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): October 25, 2017 (October 24, 2017)
ARLINGTON ASSET INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
Virginia |
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54-1873198 |
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001-34374 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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(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) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Arlington Asset Investment Corp. (the “Company”) issued a press release on October 24, 2017 announcing its financial results for the quarter ended September 30, 2017. 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 this Current Report on Form 8-K, including Exhibit 99.1 hereto, shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.
Item 5.02. |
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers |
On October 23, 2017, the Board of Directors (the “Board”) of Arlington Asset Investment Corp. (the “Company”) appointed Benjamin J. Strickler as Vice President and Chief Accounting Officer of the Company, effective immediately, in recognition of Mr. Strickler’s exemplary contributions to the Company. In this position Mr. Strickler will serve as the Company’s principal accounting officer, a position previously held by the Company’s Chief Financial Officer, Richard E. Konzmann. Mr. Konzmann will continue to serve as Executive Vice President, Chief Financial Officer and Treasurer of the Company, as well as the Company’s principal financial officer.
Mr. Strickler, age 35, has served as the Company’s Vice President and Controller since June 2015. Prior to joining the Company, Mr. Strickler was a Director of Accounting Policy for the Investments and Capital Markets segment of the Federal Home Loan Mortgage Corporation, or Freddie Mac, beginning in May 2013. While at Freddie Mac, Mr. Strickler was responsible for a variety of financial and technical accounting matters and oversaw the implementation of accounting policies, including the design and implementation of associated internal controls. Prior to joining Freddie Mac, Mr. Strickler worked in the Banking Capital Markets Assurance Practice at PricewaterhouseCoopers LLP, where he began as an associate in January 2007, eventually rising to Senior Associate in 2009 and Manager in July 2011. Mr. Strickler holds B.B.A. and M.S. in Accounting degrees from James Madison University and is a Certified Public Accountant.
There are no arrangements or understandings between Mr. Strickler and any person pursuant to which Mr. Strickler was selected as the principal accounting officer, and there are no actual or proposed transactions between Mr. Strickler or any member of his immediate family and the Company or any of its subsidiaries that would require disclosure under Item 404(a) of Regulation S-K (17 CFR 229.404(a)).
There are no family relationships between Mr. Strickler and any of the Company’s executive officers or members of the Board.
There is no material plan, contract or arrangement to which Mr. Strickler is a party or in which he will participate in connection with his appointment as the Company’s principal accounting officer.
Item 7.01Regulation FD Disclosure.
The Company has posted an updated investor presentation to its website, www.arlingtonasset.com. A copy of the slide presentation is attached as Exhibit 99.2 hereto and incorporated herein by reference. The foregoing information is not deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in filings under the Securities Act of 1933.
Item 8.01Other Events.
The Company reported net income attributable to common shareholders of $22.8 million, or $0.85 per diluted common share, and non-GAAP core operating income of $13.8 million, or $0.52 per diluted common share, for the quarter ended September 30, 2017. The Company reported book value of $13.71 per common share and tangible book value of $12.88 per common share as of September 30, 2017.
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 statements regarding future results or expectations about our investments, interest rates, portfolio allocation, dividends, financing agreements, returns on invested capital, investment strategy, taxes, portfolio, earnings, book value, housing market, compensation, growth in capital, agency mortgage-backed security (“MBS”) spreads,
prepayments, hedging instruments, duration, credit performance of private-label MBS, cash flow and benefit of deferred tax asset value. Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “views,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “potential,” “prospective,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made. Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control. Forward-looking statements are further based on various operating and return assumptions. Caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, actual results may differ materially from expectations or projections. You should carefully consider these risks when you make a decision concerning an investment in our common stock or senior notes, along with the following factors, among others, that may cause our actual results to differ materially from those described in any forward-looking statements: availability of, and our ability to deploy, capital; growing our business primarily through our current strategy of focusing on acquiring primarily agency MBS; our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and use our net operating losses and net capital losses to offset future taxable income, including whether our shareholder rights plan will be effective in preventing an ownership change that would significantly limit our ability to utilize such losses; our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of these strategies; the effect of changes in prepayment rates, interest rates and default rates on our portfolio; the effect of governmental regulation and actions; our ability to roll our repurchase agreements on favorable terms, if at all; our liquidity; our asset valuation policies; our decisions with respect to, and ability to make, future dividends; investing in assets other than MBS or pursuing business activities other than investing in MBS; our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; our decision to not elect to be taxed as a real estate investment trust under the Internal Revenue Code; competition for investment opportunities, including competition from the U.S. Department of Treasury and the U.S. Federal Reserve, for investments in agency MBS, as well as the timing of the termination by the U.S. Federal Reserve of its purchases of agency MBS; the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government; mortgage loan prepayment activity, modification programs and future legislative action; changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval; failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; fluctuations of the value of our hedge instruments; fluctuating quarterly operating results; changes in laws and regulations and industry practices that may adversely affect our business; volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; our ability to successfully expand our business into areas other than investing in MBS; changes in, and our ability to remain in compliance with, law, regulations or governmental policies affecting our business; and the factors described in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, subsequent Quarterly Reports on Form 10-Q and other documents filed by the Company with the SEC from time to time. 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 October 24, 2017. |
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99.2 |
Third Quarter 2017 Investor Presentation posted to the Company’s website. |
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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.
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ARLINGTON ASSET INVESTMENT CORP. |
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Date: October 25, 2017 |
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By: |
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/s/ Richard E. Konzmann |
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Name: |
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Richard E. Konzmann |
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Title: |
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Executive Vice President, Chief Financial |
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 Third Quarter 2017 Financial Results
ARLINGTON, VA, October 24, 2017 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported net income attributable to common shareholders of $22.8 million, or $0.85 per diluted common share, and non-GAAP core operating income of $13.8 million, or $0.52 per diluted common share, for the quarter ended September 30, 2017. A reconciliation of non-GAAP core operating income to GAAP net income (loss) before income taxes appears at the end of this press release.
