As of September 30, 2017, the Company determined that it should record a full valuation allowance against its deferred tax assets that are capital in nature consisting of its NCL carry-forwards and temporary GAAP to tax differences that are expected to result in capital losses in future periods.
A valuation allowance is provided against the deferred tax asset if, based on our evaluation, it is more-likely-than-not that some or allfair value of the deferred tax assets will not be realized. All available evidence, both positiveinvestments of our TRSs, which are recognized in net income as a component of “investment and negative,derivative gain (loss) net.” Below is considered in our determination for whether a valuation allowance for deferred tax assets is needed. Items considered in determining our valuation allowance include expectations of future earningsreconciliation of the appropriateincome tax character, recent historicalprovision for TRS earnings available for distribution, a non-GAAP financial results,measure, to the income tax planning strategies,provision determined in accordance with GAAP for the length of statutory carry-forward periods and the expected timing of the reversal of temporary differences.indicated (dollars in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Income tax provision for TRS earnings available for |
| $ | 354 |
|
| $ | 668 |
|
| $ | 1,273 |
|
| $ | 1,203 |
|
Income tax (benefit) provision for TRS investment |
|
| (155 | ) |
|
| 406 |
|
|
| 422 |
|
|
| 2,960 |
|
GAAP income tax provision |
| $ | 199 |
|
| $ | 1,074 |
|
| $ | 1,695 |
|
| $ | 4,163 |
|
Non-GAAP Core Operating IncomeEarnings Available for Distribution
In addition to the results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”),GAAP, we reported “non-GAAP core operating income.” We define core operating income as “economic net interest income” less “core general and administrative expenses.”
Economic Net Interest Income
Economic net interest income,also report a non-GAAP financial measure represents the interest"earnings available for distribution". We define earnings available for distribution as net income earned net of the interest expense incurred from all of our interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions. Economic net interest income is comprised of the following: periodic (i) net interest incomeavailable to common stock determined in accordance with GAAP (ii)adjusted for the following items:
Realized and unrealized gains and losses recognized with respect to our mortgage related investments and economic hedging instruments, which are reported in line item “investment and derivative gain (loss), net” of our consolidated statements of comprehensive income, other than TBA dollar roll income and (iii)interest rate swap net interest income or expense, incurredare excluded from interest rate swap agreements.
We believe thatthe computation of earnings available for distribution as such gains on losses are not reflective of the economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.
Net interest income determined in accordance with GAAP. Net interest income determined in accordance with GAAP primarily represents the interest income recognized from our investments in specified agency MBS and private-label MBS (including the amortization of purchase premiums and accretion of purchase discounts), net of theearned or interest expense incurred from repurchase agreement financing arrangementsour interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our mortgage related investment portfolio is to generate a net spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we
43
generally expect the fluctuations in the fair value of our mortgage related investments and economic hedging instruments to largely offset one another over time. In addition, certain of our investments are held by our TRS which is subject to U.S. federal and state corporate income taxes. In calculating earnings available for distribution, any income tax provision or other short-benefit associated with gains or losses on our mortgage related investments and long-term borrowing transactions.economic hedging instruments are also excluded from earnings available for distribution.
TBA agency MBS dollar roll income. Dollar roll income (expense) represents the economic equivalent of net interest income (implied interest income net of financing costs)(expense) generated from our investmentstransactions in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as “dollar roll” transactions). Dollar roll income (expense) is generated (incurred) as a result of delaying, or “rolling,” the settlement of a forward-settling purchase (sale) of a TBA agency MBS by entering into an offsetting “spot” sale (purchase) with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase (sale) with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale.sale (purchase). The price discount of the forward-settling purchase (sale) relative to the contemporaneously executed spot sale (purchase) reflects compensation to the seller for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income (expense) as the excess of the spot sale (purchase) price over the forward-settling purchase (sale) price and recognize this amount ratably over the period beginning on the settlement date of the sale (purchase) and ending on the settlement date of the forward purchase.purchase (sale). In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income (expense) is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item “gain (loss) from“investment and derivative instruments, net” of the “investment gain (loss), net” section.net.”
|
Core General and Administrative Expenses
Core general and administrative expenses are non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of comprehensive income less stock-based compensation expense. Forprepared in accordance with GAAP, the nine months ended September 30, 2016, core generalnet interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “investment and administrative expenses also exclude non-recurring expenses related to the 2016 proxy contest that are in excess of those normally incurred for an annual meeting of shareholders.derivative gain (loss), net.”
Non-GAAP Core Operating Income
The following table presents our computation of non-GAAP core operating income forDuring the three and nine months ended September 30, 20172023, we incurred $0.3 million and 2016 (amounts in thousands, except per share amounts):$2.8 million, respectively, of non-recurring expenses attributable to the sale process of the Company and the entering into the Merger Agreement with EFC.
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
GAAP net interest income | $ | 14,867 |
|
| $ | 18,264 |
|
| $ | 54,077 |
|
| $ | 59,973 |
|
TBA dollar roll income |
| 6,424 |
|
|
| 5,321 |
|
|
| 14,120 |
|
|
| 12,835 |
|
Interest rate swap net interest expense |
| (4,198 | ) |
|
| (5,126 | ) |
|
| (14,900 | ) |
|
| (13,499 | ) |
Economic net interest income |
| 17,093 |
|
|
| 18,459 |
|
|
| 53,297 |
|
|
| 59,309 |
|
Core general and administrative expenses |
| (3,171 | ) |
|
| (3,612 | ) |
|
| (10,876 | ) |
|
| (10,476 | ) |
Preferred stock dividend |
| (83 | ) |
|
| — |
|
|
| (118 | ) |
|
| — |
|
Non-GAAP core operating income | $ | 13,839 |
|
| $ | 14,847 |
|
| $ | 42,303 |
|
| $ | 48,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core operating income per diluted common share | $ | 0.52 |
|
| $ | 0.64 |
|
| $ | 1.68 |
|
| $ | 2.11 |
|
Weighted average diluted common shares outstanding |
| 26,856 |
|
|
| 23,349 |
|
|
| 25,143 |
|
|
| 23,154 |
|
The following table provides a reconciliation of GAAP pre-tax net income (loss) available (attributable) to common stock to non-GAAP core operating incomeearnings available for distribution for the three and nine months ended September 30, 2017 and 2016periods indicated (amounts in thousands):
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net (loss) income (attributable) available to | $ | (7,273 | ) |
| $ | 2,756 |
|
| $ | (5,943 | ) |
| $ | (1,087 | ) |
Add (less): |
|
|
|
|
|
|
|
|
|
|
| ||||
Investment and derivative loss (gain), net |
| 7,997 |
|
|
| (1,235 | ) |
|
| 5,431 |
|
|
| (778 | ) |
Income tax (benefit) provision for TRS investment |
| (155 | ) |
|
| 406 |
|
|
| 422 |
|
|
| 2,960 |
|
Depreciation of single-family residential properties |
| — |
|
|
| 632 |
|
|
| — |
|
|
| 1,951 |
|
Stock-based compensation expense |
| 612 |
|
|
| 919 |
|
|
| 2,028 |
|
|
| 2,672 |
|
Non-recurring corporate transaction expenses (1) |
| 300 |
|
|
| — |
|
|
| 2,773 |
|
|
| — |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
| ||||
TBA dollar roll income (expense) |
| 722 |
|
|
| (421 | ) |
|
| 1,479 |
|
|
| 682 |
|
Interest rate swap net interest (expense) income |
| (183 | ) |
|
| 258 |
|
|
| (473 | ) |
|
| (315 | ) |
Non-GAAP earnings available for distribution | $ | 2,020 |
|
| $ | 3,315 |
|
| $ | 5,717 |
|
| $ | 6,085 |
|
Non-GAAP earnings available for distribution per | $ | 0.07 |
|
| $ | 0.11 |
|
| $ | 0.20 |
|
| $ | 0.21 |
|
Weighted average diluted common shares |
| 29,958 |
|
|
| 28,913 |
|
|
| 29,051 |
|
|
| 29,504 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
GAAP income before income taxes | $ | 23,691 |
|
| $ | 34,356 |
|
| $ | 36,090 |
|
| $ | 5,221 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (gain) loss, net |
| (13,368 | ) |
|
| (20,722 | ) |
|
| 4,364 |
|
|
| 38,115 |
|
Stock-based compensation expense |
| 1,373 |
|
|
| 1,018 |
|
|
| 2,747 |
|
|
| 2,182 |
|
Non-recurring proxy contest related expenses |
| — |
|
|
| — |
|
|
| — |
|
|
| 3,979 |
|
Preferred stock dividend |
| (83 | ) |
|
| — |
|
|
| (118 | ) |
|
| — |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income |
| 6,424 |
|
|
| 5,321 |
|
|
| 14,120 |
|
|
| 12,835 |
|
Interest rate swap net interest expense |
| (4,198 | ) |
|
| (5,126 | ) |
|
| (14,900 | ) |
|
| (13,499 | ) |
Non-GAAP core operating income | $ | 13,839 |
|
| $ | 14,847 |
|
| $ | 42,303 |
|
| $ | 48,833 |
|
Non-GAAP core operating income44
Earnings available for distribution is used by management to evaluate the financial performance of the Company’sour long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that non-GAAP core operating incomeearnings available for distribution assists investors in understanding and evaluating the financial performance of the Company’sour long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as itsour earnings capacity.
