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 2018 Financial Results

ARLINGTON, VA, October 23, 2018 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company” or “Arlington”) today reported a net loss attributable to common shareholders of $5.7 million, or $0.19 per diluted common share, income before income taxes available to common shareholders of $4.0 million, or $0.14 per diluted common share, and non-GAAP core operating income of $13.9 million, or $0.47 per diluted common share, for the quarter ended September 30, 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.

Third Quarter 2018 Financial Highlights

 

$0.19 per diluted common share of GAAP net loss

 

o

Includes a $0.33 per diluted common share deferred income tax provision

 

$0.14 per diluted common share of GAAP pre-tax income

 

$0.47 per diluted common share of non-GAAP core operating income

 

$9.95 per common share of book value

 

$11.06 per common share of tangible book value

 

o

Would represent book value per common share if the Company were to elect to be taxed as a real estate investment trust (“REIT”)

 

$0.375 per common share dividend

 

$5,180 million investment portfolio of agency mortgage-backed securities (“MBS”)

 

$4,175 million notional amount interest rate hedge position

 

Increased interest rate hedge duration leading to a net duration gap of negative 0.2 years

 

“Despite heightened volatility during the quarter, Arlington produced an annualized economic return of 2.3% in the third quarter measured as the change in tangible book value per common share plus the $0.375 per common share dividend,” said J. Rock Tonkel, Jr., the Company's President and Chief Executive Officer.  “Arlington continued to generate net spread earnings in excess of its quarterly dividend enabling it to deliver a strong dividend to its shareholders despite reduced overall investment volumes during the quarter. With an expectation that the Company will fully utilize its net operating loss carryforward during 2019, the Company is currently evaluating possible long-term tax structures, including potentially electing to be taxed as a REIT as early as January 1, 2019.  If the Company were to elect REIT status, it does not anticipate significant modifications to its investment portfolio or operations to qualify as a REIT, and its presentation of book value would be equivalent to its tangible book value, which was $11.06 per common share as of September 30, 2018.”

Other Third Quarter Highlights

As of September 30, 2018, the Company’s agency MBS investment portfolio totaled $5,180 million in fair value, consisting of $4,399 million of specified agency MBS and $781 million of net long to-be-announced (“TBA”) agency MBS.  As of September 30, 2018, the Company’s $5,180 million agency MBS investment portfolio was comprised of the following:

 

$96 million of 3.5% coupon 15-year agency MBS

 

$59 million of 4.0% coupon 20-year agency MBS

 

$342 million of 3.5% coupon 30-year agency MBS

 

$2,384 million of 4.0% coupon 30-year agency MBS


 

 

$1,671 million of 4.5% coupon 30-year agency MBS

 

$628 million of 5.0% coupon 30-year agency MBS

As of September 30, 2018, the Company’s $4,399 million specified agency MBS portfolio had a weighted average amortized cost basis of $104.75 and a weighted average market price of $102.17.  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-fifths of a percentage point as of September 30, 2018, compared to half of a percentage point as of June 30, 2018.

As of September 30, 2018, the Company’s net long TBA agency MBS investment portfolio had a purchase price of $783 million and market value of $781 million, resulting in a net GAAP carrying fair value of $(2) 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, 2018, the Company had $4,092 million of repurchase agreements outstanding with a weighted average rate of 2.30% and remaining weighted average maturity of 15 days secured by an aggregate of $4,304 million of agency MBS at fair value.  