Third Quarter 2017 Financial Highlights
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$0.85 per diluted common share of GAAP net income |
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$0.52 per diluted common share of non-GAAP core operating income |
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$13.71 per common share of book value |
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$12.88 per common share of tangible book value |
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$0.55 per common share dividend |
“Agency mortgage-backed securities (“MBS”) outperformed U.S. Treasuries during the quarter leading to an increase in the Company’s book value and helping to drive a 28% annualized economic return, measured as the quarterly change in tangible book value plus the $0.55 per common share dividend,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer. “While continuing to reflect strong economic returns on capital within the range of our expectations, the Company’s net interest income and non-GAAP core operating income for the quarter were impacted by higher prepayment speeds, higher net funding costs due to the full quarter effect of the Federal Reserve’s June rate hike as well as overall lower average investment volumes in part due to incremental capital raised during the quarter. Looking forward, a prospective Federal Reserve leadership change and possible tax reform are key factors that may impact monetary policy and broader markets. However, in this environment the Company continues to emphasize its substantial hedge position, portfolio stability and resilient spread income to support ongoing attractive dividends to shareholders. Based on current market conditions, we believe the impact of lower seasonal and rate driven prepayment speeds resulting in higher asset yields in the fourth quarter would elevate economic spread earnings from third quarter levels.”
Other Third Quarter Highlights
As of September 30, 2017, the Company’s agency MBS investment portfolio totaled $5,389 million in fair value, consisting of $3,994 million of specified agency MBS and $1,395 million of net long to-be-announced (“TBA”) agency MBS. As of September 30, 2017, the Company’s $5,389 million agency MBS investment portfolio was comprised of the following:
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$201 million of 3.0% coupon 30-year agency MBS |
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$2,357 million of 3.5% coupon 30-year agency MBS |
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$2,681 million of 4.0% coupon 30-year agency MBS |
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$150 million of 4.5% coupon 30-year agency MBS |
As of September 30, 2017, the Company’s $3,994 million specified agency MBS portfolio had a weighted average amortized cost basis of $105.54 and a weighted average market price of $105.25. 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 two-thirds a percentage point as of September 30, 2017, which is an increase from the one-half a percentage point as of June 30, 2017.
As of September 30, 2017, the Company’s net long TBA agency MBS investment portfolio had a purchase price of $1,402 million and market value of $1,395 million, resulting in a net GAAP carrying fair value of $(7) million. Under GAAP, the gross fair value of the agency MBS underlying the Company’s TBA commitments is not recognized on the balance sheet as the Company accounts for its TBA commitments as derivative instruments.
As of September 30, 2017, the Company had $3,695 million of repurchase agreements outstanding with a weighted average rate of 1.33% and remaining weighted average maturity of 12 days secured by an aggregate of $3,873 million of agency MBS at fair value.
Interest income less interest expense on short-term secured financing on the Company’s agency MBS portfolio was $16.0 million for the third quarter of 2017 compared to $20.1 million for the second quarter of 2017, including the amortization of the Company’s net premium on its agency MBS of $8.8 million for the third quarter of 2017 compared to $8.5 million for the second quarter of 2017. The Company’s weighted average yield on its agency MBS was 2.80% for the third quarter of 2017 compared to 2.85% for the second quarter of 2017, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 10.29% for the third quarter of 2017 compared to 9.03% for the second quarter of 2017. The Company’s weighted average cost of repurchase agreement funding was 1.31% during the third quarter of 2017 compared to 1.08% during the second quarter of 2017.
The Company reported TBA dollar roll income of $6.4 million for the third quarter of 2017 compared to $4.3 million for the second quarter of 2017. The implied weighted-average net interest spread of the Company’s TBA dollar rolls was 2.10% for the third quarter of 2017 compared to 2.42% for the second quarter of 2017. 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.
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 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 September 30, 2017, the Company had $1,300 million in notional amount of interest rate swap agreements maturing in less than 3 years with a weighted average pay fixed rate of 1.26% and a remaining weighted average maturity of 1.7 years, $700 million in notional amount of interest rate swap agreements maturing between 3 to 7 years with a weighted average pay fixed rate of 1.87% and weighted average maturity of 4.1 years, and $1,600 million in notional amount of interest rate swap agreements maturing between 7 to 10 years with a weighted average pay fixed rate of 1.90% and a remaining weighted average maturity of 8.5 years. In addition, the Company had $250 million in notional amount of forward starting two-year interest rate swap agreements that become effective in October of 2017 with a weighted average pay fixed rate of 1.12%. The Company’s weighted average net pay rate of its interest rate swap agreements was 0.47% during the third quarter of 2017 compared to 0.62% during the second quarter of 2017.
In addition to interest rate swap agreements, the Company held $350 million in equivalent notional amount of short positions in 10-year U.S. Treasury note futures that were purchased during the third quarter of 2017 when the 10-year U.S. Treasury rate was 2.10%. To limit exposure of its overall interest rate hedge portfolio in a significantly falling interest rate environment, the Company also purchased contracts that provide it with the option to call 10-year U.S. Treasury note futures from a counterparty with an equivalent notional amount of $150 million that were struck at a weighted average strike price per contract that equates to a 10-year U.S. Treasury rate of approximately 1.49%.
