Attached files
| file | filename |
|---|---|
| 8-K - FORM 8-K - Arlington Asset Investment Corp. | v334199_8k.htm |
Contacts:
Media: 703.373.0200 or ir@arlingtonasset.com
Investors: Kurt Harrington at 703.373.0200 or ir@arlingtonasset.com
Arlington Asset Investment Corp. Reports Fourth Quarter and Full Year 2012 Financial Results
Non-GAAP core operating income of $1.25 per share (diluted) for the fourth quarter 2012 or $4.92 per share (diluted) for the year ended December 31, 2012(1)
22.3% return on equity from non-GAAP core operating income for the fourth quarter 2012(2)
GAAP net income of $175.8 million includes release of valuation allowance on deferred tax assets of $162.5 million
Dividend of $0.875 per share for the fourth quarter 2012, paid on December 31, 2012
Annualized dividend yield of 15%(3), 20%(4) on a tax adjusted basis
Book value per share at December 31, 2012 was $35.24
ARLINGTON, VA, February 6, 2013 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company”) today reported non-GAAP core operating income of $16.7 million for the quarter ended December 31, 2012, or $1.25 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 $175.8 million for the quarter ended December 31, 2012, or $13.21 per share (diluted), compared to net income of $3.1 million for the quarter ended September 30, 2012, or $0.31 per share (diluted), and net income of $6.9 million, or $0.89 per share (diluted), for the quarter ended December 31, 2011.
During the fourth quarter the Company recognized an income tax benefit of $12.22 (diluted) per share resulting from the release of $162.5 million in valuation allowances on its existing deferred tax assets. The Company determined that it is more-likely-than-not that those deferred tax assets will be utilized based on the framework established for assessing the recoverability of deferred tax assets. As a result, the Company’s book value per share of $35.24 as of December 31, 2012 reflects $12.30 per share related to the deferred tax assets on the balance sheet. As the Company benefits from the utilization of the deferred tax assets in future periods, the corresponding book value attributable to the deferred tax assets utilized will also be reduced over time.
This development was an outgrowth of the consistent cash returns the Company’s business has delivered in each of the last three years and the expected positive effect on the Company’s future returns from the accretive offerings undertaken during the past year, the reduction of potential litigation liability, costs and expenses, the impact of improving housing markets and the Company’s reduced cost burden. Going forward, the Company will continue to receive the cash tax benefits of its $230 million net operating loss carry-forwards through 2025 as well as a portion of its $285 million net capital loss carry-forwards through 2014. Due to the Company’s current C corporation structure, shareholders will continue to benefit from an after-tax yield on the Company’s dividends that is approximately 35% higher than companies with a REIT structure.
“This was another quarter and year of steady progress for Arlington. Our agency-backed MBS portfolio continues to record low prepayment speeds and attractive cash returns with protection against higher rates from the Company’s substantial hedge position extending through September 2018,” said J. Rock Tonkel, Jr., the Company’s President and Chief Operating Officer. “As the year progressed we became increasingly selective in new investments, but we continue to see attractive opportunities across our business. After taking advantage of opportunities around year-end to increase our private-label MBS exposure, as of today, Arlington now has approximately two-thirds of its investable capital allocated to prime credit, deep discount, private-label MBS. Credit performance has continued to improve in this portfolio for several quarters, and as the positive implications of the housing recovery have begun to be recognized, risk spreads have declined and we have observed continued price appreciation since year-end for private-label MBS like ours.”
Fourth Quarter Highlights
Net interest income for the quarter was $17.5 million, including non-cash accretion on private-label mortgage backed securities (“MBS”) of $0.3 million required under GAAP. Net realized cash gains of $2.6 million during the quarter were from sales of MBS offset by disposition of hedge instruments. The three-month constant prepayment rate (“CPR”) for the Company’s agency-backed MBS as of December 31, 2012 was 6.06%. The Company’s debt to equity ratio at December 31, 2012 was 3 to 1.
As of December 31, 2012, the Company’s agency-backed MBS portfolio consisted of $1.4 billion in face value with a cost basis of $1.5 billion and a fair value of $1.6 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 4.04%, a weighted average cost of 107.2, a weighted average market price of 109.8, and a weighted average cost of repo funding of 48 basis points. On a mark-to-market basis, at December 31, 2012, the estimated hedged cost of funds associated with the agency-backed MBS portfolio was 1.12% on a weighted average basis over 5 years starting in September 2013. The average balance over that period was $830 million.
