ARLINGTON, Va., Oct. 25, 2016 /PRNewswire/ -- Arlington Asset
Investment Corp. (NYSE: AI) (the "Company" or "Arlington") today reported net income of
$18.8 million, or $0.81 per diluted share, and non-GAAP core
operating income of $14.8 million, or
$0.64 per diluted share, for the
quarter ended September 30,
2016. A reconciliation of non-GAAP core operating income to
GAAP income (loss) before income taxes appears at the end of this
press release.
Third Quarter 2016 Financial Highlights
- $0.81 per diluted share of GAAP
net income
- $0.64 per diluted share of
non-GAAP core operating income
- $18.83 per share of book
value
- $14.63 per share of tangible book
value
- $0.625 per share dividend
"During the third quarter, the Company's tangible book value
experienced a recovery of capital through the outperformance of its
interest rate hedges relative to its agency MBS portfolio,
benefiting from rising interest rates, lower volatility and a
narrowing of investment spreads," said J.
Rock Tonkel, Jr., the Company's President and Chief
Executive Officer. "Ongoing low rates and steady home price
appreciation continued to drive high mortgage refinancing volumes,
resulting in elevated prepayment speeds and lower asset yields
during the third quarter on the Company's agency MBS
portfolio. Despite the impact of elevated prepayment speeds,
the Company generated non-GAAP core operating income of
$0.64 per diluted share and delivered
a $0.625 per share dividend to
shareholders. During the third quarter, the Company increased
its agency investment allocation of TBA securities to take
advantage of higher risk adjusted returns in the TBA dollar roll
income market compared to specified agency MBS funded with
repurchase agreement financing. In addition, as the Company's
private-label MBS investments have generally reached their expected
investment returns and performance has plateaued, the Company has
continued to redeploy its appreciated private-label MBS into agency
MBS at expected higher relative returns."
Other Third Quarter Highlights
As of September 30, 2016, the
Company's agency investment portfolio totaled $4,839 million, consisting of $3,669 million of agency mortgage-backed
securities ("MBS") and $1,170 million
of net long to-be-announced ("TBA") agency securities. As of
September 30, 2016, the Company's
$4,839 million agency portfolio was
comprised primarily of the following:
- $1,170 million of 3.0% 30-year
agency TBA securities
- $1,757 million of 3.5% 30-year
specified agency MBS
- $1,907 million of 4.0% 30-year
specified agency MBS
As of September 30, 2016, the
Company's $3,669 million specified
agency MBS portfolio had a weighted average amortized cost basis of
$105.60 and a weighted average market
price of $107.51. 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 security, were approximately one
percentage point as of September 30,
2016, relatively unchanged compared to weighted average
pay-up premiums as of June 30,
2016.
As of September 30, 2016, the
Company's net long TBA securities had a purchase price of
$1,164 million and market value of
$1,170 million, resulting in a net
GAAP carrying fair value of $6
million. Under GAAP, the Company accounts for its TBA
securities as derivative instruments.
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 September 30,
2016, the Company had $750
million in notional amount of two-year interest rate swap
agreements with a weighted average pay fixed rate of 1.04% and a
remaining weighted average maturity of 1.2 years, $500 million in notional amount of three-year
interest rate swap agreements with a weighted average pay fixed
rate of 1.08% and weighted average maturity of 3.0 years, and
$1,500 million in notional amount of
ten-year interest rate swap agreements with a weighted average pay
fixed rate of 1.89% and a remaining weighted average maturity of
9.4 years. In addition, the Company had $375 million in notional amount of forward
starting two-year interest rate swap agreements that become
effective in approximately one year with a weighted average pay
fixed rate of 1.13%.
The Company receives a payment on its interest rate swap
agreements based on the prevailing three-month LIBOR on the date of
reset while the Company makes a payment on its repurchase
agreements that is based on a rate that is generally reset
monthly. As of September 30,
2016, the weighted average receive rate on its interest rate
swap agreements was 0.84%, an increase of 19 basis points from the
prior quarter end. As of September 30,
2016, the weighted average interest rate on its agency
repurchase agreement financing was 0.74%, an increase of 8 basis
points from the prior quarter end. The Company benefits from
this spread differential on the notional amount of its interest
rate swap agreements to the extent the spread difference remains
unchanged.
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 September 30,
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
$600 million that were struck at a
weighted average strike price per contract that equates to a
10-year U.S. Treasury rate of approximately 1.71%, 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 $600 million that
were struck at a weighted average strike price per contract that
equates to a 10-year U.S. Treasury rate of approximately
1.39%. 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 $300 million as of September 30, 2016 that were struck at a weighted
average strike price per contract that equates to a 10-year U.S.