Excluding TBA dollar roll income and interest rate swap net interest expense included in non-GAAP core operating income, the Company had net investment gains on its investment portfolio of $15.0 million and net investment losses on its related interest rate
derivative hedging instruments of $3.8 million for a net investment gain on its hedged investment portfolio of $11.2 million, or $0.42 per common share.
Income Taxes
The Company is subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended. As of September 30, 2017, the Company estimated its net operating loss (“NOL”) carry-forward at $69.7 million that begins to expire in 2027, its net capital loss (“NCL”) carry-forward at $309.8 million that begins to expire in 2019, and its alternative minimum tax (“AMT”) credit carry-forward at $9.0 million that does not expire. The Company’s estimated loss and tax credit carry-forwards as of September 30, 2017 are subject to potential adjustments up to the time of filing the Company’s income tax returns. For GAAP purposes, the Company had a net deferred tax asset of $23.5 million, or $0.83 per common share, as of September 30, 2017.
Capital Issuances
During the third quarter of 2017, the Company issued 2,037,348 shares of Class A common stock at a weighted average public offering price of $13.21 per common share for proceeds of $26.6 million, net of selling commissions and expenses, under its equity distribution agreements. During the third quarter of 2017, the Company also issued 138,683 shares of Series B Preferred Stock at a weighted average public offering price of $25.03 per share for proceeds of $3.4 million, net of selling commissions and expenses, under its equity distribution agreement.
Distributions to Shareholders
The Company’s Board of Directors approved a distribution to common shareholders of $0.55 per share for the third quarter of 2017. The distribution will be paid on October 31, 2017 to shareholders of record as of September 29, 2017. The Company’s Board of Directors also approved a distribution to its Series B preferred shareholders of $0.4375 per share for the third quarter of 2017. The distribution was paid on October 2, 2017 to shareholders of record as of September 18, 2017.
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 common and preferred shareholders of current or accumulated earnings and profits are qualified dividends eligible for the 23.8% maximum 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% maximum federal tax rate, inclusive of the 3.8% Medicare 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 Wednesday, October 25, 2017 to discuss the Company’s third quarter 2017 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 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, portfolio hedging, prepayments, dividends, book value, utilization of loss carry-forwards 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, 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 the Company’s 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, 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 Annual Report on Form 10-K for the year ended December 31, 2016 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)
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September 30, 2017 |
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June 30, 2017 |
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ASSETS |
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Cash and cash equivalents |
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$ |
26,368 |
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$ |
73,308 |
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Interest receivable |
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12,428 |
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12,785 |
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Sold securities receivable |
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92,882 |
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— |
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Mortgage-backed securities, at fair value |
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Agency |
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3,994,515 |
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4,182,529 |
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Private-label |
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54 |
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74 |
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Derivative assets, at fair value |
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4,177 |
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7,965 |
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Deferred tax assets, net |
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23,453 |
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24,162 |
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Deposits, net |
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59,317 |
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65,339 |
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Other assets |
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2,405 |
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2,729 |
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Total assets |
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$ |
4,215,599 |
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$ |
4,368,891 |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Repurchase agreements |
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$ |
3,694,838 |
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$ |
3,913,699 |
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Interest payable |
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2,813 |
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3,020 |
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Accrued compensation and benefits |
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4,210 |
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2,958 |
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Dividend payable |
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17,044 |
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15,548 |
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Derivative liabilities, at fair value |
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7,146 |
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4,038 |
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Purchased securities payable |
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21,962 |
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— |
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Other liabilities |