Periodic fair value gains and losses recognized with respect to our investments in MBS and our economic hedging instruments, which are reported in line item “total investment gain (loss), net” of our consolidated statements of comprehensive income, are excluded from the computation of non-GAAP core operating income as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our agency MBS investment portfolio is to generate a net interest
spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our agency MBS investments and our economic hedging instruments to largely offset one another over time.
A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for “non-core”all events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. For example, the economic cost or benefitIn addition, our calculation of hedging instrumentsearnings available for distribution may not be comparable to other than interest rate swap agreements, such as U.S. Treasury note futures or options, do not affect the computationsimilarly titled measures of non-GAAP core operating income.other companies. Therefore, we believe that non-GAAP core operating incomeearnings available for distribution should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between earnings available for distribution and taxable income determined in accordance with the Internal Revenue Code. As a REIT, we are required to distribute at least 90% of our REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of our taxable income in order to not be subject to any U.S. federal or state corporate income taxes. Accordingly, earnings available for distribution may not equal our distribution requirements as a REIT.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, meet margin calls on our short-term borrowings and hedging instruments, and for other general business purposes. Our primary sources of funds for liquidity consist of existing cash balances, short-term borrowings (for example, repurchase agreements), principal and interest payments from our mortgage investments in MBS, and proceeds from sales of MBS.mortgage investments. Other sources of liquidity include proceeds from the offering of common stock, preferred stock, debt securities, or other securities registered pursuant to our effective shelf registration statement filed with the Securities and Exchange Commission (“SEC”).
Liquidity, or ready access to funds, is essential to our business. Perceived liquidity issues may affect our counterparties’ willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. If we cannot obtain funding from third parties or from our subsidiaries, our results of operations could be negatively impacted.
As of September 30, 2017,2023, our debt-to-equity leverage ratio was 9.63.0 to 1 measured as the ratio of the sum of our total debt to our shareholders’stockholders’ equity as reported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” short-term financing to investable capitalleverage ratio. Our “at risk” short-term financing to investable capitalleverage ratio is measured as the ratio of the sum of our short-term recourse financing (i.e. repurchase agreement financing),financing, net payable or receivable for unsettled securities, net contractual forward price of our TBA commitments, leverage within our MSR financing receivable less our cash and cash equivalents compared to our investable capital. Our investable capital is calculated as the sum of our tangible stockholders’ equity and long-term unsecured debt. Tangible stockholders’ equity is measured as our stockholders’ equity less our net deferred tax asset, and our long-term unsecured debt is measured as our long-term unsecured debt excluding any unamortized issuance costs. As of September 30, 2017,2023, our “at risk” short-term recourse financing to investable capitalleverage ratio was 11.20.4 to 1.
Cash Flows
As of September 30, 2017,2023, our liquid assets totaled $30.4 million consisting of cash and cash equivalents totaled $26.4of $8.9 million representing a net decrease of $28.4 million from $54.8 million as of December 31, 2016. Cash provided by operating activities of $64.9 million during the nine months ended September 30, 2017 was attributable primarily to net interest income less our general and administrative expenses. Cash used in investing activities of $161.6 million during the nine months ended September 30, 2017 was primarily generated by purchases of newsettled unencumbered agency MBS and payments for settlements and deposits for margin calls on our interest rate derivative instruments, partially offset by sales of agency MBS and the receipt of principal payments from agency MBS. Cash provided by financing activities of $68.3$21.5 million during the nine months ended September 30, 2017 relates primarily to net proceeds obtained from repurchase agreements used to finance a portion of our MBS investment portfolio and proceeds received from issuance of common and preferred stock, partially offset by dividend payments to stockholders.at fair value.
Sources of Funding
We believe that our existing cash balances, net investments in MBS,mortgage investments, cash flows from operations, borrowing capacity, and other sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity,
we believe that most of our investments could be sold, in most circumstances, to provide cash. However, we may be required to sell our assets in such instances at depressed prices.
Cash Flows
As of September 30, 2017, liquid assets consisted2023, our cash totaled $8.9 million, representing a net decrease of $21.3 million from $30.2 million as of December 31, 2022. Cash used in operating activities of $13.2 million during the nine months ended September 30, 2023 was attributable primarily to net interest income, net of cashdiscount accretion, less our general and cash equivalentsadministrative expenses. Cash used in investing activities of $26.4$42.4 million during the nine months ended September 30, 2023 was attributable primarily to purchases of new agency MBS and net investments inMSR receivables, partially offset by sales of agency MBS and credit securities, distributions received on our MSR financing receivables, receipt of $370.7 million.principal payments from agency MBS and credit securities and principal receipts on loans and
45
mortgage loans of consolidated VIEs. Cash equivalents consistprovided by financing activities of $34.3 million during the nine months ended September 30, 2023 was primarily of money market funds invested in debt obligations of the U.S. government. The Company’s net investments in MBS is calculated as the sum of the Company’s total MBS investments at fair value and receivable for sold MBS, less the sum of thegenerated by proceeds from repurchase agreements, outstandingpartially offset by net repayments of secured debt of consolidated VIEs and payable for purchased MBS.dividend payments to preferred stockholders.
Debt Capital
Long-Term Unsecured Debt
As of September 30, 2017, we had $73.8 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.5 million. Our trust preferred debt obligations with an aggregate principal amount of $15.0 million outstanding as of September 30, 2017 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature between 2033 and 2035. Our 6.625% Senior Notes due 2023 with a principal amount of $25.0 million outstanding as of September 30, 2017 accrue and require payment of interest quarterly at an annual rate of 6.625% and mature on May 1, 2023. Our 6.75% Senior Notes due 2025 with a principal amount of $35.3 million outstanding as of September 30, 2017 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025.
Repurchase Agreements
We have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our investments in MBS.mortgage investments. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financing objectives. Funding for MBSmortgage investments through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.
