MCLEAN, Va., Aug. 3, 2021 /PRNewswire/ -- Arlington Asset
Investment Corp. (NYSE: AAIC) (the "Company" or "Arlington") today reported a net loss
attributable to common shareholders of $7.8
million, or $0.24 per diluted
common share, and non-GAAP core operating income of $2.2 million, or $0.07 per diluted common share, for the quarter
ended June 30, 2021. A
reconciliation of non-GAAP core operating income to GAAP net income
appears at the end of this press release.
Second Quarter 2021 Financial Highlights
- $0.24 per diluted common share of
GAAP net loss
- $0.07 per diluted common share of
non-GAAP core operating income
- $5.94 per common share of book
value
- 2.2 to 1 "at risk" leverage ratio
- 0.9 million shares of common stock repurchased, or 2.6% of
outstanding common stock at an average price of $4.06 per share
-
- Subsequent to June 30, 2021,
repurchased an additional 0.4 million shares of common stock, or
1.1% of outstanding common stock at an average price of
$3.96 per share
"The Company successfully expanded its capital allocation to
investments in mortgage servicing rights ("MSR") to 25% of
investable capital with attractive unlevered returns and realized
higher profitability during the quarter as a result. The Company's
MSR investments add a strong return opportunity to the Company's
earnings profile while also providing an important duration hedge
for the Company's low coupon agency mortgage portfolio," said J.
Rock Tonkel, Jr., the Company's President and Chief Executive
Officer. "The diversification of the Company's investment
portfolio into its MSR and mortgage credit strategies and its
continued low overall leverage profile reduced the Company's
sensitivity to agency mortgage spreads and helped cushion its
portfolio results during a period of agency mortgage-backed
security ("MBS") spread widening through the second quarter.
The Company continues to make accretive repurchases of shares of
its common stock, having repurchased 3.7% of its outstanding common
stock since the prior quarter end. The Company is currently
operating with low leverage and high liquidity while it continues
to scale its MSR portfolio and make solid progress in evaluating
and deploying capital to high return investment opportunities that
complement its agency mortgage investments and diversify risk, with
the goal of improving the level and reliability of returns to
shareholders over time."
Other Second Quarter Highlights
As of June 30, 2021, the Company's
investment portfolio totaled $954
million at fair value, which includes $36 million of business purpose residential
mortgage loans of a consolidated variable interest entity
("VIE"). Assuming the Company's investment in the VIE was not
consolidated, the Company's investment portfolio totaled
$930 million at fair value as of
June 30, 2021 consisting of
$726 million of agency
mortgage-backed securities ("MBS"), $130
million of mortgage credit investments and $74 million of MSR related assets. Based on
investable capital, the Company has allocated 39%, 36%, and 25% of
its capital to its agency MBS, mortgage credit and MSR related
investment strategies, respectively, as of June 30, 2021.
The Company's agency MBS consist of residential mortgage
pass-through certificates for which the principal and interest
payments are guaranteed by a U.S. government sponsored enterprise
("GSE"), such as the Federal National Mortgage Association ("Fannie
Mae") or the Federal Home Loan Mortgage Corporation ("Freddie
Mac"). The Company's mortgage credit investments generally
include mortgage loans secured by residential or commercial real
property or MBS collateralized by residential or commercial
mortgage loans ("non-agency MBS").
As of June 30, 2021, the Company's
agency MBS investment portfolio, totaling $726 million at fair value was comprised solely
of specified agency MBS. As of June
30, 2021, Company did not hold any net long to-be-announced
("TBA") agency MBS. As of June 30,
2021, the Company's $726
million agency MBS investment portfolio was comprised of the
following:
- $473 million of 2.0% coupon
30-year agency MBS
- $253 million of 2.5% coupon
30-year agency MBS
As of June 30, 2021, the Company's
$726 million specified agency MBS
portfolio had a weighted average amortized cost basis of
$103.66 and a weighted average market
price of $102.40. The Company's
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
MBS, were approximately one-half of a percentage point as of
June 30, 2021.
During the second quarter of 2021, the Company purchased agency
MBS totaling $253 million and sold
agency MBS for gross sale proceeds of $34
million for a net realized loss of $0.1 million.