GAAP net interest income was $10.3 million for the third quarter of 2018 compared to $10.9 million for the second quarter of 2018, including the amortization of the Company’s net premium on its agency MBS of $8.4 million for the third quarter of 2018 compared to $8.3 million for the second quarter of 2018.  The Company’s weighted average yield on its agency MBS was 3.11% for the third quarter of 2018 compared to 3.00% for the second quarter of 2018, and the actual weighted-average constant prepayment rate (“CPR”) for the Company’s agency MBS was 10.66% for the third quarter of 2018 compared to 10.31% for the second quarter of 2018.  The Company’s weighted average cost of repurchase agreement funding was 2.17% during the third quarter of 2018 compared to 1.96% during the second 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. During the third quarter of 2018, the Company extended the duration of its interest rate swap portfolio by replacing $600 million of notional amount of interest rate swaps with a remaining weighted average maturity of 8.1 years with $750 million of notional amount of interest rate swaps with an average maturity of 12.7 years.  As of September 30, 2018, the Company had $3,475 million in notional amount of interest rate swap agreements with a weighted average pay fixed rate of 2.10% and a remaining weighted average maturity of 7.1 years.  The Company’s weighted average net receive rate of its interest rate swap agreements was 0.23% during the third quarter of 2018 compared to 0.32% during the second quarter of 2018.

In addition to interest rate swap agreements, the Company held $700 million in equivalent notional amount of short positions in 10-year U.S. Treasury note futures as of September 30, 2018 that were purchased during the third quarter of 2018 when the 10-year U.S. Treasury rate was 2.92%.  As of September 30, 2018, the total notional amount of the Company’s interest rate hedges consisting of interest rate swaps and U.S. Treasury note futures was 86% of the Company’s outstanding repurchase agreement funding and TBA purchase commitments with a net duration gap of negative 0.2 years.

The Company reported TBA dollar roll income of $4.6 million for the third quarter of 2018 compared to $6.7 million for the second quarter of 2018.  The implied weighted-average net interest spread of the Company’s TBA dollar rolls was 1.86% for the third quarter of 2018 compared to 1.91% for the second 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 $17.2 million for the third quarter of 2018 compared to $20.1 million for the second 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, we had net investment losses on our investment portfolio of $46.8 million. On our related interest rate hedging instruments, we had net investment gains of $37.6 million, excluding interest rate swap net interest income. This results in a net investment loss on our hedged investment portfolio of $9.2 million, or $0.31 per diluted common share, for the third quarter of 2018.

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, 2018, the Company estimated its net operating loss (“NOL”) carryforward at $28.0 million that begins to expire in 2027, its net capital loss (“NCL”) carryforward at $390.9 million that begins to expire in 2019, and its alternative minimum tax (“AMT”) credit carryforward at $9.1 million that does not expire.  The Company’s estimated loss and tax credit carryforwards as of September 30, 2018 are subject to potential adjustments up to the time of filing the Company’s income tax returns.  

Under GAAP, a C-corporation records its deferred tax assets and liabilities on its balance sheet while a REIT does not record them on its balance sheet. The Company had a net deferred tax liability of $33.6 million, or $1.11 per common share, and an AMT credit carryforward within other assets on its consolidated balance sheet of $9.1 million, or $0.30 per common share, as of September 30, 2018.  The Company continues to record a full valuation allowance against its deferred tax assets that are capital in tax character and no valuation allowance against its deferred tax assets that are ordinary in tax character. 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.  For income tax purposes, gains and losses from its agency MBS are capital in tax character while gains and losses from its interest rate swap hedges are ordinary in tax character.  During the nine months ended September 30, 2018, the Company had net investment losses on its agency MBS for which no deferred income tax benefit was recorded since the Company records a full valuation allowance against its deferred tax assets that are capital in nature.  However, during the nine months ended September 30, 2018, the Company had net investments gains on its interest rate swap hedges for which a deferred income tax provision was recorded resulting in the Company now having a net deferred tax liability on its balance sheet as of September 30, 2018.  For accounting purposes, the Company’s interest rate swaps are a hedge against future higher funding costs on the Company’s repurchase agreement financing.  However, those future higher expected funding costs are not currently reflected as a deferred tax asset whereas the future benefits of the hedge against the higher expected funding costs are currently reflected as a deferred tax liability.  As a result, the deferred tax liability related to the net gain on the Company’s interest rate hedges should be offset in the future by tax deductions related to future higher funding costs on the Company’s repurchase agreement financing as they materialize.

