Arlington Asset Investment Corp. Reports Third Quarter 2012
Financial Results
ARLINGTON, Va., Oct. 29, 2012 /PRNewswire/ -- Arlington
Asset Investment Corp. (NYSE: AI) (the "Company") today reported
non-GAAP core operating income of $13.5
million for the quarter ended September 30, 2012, or $1.34 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,
2012, or $0.31 per share
(diluted), compared to net income of $2.1
million for the quarter ended June
30, 2012, or $0.22 per share
(diluted), and net loss of $11.6
million, or $(1.50) per share
(diluted), for the quarter ended September
30, 2011.
"Our portfolio has been resilient to the effects of QE3 with
persistent low CPRs in our agency-backed MBS portfolio and
consistent positive credit performance in private-label MBS," said
J. Rock Tonkel, Jr., President and
Chief Operating Officer. "On top of another quarter of strong
portfolio performance, the accretive offering we completed in
September increases operating efficiency, enhances the Company's
returns, accelerates the use of our tax benefits and maintains the
Company's low leverage posture."
Third Quarter Highlights
Net interest income for the quarter was $14.3 million, including non-cash accretion on
private-label mortgage backed securities ("MBS") of $1.8 million required under GAAP. Net
realized cash gains during the quarter were from sales of
agency-backed MBS and equaled $5.5
million. The three-month constant prepayment rate
("CPR") for the Company's agency-backed MBS as of September 30, 2012 was 6.4%. The Company's
debt to equity ratio at September 30,
2012 was 2.9 to 1.
As of September 30, 2012, the
Company's agency-backed MBS portfolio consisted of $1.1 billion in face value with a cost basis of
$1.2 billion and a fair value of
$1.2 billion. 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 4.20%, a weighted average cost of 106.1,
a weighted average market price of 110.3, and a weighted average
cost of repo funding of 43 basis points. On a mark-to-market
basis at September 30, 2012, the
estimated hedged cost of funds associated with the agency-backed
MBS portfolio was 0.80% on a weighted average basis over 5 years
starting in March 2013. The average balance over that period
was $826 million.
As of September 30, 2012, the
Company's private-label MBS portfolio consisted of $329.4 million in face value with an amortized
cost basis of $159.0 million and a
fair value of $196.0 million.
The following table presents certain statistics of our
private-label MBS portfolio as of or for the quarter ended
September 30, 2012 (dollars in
millions):
|
Total
Private-
Label MBS
|
|
|
Fair
market value
|
$196.0
|
Fair
market value (as a % of face value)
|
59.5%
|
Quarterly
cash yield (as a % of ending fair market value, excluding GAAP
non-cash accretion)
|
9.0%
|
|
|
Quarterly
unlevered yield (GAAP, as a % of amortized cost)
|
16.1%
|
Quarterly
unlevered cash yield (excluding GAAP non-cash accretion)
|
11.2%
|
Average
cost (as a % of face value)
|
47.8%
|
Weighted
average coupon
|
4.9%
|
|
|
Face
value
|
$329.4
|
Amortized
cost
|
$159.0
|
Purchase
discount
|
$170.4
|
|
|
60+ days
delinquent
|
18.8%
|
Credit
enhancement
|
4.1%
|
Severity
(3-month)
|
43.0%
|
Constant
prepayment rate (3-month)
|
19.7%
|
Capital Raise
On September 26, 2012, the Company
completed a public offering of 3,450,000 shares of Class A common
stock, including 450,000 shares of Class A common stock purchased
by the underwriters pursuant to an option granted by the Company to
cover over-allotments, for net proceeds of $83.2 million after deducting underwriting
discounts, commissions and estimated expenses.
The Company deployed the capital raised from the offering in a
combination of 30 year fixed-rate agency-backed MBS and
private-label MBS. As of October 29,
2012, the Company's agency-backed MBS portfolio consisted of
$1.5 billion in face value and
$1.6 billion in fair value including
forward purchases and sales, a weighted average coupon of 4.1%, and
an expected asset yield of approximately 2.90% assuming 7%
CPR. During October 2012, the
Company extended certain hedge positions such that the estimated
hedged cost of funds associated with the agency-backed MBS
portfolio was approximately 1.08% on a weighted average basis over
6 years.
