ARLINGTON, Va., April 28, 2014 /PRNewswire/ -- Arlington
Asset Investment Corp. (NYSE: AI) (the "Company") today reported
non-GAAP core operating income of $20.1
million for the quarter ended March
31, 2014, or $1.18 per share
(diluted). A reconciliation of non-GAAP core operating income
to GAAP net income appears at the end of this press release.
On a GAAP basis, the Company reported net income of $7.0 million for the quarter ended March 31, 2014, or $0.41 per share (diluted), compared to net income
of $40.0 million for the quarter
ended December 31, 2013, or
$2.36 per share (diluted), and net
income of $3.2 million, or
$0.23 per share (diluted), for the
quarter ended March 31,
2013.
"Arlington continues to benefit
from its hybrid portfolio structure, earning competitive returns on
its hedged, agency-backed MBS portfolio and simultaneously
experiencing capital appreciation in its private-label MBS
portfolio. The Company's capital raise during the quarter was
accretive to investable book value and will positively impact
future cash earnings while further reducing the Company's expense
to capital ratio, boosting return on equity, and efficiently
utilizing tax benefits. These positive trends should continue
as the Company completes the full deployment of capital from the
offering and shifts capital from its maturing private-label MBS
portfolio into its higher current cash returning hedged
agency-backed MBS portfolio," said J. Rock
Tonkel, Jr., the Company's President and Chief Operating
Officer.
First Quarter Highlights
Net interest income for the first quarter was $21.6 million, including non-cash accretion on
private-label mortgage-backed securities ("MBS") of $2.4 million required under GAAP. The
three-month constant prepayment rate ("CPR") for the Company's
agency-backed MBS as of March 31,
2014 was 6.00%. The Company's debt to equity ratio at
March 31, 2014 was approximately 3 to
1.
As of March 31, 2014, the
Company's agency-backed MBS portfolio consisted of $1.9 billion in face value with a cost basis and
a fair value of $2.0 billion.
As of March 31, 2014, all of the
Company's agency-backed MBS were fixed-rate 30-year MBS
specifically selected for their prepayment protections with a
weighted average coupon of 4.06%, a weighted average cost of
106.82, a weighted average market price of 104.38, and had a
weighted average cost of repo funding of 34 basis points. On
a mark-to-market basis, the Company had an average of $1.1 billion in Eurodollar futures associated
with the agency-backed MBS portfolio starting in March 2015 and ending in December 2018 with a rate of 2.27% and an
equivalent funding cost through December
2018 of approximately 1.73%. The Company also had
$625 million in notional 10-year
interest rate swap futures with a marked rate of approximately
2.87%, resulting in a combined hedged notional amount of
approximately $1.7 billion.
During April 2014, the Company
purchased or has pending purchases for approximately $500 million in face value of additional
agency-backed MBS, which it expects to hedge similarly to its
existing agency-backed MBS portfolio.
As of March 31, 2014, the
Company's private-label MBS portfolio consisted of $458.6 million in face value with an amortized
cost basis of $270.1 million and a
fair value of $329.8 million.
The following table presents certain statistics of the
Company's private-label MBS portfolio as of or for the quarter
ended March 31, 2014 (dollars in
millions):
|
Total
Private-
Label
MBS
|
|
|
Fair market
value
|
$329.8
|
Fair market value (as
a % of face value)
|
71.9%
|
Quarterly cash yield
(as a % of average fair market value, excluding GAAP non-cash
accretion)
|
5.6%
|
|
|
Quarterly unlevered
yield (GAAP, as a % of amortized cost)
|
10.2%
|
Quarterly unlevered
cash yield (as a % of average amortized cost excluding GAAP
non-cash accretion)
|
6.7%
|
Average cost (as a %
of face value)
|
54.0%
|
Weighted average
coupon
|
3.1%
|
|
|
Face value
|
$458.6
|
Amortized
cost
|
$270.1
|
Purchase
discount
|
$188.5
|
|
|
60+ days
delinquent
|
15.0%
|
Credit
enhancement
|
0.3%
|
Severity
(3-month)
|
32.6%
|
Constant prepayment
rate (3-month)
|
9.7%
|
The Company has chosen to modify non-GAAP core operating income
to better reflect the attributes of its business. As a
result, the Company excludes both the realized and unrealized
fluctuations in the gains and losses in the assets and hedges on
its hedged, agency-backed MBS portfolio when assessing the
underlying non-GAAP core operating income of the Company.
This will result in presenting cash spread income for the Company's
agency-backed MBS portfolio in non-GAAP core operating income
whereas realized and unrealized gains and losses on assets and
hedges for the agency-backed MBS portfolio will continue to be
included as components in the changes in book value and in the GAAP
net income of the Company. See below for the discussion and detail
of non-GAAP core operating income.
Dividend
The Company's Board of Directors approved a $0.875 dividend for the first quarter of
2014. The dividend will be paid on April 30, 2014 to shareholders of record as of
March 31, 2014. This
represented a 14% annualized dividend yield based on the Class A
common stock closing price on the New York Stock Exchange (NYSE) of
$25.55 on April 28, 2014.
