PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements and Notes The company's financial statements reflect a significant strategic shift in H1 2020, with reduced assets and liabilities, and a net income of $10.2 million in Q2 2020, driven by investment gains Consolidated Financial Statements Consolidated financial statements for June 30, 2020, show significant deleveraging with an 80% asset decrease, a $10.2 million net income in Q2 2020, but an $83.9 million net loss for the six-month period Consolidated Balance Sheets (in thousands) | | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $785,800 | $4,000,114 | | Agency mortgage-backed securities | $501,582 | $3,768,496 | | Total Liabilities | $546,815 | $3,672,866 | | Repurchase agreements | $426,877 | $3,581,237 | | Total Stockholders' Equity | $238,985 | $327,248 | Consolidated Statements of Operations (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Interest Income | $3,765 | $6,582 | | Total Investment Gain (Loss), Net | $9,797 | $(26,683) | | Net Income (Loss) | $10,234 | $(23,525) | | Diluted Earnings (Loss) Per Share | $0.26 | $(0.67) | Consolidated Statements of Cash Flows (in thousands) | | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $15,978 | $18,704 | | Net Cash Provided by Investing Activities | $3,146,981 | $127,917 | | Net Cash Used in Financing Activities | $(3,168,499) | $(138,650) | | Net (Decrease) Increase in Cash | $(5,540) | $7,971 | Notes to Consolidated Financial Statements Notes detail accounting policies, the company's focus on a levered mortgage investment portfolio, REIT election intent, reduced investment securities, derivative use, and the suspension of common stock dividends in Q1 and Q2 2020 - The company focuses on acquiring and holding a levered portfolio of mortgage investments, primarily agency MBS and mortgage credit investments, and intends to elect to be taxed as a REIT for the taxable year ended December 31, 201915 Investment Securities (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Agency MBS | $501,582 | $3,768,496 | | Mortgage Credit Securities | $79,871 | $33,501 | | Loans | $69,575 | $45,000 | Financing (in thousands) | Financing Type | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Repurchase Agreements | $426,877 | $3,581,237 | | Weighted-Average Rate | 0.43% | 2.11% | | Long-Term Unsecured Debt | $74,022 | $74,328 | - For the quarters ended March 31, 2020, and June 30, 2020, the Board of Directors determined that the Company would not declare a dividend on its common stock106 - During the three and six months ended June 30, 2020, the Company repurchased 1,069,340 shares of Class A common stock for a total purchase price of $3,047 thousand112 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the strategic response to COVID-19, including reduced leverage and increased liquidity, resulting in a smaller portfolio, lower net interest income, and significant Q2 2020 investment gains Overview and Market Conditions The company, an investment firm, navigated extreme H1 2020 market volatility due to COVID-19, with Federal Reserve actions stabilizing markets and the CARES Act impacting mortgages, while managing the LIBOR transition - The global economic impact of the COVID-19 pandemic led to substantial liquidity strains and extreme market volatility, with Federal Reserve actions improving market functioning and tightening agency mortgage spreads during Q2 2020135136 - In response to the pandemic, the FOMC lowered its target federal funds rate by a total of 150 basis points to a range of 0% to 0.25% and announced large-scale asset purchases to support smooth market functioning137138 - The CARES Act instituted a foreclosure moratorium and a borrower's right to request forbearance on any federally-backed residential mortgage, including those in agency MBS145 Portfolio Overview and Results of Operations In H1 2020, the company reduced risk and leverage, shrinking its portfolio to $651 million, resulting in lower net interest income but a $9.8 million net investment gain in Q2 2020 - The company reduced its 'at risk' short term secured financing to investable capital ratio to 1.2 to 1 as of June 30, 2020, compared to 8.7 to 1 as of December 31, 2019, by selling mortgage investments and reducing repo borrowings160 Total Mortgage Investments (in thousands) | Investment Type | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Agency MBS | $501,582 | $3,768,496 | | Total Mortgage Credit Investments | $149,446 | $78,501 | | Total Mortgage Investments | $651,028 | $3,846,997 | GAAP and Non-GAAP Income Metrics (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | GAAP