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 acquires and holds residential mortgage-related assets, primarily comprised of residential mortgage-backed securities (“MBS”). The Company’s investments in residential MBS include (i) residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), government-sponsored enterprises (“GSEs”) or the Government National Mortgage Association (“Ginnie Mae”), a U.S. government agency, which are collectively referred to as “agency MBS,” and (ii) residential MBS issued 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.”
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, 2017.
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, other comprehensive 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 September 30, 2018 and December 31, 2017, approximately 99% and 98%, 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 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
5
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 propo
rtional amount of the unamortized premium or discount is recognized in interest income such that the 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 2017 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. 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
|
This amendment defers the effective date of ASU No. 2014-09 for all entities by one year.
ASU No. 2014-09 requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue recognition with respect to financial instruments is not within the scope of ASU No. 2014-09.
|
January 1, 2018
|
The adoption of ASU No. 2015-14 did not impact the Company’s consolidated financial statements.
|
|
|
|
|
6
Standard
|
Description
|
Date of
Adoption
|
Effect on the Consolidated
Financial Statements
|
ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
|
This amendment makes targeted changes to certain aspects of guidance applicable to financial assets and financial liabilities. The amendment primarily affects accounting for certain equity investments, financial liabilities measured under the fair value option, and certain financial instrument presentation and disclosure requirements. Accounting for investments in debt securities and financial liabilities not measured under the fair value option is largely unaffected by this amendment.
|
January 1, 2018
|
ASU No. 2016-01 requires entities to measure investments in equity securities at fair value, unless fair value measurement is impractical, with changes in fair value recognized in current period earnings. Upon the adoption of ASU No. 2016-01, the Company recognized a cumulative-effect increase of $4,059 (net of taxes) in stockholders’ equity representing, as of January 1, 2018, the excess of fair value over historical cost of its investments in equity securities that were previously carried at their historical cost (net of
impairments).
Subsequent to January 1, 2018, all changes in the estimated fair value of such instruments will be recognized in net income.
|
|
|
|
|
ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments (Topic 230)
|
This amendment was issued to reduce diversity in practice with respect to eight various statement of cash flow reporting issues for which existing GAAP is either unclear or does not provide specific guidance.
|
January 1, 2018
|
The adoption of ASU No. 2016-15 did not have a material impact on the Company’s consolidated financial statements.
|
|
|
|
|
Recently Issued Accounting Guidance Not Yet Adopted
|
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 will be the recognition of lease liabilities and associated right-of-use assets on the Company’s balance sheet. The Company does not expect the adoption of ASU No. 2016-02 will have a material effect on the timing or amount of periodic lease expense recognized in net income.
|
|
|
|
|
7
Standard
|
Description
|
Date of
Adoption
|
Effect on the Consolidated
Financial Statements
|
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, 2019
|
As of September 30, 2018, 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.
|
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, 2020
|
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 Company does not expect the adoption of ASU No. 2017-08 to have a material effect on its 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 currently elect to apply hedge accounting and, at this time, does not plan to elect to apply hedge accounting in the future. Accordingly, at this time, the Company does not expect ASU No. 2017-12 will have an effect 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 September 30, 2018 and December 31, 2017, the Company had $4,399,466 and $4,054,424, respectively, of fair value in agency MBS classified as trading securities. As of September 30, 2018, all the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans.
8
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 sec
urities:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net gains (losses) recognized in earnings for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS still held at period end
|
|
$
|
(29,744
|
)
|
|
$
|
12,715
|
|
|
$
|
(103,536
|
)
|
|
$
|
22,178
|
|
Agency MBS sold during the period
|
|
|
(8,113
|
)
|
|
|
1,296
|
|
|
|
(43,547
|
)
|
|
|
3,421
|
|
Total
|
|
$
|
(37,857
|
)
|
|
$
|
14,011
|
|
|
$
|
(147,083
|
)
|
|
$
|
25,599
|
|
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 5. Derivative Instruments” for further information about dollar rolls.
Note 4. Borrowings
Repurchase Agreements
The Company finances the purchase of MBS through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells MBS to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same security at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. MBS sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such securities 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. The difference between the proceeds received by the Company upon the initial transfer of the MBS and the contractually agreed-upon repurchase price is recognized as interest expense 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 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.
