ARLINGTON, Va., May 10, 2016 /PRNewswire/ -- Arlington Asset
Investment Corp. (NYSE: AI) (the "Company" or "Arlington") today reported non-GAAP core
operating income of $18.4 million for
the quarter ended March 31, 2016, or
$0.80 per diluted share. A
reconciliation of non-GAAP core operating income to GAAP income
(loss) before income tax appears at the end of this press
release.
First Quarter 2016 Financial Highlights
- $0.80 per diluted share of
non-GAAP core operating income
- Inclusive of $0.05 per diluted
share increase in cost of funding from the fourth quarter
- $(1.38) per diluted share of net
loss
- $18.86 per share of book
value
- $14.45 per share of tangible book
value
- $0.625 per share dividend
"Our investment portfolio continued to generate strong cash
spread earnings consistent with our expectations, despite volatile
market conditions and an increase in our short-term cost of funding
following the Federal Reserve's December rate increase. A
relatively benign prepayment environment helped drive strong core
operating income results during the first quarter of $0.80 per diluted share, in line with recent
quarters after giving effect to the increase in short-term funding
costs. These positive results enabled the Company to continue
to deliver a consistent dividend to our shareholders of
$0.625 per share," said J. Rock Tonkel, Jr., the Company's President and
Chief Executive Officer. "Arlington continues to maintain an overall
hedge structure that is well-positioned for an increase in interest
rates and is best situated to protect the Company's book value and
earnings potential over the long-term. In a falling interest
rate and wider spread environment such as this past quarter, this
hedging strategy results in a temporary decline in book value;
however, the Company would expect that this temporary decline in
book value would be recovered over time either through higher
future spread earnings if rates remain low and spreads are wide, or
through a reversal of this temporary decline in book value if rates
rise and spreads narrow. Consistent with its interest rate
hedging strategy, the Company modified some of the components of
its hedge position during the first quarter by incorporating put
options on U.S. Treasury rates that will continue to provide the
Company with protection against a significant rise in interest
rates while also reducing future book value volatility in a falling
interest rate environment. We will continue to execute on our
investment and hedging strategy that enables the Company to
maintain the attractive cash returns of its investment portfolio in
order to produce predictable core operating income that provides
consistent dividends to our shareholders on a tax advantaged basis.
In addition, the Company has the flexibility to substantially
increase common share repurchases under its current authorization
and expects to be opportunistic in doing so. Above all, our
Board of Directors and management team are focused on continuing to
drive strong returns and value creation for all Arlington shareholders."
Change in Accounting Method and Non-GAAP Core Operating
Income Calculation
As previously communicated in its prior quarter earnings release
and public filings, the Company modified its accounting policy for
recognizing interest income on its investments in agency MBS
classified as trading securities in the first quarter by amortizing
purchase premiums (or accreting purchase discounts) as an
adjustment to interest income in accordance with the "interest
method" permitted by GAAP. The change in accounting policy
was retrospectively applied to all historical periods.
Because the Company accounts for its investments in trading agency
MBS at fair value with all periodic changes in fair value reflected
in the Company's net income, this change in accounting policy does
not affect the Company's historical or future reported consolidated
balance sheets nor does it affect the Company's historical or
future reported net income or comprehensive income. However,
the change in accounting policy results in a reclassification
between previously reported "investment gains (losses), net" and
"interest income" on the Company's historical consolidated
statements of comprehensive income. A reconciliation of the
reclassification on the quarterly results for 2015 as a result of
this change in accounting policy appears at the end of this press
release.
In the first quarter of 2016, the Company also revised its
presentation of non-GAAP core operating income, which now reflects
the change in its accounting policy for recognizing interest income
on its investments in agency MBS. A detailed description of
non-GAAP core operating income appears at the end of this press
release.
Other First Quarter Highlights
As of March 31, 2016, the
Company's agency investment portfolio totaled $4,148 million consisting of $3,418 million of agency MBS and $730 million of net long to-be-announced ("TBA")
agency securities. As of March 31,
2016, the Company's $3,418
million of fixed-rate agency MBS were comprised of the
following:
- $1,013 million of 3.5% 30-year
MBS
- $2,329 million of 4.0% 30-year
MBS
- $76 million of 4.5% 30-year
MBS
As of March 31, 2016, the
Company's agency MBS had a weighted average original purchase price
of $105.57 and a weighted average
market price of $107.04. The
Company's fixed-rate agency MBS were specifically selected for
their relatively lower propensity for prepayment with approximately
60% of the Company's agency MBS portfolio in specified pools of low
loan balance loans, approximately 13% in specified pools of loans
issued under the Home Affordable Refinance Program ("HARP"), while
the remainder includes specified pools of loans originated in
certain geographic areas, 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 to approximately 5/8 of a percentage point as of
March 31, 2016 compared to
approximately 1/2 of a percentage point as of December 31, 2015. The actual
weighted-average constant prepayment rate ("CPR") for the Company's
agency MBS was 8.14% for the first quarter of 2016.
