UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event
reported): July 28, 2015 (July 27, 2015)
ARLINGTON ASSET INVESTMENT CORP.
(Exact name of Registrant as specified in
its charter)
Virginia |
|
54-1873198 |
|
001-34374 |
(State or Other Jurisdiction
of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
|
(Commission File Number) |
1001 Nineteenth Street North
Arlington, VA 22209
(Address of principal executive offices)
(Zip code)
(703) 373-0200
(Registrant’s telephone number including
area code)
N/A
(Former name or former address, if changed
from last report)
Check the appropriate box below if the Form 8-K filing is intended
to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations
and Financial Condition.
Arlington Asset Investment
Corp. (the “Company”) issued a press release on July 27, 2015 announcing its financial results for the quarter ended
June 30, 2015. A copy of the press release is attached hereto as Exhibit 99.1.
The information in Item
2.02 of this Current Report on Form 8-K, including Exhibit 99.1 furnished pursuant to Item 9.01, shall not be deemed “filed”
for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section.
Furthermore, the information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 furnished pursuant to Item
9.01, shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933.
Forward-Looking Statements Disclaimer
This Current Report
on Form 8-K contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, including those relating to forward settling transactions, forward yield, and the effect of actions
of the U.S. government, including the Federal Reserve, on our results. Forward-looking statements typically are identified by use
of the terms such as “believe,” “expect,” “anticipate,” “estimate,” “plan,”
“continue,” “intend,” “should,” “may” or similar expressions. Forward-looking statements
are based on the Company's beliefs, assumptions and expectations of the Company's future performance, taking into account all information
currently available to the Company. The Company cannot assure you that actual results will not vary from the expectations contained
in the forward-looking statements. All of the forward-looking statements are subject to numerous possible events, factors and conditions,
many of which are beyond the control of the Company and not all of which are known to the Company, including, without limitation,
market conditions and those described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and
other documents which have been filed with the Securities and Exchange Commission. All forward-looking statements speak only as
of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events
or how they may affect us. Except as required by law, the Company is not obligated to, and does not intend to, update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
99.1 |
Arlington Asset Investment Corp. Press Release dated July 27, 2015. |
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.
|
ARLINGTON ASSET INVESTMENT CORP. |
|
|
|
|
Date: July 28, 2015 |
By: |
/s/ Richard E. Konzmann |
|
Name: |
Richard E. Konzmann |
|
Title: |
Executive Vice President, Chief Financial Officer and Treasurer |
EXHIBIT INDEX
Exhibit
No. |
|
Description |
|
|
|
99.1 |
|
Arlington Asset Investment Corp. Press Release dated July 27, 2015. |
Exhibit 99.1
![](image_001.jpg)
Contacts:
Media: 703.373.0200 or ir@arlingtonasset.com
Investors: Rich Konzmann at 703.373.0200 or ir@arlingtonasset.com
Arlington Asset Investment Corp. Reports
Second Quarter 2015 Financial Results
ARLINGTON, VA, July 27, 2015 –
Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported non-GAAP core
operating income of $40.6 million for the quarter ended June 30, 2015, or $1.76 per diluted share. Excluding gains on private-label
mortgage-backed securities (“MBS”), the Company reported non-GAAP core operating income of $30.5 million, or $1.32
per diluted share. A reconciliation of non-GAAP core operating income measures to GAAP net income (loss) appears at the end of
this press release.
Second Quarter 2015 Financial Highlights
| · | $1.76 per diluted share of non-GAAP core operating income |
| · | $1.32 per diluted share of non-GAAP core operating income excluding gain on private-label MBS |
| · | $0.29 per diluted share of net income |
| · | $23.71 per share of book value |
| · | $0.875 per share dividend declared |
“The Company experienced solid core
operating income this quarter driven by growth in the Company’s agency MBS portfolio. However, persistent interest rate volatility
and spread widening in fixed-rate agency MBS contributed to a decline in the Company’s book value during the quarter,”
said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. “We reallocated approximately $67 million
of capital this quarter from private-label MBS into higher return agency MBS investments, and we continue to maintain a substantial
hedge position with a focus on protecting our portfolio from rising interest rates. Looking forward, while higher future financing
costs associated with expected Federal Reserve tightening as well as increased economic hedge costs will likely lead to compressed
net spread income over time, we continue to benefit from the investment flexibility and future reallocation opportunity afforded
by our remaining $152 million private-label MBS portfolio.”