As of September 30, 2018 and December 31, 2017, 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, 2018
|
|
|
December 31, 2017
|
|
Pledged with agency MBS:
|
|
|
|
|
|
|
|
|
Repurchase agreements outstanding
|
|
$
|
4,092,251
|
|
|
$
|
3,667,181
|
|
Agency MBS collateral, at fair value
|
|
|
4,303,913
|
|
|
|
3,858,815
|
|
Net amount
(1)
|
|
|
211,662
|
|
|
|
191,634
|
|
Weighted-average rate
|
|
|
2.30
|
%
|
|
|
1.56
|
%
|
Weighted-average term to maturity
|
|
15.3 days
|
|
|
12.6 days
|
|
(1)
|
Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.
|
9
The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the
three and nine months ende
d September 30, 2018
and
2017
:
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
Weighted-average outstanding balance during the three months ended
|
|
$
|
3,841,280
|
|
|
$
|
3,819,095
|
|
Weighted-average rate during the three months ended
|
|
|
2.17
|
%
|
|
|
1.31
|
%
|
Weighted-average outstanding balance during the nine months ended
|
|
$
|
3,730,460
|
|
|
$
|
3,956,579
|
|
Weighted-average rate during the nine months ended
|
|
|
1.93
|
%
|
|
|
1.10
|
%
|
Long-Term Unsecured Debt
As of September 30, 2018 and December 31, 2017, the Company had $74,048 and $73,880, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $1,252 and $1,420, respectively. The Company’s long-term debentures consisted of the following as of the dates indicated:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
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
|
%
|
|
|
5.09
|
%
|
|
|
6.75
|
%
|
|
|
6.625
|
%
|
|
|
4.11
|
%
|
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
|
|
The Senior Notes due 2023 and the Senior Notes due 2025 are publicly traded on the New York Stock Exchange under the ticker symbols “AIW” and “AIC,” respectively. The Senior Notes due 2023 and Senior Notes due 2025 may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing these 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.
Note 5. 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 assets” or “derivative liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment 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 Derivatives
The Company is party to interest rate derivative instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in certain MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate derivatives include centrally cleared interest rate swaps, exchange-traded instruments, such as Eurodollar futures, interest rate swap futures, U.S. Treasury note futures and options on futures, and nonexchange-traded instruments such as options on agency MBS. While the Company uses its interest rate derivatives 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 derivative 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 derivatives 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.
10
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” in the accompanying consolidated balance sheets.
The 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, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of 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.
To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”
In addition to interest rate derivatives that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment 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 securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.
The Company’s agency MBS investment portfolio includes 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 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 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.
Under the terms of these forward commitments, the daily exchange of variation margin may occur based on changes in the fair value of the agency MBS commitments if a party to the transaction demands it. 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.
11
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, 2018
|
|
|
December 31, 2017
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Interest rate swaps
|
|
$
|
91
|
|
|
$
|
(1,124
|
)
|
|
$
|
—
|
|
|
$
|
(3,338
|
)
|
5-year U.S. Treasury note futures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
10-year U.S. Treasury note futures
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
—
|
|
|
|
(1,321
|
)
|
TBA commitments
|
|
|
—
|
|
|
|
(2,088
|
)
|
|
|
763
|
|
|
|
(154
|
)
|
Total
|
|
$
|
91
|
|
|
$
|
(3,431
|
)
|
|
$
|
763
|
|
|
$
|
(4,833
|
)
|
Interest Rate Swaps
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 the prevailing three-month LIBOR on the date of reset.
The following table presents information about the Company’s interest rate swap agreements that were in effect as of September 30, 2018:
|
|
|
|
|
|
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
|
|
$
|
1,050,000
|
|
|
|
1.53
|
%
|
|
|
2.33
|
%
|
|
|
0.80
|
%
|
|
|
1.8
|
|
|
$
|
(225
|
)
|
3 to less than 7 years
|
|
|
225,000
|
|
|
|
1.95
|
%
|
|
|
2.35
|
%
|
|
|
0.40
|
%
|
|
|
3.5
|
|
|
|
(77
|
)
|
7 to less than 10 years
|
|
|
2,050,000
|
|
|
|
2.34
|
%
|
|
|
2.33
|
%
|
|
|
(0.01
|
)%
|
|
|
8.6
|
|
|
|
(822
|
)
|
10 or more years
|
|
|
150,000
|
|
|
|
3.01
|
%
|
|
|
2.32
|
%
|
|
|
(0.69
|
)%
|
|
|
29.8
|
|
|
|
91
|
|
Total / weighted-average
|
|
$
|
3,475,000
|
|
|
|
2.10
|
%
|
|
|
2.33
|
%
|
|
|
0.23
|
%
|
|
|
7.1
|
|
|
$
|
(1,033
|
)
|
The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2017:
|
|
|
|
|
|
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
|
|
|
|
1.28
|
%
|
|
|
1.51
|
%
|
|
|
0.23
|
%
|
|
|
1.8
|
|
|
$
|
(248
|
)
|
3 to less than 7 years
|
|
|
700,000
|
|
|
|
1.87
|
%
|
|
|
1.48
|
%
|
|
|
(0.39
|
)%
|
|
|
3.9
|
|
|
|
(454
|
)
|
7 to 10 years
|
|
|
1,600,000
|
|
|
|
1.90
|
%
|
|
|
1.55
|
%
|
|
|
(0.35
|
)%
|
|
|
8.3
|
|
|
|
(2,636
|
)
|
Total / weighted-average
|
|
$
|
3,600,000
|
|
|
|
1.67
|
%
|
|
|
1.52
|
%
|
|
|
(0.15
|
)%
|
|
|
5.1
|
|
|
$
|
(3,338
|
)
|
U.S. Treasury Note Futures
The Company’s 10-year U.S. Treasury note futures held as of September 30, 2018 are short positions with an aggregate notional amount of $700,000 that mature in December 2018. 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. As of December 31, 2017, the Company held short positions of 5-year and 10-year U.S. Treasury note futures with aggregate notional amounts of $21,600 and $650,000, respectively, with a maturity date in March 2018.
