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| 8-K - FORM 8-K - Arlington Asset Investment Corp. | v392225_8k.htm |
Exhibit 99.1
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 Third Quarter 2014 Financial Results
Non-GAAP core operating income of $1.36 per share (diluted) for the third quarter 2014(1)
Dividend of $0.875 per share for the third quarter 2014, payable on October 31, 2014
Annualized dividend yield of 13%(2), 17%(3) on a tax adjusted basis
Book value per share at September 30, 2014 was $30.43
ARLINGTON, VA, October 27, 2014 – 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 | ||||||