ARLINGTON, Va., Feb. 7, 2017 /PRNewswire/ -- Arlington Asset
Investment Corp. (NYSE: AI) (the "Company" or "Arlington") today reported a net loss of
$41.4 million, or $1.79 per diluted share, and non-GAAP core
operating income of $14.9 million, or
$0.64 per diluted share, for the
quarter ended December 31, 2016.
A reconciliation of non-GAAP core operating income to GAAP
net income (loss) before income taxes appears at the end of this
press release.
Fourth Quarter 2016 Financial Highlights
- $1.79 per diluted share of GAAP
net loss
- $0.64 per diluted share of
non-GAAP core operating income
- $16.21 per share of book
value
- $13.11 per share of tangible book
value
- $0.625 per share dividend
Full Year 2016 Financial Highlights
- $1.79 per diluted share of GAAP
net loss
- $2.75 per diluted share of
non-GAAP core operating income
- $2.50 per share dividend
"The results of the U.S. Presidential election and the new
administration's anticipated fiscal policies raised expectations
for faster economic growth and higher inflation. This led to
a repricing of financial assets with increased demand for equity
assets and a sell-off in U.S. Treasuries, driving the 10-year U.S.
Treasury rate up 100 basis points during the quarter," said
J. Rock Tonkel, Jr., the Company's
President and Chief Executive Officer. "The rapid rise in
rates and volatility led to agency MBS spread widening during the
quarter, which resulted in an underperformance of the Company's
agency MBS portfolio relative to its interest rate hedges leading
to a decline in tangible book value as of year-end. Going
forward, wider agency MBS spreads and lower expected prepayment
speeds associated with higher rates should lead to more attractive
investment opportunities benefiting future investment
returns. Overall, the Company has continued to generate a
resilient stream of consistent spread income to support dividends
in a tax advantaged manner to its shareholders."
Other Fourth Quarter Highlights
As of December 31, 2016, the
Company's agency MBS investment portfolio totaled $4,631 million in fair value, consisting of
$3,911 million of specified agency
mortgage-backed securities ("MBS") and $720
million of net long to-be-announced ("TBA") agency
MBS. As of December 31, 2016,
the Company's $4,631 million agency
MBS investment portfolio was comprised primarily of the
following:
- $720 million of 3.0% coupon
30-year agency TBA agency MBS
- $2,142 million of 3.5% coupon
30-year specified agency MBS
- $1,768 million of 4.0% coupon
30-year specified agency MBS
As of December 31, 2016, the
Company's net long TBA agency MBS investment portfolio had a
purchase price of $719 million and
market value of $720 million,
resulting in a net GAAP carrying fair value of $1 million. Under GAAP, the gross fair
value of the agency MBS underlying the Company's TBA commitments is
not recognized on the balance sheet as the Company accounts for its
TBA commitments as derivative instruments.
As of December 31, 2016, the
Company's $3,911 million specified
agency MBS portfolio had a weighted average amortized cost basis of
$105.55 and a weighted average market
price of $104.14. The Company's
fixed-rate agency MBS are comprised of securities backed by
specified pools of mortgage loans selected for their lower
propensity for prepayment. Weighted average pay-up premiums
on the Company's agency MBS portfolio, which represent the
estimated price premium of agency MBS backed by specified pools
over a generic TBA agency MBS, were almost one-half a percentage
point as of December 31, 2016,
compared to a weighted average pay-up premium of approximately one
percentage point as of September 30,
2016.
As of December 31, 2016, the
Company had $3,649 million of
repurchase agreements outstanding with a weighted average rate of
96 basis points and remaining weighted average maturity of 19 days
secured by an aggregate of $3,851
million of agency MBS at fair value.
The Company enters into various hedging transactions to mitigate
the interest rate sensitivity of its cost of borrowing and the
value of its agency MBS portfolio including interest rate swap
agreements and put and call options on 10-year U.S. Treasury note
futures.
Under the terms of the Company's interest rate swap agreements,
the Company pays semiannual interest payments based on a fixed rate
and receives quarterly variable interest payments based upon the
prevailing three-month London Interbank Offered Rate ("LIBOR") on
the date of reset. As of December 31,
2016, the Company had $1,375
million in notional amount of interest rate swap agreements
maturing in less than 3 years with a weighted average pay fixed
rate of 1.10% and a remaining weighted average maturity of 1.7
years, $350 million in notional
amount of interest rate swap agreements maturing between 3 to 7
years with a weighted average pay fixed rate of 1.84% and weighted
average maturity of 3.7 years, and $1,600
million in notional amount of interest rate swap agreements
maturing between 7 to 10 years with a weighted average pay fixed
rate of 1.93% and a remaining weighted average maturity of 9.2
years. In addition, the Company had $375 million in notional amount of forward
starting two-year interest rate swap agreements that become
effective in September and October of 2017 with a weighted average
pay fixed rate of 1.13%.