As of December 31, 2012, the Company’s private-label MBS portfolio consisted of $330.6 million in face value with an amortized cost basis of $159.7 million and a fair value of $199.1 million. The following table presents certain statistics of our private-label MBS portfolio as of or for the quarter ended December 31, 2012 (dollars in millions):
| Total Private-Label MBS | ||||
| Fair market value | $ | 199.1 | ||
| Fair market value (as a % of face value) | 60.2 | % | ||
| Quarterly cash yield (as a % of ending fair market value, excluding GAAP non-cash accretion) | 10.9 | % | ||
| Quarterly unlevered yield (GAAP, as a % of amortized cost) | 14.0 | % | ||
| Quarterly unlevered cash yield (excluding GAAP non-cash accretion) | 13.4 | % | ||
| Average cost (as a % of face value) | 48.3 | % | ||
| Weighted average coupon | 4.4 | % | ||
| Face value | $ | 330.6 | ||
| Amortized cost | $ | 159.7 | ||
| Purchase discount | $ | 170.9 | ||
| 60+ days delinquent | 18.5 | % | ||
| Credit enhancement | 3.0 | % | ||
| Severity (3-month) | 45.8 | % | ||
| Constant prepayment rate (3-month) | 16.9 | % | ||
Dividend
The Company’s Board of Directors approved a $0.875 dividend for the fourth quarter of 2012. The dividend was paid on December 31, 2012 to shareholders of record on December 17, 2012. This represented a 15% annualized dividend yield based on the Class A common stock closing price on the New York Stock Exchange (NYSE) of $23.61 on February 6, 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 December 31, 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, (iv) other-than-temporary impairment charges recognized and (v) release of valuation allowance on deferred tax assets, if any.
The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements for the quarter ended December 31, 2012 (dollars in thousands):
| GAAP net income | $ | 175,797 | ||
| Adjustments | ||||
| Adjusted expenses(a) | 1,202 | |||
| Release of valuation allowance on deferred tax assets | (162,519 | ) | ||
| Stock compensation | 418 | |||
| Net unrealized mark-to-market gain on trading MBS and hedge instruments | (2,250 | ) | ||
| Other-than-temporary impairment charges | 4,277 | |||
| Adjusted interest related to purchase discount accretion | (265 | ) | ||
| Non-GAAP core operating income | $ | 16,660 | ||
| Non-GAAP core operating income per share (diluted) | $ | 1.25 |
| (a) | Adjusted expenses represent certain professional fees, litigation fees and recoveries, 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 fourth quarter 2012 dividend and the Class A common stock closing price on the NYSE of $23.61 on February 6, 2013. |
| (4) | 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 20% 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, statements on tax benefits, including net loss carry-forwards 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 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, both of 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 COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| Three Months Ended | Twelve Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| INTEREST INCOME | $ | 19,241 | $ | 13,727 | $ | 64,154 | $ | 52,545 | ||||||||
| INTEREST EXPENSE | ||||||||||||||||
| Interest on short-term debt | 1,664 | 707 | 4,475 | 2,043 | ||||||||||||
| Interest on long-term debt | 119 | 120 | 490 | 465 | ||||||||||||
| Total interest expense | 1,783 | 827 | 4,965 | 2,508 | ||||||||||||
| Net interest income | 17,458 | 12,900 | 59,189 | 50,037 | ||||||||||||
| OTHER INCOME (LOSS), NET | ||||||||||||||||
| Investment gain (loss), net | 809 | (1,711 | ) | (10,723 | ) | (19,166 | ) | |||||||||
