EX-99.1 2 v358450_ex99-1.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 2013 Financial Results

Non-GAAP core operating income of $1.03 per share (diluted) for the third quarter 2013(1)

Dividend of $0.875 per share for the third quarter 2013, payable on October 31, 2013

Annualized dividend yield of 14%(2), 19%(3) on a tax adjusted basis

Book value per share at September 30, 2013 was $31.77

 

ARLINGTON, VA, October 28, 2013 – 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)
(Unaudited)

 

         
   Three Months Ended   Nine Months Ended 
   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