Net Income (Loss) Attributable to Common Stock | $9,476 | $(24,299) | | Non-GAAP Core Operating Income | $437 | $8,365 | | Non-GAAP Core Operating Income per Diluted Share | $0.01 | $0.23 | Liquidity and Capital Resources The company's liquidity strategy resulted in $100.2 million in liquid assets as of June 30, 2020, with significantly reduced repurchase agreements and ongoing access to capital markets - As of June 30, 2020, the company's liquid assets totaled $100.2 million, consisting of $14.1 million in cash and cash equivalents and $86.1 million in unencumbered agency MBS208 - The 'at risk' short-term financing to investable capital ratio was 1.2 to 1 as of June 30, 2020207 Repurchase Agreements Outstanding (in thousands) | Financing | June 30, 2020 | | :--- | :--- | | Repurchase Agreements Outstanding | $426,877 | | Weighted-Average Rate | 0.43% | | Weighted-Average Term to Maturity | 36.3 days | - As of June 30, 2020, the company had 11,302,160 shares of Class A common stock available for sale under its common equity distribution agreements and 881,965 shares available for repurchase under its repurchase program234238 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate, prepayment, spread, and credit risks, with sensitivity analysis showing a 100 basis point rate increase decreases book value by 5.26% and a 25 basis point spread widening decreases it by 2.77% Estimated Change in Book Value Per Common Share Due to Interest Rate Changes | Interest Rate Change | Estimated Change in Book Value Per Common Share | | :--- | :--- | | +100 basis points | -5.26% | | +50 basis points | -1.75% | | -50 basis points | +0.53% | | -100 basis points | +0.37% | Estimated Change in Book Value Per Common Share Due to Agency MBS Spread Changes | Agency MBS Spread Change | Estimated Change in Book Value Per Common Share | | :--- | :--- | | +25 basis points | -2.77% | | +10 basis points | -1.11% | | -10 basis points | +1.11% | | -25 basis points | +2.77% | - The company's mortgage credit investments expose it to credit risk, as they are not guaranteed by a GSE or government agency, representing the risk of not receiving full principal or interest payments due to borrower default254 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of the end of the period covered by the report266 - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2020267 PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings but reports no specific material cases expected to adversely affect its financial condition - The company is involved in civil lawsuits, legal proceedings, and arbitration matters considered to be in the ordinary course of business, with no assurance that they will not have a material adverse effect in the future269 Item 1A. Risk Factors A new risk factor addresses severe COVID-19 disruptions, potentially impacting investment values, prepayment rates, financing, personnel, and future dividend payments - A new risk factor has been added to address the severe disruptions caused by the COVID-19 pandemic, which may have a material adverse impact on the business271 - Specific COVID-19 related risks include adverse effects on the value of investments, increased refinancing and prepayment activity, disruptions in financing operations such as increased margin calls, and potential unavailability of key personnel272273274 - The Board of Directors did not declare a common stock dividend for the first and second quarters of 2020 to enhance liquidity, and future dividends are subject to uncertainty276 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,069,340 shares of Class A common stock, along with Series B and Series C Preferred Stock, during Q2 2020 Common Stock Repurchases | Period | Total Shares Purchased (Class A Common) | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2020 | — | $— | | May 2020 | 22,249 | $2.46 | | June 2020 | 1,047,091 | $2.86 | | Total Q2 2020 | 1,069,340 | $2.85 | - In June 2020, the company repurchased 10,200 shares of its Series B Preferred Stock at an average price of $16.98 per share280 - In June 2020, the company repurchased 33,100 shares of its Series C Preferred Stock at an average price of $18.95 per share281 Other Items (Defaults, Mine Safety, Other Info, Exhibits) The company reports no defaults on senior securities, mine safety is not applicable, and Item 6 lists exhibits including officer certifications - Item 3: No defaults upon senior securities were reported281 - Item 6: A comprehensive list of exhibits filed with the report is provided, including certifications by the CEO and CFO284286287
Arlington Asset Investment(AAIC) - 2020 Q2 - Quarterly Report