ARLINGTON, Va., Oct. 26, 2011 /PRNewswire/ -- Arlington Asset
Investment Corp. (NYSE: AI) (the "Company") today reported core
operating income of $8.7 million for
the quarter ended September 30, 2011,
or $1.12 per share (diluted).
On a GAAP basis, the Company reported a net loss of
$11.6 million for the quarter ended
September 30, 2011, or $(1.50) per share (diluted), compared to net
income of $5.2 million, or
$0.65 per share (diluted), for the
quarter ended September 30, 2010.
The Company has hedged substantially all of its agency-backed
mortgage-backed securities ("MBS") primarily using Eurodollar
futures. While the Company's hedge and portfolio are structured to
protect MBS portfolio returns over time, unrealized mark-to-market
gains or losses may result from volatility or uncertainty in the
economy and/or the capital markets. In the third quarter, decreases
in interest rates relative to our hedge cost combined with
increases in market based spreads for our agency-backed MBS
resulted in unrealized losses for the quarter which are reflected
in the Company's GAAP book value per share of $23.93 as of September 30,
2011. The Company's book value per share excluding these net
non-cash, mark-to-market charges related to our agency-backed MBS
and hedge positions was $28.25 as of
September 30, 2011.
"With mortgage rates at historically low levels, spreads on
agency MBS continue to be wide and attractive by historical
standards. Substantially all of the Company's agency MBS
benefit from prepayment protection that has resulted in a low
constant prepayment rate. At the same time, low long-term
interest rates offer exceptionally low hedging costs that can be
extended for five years or more," said J.
Rock Tonkel, Jr., President and Chief Operating Officer.
"Consequently, the Company believes that risk adjusted
returns currently available in agency MBS investments continue to
be among the highest observed on a historical basis, and as market
conditions permit, we intend to reallocate additional capital to
our agency-backed MBS portfolio over time."
Third Quarter Highlights
During the third quarter, net interest income was $12.4 million, a decrease of $0.3 million from the second quarter of 2011.
The yield on the agency-backed MBS portfolio was 4.49% for
the third quarter, and the yield on the private-label MBS portfolio
was 16.48% for the third quarter. Net realized gains from
sales of MBS during the third quarter of $1.0 million were recorded from the sale of
$7.5 million of face value in
private-label MBS.
As of September 30, 2011, the
Company's agency-backed MBS consisted of $621.6 million in face value with a cost basis of
$637.3 million and was fair valued at
$665.5 million. Substantially
all of the Company's agency-backed MBS were fixed-rate 30-year MBS
with low prepayment characteristics, a weighted average coupon of
4.61%, a weighted average cost of 102.5, and a weighted average
cost of funding of 29 basis points at September 30, 2011. The three-month
constant prepayment rate (CPR) for the Company's agency-backed MBS
as of September 30, 2011 was 5%.
The Company's debt to equity ratio at September 30, 2011 was 3.6 to 1.
The Company's private-label MBS portfolio consisted of
$281.0 million in face value with an
amortized cost basis of $140.1
million and fair value of $183.3
million. The following table presents certain statistics of
our private-label MBS portfolio as of and for the quarter ended
September 30, 2011 (dollars in
millions):
|
|
|
Total
Private-Label MBS
|
|
|
|
|
Fair market
value
|
$183
|
|
Fair market value (as a %
of face value)
|
65.3%
|
|
|
|
|
Quarterly yield (as a % of
amortized cost)
|
16.5%
|
|
Average cost (as a % of
face value)
|
48.8%
|
|
Weighted average
coupon
|
5.4%
|
|
|
|
|
Face value
|
$281
|
|
Amortized cost
|
$140
|
|
Purchase
discount
|
$134
|
|
|
|
|
60+ delinquent
|
20.0%
|
|
Credit
enhancement
|
7.7%
|
|
Severity
(3-month)
|
47.9%
|
|
Constant prepayment rate
(3-month)
|
14.4%
|
|
|
|
|
|
The Company's Board of Directors approved a $0.875 dividend for the third quarter of 2011.
The dividend will be paid on October
31, 2011 to shareholders of record on September 30, 2011. This represented a 14%
annualized dividend yield based on the Class A common stock closing
price on the New York Stock Exchange (NYSE) of $24.69 on October 26,
2011.
(1) Non-GAAP Financial Measures
In addition to the financial results reported in accordance with
generally accepted accounting principles as consistently applied in
the United States (GAAP), the
Company has disclosed non-GAAP core operating income for the
quarter ended September 30, 2011 in
this press release. This non-GAAP measurement is used by management
to analyze and assess the Company's operating results and
dividends. Management believes that this non-GAAP measurement
assists investors in understanding the impact of these non-core
items and non-cash expenses on the performance of the Company and
provides additional clarity around the Company's forward earnings
capacity and trend.