(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 calculated non-GAAP core operating income for the three
months ended March 31, 2014.
The Company's non-GAAP core operating income for the three
months ended March 31, 2014 was
$20.1 million. In determining core
operating income, the Company excluded certain legacy litigation
expenses and the following non-cash expenses: (1) compensation
costs associated with stock-based awards, (2) accretion of MBS
purchase discounts adjusted for contractual interest and principal
repayments in excess of proportionate invested capital, (3)
other-than-temporary impairment charges recognized, (4) non-cash
income tax provisions, and (5) benefit from the reversal of
previously accrued federal and state tax liability and accrued
interest related to uncertain tax positions. Additionally, starting
in 2014, the Company has excluded both realized and unrealized
gains and losses on the agency-backed MBS and all related hedge
instruments, and has presented prior periods on a consistent basis.
These adjustments are only for the purpose of calculating the
Company's non-GAAP core operating income; therefore, they do not
change the Company's GAAP book value as reported.
The Company's portfolio strategy on the agency-backed MBS
portfolio is to generate a net interest margin on the leveraged
assets and hedge the market value of the assets, expecting that the
fluctuations in the market value of the agency-backed MBS and
related hedges should largely offset each other over time. As a
result, the Company excludes both the realized and unrealized
fluctuations in the gains and losses in the assets and hedges on
its hedged, agency-backed MBS portfolio when assessing the
underlying core operating income of the Company. However, the
Company's portfolio strategy on the private-label MBS is to
generate a total cash return comprised of both interest income and
the cash return realized when the private-label MBS are sold that
equals the difference between the sale price and the discount to
par paid at acquisition. Therefore, the Company excludes non-cash
accretion of private-label MBS purchase discounts from non-GAAP
core operating income, but includes realized cash gains or losses
on its private-label MBS portfolio in core operating income to
reflect the total cash return on those securities over their
holding period.
This non-GAAP core operating income measurement is used by
management to analyze and assess the Company's operating results on
its portfolio and assist with the determination of the appropriate
level of dividends. The Company believes that this non-GAAP
measurement assists investors in understanding the impact of these
non-core items and non-cash expenses on our performance and
provides additional clarity around our earnings capacity and
trends. 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 our business and these effects
should not be ignored in evaluating and analyzing our financial
results. Therefore, the Company believes net income on a GAAP basis
and core operating income on a non-GAAP basis should be considered
together.
The following is a reconciliation of GAAP net income to non-GAAP
core operating income for the three months ended March 31, 2014 and 2013 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2014
|
|
2013
Revised
|
|
2013
As Previously
Reported
|
|
GAAP net
income
|
|
$
|
7,033
|
|
|
$
|
3,177
|
|
|
$
|
3,177
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy litigation
expenses (a)
|
|
|
11
|
|
|
|
504
|
|
|
|
504
|
|
|
Stock
compensation
|
|
|
677
|
|
|
|
495
|
|
|
|
495
|
|
|
Non-cash interest
income related to purchase discount accretion
(b)
|
|
|
(2,443)
|
|
|
|
(712)
|
|
|
|
(712)
|
|
|
Net realized and
unrealized loss on trading MBS and
hedge
instruments
|
|
|
10,633
|
|
|
|
14,784
|
|
|
|
14,738
|
|
|
Benefit from the
reversal of federal tax liability and accrued interest
related to
uncertain tax position
|
|
|
—
|
|
|
|
(3,744)
|
|
|
|
(3,744)
|
|
|
Other-than-temporary
impairment charges
|
|
|
—
|
|
|
|
162
|
|
|
|
162
|
|
|
Non-cash income tax
provisions
|
|
|
4,203
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-GAAP core
operating income
|
|
$
|
20,114
|
|
|
$
|
14,666
|
|
|
$
|
14,620
|
|
|
|
|
(a) Legacy litigation
expenses relate to legal matters pertaining to events related to
business activities the Company completed or exited in or prior to
2009 — primarily debt extinguishment, sub-prime mortgage
origination and securitization and broker/dealer
operations.
|
|
(b) Non-cash interest
income related to purchase discount accretion represents interest
income recognized in excess of cash receipts related to contractual
interest income and principal repayments in excess of proportionate
invested capital.
|
|
(2) Based on the annualized first quarter 2014 dividend
and the Class A common stock closing price on the NYSE of
$25.55 on April 28, 2014.
(3) The Company's dividends are eligible for the 23.8%
federal income tax rate on qualified dividend income, whereas
dividends paid by a REIT are generally subject to the higher 43.4%
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 an 18% yield.
