UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): October 27, 2015 (October 26, 2015)
ARLINGTON ASSET INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
Virginia | 54-1873198 | 001-34374 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | (Commission File Number) |
1001 Nineteenth Street North
Arlington, VA 22209
(Address of principal executive offices) (Zip code)
(703) 373-0200
(Registrant’s telephone number including area code)
N/A
(Former name or former address, if changed from last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. | Results of Operations and Financial Condition. |
Arlington Asset Investment Corp. (the “Company”) issued a press release on October 26, 2015 announcing its financial results for the quarter ended September 30, 2015. A copy of the press release is attached hereto as Exhibit 99.1 (the “Press Release”).
The information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 furnished pursuant to Item 9.01, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section. Furthermore, the information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 furnished pursuant to Item 9.01, shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933.
Item 7.01. | Regulation FD Disclosure. |
In the Press Release, the Company also announced that its board of directors (the “Board”) authorized an expansion of the Company’s stock repurchase program, which was originally authorized in July 2010 (the “Repurchase Program”).
Item 8.01. | Other Events. |
The information regarding the Repurchase Program set forth in Item 7.01 is incorporated herein by reference.
Pursuant to the expanded Repurchase Program, the Company may repurchase up to 2,000,000 shares of the Company’s Class A common stock, par value $0.01 per share (“Common Stock”), which includes the 205,485 shares still available to be repurchased under the July 2010 authorization. The Board expanded the Repurchase Program in order to better position the Company to continue stock repurchases while believing that the Common Stock has been trading on the New York Stock Exchange at a price per share below the fair value of the Common Stock after reviewing the trading prices of comparable companies and other relevant factors.
Repurchases of Common Stock may be made from time to time in open market transactions, including through block purchases, through privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in each case at management’s discretion in accordance with applicable securities laws and based on market conditions and other factors. Open market repurchases of shares of the Common Stock will be made in accordance with Rule 10b-18 of the Exchange Act, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice.
The Repurchase Program will be funded using the Company’s cash on hand and cash generated from operations. During the nine months ended September 30, 2015, the Company did not repurchase any shares of Common Stock.
Forward-Looking Statements Disclaimer
This Current Report on Form 8-K contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including those relating to the fair value and future market price of the Common Stock, future market conditions, interest rates, portfolio allocation, financing costs, portfolio hedging, prepayments, advances from the Federal Home Loan Bank of Cincinnati, direct repo, and the effect of actions of the U.S. government, including the Federal Reserve, the Federal Housing Finance Agency and the U.S. Treasury, on our results. Forward-looking statements typically are identified by use of the terms such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions. Forward-looking statements are based on the Company's beliefs, assumptions and expectations of the Company's future performance, taking into account all information currently available to the Company. The Company cannot assure you that actual results will not vary from the expectations contained in the forward-looking statements. All of the forward-looking statements are subject to numerous possible events, factors and conditions, many of which are beyond the control of the Company and not all of which are known to the Company, including, without limitation, market conditions and those described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and other documents which have been filed with the Securities and Exchange Commission. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
2 |
Item 9.01. | Financial Statements and Exhibits. |
(d) | Exhibits. |
99.1 | Arlington Asset Investment Corp. Press Release dated October 26, 2015. |
3 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
ARLINGTON ASSET INVESTMENT CORP. | ||
Date: October 27, 2015 | By: | /s/ Richard E. Konzmann |
Name: | Richard E. Konzmann | |
Title: | Executive Vice President,
Chief Financial Officer and Treasurer |
EXHIBIT INDEX
Exhibit No. | Description | |
99.1 | Arlington Asset Investment Corp. Press Release dated October 26, 2015. |
Exhibit 99.1
Contacts:
Media: 703.373.0200 or ir@arlingtonasset.com
Investors: Rich Konzmann at 703.373.0200 or ir@arlingtonasset.com
Arlington Asset Investment Corp. Reports Third Quarter 2015 Financial Results
Announces Increase to Share Repurchase Program
ARLINGTON, VA, October 26, 2015 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported non-GAAP core operating income of $31.1 million for the quarter ended September 30, 2015, or $1.35 per diluted share. Excluding realized gains and losses on private-label mortgage-backed securities (“MBS”), the Company reported non-GAAP core operating income of $31.2 million, or $1.35 per diluted share. A reconciliation of non-GAAP core operating income measures to GAAP net income (loss) appears at the end of this press release.