Our repurchase agreements to finance our acquisition of MBS include provisions contained in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association (“SIFMA”) and may be amended and supplemented in accordance with industry standards for repurchase facilities. OurCertain of our repurchase agreements include financial covenants, with which the failure to comply would constitute an event of default under the applicable repurchase agreement.default. Similarly, each repurchase agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. As provided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination, the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us to the counterparty.us.
Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (commonly referred to as a “margin call”), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBSmortgage investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates, higher prepayments or prepayments.higher actual or expected credit losses. Our repurchase agreements generally provide that valuations for MBSmortgage investments securing our repurchase agreements are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances and under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the MBSmortgage investments securing our repurchase agreements. In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in the event of a margin call, we must provide cash or additional securities or cash on the same business day that the margin call is made if the lender provides us notice prior to the margin notice deadline on such day.
To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should we encounter increases in interest rates, prepayments or prepayments,expected credit losses, margin calls on our repurchase agreements could result in a material adverse change in our liquidity position.
Our repurchase agreement counterparties apply a “haircut” to the value of the pledged collateral, which means the collateral is valued, for the purposes of the repurchase agreement transaction, at less than fair value. Upon the renewal of a repurchase agreement financing at maturity, a lender could increase the “haircut” percentage applied to the value of the pledged collateral, thus reducing our liquidity.
Our repurchase agreements generally mature within 30 to 60 days, but may have maturities as short as one day and as long as one year. In the event that market conditions are such that we are unable to continue to obtain repurchase agreement financing for our mortgage investments in MBS in amounts and at interest rates consistent with our financing objectives, we may liquidate such investments and may incur significant losses on any such sales of MBS.mortgage investments.
In the event that market conditions are such that we are unable to obtain financing for our investments in MBS in amounts and at interest rates consistent with our financing objectives, to the extent deemed appropriate, we may use cash to finance our investments
or we may liquidate such investments. Accordingly, depending upon market conditions, we may incur significant losses on any such sales of MBS.
The following table provides information regarding our outstanding repurchase agreement borrowings as of datesthe date and periodsperiod indicated (dollars in thousands):
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|
| September 30, 2023 |
| |
Agency MBS repurchase financing: |
|
|
| |
Repurchase agreements outstanding |
| $ | 475,109 |
|
Agency MBS collateral, at fair value |
|
| 499,324 |
|
Net amount (1) |
|
| 24,215 |
|
Weighted-average rate |
|
| 5.48 | % |
Weighted-average term to maturity |
| 12.0 days |
| |
Non-agency MBS repurchase financing: |
|
|
| |
Repurchase agreements outstanding |
| $ | 79,598 |
|
MBS collateral, at fair value |
|
| 88,524 |
|
Net amount (1) |
|
| 8,926 |
|
Weighted-average rate |
|
| 6.08 | % |
Weighted-average term to maturity |
| 18.0 days |
| |
Total mortgage investments repurchase financing: |
|
|
| |
Repurchase agreements outstanding |
| $ | 554,707 |
|
Mortgage investments collateral, at fair value |
|
| 587,848 |
|
Net amount (1) |
|
| 33,141 |
|
Weighted-average rate |
|
| 5.57 | % |
Weighted-average term to maturity |
| 12.9 days |
| |
Maximum amount outstanding at any month-end during the period |
| $ | 554,707 |
|
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||
Pledged with agency MBS: |
|
|
|
|
|
|
|
|
Repurchase agreements outstanding |
| $ | 3,694,838 |
|
| $ | 3,649,102 |
|
Agency MBS collateral, at fair value |
|
| 3,873,154 |
|
|
| 3,851,269 |
|
Net amount (1) |
|
| 178,316 |
|
|
| 202,167 |
|
Weighted-average rate |
|
| 1.33 | % |
|
| 0.96 | % |
Weighted-average term to maturity |
| 11.9 days |
|
| 19.3 days |
| ||
Maximum amount outstanding at any month-end during the period |
| $ | 4,292,755 |
|
| $ | 3,653,114 |
|
|
|
To limit our exposure to counterparty risk, we diversify our repurchase agreement funding across multiple counterparties and by counterparty region.counterparties. As of September 30, 2017,2023, we had outstanding repurchase agreement balances with 16seven counterparties and have master repurchase agreements in place with a total of 1914 counterparties located throughout North America, Europe and Asia. As of September 30, 2017,2023, no more than 5.3%4.2% of our stockholders’ equity was at risk with any one counterparty, with the top five counterparties representing approximately 21.6%14.3% of our stockholders’ equity. The table below includes
Long-Term Unsecured Debt
As of September 30, 2023, we had $86.7 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.0 million. Our 6.75% Senior Notes due 2025 with a summaryprincipal amount of our repurchase agreement funding by number of counterparties and counterparty region$34.9 million outstanding as of September 30, 2017 (dollars2023 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025. Our 6.00% Senior Notes due 2026 with a principal amount of $37.8 million outstanding as of September 30, 2023 accrue and require payment of interest quarterly at an annual rate of 6.00% and mature on August 1, 2026. Our trust preferred debt with a principal amount of $15.0 million outstanding as of September 30, 2023 accrue and require the payment of interest quarterly at three-month term SOFR plus 2.51% to 3.26% and mature between 2033 and 2035. Our Senior Notes due 2025, Senior Notes due 2026 and trust preferred debt may be redeemed in thousands):whole or part at any time and from time to time at our option at a redemption price equal to the principal amount plus accrued and unpaid interest.
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|
| Number of |
|
| Percentage of Repurchase |
| ||
|
| Counterparties |
|
| Agreement Funding |
| ||
North America |
|
| 11 |
|
|
| 71.8 | % |
Europe |
|
| 1 |
|
|
| 7.9 | % |
Asia |
|
| 4 |
|
|
| 20.3 | % |
|
|
| 16 |
|
|
| 100.0 | % |
Derivative Instruments
In the normal course of our operations, we are a party to financial instruments that are accounted for as derivative financial instruments including (i) interest rate derivativehedging instruments such as interest rate swaps, Eurodollar futures, interest rate swap futures, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, andEurodollar futures, interest rate swap futures, options on agency MBS, and TBA sale commitments and (ii) derivative instruments that economically serve as investments such as TBA contracts.purchase commitments.
Interest Rate DerivativeHedging Instruments
We exchange cash variation margin with the counterparties to our interest rate derivativehedging instruments at least on a daily basis based upon daily changes in fair value as measured by the central clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requires market participants to deposit and maintain an “initial margin” amount which is determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse from the maximum estimated single-day price movement in that market participant’s contracts. However, the futures commission merchants (“FCMs”) through which we conduct trading of our cleared and exchanged-traded hedging instruments may require incremental initial margin in excess of the clearinghouse’s requirement. The clearing exchanges have the sole discretion to determine the value of derivative instruments.our hedging instruments for the purpose of setting initial and variation margin requirements or otherwise. In the event of a margin call, we must generally provide additional collateral on the same business day. To date, we have not had any margin calls on our derivativehedging agreements that we were not able to satisfy. However, if we encounter significant decreaseschanges in long-term interest rates, margin calls on our derivativehedging agreements could result in a material adverse change in our liquidity position.