In addition to interest rate swap agreements, the Company also
had a series of contracts whereby the Company either purchased or
sold put and call options on 10-year U.S. Treasury note futures to
mitigate the interest rate sensitivity of the value of its agency
MBS portfolio. As of December 31,
2016, the Company purchased contracts that provide the
Company with the option to put 10-year U.S. Treasury note futures
to a counterparty with an equivalent notional amount of
$1,650 million that were struck at a
weighted average strike price per contract that equates to a
10-year U.S. Treasury rate of approximately 2.77%, and sold
contracts that provide a counterparty the option to call 10-year
U.S. Treasury note futures from the Company with an equivalent
notional amount of $1,000 million
that were struck at a weighted average strike price per contract
that equates to a 10-year U.S. Treasury rate of approximately
2.24%. In order to limit its exposure on the sold call
options from a significant fall in long-term interest rates, the
Company also purchased contracts that provide the Company with the
option to call 10-year U.S. Treasury note futures from a
counterparty with an equivalent notional amount of $1,000 million as of December 31, 2016 that were struck at a weighted
average strike price per contract that equates to a 10-year U.S.
Treasury rate of approximately 2.12%.
Interest income less interest expense on short-term financing on
the Company's agency MBS portfolio for the fourth quarter of 2016
and 2015 was $16.8 million and
$24.4 million, respectively.
For the quarters ended December 31,
2016 and 2015, the amortization of the Company's net premium
on its agency MBS was $9.4 million
and $7.1 million, respectively, and
its weighted average yield on its agency MBS was 2.55% and 2.97%,
respectively. The actual weighted-average constant prepayment rate
("CPR") for the Company's agency MBS was 12.90% and 7.82% for the
fourth quarters of 2016 and 2015, respectively.
For the quarters ended December 31,
2016 and 2015, the Company reported TBA dollar roll income
of $6.4 million and $2.4 million, respectively. TBA dollar roll
income is considered the economic equivalent of investing in agency
MBS financed with a repurchase agreement and is calculated as the
price discount of a forward-settling purchase of a TBA agency MBS
relative to the "spot" sale of the same security. Under
GAAP, the Company accounts for its TBA commitments as derivative
instruments and recognizes income from TBA dollar rolls as a
component of net investment gains and losses in the Company's
financial statements.
During the fourth quarter of 2016, the Company recorded net
investment losses on its agency MBS investment portfolio, inclusive
of TBA derivative positions, of $162.0
million and net investment gains on its related interest
rate derivative hedging instruments of $128.4 million for a net investment loss on its
hedged agency portfolio of $33.6
million. Excluding TBA dollar roll income and interest
rate swap net interest expense included in non-GAAP core operating
income, the Company had net investment losses on its agency MBS
investment portfolio of $168.4
million and net investment gains on its related interest
rate derivative hedging instruments of $132.7 million for a net investment loss on its
hedged agency portfolio of $35.7
million, or $1.54 per
share.
As of December 31, 2016, the
Company's private-label MBS portfolio consisted of $1.3 million at fair value. Interest income
less interest expense on short-term financing on the Company's
private-label MBS portfolio for the fourth quarter of 2016 and 2015
was $0.5 million and $2.7 million, respectively, including non-cash
accretion of $0.2 million and
$1.6 million, respectively.
During the fourth quarter of 2016, the Company sold private-label
MBS for sale proceeds of $18.9
million.
Corporate Tax Structure
The Company is subject to taxation as a corporation under
Subchapter C of the Internal Revenue Code of 1986, as
amended. As of December 31,
2016, the Company's estimated net operating loss
carry-forward was $95.7 million that
begins to expire in 2027 and its estimated net capital loss
carry-forward was $310.9 million that
begins to expire in 2019. The Company's estimated net
operating and net capital loss carry-forwards as of December 31, 2016 are subject to potential
adjustments up to the time of filing the Company's income tax
returns. For GAAP accounting purposes, as of December 31, 2016 the Company had a deferred tax
asset of $73.4 million, or
$3.10 per share, which reflects a
substantial valuation allowance against its net capital loss
carry-forwards. During the fourth quarter of 2016, the
Company recorded an increase in the valuation allowance of
$32.0 million, or $1.38 per diluted share, due primarily to
unrealized losses on the Company's agency MBS portfolio.