 

Distributions to Shareholders

The Company’s Board of Directors approved a distribution to common shareholders of $0.375 per share for the third quarter of 2018.  The distribution will be paid on October 31, 2018 to shareholders of record as of September 28, 2018.  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 2018.  The distribution was paid on October 1, 2018 to shareholders of record as of September 18, 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. As a C corporation, distributions to common and preferred individual 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 individual shareholders by a REIT of current or accumulated earnings and profits are nonqualified dividends subject to the higher 33.4% maximum effective federal tax rate (net of the 20% dividend deduction benefit), each 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 24, 2018 to discuss the Company’s third 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 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 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, 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)

 

 

 

September 30, 2018

 

 

June 30, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,199

 

 

$

18,696

 

Interest receivable

 

 

14,818

 

 

 

13,368

 

Sold securities receivable

 

 

 

 

 

84,349

 

Mortgage-backed securities, at fair value

 

 

 

 

 

 

 

 

Agency

 

 

4,399,466

 

 

 

4,050,458

 

Private-label

 

 

37

 

 

 

61

 

Derivative assets, at fair value

 

 

91

 

 

 

9,921

 

Deposits, net

 

 

73,966

 

 

 

61,550

 

Other assets

 

 

15,835

 

 

 

15,973

 

Total assets

 

$

4,536,412

 

 

$

4,254,376

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

4,092,251

 

 

$

3,752,582

 

Interest payable

 

 

4,241

 

 

 

3,728

 

Accrued compensation and benefits

 

 

3,665

 

 

 

2,413

 

Dividend payable

 

 

12,723

 

 

 

12,265

 

Derivative liabilities, at fair value

 

 

3,431

 

 

 

234

 

Purchased securities payable

 

 

 

 

 

77,419

 

Deferred tax liabilities, net

 

 

33,639

 

 

 

24,011

 

Other liabilities

 

 

1,724

 

 

 

1,265

 

Long-term unsecured debt

 

 

74,048

 

 

 

73,992

 

Total liabilities

 

 

4,225,722

 

 

 

3,947,909

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock (liquidation preference of $8,654 and $8,519, respectively)

 

 

8,138

 

 

 

8,007

 

Common stock

 

 

303

 

 

 

282

 

Additional paid-in capital

 

 

1,997,281

 

 

 

1,976,309

 

Accumulated deficit

 

 

(1,695,032

)

 

 

(1,678,131

)

Total equity

 

 

310,690

 

 

 

306,467

 

Total liabilities and equity

 

$

4,536,412

 

 

$

4,254,376

 

Book value per common share (1)

 

$

9.95

 

 

$

10.52

 

Tangible book value per common share (2)

 

$

11.06

 

 

$

11.37

 

Common shares outstanding (in thousands) (3)

 

 

30,364

 

 

 

28,318

 

 

 

 

 

 

 

 

 

 

(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 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)

 

 

Three Months Ended

 

 

September 30,

2018

 

 

June 30,

2018

 

 

March 31,

2018

 

 

December 31,

2017

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

$

32,679

 

 

$

29,940

 

 

$

30,725

 

 

$

30,514

 

Private-label mortgage-backed securities

 

2

 

 

 

10

 

 

 

4

 

 

 

19

 

Other

 

183

 

 

 

105

 

 

 

131

 

 

 

76

 

Total interest income

 

32,864

 

 

 

30,055

 

 

 

30,860

 

 

 

30,609

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term secured debt

 

21,265

 

 

 

17,936

 

 

 

15,325

 

 

 

13,727

 

Long-term unsecured debt

 

1,261

 

 

 

1,257

 

 

 

1,231

 

 

 

1,225

 

Total interest expense

 

22,526

 

 

 

19,193

 

 

 

16,556

 

 

 

14,952

 

Net interest income

 

10,338

 

 

 

10,862

 

 

 

14,304

 

 

 

15,657

 

Investment (loss) gain, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on trading investments, net

 

(37,878

)

 

 

(20,892

)

 

 

(88,343

)

 

 

(23,208

)

Gain from derivative instruments, net

 

35,620

 

 

 

16,052

 