As of September 30, 2017,2023, we had outstanding interest rate swaps 10-year U.S. Treasury note futures, and options on 10-year U.S. Treasury note futures with the following aggregate notional amount net fair value and corresponding initial margin held in collateral deposit with the custodian (inFCM (dollars in thousands):
|
| September 30, 2017 |
| |||||||||
|
| Notional |
|
| Net Fair |
|
| Collateral |
| |||
|
| Amount |
|
| Value |
|
| Deposit |
| |||
Interest rate swaps (1) |
| $ | 3,850,000 |
|
| $ | 3,348 |
|
| $ | 49,518 |
|
U.S. Treasury note futures and options on U.S. Treasury note futures |
|
| 500,000 |
|
|
| 821 |
|
|
| 4,035 |
|
|
| September 30, 2023 |
| |||||
|
| Notional |
|
| Collateral |
| ||
|
| Amount |
|
| Deposit |
| ||
Interest rate swaps |
| $ | 85,000 |
|
| $ | 1,624 |
|
|
|
The FCMs through which we conduct trading of our hedging instruments may limit their exposure to us (due to an inherent one business day lag in the variation margin exchange process) by applying a maximum “ceiling” on their level of risk, either overall and/or by instrument type. The FCMs generally use the amount of initial margin that we have posted with them as a measure of their level of risk exposure to us. We currently have FCM relationships with two large financial institutions. To date, among our two FCM arrangements, we have had sufficient excess capacity above and beyond what we believe to be a sufficient and appropriate hedge position. However, if our FCMs substantially lowered their risk exposure thresholds, we could experience a material adverse change in our liquidity position and our ability to hedge appropriately.
TBA Dollar Roll Transactions
TBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments. In a TBA dollar roll transaction, we do not intend to take physical delivery of the underlying agency MBS and will generally enter into an offsetting position and net settle the paired off positionpaired-off positions in cash. However, under certain market conditions, it may be uneconomical for us to roll our TBA contractspositions into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA contract,position, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted.impacted. If we were required to make physical delivery to settle a short TBA position, we could be required to delivery agency MBS from our balance that has a value in excess of the short TBA position which would result in us incurring a loss.
Our TBA contractsMargin Requirements for Agency MBS Purchase and beginning in the latter half of 2017 as a result of amended regulatory requirements provided by the Financial Industry Regulatory Authority, ourSale Commitments
Our commitments to purchase and sell specified agency MBS, including TBA commitments, are subject to master securities forward transaction agreements published by SIFMA as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to our counterparty in the event the fair value of ourthe agency MBS underlying our purchase and sale commitments declinechange and such counterparty demands collateral through a margin call. Margin calls on agency MBS commitments are generally caused by factors such as risingchanging interest rates or prepayments. Our agency MBS commitments provide that valuations for our commitments and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the agency MBS commitment and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.day.
Equity Capital48
MSR Financing Receivable Commitments
Preferred Stock
In May 2017,We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enables us to garner the Company completed a public offeringeconomic return of an investment in which 135,000 shares of its 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”) were issued to the public at a public offering price of $24.00 per share
for proceeds net of underwriting discounts and commissions and expenses of $3.0 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AI PrB”.
The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemedan MSR purchased by the Company. Holdersmortgage servicing counterparty through an MSR financing transaction. We have committed to invest a total minimum of Series B Preferred Stock have no voting rights, except under limited conditions,$50 million of capital with the counterparty with $25 million of the minimum commitment expiring on December 31, 2023 and are entitled to receive a cumulative cash dividend at a rate$25 million of 7.00% per annum of their $25.00 per share liquidation preference before holders of common stock are entitled to receive any dividends. Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencingthe minimum commitment expiring on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly in arrears on the 30th day of each December, March, June and September.April 1, 2024. As of September 30, 2017,2023, we have fully funded the total minimum commitment. At any time prior to the minimum commitment expiration dates, we have the option to request the mortgage servicing counterparty to sell the related MSR investments and repay us amounts owed to us under the MSR financing transaction less a minimum fee the mortgage servicing counterparty would have earned over the remaining original commitment periods.
At our election, we can request the mortgage servicing counterparty utilize leverage on the MSRs to which our MSR financing receivables are referenced to finance the purchase of additional MSRs to increase potential returns to us. As of September 30, 2023, our mortgage servicing counterparty has a $100 million credit facility with any draws secured by its MSRs including potentially MSRs to which our MSR financing receivables are referenced. As of September 30, 2023, our mortgage servicing counterparty had drawn $80.0 million and had $20.0 million of availability under its credit facility. As of September 30, 2023, we had declaredthe ability to utilize approximately 90% of our mortgage servicing counterparty’s available undrawn capacity under its credit facility although our share of the undrawn capacity could decline over time. In general, our mortgage servicing counterparty can obtain advances of up to 60% of the fair value of the MSR collateral value pledged. Under our mortgage servicing counterparty’s credit facility, if the fair value of our pledged MSR collateral declines and paid allthe lender demands additional collateral from our mortgage servicing counterparty through a margin call, we would be required quarterly dividendsto provide the mortgage servicing counterparty with additional funds to meet such margin call. If we were unable to satisfy such margin call, the lender could liquidate the MSR collateral position to which our MSR financing receivables are referenced to satisfy the loan obligation, thereby reducing the value of our MSR financing receivables. Draws under the facility bear interest at term SOFR plus 2.90% with a SOFR floor of 1.60% and a maturity date of April 29, 2024 with two one-year borrower extension options.
Under the arrangement, we are obligated to provide funds to the mortgage servicing counterparty to fund its advances of payments on the serviced pool of mortgage loans within the referenced MSR. The mortgage servicing counterparty is required to return to us any subsequent servicing advances collected or reimbursed by the GSEs. At our Series B Preferred Stock.option, we could request the mortgage servicing counterparty to fund any servicing advances with draws under its credit facility, subject to available borrowing capacity, while we would be required to fund such financing costs.
As of September 30, 2023, our mortgage servicing counterparty has drawn $80.0 million of financing under its credit facility, including $0 million attributable to us, collateralized by an estimated $411.6 million of MSRs, including $0 million attributable to us, and $6.8 million of servicer advances, including $0 million attributable to us.
Equity Capital
Common Equity Distribution Agreements
On May 24, 2013, we entered intoWe are party to separate common equity distribution agreements (the “Prior Equity Distribution Agreements”) with each of RBC Capital Markets, LLC,equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC (the “Prior Equity Sales Agents”), pursuant to which we may offer and sell, from time to time, up to 1,750,000 shares of our Class A common stock. Pursuant to the Prior Equity Distribution Agreements,common equity distribution agreements, shares of our common stock may be offered and sold through the Prior Equity Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933 as amended (the “Securities Act”), includingequity sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions.
During the three months ended March 31, 2017, we issued 800 shares of Class A common stock at a weighted average public offering price of $15.16 per share for proceeds net of underwriting discounts and commissions and expenses of $12 thousand under the Prior Equity Distribution Agreements. On February 23, 2017, we terminated the Prior Equity Distribution Agreements.
On February 22, 2017, we entered into new separate equity distribution agreements (the “New Equity Distribution Agreements”) with each of JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. (the “New Equity Sales Agents”), pursuant to which we may offer and sell, from time to time, up to 6,000,000 shares of our Class A common stock. Pursuant to the New Equity Distribution Agreements, shares of our common stock may be offered and sold through the New Equity Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. During the nine months ended September 30, 2017, we issued 4,368,837 shares of Class A common stock at a weighted average public offering price of $13.90 per share for proceeds net of selling commissions and expenses of $59.9 million under the New Equity Distribution Agreements.
As of September 30, 2017, we had 1,631,163 shares of Class A common stock available for sale under the New Equity Distribution Agreements.
On May 16, 2017, we entered into a new separate equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC (the “Series B Preferred Equity Agent”), pursuant to which we may offer and sell, from time to time, up to 1,865,000 shares of our Series B Preferred Stock. Pursuant to the Series B Preferred Equity Distribution Agreement, shares of our Series B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agentagents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. During the nine months endedAs of September 30, 2017,2023, we issued 159,993had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.