Dividend
The Company's Board of Directors approved a $0.875 dividend for the third quarter of
2012. The dividend will be paid on October 31, 2012 to shareholders of record on
September 28, 2012. This
represented a 16% annualized dividend yield based on the Class A
common stock closing price on the New York Stock Exchange (NYSE) of
$21.72 on October 26, 2012.
Supplemental Discussion
The ability of the Company to allocate its capital between
private-label MBS and agency-backed MBS helped deliver another
positive quarter for the Company. Continued low prepayment
speeds in the Company's agency-backed MBS portfolio and high
unlevered cash yields from the private-label MBS portfolio were an
important contributor again this quarter. Consistent
refinement of the agency-backed MBS portfolio during the quarter to
minimize potential prepayment risk resulted in the Company
realizing net cash gains from sales of agency-backed MBS related
activities during the quarter of $5.5
million. Finally, the deployment of proceeds from our
accretive September capital raise will improve the Company's
operating efficiency and we anticipate will increase returns going
forward.
Asset selection, substantial hedging, flexibility in allocating
capital between agency-backed MBS and private-label MBS, and low
leverage have been the keys to both the attractive returns we
derive from our MBS portfolio and the best protection against
changes in prepayment spreads, interest rates and the funding
environment. In the agency-backed MBS portfolio, we have
maintained 100% concentration in prepayment protected fixed rate
assets and single digit CPRs have been the consistent result.
By comparison, the Fannie Mae 4.50% coupon universe experienced a
three-month CPR of 30%. Despite higher asset prices for
agency-backed MBS associated with QE3 and the low rate environment,
hedging costs are exceptionally low and risk-adjusted returns
remain attractive.
Approximately 59% of our agency-backed MBS portfolio was
originated under HARP programs, and all of our remaining assets
consist of either low loan balance loans, high LTV loans or loans
with other prepayment protected features. These loan
characteristics significantly reduce the economic incentive to the
borrower to refinance or constrain the borrower's ability to
refinance. With an expected agency-backed MBS asset yield of
approximately 2.90%, an approximate average annual hedge cost of
1.08% over six years, and assuming leverage of eight to one on
invested capital of about $175
million, the annual expected return on equity from the
agency-backed MBS portfolio would be in the high teens on a hedged
basis. Expressed this way, using the average hedge cost over
its life, economic earnings on a per share basis in the third
quarter would have been approximately $0.09 per quarter lower than Core Operating
Income per share, or $1.25 per
share.
Low rates, positive home price trends, and improving credit
access continue to have a positive impact on our deep discount
private-label MBS portfolio. Serious delinquencies and loss
severities declined for the third consecutive quarter, while CPRs
rose to 20%, increasing our cash returns in that portfolio.
While new investment returns have declined in certain private-label
MBS sectors, we continue to see attractive opportunities that offer
current cash yields in the high single digits and total
loss-adjusted yields in the teens.
At September 30, 2012, our
private-label MBS portfolio had a fair value of 59.5% of face
value, total market value of $196
million, and repo of $35
million. OCI related to the private-label MBS was
$37 million as of September 30, 2012. The assumptions used to
value the portfolio at September 30,
2012 included, on a weighted average basis, a constant
default rate of 5.3%, loss severity on liquidated loans of 45.2%,
constant pre-payment rate of 14.7% and a discount rate of 8.5%.
During the third quarter, the Company recorded $6.9 million of non-cash GAAP charges for OTTI on
11 non-agency bonds representing a reversal of the cumulative
non-cash discount accretion previously recorded on the bonds.
This charge is non-cash, does not affect core operating earnings or
book value, but does lower the accounting basis used to record
future discount accretion, which should more closely reflect future
cash flows.
