Exhibit 99.1
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 Fourth Quarter and Full Year 2018 Financial Results
ARLINGTON, VA, February 19, 2019 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported a net loss attributable to common shareholders of $26.5 million, or $0.87 per diluted common share, loss before income taxes attributable to common shareholders of $60.1 million, or $1.98 per diluted common share, and non-GAAP core operating income of $13.4 million, or $0.44 per diluted common share, for the quarter ended December 31, 2018. A reconciliation of non-GAAP core operating income to GAAP net income (loss) before income taxes appears at the end of this press release.
Fourth Quarter 2018 Financial Highlights
| o | Includes a $1.11 per diluted common share deferred income tax benefit |
| • | $1.98 per diluted common share of GAAP pre-tax loss |
| • | $0.44 per diluted common share of non-GAAP core operating income |
| • | $8.71 per common share of book value |
| o | $9.22 per common share of book value as of January 31, 2019 |
| • | $0.375 per common share dividend |
| • | Announced plan to elect to be taxed as a real estate investment trust (“REIT”) commencing with the taxable year ending December 31, 2019 |
Full Year 2018 Financial Highlights
| • | $3.18 per diluted common share of GAAP net loss |
| o | Includes a $0.03 per diluted common share deferred income tax provision |
| • | $3.15 per diluted common share of GAAP pre-tax loss |
| • | $2.06 per diluted common share of non-GAAP core operating income |
| • | $1.675 per common share dividend |
“Volatile market conditions driven by a strong risk off sentiment in the fourth quarter caused significant widening of spreads across fixed income products, including agency mortgage-backed securities (“MBS”),” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. “These conditions have given way to a meaningfully more favorable environment in early 2019, marked by improved book value, a more benign Federal Reserve outlook, new investments with solid mid-teens returns and ample funding availability, all of which bode well for future long-term returns and make us optimistic about opportunities going forward.”
Other Fourth Quarter Highlights
As of December 31, 2018, the Company’s agency MBS investment portfolio totaled $3,982 million in fair value, consisting solely of specified agency MBS. As of December 31, 2018, the Company did not have any net long to-be-announced (“TBA”) agency MBS positions. As of December 31, 2018, the Company’s $3,982 million agency MBS investment portfolio was comprised of the following:
| • | $335 million of 3.5% coupon 30-year agency MBS |
| • | $2,149 million of 4.0% coupon 30-year agency MBS |
As of December 31, 2018, the Company’s $3,982 million specified agency MBS portfolio had a weighted average amortized cost basis of $104.70 and a weighted average market price of $102.98. The Company’s fixed-rate agency MBS are comprised of securities backed by specified pools of mortgage loans selected for their lower propensity for prepayment. 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 TBA agency MBS, were approximately three-fifths of a percentage point as of December 31, 2018, compared to two-fifths of a percentage point as of September 30, 2018. As of January 31, 2019, the Company’s agency MBS portfolio totaled $4,279 million in fair value, consisting of $3,640 million of specified agency MBS and $639 million of net long TBA agency MBS.
As of December 31, 2018, the Company had $3,722 million of repurchase agreements outstanding with a weighted average rate of 2.72% and remaining weighted average maturity of 17 days secured by an aggregate of $3,931 million of agency MBS at fair value. As of January 31, 2019, the weighted average rate of the Company’s repurchase agreements outstanding had declined to 2.65%.
GAAP net interest income was $10.6 million for the fourth quarter of 2018 compared to $10.3 million for the third quarter of 2018, including the amortization of the Company’s net premium on its agency MBS of $7.2 million for the fourth quarter of 2018 compared to $8.4 million for the third quarter of 2018. The Company’s weighted average yield on its agency MBS was 3.30% for the fourth quarter of 2018 compared to 3.11% for the third quarter of 2018, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 8.25% for the fourth quarter of 2018 compared to 10.66% for the third quarter of 2018. The Company’s weighted average cost of repurchase agreement funding was 2.43% during the fourth quarter of 2018 compared to 2.17% during the third quarter of 2018.