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
12
counterparty, and the Company may also write call options that provide a counterparty with the option to buy 10-year U.S. Treasur
y 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
.
As of September 30, 2018 and December 31, 2017, the Company had no outstanding options on 10-year U.S. Treasury note futures contracts.
TBA Commitments
The following tables present information about the Company’s TBA commitments as of the dates indicated:
|
|
September 30, 2018
|
|
|
|
Notional Amount:
Net Purchase (Sale)
Commitment
|
|
|
Contractual Forward Price
|
|
|
Market Price
|
|
|
Fair Value
|
|
Dollar roll positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5% 30-year MBS purchase commitments
|
|
$
|
250,000
|
|
|
$
|
258,549
|
|
|
$
|
257,945
|
|
|
$
|
(604
|
)
|
5.0% 30-year MBS purchase commitments
|
|
|
500,000
|
|
|
|
524,797
|
|
|
|
523,313
|
|
|
|
(1,484
|
)
|
Total TBA commitments, net
|
|
$
|
750,000
|
|
|
$
|
783,346
|
|
|
$
|
781,258
|
|
|
$
|
(2,088
|
)
|
|
|
December 31, 2017
|
|
|
|
Notional Amount:
Net Purchase (Sale)
Commitment
|
|
|
Contractual Forward Price
|
|
|
Market Price
|
|
|
Fair Value
|
|
Dollar roll positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0% 15-year MBS purchase commitments
|
|
$
|
250,000
|
|
|
$
|
254,873
|
|
|
$
|
254,766
|
|
|
$
|
(107
|
)
|
3.5% 30-year MBS purchase commitments
|
|
|
1,015,000
|
|
|
|
1,041,496
|
|
|
|
1,042,212
|
|
|
|
716
|
|
Total TBA commitments, net
|
|
$
|
1,265,000
|
|
|
$
|
1,296,369
|
|
|
$
|
1,296,978
|
|
|
$
|
609
|
|
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,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest rate derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
(1)
|
$
|
2,295
|
|
|
$
|
(4,198
|
)
|
|
$
|
3,962
|
|
|
$
|
(14,900
|
)
|
Unrealized gains (losses), net
|
|
11,386
|
|
|
|
10,833
|
|
|
|
66,023
|
|
|
|
(7,991
|
)
|
Gains (losses) realized upon early termination
|
|
17,567
|
|
|
|
(14,137
|
)
|
|
|
38,050
|
|
|
|
(13,441
|
)
|
Total interest rate swap gains (losses), net
|
|
31,248
|
|
|
|
(7,502
|
)
|
|
|
108,035
|
|
|
|
(36,332
|
)
|
U.S. Treasury note futures, net
|
|
8,691
|
|
|
|
(133
|
)
|
|
|
27,171
|
|
|
|
(2,174
|
)
|
Options on U.S. Treasury note futures, net
|
|
—
|
|
|
|
(147
|
)
|
|
|
—
|
|
|
|
(6,300
|
)
|
Other, net
|
|
—
|
|
|
|
(221
|
)
|
|
|
—
|
|
|
|
(221
|
)
|
Total interest rate derivative gains (losses), net
|
|
39,939
|
|
|
|
(8,003
|
)
|
|
|
135,206
|
|
|
|
(45,027
|
)
|
TBA and specified agency MBS commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income
(2)
|
|
4,604
|
|
|
|
6,424
|
|
|
|
17,989
|
|
|
|
14,120
|
|
Other (losses) gains on agency MBS commitments, net
|
|
(8,923
|
)
|
|
|
1,007
|
|
|
|
(61,369
|
)
|
|
|
962
|
|
Total (losses) gains on agency MBS commitments, net
|
|
(4,319
|
)
|
|
|
7,431
|
|
|
|
(43,380
|
)
|
|
|
15,082
|
|
Total derivative gains (losses), net
|
$
|
35,620
|
|
|
$
|
(572
|
)
|
|
$
|
91,826
|
|
|
$
|
(29,945
|
)
|
|
(1)
|
Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Also includes “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrally cleared interest rate swap agreements.