As of March 31, 2016, the
Company's net long TBA securities had a net notional amount of
$690 million, purchase price of
$726 million and market value of
$730 million resulting in a net GAAP
carrying fair value of $4
million. Under GAAP, the Company accounts for its TBA
securities as derivative instruments. As of March 31, 2016, the Company's $730 million of net long TBA securities were
comprised of the following:
- $367 million of 3.5% 30-year
MBS
- $363 million of 4.0% 30-year
MBS
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. As of March 31, 2016, the Company had interest rate
derivatives used to hedge its agency MBS investment portfolio with
notional amounts as follows:
- $1,750 million of interest rate
swaps
- $375 million of 10-year U.S.
Treasury note futures
- $2,000 million of put options on
10-year U.S. Treasury note futures
As of March 31, 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 1.7 years and $1,000 million in
notional amount of 10-year interest rate swap agreements with a
weighted average pay fixed rate of 2.03% and a remaining weighted
average maturity of 9.8 years. As of March 31, 2016, the Company also had $375 million in notional 10-year U.S. Treasury
note futures that were purchased during the first quarter of 2016
when the 10-year U.S. Treasury note rate was 1.76% on a weighted
average basis and had a market rate of 1.78% as of period
end. During the first quarter of 2016, the Company purchased
contracts that provide the Company the option to put 10-year U.S.
Treasury note futures with an equivalent notional amount of
$2,000 million that were struck at a
weighted average strike price per contract of $124.25, or an equivalent 10-year U.S. Treasury
rate of approximately 2.45%.
Interest income less interest expense on short-term financing on
the Company's agency MBS portfolio for the first quarter of 2016
and 2015 was $20.4 million and
$22.7 million, respectively.
For the quarters ended March 31, 2016
and 2015, the amortization of the Company's net premium on its
agency MBS was $6.8 million and
$6.5 million, respectively, and its
weighted average yield on its agency MBS was 2.93% and 3.04%,
respectively. During the first quarter of 2016, the Company
increased its agency investment allocation from specified agency
MBS to non-specified agency TBAs. For the quarters ended
March 31, 2016 and 2015, the Company
reported TBA dollar roll income of $3.8
million and $0.3 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 first quarter of 2016, the Company
recorded net investment gains on its agency investment portfolio of
$62.1 million and net investment
losses on its related interest rate derivative hedging instruments
of $112.1 million for a net
investment loss on its hedged agency portfolio of $50.0 million.
As of March 31, 2016, the
Company's private-label MBS portfolio consisted of $173.0 million in face value with an amortized
cost basis of $121.2 million and a
fair value of $129.2 million.
Interest income less interest expense on short-term financing on
the Company's private-label MBS portfolio for the first quarter of
2016 and 2015 was $2.7 million and
$4.7 million, including non-cash
accretion of $1.4 million and
$2.7 million, respectively.
During the first quarter of 2016, the Company recorded net
unrealized losses on its available-for-sale private-label MBS of
$8.1 million included in other
comprehensive income and net unrealized gains on its trading
private-label MBS of $0.1 million for
a total change in fair value reflected in book value of
$8.0 million, or $0.35 per share.
As of March 31, 2016, the Company
had $3,030 million of repurchase
agreements outstanding with a weighted average rate of 66 basis
points secured by an aggregate of $3,201
million of agency MBS at fair value. As of
March 31, 2016, the Company also had
$33 million of repurchase agreements
outstanding with a weighted average rate of 2.45% secured by
$57 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 March 31, 2016,
the Company's estimated net operating loss carry-forwards were
$100.2 million that begin to expire
in 2027 and its estimated net capital loss carry-forwards were
$294.3 million that begin to expire
in 2019. The Company's estimated net operating and net
capital loss carry-forwards as of March 31,
2016 are subject to potential adjustments up to the time of
filing the Company's income tax returns. For GAAP accounting
purposes, as of March 31, 2016 the
Company had a deferred tax asset of $101.5
million, or $4.41 per share,
which reflects a partial valuation allowance against its net
capital loss-carryforwards. During the first quarter of 2016,
the Company recorded an increase in the valuation allowance of
$12.0 million primarily attributable
to net capital losses during the period on certain of its interest
rate hedging instruments.