 

 

40,154

 

 

 

33,169

 

Other, net

 

1

 

 

 

324

 

 

 

50

 

 

 

277

 

Total investment (loss) gain, net

 

(2,257

)

 

 

(4,516

)

 

 

(48,139

)

 

 

10,238

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

2,833

 

 

 

2,061

 

 

 

3,040

 

 

 

3,505

 

Other general and administrative expenses

 

1,121

 

 

 

1,400

 

 

 

1,257

 

 

 

1,442

 

Total general and administrative expenses

 

3,954

 

 

 

3,461

 

 

 

4,297

 

 

 

4,947

 

Income (loss) before income taxes

 

4,127

 

 

 

2,885

 

 

 

(38,132

)

 

 

20,948

 

Income tax provision

 

9,628

 

 

 

6,493

 

 

 

18,251

 

 

 

13,707

 

Net (loss) income

 

(5,501

)

 

 

(3,608

)

 

 

(56,383

)

 

 

7,241

 

Dividend on preferred stock

 

(151

)

 

 

(149

)

 

 

(137

)

 

 

(133

)

Net (loss) income (attributable) available to

   common stock

$

(5,652

)

 

$

(3,757

)

 

$

(56,520

)

 

$

7,108

 

Basic (loss) earnings per common share

$

(0.19

)

 

$

(0.13

)

 

$

(2.00

)

 

$

0.25

 

Diluted (loss) earnings per common share

$

(0.19

)

 

$

(0.13

)

 

$

(2.00

)

 

$

0.25

 

Weighted average common shares outstanding (in

   thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

29,382

 

 

 

28,210

 

 

 

28,197

 

 

 

28,192

 

Diluted

 

29,382

 

 

 

28,210

 

 

 

28,197

 

 

 

28,580

 

 

 


 

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 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 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 (unaudited, amounts in thousands, except per share amounts):

 

 

Three Months Ended

 

 

September 30,

2018

 

 

June 30,

2018

 

 

March 31,

2018

 

 

December 31,

2017

 

GAAP net interest income

$

10,338

 

 

$

10,862

 

 

$

14,304

 

 

$

15,657

 

TBA dollar roll income

 

4,604

 

 

 

6,742

 

 

 

6,643

 

 

 

7,171

 

Interest rate swap net interest income (expense)

 

2,295

 

 

 

2,483

 

 

 

(816

)

 

 

(2,434

)

Economic net interest income

 

17,237

 

 

 

20,087

 

 

 

20,131

 

 

 

20,394

 

Core general and administrative expenses

 

(3,202

)

 

 

(3,162

)

 

 

(3,846

)

 

 

(3,768

)

Preferred stock dividend

 

(151

)

 

 

(149

)

 

 

(137

)

 

 

(133

)

Non-GAAP core operating income

$

13,884

 

 

$

16,776

 

 

$

16,148

 

 

$

16,493

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP core operating income per

   diluted common share

$

0.47

 

 

$

0.59

 

 

$

0.57

 

 

$

0.58

 

Weighted average diluted common

   shares outstanding

 

29,718

 

 

 

28,463

 

 

 

28,430

 

 

 

28,580

 

 

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,

2018

 

 

June 30,

2018

 

 

March 31,

2018

 

 

December 31,

2017

 

GAAP income (loss) before income taxes

$

4,127

 

 

$

2,885

 

 

$

(38,132

)

 

$

20,948

 

Add back (Less):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investment loss (gain), net

 

2,257

 

 

 

4,516

 

 

 

48,139

 

 

 

(10,238

)

Stock-based compensation expense

 

752

 

 

 

299

 

 

 

451

 

 

 

1,179

 

Preferred stock dividend

 

(151

)

 

 

(149

)

 

 

(137

)

 

 

(133

)

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TBA dollar roll income

 

4,604

 

 

 

6,742

 

 

 

6,643

 

 

 

7,171

 

Interest rate swap net interest income (expense)

 

2,295

 

 

 

2,483

 

 

 

(816

)

 

 