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1,190 |
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1,233 |
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Long-term unsecured debt |
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73,824 |
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73,768 |
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Total liabilities |
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3,823,027 |
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4,014,264 |
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Equity: |
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Preferred stock (liquidation preference of $7,375 and $3,908, respectively) |
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6,904 |
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3,500 |
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Common stock |
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280 |
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260 |
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Additional paid-in capital |
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1,972,463 |
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1,944,847 |
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Accumulated deficit |
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(1,587,075 |
) |
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(1,593,980 |
) |
Total equity |
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392,572 |
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354,627 |
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Total liabilities and equity |
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$ |
4,215,599 |
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$ |
4,368,891 |
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Book value per common share (1) |
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$ |
13.71 |
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$ |
13.48 |
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Tangible book value per common share (2) |
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$ |
12.88 |
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$ |
12.55 |
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Common shares outstanding (in thousands) (3) |
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28,094 |
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26,026 |
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(1) Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. |
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(2) Tangible book value per common share is calculated as total equity less the liquidation preference of issued and outstanding shares of the Company’s preferred stock and net deferred tax assets divided by common shares outstanding. |
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(3) Represents common shares outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock. |
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ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
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Three Months Ended |
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September 30, 2017 |
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June 30, 2017 |
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March 31, 2017 |
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December 31, 2016 |
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Interest income |
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Agency mortgage-backed securities |
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$ |
28,771 |
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$ |
31,397 |
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$ |
30,286 |
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$ |
24,073 |
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Private-label mortgage-backed securities |
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2 |
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43 |
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37 |
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473 |
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Other |
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62 |
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21 |
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20 |
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31 |
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Total interest income |
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28,835 |
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31,461 |
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30,343 |
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24,577 |
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Interest expense |
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Short-term secured debt |
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12,748 |
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11,314 |
|
|
|
8,859 |
|
|
|
7,231 |
|
Long-term unsecured debt |
|
|
1,220 |
|
|
|
1,214 |
|
|
|
1,207 |
|
|
|
1,205 |
|
Total interest expense |
|
|
13,968 |
|
|
|
12,528 |
|
|
|
10,066 |
|
|
|
8,436 |
|
Net interest income |
|
|
14,867 |
|
|
|
18,933 |
|
|
|
20,277 |
|
|
|
16,141 |
|
Investment gain (loss), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on trading investments, net |
|
|
13,996 |
|
|
|
15,855 |
|
|
|
(4,219 |
) |
|
|
(122,332 |
) |
(Loss) gain from derivative instruments, net |
|
|
(572 |
) |
|
|
(31,678 |
) |
|
|
2,305 |
|
|
|
88,285 |
|
Realized gain on sale of available-for-sale investments, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,931 |
|
Other, net |
|
|
(56 |
) |
|
|
(147 |
) |
|
|
152 |
|
|
|
(87 |
) |
Total investment gain (loss), net |
|
|
13,368 |
|
|
|
(15,970 |
) |
|
|
(1,762 |
) |
|
|
(31,203 |
) |
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
3,449 |
|
|
|
2,804 |
|
|
|
3,445 |
|
|
|
2,776 |
|
Other general and administrative expenses |
|
|
1,095 |
|
|
|
1,350 |
|
|
|
1,480 |
|
|
|
1,343 |
|
Total general and administrative expenses |
|
|
4,544 |
|
|
|
4,154 |
|
|
|
4,925 |
|
|
|
4,119 |
|
Income (loss) before income taxes |
|
|
23,691 |
|
|
|
(1,191 |
) |
|
|
13,590 |
|
|
|
(19,181 |
) |
Income tax provision |
|
|
823 |
|
|
|
16,737 |
|
|
|
8,336 |
|
|
|
22,255 |
|
Net income (loss) |
|
|
22,868 |
|
|
|
(17,928 |
) |
|
|
5,254 |
|
|
|
(41,436 |
) |
Dividend on preferred stock |
|
|
(83 |
) |
|
|
(35 |
) |
|
|
— |
|
|
|
— |
|
Net income (loss) available (attributable) to common stock |
|
$ |
22,785 |
|
|
$ |
(17,963 |
) |
|
$ |
5,254 |
|
|
$ |
(41,436 |
) |
Basic earnings (loss) per common share |
|
$ |
0.86 |
|
|
$ |
(0.74 |
) |
|
$ |
