0001564590-19-031158.txt : 20190809 0001564590-19-031158.hdr.sgml : 20190809 20190809135258 ACCESSION NUMBER: 0001564590-19-031158 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 67 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190809 DATE AS OF CHANGE: 20190809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arlington Asset Investment Corp. CENTRAL INDEX KEY: 0001209028 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 541873198 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34374 FILM NUMBER: 191012451 BUSINESS ADDRESS: STREET 1: 1001 19TH STREET NORTH STREET 2: SUITE 1900 CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 7033730200 MAIL ADDRESS: STREET 1: 1001 19TH STREET NORTH STREET 2: SUITE 1900 CITY: ARLINGTON STATE: VA ZIP: 22209 FORMER COMPANY: FORMER CONFORMED NAME: FRIEDMAN BILLINGS RAMSEY GROUP INC DATE OF NAME CHANGE: 20030331 FORMER COMPANY: FORMER CONFORMED NAME: FOREST MERGER CORP DATE OF NAME CHANGE: 20021205 10-Q 1 ai-10q_20190630.htm 10-Q ai-10q_20190630.htm

 

 

 

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 June 30, 2019

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.)

 

1001 Nineteenth Street North

Arlington, VA

 

22209

(Address of Principal Executive Offices)

 

(Zip Code)

 

(703) 373-0200

(Registrant’s Telephone Number, Including Area Code)

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 

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

 

AI

 

NYSE

7.00% Series B Cumulative Perpetual Redeemable Preferred Stock

 

AI PrB

 

NYSE

8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock

 

AI PrC

 

NYSE

 

Number of shares outstanding of each of the registrant’s classes of common stock, as of July 31, 2019:

 

Title

 

Outstanding

Class A Common Stock

 

36,659,233 shares

 

 


 

ARLINGTON ASSET INVESTMENT CORP.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

INDEX

 

 

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Consolidated Financial Statements and Notes — (unaudited)

 

1

 

 

 

 

Consolidated Balance Sheets

 

1

 

 

 

 

Consolidated Statements of Comprehensive Income

 

2

 

 

 

 

Consolidated Statements of Changes in Equity

 

3

 

 

 

 

Consolidated Statements of Cash Flows

 

4

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

40

 

 

Item 4.

 

Controls and Procedures

 

44

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

 

45

 

 

Item 1A.

 

Risk Factors

 

45

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

Item 3.

 

Defaults Upon Senior Securities

 

45

 

 

Item 4.

 

Mine Safety Disclosures

 

45

 

 

Item 5.

 

Other Information

 

45

 

 

Item 6.

 

Exhibits

 

45

 

 

 

 

Signatures

 

48

 

 

 

i


 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,684

 

 

$

26,713

 

Interest receivable

 

 

12,471

 

 

 

13,349

 

Sold securities receivable

 

 

546,106

 

 

 

 

Mortgage-backed securities, at fair value

 

 

 

 

 

 

 

 

Agency

 

 

3,414,580

 

 

 

3,982,106

 

Private-label

 

 

26

 

 

 

24

 

Derivative assets, at fair value

 

 

6,243

 

 

 

438

 

Deposits

 

 

31,247

 

 

 

61,052

 

Other assets

 

 

18,535

 

 

 

15,768

 

Total assets

 

$

4,063,892

 

 

$

4,099,450

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

3,531,539

 

 

$

3,721,629

 

Interest payable

 

 

3,336

 

 

 

4,646

 

Accrued compensation and benefits

 

 

2,436

 

 

 

3,732

 

Dividend payable

 

 

8,392

 

 

 

11,736

 

Derivative liabilities, at fair value

 

 

3,131

 

 

 

6,959

 

Purchased securities payable

 

 

113,019

 

 

 

 

Other liabilities

 

 

3,534

 

 

 

2,200

 

Long-term unsecured debt

 

 

74,216

 

 

 

74,104

 