As of June 30, 2021, the Company's
$130 million mortgage credit
investment portfolio at fair value was comprised of the
following:
- $75 million of commercial
mortgage loans
- $25 million of non-agency MBS
collateralized by residential mortgage loans
- $23 million of non-agency MBS
collateralized by business purpose residential mortgage loans
-
- Includes a $12 million net
investment in a consolidated VIE
- $4 million of non-agency MBS
collateralized by small balance commercial mortgage loans
- $3 million of asset backed
securities collateralized by loans secured by residential solar
panels
During the second quarter of 2021, the Company purchased
mortgage credit investments totaling $58
million and sold mortgage credit investments for gross
proceeds of $2 million for a net
realized loss of $0.1 million.
As of June 30, 2021, the Company
had $74 million of MSR financing
receivable investments at fair value. The Company is party
to agreements with a licensed, GSE approved residential
mortgage loan servicer that enable the Company to garner the
economic return of an investment in an MSR purchased by the
mortgage servicing counterparty. The arrangement allows the
Company to participate in the economic benefits of investing in an
MSR without holding the requisite licenses to purchase or hold MSRs
directly. The transactions are accounted for as a financing
receivable on the Company's consolidated financial
statements. During the second quarter of 2021, the Company
purchased $39 million of MSR
financing receivables.
As of June 30, 2021, the Company
had a total of $695 million of
repurchase agreements outstanding. As of June 30, 2021, the Company had $674 million of repurchase agreements outstanding
with a weighted average rate of 0.09% and remaining weighted
average maturity of 14 days secured by an aggregate of $711 million of agency MBS at fair value,
including $34 million of unsettled
agency MBS sale commitments included in the line item "sold
securities receivable" on the consolidated balance
sheet. As of June 30,
2021, the Company had a $21
million repurchase agreement outstanding with a rate of
2.59% and remaining maturity of 307 days secured by a $30 million commercial mortgage loan at fair
value. As of June 30, 2021, the
Company did not have any repurchase agreements outstanding secured
by non-agency MBS.
The Company's "at risk" leverage ratio was 2.2 to 1 as of
June 30, 2021 compared to 1.4 to 1 as
of March 31, 2021. The
Company's "at risk" leverage ratio is calculated as the sum of the
Company's repurchase agreement financing, net payable or receivable
for unsettled securities and net contractual price of TBA
commitments less cash and cash equivalents compared to the
Company's investable capital measured as the sum of the Company's
shareholders' equity and long-term unsecured debt.
GAAP net interest income was $5.1
million for the second quarter of 2021 compared to
$3.8 million for the first quarter of
2021. The Company's weighted average yield on its agency MBS
was 1.62% for the second quarter of 2021 compared to 1.55% for the
first quarter of 2021, and the actual weighted-average constant
prepayment rate ("CPR") for the Company's agency MBS was 6.34% for
the second quarter of 2021 compared to 5.26% for the first quarter
of 2021. The Company's weighted average cost of repurchase
agreement funding secured by agency MBS was 0.11% during the second
quarter of 2021 compared to 0.18% during the first quarter of 2021.
The weighted average yield on the Company's MSR financing
receivables was 10.68% for the second quarter of 2021 compared to
9.37% for the first quarter of 2021.
Under the terms of the Company's interest rate swap agreements,
the Company pays semiannual interest payments based on a fixed rate
and receives variable interest payments based upon either the
prevailing three-month London Interbank Offered Rate ("LIBOR") or
Secured Overnight Financing Rate ("SOFR"). As of June 30, 2021, the Company had $525 million in notional amount of interest rate
swap agreements with a weighted average pay fixed rate of 0.70% and
a remaining weighted average maturity of 6.3 years. The
Company's weighted average net pay rate of its interest rate swap
agreements was 0.73% during the second quarter of 2021 compared to
0.64% during the first quarter of 2021. The Company also held
a $45 million notional amount of net
long U.S. Treasury futures as of June
30, 2021. As of June 30,
2021, the total notional amount of the Company's interest
rate swaps and U.S. Treasury futures was 69% of the Company's
outstanding repurchase agreement funding and net TBA purchase
commitments with a net duration gap of (0.8) years. Under
GAAP, the Company has not designated these transactions as hedging
instruments for financial reporting purposes and, therefore, all
gains and losses on its hedging instruments are recorded as net
investment gains and losses in the Company's financial
statements.