Other Second Quarter Highlights
As of June 30, 2015, the Company’s
agency MBS portfolio consisted of $3,914 million in face value and $4,154 million of fair value. As of June 30, 2015, the Company’s
agency MBS were fixed-rate 30-year MBS specifically selected for their prepayment protections with a weighted average coupon of
3.98%, a weighted average original cost of 106.14 and a weighted average market price of 106.15. As of June 30, 2015, approximately
48% of the Company’s agency MBS portfolio is in specified pools of low loan balance loans, approximately 30% is in specified
pools of loans issued under the Home Affordable Refinance Program (“HARP”), while the remainder includes specified
pools of 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 to-be-announced agency security, declined to approximately 1/2 of a point as of June 30, 2015 compared to
approximately ¾ of a point as of March 31, 2015. The three-month constant prepayment rate (“CPR”) for the Company’s
agency MBS increased to 12.34% as of June 30, 2015, compared to 8.18% as of March 31, 2015. As of June 30, 2015, the Company had
$3,592 million of repurchase agreements outstanding with a weighted average rate of 38 basis points secured by $3,784 million of
agency MBS at fair value. The Company’s total debt to equity ratio as of June 30, 2015 was approximately 6.8 to 1.
As of June 30, 2015, the Company’s
Eurodollar futures run consecutively through June 2020 with a weighted average notional amount of $2,427 million with
a weighted average contract rate of 2.69% and a current market rate of 1.74%. As of June 30, 2015, the Company also had
$1,075 million in notional 10-year interest rate swap futures with a weighted average contract rate
of 2.77% and a current market rate of 2.47%. As of June 30, 2015, the total weighted average hedge notional amount as a
percentage of the Company’s outstanding repurchase agreement financing on its agency MBS was 97%, relatively unchanged from
the prior quarter. The Company increased its long-term hedges to 31% of its total hedge portfolio as of June 30, 2015 compared
to approximately 27% as of March 31, 2015.
Net interest
income for the second quarter of 2015 was $34.1 million, including non-cash accretion on private-label MBS of $2.3 million required
under GAAP. During the second quarter of 2015, the Company recorded net investment losses on its agency MBS portfolio of $61.8
million and net investment gains on its derivative hedging instruments of $30.4 million for a net investment loss on its hedged
agency MBS portfolio of $31.4 million. In recent quarters, the Company’s increased allocation
of capital to agency MBS has resulted in growth in the Company’s net interest income and core operating income. With this
growth in the agency MBS portfolio, the economic costs of the Company’s hedge instruments have grown proportionately, which
are reflected in the Company’s GAAP net income and changes in book value through net investment gains and losses rather than
through net interest income and core operating income.
As of June 30, 2015, the Company’s
private-label MBS portfolio consisted of $198.9 million in face value with an amortized cost basis of $132.6 million and a fair
value of $152.2 million. During the second quarter of 2015, the Company sold private-label MBS for sale proceeds of $89.6 million,
realizing a GAAP gain of $13.1 million. Net sale proceeds from these private-label MBS after deducting associated repurchase financing
was $66.8 million. During the second quarter of 2015, the Company purchased $2.9 million of new private-label MBS. As of June 30,
2015, the Company had $39.4 million of repurchase agreements outstanding with a weighted average rate of 212 basis points secured
by $70.6 million of private-label MBS at fair value.
Dividend
The Company’s
Board of Directors approved a $0.875 dividend for the second quarter of 2015. The dividend will be paid on July 31, 2015 to shareholders
of record as of June 30, 2015.
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 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 9:00 A.M. Eastern Time on Tuesday, July 28, 2015 to discuss the results. Investors wishing
to listen to the earnings call may do so 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.