0.22 |
|
|
$ |
(1.79 |
) |
Diluted earnings (loss) per common share |
|
$ |
0.85 |
|
|
$ |
(0.74 |
) |
|
$ |
0.22 |
|
|
$ |
(1.79 |
) |
Weighted average common shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
26,377 |
|
|
|
24,319 |
|
|
|
23,652 |
|
|
|
23,167 |
|
Diluted |
|
|
26,856 |
|
|
|
24,319 |
|
|
|
23,897 |
|
|
|
23,167 |
|
Other comprehensive income (loss), net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification in investment gain (loss), net, related to sales of available-for-sale securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,685 |
) |
Comprehensive income (loss) |
|
$ |
22,868 |
|
|
$ |
(17,928 |
) |
|
$ |
5,254 |
|
|
$ |
(46,121 |
) |
The following tables present information on the Company’s investment and hedge portfolio as of September 30, 2017 (unaudited, dollars in thousands):
Agency MBS:
|
|
Fair Value |
|
|
Specified agency MBS |
|
$ |
3,994,515 |
|
Net long agency TBA position |
|
|
1,394,553 |
|
Total |
|
$ |
5,389,068 |
|
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% |
|
$ |
1,276,307 |
|
|
$ |
61,850 |
|
|
$ |
1,338,157 |
|
|
$ |
(17,101 |
) |
|
$ |
1,321,056 |
|
|
$ |
103.51 |
|
|
|
3.50 |
% |
|
|
6.9 |
|
4.0% |
|
|
2,379,630 |
|
|
|
137,540 |
|
|
|
2,517,170 |
|
|
|
6,242 |
|
|
|
2,523,412 |
|
|
|
106.04 |
|
|
|
4.00 |
% |
|
|
6.1 |
|
4.5% |
|
|
139,128 |
|
|
|
10,668 |
|
|
|
149,796 |
|
|
|
230 |
|
|
|
150,026 |
|
|
|
107.83 |
|
|
|
4.50 |
% |
|
|
4.5 |
|
5.5% |
|
|
20 |
|
|
|
— |
|
|
|
20 |
|
|
|
1 |
|
|
|
21 |
|
|
|
111.73 |
|
|
|
5.50 |
% |
|
|
5.6 |
|
Total/weighted-average |
|
$ |
3,795,085 |
|
|
$ |
210,058 |
|
|
$ |
4,005,143 |
|
|
$ |
(10,628 |
) |
|
$ |
3,994,515 |
|
|
|
105.25 |
|
|
|
3.85 |
% |
|
|
6.3 |
|
Net Long Agency TBA Positions:
|
|
Notional Amount: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Long (Short) Position |
|
|
Implied Cost Basis |
|
|
Implied Fair Value |
|
|
Net Carrying Amount |
|
||||
30-year 3.0% coupon purchase commitments |
|
$ |
200,000 |
|
|
$ |
202,258 |
|
|
$ |
200,563 |
|
|
$ |
(1,695 |
) |
30-year 3.5% coupon purchase commitments |
|
|
1,005,000 |
|
|
|
1,040,762 |
|
|
|
1,036,092 |
|
|
|
(4,670 |
) |
30-year 4.0% coupon purchase commitments |
|
|
250,000 |
|
|
|
263,929 |
|
|
|
263,164 |
|
|
|
(765 |
) |
30-year 4.0% coupon sale commitments |
|
|
(100,000 |
) |
|
|
(105,250 |
) |
|
|
(105,266 |
) |
|
|
(16 |
) |
Total TBA commitments, net |
|
$ |
1,355,000 |
|
|
$ |
1,401,699 |
|
|
$ |
1,394,553 |
|
|
$ |
(7,146 |
) |
Interest Rate Swaps Currently Effective:
|
|
|
|
|
|
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 |
|
$ |
1,300,000 |
|
|
|
1.26 |
% |
|
|
1.32 |
% |
|
|
0.06 |
% |
|
|
1.7 |
|
|
$ |
447 |
|
3 to less than 7 years |
|
|
700,000 |
|
|
|
1.87 |
% |
|
|
1.32 |
% |
|
|
(0.55 |
)% |
|
|
4.1 |
|
|
|
844 |
|
7 to 10 years |
|
|
1,600,000 |
|
|
|
1.90 |
% |
|
|
1.32 |
% |
|
|
(0.58 |
)% |
|
|
8.5 |
|
|
|
1,963 |
|
Total / weighted-average |
|
$ |
3,600,000 |
|
|
|
1.66 |
% |
|
|
1.32 |
% |
|
|
(0.34 |
)% |
|
|
5.2 |
|
|
$ |
3,254 |
|
Forward-Starting Interest Rate Swaps:
|
|
|
|
|
|
Weighted-average: |
|
|
|
|
|
|||||
|
|
Notional Amount |
|
|
Fixed Pay Rate |
|
|
Term After Effective Date (Years) |
|
|
Fair Value |
|
||||
Effective in October 2017 |
|
$ |
250,000 |
|
|
|
1.12 |
% |
|
|
2.0 |
|
|
$ |
94 |
|
10-year U.S. Treasury Note Futures:
Maturity Date |
|
Notional Amount |
|
|
Net Fair Value |
|
||
December 2017 |
|
$ |
350,000 |
|
|
$ |
820 |
|
Options on 10-year U.S. Treasury Note Futures:
|
|
Notional Amount |
|
|
Weighted-average Strike Price |
|
|
Implied Strike Rate (1) |
|
|
Net Fair Value |
|
||||
Purchased call options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
|
$ |
150,000 |
|
|
|
133.0 |
|
|
|
1.49 |
% |
|
$ |
1 |
|
(1) |
The implied strike rate is estimated based upon the weighted average strike price per option contract and the price of an equivalent U.S. Treasury note futures contract. |
Options on Agency MBS:
|
|
Notional Amount |
|
|
Weighted-average Strike Price |
|
|
Underlying Agency MBS Coupon |
|
|
Net Fair Value |
|
||||
Purchased put options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2017 expiration |
|
$ |
500,000 |
|
|
|
102.5 |
|
|
|
4.00 |
% |
|
$ |
— |
|
November 2017 expiration |
|
|
200,000 |
|
|
|
103.5 |
|
|
|
4.00 |
% |
|
|
8 |
|
Total / weighted average for purchased put options |
|
$ |
700,000 |
|
|
|
102.8 |
|
|
|
4.00 |
% |
|
$ |
8 |
|
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 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 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 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 core operating income for the last four fiscal quarters (unaudited, amounts in thousands, except per share amounts):
|
|
Three Months Ended |
|
|||||||||||||
|
|
September 30, 2017 |
|
|
June 30, 2017 |
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||||
GAAP net interest income |
|
$ |
14,867 |
|
|
$ |
18,933 |
|
|
$ |
20,277 |
|
|
$ |
16,141 |
|
TBA dollar roll income |
|
|
6,424 |
|
|
|
4,298 |
|
|
|
3,398 |
|
|
|
6,426 |
|
Interest rate swap net interest expense |
|
|
(4,198 |
) |
|
|
(5,293 |
) |
|
|
(5,409 |
) |
|
|
(4,326 |
) |
Economic net interest income |
|
|
17,093 |
|
|
|
17,938 |
|
|
|
18,266 |
|
|
|
18,241 |
|
Core general and administrative expenses |
|
|
(3,171 |
) |
|
|
(3,681 |
) |
|
|
(4,024 |
) |
|
|
(3,326 |
) |
Preferred stock dividend |
|
|
(83 |
) |
|
|
(35 |
) |
|
|
— |
|
|
|
— |
|
Non-GAAP core operating income |
|
$ |
13,839 |
|
|
$ |
14,222 |
|
|
$ |
14,242 |
|
|
$ |
14,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP core operating income per diluted common share |
|
$ |
0.52 |
|
|
$ |
0.58 |
|
|
$ |
0.60 |
|
|
$ |
0.64 |
|
Weighted average diluted common shares outstanding |
|
|
26,856 |
|
|
|
24,552 |
|
|
|
23,897 |
|
|
|
23,343 |
|
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 (unaudited, amounts in thousands):
|
|
Three Months Ended |
|
|||||||||||||
|
|
September 30, 2017 |
|
|
June 30, 2017 |
|
|
March 31, 2017 |
|
|
December 31, 2016 |
|
||||
GAAP income (loss) before income taxes |
|
$ |
23,691 |
|
|
$ |
(1,191 |
) |
|
$ |
13,590 |
|
|
$ |
(19,181 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (gain) loss, net |
|
|
(13,368 |
) |
|
|
15,970 |
|
|
|
1,762 |
|
|
|
31,203 |
|
Stock-based compensation expense |
|
|
1,373 |
|
|
|
473 |
|
|
|
901 |
|
|
|
793 |
|
Preferred stock dividend |
|
|
(83 |
) |
|
|
(35 |
) |
|
|
— |
|
|
|
— |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA dollar roll income |
|
|
6,424 |
|
|
|
4,298 |
|
|
|
3,398 |
|
|
|
6,426 |
|
Interest rate swap net interest expense |
|
|
(4,198 |
) |
|
|
(5,293 |
) |
|
|
(5,409 |
) |
|
|
(4,326 |
) |
Non-GAAP core operating income |
|
$ |
13,839 |
|
|
$ |
14,222 |
|
|
$ |
14,242 |
|
|
$ |
14,915 |
|
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.