Core operating income was $2.2
million, or $0.07 per diluted
common share for the second quarter of 2021 compared to
$1.0 million, or $0.03 per diluted common share for the first
quarter of 2021. Core operating income is a non-GAAP
financial measure that is described later in this press
release.
The Company had net investment losses of $9.6 million, or $0.29 per diluted common share, for the second
quarter of 2021 on its investment portfolio and related interest
rate hedging instruments, excluding TBA dollar roll income and
interest rate swap net interest expense.
During the second quarter of 2021, the Company repurchased 0.9
million shares of its common stock at an average price of
$4.06 per share for a total purchase
cost of $3.5 million, representing
2.6% of common stock outstanding as of March
31, 2021. Subsequent to June
30, 2021, the Company purchased an additional 0.4 million
shares of its common stock at an average price of $3.96 per share for a total purchase cost of
$1.5 million, representing 1.1% of
common stock outstanding as of June
30, 2021. Currently, the Company had remaining
authorization from its Board of Directors to repurchase up to 14.9
million shares of its common stock.
Distributions to Shareholders
The Company's Board of Directors approved distributions to its
Series B and Series C preferred shareholders of $0.4375 per share and $0.515625 per share, respectively, for the second
quarter of 2021. The distributions were paid on June 30, 2021 to shareholders of record as of
June 15, 2021. The Company's
Board of Directors determined not to declare a dividend on its
common stock for the second quarter of 2021. The Company's
Board of Directors will continue to evaluate the payment of
quarterly dividends based on multiple factors including current
financial results, overall market conditions, return opportunities
on investments, liquidity needs and REIT distribution
requirements. No definitive determination has been made at
this time regarding the declaration of future dividends.
The Company is organized and operated in a manner that will
allow it to qualify as a REIT for U.S. federal income tax purposes
and currently intends to continue to be organized and operated in
such a manner. As a REIT, distributions to shareholders will
generally be taxable as ordinary income that are not eligible to be
taxed as qualified dividends. However, a portion of such
distributions may be designated as long-term capital gain dividends
to the extent that such portion is attributable to the Company's
sale of capital assets held for more than one year.
Non-corporate taxpayers may deduct up to 20% of dividends received
from a REIT that are not designated as capital gain dividends or
qualified dividend income, subject to certain limitations.
Distributions in excess of the Company's current and accumulated
earnings and profits will be treated as a tax-free return of
capital to the extent of each shareholder's tax basis in the
Company's stock and as capital gain thereafter.
Conference Call
The Company will hold a conference call for investors
at 9:00 A.M. Eastern Time on Wednesday, August 4,
2021 to discuss the Company's second quarter 2021 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: AAIC) currently invests
primarily in mortgage-related and other assets and has elected to
be taxed as a REIT. 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, utilization of loss carryforwards, any change in long-term
tax structures (including any REIT election), use of equity raise
proceeds 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,
the uncertainty and economic impact of the ongoing coronavirus
(COVID-19) pandemic and the measures taken by the government to
address it, including the impact on our business, financial
condition, liquidity and results of operations due to a significant
decrease in economic activity and disruptions in our financing
operations, among other factors, changes in interest rates,
increased costs of borrowing, decreased interest spreads, credit
risks underlying the Company's assets, especially related to the
Company's mortgage credit investments, changes in political and
monetary policies, changes in default rates, changes in prepayment
rates and other assumptions underlying our estimates related to our
projections of future core earnings, changes in the Company's
returns, changes in the use of the Company's tax benefits, the
Company's ability to qualify and maintain qualification as a REIT,
changes in the agency MBS asset yield, changes in the Company's
monetization of net operating loss carryforwards, changes in the
Company's investment strategy, 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
carryforwards, 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 most recent Annual Report on
Form 10-K 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. 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 the Company.
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.