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, spread income, portfolio hedging, migrating capital from the private-label MBS portfolio to the agency
MBS portfolio, 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 our 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 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, 2014 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 follow
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on agency securities |
|
$ |
34,529 |
|
|
$ |
23,184 |
|
|
$ |
66,443 |
|
|
$ |
39,892 |
|
Interest on private-label securities |
|
|
4,155 |
|
|
|
6,852 |
|
|
|
9,198 |
|
|
|
14,002 |
|
Other |
|
|
6 |
|
|
|
27 |
|
|
|
13 |
|
|
|
36 |
|
Total interest income |
|
|
38,690 |
|
|
|
30,063 |
|
|
|
75,654 |
|
|
|
53,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term debt |
|
|
3,395 |
|
|
|
2,124 |
|
|
|
6,475 |
|
|
|
3,858 |
|
Interest on long-term debt |
|
|
1,180 |
|
|
|
552 |
|
|
|
1,828 |
|
|
|
1,103 |
|
Total interest expense |
|
|
4,575 |
|
|
|
2,676 |
|
|
|
8,303 |
|
|
|
4,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
34,115 |
|
|
|
27,387 |
|
|
|
67,351 |
|
|
|
48,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT (LOSS) GAIN, NET |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on sale of available-for-sale investments, net |
|
|
13,117 |
|
|
|
4,690 |
|
|
|
16,465 |
|
|
|
9,359 |
|
Other-than-temporary impairment charges |
|
|
- |
|
|
|
(80 |
) |
|
|
- |
|
|
|
(80 |
) |
(Loss) gain on trading investments, net |
|
|
(61,849 |
) |
|
|
49,694 |
|
|
|
(48,558 |
) |
|
|
62,454 |
|
Gain (loss) from derivative instruments, net |
|
|
30,391 |
|
|
|
(46,585 |
) |
|
|
(45,728 |
) |
|
|
(70,065 |
) |
Other, net |
|
|
305 |
|
|
|
187 |
|
|
|
414 |
|
|
|
324 |
|
Total investment (loss) gain, net |
|
|
(18,036 |
) |
|
|
7,906 |
|
|
|
(77,407 |
) |
|
|
1,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before other expenses |
|
|
16,079 |
|
|
|
35,293 |
|
|
|
(10,056 |
) |
|
|
50,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
2,669 |
|
|
|
3,185 |
|
|
|
5,081 |
|
|
|
6,146 |
|
Professional services |
|
|
321 |
|
|
|
395 |
|
|
|
451 |
|
|
|
911 |
|
Insurance |
|
|
105 |
|
|
|
105 |
|
|
|
210 |
|
|
|
210 |
|
Occupancy and equipment |
|
|
124 |
|
|
|
120 |
|
|
|
240 |
|
|
|
219 |
|
Board of director fees |
|
|
304 |
|
|
|
264 |
|
|
|
542 |
|
|
|
495 |
|
Other operating expenses |
|
|
308 |
|
|
|
311 |
|
|
|
615 |
|
|
|
554 |
|
Total other expenses |
|
|
3,831 |
|
|
|
4,380 |
|
|
|
7,139 |
|
|
|
8,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
12,248 |
|
|
|
30,913 |
|
|
|
(17,195 |
) |
|
|
42,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
5,647 |
|
|
|
12,074 |
|
|
|
18,389 |
|
|
|
16,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,601 |
|
|
$ |
18,839 |
|
|
$ |
(35,584 |
) |
|
$ |
25,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
$ |
0.29 |
|
|
$ |
0.95 |
|
|
$ |
(1.55 |
) |
|
$ |
1.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
$ |
0.29 |
|
|
$ |
0.94 |
|
|
$ |
(1.55 |
) |
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic (in thousands) |
|
|
22,979 |
|
|
|
19,740 |
|
|
|
22,976 |
|
|
|
18,282 |
|
Weighted average shares outstanding - diluted (in thousands) |
|
|
23,098 |
|
|
|
20,060 |
|
|
|
22,976 |
|
|
|
18,579 |
|
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
ASSETS |
|
June 30, 2015 |
|
|
March 31, 2015 |
|
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,840 |
|
|
$ |
15,315 |
|
|
$ |
33,832 |
|
Interest receivable |
|
|
12,273 |
|
|
|
11,269 |
|
|
|
10,701 |
|
Sold securities receivable |
|
|
51,690 |
|
|
|
78,915 |
|
|
|
- |
|
Mortgage-backed securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities |
|
|
4,154,387 |
|
|
|
3,687,764 |
|
|
|
3,414,340 |
|
Private-label securities |
|
|
152,162 |
|
|
|
241,017 |
|
|
|
267,437 |
|
Other investments |
|
|
1,749 |
|
|
|
1,819 |
|
|
|
1,837 |
|
Derivative assets, at fair value |
|
|
2,144 |
|
|
|
1,508 |
|
|
|
1,267 |
|
Deferred tax assets, net |
|
|
113,121 |
|
|
|
113,276 |
|
|
|
122,365 |
|
Deposits |
|
|
183,806 |
|
|
|
213,037 |
|
|
|
160,427 |
|
Prepaid expenses and other assets |
|
|
2,498 |
|
|
|
2,697 |
|
|
|
2,283 |
|
Total assets |
|
$ |
4,694,670 |
|
|
$ |
4,366,617 |
|
|
$ |
4,014,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
$ |
3,631,772 |
|
|
$ |
3,371,690 |
|
|
$ |
3,179,775 |
|
Interest payable |
|
|
1,267 |
|
|
|
1,162 |
|
|
|
1,106 |
|
Accrued compensation and benefits |
|
|
2,989 |
|
|
|
1,562 |
|
|
|
6,067 |
|
Dividend payable |
|
|
21,089 |
|
|
|
21,574 |