Third Quarter 2015 Financial Highlights
· | $1.35 per diluted share of non-GAAP core operating income |
· | $1.35 per diluted share of non-GAAP core operating income excluding gain (loss) on private-label MBS |
· | $(2.29) per diluted share of net loss |
· | $20.75 per share of book value |
· | $0.625 per share dividend declared |
· | Board approval for share repurchase program of up to 2.0 million shares of Class A common stock |
“Continued interest rate volatility and spread widening between the Company’s interest rate hedges and its agency MBS investments primarily drove the decline in book value during the quarter,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. “In light of continued expectations for moderate economic growth and more stable interest rates, the Company adjusted the composition of its hedges during the quarter by increasing its 10-year duration hedge instruments and reducing its shorter duration Eurodollar futures. Looking forward, our interest rate hedges continue to be structured to maintain substantial protection to our agency MBS portfolio against rising interest rates but with a lower initial hedge cost. As of quarter end, the Company’s allocation of investable capital remained relatively unchanged with approximately 23% directed to private-label MBS. The Company expects to maintain its current allocation of investable capital to private-label MBS in the near future to capture the benefit of investment diversification and return opportunities afforded by investing in credit oriented, variable rate investments at low leverage levels. Also, we are pleased to announce that the Company’s wholly-owned captive insurance subsidiary was approved as a member of the Federal Home Loan Bank (“FHLB”) of Cincinnati during the quarter providing the Company with diversification of funding sources at a reduced cost to traditional repurchase financing. Beginning in the fourth quarter, the Company further expanded its lower cost funding sources with its initial “direct repo” provider.”
Other Third Quarter Highlights
As of September 30, 2015, the Company’s agency investment portfolio totaled $4,198 million consisting of $3,790 million of agency MBS and $408 million of net long to-be-announced (“TBA”) agency securities. As of September 30, 2015, the Company’s $3,790 million of fixed-rate agency MBS were comprised of the following:
· | $537.3 million of 3.5% 30-year MBS |
· | $3,107.7 million of 4.0% 30-year MBS |
· | $145.0 million of 4.5% 30-year MBS |
As of September 30, 2015, the Company’s agency MBS had a weighted average original cost of 105.99 and a weighted average market price of 106.99. The Company’s fixed-rate agency MBS was specifically selected for their prepayment protections with approximately 48% of the Company’s agency MBS portfolio in specified pools of low loan balance loans, approximately 26% in specified pools of loans issued under the Home Affordable Refinance Program (“HARP”), while the remainder includes specified pools of loans with low FICO scores or with other characteristics selected for the prepayment protection. 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 security, increased modestly to approximately 3/5 of a point as of September 30, 2015 compared to approximately 1/2 of a point as of June 30, 2015. The three-month constant prepayment rate (“CPR”) for the Company’s agency MBS decreased to 8.16% as of September 30, 2015, compared to 12.34% as of June 30, 2015.
As of September 30, 2015, the Company’s net long TBA securities had a net notional amount of $390.0 million, purchase price of $404.9 million and market value of $408.4 million resulting in a net GAAP carrying fair value of $3.5 million. The Company accounts for its TBA mortgage portfolio as derivative instruments and recognizes income from TBA dollar rolls in other gains and losses in the Company’s financial statements. As of September 30, 3015, the Company’s $408.4 million of net long TBA securities were comprised of the following:
· | $265.8 million of 3.5% 30-year MBS |
· | $90.5 million of 4.0% 30-year MBS |
· | $52.1 million of 3.0% 15-year MBS |
As of September 30, 2015, the total weighted average notional amount of the Company’s interest rate hedges on its agency investment portfolio was $3,050 million comprised of Eurodollar futures, 10-year interest rate swap futures and 10-year U.S. Treasury futures. The total weighted average hedge notional amount as a percentage of the Company’s outstanding repurchase agreement and FHLB advance financing on its agency MBS and net long TBA position was 79% as of September 30, 2015. As of September 30, 2015, the Company’s Eurodollar futures run consecutively for five quarters from June 2016 through June 2017 with a weighted average notional amount of $1,000 million and a weighted average contract rate of 2.40% and a current market rate of 0.93%. As of September 30, 2015, the Company had $985 million in notional 10-year interest rate swap futures with a weighted average implied contract rate of 2.28% and a current market rate of 2.06%. The Company also had $1,065 million in notional 10-year U.S. Treasury futures that were purchased when the 10-year U.S. Treasury rate was 2.20% on a weighted average basis and had a market rate of 2.06% as of period end.