The Company enters into various hedging transactions to mitigate the interest rate sensitivity of its cost of borrowing and the value of its agency MBS portfolio including interest rate swap agreements, U.S. Treasury note futures, put and call options on 10-year U.S. Treasury note futures, and options on agency MBS. Under GAAP, the Company has not designated these transactions as hedging instruments for financial reporting purposes and therefore all gains and losses on its hedging instruments are recorded as net investment gains and losses in the Company’s financial statements.
Under the terms of the Company’s interest rate swap agreements, the Company pays semiannual interest payments based on a fixed rate and receives quarterly variable interest payments based upon the prevailing three-month London Interbank Offered Rate (“LIBOR”) on the date of reset. As of December 31, 2018, the Company had $3,100 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 2.07% and a remaining weighted average maturity of 6.6 years. The Company’s weighted average net receive rate of its interest rate swap agreements was 0.33% during the fourth quarter of 2018 compared to 0.30% during the third quarter of 2018.
In addition to interest rate swap agreements, the Company held $320 million in equivalent notional amount of short positions in 10-year U.S. Treasury note futures as of December 31, 2018 that were purchased during the fourth quarter of 2018 when the 10-year U.S. Treasury rate was 3.01%. As of December 31, 2018, the total notional amount of the Company’s interest rate hedges consisting of interest rate swaps and U.S. Treasury note futures was 92% of the Company’s outstanding repurchase agreement funding and net TBA purchase commitments with a net duration gap of negative 1.1 years.
The Company reported TBA dollar roll income of $2.9 million for the fourth quarter of 2018 compared to $4.6 million for the third quarter of 2018. The implied weighted-average net interest spread of the Company’s TBA dollar rolls was 1.66% for the fourth quarter of 2018 compared to 1.86% for the third quarter of 2018. TBA dollar roll income is considered the economic equivalent of investing in agency MBS financed with a repurchase agreement and is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the “spot” sale of the same security. Under GAAP, the Company accounts for its TBA commitments as derivative instruments and recognizes income from TBA dollar rolls as a component of net investment gains and losses in the Company’s financial statements.
Economic net interest income was $15.9 million for the fourth quarter of 2018 compared to $17.2 million for the third quarter of 2018. Economic net interest income is comprised of net interest income determined in accordance with GAAP, TBA dollar roll income and net interest income or expense from interest rate swaps. Economic net interest income is a non-GAAP financial measure that is described later in this press release.
Excluding TBA dollar roll income, the Company had net investment gains on our investment portfolio of $29.3 million for the fourth quarter of 2018. On our related interest rate hedging instruments, the Company had net investment losses of $103.5 million, excluding
interest rate swap net interest income. This results in a net investment loss on our hedged investment portfolio of $74.2 million, or $2.44 per diluted common share, for the fourth quarter of 2018.
Total general and administrative expenses were $1.7 million for the fourth quarter of 2018 compared to $4.0 million for the third quarter of 2018, a decline of 58%. Total general and administrative expenses were $13.4 million for full year 2018 compared to $18.6 million for full year 2017, a decline of 28%. The decline in total general and administrative expenses was driven primarily by lower compensation and benefits expenses due to lower annual short-term cash incentive compensation and lower long-term performance-based stock compensation. Compensation and benefits expenses were $0.4 million for the fourth quarter of 2018 compared to $2.8 million for the third quarter of 2018, a decline of 86%. Compensation and benefits expenses were $8.3 million for full year 2018 compared to $13.2 million for full year 2017, a decline of 37%. Other general and administrative expenses were $5.0 million for full year 2018 compared to $5.4 million for full year 2017, a decline of 7%.
Election to be Taxed as a REIT
On December 27, 2018, the Company’s Board of Directors approved a plan for the Company to elect to be taxed and to operate in a manner that will allow the Company to qualify as a REIT for U.S. federal income tax purposes commencing with the Company’s taxable year ending December 31, 2019. For taxable years ending December 31, 2018 and prior, the Company was subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended. With the expectation that the Company would utilize its net operating loss (“NOL”) carryforwards as a C Corporation in 2019, the Board of Directors believes that the Company’s plan to elect to be taxed as a REIT is the best long-term tax structure for both the Company and its shareholders. As a result of its announcement that it expects to be taxed as a REIT beginning January 1, 2019, the Company’s deferred tax assets and liabilities were eliminated as of December 31, 2018.
