Arlington Asset Investment Corp. Reports Fourth Quarter and Full Year 2010 Financial Results
Book value of $28.46 per share at December 31, 2010, up 14% or $3.44 per share in fourth quarter 2010
55% return from book value growth plus dividends in 2010
Core Operating Income of $0.99 per share for the fourth quarter 2010 and $3.96 for the full year 2010(1)
Fourth quarter 2010 dividend of $0.60 per share paid on January 31, 2011
Debt to equity of 0.9 to 1 as of December 31, 2010

ARLINGTON, Va., Feb. 9, 2011 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company") today reported core operating income of $7.7 million for the quarter ended December 31, 2010, or $0.99 per share (diluted).  In determining core operating income, a non-GAAP financial measure, the Company has excluded certain costs and the following non-cash expenses: (1) compensation costs associated with stock-based awards, (2) accretion of mortgage-backed securities ("MBS") purchase discounts adjusted for principal repayments in excess of proportionate invested capital, and (3) unrealized mark-to-market adjustments on the trading MBS and interest rate hedge instruments.  A reconciliation of 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 $8.0 million for the quarter ended December 31, 2010, or $1.03 per share (diluted), compared to net income of $5.2 million, or $0.65 per share (diluted) for the quarter ended September 30, 2010 and $4.7 million, or $0.59 per share (diluted) for the quarter ended December 31, 2009.  The Company reported net income of $26.6 million for the year ended December 31, 2010, or $3.38 per share (diluted) as compared to net income of $116.5 million, or $14.89 per share (diluted) for the year ended December 31, 2009.  Full year 2009 results included a pre-tax gain of $160.4 million from the extinguishment of trust preferred securities.  As of December 31, 2010, the Company's book value per share was $28.46.  

"For the fourth quarter and full year 2010, the Company returned 16% and 55%, respectively, to shareholders from book value per share growth plus dividends.  2011 has begun on a positive note, and  Arlington has realized $3.2 million of cash gains from sales of non-agency MBS in the first quarter. The Company has continued to benefit in the first quarter from generally higher non-agency MBS prices associated with increased capital flows to the sector, a limited supply of newly issued securities, a continued overall stable trend in credit statistics and broadened investor awareness of the attractive loss adjusted returns available in the non-agency MBS sector," said J. Rock Tonkel, Jr., President and Chief Operating Officer.  "With an expanded capital base and the benefit of over $800 million of combined net operating and capital loss carry-forwards to amplify returns, we remain optimistic about the Company's ability to generate attractive cash returns to shareholders going forward combined with the potential for growth in book value per share, all protected by the Company's low leverage position.  In addition, under the tax bill passed by the U.S. Congress in late 2010, individual shareholders currently benefit from a 15% Federal tax rate on dividends from the Company."

Throughout 2010, the Company benefitted from the allocation of substantially all of its investable capital to non-agency MBS, primarily Re-REMIC mezzanine securities.  As market prices for the Company's non-agency MBS portfolio have appreciated substantially, the Company now has the opportunity to migrate a portion of its reflated capital from appreciated non-agency MBS to hedged and appropriately levered agency MBS with significantly higher cash returns.  Subsequent to December 31, 2010, the Company has sold $31 million face value of its non-agency MBS, generating liquid capital of $23 million which the Company intends to allocate to agency MBS.  

In addition, at current market prices, approximately $113 million of the Company's investable capital is allocated to non-agency MBS with a cash yield of approximately 7.5% and an expected total annual yield of 10.5% including expected reflation.  The Company expects to migrate that capital to agency MBS based on cash returns currently available in that sector, maintaining cash returns consistent with that of the Company's existing agency MBS described below.  If that were to occur, approximately 50% of the Company's investable capital would be allocated to agency MBS with a potential positive impact on overall MBS portfolio cash returns and earnings.  As of February 8th, the Company's agency MBS portfolio equaled approximately $360 million in face value with a 4.61% coupon, 102.8 cost, a 28 bps cost of funds, and asset values hedged against market value fluctuations.  Assuming leverage of approximately 6 times, the Company's capital allocated to these assets is expected to produce cash returns on invested capital in excess of 20%.