Distributions to Shareholders
The Company has announced the tax characteristics of the
distributions paid on its common stock in calendar year 2016. The
Company has determined that all of its cash distributions paid to
shareholders in calendar year 2016 were returns of capital.
Shareholders should receive a Form 1099-DIV containing this
information from their brokers, transfer agents or other
institutions.
The Company's Board of Directors approved a distribution to
common shareholders of $0.625 per
share for the fourth quarter of 2016. The distribution was
paid on January 31, 2017 to
shareholders of record as of December 30,
2016.
The tax characterization of the Company's distributions to
shareholders is determined annually and reported to shareholders on
Form 1099-DIV after the end of the calendar year. As a
C-corporation, distributions to shareholders of current or
accumulated earnings and profits are qualified dividends eligible
for the 23.8% maximum federal income tax rate whereas similar
distributions to shareholders by a REIT of current or accumulated
earnings and profits are nonqualified dividends subject to the
higher 43.4% maximum federal tax rate, inclusive of the 3.8%
Medicare tax rate, on ordinary income. Any distributions in
excess of current or accumulated earnings and profits would be
reported as returns of capital instead of qualified
dividends. Distributions that are classified as returns of
capital are nontaxable to the extent they do not exceed a
shareholder's adjusted tax basis in the Company's stock, or as a
capital gain to the extent that the amount of the distribution
exceeds a shareholder's adjusted tax basis in the Company's stock.
The tax rates referenced above are with respect to fiscal year
2016.
Conference Call
The Company will hold a conference call for investors
at 9:00 A.M. Eastern Time on Wednesday, February 8,
2017 to discuss the Company's fourth quarter and full year
2016 results.
Investors may listen to the earnings call via the internet at:
http://www.arlingtonasset.com/index.php?s=19.
Replays of the earnings call will be available for 60 days via
webcast at the Internet address provided above, beginning two hours
after the call ends.
Additional Information
The Company will make available additional quarterly information
for the benefit of its shareholders through a supplemental
presentation that will be available at the Company's website,
www.arlingtonasset.com. The presentation will be
available on the Webcasts and Presentations section located under
the Updates & Events tab of the Company's website.
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 interest rates, portfolio allocation,
financing costs, portfolio hedging, prepayments, dividends, 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 prepayment rates, changes in
the Company's returns, changes in the use of the Company's tax
benefits, changes in the agency 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 the Company's net
operating loss and net capital loss carry-forwards, impacts of
changes to and changes by Fannie Mae and Freddie Mac, actions taken
by the U.S. Federal Reserve, the Federal Housing Finance Agency 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,
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, 2015 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 to follow
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED
BALANCE SHEETS
(Dollars in
thousands, except per share amounts)
(Unaudited)
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
54,794
|
|
|
$
|
36,987
|
|
Interest
receivable
|
|
|
11,646
|
|
|
|
11,936
|
|
Mortgage-backed
securities, at fair value
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,911,375
|
|
|
|
3,865,316
|
|
Private-label
|
|
|
1,266
|
|
|
|
130,553
|
|
Derivative assets, at
fair value
|
|
|
74,889
|
|
|
|
12,991
|
|
Deferred tax assets,
net
|
|
|
73,432
|
|
|
|
97,530
|
|
Deposits
|
|
|
11,149
|
|
|
|
29,429
|
|
Other
assets
|
|
|
3,003
|
|
|
|
18,197
|
|
Total
assets
|
|
$
|
4,141,554
|
|
|
$
|
4,202,939
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
3,649,102
|
|
|
$
|
2,834,780
|
|
Federal Home Loan Bank
advances
|
|
|
—
|
|
|
|
786,900
|
|
Interest
payable
|
|
|
3,434
|
|
|
|
2,436
|
|
Accrued compensation
and benefits
|
|
|
5,406
|
|
|
|
5,170
|
|
Dividend
payable
|
|
|
15,739
|
|
|
|
14,504
|
|
Derivative
liabilities, at fair value
|
|
|
9,554
|
|
|
|
553
|
|
Other
liabilities
|
|
|
1,247
|
|
|
|
1,132
|
|
Long-term
debt
|
|
|
73,656
|
|
|
|
73,433
|
|
Total
liabilities
|
|
|
3,758,138
|
|
|
|
3,718,908
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
236
|
|
|
|
230
|
|
Additional paid-in
capital
|
|
|
1,910,284
|
|
|
|
1,898,085
|
|
Accumulated other
comprehensive income, net of taxes
|
|
|
-
|
|
|
|
12,371
|
|
Accumulated
deficit
|
|
|
(1,527,104)
|
|
|
|
(1,426,655)
|
|
Total
equity
|
|
|
383,416
|
|
|
|
484,031
|
|
Total liabilities
and equity
|
|
$
|
4,141,554
|
|
|
$
|
4,202,939
|
|
Book value per
share
|
|
$
|
16.21
|
|
|
$
|
21.05
|
|
Tangible book
value per share (1)
|
|
$
|
13.11
|
|
|
$
|
16.81
|
|
Shares outstanding
(in thousands) (2)
|
|
|
23,651
|
|
|
|
22,994
|
|
|
|
|
|
|
|
|
|
|
(1) Tangible book
value represents total stockholders' equity less net deferred tax
assets.