As a REIT, the Company can continue to utilize its NOL and net capital loss (“NCL”) carryforwards to reduce its taxable income and therefore its REIT distribution requirements. As of December 31, 2018, the Company estimated its NOL carryforward at $14.5 million that expires in 2028 and its NCL carryforward at $424.2 million that begins to expire in 2019. In addition, the Company had an alternative minimum tax (“AMT”) credit carryforward of $9.1 million as of December 31, 2018 that does not expire. The AMT credit carryforward can be realized as either a cash refund or as an offset to future regular tax liabilities or a combination of both. The Company’s estimated loss and tax credit carryforwards as of December 31, 2018 are subject to potential adjustments up to the time of filing the Company’s income tax returns.
Distributions to Shareholders
The Company’s Board of Directors approved a distribution to common shareholders of $0.375 per share for the fourth quarter of 2018. The distribution was paid on January 31, 2019 to shareholders of record as of December 31, 2018. The Company’s Board of Directors also approved a distribution to its Series B preferred shareholders of $0.4375 per share for the fourth quarter of 2018. The distribution was paid on December 31, 2018 to shareholders of record as of December 12, 2018.
The tax characterization of the Company’s distributions to shareholders is determined and reported to shareholders on Form 1099-DIV after the end of the calendar year. The Company has also announced the tax characteristics of the distributions paid to its common and preferred shareholders in calendar year 2018. The Company’s distributions paid to common shareholders in 2018 of $1.85 per share were all a return of capital. The Company’s distributions paid to its Series B preferred shareholders in 2018 of $1.75 per share were also all a return of capital. Shareholders should receive a Form 1099-DIV containing this information from their brokers, transfer agents or other institutions. The fourth quarter 2018 distribution to the Company’s common shareholders paid in January 2019 will be reported as a 2019 distribution for federal income tax purposes.
Commencing with its taxable year ending December 31, 2019, the Company intends to elect and operate in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes. As a REIT, distributions to shareholders will generally be taxable as ordinary income that are not eligible to be taxed as qualified dividends. However, a portion of such distributions may be designated as long-term capital gain dividends to the extent that such portion is attributable to the Company’s sale of capital assets held for more than one year. Non-corporate taxpayers may deduct up to 20% of dividends received from a REIT that are not designated as capital gain dividends or qualified dividend income, subject to certain limitations. Distributions in excess of the Company’s current and accumulated earnings and profits will be treated as a tax-free return of capital to the extent of each shareholder’s tax basis in the Company’s stock and as capital gain thereafter.
The Company will hold a conference call for investors at 9:00 A.M. Eastern Time on Tuesday, February 19, 2019 to discuss the Company’s fourth quarter 2018 results.
Investors may listen to the earnings call 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.
Additional Information
The Company will make available additional quarterly information for the benefit of its shareholders through a supplemental presentation that will be available at the Company's website, www.arlingtonasset.com. The presentation will be available on the Webcasts and Presentations section located under the Updates & Events tab of the Company's website.
About the Company
Arlington Asset Investment Corp. (NYSE: AI) is a REIT 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, portfolio hedging, prepayments, dividends, book value, utilization of loss carryforwards, any change in long-term tax structures (including any REIT election) 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 and other assumptions underlying our estimates related to our projections of future core earnings, changes in the Company’s returns, changes in the use of the Company’s tax benefits, the Company’s ability to qualify and maintain qualification as a REIT, changes in the agency MBS asset yield, changes in the Company’s monetization of net operating loss carryforwards, changes in the Company’s ability to generate cash earnings and dividends, preservation and utilization of the Company’s net operating loss and net capital loss carryforwards, impacts of changes to and changes by Fannie Mae and Freddie Mac, actions taken by the U.S. Federal Reserve, the Federal Housing Finance Agency 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, and general economic, political, regulatory and market conditions. These and other material risks are described in the Company's most recent Annual Report on Form 10-K 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. 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 the Company. 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.