As the Company's net interest income and cash earnings expand
from the deployment of the September offering proceeds at
attractive spreads, we expect to monetize more of the Company's net
operating loss carry-forwards, converting potential future value to
current cash return for shareholders. As of September 30, 2012, the Company's net capital
loss carry-forward was $390 million
with a final expiration in 2015, and the Company's net operating
loss carry-forward was $230 million
with a final expiration in 2028.
We are optimistic about the Company's opportunities. We
have two complementary portfolios with attractive attributes and
high risk adjusted returns that permit the Company to generate
consistent cash earnings and dividends with the potential for
growth. While agency prices are high and reinvestment spreads have
narrowed slightly, our assets are performing well, hedge costs are
low, and the investment environment continues to be
attractive. In private-label mortgage backed securities,
credit trends have improved and we continue to see investment
opportunities with expected loss-adjusted yields solidly in double
digits.
__________________________________
(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, 2012 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, (iii) net unrealized mark-to-market
adjustments on the trading MBS and hedge instruments and (iv)
other-than-temporary impairment charges recognized, if any.
The following table presents a reconciliation of the GAAP
financial results to non-GAAP measurements for the quarter ended
September 30, 2012 (dollars in
thousands):
GAAP net
income
|
$3,123
|
Adjustments
|
|
Adjusted
expenses(a)
|
(898)
|
Stock compensation
|
279
|
Net unrealized mark-to-market loss
on trading MBS and
hedge
instruments
|
5,843
|
Other-than-temporary impairment
charges
|
6,900
|
Adjusted interest related to
purchase discount accretion
|
(1,797)
|
Non-GAAP core
operating income
|
$13,450
|
Non-GAAP
core operating income per share (diluted)
|
$1.34
|
|
|
(a)
Adjusted expenses represent certain professional fees, litigation
recovery,
and income taxes that are not considered representative of routine
activities
of the Company.
|
(2)
Return on Equity from non-GAAP core operating income is calculated
using beginning equity and non-GAAP core operating income for the
respective period.
(3)
Based on the annualized third quarter 2012 dividend and a Class A
common stock closing price on the NYSE of $21.72 on October 26,
2012.
(4)
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 21% 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,
risk spreads, private-label MBS trading activity, liquidity levels
and credit trends, agency-backed MBS prices, cash earnings, book
value, portfolio allocation, 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,
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 leverage on
invested capital, 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 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, use of
proceeds from our recently-completed equity offering, ability to
realize book value growth through reflation of private-label MBS,
the realization of gains and losses on principal investments, the
outcome of certain litigation and investigatory matters, 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 for the year ended December 31,
2011 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 COMPREHENSIVE
INCOME
|
(Dollars
in thousands, except per share data)
|
(Unaudited)
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
30,
|
|
September
30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
INTEREST INCOME
|
$
15,519
|
|
$
13,061
|
|
$
44,913
|
|
$
38,818
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
Interest on short-term debt
|
1,125
|
|
542
|
|
2,811
|
|
1,336