|
|
|
|
|
|
|
|
|
|
|
(2) Represents shares
of Class A common stock and Class B common stock outstanding plus
vested restricted stock units convertible into Class A common stock
less unvested restricted Class A common stock.
|
|
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in
thousands, except per share data)
(Unaudited)
|
|
|
Fiscal Year
2016
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed
securities
|
|
$
|
97,053
|
|
|
$
|
24,073
|
|
|
$
|
23,917
|
|
|
$
|
23,408
|
|
|
$
|
25,655
|
|
Private-label
mortgage-backed securities
|
|
|
7,910
|
|
|
|
473
|
|
|
|
1,655
|
|
|
|
2,808
|
|
|
|
2,974
|
|
Other
|
|
|
373
|
|
|
|
31
|
|
|
|
82
|
|
|
|
135
|
|
|
|
125
|
|
Total interest
income
|
|
|
105,336
|
|
|
|
24,577
|
|
|
|
25,654
|
|
|
|
26,351
|
|
|
|
28,754
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
24,433
|
|
|
|
7,231
|
|
|
|
6,193
|
|
|
|
5,509
|
|
|
|
5,500
|
|
Long-term
debt
|
|
|
4,789
|
|
|
|
1,205
|
|
|
|
1,197
|
|
|
|
1,194
|
|
|
|
1,193
|
|
Total interest
expense
|
|
|
29,222
|
|
|
|
8,436
|
|
|
|
7,390
|
|
|
|
6,703
|
|
|
|
6,693
|
|
Net interest
income
|
|
|
76,114
|
|
|
|
16,141
|
|
|
|
18,264
|
|
|
|
19,648
|
|
|
|
22,061
|
|
Investment (loss)
gain, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
on sale of available-for-sale investments, net
|
|
|
4,777
|
|
|
|
2,931
|
|
|
|
2,439
|
|
|
|
(593)
|
|
|
|
-
|
|
Other-than-temporary
impairment charges
|
|
|
(1,737)
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,638)
|
|
|
|
(99)
|
|
(Loss) gain on trading
investments, net
|
|
|
(41,249)
|
|
|
|
(122,332)
|
|
|
|
2,468
|
|
|
|
27,665
|
|
|
|
50,950
|
|
(Loss) gain from
derivative instruments, net
|
|
|
(31,660)
|
|
|
|
88,285
|
|
|
|
15,196
|
|
|
|
(34,381)
|
|
|
|
(100,760)
|
|
Other, net
|
|
|
551
|
|
|
|
(87)
|
|
|
|
619
|
|
|
|
-
|
|
|
|
19
|
|
Total investment
(loss) gain, net
|
|
|
(69,318)
|
|
|
|
(31,203)
|
|
|
|
20,722
|
|
|
|
(8,947)
|
|
|
|
(49,890)
|
|
General and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
11,526
|
|
|
|
2,776
|
|
|
|
3,430
|
|
|
|
2,756
|
|
|
|
2,564
|
|
Other general and
administrative expenses
|
|
|
9,230
|
|
|
|
1,343
|
|
|
|
1,200
|
|
|
|
4,916
|
|
|
|
1,771
|
|
Total general and
administrative expenses
|
|
|
20,756
|
|
|
|
4,119
|
|
|
|
4,630
|
|
|
|
7,672
|
|
|
|
4,335
|
|
(Loss) income
before income taxes
|
|
|
(13,960)
|
|
|
|
(19,181)
|
|
|
|
34,356
|
|
|
|
3,029
|
|
|
|
(32,164)
|
|
Income tax provision
(benefit)
|
|
|
27,387
|
|
|
|
22,255
|
|
|
|
15,543
|
|
|
|
(9,865)
|
|
|
|
(546)
|
|
Net (loss)
income
|
|
$
|
(41,347)
|
|
|
$
|
(41,436)
|
|
|
$
|
18,813
|
|
|
$
|
12,894
|
|
|
$
|
(31,618)
|
|
Basic (loss) earnings
per share
|
|
$
|
(1.79)
|
|
|
$
|
(1.79)
|
|
|
$
|
0.82
|
|
|
$
|
0.56
|
|
|
$
|
(1.38)
|
|
Diluted (loss)
earnings per share
|
|
$
|
(1.79)
|
|
|
$
|
(1.79)
|
|
|
$
|
0.81
|
|
|
$
|
0.56
|
|
|
$
|
(1.38)
|
|
Weighted average
shares outstanding (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,051
|
|
|
|
23,167
|
|
|
|
23,038