Preferred Stock
As of September 30, 2023, we had Series B Preferred Stock outstanding with a liquidation preference of $9.5 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrB.” The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series B Preferred Stock have no voting rights, except under limited conditions and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option. Dividends are payable quarterly in arrears on the 30th day of each December, March, June and September, when and as declared. We have declared and paid all required quarterly dividends on our Series B Preferred Stock to date.
As of September 30, 2023, we had Series C Preferred Stock outstanding with a liquidation preference of $23.9 million. The Series C Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrC.” The Series C
49
Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series C Preferred Stock have no voting rights except under limited conditions and will be entitled to receive cumulative cash dividends (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum. As of June 30, 2023, references to LIBOR were replaced by CME Term SOFR plus the applicable statutory spread adjustment. Shares of Series C Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve our qualification as a REIT. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible into shares of our common stock. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. We have declared and paid all required quarterly dividends on our Series C Preferred Stock to date.
Preferred Equity Distribution Agreement
We are party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which we may offer and sell, from time to time, shares of our Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of our Series B Preferred Stock may be offered and sold through the preferred equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions.
As of September 30, 2023, we had 1,602,566 shares of Series B Preferred stock at a weighted average public offering price of $24.95 per share for proceeds net of selling commissions and expenses of $3.9 million under the Series B Preferred Equity Distribution Agreement.
As of September 30, 2017, we had 1,705,007 shares of Series B Preferred stockStock available for sale under the Series B Preferred Equitypreferred equity distribution agreement.
REIT Distribution AgreementRequirements
Share Repurchase ProgramWe have elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, we are required to distribute annually 90% of our REIT taxable income (subject to certain adjustments) to our shareholders. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate income taxes on our taxable income that we distribute to our shareholders on a timely basis. At present, it is our intention to distribute 100% of our taxable income, although we will not be required to do so. We intend to make distributions of our taxable income within the time limits prescribed by the Internal Revenue Code.
The Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2.0 million shares of its Class A common stock. As of September 30, 2017, 1,951,305 shares2023, we had estimated NOL carryforwards of Class A common stock remained available for repurchase under the repurchase program.
Off-Balance Sheet Arrangements
$163.8 million that can be used to offset future taxable ordinary income and reduce our future distribution requirements. As of September 30, 20172023, we also had estimated NCL carryforwards of $136.1 million that can be used to offset future net capital gains.
Off-Balance Sheet Arrangements and Other Commitments
As of September 30, 2023 and December 31, 2016,2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose entities or variable interest entities (“VIEs”),
VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.purposes that have, or are reasonably likely to have, a material current or future effect on our financial condition. Our economic interests held in unconsolidated VIEs are generally limited in nature to those of a passive holder of MBS issued by a securitization trust.beneficial interests in securitized financial assets. As of September 30, 20172023 and December 31, 2016,2022, we had not consolidated for financial reporting purposes anyone and two, respectively, securitization trusts for which we determined that our investments provided us with both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We were not required to consolidate for financial reporting purposes any other VIEs as of September 30, 2023 and December 31, 2022, as we dodid not have the power to direct the activities that most significantly impact the economic performance of such entities. Further, asFor further information about our consolidated VIEs, refer to "Note 8. Consolidation of Variable Interest Entities" under Item 1 of this Quarterly Report on Form 10-Q.
As of September 30, 20172023 and December 31, 2016,2022, we had not guaranteed any obligations of unconsolidated entities orentities. As of September 30, 2023 and December 31, 2022, we had not entered into any commitment or intent to provide funding to any such entities.unconsolidated entities other than the aforementioned asset-backed revolving credit facility funding commitment.
Critical Accounting Estimates
Refer to the heading titled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our critical accounting estimates.
50
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. The primary market risks that we are exposed to are interest rate risk, prepayment risk, extension risk, creditspread risk, spreadcredit risk, liquidity risk and regulatory risk. See “Item 1 — Business” in our Annual Report on Form 10-K for the year ended December 31, 20162022 for a descriptiondiscussion of our risk management strategies.strategies related to these market risks. The following is additional information regarding certain of these market risks.
Interest Rate Risk
We are exposed to interest rate risk in our agency MBS portfolio.and MSR related assets. Our investments in MBSmortgage investments are also financed with short-term borrowing facilities, such as repurchase agreements, which are interest rate sensitive financial instruments. Our exposure to interest rate risk fluctuates based upon changes in the level and volatility of interest rates, mortgage prepayments, and in the shape and slope of the yield curve, among other factors. Through the use of interest rate derivativehedging instruments, we attempt to economically hedge a portion of our exposure to changes, attributable to changes in benchmark interest rates, in certainagency MBS fair values and future interest cash flows on our short-term financing arrangements. Our primary interest rate derivativeshedging instruments include interest rate swaps as well as U.S. Treasury note futures, options on U.S. Treasury note futures, and options on agency MBS. Historically, we have also utilized Eurodollar futuresMBS and interest rate swap futures.TBA sale commitments.
Changes in both short- and long-term interest rates affect us in several ways, including our financial position. As interest rates increase,rise, the fair value of fixed-rate agency MBS may be expected to decline, prepayment rates may be expected to decrease and duration may be expected to extend. However, an increase in interest rates results in an increase inextend, while the fair valuevalues of our interest rate derivative instruments.hedging instruments and MSR financing receivables are generally expected to increase due to lower expectations of prepayments in the referenced pools of mortgage loans. Conversely, if interest rates decline, the fair value of fixed-rate agency MBS is generally expected to increase while the fair value of our interest rate derivatives ishedging instruments and MSR related assets are expected to decline. We manage our interest rate risk through investment allocation between our agency MBS and MSR related assets and the utilization of interest rate hedging instruments.
The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS, MSR financing receivable and derivative instruments under several hypothetical scenarios of interest rate movements. For the purposes of this illustration, interest rates are defined by the U.S. Treasury yield curve. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” Our estimate of the change in the fair value of agency MBS is based upon the same assumptions we use to manage the impact of interest rates on the portfolio. The interest rate sensitivity of our agency MBS and TBA commitments is derived from The Yield Book, a third-party model. The interest rate sensitivity of our MSR financing receivable is derived from an internal model. Actual results could differ significantly from these estimates. The effective durations are based on observed fair value changes, as well as our own estimate of the effect of interest rate changes on the fair value of the investments, including assumptions regarding prepayments based, in part, on age and interest rate of the mortgages underlying the agency MBS, prior exposure to refinancing opportunities, and an overall analysis of historical prepayment patterns under a variety of historical interest rate conditions.
The interest rate sensitivity analyses illustrated by the tables that follow have certain limitations, most notably the following:
The 50 and 100 basis point upward and downward shocks to interest rates that are applied in the analyses represent parallel shocks to the forward yield curve. The analyses do not consider the sensitivity of stockholders’ equity to changes in the shape or slope of the forward yield curve.
The analyses assume that spreads remain constant and, therefore, do not reflect an estimate of the impact that changes in spreads would have on the value of our MBS investments or our LIBOR-basedSOFR-based derivative instruments, such as our interest rate swap agreements.
The analyses assume a static portfolio and do not reflect activities and strategic actions that management may take in the future to manage interest rate risk in response to significant changes in interest rates or other market conditions.
The yield curve that results from applying an instantaneous parallel 100 basis point decrease in interest rates may reflect an interest rate of less than 0% in certain portionspoints of the curve. The results of the analysisanalyses included in the applicable tables to followbelow reflect the effect of these negative interest rates.
The analyses do not reflect any estimated changes in our income tax provision.
