ARLINGTON, Va., July 27, 2011 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company") today reported core operating income of $10.6 million for the quarter ended June 30, 2011, or $1.37 per share (diluted). On a GAAP basis, the Company reported net income of $0.1 million for the quarter ended June 30, 2011, or $0.01 per share (diluted), compared to net income of $8.8 million, or $1.10 per share (diluted), for the quarter ended June 30, 2010.
The second quarter per share net income and book value include net non-cash, mark-to-market charges of $1.39 and $1.65, respectively, related to our agency-backed MBS portfolio and hedge positions. While the Company's hedge and portfolio structure are intended to protect MBS portfolio returns over time, unrealized gains or losses may result from shorter term volatility or uncertainty in the economy and/or the capital markets. In the second quarter, decreases in interest rates relative to our swap cost and increases in market based spreads for our agency-backed MBS resulted in unrealized losses for the quarter. As of June 30, 2011, the Company's GAAP book value per share was $27.12; excluding net non-cash, mark-to-market charges, book value per share would have been $28.77.
"Core operating income was strong this quarter as growth in the agency-backed MBS portfolio drove higher net interest income and facilitated another increase in the dividend. The Company's concentration in agency-backed MBS with favorable prepayment attributes produced single-digit CPRs and enhanced returns in the quarter, while credit trends in the private-label MBS portfolio were stable to slightly improved in certain cases," said J. Rock Tonkel, Jr., President and Chief Operating Officer. "New investment opportunities remain attractive, even as we continue to monitor developments in Washington and the markets closely."
Second Quarter Highlights
During the second quarter, net interest income increased by $0.6 million to $12.7 million from $12.1 million for the first quarter of 2011 as the Company migrated incremental capital to its agency-backed MBS portfolio. The yield on the agency-backed MBS portfolio was 4.48% for the second quarter, and the yield on the private-label MBS portfolio was 16.3% for the second quarter. Net realized gains from sales of MBS during the second quarter were $2.2 million or $0.29 per share.
As of June 30, 2011, the Company's agency-backed MBS consisted of $633.1 million in face value with a cost basis of $648.9 million and was fair valued at $661.1 million. Substantially all of the Company's agency-backed MBS were fixed-rate 30-year MBS that had a weighted average coupon of 4.61%, a weighted average cost of 102.5, and a weighted average cost of funding of 24 basis points at June 30, 2011. The three-month CPR for the Company's agency-backed MBS as of June 30, 2011 was 2%. The Company has hedged its agency-backed MBS primarily using Eurodollar futures. These Eurodollar futures mature through June 30, 2016 and have a lifetime weighted average rate of 2.88% as of June 30, 2011. The Company's debt to equity ratio at June 30, 2011 was 3.1 to 1.
The Company's private-label MBS portfolio consisted of $291.6 million in face value with an amortized cost basis of $144.8 million and fair value of $194.4 million. During the second quarter, the Company sold private-label MBS with a face value of $22.6 million for a gain of $1.5 million. The following table presents certain statistics of our private-label MBS portfolio as of and for the quarter ended June 30, 2011 (dollars in millions):
Total Private-Label MBS
Fair market value
Fair market value (as a % of face value)
2nd qtr. yield (as a % of amortized cost)
Average cost (as a % of face value)
Weighted average coupon
The Company's Board of Directors approved a $0.875 dividend for the second quarter of 2011. The dividend will be paid on July 29, 2011 to shareholders of record on July 5, 2011. This represented a 12% annualized dividend yield based on the Class A common stock closing price on the New York Stock Exchange(NYSE) of $29.77 on July 27, 2011.
(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, 2011 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.
In determining core operating income, 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 hedge instruments.
The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements for the quarter ended June 30, 2011 (dollars in thousands):
GAAP net income
Net unrealized mark-to-market loss on trading MBS and hedge instruments
Adjusted interest related to purchase discount accretion
Non-GAAP core operating income
Non-GAAP core operating income per share (diluted)
(a) Adjusted expenses represents certain professional fees and income taxes that are not considered representative of routine activities of the Company.
(2) Based on the annualized second quarter 2011 dividend and a Class A common stock closing price on the NYSE of $29.77 on July 27, 2011.
(3) 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 15% 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, 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 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 mortgage pre-payment speeds, ability to realize book value growth through reflation of private-label MBS, 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.
Financial data follows
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended
Six Months Ended
Interest on short-term debt
Interest on long-term debt
Total interest expense
Net interest income
OTHER (LOSS) INCOME, NET
Investment (loss) gain, net
Total other (loss) income, net
Operating income before other expenses
Compensation and benefits
Occupancy and equipment
Other operating expenses
Total other expenses
Income before income taxes
Income tax provision
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding - basic (in thousands)
Weighted average shares outstanding - diluted (in thousands)
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, 2011
December 31, 2010
Cash and cash equivalents
Mortgage-backed securities, at fair value
Prepaid expenses and other assets
LIABILITIES AND EQUITY
Accrued compensation and benefits
Derivative liabilities, at fair value
Purchased securities payable
Accounts payable, accrued expenses and other liabilities
Additional paid-in capital
Accumulated other comprehensive income, net of taxes
Total liabilities and equity
Book Value per Share
Shares Outstanding (in thousands)
SOURCE Arlington Asset Investment Corp.