|
|
|
|
23,003
|
|
|
|
22,994
|
|
Diluted
|
|
|
23,051
|
|
|
|
23,167
|
|
|
|
23,349
|
|
|
|
23,070
|
|
|
|
22,994
|
|
Other
comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on
available-for-sale securities
|
|
|
(6,197)
|
|
|
$
|
-
|
|
|
$
|
(221)
|
|
|
$
|
(1,006)
|
|
|
$
|
(4,970)
|
|
Reclassification in
investment gain (loss), net, related to sales and other-than-temporary
impairment charges on
available-for-sale securities
|
|
|
(6,174)
|
|
|
|
(4,685)
|
|
|
|
(2,324)
|
|
|
|
775
|
|
|
|
60
|
|
Comprehensive
(loss) income
|
|
$
|
(53,718)
|
|
|
$
|
(46,121)
|
|
|
$
|
16,268
|
|
|
$
|
12,663
|
|
|
$
|
(36,528)
|
|
The following tables present information on the Company's
investment and hedge portfolio as of December 31, 2016 (unaudited, dollars in
thousands):
Agency
MBS:
|
|
|
|
Fair
Value
|
|
Specified agency
MBS
|
|
$
|
3,909,452
|
|
Inverse interest-only
agency MBS
|
|
|
1,923
|
|
Total agency
MBS
|
|
|
3,911,375
|
|
Net long agency TBA
position
|
|
|
720,027
|
|
Total
|
|
$
|
4,631,402
|
|
Specified Agency
MBS:
|
|
|
|
Unpaid
Principal Balance
|
|
|
Net Unamortized
Purchase Premiums
|
|
|
Amortized
Cost Basis
|
|
|
Net Unrealized
Gain (Loss)
|
|
|
Fair
Value
|
|
|
Market
Price
|
|
|
Coupon
|
|
|
Weighted Average
Remaining Life
|
|
30-year fixed
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5%
|
|
$
|
2,082,197
|
|
|
$
|
107,193
|
|
|
$
|
2,189,390
|
|
|
$
|
(47,680)
|
|
|
$
|
2,141,710
|
|
|
$
|
102.86
|
|
|
|
3.50%
|
|
|
|
8.2
|
|
4.0%
|
|
|
1,671,822
|
|
|
|
101,201
|
|
|
|
1,773,023
|
|
|
|
(5,304)
|
|
|
|
1,767,719
|
|
|
|
105.74
|
|
|
|
4.00%
|
|
|
|
6.9
|
|
5.5%
|
|
|
21
|
|
|
|
—
|
|
|
|
21
|
|
|
|
2
|
|
|
|
23
|
|
|
|
112.19
|
|
|
|
5.50%
|
|
|
|
5.7
|
|
Total/weighted-average
|
|
$
|
3,754,040
|
|
|
$
|
208,394
|
|
|
$
|
3,962,434
|
|
|
$
|
(52,982)
|
|
|
$
|
3,909,452
|
|
|
|
104.14
|
|
|
|
3.72%
|
|
|
|
7.6
|
|
Net Long Agency
TBA Dollar Roll Positions:
|
|
|
|
Notional
Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Long (Short)
Position
|
|
|
Implied
Cost
Basis
|
|
|
Implied
Fair
Value
|
|
|
Net
Carrying
Amount
|
|
30-year 3.0% coupon
purchase commitments
|
|
$
|
725,000
|
|
|
$
|
718,887
|
|
|
$
|
720,027
|
|
|
$
|
1,140
|
|
30-year 3.5% coupon
purchase commitments
|
|
|
25,000
|
|
|
|
25,586
|
|
|
|
25,613
|
|
|
|
27
|
|
30-year 3.5% coupon
sale commitments
|
|
|
(25,000)
|
|
|
|
(25,602)
|
|
|
|
(25,613)
|
|
|
|
(11)
|
|
Total dollar roll
positions, net
|
|
$
|
725,000
|
|
|
$
|
718,871
|
|
|
$
|
720,027
|
|
|
$
|
1,156
|
|
Interest Rate
Swaps Currently Effective:
|
|
|
|
|
|
|
|
Weighted-average:
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
Fixed
Pay
Rate
|
|
|
Variable
Receive
Rate
|
|
|
Remaining
Life
(Years)
|
|
|
Fair
Value
|
|
Years to
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3
years
|
|
$
|
1,375,000
|
|
|
|
1.10%
|
|
|
|
0.97%
|
|
|
|
1.7
|
|
|
$
|
6,470
|
|
3 to less than 7
years
|
|
|
350,000
|
|
|
|
1.84%
|
|
|
|
1.00%
|
|
|
|
3.7
|
|
|
|
(769)
|
|
7 to 10
years
|
|
|