|
13
|
(2)
|
Represents the price discount of forward-settling TBA pu
rchases relative to a contemporaneously executed “spot” TBA sale, which economically equates to net interest income that is earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settlin
g purchase.
|
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, 2018
|
|
|
|
Beginning of
Period
|
|
|
Additions
|
|
|
Scheduled
Settlements
|
|
|
Early
Terminations
|
|
|
End of Period
|
|
Interest rate swaps
|
|
$
|
3,325,000
|
|
|
$
|
750,000
|
|
|
$
|
—
|
|
|
$
|
(600,000
|
)
|
|
$
|
3,475,000
|
|
10-year U.S. Treasury note futures
|
|
|
700,000
|
|
|
|
700,000
|
|
|
|
(700,000
|
)
|
|
|
—
|
|
|
|
700,000
|
|
Commitments to purchase (sell) MBS, net
|
|
|
1,100,000
|
|
|
|
3,050,000
|
|
|
|
(3,400,000
|
)
|
|
|
—
|
|
|
|
750,000
|
|
|
|
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 Nine Months Ended September 30, 2018
|
|
|
|
Beginning of
Period
|
|
|
Additions
|
|
|
Scheduled
Settlements
|
|
|
Early
Terminations
|
|
|
End of Period
|
|
Interest rate swaps
|
|
$
|
3,600,000
|
|
|
$
|
1,300,000
|
|
|
$
|
—
|
|
|
$
|
(1,425,000
|
)
|
|
$
|
3,475,000
|
|
5-year U.S. Treasury note futures
|
|
|
21,600
|
|
|
|
—
|
|
|
|
(21,600
|
)
|
|
|
—
|
|
|
|
—
|
|
10-year U.S. Treasury note futures
|
|
|
650,000
|
|
|
|
2,550,000
|
|
|
|
(2,500,000
|
)
|
|
|
—
|
|
|
|
700,000
|
|
Commitments to purchase (sell) MBS, net
|
|
|
1,265,000
|
|
|
|
11,170,000
|
|
|
|
(11,685,000
|
)
|
|
|
—
|
|
|
|
750,000
|
|
|
|
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
|
|
Cash Collateral Posted for Derivative Instruments 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” in the accompanying consolidated balance sheets, for the dates indicated:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Cash collateral posted for:
|
|
|
|
|
|
|
|
|
Interest rate swaps (cash initial margin)
|
|
$
|
62,787
|
|
|
$
|
46,218
|
|
U.S. Treasury note futures (cash initial margin)
|
|
|
7,350
|
|
|
|
6,960
|
|
Unsettled MBS trades and TBA commitments, net
|
|
|
3,829
|
|
|
|
5,925
|
|
Total cash collateral posted
|
|
$
|
73,966
|
|
|
$
|
59,103
|
|
14
Note 6. 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” in the accompanying consolidated balance sheets.
The 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, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. The carrying amount of 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, 2018
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
$
|
(91
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivative instruments
|
|
|
91
|
|
|
|
—
|
|
|
|
91
|
|
|
|
(91
|
)
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
91
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
$
|
(91
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,124
|
|
|
$
|
—
|
|
|
$
|
1,124
|
|
|
$
|
(91
|
)
|
|
$
|
(1,033
|
)
|
|
$
|
—
|
|
10-year U.S. Treasury note futures
|
|
|
219
|
|
|
|
—
|
|
|
|
219
|
|
|
|
—
|
|
|
|
(219
|
)
|
|
|
—
|
|
TBA commitments
|
|
|
2,088
|
|
|
|
—
|
|
|
|
2,088
|
|
|
|
—
|
|
|
|
(2,088
|
)
|
|
|
—
|
|
Total derivative instruments
|
|
|
3,431
|
|
|
|
—
|
|
|
|
3,431
|
|
|
|
(91
|
)
|
|
|
(3,340
|
)
|
|
|
—
|
|
Repurchase agreements
|
|
|
4,092,251
|
|
|
|
—
|
|
|
|
4,092,251
|
|
|
|
(4,092,251
|
)
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
4,095,682
|
|
|
$
|
—
|
|
|
$
|
4,095,682
|
|
|
$
|
(4,092,342
|
)
|
|
$
|
(3,340
|
)
|
|
$
|
—
|
|
15
|
|
As of December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA commitments
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
763
|
|
Total derivative instruments
|
|
|
763
|
|
|
|
—
|
|
|
|
763
|
|
|
|
—
|
|
|
|
—
|
|
|
|
763
|
|
Total assets
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
763
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3,338
|
|
|
$
|
—
|
|
|
$
|
3,338
|
|
|
$
|
—
|
|
|
$
|
(3,338
|
)
|
|
$
|
—
|
|
U.S. Treasury note futures
|
|
|
1,341
|
|
|
|
—
|
|
|
|
1,341
|
|
|
|
—
|
|
|
|
(1,341
|
)
|
|
|
—
|
|
TBA commitments
|
|
|
154
|
|
|
|
—
|
|
|
|
154
|
|
|
|
—
|
|
|
|
(154
|
)
|
|
|
—
|
|
Total derivative instruments
|
|
|
4,833
|
|
|
|
—
|
|
|
|
4,833
|
|
|
|
—
|
|
|
|
(4,833
|
)
|
|
|
—
|
|
Repurchase agreements
|
|
|
3,667,181
|
|
|
|
—
|
|
|
|
3,667,181
|
|
|
|
(3,667,181
|
)
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
$
|
3,672,014
|
|
|
$
|
—
|
|
|
$
|
3,672,014
|
|
|
$
|
(3,667,181
|
)
|
|
$
|
(4,833
|
)
|
|
$
|
—
|
|
(1)
|
Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.