Treasury rate of approximately 1.07%.
Interest income less interest expense on short-term financing on
the Company's agency MBS portfolio for the third quarter of 2016
and 2015 was $17.9 million and
$24.2 million, respectively.
For the quarters ended September 30,
2016 and 2015, the amortization of the Company's net premium
on its agency MBS was $8.9 million
and $9.3 million, respectively, and
its weighted average yield on its agency MBS was 2.60% and 2.81%,
respectively. The actual weighted-average constant prepayment rate
("CPR") for the Company's agency MBS was 12.64% and 10.30% for the
third quarters of 2016 and 2015, respectively.
For the quarters ended September 30,
2016 and 2015, the Company reported TBA dollar roll income
of $5.3 million and $1.9 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 securities 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 third quarter of 2016, the Company recorded net
investment gains on its agency investment portfolio of $9.3 million and net investment gains on its
related interest rate derivative hedging instruments of
$8.4 million for a net investment
gain on its hedged agency portfolio of $17.7
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 gains on its agency
investment portfolio of $4.0 million
and net investment gains on its related interest rate derivative
hedging instruments of $13.5 million
for a net investment gain on its hedged agency portfolio of
$17.5 million, or $0.76 per share.
As of September 30, 2016, the
Company's private-label MBS portfolio consisted of $26.8 million in face value with an amortized
cost basis of $17.3 million and a
fair value of $21.3 million.
Interest income less interest expense on short-term financing on
the Company's private-label MBS portfolio for the third quarter of
2016 and 2015 was $1.5 million and
$3.0 million, respectively, including
non-cash accretion of $0.9 million
and $1.8 million, respectively.
During the third quarter of 2016, the Company sold private-label
MBS for sale proceeds of $67.8
million, which was $0.3
million less than the prior quarter fair value.
Subsequent to September 30, 2016, the
Company sold additional private-label MBS for sale proceeds of
$13.5 million.
As of September 30, 2016, the
Company had $3,371 million of
repurchase agreements outstanding with a weighted average rate of
74 basis points secured by an aggregate of $3,555 million of agency MBS at fair value.
As of September 30, 2016, the Company
also had $6 million of repurchase
agreements outstanding with a weighted average rate of 238 basis
points secured by $13 million of
private-label MBS at fair value.
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 September 30,
2016, the Company's estimated net operating loss
carry-forwards were $91.7 million
that begin to expire in 2027 and its estimated net capital loss
carry-forwards were $272.2 million
that begin to expire in 2019. The Company's estimated net
operating and net capital loss carry-forwards as of September 30, 2016 are subject to potential
adjustments up to the time of filing the Company's income tax
returns. For GAAP accounting purposes, as of September 30, 2016 the Company had a deferred tax
asset of $96.9 million, or
$4.20 per share, which reflects a
substantial valuation allowance against its net capital loss
carry-forwards. During the third quarter of 2016, the Company
recorded an increase in the valuation allowance of $2.7 million.
Distributions to Shareholders
The Company's Board of Directors approved a distribution to
common shareholders of $0.625 per
share for the third quarter of 2016. The distribution will be
paid on October 31, 2016 to
shareholders of record as of September 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% 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, 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.