1,600,000
|
|
|
|
1.93%
|
|
|
|
0.96%
|
|
|
|
9.2
|
|
|
|
50,511
|
|
Total /
weighted-average
|
|
$
|
3,325,000
|
|
|
|
1.58%
|
|
|
|
0.97%
|
|
|
|
5.5
|
|
|
$
|
56,212
|
|
Forward-Starting
Interest Rate Swaps:
|
|
|
|
|
|
|
Weighted-average:
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
Fixed
Pay
Rate
|
|
|
Term After
Effective
Date
(Years)
|
|
|
Fair
Value
|
|
Effective in
September / October 2017
|
|
$
|
375,000
|
|
|
|
1.13%
|
|
|
|
2.0
|
|
|
$
|
5,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on 10-year
U.S. Treasury Note Futures:
|
|
|
|
Notional
Amount
Long/(Short)
|
|
|
Weighted-
average
Strike
Price
|
|
|
Implied
Strike
Rate
(1)
|
|
|
Net Fair
Value
|
|
Purchased put
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
expiration
|
|
$
|
950,000
|
|
|
|
120.8
|
|
|
|
2.87%
|
|
|
$
|
539
|
|
February 2017
expiration
|
|
|
700,000
|
|
|
|
122.6
|
|
|
|
2.64%
|
|
|
|
3,281
|
|
Total / weighted
average for purchased put options
|
|
$
|
1,650,000
|
|
|
|
121.6
|
|
|
|
2.77%
|
|
|
$
|
3,820
|
|
Sold call
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
expiration
|
|
$
|
(100,000)
|
|
|
|
126.0
|
|
|
|
2.25%
|
|
|
$
|
(141)
|
|
February 2017
expiration
|
|
|
(900,000)
|
|
|
|
126.0
|
|
|
|
2.24%
|
|
|
|
(3,765)
|
|
Total / weighted
average for sold call options
|
|
$
|
(1,000,000)
|
|
|
|
126.0
|
|
|
|
2.24%
|
|
|
$
|
(3,906)
|
|
Purchased call
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2017
expiration
|
|
$
|
1,000,000
|
|
|
|
127.1
|
|
|
|
2.12%
|
|
|
$
|
469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
383
|
|
(1)
|
The implied strike
rate is estimated based upon the weighted average strike price per
option contract and the price of an equivalent U.S. Treasury note
futures contract.
|
Non-GAAP Core Operating Income
In addition to the Company's results of operations determined in
accordance with generally accepted accounting principles as
consistently applied in the United
States ("GAAP"), the Company also reports "non-GAAP core
operating income". The Company defines core operating income
as "economic net interest income" less "core general and
administrative expenses."
Economic Net Interest Income
Economic net interest income, a non-GAAP financial measure,
represents the interest income earned net of interest expense
incurred from all of our interest bearing financial instruments as
well as agency MBS which underlie, and are implicitly financed
through, our TBA dollar roll transactions. Economic net
interest income is comprised of the following:
- net interest income determined in accordance with GAAP;
- TBA agency MBS dollar roll income, which is calculated as the
price discount of a forward-settling purchase of a TBA agency MBS
relative to the "spot" sale of the same security, earned ratably
over the period beginning on the settlement date of the sale and
ending on the settlement date of the forward-settling purchase;
and
- net interest income or expense incurred from interest rate swap
agreements.