Financial data to follow
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED
BALANCE SHEETS
(Dollars in
thousands, except per share amounts)
(Unaudited)
|
|
|
|
June 30,
2021
|
|
|
March 31,
2021
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
2,349
|
|
|
$
|
48,198
|
|
Restricted cash of
consolidated VIE
|
|
|
4,456
|
|
|
|
12,557
|
|
Interest receivable of
consolidated VIE
|
|
|
179
|
|
|
|
309
|
|
Sold securities
receivable
|
|
|
34,456
|
|
|
|
109,068
|
|
Agency mortgage-backed
securities, at fair value
|
|
|
725,709
|
|
|
|
515,674
|
|
Mortgage credit
investments, at fair value
|
|
|
117,902
|
|
|
|
61,319
|
|
Mortgage loans of
consolidated VIE, at fair value
|
|
|
35,778
|
|
|
|
57,467
|
|
MSR financing
receivables, at fair value
|
|
|
74,652
|
|
|
|
36,005
|
|
Derivative assets, at
fair value
|
|
|
881
|
|
|
|
2,280
|
|
Deposits
|
|
|
16,554
|
|
|
|
25,421
|
|
Other
assets
|
|
|
17,181
|
|
|
|
15,046
|
|
Total
assets
|
|
$
|
1,030,097
|
|
|
$
|
883,344
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
694,586
|
|
|
$
|
505,550
|
|
Secured debt of
consolidated VIE, at fair value
|
|
|
28,465
|
|
|
|
58,654
|
|
Interest payable of
consolidated VIE
|
|
|
99
|
|
|
|
201
|
|
Derivative
liabilities, at fair value
|
|
|
2,327
|
|
|
|
4,267
|
|
Other
liabilities
|
|
|
2,739
|
|
|
|
2,111
|
|
Long-term unsecured
debt
|
|
|
73,129
|
|
|
|
73,074
|
|
Total
liabilities
|
|
|
801,345
|
|
|
|
643,857
|
|
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock
(liquidation preference of $36,333)
|
|
|
35,289
|
|
|
|
35,289
|
|
Common
stock
|
|
|
327
|
|
|
|
335
|
|
Additional paid-in
capital
|
|
|
2,037,953
|
|
|
|
2,040,898
|
|
Accumulated
deficit
|
|
|
(1,844,817)
|
|
|
|
(1,837,035)
|
|
Total
equity
|
|
|
228,752
|
|
|
|
239,487
|
|
Total liabilities
and equity
|
|
$
|
1,030,097
|
|
|
$
|
883,344
|
|
Book value per
common share (1)
|
|
$
|
5.94
|
|
|
$
|
6.12
|
|
Common shares
outstanding (in thousands) (2)
|
|
|
32,411
|
|
|
|
33,169
|
|
|
|
|
|
|
|
|
|
|
(1) Book value per
common share is calculated as total equity less the preferred stock
liquidation preference divided by common shares
outstanding.
|
|
(2) Represents common
shares outstanding plus vested restricted stock units convertible
into common stock less unvested restricted common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
|
March 31,
2021
|
|
Assets and
liabilities of consolidated VIE:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
4,456
|
|
|
$
|
12,557
|
|
Mortgage loans, at
fair value
|
|
|
35,778
|
|
|
|
57,467
|
|
Interest
receivable
|
|
|
179
|
|
|
|
309
|
|
Secured debt, at fair
value
|
|
|
(28,465)
|
|
|
|
(58,654)
|
|
Interest
payable
|
|
|
(99)
|
|
|
|
(201)
|
|
Net investment in
consolidated VIE
|
|
$
|
11,849
|
|
|
$
|
11,478
|
|
ARLINGTON ASSET
INVESTMENT CORP.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Dollars in
thousands, except per share data)
(Unaudited)
|
|
|
|
Three Months
Ended
|
|
|
|
June
30,
2021
|
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
|
September
30,
2020
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed
securities
|
|
$
|
2,984
|
|
|
$
|
2,784
|
|
|
$
|
3,015
|
|
|
$
|
2,808
|
|
Mortgage credit
investments
|
|
|
1,770
|
|
|
|
1,269
|
|
|
|
1,863
|
|
|
|
2,217
|
|
Mortgage loans of
consolidated VIE
|
|
|
776
|
|
|
|
1,687
|
|
|
|
4,305
