Arlington Asset Investment Corp. Reports Second Quarter 2012 Financial Results
Non-GAAP Core Operating Income of $1.16 per share (diluted) for the second quarter 2012(1)
20.5% Return on Equity from Non-GAAP Core Operating Income for the second quarter 2012(2)
Dividend of $0.875 per share for the second quarter 2012, will be paid on July 31, 2012
Annualized dividend yield of 15%(3), 20%(4) on a tax adjusted basis
Book value per share at June 30, 2012 was $22.58

ARLINGTON, Va., July 30, 2012 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company") today reported non-GAAP core operating income of $11.3 million for the quarter ended June 30, 2012, or $1.16 per share (diluted).  A reconciliation of non-GAAP core operating income to GAAP net income appears at the end of this press release.  On a GAAP basis, the Company reported net income of $2.1 million for the quarter ended June 30, 2012, or $0.22 per share (diluted), compared to net income of $10.8 million for the quarter ended March 31, 2012, or $1.37 per share (diluted), and net income of $0.1 million, or $0.01 per share (diluted), for the quarter ended June 30, 2011. 

"The Company had another solid quarter in core operating earnings per share and overall portfolio performance.  Since quarter end, strong investor appetite has pushed prices up in our prepayment protected agency-backed MBS portfolio causing spreads between our agency-backed MBS and our hedges to narrow, boosting book value per share and permitting us to realize cash gains of approximately $5.0 million to date in the third quarter," said J. Rock Tonkel, Jr., President and Chief Operating Officer.  "Trading activity and liquidity levels in private-label MBS have increased since mid-June, while credit trends in our private-label MBS portfolio continue to be steady with improvement in delinquency levels, CPRs, and loss severities."

Second Quarter Highlights

Net interest income for the quarter was $13.0 million, excluding non-cash accretion of $1.9 million, required under GAAP.  Net realized cash gains during the quarter were $1.4 million.  The three-month CPR for the Company's agency-backed MBS as of June 30, 2012 was 4.4%.  The Company's debt to equity ratio at June 30, 2012 was 4.4 to 1.

As of June 30, 2012, the Company's agency-backed MBS consisted of $934.3 million in face value with a cost basis of $976.9 million and a fair value of $1.0 billion.  Substantially all of the Company's agency-backed MBS were fixed-rate 30-year MBS specifically selected for their prepayment protections with a weighted average coupon of 4.32%, a weighted average cost of 104.4, a weighted average market price of 108.9, and a weighted average cost of repo funding of 41 basis points.  On a mark-to-market basis at June 30, 2012, the estimated hedged cost of funds associated with the agency-backed MBS portfolio was 1.07% on a weighted average basis over 5 years. 

As of June 30, 2012, the Company's private-label MBS portfolio consisted of $271.1 million in face value with an amortized cost basis of $139.0 million and a fair value of $172.9 million.  The following table presents certain statistics of our private-label MBS portfolio as of or for the quarter ended June 30, 2012 (dollars in millions):

 


Total Private-Label MBS



Fair market value

$172.9

Fair market value (as a % of face value)

63.8%



Quarterly yield (as a % of amortized cost)

17.9%

Quarterly cash yield (excluding GAAP non-cash accretion)

12.6%

Average cost (as a % of face value)

49.3%

Weighted average coupon

5.2%



Face value

$271.1

Amortized cost

$139.0

Purchase discount

$132.0



60+ delinquent

19.4%

Credit enhancement

5.6%

Severity (3-month)

48.8%

Constant prepayment rate (3-month)

16.8%

 

The Company's Board of Directors approved a $0.875 dividend for the second quarter of 2012.  The dividend will be paid on July 31, 2012 to shareholders of record on June 29, 2012.  This represented a 15% annualized dividend yield based on the Class A common stock closing price on the New York Stock Exchange (NYSE) of $22.70 on July 30, 2012. 

