October 28, 2013 at 20:36 PM EDT
Arlington Asset Investment Corp. Reports Third Quarter 2013 Financial Results
Non-GAAP core operating income of $1.03 per share (diluted) for the third quarter 2013(1)

ARLINGTON, Va., Oct. 28, 2013 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company") today reported non-GAAP core operating income of $17.3 million for the quarter ended September 30, 2013, or $1.03 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 $3.1 million for the quarter ended September 30, 2013, or $0.18 per share (diluted), compared to net income of $3.2 million for the quarter ended June 30, 2013, or $0.19 per share (diluted), and net income of $3.1 million, or $0.31 per share (diluted), for the quarter ended September 30, 2012. 

"While interest rates and market volatility have experienced sharp swings over the last two quarters, our complementary portfolios of private-label and agency mortgage-backed securities have exhibited durable spread income as well as relatively stable book value.  Improvement in the credit performance of our private-label mortgage-backed securities portfolio accelerated during the quarter consistent with ongoing improvement in housing market conditions," said J. Rock Tonkel, Jr., the Company's President and Chief Operating Officer.  "While the political environment and market conditions remain uncertain, Arlington benefits from the protection of long duration interest rate hedges approximately equal to the market value of our agency mortgage-backed securities portfolio and the variable rate nature of our private-label mortgage-backed securities portfolio."

Third Quarter Highlights

Net interest income for the third quarter was $20.7 million, including non-cash accretion on private-label mortgage-backed securities ("MBS") of $1.9 million required under GAAP.  Net realized cash gains were $2.2 million during the quarter.  The three-month constant prepayment rate ("CPR") for the Company's agency-backed MBS as of September 30, 2013 was 9.85%.  The Company's debt to equity ratio at September 30, 2013 was approximately 3 to 1.

As of September 30, 2013, the Company's agency-backed MBS portfolio consisted of $1.6 billion in face value with a cost basis of $1.7 billion and a fair value of $1.6 billion.  As of September 30, 2013, 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 4.08%, a weighted average cost of 107.5, a weighted average market price of 105.3, and had a weighted average cost of repo funding of 37 basis points.  On a mark-to-market basis, the Company had an average of $1.0 billion in Eurodollar futures associated with the agency-backed MBS portfolio starting in December 2014 and ending in September 2018 with a rate of 2.11% and an equivalent funding cost over the next five years of approximately 1.54%.  The Company also had $640 million in notional 10-year interest rate swap futures with a marked rate of approximately 2.85% resulting in a combined hedged notional amount of approximately $1.6 billion.

As of September 30, 2013, the Company's private-label MBS portfolio consisted of $511.8 million in face value with an amortized cost basis of $287.0 million and a fair value of $344.1 million.  The following table presents certain statistics of our private-label MBS portfolio as of or for the quarter ended September 30, 2013 (dollars in millions):


Total Private-

Label MBS



Fair market value

$344.1

Fair market value (as a % of face value)

67.2%

Quarterly cash yield (as a % of average fair market value, excluding GAAP non-cash accretion)

6.2%



Quarterly unlevered yield (GAAP, as a % of amortized cost)

10.3%

Quarterly unlevered cash yield (as a % of average amortized cost excluding GAAP non-cash accretion)

7.5%

Average cost (as a % of face value)

53.4%

Weighted average coupon

3.5%



Face value

$511.8

Amortized cost

$287.0

Purchase discount

$224.8



60+ days delinquent

16.3%

Credit enhancement

0.3%

Severity (3-month)

40.7%

Constant prepayment rate (3-month)

18.3%

Dividend

The Company's Board of Directors approved a $0.875 dividend for the third quarter of 2013.  The dividend will be paid on October 31, 2013 to shareholders of record on September 30, 2013.  This represented a 14% annualized dividend yield based on the Class A common stock closing price on the New York Stock Exchange (NYSE) of $25.21 on October 28, 2013. 

(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, 2013 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 legacy litigation expenses 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, (iii) unrealized mark-to-market adjustments on the trading MBS and hedge instruments, (iv) other-than-temporary impairment charges recognized, and (v) non-cash income tax provisions.