Stock Repurchase Program
In October 2015, the Company's
Board of Directors 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. As of
March 31, 2016, 1.95 million shares
of the Company's Class A common stock remain available for
repurchase under the repurchase program, unchanged from
December 31, 2015.
Distributions to Shareholders
The Company's Board of Directors approved a distribution to
common shareholders of $0.625 per
share for the first quarter of 2016. The distribution was
paid on April 29, 2016 to
shareholders of record as of March 31,
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 11:00 A.M. Eastern Time on Tuesday, May 10,
2016 to discuss the Company's first 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,
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, 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)
|
|
|
|
|
March 31,
2016
|
|
|
ASSETS
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
43,184
|
|
|
Interest
receivable
|
|
|
9,808
|
|
|
Mortgage-backed
securities, at fair value
|
|
|
|
|
|
Private-label
|
|
|
129,231
|
|
|
Agency
|
|
|
3,417,850
|
|
|
Derivative assets, at
fair value
|
|
|
5,587
|
|
|
Deferred tax assets,
net
|
|
|
101,480
|
|
|
Deposits
|
|
|
81,768
|
|
|
Other
assets
|
|
|
2,381
|
|
|
Total
assets
|
|
$
|
3,791,289
|
|
|
LIABILITIES AND
EQUITY
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Repurchase
agreements
|
|
$
|
3,062,381
|
|
|
Interest
payable
|
|
|
1,365
|
|
|
Accrued compensation
and benefits
|
|
|
1,423
|
|
|
Dividend
payable
|
|
|
14,476
|
|
|
Derivative
liabilities, at fair value
|
|
|
44,719
|
|
|
Purchased
securities payable
|
|
|
158,261
|
|
|
Accounts payable,
accrued expenses and other liabilities
|
|
|
1,502
|
|
|
Long-term
debt
|
|
|
73,489
|
|
|
Total
liabilities
|
|
|
3,357,616
|
|
|
Equity:
|
|
|
|
|
|
Common
stock
|
|
|
230
|
|
|
Additional paid-in
capital
|
|
|
1,898,670
|
|
|
Accumulated other
comprehensive income, net of taxes
|
|
|
7,461
|
|
|
Accumulated
deficit
|
|
|
(1,472,688)
|
|
|
Total
equity
|
|
|
433,673
|
|
|
Total liabilities
and equity
|
|
$
|
3,791,289
|
|
|
Book value per
share
|
|
$
|
18.86
|
|
|
Tangible book
value per share (1)
|
|
$
|
14.45
|
|
|
Shares outstanding
(in thousands) (2)
|
|
|
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)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Interest
income
|
|
|
|
|
|
|
|
|
Agency mortgage-backed
securities
|
|
$
|
25,655
|
|
|
$
|
25,460
|
|
Private-label
mortgage-backed securities
|
|
|
2,971
|
|
|
|
5,043
|
|
Other
|
|
|
128
|
|
|
|
7
|
|
Total interest
income
|
|
|
28,754
|
|
|
|
30,510
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
5,500
|
|
|
|
3,080
|
|
Long-term
debt
|
|
|
1,193
|
|
|
|
648
|
|
Total interest
expense
|
|
|
6,693
|
|
|
|
3,728
|
|
Net interest
income
|
|
|
22,061
|
|
|
|
26,782
|
|
Investment loss,
net
|
|
|
|
|
|
|
|
|
Realized gain on sale
of available-for-sale investments, net
|
|
|
—
|
|
|
|
3,348
|
|
Other-than-temporary
impairment charges
|
|
|
(99)
|
|
|
|
—
|
|
Gain on trading
investments, net
|
|
|
50,950
|
|
|
|
19,745
|
|
Loss from derivative
instruments, net
|
|
|
(100,760)
|
|
|
|
(76,012)
|
|
Other, net
|
|
|
19
|
|
|
|
112
|
|
Total investment loss,
net
|
|
|
(49,890)
|
|
|
|
(52,807)
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
|
2,564
|
|
|
|
2,412
|
|
Other
expenses
|
|
|
1,771
|
|
|
|
1,006
|
|
Total other
expenses
|
|
|
4,335
|
|
|
|
3,418
|
|
Loss before income
taxes
|
|
|
(32,164)
|
|
|
|
(29,443)
|
|
Income tax (benefit)
provision
|
|
|
(546)
|
|
|
|
12,742
|
|
Net
loss
|
|
$
|
(31,618)
|
|
|