|
|
|
|
—
|
|
MSR financing
receivables
|
|
|
1,390
|
|
|
|
358
|
|
|
|
—
|
|
|
|
—
|
|
Interest and other
income
|
|
|
125
|
|
|
|
161
|
|
|
|
314
|
|
|
|
385
|
|
Total interest
income
|
|
|
7,045
|
|
|
|
6,259
|
|
|
|
9,497
|
|
|
|
5,410
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term secured
debt
|
|
|
403
|
|
|
|
488
|
|
|
|
526
|
|
|
|
470
|
|
Long-term unsecured
debt
|
|
|
1,150
|
|
|
|
1,151
|
|
|
|
1,154
|
|
|
|
1,162
|
|
Secured debt of
consolidated VIE
|
|
|
405
|
|
|
|
862
|
|
|
|
1,403
|
|
|
|
—
|
|
Total interest
expense
|
|
|
1,958
|
|
|
|
2,501
|
|
|
|
3,083
|
|
|
|
1,632
|
|
Net interest
income
|
|
|
5,087
|
|
|
|
3,758
|
|
|
|
6,414
|
|
|
|
3,778
|
|
Investment (loss)
gain, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
mortgage investments, net
|
|
|
5,334
|
|
|
|
(21,665)
|
|
|
|
2,161
|
|
|
|
2,696
|
|
(Loss) gain from
derivative instruments, net
|
|
|
(14,983)
|
|
|
|
14,545
|
|
|
|
1,223
|
|
|
|
487
|
|
Other, net
|
|
|
617
|
|
|
|
357
|
|
|
|
4,736
|
|
|
|
769
|
|
Total investment
(loss) gain, net
|
|
|
(9,032)
|
|
|
|
(6,763)
|
|
|
|
8,120
|
|
|
|
3,952
|
|
General and
administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
1,841
|
|
|
|
1,395
|
|
|
|
1,712
|
|
|
|
1,774
|
|
Other general and
administrative expenses
|
|
|
1,349
|
|
|
|
1,242
|
|
|
|
1,361
|
|
|
|
1,197
|
|
Total general and
administrative expenses
|
|
|
3,190
|
|
|
|
2,637
|
|
|
|
3,073
|
|
|
|
2,971
|
|
(Loss) income
before income taxes
|
|
|
(7,135)
|
|
|
|
(5,642)
|
|
|
|
11,461
|
|
|
|
4,759
|
|
Income tax
(benefit) provision
|
|
|
(76)
|
|
|
|
398
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss)
income
|
|
|
(7,059)
|
|
|
|
(6,040)
|
|
|
|
11,461
|
|
|
|
4,759
|
|
Dividend on preferred
stock
|
|
|
(723)
|
|
|
|
(723)
|
|
|
|
(733)
|
|
|
|
(726)
|
|
Net (loss) income
(attributable) available to
common stock
|
|
$
|
(7,782)
|
|
|
$
|
(6,763)
|
|
|
$
|
10,728
|
|
|
$
|
4,033
|
|
Basic (loss) earnings
per common share
|
|
$
|
(0.24)
|
|
|
$
|
(0.20)
|
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
Diluted (loss)
earnings per common share
|
|
$
|
(0.24)
|
|
|
$
|
(0.20)
|
|
|
$
|
0.32
|
|
|
$
|
0.12
|
|
Weighted average
common shares outstanding (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,066
|
|
|
|
33,181
|
|
|
|
33,415
|
|
|
|
34,655
|
|
Diluted
|
|
|
33,066
|
|
|
|
33,181
|
|
|
|
33,554
|
|
|
|
34,697
|
|
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," preferred stock dividends and an "income
tax provision for taxable REIT subsidiary ("TRS") core operating
income".
Economic Net Interest Income
Economic net interest income, a non-GAAP financial measure,
represents the interest income earned net of interest expense
incurred from all of our interest-bearing financial instruments as
well as the agency MBS which underlie, and are implicitly financed
through, our TBA dollar roll transactions. 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 earned 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 earned 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. We believe that
economic net interest income assists investors in understanding and
evaluating the financial performance of the Company's
long-term-focused, net interest spread-based investment strategy,
prior to the deduction of core general and administrative
expenses.