Investor Presentation Third Quarter 2017 Exhibit 99.2
Information Related to Forward-Looking Statements This presentation contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding future results or expectations about our investments, interest rates, portfolio allocation, dividends, financing agreements, returns on invested capital, investment strategy, taxes, portfolio, earnings, book value, housing market, compensation, growth in capital, agency MBS spreads, prepayments, hedging instruments, duration, credit performance of private-label MBS, cash flow and benefit of deferred tax asset value. Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “views,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “potential,” “prospective,” “will” and similar expressions, or the negative of these words. Such forward-looking statements are based on facts and conditions as they exist at the time such statements are made. Forward-looking statements are also based on predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond our control. Forward-looking statements are further based on various operating and return assumptions. Caution must be exercised in relying on forward-looking statements. Due to known and unknown risks, actual results may differ materially from expectations or projections. You should carefully consider these risks when you make a decision concerning an investment in our common stock or senior notes, along with the following factors, among others, that may cause our actual results to differ materially from those described in any forward-looking statements: availability of, and our ability to deploy, capital; growing our business primarily through our current strategy of focusing on acquiring primarily agency mortgage-backed securities (“MBS”); our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and use our net operating losses, and net capital losses to offset future taxable income, including whether our shareholder rights plan will be effective in preventing an ownership change that would significantly limit our ability to utilize such losses; our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of these strategies; the effect of changes in prepayment rates, interest rates and default rates on our portfolio; the effect of governmental regulation and actions; our ability to roll our repurchase agreements on favorable terms, if at all; our liquidity; our asset valuation policies; our decisions with respect to, and ability to make, future dividends; investing in assets other than MBS or pursuing business activities other than investing in MBS; our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended; our decision to not elect to be taxed as a real estate investment trust under the Internal Revenue Code; competition for investment opportunities, including competition from the U.S. Department of Treasury and the U.S. Federal Reserve, for investments in agency MBS, as well as the timing of the termination by the U.S. Federal Reserve of its purchases of agency MBS; the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government; mortgage loan prepayment activity, modification programs and future legislative action; changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval; failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations; fluctuations of the value of our hedge instruments; fluctuating quarterly operating results; changes in laws and regulations and industry practices that may adversely affect our business; volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere; our ability to successfully expand our business into areas other than investing in MBS; changes in, and our ability to remain in compliance with, law, regulations or governmental policies affecting our business; and the factors described in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, subsequent Quarterly Reports on Form 10-Q and other documents filed by the Company with the SEC from time to time. 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.
Company Overview Investment firm focused on securitized residential mortgage assets Invests in high quality liquid assets with substantial interest rate hedges to protect long-term capital and to produce predictable cash flows to support consistent dividends to shareholders Internally-managed Structured as a C-corp to enhance shareholder returns and optimize investment strategy Flexible investment allocation approach to achieve highest risk-adjusted returns Invest in interest rate sensitive agency MBS issued by Fannie Mae and Freddie Mac Invest opportunistically in other asset classes NYSE Ticker AI Share Price (10/23/17) $12.67 Dividend Yield (10/23/17) 17.4% Market Cap (10/23/17) $357 million Total Assets (9/30/17) $4.2 billion Book Value Per Common Share (9/30/17) $13.71 Tangible Book Value Per Share (9/30/17) $12.88
Publicly Traded Capital Class A Common Stock Ticker: AI Exchange: NYSE Market Capitalization: $357 million (1) Annual Dividend Yield: 17.4% (1) Senior Notes Due 2023 Ticker: AIW Exchange: NYSE Per Annum Interest Rate: 6.625% Payable Quarterly Maturity Date: May 1, 2023 Senior Notes Due 2025 Ticker: AIC Exchange: NYSE Per Annum Interest Rate: 6.75% Payable Quarterly Maturity Date: March 15, 2025 Series B Cumulative Perpetual Redeemable Preferred Stock Ticker: AI PrB Exchange: NYSE Per Annum Dividend Rate: 7.00% Payable Quarterly (1) As of October 23, 2017.
As of June 30, 2017: $5.34 Billion Fair Value As of September 30, 2017: $5.39 Billion Fair Value Agency MBS Investment Portfolio Allocation Specified Pool vs. TBA Allocation (1) Includes the fair value of the agency MBS underlying forward-settling “to-be-announced (“TBA”) purchase or sale commitments that are accounted for as derivative instruments in accordance with GAAP. The difference between the contractual forward price of the Company’s TBA commitments and the fair value of the underlying MBS is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” or “derivative liabilities, at fair value.” By Fixed Coupon Rate (1) As of September 30, 2017: As of June 30, 2017 :
Agency MBS Quarterly Balances and Yields TBA dollar roll transactions involve delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” sale prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the “spot” sale. Cost basis is based upon the contractual price of the initial TBA purchase trade of each individual series of dollar roll transactions. For comparative purposes, this illustration assumes that a specified agency MBS is 100% financed with a repurchase agreement. Represents the weighted average net pay rate on the Company’s interest rate swap agreements multiplied by the weighted average interest rate swap notional to repurchase agreement and TBA financing ratio.