51
These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):
|
| September 30, 2023 |
| |||||||||
|
|
|
|
| Value |
|
| Value |
| |||
|
|
|
|
| with 50 |
|
| with 50 |
| |||
|
|
|
|
| Basis Point |
|
| Basis Point |
| |||
|
|
|
|
| Increase in |
|
| Decrease in |
| |||
|
| Value |
|
| Interest Rates |
|
| Interest Rates |
| |||
Agency MBS |
| $ | 520,851 |
|
| $ | 506,245 |
|
| $ | 534,645 |
|
TBA commitments |
|
| 9,421 |
|
|
| 21,233 |
|
|
| (876 | ) |
MSR financing receivables |
|
| 191,800 |
|
|
| 194,806 |
|
|
| 187,645 |
|
Interest rate swaps |
|
| 78 |
|
|
| 1,393 |
|
|
| (1,237 | ) |
Equity available to common stock (1) |
|
| 179,931 |
|
|
| 181,459 |
|
|
| 177,958 |
|
Equity available to common stock percent change |
|
|
|
|
| 0.85 | % |
|
| (1.10 | )% |
|
| September 30, 2023 |
| |||||||||
|
|
|
|
| Value |
|
| Value |
| |||
|
|
|
|
| with 100 |
|
| with 100 |
| |||
|
|
|
|
| Basis Point |
|
| Basis Point |
| |||
|
|
|
|
| Increase in |
|
| Decrease in |
| |||
|
| Value |
|
| Interest Rates |
|
| Interest Rates |
| |||
Agency MBS |
| $ | 520,851 |
|
| $ | 490,983 |
|
| $ | 547,603 |
|
TBA commitments |
|
| 9,421 |
|
|
| 33,228 |
|
|
| (10,812 | ) |
MSR financing receivables |
|
| 191,800 |
|
|
| 198,363 |
|
|
| 183,986 |
|
Interest rate swaps |
|
| 78 |
|
|
| 2,708 |
|
|
| (2,552 | ) |
Equity available to common stock (1) |
|
| 179,931 |
|
|
| 183,063 |
|
|
| 176,006 |
|
Equity available to common stock percent change |
|
|
|
|
| 1.74 | % |
|
| (2.18 | )% |
|
| September 30, 2017 |
| |||||||||
|
|
|
|
|
| Value |
|
| Value |
| ||
|
|
|
|
|
| with 50 |
|
| with 50 |
| ||
|
|
|
|
|
| Basis Point |
|
| Basis Point |
| ||
|
|
|
|
|
| Increase in |
|
| Decrease in |
| ||
|
| Value |
|
| Interest Rates |
|
| Interest Rates |
| |||
Agency MBS |
| $ | 3,994,515 |
|
| $ | 3,902,198 |
|
| $ | 4,059,237 |
|
TBA commitments |
|
| (7,146 | ) |
|
| (42,697 | ) |
|
| 16,030 |
|
10-year U.S. Treasury note futures |
|
| 820 |
|
|
| 14,521 |
|
|
| (12,883 | ) |
Interest rate swaps |
|
| 3,348 |
|
|
| 89,780 |
|
|
| (83,086 | ) |
Options on MBS |
|
| 8 |
|
|
| 4,235 |
|
|
| — |
|
Options on U.S. Treasury note futures |
|
| 1 |
|
|
| — |
|
|
| 107 |
|
Equity available to common stock |
|
| 385,197 |
|
|
| 361,690 |
|
|
| 373,057 |
|
Book value per common share |
| $ | 13.71 |
|
| $ | 12.87 |
|
| $ | 13.28 |
|
Book value per common share percent change |
|
|
|
|
|
| (6.10 | )% |
|
| (3.15 | )% |
|
| September 30, 2017 |
| |||||||||
|
|
|
|
|
| Value |
|
| Value |
| ||
|
|
|
|
|
| with 100 |
|
| with 100 |
| ||
|
|
|
|
|
| Basis Point |
|
| Basis Point |
| ||
|
|
|
|
|
| Increase in |
|
| Decrease in |
| ||
|
| Value |
|
| Interest Rates |
|
| Interest Rates |
| |||
Agency MBS |
| $ | 3,994,515 |
|
| $ | 3,791,400 |
|
| $ | 4,096,513 |
|
TBA commitments |
|
| (7,146 | ) |
|
| (84,987 | ) |
|
| 28,435 |
|
10-year U.S. Treasury note futures |
|
| 820 |
|
|
| 28,222 |
|
|
| (26,584 | ) |
Interest rate swaps |
|
| 3,348 |
|
|
| 176,213 |
|
|
| (169,519 | ) |
Options on MBS |
|
| 8 |
|
|
| 17,266 |
|
|
| — |
|
Options on U.S. Treasury note futures |
|
| 1 |
|
|
| — |
|
|
| 1,430 |
|
Equity available to common stock |
|
| 385,197 |
|
|
| 321,767 |
|
|
| 323,928 |
|
Book value per common share |
| $ | 13.71 |
|
| $ | 11.45 |
|
| $ | 11.53 |
|
Book value per common share percent change |
|
|
|
|
|
| (16.47 | )% |
|
| (15.91 | )% |
Spread Risk
Our mortgage investments in MBS expose us to “spread risk.” Spread risk, also known as “basis risk,” is the risk of an increase in the spread between market participants’ required rate of return (or “market yield”) on our MBSmortgage investments and prevailing benchmark interest rates, such as the U.S. Treasury or interest rate swap rates.
The spread risk inherent to our investments in agency MBS and the resulting fluctuations in fair value of these securities can occur independent of changes in prevailing benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U. S. Federal Reserve, liquidity, or changes in market participants’ required rates of return on different assets. While we use interest rate derivativehedging instruments to attempt to mitigate the sensitivity of our net book value to changes in prevailing benchmark interest rates, such instruments are generally not designed to mitigate spread risk inherent to our investment in agency MBS. Consequently, the value of our agency MBS and, in turn, our net book value, could decline independent of changes in interest rates.
The tables that follow illustrate the estimated change in fair value for our investments in agency MBS and TBA commitments under several hypothetical scenarios of agency MBS spread movements. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” The sensitivity of our agency MBS and TBA commitments to changes in MBS spreads is derived from The Yield Book, a third-party model. The analysis to follow reflects an assumed spread duration for our investment in agency MBS of 5.45.3 years, which is a model-based assumption that is dependent upon the size and composition of our investment portfolio as well as economic conditions present as of September 30, 2017.2023.