Total liabilities

 

 

3,739,603

 

 

 

3,825,006

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Series B Preferred stock, $0.01 par value, 354,039 and 350,595 shares issued and

   outstanding, respectively (liquidation preference of $8,851 and $8,765,

   respectively)

 

 

8,296

 

 

 

8,245

 

Series C Preferred stock, $0.01 par value, 1,200,000 and -0- shares issued and

   outstanding, respectively (liquidation preference of $30,000 and $-0-,

   respectively)

 

 

28,944

 

 

 

 

Class A common stock, $0.01 par value, 450,000,000 shares authorized, 36,572,617

   and 30,497,998 shares issued and outstanding, respectively

 

 

366

 

 

 

305

 

Additional paid-in capital

 

 

2,047,616

 

 

 

1,997,876

 

Accumulated deficit

 

 

(1,760,933

)

 

 

(1,731,982

)

Total stockholders’ equity

 

 

324,289

 

 

 

274,444

 

Total liabilities and stockholders’ equity

 

$

4,063,892

 

 

$

4,099,450

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

32,275

 

 

$

29,940

 

 

$

65,845

 

 

$

60,665

 

Private-label mortgage-backed securities

 

 

14

 

 

 

10

 

 

 

15

 

 

 

14

 

Other

 

 

428

 

 

 

105

 

 

 

689

 

 

 

236

 

Total interest income

 

 

32,717

 

 

 

30,055

 

 

 

66,549

 

 

 

60,915

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term secured debt

 

 

24,866

 

 

 

17,936

 

 

 

49,509

 

 

 

33,261

 

Long-term unsecured debt

 

 

1,269

 

 

 

1,257

 

 

 

2,541

 

 

 

2,488

 

Total interest expense

 

 

26,135

 

 

 

19,193

 

 

 

52,050

 

 

 

35,749

 

Net interest income

 

 

6,582

 

 

 

10,862

 

 

 

14,499

 

 

 

25,166

 

Investment advisory fee income

 

 

 

 

 

 

 

 

250

 

 

 

 

Investment loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on trading investments, net

 

 

42,239

 

 

 

(20,892

)

 

 

111,407

 

 

 

(109,235

)

(Loss) gain from derivative instruments, net

 

 

(69,072

)

 

 

16,052

 

 

 

(124,277

)

 

 

56,206

 

Other, net

 

 

150

 

 

 

324

 

 

 

(10

)

 

 

374

 

Total investment loss, net

 

 

(26,683

)

 

 

(4,516

)

 

 

(12,880

)

 

 

(52,655

)

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

2,233

 

 

 

2,061

 

 

 

5,349

 

 

 

5,101

 

Other general and administrative expenses

 

 

1,191

 

 

 

1,400

 

 

 

2,451

 

 

 

2,657

 

Total general and administrative expenses

 

 

3,424

 

 

 

3,461

 

 

 

7,800

 

 

 

7,758

 

(Loss) income before income taxes

 

 

(23,525

)

 

 

2,885

 

 

 

(5,931

)

 

 

(35,247

)

Income tax provision

 

 

 

 

 

6,493

 

 

 

 

 

 

24,744

 

Net loss

 

 

(23,525

)

 

 

(3,608

)

 

 

(5,931

)

 

 

(59,991

)

Dividend on preferred stock

 

 

(774

)

 

 

(149

)

 

 

(1,052

)

 

 

(286

)

Net loss attributable to common stock

 

$

(24,299

)

 

$

(3,757

)

 

$

(6,983

)

 

$

(60,277

)

Basic loss per common share

 

$

(0.67

)

 

$

(0.13

)

 

$

(0.20

)

 

$

(2.14

)

Diluted loss per common share

 

$

(0.67

)

 

$

(0.13

)

 

$

(0.20

)

 

$

(2.14

)

Weighted-average common shares outstanding

  (in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

36,533

 

 

 

28,210

 

 

 

34,803

 

 

 

28,204

 

Diluted

 

 

36,533

 

 

 

28,210

 

 

 

34,803

 

 

 

28,204

 

 

See notes to consolidated financial statements.

