ARLINGTON, Va., Oct. 27, 2014 /PRNewswire/ -- Arlington
Asset Investment Corp. (NYSE: AI) (the "Company") today reported
non-GAAP core operating income of $28.7
million for the quarter ended September 30, 2014, or $1.36 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 $12.8 million
for the quarter ended September 30,
2014, or $0.61 per share
(diluted), compared to net income of $18.8
million for the quarter ended June
30, 2014, or $0.94 per share
(diluted), and net income of $3.1
million, or $0.18 per share
(diluted), for the quarter ended September
30, 2013.
"Our results reflect the positive financial dynamic taking place
in the Company through the redeployment of appreciated capital in
the private-label MBS portfolio to higher return opportunities,
paired with a reduction in the ratio of cash expenses to investable
capital," said J. Rock Tonkel, Jr.,
the Company's President and Chief Executive Officer. "While
these factors drove higher core earnings and returns during the
quarter, we also continue to be encouraged by the ongoing expansion
of our funding capacity and the resilience of our MBS portfolio
structure through market movements. We continue to maintain a
hedged portfolio structure and a highly liquid balance sheet."
Third Quarter Highlights
Net interest income for the third quarter was $30.3 million, including non-cash accretion on
private-label MBS of $1.3 million
required under GAAP. The three-month constant prepayment rate
("CPR") for the Company's agency-backed MBS as of September 30, 2014 was 7.04%. The Company's
debt to equity ratio at September 30,
2014 was approximately 4 to 1.
As of September 30, 2014, the
Company's agency-backed MBS portfolio consisted of $3.0 billion in face value with a cost basis and
a fair value of $3.2 billion.
As of September 30, 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 4.04%, a weighted average cost of
106.10, a weighted average market price of 105.87, and had a
weighted average cost of repo funding of 32 basis points. On
a mark-to-market basis, the Company had an average of $2.1 billion in Eurodollar futures associated
with the Company's agency-backed MBS portfolio starting in
March 2015 and ending in June 2019 with a rate of 2.17% and an equivalent
funding cost through September 2019
of approximately 2.05%. The Company also had $1.1 billion in notional 10-year interest rate
swap futures with a marked rate of approximately 2.65%, resulting
in a combined hedged notional amount of approximately $3.2 billion.
As of September 30, 2014, the
Company's private-label MBS portfolio consisted of $389.4 million in face value with an amortized
cost basis of $237.9 million and a
fair value of $292.8 million.
The following table presents certain statistics of the
Company's private-label MBS portfolio as of or for the quarter
ended September 30, 2014 (dollars in
millions):
|
Total
Private-Label MBS
|
|
|
Fair market
value
|
$292.8
|
Fair market value (as
a % of face value)
|
75.2%
|
Quarterly cash yield
(as a % of average fair market value, excluding GAAP non-cash
accretion)
|
7.0%
|
|
|
Quarterly unlevered
yield (GAAP, as a % of amortized cost)
|
10.6%
|
Quarterly unlevered
cash yield (as a % of average amortized cost excluding GAAP
non-cash accretion)
|
8.6%
|
Average cost (as a %
of face value)
|
53.5%
|
Weighted average
coupon
|
3.0%
|
|
|
Face value
|
$389.4
|
Amortized
cost
|
$237.9
|
Purchase
discount
|
$151.5
|
|
|
60+ days
delinquent
|
15.2%
|
Credit
enhancement
|
0.3%
|
Severity
(3-month)
|
41.5%
|
Constant prepayment
rate (3-month)
|
12.2%
|
Dividend
The Company's Board of Directors approved a $0.875 dividend for the third quarter of
2014. The dividend will be paid on October 31, 2014 to shareholders of record as of
September 29, 2014. This
represented a 13% annualized dividend yield based on the Class A
common stock closing price on the New York Stock Exchange (NYSE) of
$27.03 on October 24, 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 September 30, 2014.