Financing Summary 16 counterparties with access to 19 total counterparties Less than 10% of equity at risk with any one counterparty 5.3% of equity at risk with largest counterparty 21.5% of equity at risk with five largest counterparties Favorable repo financing costs Spread between average one-month LIBOR and average repo financing rate remains low relative to recent historical periods Diversified Funding Sources As of September 30, 2017 (dollars in thousands):
Hedging Summary Hedge Position Helps Mitigate Impact of Rising Rates on Agency Portfolio Interest Rate Swaps as of September 30, 2017 (dollars in thousands): Duration is calculated based upon each interest rate swap’s “DV01” (a valuation metric illustrating the dollar value of a one basis point increase in interest rates) as reported by the Chicago Mercantile Exchange, the clearinghouse through which those instruments were centrally cleared. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner. The implied strike rate is estimated based upon the weighted average strike price per option contract and the price of an equivalent 10-year U.S. Treasury note futures contract. Other Hedges as of September 30, 2017 (dollars in thousands): Futures: Options:
Portfolio Weighted Average Statistics For the third and second quarters of 2017, includes a weighted average notional of futures on 10-year U.S. Treasury Notes of $350,000 and $234,722, respectively. Calculated as the total of the following, expressed as an annualized percentage of the total agency MBS weighted average cost basis for the period: GAAP interest income from agency MBS, plus TBA dollar roll income, less agency MBS repurchase agreement interest expense, less interest rate swap net interest expense.
MBS Portfolio Economics MBS Portfolio Net Spread Income Return on Investable Capital (1): Total investable capital is calculated as stockholders’ equity determined in accordance with GAAP, less the net deferred tax asset, plus long-term unsecured debt. Includes interest expense incurred from repurchase agreement financing and net interest expense incurred from interest rate swap agreements that have been allocated to the Company’s specified agency MBS portfolio based upon the relative average cost basis of agency MBS during the period. Excludes the economic cost or benefit of hedging instruments other than interest rate swap agreements. Calculated based upon weighted average repurchase agreement and average investable capital balances for the period. Excludes implied financing of TBA dollar rolls. Expressed as an annualized percentage of average investable capital for the period. Expressed as an annualized percentage of average investable capital for the period. For example, for the third quarter of 2017, calculated as $6.4 million in dollar roll income (representing an implied net interest spread of 2.10% on a weighted average cost basis of $1.2 billion) less the net interest expense incurred during the period from interest rate swaps allocated to the Company’s TBA dollar roll portfolio (allocated based upon the relative average cost basis of TBAs during the period) divided by average investable capital for the period (annualized). All else being equal, as the average balance of the Company’s TBA dollar roll portfolio increases, the calculated annualized return on average investable capital will increase (and vice versa). Core general and administrative expenses represent 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.
Common and preferred stock dividends of a C-corp are qualified dividends whereas similar dividends of a REIT are non-qualified dividends (1) Net operating loss carry-forward of $70MM as of September 30, 2017 Net capital loss carry-forward of $310MM as of September 30, 2017 AMT credit carry-forward of $9MM as of September 30, 2017 Net deferred tax asset of $24MM or $0.83 per common share as of September 30, 2017 Full valuation allowance against net deferred tax assets that are capital in tax nature The Company's distributions to shareholders of current or accumulated earnings and profits (“E&P”) are qualified dividends eligible for the 23.8% maximum federal income tax rate whereas similar distributions to shareholders by a REIT of current or accumulated E&P are nonqualified dividends subject to the higher 43.4% maximum federal income tax rate on ordinary income, each inclusive of the 3.8% Medicare tax. Any distributions in excess of current or accumulated E&P would be reported as a return 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 stock, or as a capital gain to the extent that the amount of the distribution exceeds a shareholder’s adjusted tax basis in the common stock. Corporate Tax Structure Provides Enhanced Shareholder Returns and Flexibility Our C-corp structure benefits stockholders by providing a tax-advantaged dividend as we continue to utilize our net operating loss and net capital loss carry-forwards Provides option to reinvest earnings and opportunistically benefit from market dislocation Allows investment flexibility as we are not bound by any substantial restrictions Structure provides flexibility as we are not required to distribute taxable earnings to stockholders
Internally-managed structure provides operating leverage Alignment of interest between shareholders and management Eliminates inherent conflicts of interest of externally managed structures Alignment of management compensation to Company performance Annual cash incentive compensation and long-term incentive stock compensation earned based on Company and stock performance Core G&A Expenses as % of Investable Capital(1)(2) – Last 12 Months Internally Managed Structure Core general and administrative expense is calculated as expenses determined in accordance with GAAP less stock compensation, 2016 proxy contest fees that are in excess of those normally incurred for an annual meeting of shareholders and legacy litigation expenses in 2012 through 2014. Average investable capital is composed of shareholders’ equity plus long-term unsecured debt less deferred tax assets, net. 2016 GAAP general and administrative expenses include a total of $3,979 in non-recurring proxy contest expenses. Annual GAAP and Core G&A Expenses(1)(3) – Last 12 Months (in thousands)
Appendix
Market Data (1)(2) 30-Year FNMA fixed rate price information is provided for illustrative purposes only and represents generic FNMA TBA prices and is not meant to be reflective of securities held by the Company. Source: Bloomberg
Balance Sheet Book value per common share is calculated as total equity less the preferred stock liquidation preference divided by common shares outstanding. Tangible book value represents total stockholders' equity less net deferred tax assets and the preferred stock liquidation preference. Represents shares of common stock outstanding plus vested restricted stock units convertible into common stock less unvested restricted common stock.