Interest income less interest expense on short-term financing on the Company’s agency MBS portfolio for the third quarter of 2015 was $33.5 million. The amortization of net premiums on the Company’s agency MBS is reflected in the Company’s GAAP net income and changes in book value through net investment gains and losses rather than through net interest income and core operating income. For the quarter ended September 30, 2015, the amortization of the Company’s net premium on its agency MBS based on actual total principal payments was approximately $8.1 million, or $0.35 per diluted share. During the third quarter of 2015, the Company recorded net investment gains on its agency investment portfolio of $34.2 million and net investment losses on its related derivative hedging instruments of $104.2 million for a net investment loss on its hedged agency portfolio of $70.0 million. In recent quarters, the Company’s increased allocation of capital to agency MBS has resulted in growth in the Company’s net interest income and core operating income. With this growth in the agency MBS portfolio, the economic costs of the Company’s hedge instruments have grown proportionately, which are reflected in the Company’s GAAP net income and changes in book value through net investment gains and losses rather than through net interest income and core operating income.
As of September 30, 2015, the Company’s private-label MBS portfolio consisted of $179.2 million in face value with an amortized cost basis of $120.8 million and a fair value of $134.8 million. During the third quarter of 2015, the Company sold private-label MBS for sale proceeds of $14.2 million, realizing a GAAP gain of $1.0 million. Net sale proceeds from these private-label MBS after deducting associated repurchase financing was $7.6 million. Interest income less interest expense on short-term financing on the Company’s private-label MBS portfolio for the third quarter of 2015 was $3.0 million, including non-cash accretion of $1.8 million required under GAAP.
As of September 30, 2015, the Company had $3,121 million of repurchase agreements outstanding with a weighted average rate of 48 basis points and $308.5 million of FHLB advances outstanding with a weighted average rate of 19 basis points secured by an aggregate of $3,613 million of agency MBS at fair value. As of September 30, 2015, the Company also had $32.4 million of repurchase agreements outstanding with a weighted average rate of 214 basis points secured by $59.0 million of private-label MBS at fair value.
Stock Repurchase Program
The Company also announced today that its board of directors has authorized an increase in the Company’s share repurchase program pursuant to which the Company may repurchase up to 2.0 million shares of its Class A common stock, which includes the 205,485 shares previously available to be repurchased under the prior share repurchase program established in July 2010.
Dividend
The Company’s Board of Directors approved a $0.625 dividend for the third quarter of 2015. The dividend will be paid on October 30, 2015 to shareholders of record as of September 30, 2015.
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% 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% 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.
Conference Call
The Company will hold a conference call for investors at 9:00 A.M. Eastern Time on Tuesday, October 27, 2015 to discuss the results. Investors wishing to listen to the earnings call may do so 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.
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, FHLB advances, direct repo, 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 our 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, 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, 2014 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, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
INTEREST INCOME | ||||||||||||||||
Interest on agency securities | $ | 37,325 | $ | 26,711 | $ | 103,769 | $ | 66,603 | ||||||||
Interest on private-label securities | 3,244 | 6,583 | 12,442 | 20,585 | ||||||||||||
Other | 6 | 7 | 18 | 43 | ||||||||||||
Total interest income | 40,575 | 33,301 | 116,229 | 87,231 | ||||||||||||
INTEREST EXPENSE | ||||||||||||||||
Interest on short-term debt | 3,989 | 2,422 | 10,464 | 6,280 | ||||||||||||
Interest on long-term debt | 1,176 | 554 | 3,004 | 1,657 | ||||||||||||