|
(2)
|
Does not include the amount of cash collateral pledged in respect of derivative instruments that exceeds the associated derivative liability presented in the consolidated balance sheets.
|
Note 7. 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.
|
16
The Company measures the fair value of the following assets and liabilities:
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 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.
Derivative instruments
Exchange-traded derivative instruments
- Exchange-traded derivative instruments, which include 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 LIBOR 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 rate 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 contract under measurement.
Other
Long-term unsecured debt
- As of September 30, 2018 and December 31, 2017, the carrying value of the Company’s long-term unsecured debt was $74,048 and $73,880, 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 $69,740 and $70,314 as of September 30, 2018 and December 31, 2017, 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 non-public companies and investment funds
– As of September 30, 2018, the Company had investment in equity securities and investment funds measured at fair value of $6,133, which is included in the line item “other assets” in the accompanying consolidated balance sheets.
ASU No. 2016-01, effective January 1, 2018, requires entities to measure investments in equity securities at fair value, unless fair value measurement is impractical, with changes in fair value recognized in current period earnings. Upon the adoption of ASU No. 2016-01, the Company recognized a cumulative-effect increase of $4,059 (net of taxes) in stockholders’ equity representing, as of January 1, 2018, the excess of fair value over historical cost of its investments in equity securities that were previously carried at their historical cost (net of impairments).
As of December 31, 2017, the Company had investments in equity securities and investment funds with a carrying amount of $1,675, which are included in the line item “other assets” in the accompanying consolidated balance sheets. As of December 31, 2017, $439 of these investments represented 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 remaining $1,236 in investments in equity securities of non-public companies and investment funds as of December 31, 2017 were measured at cost, net of impairments. The Company’s estimate of the total fair value of investments in equity securities and investment funds was $5,801 as of December 31, 2017.
17
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 and investment funds are not readily determinable. Accordingly, for its inves
tments in equity securities, the Company estimates fair value by estimating the enterprise value of the investee
which it then
“
waterfalls
”
over 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 of recent investments in, or tender offers for, the equity securities of the investee
, a discounted cash flow ana
lysis and a comparable guideline public company valuation
.
The primary unobservable input
s
used in estimating the fair value of an equity security of a non-public company
include
a discount factor
, representing a discount
for lack of marketability and cont
rol
,
applied to the fair value of the entity’s net assets
and a
cost of equity
discount rate,
used to discount to present value the equity cash flows available for distribution and the terminal value of the entity
. As of
September 30, 2018
,
the discount factor for lack of marketability and control and the cost of equity discount rate used as inputs were
8
percent and 12 percent, respectively. As of
December 31, 2017, the discount factor for lack of marketability and control
was
estimated to b
e
20 percent.
For its investments in investment funds, the Company estimates fair value based upon the investee’s net asset value per share.