These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts).:
52
|
| September 30, 2023 |
| |||||||||
|
|
|
|
| Value with |
|
| Value with |
| |||
|
|
|
|
| 10 Basis Point |
|
| 10 Basis Point |
| |||
|
|
|
|
| Increase in |
|
| Decrease In |
| |||
|
|
|
|
| Agency MBS |
|
| Agency MBS |
| |||
|
| Value |
|
| Spreads |
|
| Spreads |
| |||
Agency MBS |
| $ | 520,851 |
|
| $ | 517,715 |
|
| $ | 523,987 |
|
TBA commitments |
|
| 9,421 |
|
|
| 11,935 |
|
|
| 6,907 |
|
Equity available to common stock (1) |
|
| 179,931 |
|
|
| 179,309 |
|
|
| 180,552 |
|
Equity available to common stock percent change |
|
|
|
|
| (0.35 | )% |
|
| 0.35 | % |
|
| September 30, 2023 |
| |||||||||
|
|
|
|
| Value with |
|
| Value with |
| |||
|
|
|
|
| 25 Basis Point |
|
| 25 Basis Point |
| |||
|
|
|
|
| Increase in |
|
| Decrease In |
| |||
|
|
|
|
| Agency MBS |
|
| Agency MBS |
| |||
|
| Value |
|
| Spreads |
|
| Spreads |
| |||
Agency MBS |
| $ | 520,851 |
|
| $ | 513,012 |
|
| $ | 528,690 |
|
TBA commitments |
|
| 9,421 |
|
|
| 15,707 |
|
|
| 3,135 |
|
Equity available to common stock (1) |
|
| 179,931 |
|
|
| 178,377 |
|
|
| 181,484 |
|
Equity available to common stock percent change |
|
|
|
|
| (0.86 | )% |
|
| 0.86 | % |
|
| September 30, 2017 |
| |||||||||
|
|
|
|
|
| Value with |
|
| Value with |
| ||
|
|
|
|
|
| 10 Basis Point |
|
| 10 Basis Point |
| ||
|
|
|
|
|
| Increase in |
|
| Decrease In |
| ||
|
|
|
|
|
| Agency MBS |
|
| Agency MBS |
| ||
|
| Value |
|
| Spreads |
|
| Spreads |
| |||
Agency MBS |
| $ | 3,994,515 |
|
| $ | 3,972,950 |
|
| $ | 4,016,080 |
|
TBA commitments, net |
|
| (7,146 | ) |
|
| (14,754 | ) |
|
| 461 |
|
Options on Agency MBS |
|
| 8 |
|
|
| 1,670 |
|
|
| — |
|
Equity available to common stock |
|
| 385,197 |
|
|
| 357,686 |
|
|
| 414,361 |
|
Book value per common share |
| $ | 13.71 |
|
| $ | 12.73 |
|
| $ | 14.75 |
|
Book value per common share percent change |
|
|
|
|
|
| (7.14 | )% |
|
| 7.57 | % |
|
| September 30, 2017 |
| |||||||||
|
|
|
|
|
| Value with |
|
| Value with |
| ||
|
|
|
|
|
| 25 Basis Point |
|
| 25 Basis Point |
| ||
|
|
|
|
|
| Increase in |
|
| Decrease In |
| ||
|
|
|
|
|
| Agency MBS |
|
| Agency MBS |
| ||
|
| Value |
|
| Spreads |
|
| Spreads |
| |||
Agency MBS |
| $ | 3,994,515 |
|
| $ | 3,940,602 |
|
| $ | 4,048,428 |
|
TBA commitments, net |
|
| (7,146 | ) |
|
| (26,165 | ) |
|
| 11,872 |
|
Options on Agency MBS |
|
| 8 |
|
|
| 2,585 |
|
|
| — |
|
Equity available to common stock |
|
| 385,197 |
|
|
| 314,842 |
|
|
| 458,120 |
|
Book value per common share |
| $ | 13.71 |
|
| $ | 11.21 |
|
| $ | 16.31 |
|
Book value per common share percent change |
|
|
|
|
|
| (18.26 | )% |
|
| 18.93 | % |
InflationCredit Risk
Virtually allUnlike our agency MBS investments, our credit investments do not carry a credit guarantee from a GSE or government agency. Accordingly, our credit investments expose us to credit risk. Credit risk, sometimes referred to as non-performance or non-payment risk, is the risk that we will not receive, in full, the contractually required principal or interest cash flows stemming from our investments due to an underlying borrower’s or issuer’s default on their obligation. Upon a mortgage loan borrower’s default, a foreclosure sale or other liquidation of the underlying mortgaged property will result in a credit loss if the liquidation proceeds fall short of the mortgage loan’s unpaid principal balance and unpaid accrued interest.
Some of our assets and liabilitiescredit investments have credit enhancements that mitigate our exposure to the credit risk of the underlying mortgage loans. Credit losses incurred on the underlying mortgage loans collateralizing our investments in non-agency MBS are interest rate sensitive in nature. Asallocated on a result, interest rates and other factors influence“reverse sequential” basis. Accordingly, any credit losses realized on the underlying mortgage loans are first absorbed by the beneficial interests subordinate to our performance farnon-agency MBS, if any, to the extent of their respective principal balance, prior to being allocated to our investments.
Other of our non-agency MBS investments represent “first loss” positions. Accordingly, for such investments, credit losses realized on the underlying pool of mortgage loans are first allocated to our security, to the extent of its principal balance, prior to being allocated to the respective securitization’s more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAPsenior credit positions.
We accept exposure to credit risk at levels we deem prudent within our overall investment strategy and our distributionsevaluation of the potential risk-adjusted returns. We attempt to manage our exposure to credit risk through prudent asset selection resulting from pre-acquisition due diligence, on-going performance monitoring subsequent to acquisition, and the disposition of assets for which we identify negative credit trends.
There is no guarantee that our attempts to manage our credit risk will be successful. We could experience substantial losses if the credit performance of the mortgage loans to which we are determined byexposed falls short of our Board of Directors in its sole discretion pursuant to our variable dividend policy; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.expectations.
Cautionary Statement About Forward-Looking Information
When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (“SEC”)SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following:
the availability and terms of, and our ability to deploy, capital and our ability to grow our business through our current strategy focused on acquiring primarilyeither (i) residential mortgage-backed securities (“MBS”)MBS that are either issued by U.S. government agencies or guaranteed
53
our ability to qualify and maintain our qualification as a REIT;
our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of, or changes in, these strategies;
|
|
the effect of governmental regulation and actions on our business, including, without limitation, changes to monetary and fiscal policy and tax laws;
our ability to quantify and manage risk;
our ability to roll our repurchase agreements on favorable terms, if at all;
our liquidity;
our asset valuation policies;
our decisions with respect to, and ability to make, future dividends;
investing in assets other than MBSmortgage investments or pursuing business activities other than investing in MBS;
our ability to successfully operate our business as a REIT;
our decision to not elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code; and
the effect of general economic conditions including the impact of a potential recessionary environment on our business.
Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results to vary from our forward-looking statements, before making an investment in our securities:
the overall environment for interest rates, changes in interest rates, interest rate spreads, the yield curve and prepayment rates, including the timing of increaseschanges in the Federal Funds rate by the U.S. Federal Reserve;
risks associated with our ability to consummate the proposed plan of merger with EFC on the proposed terms or on the anticipated timeline, or at all, including, among other things, our ability to obtain necessary shareholder approval, the satisfaction or waiver of other conditions to closing the Merger, the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger, risks related to diverting the attention of our management from ongoing business operations; failure to realize the expected benefits of the Merger; significant transaction costs and/or unknown or inestimable liabilities; the risk of shareholder litigation in connection with the proposed Merger;
potential risk attributable to our mortgage-related portfolios, including changes in fair value;
54
our use of leverage and our dependence on repurchase agreements and other short-term borrowings to finance our mortgage-related holdings;
the availability of certain short-term liquidity sources;
competition for investment opportunities, including competition from the U.S. Department of Treasury (“U.S. Treasury”) and the opportunities;
the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”)Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government;
mortgage loan prepayment activity, modification programs and future legislative action;
changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval;
failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations;
fluctuations of the value of our hedge instruments;
fluctuating quarterly operating results;
changes in laws and regulations and industry practices that may adversely affect our business;
volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere;
our ability to qualify and maintain our qualification as a REIT for federal income tax purposes;
|
|
These and other risks, uncertainties and factors, including those described elsewhere in this QuarterlyAnnual Report on Form 10-Q,10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer, J. Rock Tonkel, Jr., and our Chief Financial Officer, Richard E. Konzmann, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
55
PART II
OTHER INFORMATION
We are from time to time involved in civil lawsuits, legal proceedings and arbitration matters that we consider to be in the ordinary course of our business. There can be no assurance that these matters individually or in the aggregate will not have a material adverse effect on our financial condition or results of operations in a future period. We are also subject to the risk of litigation, including litigation that may be without merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect our financial condition, results of operations and liquidity. Furthermore, we operate in highly-regulated markets that currently are under intense regulatory scrutiny, and we have received, and we expect in the future that we may receive, inquiries and requests for documents and information from various federal, state and foreign regulators. In addition, one or more of our subsidiaries have received requests to repurchase loans from various parties in connection with the former securitization business conducted by a subsidiary. We believe that the continued scrutiny of MBS, structured finance, and derivative market participants increases the risk of additional inquiries and requests from regulatory or enforcement agencies and other parties. We cannot provide any assurance that these inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or that, if any such investigation or proceeding were to arise, it would not materially adversely affect our Company.