Total interest expense | 5,165 | 2,976 | 13,468 | 7,937 | ||||||||||||
Net interest income | 35,410 | 30,325 | 102,761 | 79,294 | ||||||||||||
INVESTMENT (LOSS) GAIN, NET | ||||||||||||||||
Realized gain on sale of available-for-sale investments, net | 969 | 3,467 | 17,434 | 12,826 | ||||||||||||
Other-than-temporary impairment charges | - | (71 | ) | - | (151 | ) | ||||||||||
Gain (loss) on trading investments, net | 27,553 | (18,025 | ) | (21,005 | ) | 44,429 | ||||||||||
(Loss) gain from derivative instruments, net | (97,828 | ) | 7,556 | (143,556 | ) | (62,509 | ) | |||||||||
Other, net | 8 | 91 | 422 | 415 | ||||||||||||
Total investment (loss) gain, net | (69,298 | ) | (6,982 | ) | (146,705 | ) | (4,990 | ) | ||||||||
OTHER EXPENSES | ||||||||||||||||
Compensation and benefits | 2,071 | 3,995 | 7,152 | 10,141 | ||||||||||||
Other operating expenses | 1,174 | 1,059 | 3,232 | 3,448 | ||||||||||||
Total other expenses | 3,245 | 5,054 | 10,384 | 13,589 | ||||||||||||
Income (loss) before income taxes | (37,133 | ) | 18,289 | (54,328 | ) | 60,715 | ||||||||||
Income tax provision | 15,497 | 5,442 | 33,886 | 21,996 | ||||||||||||
Net income (loss) | $ | (52,630 | ) | $ | 12,847 | $ | (88,214 | ) | $ | 38,719 | ||||||
Basic earnings (loss) per share | $ | (2.29 | ) | $ | 0.62 | $ | (3.84 | ) | $ | 2.03 | ||||||
Diluted earnings (loss) per share | $ | (2.29 | ) | $ | 0.61 | $ | (3.84 | ) | $ | 1.99 | ||||||
Weighted average shares outstanding - basic (in thousands) | 23,021 | 20,577 | 22,991 | 19,056 | ||||||||||||
Weighted average shares outstanding - diluted (in thousands) | 23,021 | 21,055 | 22,991 | 19,413 | ||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES | ||||||||||||||||
Unrealized gains (losses) on available-for-sale securities (net of taxes of $(1,562), $139, $(4,117), and $1,717, respectively) | $ | (2,451 | ) | $ | 219 | $ | (6,775 | ) | $ | 2,697 | ||||||
Reclassification in investment (loss) gain, net, related to sales and other-than-temporary impairment charges on available-for-sale securities (net of tax of $(287), $(766), $(4,979) and $(3,866), respectively) | (1,122 | ) | (2,456 | ) | (17,763 | ) | (8,276 | ) | ||||||||
Comprehensive (loss) income | $ | (56,203 | ) | $ | 10,610 | $ | (112,752 | ) | $ | 33,140 |
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS | September 30, 2015 | June 30, 2015 | December 31, 2014 | |||||||||
Cash and cash equivalents | $ | 13,529 | $ | 20,840 | $ | 33,832 | ||||||
Interest receivable | 11,459 | 12,273 | 10,701 | |||||||||
Sold securities receivable | 28,035 | 51,690 | - | |||||||||
Mortgage-backed securities, at fair value | ||||||||||||
Private-label securities | 134,789 | 152,162 | 267,437 | |||||||||
Agency securities | 3,790,044 | 4,154,387 | 3,414,340 | |||||||||
Derivative assets, at fair value | 3,863 | 2,144 | 1,267 | |||||||||
Deferred tax assets, net | 103,319 | 113,121 | 125,607 | |||||||||
Deposits | 87,258 | 183,806 | 160,427 | |||||||||
Other assets | 9,938 | 4,247 | 4,120 | |||||||||
Total assets | $ | 4,182,234 | $ | 4,694,670 | $ | 4,017,731 | ||||||
LIABILITIES AND EQUITY | ||||||||||||
Liabilities: | ||||||||||||
Repurchase agreements | $ | 3,153,756 | $ | 3,631,772 | $ | 3,179,775 | ||||||
FHLB advances | 308,500 | - | - | |||||||||
Interest payable | 1,200 | 1,267 | 1,106 | |||||||||
Accrued compensation and benefits | 4,293 | 2,989 | 6,067 | |||||||||
Dividend payable | 14,553 | 21,089 | 20,195 | |||||||||
Derivative liabilities, at fair value | 53,514 | 144,936 | 124,308 | |||||||||
Purchased securities payable | 92,107 | 271,035 | - | |||||||||
Accounts payable, accrued expenses and other liabilities | 1,003 | 894 | 1,006 | |||||||||
Long-term debt | 75,300 | 75,300 | 40,000 | |||||||||
Total liabilities | 3,704,226 | 4,149,282 | 3,372,457 | |||||||||
Equity: | ||||||||||||
Common stock | 230 | 230 | 230 | |||||||||
Additional paid-in capital | 1,897,472 | 1,898,217 | 1,897,027 | |||||||||
Accumulated other comprehensive income, net of taxes | 11,334 | 14,907 | 35,872 | |||||||||
Accumulated deficit | (1,431,028 | ) | (1,367,966 | ) | (1,287,855 | ) | ||||||
Total equity | 478,008 | 545,388 | 645,274 | |||||||||
Total liabilities and equity | $ | 4,182,234 | $ | 4,694,670 | $ | 4,017,731 | ||||||
Book Value per Share | $ | 20.75 | $ | 23.71 | $ | 28.09 | ||||||
Shares Outstanding (in thousands) (1) | 23,042 | 23,005 | 22,973 |
(1) 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.
