Arlington Asset Investment Corp. Reports Third Quarter 2010 Financial Results

Book value increase of $1.81 per share to $25.02 per share

Core Operating Income of $7.7 million or $0.97 per share (1)

Continued positive trend in credit performance

Oct 25, 2010, 21:38 ET from Arlington Asset Investment Corp.

ARLINGTON, Va., Oct. 25 /PRNewswire-FirstCall/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company") today reported core operating income of $7.7 million for the quarter ended September 30, 2010, or $0.97 per share (diluted).  In determining core operating income, a non-GAAP financial measure, the Company has excluded non-recurring costs and the following non-cash expenses: (1) compensation costs associated with stock-based awards, (2) accretion/amortization of mortgage-backed securities ("MBS") purchase discounts/premiums 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 $5.2 million for the quarter ended September 30, 2010, or $0.65 per share (diluted), compared to net income of $8.8 million, or $1.10 per share (diluted) for the quarter ended June 30, 2010 and $42.4 million, or $5.38 per share (diluted) for the quarter ended September 30, 2009.  As of September 30, 2010, the Company's book value per share was $25.02.  

"For the third quarter, Arlington shareholders experienced a $1.81 per share increase in book value after payment of a $0.60 per share dividend.  The dividend plus the increase in book value resulted in a 10.4% return to investors for the quarter and a 34.7% return for the nine months ended September 30, 2010 (46.3% on an annualized basis).  Total 60 day plus delinquencies and loss severities in the Company's non-agency MBS portfolio continued a positive trend for the third consecutive quarter.  Arlington benefited again this quarter from generally higher non-agency MBS prices associated with increased capital flows to the sector, a continued positive 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.  "We believe the non-agency MBS sector continues to be undervalued and offers the opportunity for attractive risk-adjusted returns on new investments as well as the potential for reflation to prices more in line with other investment alternatives.  For Arlington, the potential for book value growth through reflation is represented by the $194 million discount on the Company's non-agency MBS."

Third Quarter Highlights

Net interest income from the Company's non-agency MBS portfolio was $8.1 million during the third quarter of 2010 representing an annualized yield of 18.2% as compared to $8.1 million during the second quarter of 2010 representing an annualized yield of 18.6%.  Realized gains from sales of non-agency MBS during the third quarter of 2010 were $1.9 million.  Cash expenses declined to $2.4 million for the third quarter of 2010.  

During the quarter, the Company's investable capital was deployed primarily in its non-agency MBS portfolio with a market value of $220 million at September 30, 2010.  The following table represents certain statistics of the Company's non-agency MBS portfolio as of September 30, 2010 (dollars in millions):

Senior Securities

Re-REMIC / Mezzanine Securities

Total Non- Agency MBS

3rd Qtr. yield (as a % of amortized cost)

16.0%

19.1%

18.2%

Average cost (as a % of face value)

65%

44%

48%

WAC

5.1%

5.7%

5.6%

Face value

$75

$298

$373

Amortized cost

$49

$130

$179

Purchase discount

$26

$161

$187

Fair market value

$57

$163

$220

60+ delinquent

27.4%

17.1%

19.9%

Credit enhancement

14.2%

8.0%

9.7%

Severity

44.7%

42.0%

42.7%

3 month CPR

15.2

15.6

15.5

Key credit and prepayment measures in the Company's non-agency MBS portfolio continued a positive trend during the quarter. Total 60 day plus delinquencies in the Company's non-agency MBS portfolio declined to 19.9% at September 30, 2010 from 20.8% at June 30, 2010 and trailing three month average loss severities on liquidated loans declined to 42.7% at September 30, 2010 from 42.8% at June 30, 2010.  

At September 30, 2010, the face value of the Company's agency MBS portfolio was $163 million with a weighted average coupon of 4.81, a CPR of 12.0, and a yield of 4.8%.  The Company hedged the agency MBS portfolio using Eurodollar futures with a September 15, 2015 maturity and a weighted average rate of 2.34% at September 30, 2010.  

The Company's Board of Directors approved a $0.60 dividend for the third quarter of 2010.  The dividend will be paid on October 29, 2010 to shareholders of record on September 30, 2010.  This represented a 10% annualized dividend yield based on the Class A common stock closing price of $24.10 on October 25, 2010.  