2


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands)

(Unaudited)

 

 

 

Series B

Preferred

Stock

(#)

 

 

Series B

Preferred

Amount

($)

 

 

Series C

Preferred

Stock

(#)

 

 

Series C

Preferred

Amount

($)

 

 

Class A

Common

Stock

(#)

 

 

Class A

Amount

($)

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Total

 

Balances, December 31, 2017

 

 

303,291

 

 

$

7,108

 

 

 

 

 

$

 

 

 

28,140,721

 

 

$

281

 

 

$

1,974,941

 

 

$

(1,596,013

)

 

$

386,317

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56,383

)

 

 

(56,383

)

Issuance of Class A common

  stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

(23

)

Issuance of preferred stock

 

 

19,431

 

 

 

459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

459

 

Cumulative-effect of accounting

  change (see Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,059

 

 

 

4,059

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

451

 

 

 

 

 

 

451

 

Dividends declared (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,875

)

 

 

(15,875

)

Balances, March 31, 2018

 

 

322,722

 

 

$

7,567

 

 

 

 

 

$

 

 

 

28,140,721

 

 

$

281

 

 

$

1,975,369

 

 

$

(1,664,212

)

 

$

319,005

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,608

)

 

 

(3,608

)

Issuance of Class A common

  stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66,989

 

 

 

1

 

 

 

710

 

 

 

 

 

 

711

 

Issuance of preferred stock

 

 

18,030

 

 

 

440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

440

 

Repurchase of Class A common

  stock under stock-based

  compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,011

)

 

 

 

 

 

(67

)

 

 

 

 

 

(67

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

297

 

 

 

 

 

 

297

 

Dividends declared (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,311

)

 

 

(10,311

)

Balances, June 30, 2018

 

 

340,752

 

 

$

8,007

 

 

 

 

 

$

 

 

 

28,201,699

 

 

$

282

 

 

$

1,976,309

 

 

$

(1,678,131

)

 

$

306,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2018

 

 

350,595

 

 

$

8,245

 

 

 

 

 

$

 

 

 

30,497,998

 

 

$

305

 

 

$

1,997,876

 

 

$

(1,731,982

)

 

$

274,444

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,594

 

 

 

17,594

 

Issuance of Class A common

  stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,000,000

 

 

 

60

 

 

 

48,750

 

 

 

 

 

 

48,810

 

Issuance of Class A common

  stock under stock-based

  compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,619

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Issuance of preferred stock

 

 

2,035

 

 

 

45

 

 

 

1,200,000

 

 

 

28,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28,925

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

773

 

 

 

 

 

 

773

 

Dividends declared (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,135

)

 

 

(14,135

)

Balances, March 31, 2019

 

 

352,630

 

 

$

8,290

 

 

 

1,200,000

 

 

$

28,880

 

 

 

36,572,617

 

 

$

366

 

 

$

2,047,398

 

 

$

(1,728,523

)

 

$

356,411

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,525

)

 

 

(23,525

)

Issuance of Class A common

  stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Issuance of preferred stock

 

 

1,409

 

 

 

6

 

 

 

 

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

217

 

 

 

 

 

 

217

 

Dividends declared (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,885

)

 

 

(8,885

)

Balances, June 30, 2019

 

 

354,039

 

 

$

8,296

 

 

 

1,200,000

 

 

$

28,944

 

 

 

36,572,617

 

 

$

366

 

 

$

2,047,616

 

 

$

(1,760,933

)

 

$

324,289

 

 

 

(1)

The Board of Directors approved and the Company declared and paid dividends of $0.375 and $0.225 per common share for the three months ended March 31, 2019 and June 30, 2019, respectively, and $0.55 and $0.375 per common share for the three months ended March 31, 2018 and June 30, 2018, respectively. The Board of Directors approved and the Company declared and paid dividends of $0.4375 per Series B preferred share for the three months ended March 31, 2019, June 30, 2019, March 31, 2018 and June 30, 2018. The Board of Directors approved and the Company declared and paid dividends of $0.61875 per Series C preferred share for the three months ended June 30, 2019. For the three months ended March 31, 2019, includes a dividend accrual of $0.103125 per Series C preferred share that had not been declared.