A limitation of utilizing this non-GAAP measure is that the GAAP
accounting effects of these events do in fact reflect the
underlying financial results of the Company's business and these
effects should not be ignored in evaluating and analyzing the
Company's financial results. Therefore, management believes net
income on a GAAP basis and core operating income on a non-GAAP
basis should be considered together.
In determining core operating income, the Company has excluded
certain costs and the following non-cash expenses: (i) compensation
costs associated with stock-based awards, (ii) accretion of MBS
purchase discounts adjusted for principal repayments in excess of
proportionate invested capital, and (iii) unrealized mark-to-market
adjustments on trading MBS and hedge instruments.
The following table presents a reconciliation of the GAAP
financial results to non-GAAP measurements for the quarter ended
September 30, 2011 (dollars in
thousands):
|
|
GAAP net loss
|
$(11,643)
|
|
Adjustments
|
|
|
Adjusted
expenses(a)
|
518
|
|
Stock
compensation
|
176
|
|
Net unrealized
mark-to-market loss on trading
MBS and hedge instruments
|
20,675
|
|
Adjusted interest
related to purchase discount accretion
|
(1,048)
|
|
Non-GAAP
core operating income
|
$8,678
|
|
Non-GAAP core operating income
per share (diluted)
|
$1.12
|
|
|
|
|
(a)
Adjusted expenses represents certain professional fees and income
taxes that
are
not considered representative of routine activities of the
Company.
|
|
|
|
|
|
(2) Based on the annualized third quarter 2011 dividend and a
Class A common stock closing price on the NYSE of $24.69 on October 26,
2011.
(3) The Company's dividends are eligible for the 15%
federal income tax rate on qualified dividend income, whereas
dividends paid by a REIT are generally subject to the higher 35%
tax rate on ordinary income. To provide the same return
after payment of federal income tax as the Company, a REIT would be
required to pay dividends providing a 19% yield.
About the Company
Arlington Asset Investment Corp. (NYSE: AI) is a principal
investment firm that invests in mortgage-related and other assets.
The Company is headquartered in the Washington, D.C. metropolitan area. For
more information, please visit www.arlingtonasset.com.
Statements concerning future performance, returns, leverage,
portfolio allocation, hedges, prepayments, plans and steps to
position the Company to realize value, and any other guidance on
present or future periods, constitute forward-looking statements
that are subject to a number of factors, risks and uncertainties
that might cause actual results to differ materially from stated
expectations or current circumstances. These factors include,
but are not limited to, changes in interest rates, increased costs
of borrowing, decreased interest spreads, changes in default rates,
preservation of our net operating loss and net capital loss
carry-forwards, impacts of regulatory changes including actions
taken by the Securities and Exchange Commission, impacts of changes
to Fannie Mae and Freddie Mac, actions taken by the U.S. Federal
Reserve and the U.S. Treasury, availability of opportunities that
meet or exceed our risk adjusted return expectations, ability to
effectively migrate private-label MBS into agency-backed MBS,
ability to realize a higher return on capital migrated to
agency-backed MBS, ability and willingness to make future
dividends, the failure of sovereign or municipal entities to meet
their debt obligations or a downgrade in the credit rating of such
debt obligations, ability to generate sufficient cash through
retained earnings to satisfy capital needs, changes in and the
effects on the Company of mortgage prepayment speeds, ability to
realize book value growth through reflation of private-label MBS,
the realization of gains and losses on principal investments,
available technologies, competition for business and personnel, and
general economic, political, regulatory and market conditions.
These and other risks are described in the Company's Annual
Report on Form 10-K and Quarterly Reports on Form 10-Q that are
available from the Company and from the SEC, and you should read
and understand these risks when evaluating any forward-looking
statement.