Conference Call
The Company will hold a conference call for investors
at 9:00 A.M. Eastern Time on Wednesday, October 26,
2016 to discuss the Company's third quarter of 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)
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
42,761
|
|
|
$
|
36,987
|
|
Interest
receivable
|
|
|
10,683
|
|
|
|
11,936
|
|
Sold securities
receivable
|
|
|
62,516
|
|
|
|
—
|
|
Mortgage-backed
securities, at fair value
|
|
|
|
|
|
|
|
|
Private-label
|
|
|
21,304
|
|
|
|
130,553
|
|
Agency
|
|
|
3,669,259
|
|
|
|
3,865,316
|
|
Derivative assets, at
fair value
|
|
|
7,870
|
|
|
|
12,991
|
|
Deferred tax assets,
net
|
|
|
96,891
|
|
|
|
97,530
|
|
Deposits
|
|
|
120,537
|
|
|
|
29,429
|
|
Other
assets
|
|
|
2,776
|
|
|
|
18,197
|
|
Total
assets
|
|
$
|
4,034,597
|
|
|
$
|
4,202,939
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
3,376,898
|
|
|
$
|
2,834,780
|
|
Federal Home Loan Bank
advances
|
|
|
—
|
|
|
|
786,900
|
|
Interest
payable
|
|
|
1,449
|
|
|
|
2,436
|
|
Accrued compensation
and benefits
|
|
|
4,315
|
|
|
|
5,170
|
|
Dividend
payable
|
|
|
15,060
|
|
|
|
14,504
|
|
Derivative
liabilities, at fair value
|
|
|
68,084
|
|
|
|
553
|
|
Purchased securities
payable
|
|
|
59,763
|
|
|
|
—
|
|
Other
liabilities
|
|
|
1,239
|
|
|
|
1,132
|
|
Long-term
debt
|
|
|
73,601
|
|
|
|
73,433
|
|
Total
liabilities
|
|
|
3,600,409
|
|
|
|
3,718,908
|
|
Equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
230
|
|
|
|
230
|
|
Additional paid-in
capital
|
|
|
1,899,754
|
|
|
|
1,898,085
|
|
Accumulated other
comprehensive income, net of taxes
|
|
|
4,685
|
|
|
|
12,371
|
|
Accumulated
deficit
|
|
|
(1,470,481)
|
|
|
|
(1,426,655)
|
|
Total
equity
|
|
|
434,188
|
|
|
|
484,031
|
|
Total liabilities
and equity
|
|
$
|
4,034,597
|
|
|
$
|
4,202,939
|
|
Book value per
share
|
|
$
|
18.83
|
|
|
$
|
21.05
|
|
Tangible book
value per share (1)
|
|
$
|
14.63
|
|
|
$
|
16.81
|
|
Shares outstanding
(in thousands) (2)
|
|
|
23,056
|
|
|
|
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)
|
|
|
|
Third Quarter
2016
|
|
|
Second Quarter
2016
|
|
|
Third Quarter
2015
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed
securities
|
|
$
|
23,917
|
|
|
$
|
23,408
|
|
|
$
|
27,989
|
|
Private-label
mortgage-backed securities
|
|
|
1,655
|
|
|
|
2,808
|
|
|
|
3,249
|
|
Other
|
|
|
82
|
|
|
|
135
|
|
|
|
1
|
|
Total interest
income
|
|
|
25,654
|
|
|
|
26,351
|
|
|
|
31,239
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
6,193
|
|
|
|
5,509
|
|
|
|
3,989
|
|
Long-term
debt
|
|
|
1,197
|
|
|
|
1,194
|
|
|
|
1,176
|
|
Total interest
expense
|
|
|
7,390
|
|
|
|
6,703
|
|
|
|
5,165
|
|
Net interest
income
|
|
|
18,264
|
|
|
|
19,648
|
|
|
|
26,074
|
|
Investment gain
(loss), net
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
on sale of available-for-sale investments, net
|
|
|
2,439
|
|
|
|
(593)
|
|
|
|
969
|
|
Other-than-temporary
impairment charges
|
|
|
-
|
|
|
|
(1,638)
|
|
|
|
-
|
|
Gain on trading
investments, net
|
|
|
2,468
|
|
|
|
27,665
|
|
|
|
36,889
|
|
Gain (loss) from
derivative instruments, net
|
|
|
15,196
|
|
|
|
(34,381)
|
|
|
|
(97,627)
|
|
Other, net
|
|
|
619
|
|
|
|
-
|
|
|
|
12
|
|
Total investment gain
(loss), net
|
|
|
20,722
|
|
|
|
(8,947)
|
|
|
|
(59,757)
|
|
General and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
3,430
|
|
|
|
2,756
|
|
|
|
2,071
|
|
Other general and
administrative expenses
|
|
|
1,200
|
|
|
|
4,916
|
|
|
|
1,379
|
|
Total general and
administrative expenses
|
|
|
4,630
|
|
|
|
7,672
|
|
|
|
3,450
|
|
Income (loss)
before income taxes
|
|
|
34,356