Core General and Administrative Expenses
Core general and administrative expenses are non-interest
expenses reported within the line item "total general and
administrative expenses" of the consolidated statements of
comprehensive income less stock-based compensation expense.
Income Tax Provision for TRS Core Operating Income
Our TRSs are subject to U.S. federal and state corporate income
taxes. Our computation of core operating income includes a
provision for income taxes on the core operating income of our
TRSs. The core operating income of our TRSs is comprised of
net interest income generated by our TRSs net of our TRSs' general
and administrative expenses. In our consolidated statements
of comprehensive income prepared in accordance with GAAP, the
"income tax provision (benefit)" includes (i) the income tax
provision for TRS core operating income and (ii) an income tax
provision for (or benefit from) periodic increases (or decreases)
in the fair value of the investments of our TRSs, which are
recognized in net income as a component of "investment gain (loss)
net."
Non-GAAP Core Operating Income Results
The following table presents the Company's computation of
economic net interest income and core operating income for the last
four fiscal quarters (unaudited, amounts in thousands, except per
share amounts):
|
|
Three Months
Ended
|
|
|
|
June
30,
2021
|
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
|
September
30,
2020
|
|
GAAP net interest
income
|
|
$
|
5,087
|
|
|
$
|
3,758
|
|
|
$
|
6,414
|
|
|
$
|
3,778
|
|
TBA dollar roll
income
|
|
|
1,778
|
|
|
|
836
|
|
|
|
1,156
|
|
|
|
319
|
|
Interest rate swap
net interest expense
|
|
|
(1,187)
|
|
|
|
(710)
|
|
|
|
(62)
|
|
|
|
(23)
|
|
Economic net interest
income
|
|
|
5,678
|
|
|
|
3,884
|
|
|
|
7,508
|
|
|
|
4,074
|
|
Core general and
administrative expenses
|
|
|
(2,653)
|
|
|
|
(2,134)
|
|
|
|
(2,668)
|
|
|
|
(2,375)
|
|
Preferred stock
dividend
|
|
|
(723)
|
|
|
|
(723)
|
|
|
|
(733)
|
|
|
|
(726)
|
|
Income tax provision
for TRS core operating income
|
|
|
(61)
|
|
|
|
(11)
|
|
|
|
—
|
|
|
|
—
|
|
Non-GAAP core
operating income
|
|
$
|
2,241
|
|
|
$
|
1,016
|
|
|
$
|
4,107
|
|
|
$
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core
operating income per
diluted
common share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.12
|
|
|
$
|
0.03
|
|
Weighted average
diluted common
shares
outstanding
|
|
|
33,424
|
|
|
|
33,444
|
|
|
|
33,554
|
|
|
|
34,697
|
|
The following table provides a reconciliation of GAAP net income
(loss) to non-GAAP core operating income for the last four fiscal
quarters (unaudited, amounts in thousands):
|
|
Three Months
Ended
|
|
|
|
June
30,
2021
|
|
|
March
31,
2021
|
|
|
December
31,
2020
|
|
|
September
30,
2020
|
|
GAAP net (loss)
income
|
|
$
|
(7,059)
|
|
|
$
|
(6,040)
|
|
|
$
|
11,461
|
|
|
$
|
4,759
|
|
Add
(less):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment loss
(gain), net
|
|
|
9,032
|
|
|
|
6,763
|
|
|
|
(8,120)
|
|
|
|
(3,952)
|
|
Stock-based
compensation expense
|
|
|
537
|
|
|
|
503
|
|
|
|
405
|
|
|
|
596
|
|
Income tax (benefit)
provision for TRS investment
gain
(loss)
|
|
|
(137)
|
|
|
|
387
|
|
|
|
—
|
|
|
|
—
|
|
Preferred stock
dividend
|
|
|
(723)
|
|
|
|
(723)
|
|
|
|
(733)
|
|
|
|
(726)
|
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll
income
|
|
|
1,778
|
|
|
|
836
|
|
|
|
1,156
|
|
|
|
319
|
|
Interest rate swap net
interest expense
|
|
|
(1,187)
|
|
|
|
(710)
|
|
|
|
(62)
|
|
|
|
(23)
|
|
Non-GAAP core
operating income
|
|
$
|
2,241
|
|
|
$
|
1,016
|
|
|
$
|
4,107
|
|
|
$
|
973
|
|
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 common 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 determined in accordance with GAAP should be considered in
conjunction with non-GAAP core operating income. Furthermore,
there may be differences between non-GAAP core operating income and
taxable income determined in accordance with the Internal Revenue
Code. As a REIT, the Company will be required to distribute
at least 90% of its REIT taxable income (subject to certain
adjustments) to qualify as a REIT and all of its taxable income in
order to not be subject to any U.S. Federal or state corporate
income taxes. Accordingly, non-GAAP core operating income may
not equal the Company's distribution requirements as a REIT.