Financial data follows
|
|
ARLINGTON ASSET INVESTMENT
CORP.
|
|
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
(Dollars in thousands, except
per share data)
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
(Unaudited)
|
|
September
30,
|
|
September
30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
INTEREST INCOME
|
|
$ 13,061
|
|
$ 10,150
|
|
$ 38,818
|
|
$ 29,401
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
Interest on short-term
debt
|
|
542
|
|
178
|
|
1,336
|
|
405
|
|
Interest on long-term
debt
|
|
115
|
|
146
|
|
345
|
|
423
|
|
Total interest
expense
|
|
657
|
|
324
|
|
1,681
|
|
828
|
|
Net interest
income
|
|
12,404
|
|
9,826
|
|
37,137
|
|
28,573
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (LOSS) INCOME,
NET
|
|
|
|
|
|
|
|
|
|
Investment (loss) gain,
net
|
|
(20,195)
|
|
(2,089)
|
|
(17,455)
|
|
642
|
|
Other loss
|
|
(4)
|
|
(3)
|
|
(11)
|
|
(10)
|
|
Total other (loss)
income, net
|
|
(20,199)
|
|
(2,092)
|
|
(17,466)
|
|
632
|
|
Operating (loss)
income before other expenses
|
|
(7,795)
|
|
7,734
|
|
19,671
|
|
29,205
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
2,537
|
|
2,365
|
|
7,543
|
|
7,664
|
|
Professional
services
|
|
441
|
|
233
|
|
1,125
|
|
993
|
|
Business
development
|
|
19
|
|
19
|
|
98
|
|
58
|
|
Occupancy and
equipment
|
|
93
|
|
90
|
|
281
|
|
294
|
|
Communications
|
|
51
|
|
44
|
|
147
|
|
156
|
|
Other operating
expenses
|
|
448
|
|
387
|
|
1,168
|
|
1,684
|
|
Total other
expenses
|
|
3,589
|
|
3,138
|
|
10,362
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes
|
|
(11,384)
|
|
4,596
|
|
9,309
|
|
18,356
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
(benefit)
|
|
259
|
|
(560)
|
|
1,076
|
|
(199)
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ (11,643)
|
|
$ 5,156
|
|
$ 8,233
|
|
$ 18,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per
share
|
|
$
(1.50)
|
|
$ 0.66
|
|
$ 1.07
|
|
$ 2.39
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per
share
|
|
$
(1.50)
|
|
$ 0.65
|
|
$ 1.06
|
|
$ 2.35
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding - basic (in thousands)
|
|
7,748
|
|
7,755
|
|
7,711
|
|
7,768
|
|
Weighted average shares
outstanding - diluted (in thousands)
|
|
7,748
|
|
7,887
|
|
7,737
|
|
7,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARLINGTON ASSET INVESTMENT
CORP.
|
|
CONSOLIDATED BALANCE
SHEETS
|
|
(Dollars in thousands, except
per share amounts)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
September
30, 2011
|
|
December 31,
2010
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
20,295
|
|
$
12,412
|
|
Receivables
|
|
|
|
|
|
Interest
|
|
3,648
|
|
2,345
|
|
Other
|
|
404
|
|
219
|
|
Mortgage-backed securities, at
fair value
|
|
|
|
|
|
Available-for-sale
|
|
183,509
|
|
252,909
|
|
Trading
|
|
665,337
|
|
174,055
|
|
Other investments
|
|
3,195
|
|
8,287
|
|
Derivative assets, at fair
value
|
|
246
|
|
-
|
|
Deposits
|
|
71,305
|
|
4,748
|
|
Prepaid expenses and other
assets
|
|
739
|
|
358
|
|
Total
assets
|
|
$
948,678
|
|
$
455,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Repurchase agreements
|
|
$
655,987
|
|
$
190,220
|
|
Interest payable
|
|
283
|
|
187
|
|
Accrued compensation and
benefits
|
|
7,288
|
|
7,201
|
|
Dividend payable
|
|
6,788
|
|
4,655
|
|
Derivative liabilities, at fair
value
|
|
61,845
|
|
2,398
|
|
Purchased securities
payable
|
|
-
|
|
2,555
|
|
Accounts payable, accrued
expenses and other liabilities
|
|
16,048
|
|
16,373
|
|
Long-term debt
|
|
15,000
|
|
15,000
|
|
Total
liabilities
|
|
763,239
|
|
238,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Common stock
|
|
77
|
|
77
|
|
Additional paid-in
capital
|
|
1,506,050
|
|
1,505,971
|
|
Accumulated other comprehensive
income, net of taxes
|
|
43,252
|
|
63,495
|
|
Accumulated deficit
|
|
(1,363,940)
|
|
(1,352,799)
|
|
Total equity
|
|
185,439
|
|
216,744
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
948,678
|
|
$
455,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value per
Share
|
|
$
23.93
|
|
$
28.46
|
|
|
|
|
|
|
|
Shares Outstanding (in
thousands)
|
|
7,748
|
|
7,617
|
|
|
|
|
|
|
|
|
SOURCE Arlington Asset Investment Corp.