$
|
(42,185)
|
|
Basic loss per
share
|
|
$
|
(1.38)
|
|
|
$
|
(1.84)
|
|
Diluted loss per
share
|
|
$
|
(1.38)
|
|
|
$
|
(1.84)
|
|
Weighted-average
shares outstanding (in thousands)
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,994
|
|
|
|
22,973
|
|
Diluted
|
|
|
22,994
|
|
|
|
22,973
|
|
Other
comprehensive loss, net of taxes
|
|
|
|
|
|
|
|
|
Unrealized gains
(losses) on available-for-sale securities (net of taxes of
$(3,164) and $(2,663),
respectively)
|
|
$
|
(4,970)
|
|
|
$
|
(4,493)
|
|
Reclassification
|
|
|
|
|
|
|
|
|
Included in investment
loss, net, related to sales of available-for-sale securities
(net of taxes of $-0- and $(380),
respectively)
|
|
|
—
|
|
|
|
(3,362)
|
|
Included in investment
loss, net, related to other-than-temporary impairment
charges on available-for-sale securities
(net of taxes of $39 and $-0-, respectively)
|
|
|
60
|
|
|
|
—
|
|
Comprehensive
loss
|
|
$
|
(36,528)
|
|
|
$
|
(50,040)
|
|
The following tables present information on the Company's
investment and hedge portfolio as of March
31, 2016 (dollars in thousands):
Agency MBS:
|
|
Face
Amount
|
|
|
Fair
Value
|
|
|
Market
Price
|
|
|
Coupon
|
|
|
Weighted
Average
Life
|
|
30-year fixed
rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5%
|
|
$
|
961,398
|
|
|
$
|
1,012,562
|
|
|
$
|
105.32
|
|
|
|
3.50
|
%
|
|
|
6.0
|
|
4.0%
|
|
|
2,162,322
|
|
|
|
2,329,172
|
|
|
|
107.72
|
|
|
|
4.00
|
%
|
|
|
4.9
|
|
4.5%
|
|
|
69,422
|
|
|
|
76,091
|
|
|
|
109.61
|
|
|
|
4.50
|
%
|
|
|
4.1
|
|
5.5%
|
|
|
22
|
|
|
|
25
|
|
|
|
112.68
|
|
|
|
5.50
|
%
|
|
|
4.8
|
|
Total/weighted-average
|
|
$
|
3,193,164
|
|
|
$
|
3,417,850
|
|
|
|
107.04
|
|
|
|
3.86
|
%
|
|
|
5.2
|
|
Net TBA Securities:
|
|
Notional
Amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Long
(Short)
Position
|
|
|
Implied
Cost
Basis
|
|
|
Implied Fair
Value
|
|
|
Net Carrying
Amount
|
|
30-year 3.5%
coupon
|
|
$
|
350,000
|
|
|
$
|
364,073
|
|
|
$
|
366,734
|
|
|
$
|
2,661
|
|
30-year 4.0%
coupon
|
|
|
340,000
|
|
|
|
361,717
|
|
|
|
363,110
|
|
|
|
1,393
|
|
Total
|
|
$
|
690,000
|
|
|
$
|
725,790
|
|
|
$
|
729,844
|
|
|
$
|
4,054
|
|
Private-label MBS:
|
Face value
|
|
$
|
172,969
|
|
|
Discount
|
|
$
|
(51,797)
|
|
|
Amortized
cost
|
|
$
|
121,172
|
|
|
Net unrealized
gain
|
|
$
|
8,059
|
|
|
Fair market
value
|
|
$
|
129,231
|
|
|
Fair market value (as
a % of face value)
|
|
|
74.7
|
%
|
|
Quarterly GAAP yield
(annualized)
|
|
|
10.32
|
%
|
|
Weighted average
coupon
|
|
|
3.01
|
%
|
|
Three-month voluntary
prepayment rate (annualized)
|
|
|
6.9
|
%
|
|
Credit
enhancement
|
|
|
1.8
|
%
|
|
60+ days
delinquent
|
|
|
12.4
|
%
|
|
Three-month default
rate (annualized)
|
|
|
4.1
|
%
|
|
Three-month loss
severity rate (1)
|
|
|
46.3
|
%
|
|
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:
|
|
March 31,
2016
|
|
|
|
Notional Amount
|
|
|
Average Fixed
Pay Rate
|
|
|
Average Remaining
Maturity (Years)
|
|
|
Fair Value
|
|
Years to
maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 2
years
|
|
$
|
750,000
|
|
|
|
1.04
|
%
|
|
|
1.7
|
|
|
$
|
(4,983)
|
|
2 to 10
years
|
|
|
1,000,000
|
|
|
|
2.03
|
%
|
|
|
9.8
|
|
|
|
(39,717)
|
|
Total /
weighted-average
|
|
$
|
1,750,000
|
|
|
|
1.61
|
%
|
|
|
6.3
|
|
|
$
|
(44,700)
|
|
10-year U.S. Treasury Note Futures:
Maturity
Date
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
June 2016
|
|
$
|
375,000
|
|
|
$
|
733
|
|
|
|
|
|
|
|
|
|
|
Put Options on 10-year U.S. Treasury Note Futures:
Maturity
Date
|
|
Notional
Amount
|
|
|
Fair
Value
|
|
May 2016
|
|
$
|
2,000,000
|
|
|
$
|
781
|
|
|
|
|
|
|
|
|
|
|