 

See notes to consolidated financial statements.

 

 

3


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,931

)

 

$

(59,991

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

 

Investment loss, net

 

 

12,880

 

 

 

52,655

 

Net premium amortization on mortgage-backed securities

 

 

13,142

 

 

 

16,199

 

Deferred tax provision

 

 

 

 

 

24,744

 

Other

 

 

1,112

 

 

 

799

 

Changes in operating assets

 

 

 

 

 

 

 

 

Interest receivable

 

 

878

 

 

 

(822

)

Other assets

 

 

(273

)

 

 

(255

)

Changes in operating liabilities

 

 

 

 

 

 

 

 

Interest payable and other liabilities

 

 

(1,808

)

 

 

(909

)

Accrued compensation and benefits

 

 

(1,296

)

 

 

(2,603

)

Net cash provided by operating activities

 

 

18,704

 

 

 

29,817

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of agency mortgage-backed securities

 

 

(1,527,755

)

 

 

(1,858,387

)

Proceeds from sales of agency mortgage-backed securities

 

 

1,539,475

 

 

 

1,496,422

 

Receipt of principal payments on agency mortgage-backed securities

 

 

220,982

 

 

 

233,577

 

(Payments for) proceeds from derivatives and deposits, net

 

 

(104,830

)

 

 

40,002

 

Other

 

 

45

 

 

 

(15

)

Net cash provided by (used in) investing activities

 

 

127,917

 

 

 

(88,401

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

(Repayments of) proceeds from repurchase agreements, net

 

 

(190,090

)

 

 

85,401

 

Proceeds from issuance of common stock

 

 

48,811

 

 

 

688

 

Proceeds from issuance of preferred stock

 

 

28,995

 

 

 

899

 

Dividends paid

 

 

(26,366

)

 

 

(31,322

)

Net cash (used in) provided by financing activities

 

 

(138,650

)

 

 

55,666

 

Net increase (decrease) in cash and cash equivalents

 

 

7,971

 

 

 

(2,918

)

Cash and cash equivalents, beginning of period

 

 

26,713

 

 

 

21,614

 

Cash and cash equivalents, end of period

 

$

34,684

 

 

$

18,696

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

53,248

 

 

$

36,327

 

Cash payments for taxes

 

$

 

 

$

 

 

See notes to consolidated financial statements.

 

 

 

4


 

ARLINGTON ASSET INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

 

Note 1. Organization and Basis of Presentation

Arlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the “Company”) is an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (“MBS”), consisting of “agency MBS” and “private-label MBS.” Agency MBS include residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. government agency, such as the Government National Mortgage Association (“Ginnie Mae”). Private-label MBS, or “non-agency MBS,” include residential MBS that are not guaranteed by a GSE or the U.S. government. Arlington Asset is a Virginia corporation that is internally managed.

For the Company’s tax years ended December 31, 2018 and earlier, the Company was taxed as a C corporation for U.S. federal tax purposes. Commencing with its taxable year ending December 31, 2019, the Company intends to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company will be required to distribute annually 90% of its REIT taxable income (subject to certain adjustments). So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. Federal or state corporate income taxes on its taxable income that it distributes to its shareholders on a timely basis. At present, it is the Company’s intention to distribute 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

The unaudited interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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 from these estimates materially.

Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, total assets or total liabilities.