|
|
|
20,195 |
|
Derivative liabilities, at fair value |
|
|
144,936 |
|
|
|
175,793 |
|
|
|
124,308 |
|
Purchase securities payable |
|
|
271,035 |
|
|
|
148,252 |
|
|
|
- |
|
Accounts payable, accrued expenses and other liabilities |
|
|
894 |
|
|
|
751 |
|
|
|
1,006 |
|
Long-term debt |
|
|
75,300 |
|
|
|
75,300 |
|
|
|
40,000 |
|
Total liabilities |
|
|
4,149,282 |
|
|
|
3,796,084 |
|
|
|
3,372,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
230 |
|
|
|
230 |
|
|
|
230 |
|
Additional paid-in capital |
|
|
1,898,217 |
|
|
|
1,897,138 |
|
|
|
1,897,027 |
|
Accumulated other comprehensive income, net of taxes |
|
|
14,907 |
|
|
|
28,017 |
|
|
|
35,872 |
|
Accumulated deficit |
|
|
(1,367,966 |
) |
|
|
(1,354,852 |
) |
|
|
(1,291,097 |
) |
Total equity |
|
|
545,388 |
|
|
|
570,533 |
|
|
|
642,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
4,694,670 |
|
|
$ |
4,366,617 |
|
|
$ |
4,014,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book Value per Share |
|
$ |
23.71 |
|
|
$ |
24.83 |
|
|
$ |
27.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding (in thousands) (1) |
|
|
23,005 |
|
|
|
22,973 |
|
|
|
22,973 |
|
(1) 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.
In addition to the financial results reported
in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”),
the Company calculated non-GAAP core operating income for the three and six months ended June 30, 2015 and 2014. In determining
core operating income, the Company excludes certain legacy litigation expenses and adjusts net income determined in accordance
with GAAP for the following non-cash and other items: (i) compensation costs associated with stock-based awards, (ii) non-cash
accretion of private-label MBS purchase discounts, (iii) private-label MBS purchase discount accretion realized upon sale or repayment,
(iv) other-than-temporary impairment charges, (v) other-than-temporary impairment charges realized upon sale, (vi) both realized
and unrealized gains and losses on the agency MBS and all related hedge instruments, and (vii) non-cash income tax provisions.
The Company’s portfolio strategy
on the Company’s agency MBS portfolio is to generate a net interest margin on the leveraged assets and hedge the market value
of the assets, expecting that the fluctuations in the market value of the agency MBS and related hedges should largely offset each
other over time. As a result, the Company excludes both the realized and unrealized fluctuations in the gains and losses in the
assets and hedges on its hedged agency MBS portfolio when assessing the underlying core operating income of the Company. However,
the Company’s portfolio strategy on the Company’s private-label MBS portfolio is to generate a total cash return comprised
of both interest income collected and the cash return realized when the private-label MBS are sold that equals the difference between
the sale price and the discount to par paid at acquisition. Therefore, the Company excludes non-cash accretion of private-label
MBS purchase discounts from non-GAAP core operating income, but includes realized cash gains or losses on its private-label MBS
portfolio in core operating income to reflect the total cash return on those securities over their holding period. Since the timing
of realized cash gains or losses on private-label MBS may vary significantly between periods, the Company also reports core operating
income excluding gains on private-label MBS.
These non-GAAP core operating income measurements
are used by management to analyze and assess the Company’s operating results on its portfolio and assist with the determination
of the appropriate level of dividends. The Company believes that these non-GAAP measurements assist investors in understanding
the impact of these non-core items and non-cash expenses on our performance and provides additional clarity around our earnings
capacity and trends. 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 our business and these effects should not be ignored in evaluating and analyzing
our financial results. Additional limitations of core operating income are that it does not include economic financing costs on
the Company’s hedging instruments or amortization of premiums or discounts on the Company’s agency MBS whereas those
amounts are both reflected in net income determined in accordance with GAAP and changes in book value. Therefore, the Company believes
net income on a GAAP basis and these core operating income measures on a non-GAAP basis should be considered together.