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 computed "non-GAAP core
operating income" for the three months ended March 31, 2016. Beginning in the first
quarter of 2016, 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
March 31, 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
March 31, 2016
The following table presents the Company's computation of core
operating income for the three months ended March, 31, 2016
(amounts in thousands, except per share amounts):
|
|
Three Months
Ended
|
|
|
|
March 31,
2016
|
|
GAAP net interest
income
|
|
$
|
22,061
|
|
TBA dollar roll
income
|
|
|
3,795
|
|
Interest rate swap
net interest expense
|
|
|
(3,997)
|
|
Economic net interest
income
|
|
|
21,859
|
|
Core general and
administrative expenses
|
|
|
(3,420)
|
|
Non-GAAP core
operating income
|
|
$
|
18,439
|
|
|
|
|
|
|
Non-GAAP core
operating income per diluted share
|
|
$
|
0.80
|
|
Weighted average
diluted shares outstanding
|
|
|
23,040
|
|
The following table provides a reconciliation of GAAP pre-tax
net income to non-GAAP core operating income for the three months
ended March 31, 2016 (amounts in
thousands):
|
|
Three Months
Ended
|
|
|
|
March 31,
2016
|
|
GAAP loss before
income taxes
|
|
$
|
(32,164)
|
|
Less:
|
|
|
|
|
Total investment loss,
net
|
|
|
49,890
|
|
Stock-based
compensation expense
|
|
|
517
|
|
Non-recurring proxy
contest related expenses
|
|
|
398
|
|
Add
back:
|
|
|
|
|
TBA dollar roll
income
|
|
|
3,795
|
|
Interest rate swap net
interest expense
|
|
|
(3,997)
|
|
Non-GAAP core
operating income
|
|
$
|
18,439
|
|
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
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-core
operating income measures computed for prior year periods are not
directly comparable to the results computed for the first quarter
of 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 (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
|
|
Effect of Change in Accounting Policy for Agency MBS
The following table presents the effect of the Company's
retrospective application of the change in accounting policy for
recognizing interest income on its investments in agency MBS
classified as trading securities to the annual and quarterly
periods of fiscal year 2015 (amounts in thousands):
|
|
Fiscal Year
2015
|
|
|
|
Total
Year
|
|
|
Fourth
Quarter
|
|
|
Third
Quarter
|
|
|
Second
Quarter
|
|
|
First
Quarter
|
|
Interest income:
agency mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
reported
|
|
$
|
139,244
|
|
|
$
|
35,475
|
|
|
$
|
37,325
|
|
|
$
|
34,530
|
|
|
$
|
31,914
|
|
Retrospective
adjustment
|
|
|
(33,330)
|
|
|
|
(7,136)
|
|
|
|
(9,336)
|
|
|
|
(10,404)
|
|
|
|
(6,454)
|
|
As revised
|
|
$
|
105,914
|
|
|
$
|
28,339
|
|
|
$
|
27,989
|
|
|
$
|
24,126
|
|
|
$
|
25,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on
trading investments, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As previously
reported
|
|
$
|
(64,388)
|
|
|
$
|
(43,383)
|
|
|
$
|
27,553
|
|
|
$
|
(61,849)
|
|
|
$
|
13,291
|
|
Retrospective
adjustment
|
|
|
33,330
|
|
|
|
7,136
|
|
|
|
9,336
|
|
|
|
10,404
|
|
|
|
6,454
|
|
As revised
|
|
$
|
(31,058)
|
|
|
$
|
(36,247)
|
|
|
$
|
36,889
|
|
|
$
|
(51,445)
|
|
|
$
|
19,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect to previously
reported net income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
To view the original version on PR Newswire,
visit:http://www.prnewswire.com/news-releases/arlington-asset-investment-corp-reports-first-quarter-2016-financial-results-300265661.html
SOURCE Arlington Asset Investment Corp.