(2) During the third quarter of 2015, the Company determined that the previously reported deferred tax asset and acccumulated deficit were incorrect as of December 31, 2014. The Company has revised the previously reported amounts by increasing the deferred tax asset and decreasing the accumulated deficit by $3,242 for this correction.
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 and nine months ended September 30, 2015 and 2014. In determining core operating income, the Company excludes certain legacy litigation expenses and adjusts net income determined in accordance with GAAP for the following non-cash and other items: (i) compensation costs associated with stock-based awards, (ii) non-cash accretion of private-label MBS purchase discounts, (iii) private-label MBS purchase discount accretion realized upon sale or repayment, (iv) other-than-temporary impairment charges, (v) other-than-temporary impairment charges realized upon sale, (vi) both realized and unrealized gains and losses on the agency MBS and all related hedge instruments, and (vii) non-cash income tax provisions.
The Company’s portfolio strategy on the Company’s agency 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 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 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 collected 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. Since the timing of realized cash gains or losses on private-label MBS may vary significantly between periods, the Company also reports core operating income excluding gains on private-label MBS.
These non-GAAP core operating income measurements are 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 these non-GAAP measurements assist 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. Additional limitations of core operating income are that it does not include economic financing costs on the Company’s hedging instruments or amortization of premiums or discounts on the Company’s agency MBS whereas those amounts are both reflected in net income determined in accordance with GAAP and changes in book value. Therefore, the Company believes net income on a GAAP basis and these core operating income measures on a non-GAAP basis should be considered together.
The following is a reconciliation of GAAP net income to non-GAAP core operating income measures for the three and nine months ended September 30, 2015 and 2014 (dollars in thousands):
ARLINGTON ASSET INVESTMENT CORP. | ||||||||||||||||
NON-GAAP CORE OPERATING INCOME | ||||||||||||||||
(Dollars in thousands, except per share data) | Three Months Ended | Nine Months Ended | ||||||||||||||
(Unaudited) | September 30, | September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
GAAP net income (loss) | $ | (52,630 | ) | $ | 12,847 | $ | (88,214 | ) | $ | 38,719 | ||||||
Adjustments: | ||||||||||||||||
Legacy litigation expenses | - | - | - | 54 | ||||||||||||
Non-cash income tax provision | 14,729 | 5,114 | 32,035 | 21,100 | ||||||||||||
Stock compensation | (189 | ) | 1,524 | 292 | 2,980 | |||||||||||
Net realized and unrealized loss on trading MBS and hedge instruments | 70,275 | 10,374 | 164,460 | 17,808 | ||||||||||||
Net Realized gain on private-label MBS | (969 | ) | (3,467 | ) | (17,434 | ) | (12,826 | ) | ||||||||
Other-than-temporary impairment charges | - | 71 | - | 151 | ||||||||||||
Non-GAAP core operating income excluding gain on private-label MBS | 31,216 | 26,463 | 91,139 | 67,986 | ||||||||||||
Net Realized gain on private-label MBS | 969 | 3,467 | 17,434 | 12,826 | ||||||||||||
Other-than-temporary impairment charges realized upon sale or repayment | (1,222 | ) | - | (7,303 | ) | (4,026 | ) | |||||||||
Purchase discount accretion of private-label MBS realized upon sale or repayment | 1,912 | 2,275 | 11,714 | 2,622 | ||||||||||||
Non-cash interest income related to purchase discount accretion of private-label MBS | (1,797 | ) | (3,531 | ) | (6,820 | ) | (10,256 | ) | ||||||||
Non-GAAP core operating income | $ | 31,078 | $ | 28,674 | $ | 106,164 | $ | 69,152 | ||||||||
Non-GAAP core operating income excluding gain on private-label MBS per diluted share | $ | 1.35 | $ | 1.26 | $ | 3.96 | $ | 3.50 | ||||||||
Non-GAAP core operating income per diluted share | $ | 1.35 | $ | 1.36 | $ | 4.61 | $ | 3.56 | ||||||||
Weighted average diluted shares outstanding | 23,065 | 21,055 | 23,041 | 19,413 |
The following tables present information on the Company’s investment portfolio as of September 30, 2015:
ARLINGTON ASSET INVESTMENT CORP.