In the Company's consolidated statements of comprehensive income
prepared in accordance with GAAP, TBA agency MBS dollar roll income
and the net interest income or expense incurred from interest rate
swap agreements are reported as a component of the overall periodic
change in the fair value of derivative instruments within the line
item "gain (loss) from derivative instruments, net" of the
"investment gain (loss), net" section. We believe that economic net
interest income assists investors in understanding and evaluating
the financial performance of the Company's long-term-focused, net
interest spread-based investment strategy, prior to the deduction
of core general and administrative expenses.
Core General and Administrative Expenses
Core general and administrative expenses are non-interest
expenses reported within the line item "total general and
administrative expenses" of the consolidated statements of
comprehensive income less stock-based compensation expense.
For the first and second quarters of 2016, core general and
administrative expenses also exclude non-recurring expenses related
to the 2016 proxy contest that are in excess of those normally
incurred for an annual meeting of shareholders.
Non-GAAP Core Operating Income for Fiscal Year 2016
The following table presents the Company's computation of core
operating income for fiscal year 2016 (unaudited, amounts in
thousands, except per share amounts):
|
|
Fiscal Year
2016
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
GAAP net interest
income
|
|
$
|
76,114
|
|
|
$
|
16,141
|
|
|
$
|
18,264
|
|
|
$
|
19,648
|
|
|
$
|
22,061
|
|
TBA dollar roll
income
|
|
|
19,261
|
|
|
|
6,426
|
|
|
|
5,321
|
|
|
|
3,719
|
|
|
|
3,795
|
|
Interest rate swap
net interest expense
|
|
|
(17,825)
|
|
|
|
(4,326)
|
|
|
|
(5,126)
|
|
|
|
(4,376)
|
|
|
|
(3,997)
|
|
Economic net interest
income
|
|
|
77,550
|
|
|
|
18,241
|
|
|
|
18,459
|
|
|
|
18,991
|
|
|
|
21,859
|
|
Core and general
administrative expenses
|
|
|
(13,802)
|
|
|
|
(3,326)
|
|
|
|
(3,612)
|
|
|
|
(3,444)
|
|
|
|
(3,420)
|
|
Non-GAAP core
operating income
|
|
$
|
63,748
|
|
|
$
|
14,915
|
|
|
$
|
14,847
|
|
|
$
|
15,547
|
|
|
$
|
18,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core
operating income per
diluted
share
|
|
$
|
2.75
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.67
|
|
|
$
|
0.80
|
|
Weighted average
diluted shares
outstanding
|
|
|
23,202
|
|
|
|
23,343
|
|
|
|
23,349
|
|
|
|
23,070
|
|
|
|
23,040
|
|
The following table provides a reconciliation of GAAP pre-tax
net (loss) income to non-GAAP core operating income for fiscal year
2016 (unaudited, amounts in thousands):
|
|
Fiscal Year
2016
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
GAAP (loss) income
before income taxes
|
|
$
|
(13,960)
|
|
|
$
|
(19,181)
|
|
|
$
|
34,356
|
|
|
$
|
3,029
|
|
|
$
|
(32,164)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment loss
(gain), net
|
|
|
69,318
|
|
|
|
31,203
|
|
|
|
(20,722)
|
|
|
|
8,947
|
|
|
|
49,890
|
|
Stock-based
compensation expense
|
|
|
2,975
|
|
|
|
793
|
|
|
|
1,018
|
|
|
|
647
|
|
|
|
517
|
|
Non-recurring proxy
contest related expenses
|
|
|
3,979
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,581
|
|
|
|
398
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll
income
|
|
|
19,261
|
|
|
|
6,426
|
|
|
|
5,321
|
|
|
|
3,719
|
|
|
|
3,795
|
|
Interest rate swap net
interest expense
|
|
|
(17,825)
|
|
|
|
(4,326)
|
|
|
|
(5,126)
|
|
|
|
(4,376)
|
|
|
|
(3,997)
|
|
Non-GAAP core
operating income
|
|
$
|
63,748
|
|
|
$
|
14,915
|
|
|
$
|
14,847
|
|
|
$
|
15,547
|
|
|
$
|
18,439
|
|
Non-GAAP core operating income is used by management to evaluate
the financial performance of the Company's long-term investment
strategy and core business activities over periods of time as well
as assist with the determination of the appropriate level of
periodic dividends to stockholders. The Company believes that
non-GAAP core operating income assists investors in understanding
and evaluating the financial performance of the Company's long-term
investment strategy and core business activities over periods of
time as well as its earnings capacity. A limitation of
utilizing this non-GAAP financial measure is that the effect of
accounting for "non-core" events or transactions in accordance with
GAAP does, in fact, reflect the financial results of our business
and these effects should not be ignored when evaluating and
analyzing our financial results. For example, the economic
cost or benefit of hedging instruments other than interest rate
swap agreements, such as U.S. Treasury note futures or options on
U.S. Treasury note futures, do not affect the computation of
non-GAAP core operating income. In addition, the Company's
calculation of non-GAAP core operating income may not be comparable
to other similarly titled measures of other companies.