None.Except the additional risks as described below, there have been no material changes to the risk factors disclosed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022. The materialization of any risks and uncertainties identified in our Cautionary Statement About Forward-Looking Information contained in this report together with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Cautionary Statement About Forward-Looking Information” in Part I, Item 3 of this report or our Annual Report on Form 10-K for the year ended December 31, 2022.
The exchange ratio will not be adjusted in the event of any change in the stock prices of either the Company or EFC.
Upon the consummation of the Merger, each of our outstanding shares of Class A common stock will be converted into the right to receive 0.3619 shares of EFC common stock, with cash paid in lieu of any fractional shares, without interest. The exchange ratio was fixed in the Merger Agreement and, except for certain adjustments if certain asset performance provision has not been made, will not be adjusted for changes in the market prices of either shares of our common stock or shares of EFC common stock. Changes in the market price of shares of EFC common stock prior to the closing of the Merger will affect the market value of the merger consideration that our shareholders will receive upon closing of the Merger. Stock price changes may result from a variety of factors (many of which are beyond the control of us and EFC), including the following factors:
The market price of shares of EFC common stock at the closing of the Merger may vary from its price on the date the Merger Agreement was executed, on the date of the proxy statement/prospectus and on the date of our special meeting. As a result, the market value of the merger consideration represented by the exchange ratio will also vary.
If the market price of shares of EFC common stock increases between the date the Merger Agreement was signed, the date of the proxy statement/prospectus or the date of our special meeting and the closing of the Merger, our shareholders could receive shares of EFC common stock that have a market value upon completion of the Merger that is greater than the market value of such shares calculated pursuant to the exchange ratio on the date the Merger Agreement was signed, the date of the proxy statement/prospectus or on the date of the special meeting, respectively. Conversely, if the market price of shares of EFC common stock declines between the date the Merger Agreement was signed, the date of the proxy statement/prospectus or the date of our special meeting and the closing
56
of the Merger, our shareholders could receive shares of EFC common stock that have a market value upon completion of the Merger that is less than the market value of such shares calculated pursuant to the exchange ratio on the date the Merger Agreement was signed, the date of the proxy statement/prospectus or on the date of the special meeting, respectively.
Therefore, while the number of shares of EFC common stock to be issued per share of our common stock is fixed, our shareholders cannot be sure of the market value of the merger consideration they will receive upon completion of the Merger.
Completion of the Merger is subject to many closing conditions and if these conditions are not satisfied or waived, the Merger will not be completed, which could result in the requirement that we pay certain termination fees.
The consummation of the Merger is subject to certain conditions, including the receipt of the approval by our shareholders of the Merger and other customary conditions specified in the Merger Agreement.
There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed. Failure to consummate the Merger may adversely affect our results of operations and business prospects for the following reasons, among others: (i) we have incurred and will incur certain transaction costs, regardless of whether the proposed Merger close, which could adversely affect our financial condition, results of operations and ability to make distributions to our shareholders; and (ii) the proposed Merger, whether or not they close, will divert the attention of certain of our management and other key employees from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us. In addition, we or EFC may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Merger is not completed by December 29, 2023, and if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we may be required to pay EFC a termination fee of $5 million. If the Merger is not consummated, the price of our common stock might decline.
Completion of the Merger may trigger change in control or other provisions in certain agreements to which the Company is a party.
The completion of the Merger may trigger change in control or other provisions in certain agreements to which the Company is a party. If EFC and the Company are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if EFC and the Company are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the Company once the Merger is consummated.
Failure to complete the Merger could negatively impact the price of our common stock, future business and financial results.
If the Merger is not completed, our ongoing business could be adversely affected and we will be subject to a variety of risks associated with the failure to complete the Merger, including the following:
If the Merger is not completed, these risks could materially affect our business, financial results and stock price.
The pendency of the Merger could adversely affect our business and operations.
Prior to the effective time of the Merger, some of our customers, prospective customers or vendors may delay or defer decisions, which could negatively affect our revenues, earnings, cash flows and expenses, regardless of whether the Merger are completed. Similarly, our current and prospective employees may experience uncertainty about their future roles with the combined company following the Merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Merger. In addition, due to operating restrictions in the Merger Agreement, we may be unable, during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
The Merger Agreement contains provisions that could make it difficult for a third party to acquire us prior to the Merger.
57
Pursuant to the Merger Agreement, we have agreed not to (a) initiate, solicit or knowingly encourage or facilitate any inquiries, proposals or offers for, or that could reasonably be expected to lead to an alternative transaction, (b) enter into or engage in, continue or otherwise participate in any discussions or negotiations in connection with any proposal for an alternative transaction from a third party, (c) furnish non-public information to a third party in connection with or in response to alternative transactions, (d) enter into any binding or nonbinding letter of intent or agreement providing for any such alternative transaction, or (e) withhold, withdraw, modify, qualify or propose publicly to withhold, withdraw, modify or qualify, in any manner adverse to the Company, approval the board recommendation that the shareholders approve the Merger or publicly recommend the approval or adoption of, or publicly approve or adopt any alternative transactions, subject to certain exceptions set forth in the Merger Agreement.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing such an acquisition, even if the potential competing acquirer was prepared to pay consideration with a higher per share value than the value proposed to be received or realized in the Merger, or might result in a potential competing acquirer proposing to pay a lower per share value than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the Merger Agreement.
If the Merger is not consummated by December 29, 2023, either EFC or the Company may terminate the Merger Agreement.
Either EFC or the Company may terminate the Merger Agreement if the Merger has not been consummated by December 29, 2023. However, this termination right will not be available to a party if that party failed to comply with the Merger Agreement and that failure was the primary cause of, or resulted in, the failure to consummate the Merger on or before December 29, 2023.
An adverse judgment in any litigation challenging either Merger may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.
It is possible that the Company’s shareholders or EFC’s stockholders may file lawsuits challenging the Merger or the other transactions contemplated by the Merger Agreement, which may name the Company, EFC, the Company’s Board and/or the board of directors of EFC as defendants. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the applicable parties from completing the Merger on the agreed-upon terms, such an injunction may delay the consummation of the Merger in the expected timeframe or may prevent the Merger from being consummated altogether. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert management’s attention and resources, which could adversely affect the operation of the Company’s business and/or EFC’s business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit | Exhibit Title | |
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3.01 | ||
3.02 | ||
3.03 | ||
3.04 | ||
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4.02 | ||
4.03 | ||
4.04 | ||
4.05 | ||
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4.09 | ||
4.10 | ||
4.11 | ||
4.12 | ||
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4.14 | ||
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4.15 | ||
4.16 | ||
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31.02 | ||
32.01 | ||
32.02 | ||
101.INS |
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101.SCH |
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101.CAL |
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104 | ||
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* Filed herewith.
** Furnished herewith.
*** Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and 2022, for the Three Months Ended June 30, 2023 and 2022, and for the Three Months Ended September 30, 2023 and 2022; and (iv) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARLINGTON ASSET INVESTMENT CORP. | |||
By: | /s/ RICHARD E. KONZMANN | ||
Richard E. Konzmann | |||
Executive Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial Officer) | |||
Date: November |
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