Fourth Quarter Highlights

Net interest income from the Company's non-agency MBS portfolio for the quarter and year ended December 31, 2010 was $8.1 million and $31.9 million, respectively, representing an annualized yield of 18.1% and 18.3%, respectively.  Realized gains from sales of non-agency MBS for the quarter and year ended December 31, 2010 was $2.7 million and $10.8 million, respectively.  

During the quarter, the Company's investable capital was deployed primarily in its non-agency MBS portfolio with a market value of $253 million at December 31, 2010.  The following table represents certain statistics of the Company's non-agency MBS portfolio as of December 31, 2010 (dollars in millions):



Senior Securities

Re-REMIC / Mezzanine Securities

Total Non-Agency MBS





Fair market value

$51

$202

$253

Fair market value (as a % of face value)

79.8%

62.7%

65.5%





4th Qtr. yield (as a % of amortized cost)

15.8%

19.1%

18.2%

Average cost (as a % of face value)

67.0%

45.6%

49.1%

Weighted average coupon

4.3%

5.5%

5.3%





Face value

$64

$322

$386

Amortized cost

$43

$147

$190

Purchase discount

$21

$168

$189





60+ delinquent

23.2%

19.6%

20.2%

Credit enhancement

9.8%

9.6%

9.6%

Severity (3 month)

50.1%

43.4%

44.5%

CPR (3 month)

15.6

17.7

17.3








Key credit and prepayment measures in the Company's non-agency MBS portfolio continued to remain relatively stable during the fourth quarter.  Total 60 day plus delinquencies in the Company's non-agency MBS portfolio increased to 20.2% at December 31, 2010 from 19.9% at September 30, 2010, the trailing three month average loss severities on liquidated loans increased to 44.5% at December 31, 2010 from 42.7% at September 30, 2010.  

At December 31, 2010, the face value of the Company's agency MBS portfolio was $168 million with a weighted average coupon of 4.7, a one month CPR of 11.6, and a fourth quarter yield of 4.6%.  The Company hedged a portion of the agency MBS portfolio using Eurodollar futures with a December 15, 2015 maturity and a lifetime weighted average rate of 2.72%, and current rate of 0.83% at December 31, 2010.  

The Company's Board of Directors approved a $0.60 dividend for the fourth quarter of 2010.  The dividend was paid on January 31, 2011 to shareholders of record on December 31, 2010.  This represented a 9.4% annualized dividend yield based on the Class A common stock closing price of $25.58 on February 9, 2011.  

During the quarter and year ended December 31, 2010, the Company repurchased 20,969 and 243,815 shares of its Class A common stock, respectively, pursuant to its share repurchase program.  As of December 31, 2010, 256,185 shares remain available for repurchase under the repurchase program.

(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 December 31, 2010 in this press release. This non-GAAP measurement is used by management to analyze and assess the 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 Arlington Asset Investment Corp.'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.

The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements discussed above for the quarter ended December 31, 2010 (dollars in thousands):


GAAP net income

$8,031

Adjustments


   Adjusted expenses(1)

374

   Stock compensation

699

Net unrealized mark-to-market gain on trading MBS and interest rate hedge instruments                                                                        

(446)

   Adjusted interest related to purchase discount accretion

(945)

      Non-GAAP core operating income

$7,713

Non-GAAP core operating income per share (diluted)

$0.99




________________

(1)  Adjusted expenses represents certain professional fees and income taxes that are not considered representative of
       routine activities of the Company.



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, returns, leverage, 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 of our net operating loss and net capital loss carry-forwards, impacts of regulatory changes and changes to Fannie Mae and Freddie Mac, availability of opportunities that meet or exceed our risk adjusted return expectations, ability to effectively migrate non-agency MBS into agency MBS, ability and willingness to make future dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, changes in mortgage pre-payment speeds, ability to realize book value growth through reflation, the realization of gains and losses on principal investments, 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 and Quarterly Reports on Form 10-Q that are available from the Company and from the SEC and you should read and understand these risks when evaluating any forward-looking statement.

ARLINGTON ASSET INVESTMENT CORP.