Financial assets and liabilities for which carrying value approximates fair value
- Cash and cash equivalents, deposits, receivables, repurchase agreements, payables, and other assets and liabilities are 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, 2018 and December 31, 2017. 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, 2018
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
$
|
4,399,466
|
|
|
$
|
—
|
|
|
$
|
4,399,466
|
|
|
$
|
—
|
|
Private-label MBS
|
|
|
37
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37
|
|
Total MBS
|
|
|
4,399,503
|
|
|
|
—
|
|
|
|
4,399,466
|
|
|
|
37
|
|
Derivative assets
|
|
|
91
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
Derivative liabilities
|
|
|
(3,431
|
)
|
|
|
(219
|
)
|
|
|
(3,212
|
)
|
|
|
—
|
|
Other assets
|
|
|
6,133
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,133
|
|
Total
|
|
$
|
4,402,296
|
|
|
$
|
(219
|
)
|
|
$
|
4,396,345
|
|
|
$
|
6,170
|
|
|
|
December 31, 2017
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
MBS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency MBS
|
|
$
|
4,054,424
|
|
|
$
|
—
|
|
|
$
|
4,054,424
|
|
|
$
|
—
|
|
Private-label MBS
|
|
|
76
|
|
|
|
—
|
|
|
|
—
|
|
|
|
76
|
|
Total MBS
|
|
|
4,054,500
|
|
|
|
—
|
|
|
|
4,054,424
|
|
|
|
76
|
|
Derivative assets
|
|
|
763
|
|
|
|
—
|
|
|
|
763
|
|
|
|
—
|
|
Derivative liabilities
|
|
|
(4,833
|
)
|
|
|
(1,341
|
)
|
|
|
(3,492
|
)
|
|
|
—
|
|
Other assets
|
|
|
439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
439
|
|
Total
|
|
$
|
4,050,869
|
|
|
$
|
(1,341
|
)
|
|
$
|
4,051,695
|
|
|
$
|
515
|
|
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, 2018 or the year ended December 31, 2017.
18
Level 3 Financial Assets and Liabilities
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 investments that are measured at fair value on a recurring basis for the periods indicated:
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
$
|
6,235
|
|
|
$
|
618
|
|
|
$
|
515
|
|
|
$
|
1,799
|
|
Addition of certain investments in equity securities as of
January 1, 2018
|
|
—
|
|
|
|
—
|
|
|
|
5,362
|
|
|
|
—
|
|
Included in investment gain (loss), net
|
|
(21
|
)
|
|
|
(116
|
)
|
|
|
343
|
|
|
|
(55
|
)
|
Purchases
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sales
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,268
|
)
|
Payments, net
|
|
(46
|
)
|
|
|
(6
|
)
|
|
|
(66
|
)
|
|
|
(60
|
)
|
Accretion of discount
|
|
2
|
|
|
|
2
|
|
|
|
16
|
|
|
|
82
|
|
Ending balance
|
$
|
6,170
|
|
|
$
|
498
|
|
|
$
|
6,170
|
|
|
$
|
498
|
|
Net unrealized gains (losses) included in earnings for the
period for Level 3 assets still held at the reporting date
|
$
|
(21
|
)
|
|
$
|
(116
|
)
|
|
$
|
343
|
|
|
$
|
(113
|
)
|
Note 8. Income Taxes
Arlington Asset is subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended (the “Code”). As of September 30, 2018, the Company had estimated net operating loss (“NOL”) carryforwards of $27,988 that can be used to offset future taxable ordinary income. The Company’s NOL carryforwards begin to expire in 2027. As of September 30, 2018, the Company had estimated net capital loss (“NCL”) carryforwards of $390,923 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $136,840 in 2019, $102,927 in 2020, $70,319 in 2021, $3,763 in 2022 and $77,074 in 2023.
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 carryforwards and NCL carryforwards.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act, which provides for substantial changes to the federal taxation of individuals and corporations with an effective date of January 1, 2018. For corporate taxpayers, the federal income tax rate was lowered from 35.0% to 21.0%. The effects of changes in tax laws and rates on deferred tax assets and liabilities are required to be recognized in the period in which the legislation is enacted as a discrete item within the income tax provision. Accordingly, the Company recorded the effect of the decrease in the federal tax rate on the Company’s deferred tax assets and liabilities as of December 31, 2017.
Through December 31, 2017, the Company was subject to federal alternative minimum tax (“AMT”) on its taxable income and gains that are not offset by its NOL and NCL carryforwards with any AMT credit carryforwards available to offset future regular tax liabilities. As part of the Tax Cuts and Jobs Act, the corporate AMT is repealed for tax years beginning after December 31, 2017 with any AMT credit carryforward after that date continuing to be available to offset a taxpayer’s future regular tax liability. In addition, for tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryforwards exceed the regular tax liability, 50% of the excess AMT credit carryforwards would be refundable in that year with any remaining AMT credit carryforwards fully refundable in 2021. As a result, the realizability of the Company’s AMT credit carryforward is now certain and will now be realized as either a cash refund or as an offset to future regular tax liabilities or a combination of both. Accordingly, the Company reclassified its AMT credit carryforward from net deferred tax assets to a receivable as of December 31, 2017. As of September 30, 2018 and December 31, 2017, the Company had AMT credit carryforwards of $9,132 and $9,133, respectively, included in other assets on the accompanying consolidated balance sheets.
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.