The Company's non-GAAP core operating income for the three
months ended September 30, 2014 was
$28.7 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 Company's 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 Company's private-label MBS
portfolio 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 September 30, 2014 and 2013 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
|
2014
|
|
2013
Revised
|
|
2013
As Previously
Reported
|
|
GAAP net
income
|
|
$
|
12,847
|
|
|
$
|
3,093
|
|
|
$
|
3,093
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy litigation
expenses (a)
|
|
|
—
|
|
|
|
(24)
|
|
|
|
(24)
|
|
|
Non-cash income tax
provisions
|
|
|
5,114
|
|
|
|
2,170
|
|
|
|
2,170
|
|
|
Stock
compensation
|
|
|
1,524
|
|
|
|
729
|
|
|
|
729
|
|
|
Non-cash interest
income related to purchase discount
accretion (b)
|
|
|
(1,256)
|
|
|
|
(1,915)
|
|
|
|
(1,915)
|
|
|
Net realized and
unrealized loss on trading MBS and
hedge instruments
|
|
|
10,374
|
|
|
|
15,549
|
|
|
|
12,898
|
|
|
Other-than-temporary
impairment charges
|
|
|
71
|
|
|
|
380
|
|
|
|
380
|
|
|
Non-GAAP core
operating income
|
|
$
|
28,674
|
|
|
$
|
19,982
|
|
|
$
|
17,331
|
|
|
|
(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 third quarter 2014 dividend and the Class A
common stock closing price on the NYSE of $27.03 on October 24,
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 a 17% 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, the Company's
portfolio, funding capacity, liquidity, portfolio hedging,
migrating capital from the private-label MBS portfolio to the
agency-backed MBS portfolio, 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 CPR 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 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 the Company's 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
|
|
Nine Months
Ended
|
(Unaudited)
|
September
30,
|
|
September
30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
INTEREST
INCOME
|
$
33,301
|
|
$
22,995
|
|
$
87,231
|
|
$
64,468
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
Interest on
short-term debt
|
2,422
|
|
1,758
|
|
6,280
|
|
5,061
|
Interest on
long-term debt
|
554
|
|
556
|
|
1,657
|
|
1,077
|
Total interest expense
|
2,976
|
|
2,314
|
|
7,937
|
|
6,138
|
Net interest income
|
30,325
|
|
20,681
|
|
79,294
|
|
58,330
|
|
|
|
|
|
|
|
|
|
OTHER LOSS,
NET
|
|
|
|
|
|
|
|
Investment
loss, net
|
(6,978)
|
|
(11,100)
|
|
(4,979)
|
|
(35,882)
|
Other
loss
|
(4)
|
|
(3)
|
|
(11)
|
|
(11)
|
Total other loss, net
|
(6,982)
|
|
(11,103)
|
|
(4,990)
|
|
(35,893)
|
Operating income before other expenses
|
23,343
|
|
9,578
|
|
74,304
|
|
22,437
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Compensation
and benefits
|
3,995
|
|
3,042
|
|
10,141
|
|
8,034
|
Professional
services
|
290
|
|
297
|
|
1,201
|
|
1,973
|
Business
development
|
45
|
|
45
|
|
132
|
|
107
|
Occupancy and
equipment
|
107
|
|
96
|
|
326
|
|
328
|
Communications
|
47
|
|
49
|
|
146
|
|
142
|
Other
operating expenses
|
570
|
|
501
|
|
1,643
|
|
1,142
|
Total other expenses
|
5,054
|
|
4,030
|
|
13,589
|
|
11,726
|
|
|
|
|
|
|
|
|
|
Income before
income taxes
|
18,289
|
|
5,548
|
|
60,715
|
|
10,711
|
|
|
|
|
|
|
|
|
|
Income tax
provision
|
5,442
|
|
2,455
|
|
21,996
|
|
1,247
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
12,847
|
|
$
3,093
|
|
$
38,719
|
|
$
9,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per
share
|
$
0.62
|
|
$
0.19
|
|
$
2.03
|
|
$
0.60
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share
|
$
0.61
|
|
$
0.18
|
|
$
1.99
|
|
$
0.59
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding - basic (in thousands)
|
20,577
|
|
16,669
|
|
19,056
|
|
15,761
|
Weighted average
shares outstanding - diluted (in thousands)
|
21,055
|
|
16,845
|
|
19,413
|
|
15,934
|
ARLINGTON ASSET
INVESTMENT CORP.
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
(Dollars in
thousands, except per share amounts)
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
September 30,
2014
|
|
December 31,
2013
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
31,093
|
|
$
48,628
|
Receivables
|
|
|
|
|
Interest
|
|
|
9,259
|
|
5,173
|
Other
|
|
|
222
|
|
212
|
Mortgage-backed
securities, at fair value
|
|
|
|
|
Available-for-sale
|
|
292,849
|
|
341,346
|
Trading
|
|
|
3,176,135
|
|
1,576,452
|
Other
investments
|
|
1,891
|
|
2,065
|
Derivative
assets, at fair value
|
|
8,966
|
|
8,424
|
Deferred tax
assets, net
|
|
147,686
|
|
165,851
|
Deposits
|
|
|
95,216
|
|
45,504
|
Prepaid
expenses and other assets
|
|
1,379
|
|
1,311
|
Total
assets
|
|
$
3,764,696
|
|
$
2,194,966
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Repurchase
agreements
|
|
$
2,668,566
|
|
$
1,547,630
|
Interest
payable
|
|
901
|
|
774
|
Accrued
compensation and benefits
|
|
4,367
|
|
5,584
|
Dividend
payable
|
|
20,199
|
|
14,630
|
Derivative
liabilities, at fair value
|
|
67,410
|
|
33,129
|
Purchased
securities payable
|
|
263,425
|
|
-
|
Accounts
payable, accrued expenses and other liabilities
|
|
851
|
|
1,391
|
Long-term
debt
|
|
40,000
|
|
40,000
|
Total
liabilities
|
|
3,065,719
|
|
1,643,138
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Common
stock
|
|
229
|
|
166
|
Additional
paid-in capital
|
|
1,896,195
|
|
1,727,398
|
Accumulated
other comprehensive income, net of taxes
|
|
47,611
|
|
53,190
|
Accumulated
deficit
|
|
(1,245,058)
|
|
(1,228,926)
|
Total
equity
|
|
698,977
|
|
551,828
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
3,764,696
|
|
$
2,194,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value
per Share
|
|
$
30.43
|
|
$
33.10
|
|
|
|
|
|
|
Shares
Outstanding (in thousands)
|
|
22,973
|
|
16,671
|
To view the original version on PR Newswire,
visit:http://www.prnewswire.com/news-releases/arlington-asset-investment-corp-reports-third-quarter-2014-financial-results-464777479.html
SOURCE Arlington Asset Investment Corp.