CONSOLIDATED STATEMENTS OF OPERATIONS








(Dollars in thousands, except per share data)

Three Months Ended


Twelve Months Ended

(Unaudited)

December 31,


December 31,










2010


2009


2010


2009

INTEREST INCOME








 Interest on investment securities

$ 10,166


$ 6,362


$ 39,566


$   13,940

 Dividends and other interest income

-


9


1


139

   Total interest income

10,166


6,371


39,567


14,079









INTEREST EXPENSE








 Interest on short-term debt

188


77


593


495

 Interest on long-term debt

139


164


562


3,150

   Total interest expense

327


241


1,155


3,645

   Net interest income

9,839


6,130


38,412


10,434









OTHER INCOME (LOSS), NET








 Investment gain

2,686


2,294


3,328


3,926

 Other loss

(4)


(4)


(14)


(151)

 Gain on extinguishment of long-term debt

-


-


-


160,435

   Total other income, net

2,682


2,290


3,314


164,210

   Income from continuing operations before other expenses

12,521


8,420


41,726


174,644









OTHER EXPENSES








 Compensation and benefits

2,996


1,128


10,660


14,366

 Professional services

270


1,056


1,263


7,053

 Business development

39


(1,323)


97


6,577

 Occupancy and equipment

94


122


388


538

 Communications

48


(1)


204


246

 Other operating expenses

338


1,850


2,022


5,709

   Total other expenses

3,785


2,832


14,634


34,489









Income from continuing operations before income taxes

8,736


5,588


27,092


140,155









Income tax provision (benefit)

705


(2,507)


506


9,522









Income from continuing operations, net of taxes

8,031


8,095


26,586


130,633

Loss from discontinued operations, net of taxes

-


(3,394)


-


(25,547)









Net income

8,031


4,701


26,586


105,086

Net loss attributable to noncontrolling interests

-


-


-


(11,459)

Net income attributable to Arlington Asset Investment Corp. shareholders

$   8,031


$ 4,701


$ 26,586


$ 116,545

















EARNINGS PER SHARE - BASIC, attributable to Arlington Asset Investment Corp. shareholders








 Income from continuing operations

$     1.05


$   1.05


$     3.44


$     17.02

 Discontinued operations

-


(0.44)


-


(1.83)

 Net income

$     1.05


$   0.61


$     3.44


$     15.19









EARNINGS PER SHARE - DILUTED, attributable to Arlington Asset Investment Corp. shareholders








 Income from continuing operations

$     1.03


$   1.02


$     3.38


$     16.69

 Discontinued operations

-


(0.43)


-


(1.80)

 Net income

$     1.03


$   0.59


$     3.38


$     14.89









Weighted average shares outstanding - basic (in thousands)

7,635


7,679


7,734


7,675

Weighted average shares outstanding - diluted (in thousands)

7,773


7,907


7,873


7,825



ARLINGTON ASSET INVESTMENT CORP.




CONSOLIDATED BALANCE SHEETS




(Dollars in thousands, except per share amounts)




(Unaudited)












ASSETS

December 31, 2010


December 31, 2009





Cash and cash equivalents

$                    12,412


$                    10,123

Receivables




 Interest

2,345


2,011

 Other

219


20

Mortgage-backed securities, at fair value




 Available-for-sale

252,909


295,600

 Trading

174,055


-

Other investments

8,287


2,580

Deposits

4,748


2,589

Prepaid expenses and other assets

358


726

 Total assets

$                  455,333


$                  313,649









LIABILITIES AND EQUITY








Liabilities:




Repurchase agreements

$                  190,220


$                  126,830

Interest payable

187


124

Accrued compensation and benefits

7,201


5,921

Dividend payable

4,655


-

Derivative liabilities, at fair value

2,398


-

Purchased securities payable

2,555


-

Accounts payable, accrued expenses and other liabilities

16,373


13,904

Long-term debt

15,000


16,857

 Total liabilities

238,589


163,636









Equity:




Common stock

77


80

Additional paid-in capital

1,505,971


1,507,394

Accumulated other comprehensive income

63,495


7,015

Accumulated deficit

(1,352,799)


(1,364,476)

 Total equity  

216,744


150,013





 Total liabilities and equity

$                  455,333


$                  313,649









Book Value per Share

$                      28.46


$                      19.54





Shares Outstanding (in thousands)

7,617


7,679



SOURCE Arlington Asset Investment Corp.

For further information: Media: +1-877-370-4413, or ir@arlingtonasset.com, or Investors: Kurt Harrington at +1-877-370-4413, or ir@arlingtonasset.com