(1)  Non-GAAP Financial Measures

In addition to the financial results reported in accordance with generally accepted accounting principles as consistently applied in the United States (GAAP), the Company has disclosed non-GAAP core operating income for the quarter ended June 30, 2012 in this press release. This non-GAAP measurement is used by management to analyze and assess the Company's operating results and dividends. Management believes that this non-GAAP measurement assists investors in understanding the impact of these non-core items and non-cash expenses on the performance of the Company and provides additional clarity around the Company's forward earnings capacity and trend.

A limitation of utilizing this non-GAAP measure is that the GAAP accounting effects of these events do in fact reflect the underlying financial results of the Company's business and these effects should not be ignored in evaluating and analyzing the Company's financial results. Therefore, management believes net income on a GAAP basis and core operating income on a non-GAAP basis should be considered together.

In determining core operating income, the Company has excluded certain costs and the following non-cash expenses: (i) compensation costs associated with stock-based awards, (ii) accretion of MBS purchase discounts adjusted for principal repayments in excess of proportionate invested capital, (iii) net unrealized mark-to-market adjustments on the trading MBS and hedge instruments and (iv) other-than-temporary impairment charges recognized, if any.

The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements for the quarter ended June 30, 2012 (dollars in thousands):

GAAP net income

$2,144

Adjustments


    Adjusted expenses(a)

826

    Stock compensation

140

    Net unrealized mark-to-market loss on trading MBS and

       hedge instruments                                                                        

5,578

    Other-than-temporary impairment charges

4,531

    Adjusted interest related to purchase discount accretion

(1,895)

       Non-GAAP core operating income

$11,324

Non-GAAP core operating income per share (diluted)

$1.16



(a)        

Adjusted expenses represent certain professional fees and income taxes that are not considered representative of routine activities of the Company.

(2)  Return on Equity from non-GAAP core operating income is calculated using quarterly average equity and non-GAAP core operating income for the respective period.

(3)  Based on the annualized second quarter 2012 dividend and a Class A common stock closing price on the NYSE of $22.70 on July 30, 2012.

(4)  The Company's dividends are eligible for the 15% federal income tax rate on qualified dividend income, whereas dividends paid by a REIT are generally subject to the higher 35% tax rate on ordinary income.  To provide the same return after payment of federal income tax as the Company, a REIT would be required to pay dividends providing a 20% yield.

About the Company

Arlington Asset Investment Corp. (NYSE: AI) is a principal investment firm that invests in mortgage-related and other assets.  The Company is headquartered in the Washington, D.C. metropolitan area.  For more information, please visit www.arlingtonasset.com.

Statements concerning future performance, market conditions, risk spreads, private-label MBS trading activity, liquidity levels and credit trends, agency-backed MBS prices, cash earnings, book value, portfolio allocation, plans and steps to position the Company to realize 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 default rates, preservation and utilization of our net operating loss and net capital loss carry-forwards, impacts of regulatory changes including actions taken by the Securities and Exchange Commission, impacts of changes to Fannie Mae and Freddie Mac, actions taken by the U.S. Federal Reserve and the U.S. Treasury, availability of opportunities that meet or exceed our risk adjusted return expectations, ability to effectively migrate private-label MBS into agency-backed MBS, ability to realize a higher return on capital migrated to agency-backed MBS, ability and willingness to make future dividends, the failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations, ability to generate sufficient cash through retained earnings to satisfy capital needs, changes in and the effects on the Company of mortgage prepayment speeds, use of proceeds from our recently-completed equity offering, ability to realize book value growth through reflation of private-label MBS, the realization of gains and losses on principal investments, the outcome of certain litigation and investigatory matters, available technologies, competition for business and personnel, and general economic, political, regulatory and market conditions.  These and other risks are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 that are available from the Company and from the SEC, and you should read and understand these risks when evaluating any forward-looking statement.

Financial data follows

 

ARLINGTON ASSET INVESTMENT CORP.








CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME








(Dollars in thousands, except per share data)

Three Months Ended


Six Months Ended

(Unaudited)

June 30,


June 30,


2012


2011


2012


2011

INTEREST INCOME

$                    16,031


$                    13,262


$                    29,394


$                    25,757









INTEREST EXPENSE








  Interest on short-term debt

994


477


1,686


794

  Interest on long-term debt

123


115


248


230

    Total interest expense

1,117


592


1,934


1,024

    Net interest income

14,914


12,670


27,460


24,733









OTHER (LOSS) INCOME, NET








  Investment (loss) gain, net

(8,677)


(8,484)


(5,869)


2,740

  Other loss

(4)


(4)


(8)


(7)

    Total other (loss) income, net

(8,681)


(8,488)


(5,877)


2,733

    Operating income before other expenses

6,233


4,182


21,583


27,466









OTHER EXPENSES








  Compensation and benefits

2,101


2,570


4,061


5,006

  Professional services

891


561


2,475


684

  Business development 

55


47


72


79

  Occupancy and equipment 

150


92


245


188

  Communications 

53


50


105


96

  Other operating expenses 

460


425


898


720

    Total other expenses

3,710


3,745


7,856


6,773









Income before income taxes

2,523


437


13,727


20,693









Income tax provision

379


346


821


817









Net income

$                      2,144


$                           91


$                    12,906


$                    19,876

















Basic earnings per share

$                        0.22


$                        0.01


$                        1.47


$                        2.58









Diluted earnings per share

$                        0.22


$                        0.01


$                        1.47


$                        2.57









Weighted average shares outstanding - basic (in thousands)

9,726


7,723


8,795


7,692

Weighted average shares outstanding - diluted (in thousands)

9,733


7,736


8,803


7,728

















Other comprehensive income (loss), net of taxes








Unrealized gains (losses) for the period on

available-for-sale securities (net of taxes of

$-0-)

$                         343


$                    (1,597)


$                    (4,560)


$                       (136)

Reclassification adjustment for gains

included in net income on available-for-sale

securities (net of taxes of $-0-)

-


(2,089)


-


(13,794)

Comprehensive income (loss)

$                      2,487


$                    (3,595)


$                      8,346


$                      5,946

 

 

ARLINGTON ASSET INVESTMENT CORP.




CONSOLIDATED BALANCE SHEETS




(Dollars in thousands, except per share amounts)




(Unaudited)












 ASSETS 

June 30, 2012


December 31, 2011





 Cash and cash equivalents 

$                             21,137


$                             20,018

 Receivables 




   Interest 

3,360


2,366

   Sold securities receivable 

70,727


41,321

   Other  

106


11

 Mortgage-backed securities, at fair value 




   Available-for-sale 

173,042


179,566

   Trading 

1,017,822


636,872

 Other investments 

2,931


2,946

 Derivative assets, at fair value 

1,899


504

 Deposits 

88,074


71,079

 Prepaid expenses and other assets 

367


377

   Total assets 

$                        1,379,465


$                           955,060









 LIABILITIES AND EQUITY 








 Liabilities: 




 Repurchase agreements 

$                           963,051


$                           647,977

 Interest payable 

410


504

 Accrued compensation and benefits 

2,564


6,177

 Dividend payable 

8,566


6,785

 Derivative liabilities, at fair value 

81,028


63,024

 Purchased securities payable 

-


15,820

 Securities sold but not yet purchased, at fair value 

70,965


-

 Accounts payable, accrued expenses and other liabilities 

16,789


16,401

 Long-term debt 

15,000


15,000

   Total liabilities 

1,158,373


771,688









 Equity: 




 Common stock 

97


77

 Additional paid-in capital 

1,554,952


1,508,713

 Accumulated other comprehensive income, net of taxes 

33,807


38,367

 Accumulated deficit 

(1,367,764)


(1,363,785)

   Total equity    

221,092


183,372





   Total liabilities and equity 

$                        1,379,465


$                           955,060









 Book Value per Share 

$                                22.58


$                                23.67





 Shares Outstanding (in thousands) 

9,790


7,748

SOURCE Arlington Asset Investment Corp.

For further information: Media: +1-703-373-0200, ir@arlingtonasset.com; Investors: Kurt Harrington, +1-703-373-0200, ir@arlingtonasset.com