Financial data to follow
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
|
| December 31, 2018 |
|
| September 30, 2018 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 26,713 |
|
| $ | 32,199 |
|
Interest receivable |
|
| 13,349 |
|
|
| 14,818 |
|
Mortgage-backed securities, at fair value |
|
|
|
|
|
|
|
|
Agency |
|
| 3,982,106 |
|
|
| 4,399,466 |
|
Private-label |
|
| 24 |
|
|
| 37 |
|
Derivative assets, at fair value |
|
| 438 |
|
|
| 91 |
|
Deposits, net |
|
| 61,052 |
|
|
| 73,966 |
|
Other assets |
|
| 15,768 |
|
|
| 15,835 |
|
Total assets |
| $ | 4,099,450 |
|
| $ | 4,536,412 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Repurchase agreements |
| $ | 3,721,629 |
|
| $ | 4,092,251 |
|
Interest payable |
|
| 4,646 |
|
|
| 4,241 |
|
Accrued compensation and benefits |
|
| 3,732 |
|
|
| 3,665 |
|
Dividend payable |
|
| 11,736 |
|
|
| 12,723 |
|
Derivative liabilities, at fair value |
|
| 6,959 |
|
|
| 3,431 |
|
Deferred tax liabilities, net |
|
| — |
|
|
| 33,639 |
|
Other liabilities |
|
| 2,200 |
|
|
| 1,724 |
|
Long-term unsecured debt |
|
| 74,104 |
|
|
| 74,048 |
|
Total liabilities |
|
| 3,825,006 |
|
|
| 4,225,722 |
|
Equity: |
|
|
|
|
|
|
|
|
Preferred stock (liquidation preference of $8,765 and $8,654, respectively) |
|
| 8,245 |
|
|
| 8,138 |
|
Common stock |
|
| 305 |
|
|
| 303 |
|
Additional paid-in capital |
|
| 1,997,876 |
|
|
| 1,997,281 |
|
Accumulated deficit |
|
| (1,731,982 | ) |
|
| (1,695,032 | ) |
Total equity |
|
| 274,444 |
|
|
| 310,690 |
|
Total liabilities and equity |
| $ | 4,099,450 |
|
| $ | 4,536,412 |
|
Book value per common share (1) |
| $ | 8.71 |
|
| $ | 9.95 |
|
Tangible book value per common share (2) |
| $ | 8.71 |
|
| $ | 11.06 |
|
Common shares outstanding (in thousands) (3) |
|
| 30,516 |
|
|
| 30,364 |
|
|
|
|
|
|
|
|
|
|
(1) Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. |
| |||||||
|
|
|
|
|
|
|
|
|
(2) Tangible book value per common share is calculated as total equity less the preferred stock liquidation preference less net deferred tax assets plus net deferred tax liabilities divided by common shares outstanding. |
| |||||||
|
|
|
|
|
|
|
|
|
(3) Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock. |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
|
| Year Ended |
|
| Three Months Ended |
| ||||||||||||||
|
| December 31, 2018 |
|
| December 31, 2018 |
|
| September 30, 2018 |
|
| June 30, 2018 |
|
| March 31, 2018 |
| |||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
| $ | 130,258 |
|
| $ | 36,914 |
|
| $ | 32,679 |
|
| $ | 29,940 |
|
| $ | 30,725 |
|
Private-label mortgage-backed securities |
|
| 20 |
|
|
| 4 |
|
|
| 2 |
|
|
| 10 |
|
|
| 4 |
|
Other |
|
| 675 |
|
|
| 256 |
|
|
| 183 |
|
|
| 105 |
|
|
| 131 |
|
Total interest income |
|
| 130,953 |
|
|
| 37,174 |
|
|
| 32,864 |
|
|
| 30,055 |
|
|
| 30,860 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term secured debt |
|
| 79,812 |
|
|
| 25,286 |
|
|
| 21,265 |
|
|
| 17,936 |
|
|
| 15,325 |
|
Long-term unsecured debt |
|
| 5,013 |
|
|
| 1,264 |
|
|
| 1,261 |
|
|
| 1,257 |
|
|
| 1,231 |
|
Total interest expense |
|
| 84,825 |
|
|
| 26,550 |
|
|
| 22,526 |
|
|
| 19,193 |
|
|
| 16,556 |
|
Net interest income |
|
| 46,128 |
|
|
| 10,624 |
|
|
| 10,338 |
|
|
| 10,862 |
|
|