19
A
s of
September 30, 2018
and December 31, 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 N
CL carryforwards and temporary GAAP to tax differences that are expected to result in capital losses in future periods. As of
September 30, 2018
and December 31, 2017
, the Company determined that it should not record any valuation allowance against its de
ferred tax assets that are ordinary in nature, which consists of its NOL carryforwards and temporary GAAP to tax differences that are expected to result in deductions from ordinary income in future periods.
For the
three and nine months ended September 30
, 2018
, the Company recorded
a
n
increase
to its valuation allowance of $
8,503
and $
40,833
, respectively
.
Deferred tax assets and liabilities consisted of the following as of the dates indicated:
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Ordinary deferred tax assets:
|
|
|
|
|
|
|
|
NOL carryforward
|
$
|
7,204
|
|
|
$
|
15,619
|
|
Deferred net loss on designated hedges
|
|
—
|
|
|
|
4,381
|
|
Stock-based compensation
|
|
1,726
|
|
|
|
1,999
|
|
Other, net
|
|
86
|
|
|
|
19
|
|
Total ordinary deferred tax assets
|
|
9,016
|
|
|
|
22,018
|
|
Ordinary deferred tax liabilities:
|
|
|
|
|
|
|
|
Deferred net gain on designated hedges
|
|
(4,443
|
)
|
|
|
—
|
|
Net unrealized gain on designated hedges
|
|
(38,212
|
)
|
|
|
(21,218
|
)
|
Total ordinary deferred tax liabilities
|
|
(42,655
|
)
|
|
|
(21,218
|
)
|
Ordinary deferred tax (liabilities) assets, net
|
|
(33,639
|
)
|
|
|
800
|
|
|
|
|
|
|
|
|
|
Capital deferred tax assets:
|
|
|
|
|
|
|
|
NCL carryforward
|
|
100,624
|
|
|
|
80,895
|
|
Net unrealized loss on investments
|
|
44,535
|
|
|
|
23,431
|
|
Valuation allowance
|
|
(145,159
|
)
|
|
|
(104,326
|
)
|
Total capital deferred tax assets, net
|
|
—
|
|
|
|
—
|
|
Total deferred tax (liabilities) assets, net
|
$
|
(33,639
|
)
|
|
$
|
800
|
|
The Company expects to fully utilize its net operating loss carryforward during 2019, although changes to the composition and size of the portfolio and actual higher or lower than expected future taxable income could change that estimate. As a result, the Company is currently evaluating possible long-term tax structures, including potentially electing to be taxed as a real estate investment trust (“REIT”) as early as January 1, 2019. However, there is no certainty as to the timing of a REIT election or whether the Company will make a REIT election at all. If the Company were to elect to be taxed as a REIT, it would require, among other things, approval from its board of directors and certain changes to its organization documents. The Company does not anticipate that significant modifications to its investment portfolio or operations would be required to qualify as a REIT. If or when the Company determines that it is prepared to qualify as a REIT in all material respects and it commits itself to a REIT election, the Company expects that its deferred tax assets and liabilities would be derecognized from its consolidated balance sheets with a corresponding impact to its consolidated statements of comprehensive income.
On May 30, 2018, the Company received an assessment of $9,380 from Arlington County, Virginia for a business, professional and occupation license (“BPOL”) tax for calendar year 2017. The BPOL tax is a local privilege tax on a business’ gross receipts for conducting business activities subject to licensure within Arlington County. The Company has not been assessed or paid any such BPOL tax prior to calendar year 2017. The Company does not believe it is subject to the BPOL tax. During the second quarter of 2018, the Company filed an administrative appeal with Arlington County. During the third quarter of 2018, Arlington County denied the Company’s administrative appeal and, subsequently, the Company filed an administrative appeal with the Tax Commissioner of Virginia. The Company intends to fully contest the assessment. As of September 30, 2018, the Company does not believe that it is probable that is has incurred a BPOL tax liability.
20
Note
9
. 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 and performance share units. The following tables present 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)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic weighted-average common shares outstanding
|
|
29,382
|
|
|
|
26,377
|
|
|
|
28,601
|
|
|
|
24,793
|
|
Performance share units and unvested restricted stock
|
|
—
|
|
|
|
479
|
|
|
|
—
|
|
|
|
350
|
|
Diluted weighted-average common shares outstanding
|
|
29,382
|
|
|
|
26,856
|
|
|
|
28,601
|
|
|
|
25,143
|
|
Net (loss) income (attributable) available to common stock
|
$
|
(5,652
|
)
|
|
$
|
22,785
|
|
|
$
|
(65,929
|
)
|
|
$
|
10,076
|
|
Basic (loss) earnings per common share
|
$
|
(0.19
|
)
|
|
$
|
0.86
|
|
|
$
|
(2.31
|
)
|
|
$
|
0.41
|
|
Diluted (loss) earnings per common share
|
$
|
(0.19
|
)
|
|
$
|
0.85
|
|
|
$
|
(2.31
|
)
|
|
$
|
0.40
|
|
The diluted loss per share for the three and nine months ended September 30, 2018 did not include the antidilutive effect of 335,491 and 273,979 shares of unvested shares of restricted stock and performance share units, respectively.