 

Note 2. Summary of Significant Accounting Policies

Cash Equivalents

Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three months or less. As of June 30, 2019 and December 31, 2018, approximately 98% and 99%, 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.

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

5


 

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

The Company recognizes interest income for its investments in agency MBS 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’s stated coupon rate. The interest method is applied at the individual security level based upon each security’s effective interest rate. The Company calculates each security’s effective interest rate at the time of purchase by solving for the discount rate that equates the present value of that security's remaining contractual cash flows (assuming no principal prepayments) to its purchase price. Because each security’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 discount is recognized in interest income such that the contractual effective interest rate on the remaining security balance is unaffected.

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

Borrowings

Note 4

To-be-announced agency MBS transactions, including “dollar rolls”

Note 5

Derivative instruments

Note 5

Balance sheet offsetting

Note 6

Fair value measurements

Note 7

 

Refer to the Company’s 2018 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 Adopted Accounting Guidance

Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842)

This amendment replaces the existing lease accounting model with a revised model.  The primary change effectuated by the revised lease accounting model is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.

January 1, 2019

The primary impact of the adoption of ASU No. 2016-02 was the recognition of lease liabilities and associated right-of-use assets, as a component of “Other liabilities” and “Other assets,” respectively, on the Company’s consolidated balance sheets as of June 30, 2019.  The adoption of ASU No. 2016-02 did not have an effect on the timing or amount of periodic lease expense recognized in net income.  The adoption of ASU No. 2016-02 did not have a material effect on the Company’s consolidated financial statements.

 

 

 

 

6


 

Standard

Description

Date of

Adoption

Effect on the Consolidated

Financial Statements

ASU No. 2017-08, Premium Amortization of

Purchased Callable Debt Securities (Subtopic 310-20)

This amendment requires purchase premiums for investments in debt securities that are noncontingently callable by the issuer (at a fixed price and preset date) to be amortized to the earliest call date. Previously, purchase premiums for such investments were permitted to be amortized to the instrument’s maturity date.

 

January 1, 2019

 

 

Investments in prepayable financial assets, such as residential MBS, for which the embedded call options are not held by the issuer are not within the scope of ASU No. 2017-08. Accordingly, the adoption of ASU No. 2017-08 did not have an effect on the Company’s consolidated financial statements.

 

 

 

 

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815)

This update made several targeted amendments to existing GAAP with the objectives of facilitating (i) financial reporting that more closely reflects entities’ risk management strategies and (ii) greater ease of understanding and interpreting the effects of hedge accounting on an entities’ reported results.

January 1, 2019

Hedge accounting pursuant to GAAP is an elective, rather than a required, accounting model.  The Company does not elect to apply hedge accounting.  The adoption of ASU No. 2017-12 did not have an effect on the Company’s consolidated financial statements.

 

 

 

 

Recently Issued Accounting Guidance Not Yet Adopted

 

 

 

 

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 606)

The amendments in this update require financial assets measured at amortized cost as well as available-for-sale debt securities to be measured for impairment on the basis of the net amount expected to be collected.  Credit losses are to be recognized through an allowance for credit losses, which differs from the direct write-down of the amortized cost basis currently required for other-than-temporary impairments of investments in debt securities.  This update also makes substantial changes to the manner in which interest income is to be recognized for financial assets acquired with a more-than-insignificant amount of credit deterioration since origination.

 

This update will not affect the accounting for investments in debt securities that are classified as trading securities.

January 1, 2020

As of June 30, 2019, all of the Company’s investments in debt securities are classified as trading securities. Accordingly, the Company does not expect ASU No. 2016-13 to have a material impact on its consolidated financial statements.

 

 

Note 3. Investments in Agency MBS

The Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of June 30, 2019 and December 31, 2018, the Company had $3,414,580 and $3,982,106, respectively, of fair value in agency MBS classified as trading securities. As of June 30, 2019, all the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans.

 

7


 

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 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 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:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,