|
|
|
|
3,029
|
|
|
|
(37,133)
|
|
Income tax provision
(benefit)
|
|
|
15,543
|
|
|
|
(9,865)
|
|
|
|
15,497
|
|
Net income
(loss)
|
|
$
|
18,813
|
|
|
$
|
12,894
|
|
|
$
|
(52,630)
|
|
Basic earnings (loss)
per share
|
|
$
|
0.82
|
|
|
$
|
0.56
|
|
|
$
|
(2.29)
|
|
Diluted earnings
(loss) per share
|
|
$
|
0.81
|
|
|
$
|
0.56
|
|
|
$
|
(2.29)
|
|
Weighted average
shares outstanding (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,038
|
|
|
|
23,003
|
|
|
|
23,021
|
|
Diluted
|
|
|
23,349
|
|
|
|
23,070
|
|
|
|
23,021
|
|
Other
comprehensive income (loss), net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on
available-for-sale securities
|
|
$
|
(221)
|
|
|
$
|
(1,006)
|
|
|
$
|
(2,451)
|
|
Reclassification in
investment gain (loss), net, related to sales and other-than-temporary impairment charges
on available-for-sale
securities
|
|
|
(2,324)
|
|
|
|
775
|
|
|
|
(1,122)
|
|
Comprehensive
income (loss)
|
|
$
|
16,268
|
|
|
$
|
12,663
|
|
|
$
|
(56,203)
|
|
The following tables present information on the Company's
investment and hedge portfolio as of September 30, 2016 (unaudited, dollars in
thousands):
Agency
MBS:
|
|
|
|
|
|
|
Fair
Value
|
|
Specified agency
MBS
|
|
$
|
3,664,728
|
|
Inverse interest-only
agency MBS
|
|
|
4,531
|
|
Total agency
MBS
|
|
|
3,669,259
|
|
Net long agency TBA
position
|
|
|
1,169,899
|
|
Total
|
|
$
|
4,839,158
|
|
Specified Agency
MBS:
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Net
Unamortized
Purchase
Premiums
|
|
|
Amortized
Cost Basis
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair
Value
|
|
|
Market
Price
|
|
|
Coupon
|
|
|
Weighted
Average
Life
|
|
30-year fixed
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5%
|
|
$
|
1,652,087
|
|
|
$
|
87,457
|
|
|
$
|
1,739,544
|
|
|
$
|
17,771
|
|
|
$
|
1,757,315
|
|
|
$
|
106.37
|
|
|
|
3.50
|
%
|
|
|
5.8
|
|
4.0%
|
|
|
1,756,655
|
|
|
|
103,601
|
|
|
|
1,860,256
|
|
|
|
47,133
|
|
|
|
1,907,389
|
|
|
|
108.58
|
|
|
|
4.00
|
%
|
|
|
4.8
|
|
5.5%
|
|
|
21
|
|
|
|
—
|
|
|
|
21
|
|
|
|
3
|
|
|
|
24
|
|
|
|
114.00
|
|
|
|
5.50
|
%
|
|
|
5.2
|
|
Total/weighted-average
|
|
$
|
3,408,763
|
|
|
$
|
191,058
|
|
|
$
|
3,599,821
|
|
|
$
|
64,907
|
|
|
$
|
3,664,728
|
|
|
|
107.51
|
|
|
|
3.76
|
%
|
|
|
5.3
|
|
Net long agency
TBA position:
|
|
|
|
Notional
Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Long
(Short)
Position
|
|
|
Implied
Cost
Basis
|
|
|
Implied Fair
Value
|
|
|
Net Carrying
Amount
|
|
30-year 3.0% coupon
securities
|
|
$
|
1,125,000
|
|
|
$
|
1,163,633
|
|
|
$
|
1,169,899
|
|
|
$
|
6,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private-label MBS
(excluding interest-only securities):
|
|
|
Face value
|
|
$
|
26,821
|
|
|
Discount
|
|
$
|
(9,553)
|
|
|
Amortized
cost
|
|
$
|
17,268
|
|
|
Net unrealized
gain
|
|
$
|
3,939
|
|
|
Fair market
value
|
|
$
|
21,207
|
|
|
Fair market value (as
a % of face value)
|
|
|
79.1
|
%
|
|
Quarterly GAAP yield
(annualized)
|
|
|
11.57
|
%
|
|
Weighted average
coupon
|
|
|
4.54
|
%
|
|
Three-month voluntary
prepayment rate (annualized)
|
|
|
1.8
|
%
|
|
60+ days
delinquent
|
|
|
10.5
|
%
|
|
Three-month default
rate (annualized)
|
|
|
10.2
|
%
|
|
Three-month loss
severity rate (1)
|
|
|
18.9
|
%
|
|
Three-month credit
loss rate (annualized) (2)
|
|
|
1.9
|
%
|
(1)
|
Represents a
"loss-given-default" rate. Private-label MBS collateral pools which
experienced no defaults within the three-month historical period
are excluded from the loss severity rate calculation.
|
(2)
|
Calculated as the
three-month default rate multiplied by the three-month loss
severity rate.