Therefore, the Company believes that net income and comprehensive
income determined in accordance with GAAP should be considered in
conjunction with non-GAAP core operating income.
Non-GAAP Core Operating Income for Fiscal Year 2015
Beginning in the first quarter of 2016, the Company
retrospectively applied its revised definition of core operating
income to the quarterly and annual periods of fiscal year
2015. The Company notes, however, that the non-GAAP core
operating income measures computed for prior year periods are not
directly comparable to the results computed for fiscal year ended
December 31, 2016 as the Company
solely utilized hedging instruments other than interest rate swap
agreements prior to November 2015. The economic costs or
benefits of hedging instruments other than interest rate swap
agreements do not affect the computation of non-GAAP core operating
income. The results of the Company's retrospective
application of its revised definition of core operating income to
fiscal year 2015 are presented in the following table (unaudited,
amounts in thousands, except per share amounts):
|
|
Fiscal Year
2015
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
GAAP net interest
income
|
|
$
|
102,374
|
|
|
$
|
25,807
|
|
|
$
|
26,074
|
|
|
$
|
23,711
|
|
|
$
|
26,782
|
|
TBA dollar roll
income
|
|
|
6,743
|
|
|
|
2,353
|
|
|
|
1,896
|
|
|
|
2,235
|
|
|
|
259
|
|
Interest rate swap
net interest expense
|
|
|
(1,282)
|
|
|
|
(1,282)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Economic net interest
income
|
|
|
107,835
|
|
|
|
26,878
|
|
|
|
27,970
|
|
|
|
25,946
|
|
|
|
27,041
|
|
Core general and
administrative expenses
|
|
|
(13,642)
|
|
|
|
(3,121)
|
|
|
|
(3,639)
|
|
|
|
(3,575)
|
|
|
|
(3,307)
|
|
Non-GAAP core
operating income
|
|
$
|
94,193
|
|
|
$
|
23,757
|
|
|
$
|
24,331
|
|
|
$
|
22,371
|
|
|
$
|
23,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core
operating income per diluted share
|
|
$
|
4.08
|
|
|
$
|
1.03
|
|
|
$
|
1.05
|
|
|
$
|
0.97
|
|
|
$
|
1.03
|
|
Weighted average
diluted shares outstanding
|
|
|
23,088
|
|
|
|
23,066
|
|
|
|
23,065
|
|
|
|
23,098
|
|
|
|
23,096
|
|
The following table provides a reconciliation of GAAP pre-tax
net income to non-GAAP core operating income for fiscal year 2015
(unaudited, amounts in thousands):
|
|
Fiscal Year
2015
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
GAAP income (loss)
before income taxes
|
|
$
|
(30,842)
|
|
|
$
|
23,486
|
|
|
$
|
(37,133)
|
|
|
$
|
12,248
|
|
|
$
|
(29,443)
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment
(gain) loss, net
|
|
|
118,429
|
|
|
|
(1,653)
|
|
|
|
59,757
|
|
|
|
7,518
|
|
|
|
52,807
|
|
Stock-based
compensation expense
|
|
|
1,145
|
|
|
|
853
|
|
|
|
(189)
|
|
|
|
370
|
|
|
|
111
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll
income
|
|
|
6,743
|
|
|
|
2,353
|
|
|
|
1,896
|
|
|
|
2,235
|
|
|
|
259
|
|
Interest rate swap net
interest expense
|
|
|
(1,282)
|
|
|
|
(1,282)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-GAAP core
operating income
|
|
$
|
94,193
|
|
|
$
|
23,757
|
|
|
$
|
24,331
|
|
|
$
|
22,371
|
|
|
$
|
23,734
|
|
To view the original version on PR Newswire,
visit:http://www.prnewswire.com/news-releases/arlington-asset-investment-corp-reports-fourth-quarter-and-full-year-2016-financial-results-300403725.html
SOURCE Arlington Asset Investment Corp.