About the Company
Arlington Asset Investment Corp. (NYSE: AI) is a principal
investment firm that currently invests primarily 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, portfolio hedging,
market conditions, cash returns and earnings, dividends, book
value, changes in the Company's expense to capital ratio, 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 political and monetary policies, changes in
default rates, changes in the constant prepayment rate for the
Company's MBS, changes in the Company's operating efficiency,
changes in the Company's returns, changes in the use of the
Company's tax benefits, maintenance of the Company's low leverage
posture, changes in the agency-backed MBS asset yield, changes in
the Company's monetization of net operating loss carry-forwards,
changes in the Company's ability to generate consistent cash
earnings and dividends, preservation and utilization of our net
operating loss and net capital loss carry-forwards, 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 and willingness to make future dividends,
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, and general economic,
political, regulatory and market conditions. These and other
material risks are described in the Company's Annual Report on Form
10-K for the year ended December 31,
2013 and any other documents filed by the Company with the
SEC from time to time, which 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 follow
ARLINGTON ASSET
INVESTMENT CORP.
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
(Dollars in
thousands, except per share data)
|
Three Months
Ended
|
|
(Unaudited)
|
March 31,
|
|
|
|
2014
|
|
2013
|
|
INTEREST
INCOME
|
$
23,867
|
|
$
18,328
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
Interest on
short-term debt
|
1,734
|
|
1,489
|
|
Interest on
long-term debt
|
551
|
|
115
|
|
Total interest expense
|
2,285
|
|
1,604
|
|
Net interest income
|
21,582
|
|
16,724
|
|
|
|
|
|
|
|
OTHER LOSS,
NET
|
|
|
|
|
Investment
loss, net
|
(5,911)
|
|
(13,529)
|
|
Other
loss
|
(3)
|
|
(4)
|
|
Total other loss, net
|
(5,914)
|
|
(13,533)
|
|
Operating income before other expenses
|
15,668
|
|
3,191
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
Compensation
and benefits
|
2,961
|
|
2,349
|
|
Professional
services
|
516
|
|
1,121
|
|
Business
development
|
31
|
|
32
|
|
Occupancy and
equipment
|
99
|
|
121
|
|
Communications
|
47
|
|
47
|
|
Other
operating expenses
|
501
|
|
106
|
|
Total other expenses
|
4,155
|
|
3,776
|
|
|
|
|
|
|
|
Income (loss)
before income taxes
|
11,513
|
|
(585)
|
|
|
|
|
|
|
|
Income tax provision
(benefit)
|
4,480
|
|
(3,762)
|
|
|
|
|
|
|
|
Net
income
|
$
7,033
|
|
$
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
$
0.42
|
|
$
0.23
|
|
|
|
|
|
|
|
Diluted earnings
per share
|
$
0.41
|
|
$
0.23
|
|
|
|
|
|
|
|
Weighted average
shares outstanding - basic (in thousands)
|
16,808
|
|
13,927
|
|
Weighted average
shares outstanding - diluted (in thousands)
|
17,081
|
|
14,093
|
|
|
|
|
|
|
|
ARLINGTON ASSET
INVESTMENT CORP.
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
(Dollars in
thousands, except per share amounts)
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
March 31,
2014
|
|
December 31,
2013
|
|
|
|
|
|
Cash and cash
equivalents
|
$
112,292
|
|
$
48,628
|
Receivables
|
|
|
|
Interest
|
|
5,874
|
|
5,173
|
Sold
securities receivable
|
7,107
|
|
-
|
Other
|
|
15
|
|
212
|
Mortgage-backed
securities, at fair value
|
|
|
|
Available-for-sale
|
329,892
|
|
341,346
|
Trading
|
|
1,953,953
|
|
1,576,452
|
Other
investments
|
2,032
|
|
2,065
|
Derivative
assets, at fair value
|
1,746
|
|
8,424
|
Deferred tax
assets, net
|
162,483
|
|
165,851
|
Deposits
|
|
64,269
|
|
45,504
|
Prepaid
expenses and other assets
|
1,616
|
|
1,311
|
Total
assets
|
$
2,641,279
|
|
$
2,194,966
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Repurchase
agreements
|
$
1,771,522
|
|
$
1,547,630
|
Interest
payable
|
731
|
|
774
|
Accrued
compensation and benefits
|
1,229
|
|
5,584
|
Dividend
payable
|
17,312
|
|
14,630
|
Derivative
liabilities, at fair value
|
43,288
|
|
33,129
|
Purchased
securities payable
|
143,561
|
|
-
|
Accounts
payable, accrued expenses and other liabilities
|
1,889
|
|
1,391
|
Long-term
debt
|
40,000
|
|
40,000
|
Total
liabilities
|
2,019,532
|
|
1,643,138
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
Common
stock
|
197
|
|
166
|
Additional
paid-in capital
|
1,809,665
|
|
1,727,398
|
Accumulated
other comprehensive income, net of taxes
|
51,086
|
|
53,190
|
Accumulated
deficit
|
(1,239,201)
|
|
(1,228,926)
|
Total
equity
|
621,747
|
|
551,828
|
|
|
|
|
|
Total
liabilities and equity
|
$
2,641,279
|
|
$
2,194,966
|
|
|
|
|
|
|
|
|
|
|
Book Value
per Share
|
$
31.50
|
|
$
33.10
|
|
|
|
|
|
Shares
Outstanding (in thousands)
|
19,737
|
|
16,671
|
|
|
|
|
|
|
|
|
|
|
SOURCE Arlington Asset Investment Corp.