|
Interest Rate
Swaps Currently Effective:
|
|
|
|
|
|
|
|
Weighted-average:
|
|
|
|
|
|
|
|
Notional Amount
|
|
|
Fixed
Pay Rate
|
|
|
Remaining
Life (Years)
|
|
|
Fair Value
|
|
Years to
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3
years
|
|
$
|
1,250,000
|
|
|
|
1.06
|
%
|
|
|
1.9
|
|
|
$
|
(2,953)
|
|
3 to 10
years
|
|
|
1,500,000
|
|
|
|
1.89
|
%
|
|
|
9.4
|
|
|
|
(64,235)
|
|
Total /
weighted-average
|
|
$
|
2,750,000
|
|
|
|
1.51
|
%
|
|
|
6.0
|
|
|
$
|
(67,188)
|
|
|
|
Forward-Starting
Interest Rate Swaps:
|
|
|
|
|
|
|
|
Weighted-average:
|
|
|
|
|
|
|
|
Notional Amount
|
|
|
Fixed
Pay Rate
|
|
|
Term After
Effective
Date (Years)
|
|
|
Fair Value
|
|
Effective in
approximately 1 year
|
|
$
|
375,000
|
|
|
|
1.13
|
%
|
|
|
2.0
|
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on 10-year
U.S. Treasury Note Futures:
|
|
|
|
Notional
Amount
|
|
|
Implied
Strike
Rate
(1)
|
|
|
Net Fair
Value
|
|
Purchased put
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2016
maturity
|
|
$
|
500,000
|
|
|
|
1.72
|
%
|
|
$
|
781
|
|
November 2016
maturity
|
|
|
100,000
|
|
|
|
1.67
|
%
|
|
|
625
|
|
Total / weighted
average for purchased put options
|
|
$
|
600,000
|
|
|
|
1.71
|
%
|
|
|
1,406
|
|
Sold call
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2016
maturity
|
|
$
|
500,000
|
|
|
|
1.38
|
%
|
|
|
(469)
|
|
November 2016
maturity
|
|
|
100,000
|
|
|
|
1.44
|
%
|
|
|
(390)
|
|
Total / weighted
average for sold call options
|
|
$
|
600,000
|
|
|
|
1.39
|
%
|
|
|
(859)
|
|
Purchased call
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2016
maturity
|
|
$
|
300,000
|
|
|
|
1.07
|
%
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
$
|
641
|
|
(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 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.
Core General and Administrative Expenses
Core general and administrative expenses are non-interest
expenses reported within the line item "total other expenses" of
the consolidated statements of comprehensive income less
stock-based compensation expense. For the three months ended
June 30, 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 the Three Months Ended
September 30, 2016 and June 30, 2016
The following table presents the Company's computation of core
operating income for the third and second quarters of 2016,
respectively (unaudited, amounts in thousands, except per share
amounts):
|
|
Third Quarter
2016
|
|
|
Second Quarter
2016
|
|
GAAP net interest
income
|
|
$
|
18,264
|
|
|
$
|
19,648
|
|
TBA dollar roll
income
|
|
|
5,321
|
|
|
|
3,719
|
|
Interest rate swap
net interest expense
|
|
|
(5,126)
|
|
|
|
(4,376)
|
|
Economic net interest
income
|
|
|
18,459
|
|
|
|
18,991
|
|
Core and general
administrative expenses
|
|
|
(3,612)
|
|
|
|
(3,444)
|
|
Non-GAAP core
operating income
|
|
$
|
14,847
|
|
|
$
|
15,547
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core
operating income per diluted share
|
|
$
|
0.64
|
|
|
$
|
0.67
|
|
Weighted average
diluted shares outstanding
|
|
|
23,349
|
|
|
|
23,070
|
|
The following table provides a reconciliation of GAAP pre-tax
net income to non-GAAP core operating income for the third and
second quarters of 2016, respectively (unaudited, amounts in
thousands):
|
|
Third Quarter
2016
|
|
|
Second Quarter
2016
|
|
GAAP income before
income taxes
|
|
$
|
34,356
|
|
|
$
|
3,029
|
|
Less:
|
|
|
|
|
|
|
|
|
Total investment
(gain) loss, net
|
|
|
(20,722)
|
|
|
|
8,947
|
|
Stock-based
compensation expense
|
|
|
1,018
|
|
|
|
647
|
|
Non-recurring proxy
contest related expenses
|
|
|
-
|
|
|
|
3,581
|
|
Add
back:
|
|
|
|
|
|
|
|
|
TBA dollar roll
income
|
|
|
5,321
|
|
|
|
3,719
|
|
Interest rate swap net
interest expense
|
|
|
(5,126)
|
|
|
|
(4,376)
|
|
Non-GAAP core
operating income
|
|
$
|
14,847
|
|
|
$
|
15,547
|
|
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 the three month
periods ended September 30, 2016 and
June 30, 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
(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-third-quarter-2016-financial-results-300351098.html
SOURCE Arlington Asset Investment Corp.