| Other loss | (4 | ) | (3 | ) | (15 | ) | (14 | ) | ||||||||
| Total other income (loss), net | 805 | (1,714 | ) | (10,738 | ) | (19,180 | ) | |||||||||
| Operating income before other expenses | 18,263 | 11,186 | 48,451 | 30,857 | ||||||||||||
| OTHER EXPENSES | ||||||||||||||||
| Compensation and benefits | 2,759 | 2,522 | 10,339 | 10,065 | ||||||||||||
| Professional services | 781 | 708 | 4,118 | 1,833 | ||||||||||||
| Business development | 25 | 23 | 136 | 121 | ||||||||||||
| Occupancy and equipment | 112 | 93 | 467 | 374 | ||||||||||||
| Communications | 48 | 50 | 202 | 197 | ||||||||||||
| Other operating expenses | 833 | 431 | 2,184 | 1,599 | ||||||||||||
| Total other expenses | 4,558 | 3,827 | 17,446 | 14,189 | ||||||||||||
| Income before income taxes | 13,705 | 7,359 | 31,005 | 16,668 | ||||||||||||
| Income tax (benefit) provision | (162,092 | ) | 419 | (160,821 | ) | 1,495 | ||||||||||
| Net income | $ | 175,797 | $ | 6,940 | $ | 191,826 | $ | 15,173 | ||||||||
| Basic earnings per share | $ | 13.30 | $ | 0.90 | $ | 18.80 | $ | 1.97 | ||||||||
| Diluted earnings per share | $ | 13.21 | $ | 0.89 | $ | 18.73 | $ | 1.96 | ||||||||
| Weighted average shares outstanding - basic (in thousands) | 13,220 | 7,748 | 10,205 | 7,720 | ||||||||||||
| Weighted average shares outstanding - diluted (in thousands) | 13,304 | 7,755 | 10,242 | 7,741 | ||||||||||||
| Other comprehensive income (loss), net of taxes | ||||||||||||||||
| Unrealized gains (losses) for the period on available-for-sale securities, net of taxes | $ | 13,719 | $ | (4,791 | ) | $ | 12,156 | $ | (10,022 | ) | ||||||
| Reclassification adjustment for gains included in net income on available-for-sale securities, net of taxes | (11,538 | ) | (94 | ) | (11,538 | ) | (15,106 | ) | ||||||||
| Comprehensive income (loss) | $ | 177,978 | $ | 2,055 | $ | 192,444 | $ | (9,955 | ) | |||||||
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
| ASSETS | December 31, 2012 | December 31, 2011 | ||||||
| Cash and cash equivalents | $ | 35,837 | $ | 20,018 | ||||
| Receivables | ||||||||
| Interest | 4,869 | 2,366 | ||||||
| Sold securities receivable | 26,773 | 41,321 | ||||||
| Other | 644 | 11 | ||||||
| Mortgage-backed securities, at fair value | ||||||||
| Available-for-sale | 199,156 | 179,566 | ||||||
| Trading | 1,556,440 | 636,872 | ||||||
| Other investments | 2,347 | 2,946 | ||||||
| Deferred tax assets, net | 162,281 | - | ||||||
| Derivative assets, at fair value | - | 504 | ||||||
| Deposits | 85,652 | 71,079 | ||||||
| Prepaid expenses and other assets | 159 | 377 | ||||||
| Total assets | $ | 2,074,158 | $ | 955,060 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Liabilities: | ||||||||
| Repurchase agreements | $ | 1,497,191 | $ | 647,977 | ||||
| Interest payable | 582 | 504 | ||||||
| Accrued compensation and benefits | 1,542 | 6,177 | ||||||
| Dividend payable | - | 6,785 | ||||||
| Derivative liabilities, at fair value | 76,850 | 63,024 | ||||||
| Purchased securities payable | - | 15,820 | ||||||
| Accounts payable, accrued expenses and other liabilities | 17,837 | 16,401 | ||||||
| Long-term debt | 15,000 | 15,000 | ||||||
| Total liabilities | 1,609,002 | 771,688 | ||||||
| Equity: | ||||||||
| Common stock | 132 | 77 | ||||||
| Additional paid-in capital | 1,638,061 | 1,508,713 | ||||||
| Accumulated other comprehensive income, net of taxes | 38,985 | 38,367 | ||||||
| Accumulated deficit | (1,212,022 | ) | (1,363,785 | ) | ||||
| Total equity | 465,156 | 183,372 | ||||||
| Total liabilities and equity | $ | 2,074,158 | $ | 955,060 | ||||
| Book Value per Share | $ | 35.24 | $ | 23.67 | ||||
| Shares Outstanding (in thousands) | 13,198 | 7,748 | ||||||