The following is a reconciliation of GAAP
net income to non-GAAP core operating income measures for the three and six months ended June 30, 2015 and 2014:
NON-GAAP CORE OPERATING
INCOME
(Dollars in thousands, except per share data)
(Unaudited)
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
GAAP net income (loss) | |
$ | 6,601 | | |
$ | 18,839 | | |
$ | (35,584 | ) | |
$ | 25,872 | |
Adjustments: | |
| | | |
| | | |
| | | |
| | |
Legacy litigation expenses | |
| - | | |
| 43 | | |
| - | | |
| 54 | |
Non-cash income tax provision | |
| 5,174 | | |
| 11,782 | | |
| 17,306 | | |
| 15,986 | |
Stock compensation | |
| 370 | | |
| 779 | | |
| 481 | | |
| 1,456 | |
Net realized and unrealized loss (gain) on trading MBS and hedge instruments | |
| 31,458 | | |
| (3,199 | ) | |
| 94,185 | | |
| 7,434 | |
Realized gain on private-label MBS | |
| (13,117 | ) | |
| (4,690 | ) | |
| (16,465 | ) | |
| (9,359 | ) |
Other-than-temporary impairment charges | |
| - | | |
| 80 | | |
| - | | |
| 80 | |
| |
| | | |
| | | |
| | | |
| | |
Non-GAAP core operating income excluding gain on private-label MBS | |
| 30,486 | | |
| 23,634 | | |
| 59,923 | | |
| 41,523 | |
| |
| | | |
| | | |
| | | |
| | |
Realized gain on private-label MBS | |
| 13,117 | | |
| 4,690 | | |
| 16,465 | | |
| 9,359 | |
Other-than-temporary impairment charges realized upon sale or repayment | |
| (6,081 | ) | |
| (1,390 | ) | |
| (6,081 | ) | |
| (4,026 | ) |
Purchase discount accretion of private-label MBS realized upon sale or repayment | |
| 5,357 | | |
| (526 | ) | |
| 9,802 | | |
| 347 | |
Non-cash interest income related to purchase discount accretion of private-label MBS | |
| (2,327 | ) | |
| (3,408 | ) | |
| (5,023 | ) | |
| (6,725 | ) |
| |
| | | |
| | | |
| | | |
| | |
Non-GAAP core operating income | |
$ | 40,552 | | |
$ | 23,000 | | |
$ | 75,086 | | |
$ | 40,478 | |
| |
| | | |
| | | |
| | | |
| | |
Non-GAAP core operating income excluding gain on private-label MBS per share | |
$ | 1.32 | | |
$ | 1.18 | | |
$ | 2.59 | | |
$ | 2.23 | |
| |
| | | |
| | | |
| | | |
| | |
Non-GAAP core operating income per share | |
$ | 1.76 | | |
$ | 1.15 | | |
$ | 3.25 | | |
$ | 2.18 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average diluted shares outstanding | |
| 23,098 | | |
| 20,060 | | |
| 23,097 | | |
| 18,579 | |
The following tables present information
on the Company’s investment portfolio as of June 30, 2015:
AGENCY MBS PORTFOLIO
As of June 30, 2015
(Dollars in thousands)
(Unaudited)
| |
Face Amount | | |
Fair Value | | |
Market Price | | |
Coupon | | |
Weighted Average Life | |
30-year fixed rate: | |
| | | |
| | | |
| | | |
| | | |
| | |
3.5% | |
$ | 414,593 | | |
$ | 427,807 | | |
$ | 103.19 | | |
| 3.50 | % | |
| 10.5 | |
4.0% | |
| 3,252,318 | | |
| 3,457,923 | | |
| 106.32 | | |
| 4.00 | % | |
| 8.7 | |
4.5% | |
| 246,685 | | |
| 268,630 | | |
| 108.90 | | |
| 4.50 | % | |
| 7.5 | |
5.5% | |
| 24 | | |
| 27 | | |
| 112.55 | | |
| 5.50 | % | |
| 5.0 | |
Total/weighted average | |
$ | 3,913,620 | | |
$ | 4,154,387 | | |
| 106.15 | | |
| 3.98 | % | |
| 8.8 | |
![](image_001.jpg)
PRIVATE-LABEL MBS PORTFOLIO
As of June 30, 2015
(Dollars in thousands)
(Unaudited)
Face value | |
$ | 198,934 | |
Unamortized discount | |
$ | (66,315 | ) |
Amortized cost | |
$ | 132,619 | |
Net unrealized gain | |
$ | 19,543 | |
Fair market value | |
$ | 152,162 | |
Fair market value (as a % of face value) | |
| 76.5 | % |
Quarterly GAAP yield (annualized) | |
| 9.48 | % |
Weighted average coupon | |
| 2.95 | % |
60+ days delinquent | |
| 12.4 | % |
Credit enhancement | |
| 0.1 | % |
Loss severity (3-month) | |
| 33.0 | % |
Constant prepayment rate (3-month) | |
| 12.3 | % |
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