Note 10. 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 per share, and 100,000,000 shares of Class B common stock, par value $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 year ended December 31, 2017, holders of the Company's Class B common stock converted an aggregate of 20,256 shares of Class B common stock into 20,256 shares of Class A common stock. As of December 31, 2017, all remaining shares of Class B common stock had been exchanged for shares of the Company’s Class A common stock.
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 declared and paid the following dividends on its common stock to date in 2018:
Quarter Ended
|
|
Dividend
Amount
|
|
|
Declaration Date
|
|
Record Date
|
|
Pay Date
|
September 30
|
|
$
|
0.375
|
|
|
September 13
|
|
September 28
|
|
October 31
|
June 30
|
|
|
0.375
|
|
|
June 14
|
|
June 29
|
|
July 31
|
March 31
|
|
|
0.550
|
|
|
March 15
|
|
March 29
|
|
April 30
|
The Board of Directors approved and the Company declared and paid the following dividends for 2017:
Quarter Ended
|
|
Dividend
Amount
|
|
|
Declaration Date
|
|
Record Date
|
|
Pay Date
|
December 31
|
|
$
|
0.550
|
|
|
December 14
|
|
December 29
|
|
January 31, 2018
|
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
|
21
Common Equity Distribution Agreements
On May 24, 2013, the Company entered into separate common equity distribution agreements (the “Prior Equity Distribution Agreements”) with equity sales agents RBC Capital Markets, LLC, JMP Securities LLC, Ladenburg Thalmann & Co. Inc. and MLV & Co. LLC pursuant to which the Company may offer and sell, from time to time, up to 1,750,000 shares of the Company’s Class A common stock. On February 23, 2017, the Company terminated the Prior Equity Distribution Agreements. On February 22, 2017, the Company entered into new separate common equity distribution agreements (the “New Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. 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. On August 10, 2018, the Company entered into separate amendments to the New Equity Distribution Agreements (the “Amended New Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, B. Riley FBR, Inc. (formerly, FBR Capital Markets & Co.), JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 12,597,423 shares of the Company’s Class A common stock.
Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the 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 the issuances of common stock under the equity distribution agreements for the periods indicated:
Class A Common Stock Issuances
|
|
Nine Months Ended September 30, 2018
|
|
|
Year Ended
December 31, 2017
|
|
Shares issued
|
|
|
2,074,205
|
|
|
|
4,472,083
|
|
Weighted average public offering price
|
|
$
|
10.33
|
|
|
$
|
13.88
|
|
Net proceeds
(1)
|
|
$
|
21,065
|
|
|
$
|
61,213
|
|
|
(1)
|
Net of selling commissions and expenses.
|
As of September 30, 2018, the Company had 11,837,443 shares of Class A common stock available for sale under the Amended New Equity Distribution Agreements.
Common Share Repurchase Program
The Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2,000,000 shares of Class A common stock (the “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 repurchased by the Company under the Repurchase Program during the three and nine months ended September 30, 2018 and the year ended December 31, 2017. As of September 30, 2018, there remain available for repurchase 1,951,305 shares of Class A common stock under the Repurchase Program.
Preferred Stock
The Company has authorized preferred 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 $0.01 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 an initial 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.”
22
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
c
ommon 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
the Company’s
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.
W
e ha
ve
declared and paid all required quarterly dividends on
the Company’s
Series B Preferred Stock
to date in 2018
.
Preferred Equity Distribution Agreements
On May 16, 2017, 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 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 the issuances of preferred stock under the Series B Preferred Equity Distribution Agreement for the periods indicated:
Series B Preferred Stock Issuances
|
|
Nine Months Ended September 30, 2018
|
|
|
Year Ended
December 31, 2017
|
|
Shares issued
|
|
|
42,865
|
|
|
|
168,291
|
|
Weighted average public offering price
|
|
$
|
24.78
|
|
|
$
|
24.95
|
|
Net proceeds
(1)
|
|
$
|
1,030
|
|
|
$
|
4,090
|
|
|
(1)
|
Net of selling commissions and expenses.
|
As of September 30, 2018, the Company had 1,653,844 shares of Series B Preferred stock available for sale under the Series B 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.
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% 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 carryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the 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 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, and any outstanding rights will expire at the earliest of (i) June 4, 2022, (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 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, or (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.
23