|
Interest on long-term debt
|
123
|
|
115
|
|
371
|
|
345
|
Total interest expense
|
1,248
|
|
657
|
|
3,182
|
|
1,681
|
Net interest income
|
14,271
|
|
12,404
|
|
41,731
|
|
37,137
|
|
|
|
|
|
|
|
|
OTHER
LOSS, NET
|
|
|
|
|
|
|
|
Investment loss, net
|
(5,663)
|
|
(20,195)
|
|
(11,532)
|
|
(17,455)
|
Other loss
|
(3)
|
|
(4)
|
|
(11)
|
|
(11)
|
Total other loss, net
|
(5,666)
|
|
(20,199)
|
|
(11,543)
|
|
(17,466)
|
Operating income (loss) before
other expenses
|
8,605
|
|
(7,795)
|
|
30,188
|
|
19,671
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Compensation and benefits
|
3,519
|
|
2,537
|
|
7,580
|
|
7,543
|
Professional services
|
862
|
|
441
|
|
3,337
|
|
1,125
|
Business development
|
39
|
|
19
|
|
111
|
|
98
|
Occupancy and equipment
|
110
|
|
93
|
|
355
|
|
281
|
Communications
|
49
|
|
51
|
|
154
|
|
147
|
Other operating expenses
|
453
|
|
448
|
|
1,351
|
|
1,168
|
Total other expenses
|
5,032
|
|
3,589
|
|
12,888
|
|
10,362
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
3,573
|
|
(11,384)
|
|
17,300
|
|
9,309
|
|
|
|
|
|
|
|
|
Income tax
provision
|
450
|
|
259
|
|
1,271
|
|
1,076
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
3,123
|
|
$
(11,643)
|
|
$
16,029
|
|
$
8,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
$
0.31
|
|
$
(1.50)
|
|
$
1.74
|
|
$
1.07
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
$
0.31
|
|
$
(1.50)
|
|
$
1.74
|
|
$
1.06
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic (in
thousands)
|
9,977
|
|
7,748
|
|
9,192
|
|
7,711
|
Weighted average shares outstanding - diluted (in
thousands)
|
10,041
|
|
7,748
|
|
9,219
|
|
7,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
Unrealized gains (losses) for the period on available-for-sale
securities (net of taxes of $-0-)
|
$
2,997
|
|
$
(5,234)
|
|
$
(1,563)
|
|
$
(5,231)
|
Reclassification adjustment for gains included in net income on
available-for-sale securities (net of taxes of $-0-)
|
-
|
|
(1,079)
|
|
-
|
|
(15,012)
|
Comprehensive income (loss)
|
$
6,120
|
|
$
(17,956)
|
|
$
14,466
|
|
$
(12,010)
|
|
|
|
|
|
|
|
|
ARLINGTON ASSET INVESTMENT CORP.
|
CONSOLIDATED BALANCE SHEETS
|
(Dollars
in thousands, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
ASSETS
|
September 30, 2012
|
|
December 31, 2011
|
|
|
|
|
Cash
and cash equivalents
|
$
85,738
|
|
$
20,018
|
Receivables
|
|
|
|
Interest
|
2,977
|
|
2,366
|
Sold securities
receivable
|
12,212
|
|
41,321
|
Other
|
501
|
|
11
|
Mortgage-backed securities, at fair
value
|
|
|
|
Available-for-sale
|
196,049
|
|
179,566
|
Trading
|
1,198,697
|
|
636,872
|
Other investments
|
2,792
|
|
2,946
|
Derivative assets, at fair
value
|
673
|
|
504
|
Deposits
|
95,900
|
|
71,079
|
Prepaid expenses and other
assets
|
247
|
|
377
|
Total assets
|
$
1,595,786
|
|
$
955,060
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Repurchase agreements
|
$
867,056
|
|
$
647,977
|
Interest payable
|
402
|
|
504
|
Accrued compensation and
benefits
|
4,953
|
|
6,177
|
Dividend payable
|
11,611
|
|
6,785
|
Derivative liabilities, at fair
value
|
89,027
|
|
63,024
|
Purchased securities payable
|
291,495
|
|
15,820
|
Accounts payable, accrued expenses and other
liabilities
|
17,124
|
|
16,401
|
Long-term debt
|
15,000
|
|
15,000
|
Total
liabilities
|
1,296,668
|
|
771,688
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
Common stock
|
132
|
|
77
|
Additional paid-in capital
|
1,638,430
|
|
1,508,713
|
Accumulated other comprehensive income, net of
taxes
|
36,804
|
|
38,367
|
Accumulated deficit
|
(1,376,248)
|
|
(1,363,785)
|
Total
equity
|
299,118
|
|
183,372
|
|
|
|
|
Total liabilities and
equity
|
$
1,595,786
|
|
$
955,060
|
|
|
|
|
|
|
|
|
Book Value per Share
|
$
22.59
|
|
$
23.67
|
|
|
|
|
Shares Outstanding (in
thousands)
|
13,240
|
|
7,748
|
|
|
|
|
SOURCE Arlington Asset Investment Corp.