| 14,304 |
|
Investment loss, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on trading investments, net |
|
| (114,522 | ) |
|
| 32,591 |
|
|
| (37,878 | ) |
|
| (20,892 | ) |
|
| (88,343 | ) |
(Loss) gain from derivative instruments, net |
|
| (9,657 | ) |
|
| (101,483 | ) |
|
| 35,620 |
|
|
| 16,052 |
|
|
| 40,154 |
|
Other, net |
|
| 357 |
|
|
| (18 | ) |
|
| 1 |
|
|
| 324 |
|
|
| 50 |
|
Total investment loss, net |
|
| (123,822 | ) |
|
| (68,910 | ) |
|
| (2,257 | ) |
|
| (4,516 | ) |
|
| (48,139 | ) |
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
| 8,329 |
|
|
| 395 |
|
|
| 2,833 |
|
|
| 2,061 |
|
|
| 3,040 |
|
Other general and administrative expenses |
|
| 5,041 |
|
|
| 1,263 |
|
|
| 1,121 |
|
|
| 1,400 |
|
|
| 1,257 |
|
Total general and administrative expenses |
|
| 13,370 |
|
|
| 1,658 |
|
|
| 3,954 |
|
|
| 3,461 |
|
|
| 4,297 |
|
(Loss) income before income taxes |
|
| (91,064 | ) |
|
| (59,944 | ) |
|
| 4,127 |
|
|
| 2,885 |
|
|
| (38,132 | ) |
Income tax provision (benefit) |
|
| 733 |
|
|
| (33,639 | ) |
|
| 9,628 |
|
|
| 6,493 |
|
|
| 18,251 |
|
Net loss |
|
| (91,797 | ) |
|
| (26,305 | ) |
|
| (5,501 | ) |
|
| (3,608 | ) |
|
| (56,383 | ) |
Dividend on preferred stock |
|
| (590 | ) |
|
| (153 | ) |
|
| (151 | ) |
|
| (149 | ) |
|
| (137 | ) |
Net loss attributable to common stock |
| $ | (92,387 | ) |
| $ | (26,458 | ) |
| $ | (5,652 | ) |
| $ | (3,757 | ) |
| $ | (56,520 | ) |
Basic loss per common share |
| $ | (3.18 | ) |
| $ | (0.87 | ) |
| $ | (0.19 | ) |
| $ | (0.13 | ) |
| $ | (2.00 | ) |
Diluted loss per common share |
| $ | (3.18 | ) |
| $ | (0.87 | ) |
| $ | (0.19 | ) |
| $ | (0.13 | ) |
| $ | (2.00 | ) |
Weighted average common shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 29,052 |
|
|
| 30,392 |
|
|
| 29,382 |
|
|
| 28,210 |
|
|
| 28,197 |
|
Diluted |
|
| 29,052 |
|
|
| 30,392 |
|
|
| 29,382 |
|
|
| 28,210 |
|
|
| 28,197 |
|
Non-GAAP Core Operating Income
In addition to the Company’s results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”), the Company also reports “non-GAAP core operating income.” The Company defines core operating income as “economic net interest income” less “core general and administrative expenses.”
Economic Net Interest Income
Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of interest expense incurred from all of our interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions. Economic net interest income is comprised of the following:
| • | net interest income determined in accordance with GAAP; |
| • | TBA agency MBS dollar roll income, which is calculated as the price discount of a forward-settling purchase of a TBA agency MBS relative to the “spot” sale of the same security, earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settling purchase; and |
| • | net interest income earned or expense incurred from interest rate swap agreements. |
In the Company’s consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the net interest income earned or expense incurred from interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.
Core General and Administrative Expenses
Core general and administrative expenses are non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of comprehensive income less stock-based compensation expense.