The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements for the quarter ended September 30, 2013 (dollars in thousands):  

GAAP net income

$3,093

Adjustments


    Legacy litigation expenses(a)

(24)

    Stock compensation

729

    Non-cash interest income related to purchase discount accretion(b)

(1,915)

    Net unrealized mark-to-market loss on trading MBS and

       hedge instruments                                                                        

12,898

    Other-than-temporary impairment charges

380

    Non-cash income tax provisions

2,170

       Non-GAAP core operating income

$17,331

Non-GAAP core operating income per share (diluted)

$1.03


(a) Legacy litigation expenses relate to legal matters pertaining to events related to business activities the Company exited in 2009 – primarily sub-prime mortgage origination and broker/dealer operations.

(b) Non-cash interest income related to purchase discount accretion represents interest income from the accretion of purchase discount recognized in excess of cash receipts related to contractual interest income.

(2) Based on the annualized third quarter 2013 dividend and the Class A common stock closing price on the NYSE of $25.21 on October 28, 2013.

(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 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, market conditions, cash returns and earnings, book 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 political and monetary policies, changes in default rates, changes in the constant prepayment rate for the Company's MBS, changes in our 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, 2012, the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 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 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,



2013


2012


2013


2012

INTEREST INCOME

$                    22,995


$                    15,519


$                    64,468


$                    44,913










INTEREST EXPENSE








  Interest on short-term debt

1,758


1,125


5,061


2,811

  Interest on long-term debt

556


123


1,077


371

    Total interest expense

2,314


1,248


6,138


3,182

    Net interest income

20,681


14,271


58,330


41,731










OTHER LOSS, NET








  Investment loss, net

(11,100)


(5,663)


(35,882)


(11,532)

  Other loss

(3)


(3)


(11)


(11)

    Total other loss, net

(11,103)


(5,666)


(35,893)


(11,543)

    Operating income before other expenses

9,578


8,605


22,437


30,188










OTHER EXPENSES








  Compensation and benefits

3,042


3,519


8,034


7,580

  Professional services

297


862


1,973


3,337

  Business development 

45


39


107


111

  Occupancy and equipment 

96


110


328


355

  Communications 

49


49


142


154

  Other operating expenses 

501


453


1,142


1,351

    Total other expenses

4,030


5,032


11,726


12,888










Income before income taxes

5,548


3,573


10,711


17,300










Income tax provision

2,455


450


1,247


1,271










Net income

$                      3,093


$                      3,123


$                      9,464


$                    16,029



















Basic earnings per share

$                        0.19


$                        0.31


$                        0.60


$                        1.74










Diluted earnings per share

$                        0.18


$                        0.31


$                        0.59


$                        1.74










Weighted average shares outstanding - basic (in thousands)

16,669


9,977


15,761


9,192

Weighted average shares outstanding - diluted (in thousands)

16,845


10,041


15,934


9,219

 

ARLINGTON ASSET INVESTMENT CORP.





CONSOLIDATED BALANCE SHEETS





(Dollars in thousands, except per share amounts)





(Unaudited)

















 ASSETS 



September 30, 2013


December 31, 2012







 Cash and cash equivalents 


$                             16,347


$                             35,837

 Receivables 





   Interest 



5,271


4,869

   Sold securities receivable 


-


26,773

   Other  



461


644

 Mortgage-backed securities, at fair value 





   Available-for-sale 


344,165


199,156

   Trading 



1,633,263


1,556,440

 Other investments 


2,180


2,347

 Derivative assets, at fair value 


1,851


-

 Deferred tax assets, net 


151,255


162,281

 Deposits 



63,869


85,652

 Prepaid expenses and other assets 


1,437


159

   Total assets 


$                        2,220,099


$                        2,074,158













 LIABILITIES AND EQUITY 











 Liabilities: 





 Repurchase agreements 


$                        1,574,244


$                        1,497,191

 Interest payable 


791


582

 Accrued compensation and benefits 


4,025


1,542

 Dividend payable 


14,633


-

 Derivative liabilities, at fair value 


43,034


76,850

 Accounts payable, accrued expenses and other liabilities 


13,719


17,837

 Long-term debt 


40,000


15,000

   Total liabilities 


1,690,446


1,609,002













 Equity: 






 Common stock 


166


132

 Additional paid-in capital 


1,726,518


1,638,061

 Accumulated other comprehensive income, net of taxes 


49,378


38,985

 Accumulated deficit 


(1,246,409)


(1,212,022)

   Total equity    


529,653


465,156







   Total liabilities and equity 


$                        2,220,099


$                        2,074,158













 Book Value per Share 


$                                31.77


$                                35.24







 Shares Outstanding (in thousands) 


16,671


13,198

 

 

SOURCE Arlington Asset Investment Corp.

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