During the three and nine months ended September 30, 2010, the Company repurchased 193,824 and 222,846 shares of its Class A common stock pursuant to its share repurchase program.  As of September 30, 2010, 277,154 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 September 30, 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 (dollars in thousands):

GAAP net income

$5,156

Adjustments:

   Non-recurring costs

(610)

   Stock compensation

702

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

3,036

   Adjusted interest related to purchase discount accretion / premium amortization

(630)

      Non-GAAP core operating income

$7,654

Non-GAAP core operating income per share (diluted)

$0.97

About the Company

Arlington Asset Investment Corp. (NYSE: AI) is a principal investment firm that invests primarily in mortgage-related 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, 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 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, risks associated with merchant banking investments, 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)

Quarter Ended

Nine Months Ended

(Unaudited)

September 30

September 30

2010

2009

2010

2009

INTEREST INCOME

 Interest on investment securities

$ 10,150

$   3,717

$ 29,400

$     7,578

 Dividends and other interest income

-

2

1

130

   Total interest income

10,150

3,719

29,401

7,708

INTEREST EXPENSE

 Interest on short-term debt

178

114

405

418

 Interest on long-term debt

146

196

423

2,986

   Total interest expense

324

310

828

3,404

   Net interest income

9,826

3,409

28,573

4,304

OTHER INCOME (LOSS), NET

 Investment (loss) gain

(2,089)

1,588

642

1,632

 Gain on extinguishment of long-term debt

-

27,982

-

160,435

 Other loss

(3)

(4)

(10)

(147)

   Total other (loss) income, net

(2,092)

29,566

632

161,920

Income from continuing operations before other expenses

7,734

32,975

29,205

166,224

OTHER EXPENSES

 Compensation and benefits

2,365

2,736

7,664

13,238

 Professional services

233

878

993

5,997

 Business development

19

17

58

7,900

 Occupancy and equipment

90

94

294

416

 Communications

44

99

156

247

 Other operating expenses

387

1,163

1,684

3,859

   Total other expenses

3,138

4,987

10,849

31,657

Income from continuing operations before income taxes

4,596

27,988

18,356

134,567

Income tax (benefit) provision

(560)

3,584

(199)

12,029

Income from continuing operations, net of taxes

5,156

24,404

18,555

122,538

Income (loss) from discontinued operations, net of taxes

-

18,033

-

(22,153)

Net income

5,156

42,437

18,555

100,385

Net loss attributable to noncontrolling interests

-

-

-

(11,459)

Net income attributable to Arlington Asset Investment Corp. shareholders

$   5,156

$ 42,437

$ 18,555

$ 111,844

EARNINGS PER SHARE - BASIC

 Income from continuing operations attributable to Arlington Asset Investment Corp. shareholders

$     0.66

$     3.17

$     2.39

$     15.97

 Income (loss) from discontinued operations attributable to Arlington Asset Investment Corp. shareholders

-

2.34

-

(1.39)

 Net income attributable to Arlington Asset Investment Corp. shareholders

$     0.66

$     5.51

$     2.39

$     14.58

EARNINGS PER SHARE - DILUTED

 Income from continuing operations attributable to Arlington Asset Investment Corp. shareholders

$     0.65

$     3.09

$     2.35

$     15.65

 Income (loss) from discontinued operations attributable to Arlington Asset Investment Corp. shareholders

-

2.29

-

(1.37)

 Net income attributable to Arlington Asset Investment Corp. shareholders

$     0.65

$     5.38

$     2.35

$     14.28

Weighted average shares outstanding - basic (in thousands)

7,755

7,705

7,768

7,673

Weighted average shares outstanding - diluted (in thousands)

7,887

7,895

7,904

7,830

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

ASSETS

September 30, 2010

December 31, 2009

Cash and cash equivalents

$                       8,231

$                    10,123

Receivables

 Interest

2,368

2,011

 Sold securities receivable

58,686

-

 Other

424

20

Mortgage-backed securities, at fair value

 Available-for-sale

220,403

295,600

 Trading

163,151

-

Other investments

5,857

2,580

Deposits

5,929

2,589

Prepaid expenses and other assets

572

726

 Total assets

$                   465,621

$                  313,649

LIABILITIES AND EQUITY

Liabilities:

Repurchase agreements

$                   164,584

$                  126,830

Purchased securities payable

64,277

-

Interest payable

160

124

Dividend payable

4,672

-

Derivative liability

4,597

-

Accounts payable, accrued expenses and other liabilities

14,544

13,904

Accrued compensation and benefits

5,715

5,921

Long-term debt

15,948

16,857

 Total liabilities

274,497

163,636

Equity:

Common stock

77

80

Additional paid-in capital

1,505,823

1,507,394

Accumulated other comprehensive income

41,399

7,015

Accumulated deficit

(1,356,175)

(1,364,476)

 Total equity  

191,124

150,013

 Total liabilities and equity

$                   465,621

$                  313,649

Book Value per Share

$                       25.02

$                      19.54

Shares Outstanding (in thousands)

7,638

7,679

SOURCE Arlington Asset Investment Corp.



RELATED LINKS

http://www.arlingtonasset.com