Non-GAAP Core Operating Income Results
The following table presents the Company’s computation of economic net interest income and core operating income for the last four fiscal quarters and for the year ended December 31, 2018 (unaudited, amounts in thousands, except per share amounts):
|
| Year Ended |
|
| Three Months Ended |
| ||||||||||||||
|
| December 31, 2018 |
|
| December 31, 2018 |
|
| September 30, 2018 |
|
| June 30, 2018 |
|
| March 31, 2018 |
| |||||
GAAP net interest income |
| $ | 46,128 |
|
| $ | 10,624 |
|
| $ | 10,338 |
|
| $ | 10,862 |
|
| $ | 14,304 |
|
TBA dollar roll income |
|
| 20,929 |
|
|
| 2,940 |
|
|
| 4,604 |
|
|
| 6,742 |
|
|
| 6,643 |
|
Interest rate swap net interest income (expense) |
|
| 6,266 |
|
|
| 2,304 |
|
|
| 2,295 |
|
|
| 2,483 |
|
|
| (816 | ) |
Economic net interest income |
|
| 73,323 |
|
|
| 15,868 |
|
|
| 17,237 |
|
|
| 20,087 |
|
|
| 20,131 |
|
Core general and administrative expenses |
|
| (12,534 | ) |
|
| (2,324 | ) |
|
| (3,202 | ) |
|
| (3,162 | ) |
|
| (3,846 | ) |
Preferred stock dividend |
|
| (590 | ) |
|
| (153 | ) |
|
| (151 | ) |
|
| (149 | ) |
|
| (137 | ) |
Non-GAAP core operating income |
| $ | 60,199 |
|
| $ | 13,391 |
|
| $ | 13,884 |
|
| $ | 16,776 |
|
| $ | 16,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core operating income per diluted common share |
| $ | 2.06 |
|
| $ | 0.44 |
|
| $ | 0.47 |
|
| $ | 0.59 |
|
| $ | 0.57 |
|
Weighted average diluted common shares outstanding |
|
| 29,269 |
|
|
| 30,437 |
|
|
| 29,718 |
|
|
| 28,463 |
|
|
| 28,430 |
|
The following table provides a reconciliation of GAAP pre-tax net income (loss) to non-GAAP core operating income for the last four fiscal quarters and for the year ended December 31, 2018 (unaudited, amounts in thousands):
|
| Year Ended |
|
| Three Months Ended |
| ||||||||||||||
|
| December 31, 2018 |
|
| December 31, 2018 |
|
| September 30, 2018 |
|
| June 30, 2018 |
|
| March 31, 2018 |
| |||||
GAAP (loss) income before income taxes |
| $ | (91,064 | ) |
| $ | (59,944 | ) |
| $ | 4,127 |
|
| $ | 2,885 |
|
| $ | (38,132 | ) |
Add (less): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment loss, net |
|
| 123,822 |
|
|
| 68,910 |
|
|
| 2,257 |
|
|
| 4,516 |
|
|
| 48,139 |
|
Stock-based compensation expense |
|
| 836 |
|
|
| (666 | ) |
|
| 752 |
|
|
| 299 |
|
|
| 451 |
|
Preferred stock dividend |
|
| (590 | ) |
|
| (153 | ) |
|
| (151 | ) |
|
| (149 | ) |
|
| (137 | ) |
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income |
|
| 20,929 |
|
|
| 2,940 |
|
|
| 4,604 |
|
|
| 6,742 |
|
|
| 6,643 |
|
Interest rate swap net interest income (expense) |
|
| 6,266 |
|
|
| 2,304 |
|
|
| 2,295 |
|
|
| 2,483 |
|
|
| (816 | ) |
Non-GAAP core operating income |
| $ | 60,199 |
|
| $ | 13,391 |
|
| $ | 13,884 |
|
| $ | 16,776 |
|
| $ | 16,148 |
|
Non-GAAP core operating income is used by management to evaluate the financial performance of the Company’s long-term investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. The Company believes that non-GAAP core operating income assists investors in understanding and evaluating the financial performance of the Company’s long-term investment strategy and core business activities over periods of time as well as its earnings capacity. A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for “non-core” events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. For example, the economic cost or benefit of hedging instruments other than interest rate swap agreements, such as U.S. Treasury note futures or options on U.S. Treasury note futures, do not affect the computation of non-GAAP core operating income. In addition, the Company’s calculation of non-GAAP core operating income may not be comparable to other similarly titled measures of other companies. Therefore, the Company believes that net income and comprehensive income determined in accordance with GAAP should be considered in conjunction with non-GAAP core operating income.