The following tables present information on the Company's
investment and hedge portfolio as of June
30, 2021 (unaudited, dollars in thousands):
Mortgage
Investments:
|
|
|
|
Assets
|
|
|
Capital
Allocation
(1)
|
|
|
Capital
Allocation
(%)
|
|
|
Leverage
(2)
|
|
Agency MBS
|
|
$
|
725,709
|
|
|
$
|
118,409
|
|
|
|
39
|
%
|
|
|
5.4
|
|
Mortgage credit
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
loans
|
|
|
74,685
|
|
|
|
53,754
|
|
|
|
18
|
%
|
|
|
0.4
|
|
Residential
MBS
|
|
|
24,995
|
|
|
|
24,995
|
|
|
|
8
|
%
|
|
|
—
|
|
Business purpose loan
residential MBS (3)
|
|
|
22,731
|
|
|
|
22,731
|
|
|
|
8
|
%
|
|
|
—
|
|
Small balance
commercial MBS
|
|
|
3,915
|
|
|
|
3,915
|
|
|
|
1
|
%
|
|
|
—
|
|
Other
|
|
|
3,425
|
|
|
|
3,425
|
|
|
|
1
|
%
|
|
|
—
|
|
Total mortgage credit
investments
|
|
|
129,751
|
|
|
|
108,820
|
|
|
|
36
|
%
|
|
|
0.2
|
|
MSR financing
receivable
|
|
|
74,652
|
|
|
|
74,652
|
|
|
|
25
|
%
|
|
|
—
|
|
Total
|
|
$
|
930,112
|
|
|
$
|
301,881
|
|
|
|
100
|
%
|
|
|
2.2
|
|
|
|
(1)
|
Our investable
capital is calculated as the sum of our shareholders' equity
capital and long-term unsecured debt.
|
(2)
|
Our leverage is
measured as the ratio of our repurchase agreement financing, net
payable or receivable for unsettled securities, net contractual
forward purchase price of our TBA commitments less our cash and
cash equivalents compared to our investable capital.
|
(3)
|
Includes our net
investment of $11,849 in a variable interest entity with gross
assets and liabilities of $40,413 and $28,564, respectively, that
is consolidated for GAAP financial reporting purposes.