Statement of Comprehensive Income
Non-GAAP Core Operating Income (1) Core operating income and economic net interest income are non-GAAP financial measures. These non-GAAP measures are 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 stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist 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 these non-GAAP financial measures 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. 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 and economic net interest income. Non-GAAP Core Operating Income Per Diluted Share Rollforward – Q3 2017 vs. Q2 2017
Non-GAAP Core Operating Income, Continued (1) Core operating income and economic net interest income are non-GAAP financial measures. These non-GAAP measures are 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 stockholders. The Company believes that non-GAAP core operating income and economic net interest income assist 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 these non-GAAP financial measures 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. 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 and economic net interest income. Reconciliation of GAAP pre-tax net income to non-GAAP core operating income:
Book Value Per Share Rollforward – Third Quarter 2017 Tangible book value represents total stockholders' equity less net deferred tax assets and the preferred stock liquidation preference. Calculated based upon weighted average diluted shares outstanding during the quarter. Excludes TBA dollar roll income, which is included in non-GAAP core operating income. Excludes net interest expense incurred from interest rate swap agreements, which is included in non-GAAP core operating income.
Specified Agency MBS Investment Portfolio Specified pools of loans with original balances of up to $150K. Specified pools of loans with original balances between $150K and $175K. Specified pools of loans with original balances between $175K and $200K. Other specified pools include pools of loans refinanced through the Home Affordable Refinance Program (“HARP”), low FICO loans, 100% investor occupancy status loans, high LTV loans, and seasoned loans. WAC represents the weighted average coupon of the underlying collateral. Loan age represents the weighted average age of the underlying collateral. Actual 3-month constant prepayment rate (“CPR”) represents annualized 3-month CPR published in October 2017 for securities held as of September 30, 2017. Remaining life represents the weighted average expected remaining life of the security based on expected future CPR as estimated by Citi’s “The Yield Book” model. Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. 30-Year Fixed-Rate Agency MBS Selected for Prepayment Characteristics
TBA Agency MBS Investment Portfolio Net long position in TBA securities represents forward-settling contracts to purchase or sell agency MBS on a generic pool basis. TBA commitments are accounted for as derivative instruments in accordance with GAAP. The difference between the contractual forward price of the Company’s TBA commitments and the fair value of the underlying MBS is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” or “derivative liabilities, at fair value.” Excludes TBA securities entered into for economic hedging purposes. Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. Net Long TBA Position (1) as of September 30, 2017 (dollars in thousands):
Book Value Sensitivity to Rates and MBS Spreads Interest rate sensitivity of agency MBS and TBA commitments is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. Interest rate sensitivity is based on assumptions resulting in certain limitations, including (i) an instantaneous shift in rates with no changes to the slope of the yield curve, (ii) no changes in agency MBS spreads, (iii) no changes to the investment or hedge portfolio, (iv), may reflect an interest rate of less than 0% in certain portions of the curve, and (v) no changes to the deferred tax asset. Agency MBS spread sensitivity is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. The estimated change in book value reflects an assumed spread weighted average duration of 5.4 years, which is a model-based assumption that is dependent upon the size and composition of our portfolio as well as economic conditions present as of September 30, 2017. The agency MBS spread sensitivity is based on assumptions resulting in certain limitations, including (i) no changes in interest rates, (ii) no changes to the investment or hedge portfolio, (iii) and no changes to the deferred tax asset. Duration is derived from the Citi’s “The Yield Book” model. Duration is a measure of how much the price of an asset or liability is expected to change if interest rates move in a parallel manner and is dependent upon several subjective inputs and assumptions. Actual results could differ materially from these estimates. In addition, different models could generate materially different estimates using similar inputs and assumptions. Total liability and hedge duration is expressed in asset units. Long-term debt is excluded. Weighted average duration for interest rate swap agreements includes the Company’s forward-starting interest rate swap agreements, which have an aggregate notional amount of $250 million. Hedged duration gap does not reflect the economic effects of options on U.S. Treasury note futures.
Arlington has transitioned its portfolio from private-label to agency assets to achieve the highest risk adjusted returns December 31, 2009 December 31, 2011 December 31, 2013 Agency MBS capital allocation Private-label MBS capital allocation Arlington constantly evaluates different investment opportunities to allocate capital in order to achieve the highest risk adjusted returns Arlington has actively transitioned the allocation of capital towards agency MBS as levered returns, paired with Arlington’s hedging strategy, have become more attractive As markets and housing have recovered, private-label MBS returns have fallen relative to agency MBS Arlington's increased concentration of agency MBS has enhanced its ability to prudently leverage its balance sheet December 31, 2015 September 30, 2017 Agency MBS allocated capital is composed of MBS and its related interest receivable, repo, derivative instruments, deposits, net receivable or payable for unsettled securities and cash. Private-label MBS allocated capital is composed of MBS and its related repo.
Served as a Director of AI since co-founding the Company in 1989 Served as Vice Chairman and Chief Operating Officer from 1989 to 1999, Vice Chairman and Co-Chief Executive Officer from 1999 to 2003, Co-Chairman and Co-Chief Executive Officer from 2003 to 2005, Chairman and Chief Executive Officer from 2005 to 2014 and as Executive Chairman since 2014 Over 30 years of experience Served as Chief Executive Officer since 2014, Chief Operating Officer since 2007, and a Director of AI since March 2007 From 2004 to 2007, Mr. Tonkel served as President and Head of Investment Banking at FBR & Co. Over 30 years of experience J. Rock Tonkel, Jr. President and Chief Executive Officer Richard E. Konzmann EVP and Chief Financial Officer Brian J. Bowers Chief Investment Officer and Portfolio Manager Mr. Konzmann joined the Company in March 2015 Previously, he was with American Capital, Ltd., a publicly traded private equity firm and global asset manager of alternative investment funds including residential mortgage REITs, from 2002 until March 2015, most recently as Senior Vice President, Accounting Over 25 years of experience Mr. Bowers joined the Company in 2000 Previously, he was the Chief Portfolio Strategist for BB&T Capital Markets and the Portfolio Manager/Plan Sponsor of CareFirst, Inc. Over 30 years of experience Experienced Management Team Through Numerous Cycles Eric F. Billings Executive Chairman
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