The following tables present information on the Company’s investment and hedge portfolio as of December 31, 2018 (unaudited, dollars in thousands):
Agency MBS:
| Fair Value |
| ||
Specified agency MBS |
| $ | 3,982,106 |
|
Net long agency TBA position |
|
| — |
|
Total |
| $ | 3,982,106 |
|
Specified Agency MBS:
|
| Unpaid Principal Balance |
|
| Net Unamortized Purchase Premiums |
|
| Amortized Cost Basis |
|
| Net Unrealized Gain (Loss) |
|
| Fair Value |
|
| Market Price |
|
| Coupon |
|
| Weighted Average Expected Remaining Life |
| ||||||||
30-year fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% |
| $ | 334,614 |
|
| $ | 6,396 |
|
| $ | 341,010 |
|
| $ | (5,830 | ) |
| $ | 335,180 |
|
| $ | 100.17 |
|
|
| 3.50 | % |
|
| 8.0 |
|
4.0% |
|
| 2,096,002 |
|
|
| 100,805 |
|
|
| 2,196,807 |
|
|
| (48,257 | ) |
|
| 2,148,550 |
|
|
| 102.51 |
|
|
| 4.00 | % |
|
| 7.3 |
|
4.5% |
|
| 1,436,241 |
|
|
| 74,566 |
|
|
| 1,510,807 |
|
|
| (12,446 | ) |
|
| 1,498,361 |
|
|
| 104.33 |
|
|
| 4.50 | % |
|
| 6.5 |
|
5.5% |
|
| 14 |
|
|
| — |
|
|
| 14 |
|
|
| 1 |
|
|
| 15 |
|
|
| 107.59 |
|
|
| 5.50 | % |
|
| 5.7 |
|
Total/weighted-average |
| $ | 3,866,871 |
|
| $ | 181,767 |
|
| $ | 4,048,638 |
|
| $ | (66,532 | ) |
| $ | 3,982,106 |
|
| $ | 102.98 |
|
|
| 4.14 | % |
|
| 7.1 |
|
Net Long Agency TBA Positions:
|
| Notional Amount: |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Net Long (Short) Position |
|
| Implied Cost Basis |
|
| Implied Fair Value |
|
| Net Carrying Amount |
| ||||
5.0% 30-year MBS purchase commitments |
| $ | 100,000 |
|
| $ | 103,750 |
|
| $ | 104,047 |
|
| $ | 297 |
|
5.0% 30-year MBS sale commitments |
|
| (100,000 | ) |
|
| (104,188 | ) |
|
| (104,047 | ) |
|
| 141 |
|
Total TBA commitments, net |
| $ | — |
|
| $ | (438 | ) |
| $ | — |
|
| $ | 438 |
|
Interest Rate Swap Agreements:
|
|
|
|
|
| Weighted-average: |
|
|
|
|
| |||||||||||||
|
| Notional Amount |
|
| Fixed Pay Rate |
|
| Variable Receive Rate |
|
| Net Receive (Pay) Rate |
|
| Remaining Life (Years) |
|
| Fair Value |
| ||||||
Years to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 3 years |
| $ | 1,050,000 |
|
|
| 1.53 | % |
|
| 2.60 | % |
|
| 1.07 | % |
|
| 1.5 |
|
| $ | (152 | ) |
3 to less than 7 years |
|
| 325,000 |
|
|
| 2.00 | % |
|
| 2.73 | % |
|
| 0.73 | % |
|
| 4.4 |
|
|
| (432 | ) |
7 to less than 10 years |
|
| 1,600,000 |
|
|
| 2.35 | % |
|
| 2.70 | % |
|
| 0.35 | % |
|
| 8.5 |
|
|
| (4,572 | ) |
10 or more years |
|
| 125,000 |
|
|
| 3.02 | % |
|
| 2.66 | % |
|
| (0.36 | )% |
|
| 29.6 |
|
|
| (553 | ) |
Total / weighted-average |
| $ | 3,100,000 |
|
|
| 2.07 | % |
|
| 2.67 | % |
|
| 0.60 | % |
|
| 6.6 |
|
| $ | (5,709 | ) |
U.S. Treasury Note Futures:
|
| Maturity Date |
| Notional Amount |
|
| Net Fair Value |
| ||
10-year U.S. Treasury note futures |
| March 2019 |
| $ | 320,000 |
|
| $ | (1,250 | ) |