|
Specified Agency
MBS:
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Net
Unamortized
Purchase
Premiums
|
|
|
Amortized
Cost Basis
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair
Value
|
|
|
Market
Price
|
|
|
Coupon
|
|
|
Weighted
Average
Expected
Remaining
Life
|
|
30-year fixed
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0%
|
|
$
|
466,229
|
|
|
$
|
12,645
|
|
|
$
|
478,874
|
|
|
$
|
(6,111)
|
|
|
$
|
472,763
|
|
|
$
|
101.40
|
|
|
|
2.00
|
%
|
|
|
7.9
|
|
2.5%
|
|
|
242,469
|
|
|
|
13,282
|
|
|
|
255,751
|
|
|
|
(2,818)
|
|
|
|
252,933
|
|
|
|
104.32
|
|
|
|
2.50
|
%
|
|
|
6.4
|
|
5.5%
|
|
|
11
|
|
|
|
—
|
|
|
|
11
|
|
|
|
2
|
|
|
|
13
|
|
|
|
116.51
|
|
|
|
5.50
|
%
|
|
|
4.9
|
|
Total/weighted-average
|
|
$
|
708,709
|
|
|
$
|
25,927
|
|
|
$
|
734,636
|
|
|
$
|
(8,927)
|
|
|
$
|
725,709
|
|
|
$
|
102.40
|
|
|
|
2.17
|
%
|
|
|
7.4
|
|
Mortgage Credit
Investments:
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Net
Unamortized
Premiums
(Discounts)
|
|
|
Amortized
Original Cost
Basis
|
|
|
Net
Unrealized
Gain (Loss)
|
|
|
Fair Value
(1)
|
|
|
Market
Price
|
|
Mortgage credit
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage
loans
|
|
$
|
74,685
|
|
|
$
|
—
|
|
|
$
|
74,685
|
|
|
$
|
—
|
|
|
$
|
74,685
|
|
|
$
|
100.00
|
|
Residential
MBS
|
|
|
27,481
|
|
|
|
(2,534)
|
|
|
|
24,947
|
|
|
|
48
|
|
|
|
24,995
|
|
|
|
90.59
|
|
Business purpose
residential MBS (1)
|
|
|
24,593
|
|
|
|
1,603
|
|
|
|
26,196
|
|
|
|
(3,465)
|
|
|
|
22,731
|
|
|
|
93.70
|
|
Commercial
MBS
|
|
|
6,000
|
|
|
|
(787)
|
|
|
|
5,213
|
|
|
|
(1,298)
|
|
|
|
3,915
|
|
|
|
64.73
|
|
Other
|
|
|
5,061
|
|
|
|
(1,635)
|
|
|
|
3,426
|
|
|
|
(1)
|
|
|
|
3,425
|
|
|
|
67.67
|
|
Total/weighted-average
|
|
$
|
137,820
|
|
|
$
|
(3,353)
|
|
|
$
|
134,467
|
|
|
$
|
(4,716)
|
|
|
$
|
129,751
|
|
|
$
|
94.28
|
|
|
|
(1)
|
Includes our net
investment in a VIE of $11,849 at fair value that is consolidated
for GAAP financial reporting purposes.
|
Interest Rate Swap
Agreements:
|
|
|
|
|
|
|
|
Weighted-average:
|
|
|
|
Notional Amount
|
|
|
Fixed
Pay Rate
|
|
|
Variable
Receive Rate
|
|
|
Net Receive
(Pay) Rate
|
|
|
Remaining
Life (Years)
|
|
Years to
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3
years
|
|
$
|
200,000
|
|
|
|
0.10
|
%
|
|
|
0.04
|
%
|
|
|
(0.06)
|
%
|
|
|
2.4
|
|
3 to less than 7
years
|
|
|
75,000
|
|
|
|
0.89
|
%
|
|
|
0.19
|
%
|
|
|
(0.70)
|
%
|
|
|
6.5
|
|
7 to less than 10
years
|
|
|
250,000
|
|
|
|
1.12
|
%
|
|
|
0.17
|
%
|
|
|
(0.95)
|
%
|
|
|
9.4
|
|
Total /
weighted-average
|
|
$
|
525,000
|
|
|
|
0.70
|
%
|
|
|
0.12
|
%
|
|
|
(0.58)
|
%
|
|
|
6.3
|
|
MSR Financing
Receivable:
|
|
Underlying
MSR
|
|
|
|
|
|
Holder of
Loans
|
|
UPB
|
|
|
Weighted-
Average Note
Rate
|
|
|
Weighted-
Average
Servicing Fee
|
|
|
Weighted-
Average Loan
Age
|
|
Price
|
|
|
Multiple
(1)
|
|
|
Financing
Receivable
Fair
Value
|
|
Fannie Mae
|
|
$
|
6,838,328
|
|
|
|
2.94
|
%
|
|
|
0.26
|
%
|
|
9 months
|
|
|
1.04
|
%
|
|
|
4.08
|
|
|
$
|
74,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Calculated as the
underlying MSR price divided by the weighted-average servicing
fee.
|
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content:https://www.prnewswire.com/news-releases/arlington-asset-investment-corp-reports-second-quarter-2021-financial-results-301347652.html
SOURCE Arlington Asset Investment Corp.