AGENCY INVESTMENT PORTFOLIO
As of September 30, 2015
(Dollars in thousands)
(Unaudited)
Agency MBS: | ||||||||||||||||||||
Face Amount | Fair Value | Market Price | Coupon | Weighted Average Life | ||||||||||||||||
30-year fixed rate: | ||||||||||||||||||||
3.5% | $ | 513,911 | $ | 537,352 | $ | 104.56 | 3.50 | % | 9.8 | |||||||||||
4.0% | 2,895,740 | 3,107,689 | 107.32 | 4.00 | % | 7.9 | ||||||||||||||
4.5% | 132,709 | 144,977 | 109.24 | 4.50 | % | 6.7 | ||||||||||||||
5.5% | 23 | 26 | 112.01 | 5.50 | % | 4.5 | ||||||||||||||
Total/weighted average | $ | 3,542,383 | $ | 3,790,044 | 106.99 | 3.95 | % | 8.1 | ||||||||||||
Net TBA Securities: | ||||||||||||||||||||
Net Notional Amount | Net Cost Basis | Net Market Value | Net Carrying Value | |||||||||||||||||
30-year fixed rate: | ||||||||||||||||||||
3.5% | $ | 255,000 | $ | 263,438 | $ | 265,824 | $ | 2,386 | ||||||||||||
4.0% | 85,000 | 89,789 | 90,511 | 722 | ||||||||||||||||
15-year fixed rate: | ||||||||||||||||||||
3.0% | 50,000 | 51,656 | 52,039 | 383 | ||||||||||||||||
Total | $ | 390,000 | $ | 404,883 | $ | 408,374 | $ | 3,491 |
ARLINGTON ASSET INVESTMENT CORP. | ||||
PRIVATE-LABEL MBS PORTFOLIO | ||||
As of September 30, 2015 | ||||
(Dollars in thousands) | ||||
(Unaudited) | ||||
Face value | $ | 179,156 | ||
Unamortized discount | $ | (58,331 | ) | |
Amortized cost | $ | 120,825 | ||
Net unrealized gain | $ | 13,963 | ||
Fair market value | $ | 134,788 | ||
Fair market value (as a % of face value) | 75.2 | % | ||
Quarterly GAAP yield (annualized) | 9.77 | % | ||
Weighted average coupon | 3.03 | % | ||
60+ days delinquent | 12.1 | % | ||
Credit enhancement | 0.1 | % | ||
Constant default rate (3-month) | 3.0 | % | ||
Loss severity (3-month) | 29.2 | % | ||
Voluntary prepayment rate (3-month) | 10.9 | % |
#&SD:REH_R,9)PK_LW[=-TV[V'FFC"
M7BW725#J-W2"+A$VI5"%, @ ;;@$ZD8WW8^+S#RA78HP%U'E PR4R F /P 1
M H:C_HX!1< < DZO=(2W+V9M#K'45JEA=UJ4*<"ET?,T4%3J(\IC<[8_7Y2G
M^.8Q#?'QQ9B8&K"^=R^?(Q-;FY>,BI\E;E9EH:,(W:R0+-T'@I,W#Y*1>-(Q
M5R4'"J:0@40-R@8""/"L6/M+78S.3E8F'KLO97D Q:/YHL8K&( R(_(NLS:I
M^2?,S/)!PW;'4!),!T+RZF 3% 5 KK2[OJ?2'@@5*:3N+PJNH]1FZCJXJA'2:.@@8J\=)R:*I#!^!BAP[9
MK))GIJ3E\IXPLC>P-U$9'&%-L:%L;'(8A%\EQ;1TU243$Q>18C&-9*/2B01*
M!I!$0'4GQK';..9_PW!R,G.1F:[A%TD]4:'ELD8]'B[%7)[V ;Q8
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M=88,YB,(Q$QP[)_I'!S-'$.