(2,434

)

Non-GAAP core operating income

$

13,884

 

 

$

16,776

 

 

$

16,148

 

 

$

16,493

 

 

 

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 September 30, 2018 (unaudited, dollars in thousands):

Agency MBS:

 

 

Fair Value

 

Specified agency MBS

 

$

4,399,466

 

Net long agency TBA position

 

 

781,258

 

Total

 

$

5,180,724

 

 

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

 

15-year fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.5%

 

$

95,675

 

 

$

1,673

 

 

$

97,348

 

 

$

(746

)

 

$

96,602

 

 

$

100.97

 

 

 

3.50

%

 

 

4.7

 

20-year fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.0%

 

 

57,977

 

 

 

1,956

 

 

 

59,933

 

 

 

(825

)

 

 

59,108

 

 

 

101.95

 

 

 

4.00

%

 

 

6.9

 

30-year fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.5%

 

 

346,872

 

 

 

8,123

 

 

 

354,995

 

 

 

(12,715

)

 

 

342,280

 

 

 

98.68

 

 

 

3.50

%

 

 

8.8

 

4.0%

 

 

2,346,617

 

 

 

113,716

 

 

 

2,460,333

 

 

 

(76,102

)

 

 

2,384,231

 

 

 

101.60

 

 

 

4.00

%

 

 

8.1

 

4.5%

 

 

1,359,321

 

 

 

73,604

 

 

 

1,432,925

 

 

 

(20,314

)

 

 

1,412,611

 

 

 

103.92

 

 

 

4.50

%

 

 

8.0

 

5.0%

 

 

99,526

 

 

 

5,400

 

 

 

104,926

 

 

 

(311

)

 

 

104,615

 

 

 

105.11

 

 

 

5.00

%

 

 

5.5

 

5.5%

 

 

18

 

 

 

 

 

 

18

 

 

 

1

 

 

 

19

 

 

 

108.68

 

 

 

5.50

%

 

 

6.2

 

         Total/weighted-

             average 30-year

             fixed rate

 

 

4,152,354

 

 

 

200,843

 

 

 

4,353,197

 

 

 

(109,441

)

 

 

4,243,756

 

 

 

102.20

 

 

 

4.15

%

 

 

8.1

 

Total/weighted-average

 

$

4,306,006

 

 

$

204,472

 

 

$

4,510,478

 

 

$

(111,012

)

 

$

4,399,466

 

 

$

102.17

 

 

 

4.13

%

 

 

8.0

 

Net Long Agency TBA Positions:

 

 

 

Notional Amount:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Long (Short) Position

 

 

Implied Cost

Basis

 

 

Implied

Fair Value

 

 

Net Carrying

Amount

 

4.5% 30-year MBS purchase commitments

 

$

250,000

 

 

$

258,549

 

 

$

257,945

 

 

$

(604

)

5.0% 30-year MBS purchase commitments

 

 

500,000

 

 

 

524,797

 

 

 

523,313

 

 

 

(1,484

)

Total TBA commitments, net

 

$

750,000

 

 

$

783,346

 

 

$

781,258

 

 

$

(2,088

)

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

%

 

 

2.33

%

 

 

0.80

%

 

 

1.8

 

 

$

(225

)

3 to less than 7 years

 

 

225,000

 

 

 

1.95

%

 

 

2.35

%

 

 

0.40

%

 

 

3.5

 

 

 

(77

)

7 to less than 10 years

 

 

2,050,000

 

 

 

2.34

%

 

 

2.33

%

 

 

(0.01

)%

 

 

8.6

 

 

 

(822

)

10 or more years

 

 

150,000

 

 

 

3.01

%

 

 

2.32

%

 

 

(0.69

)%

 

 

29.8

 

 

 

91

 

Total / weighted-average

 

$

3,475,000

 

 

 

2.10

%

 

 

2.33

%

 

 

0.23

%

 

 

7.1

 

 

$

(1,033

)

 


 

U.S. Treasury Note Futures:

 

 

 

Maturity Date

 

Notional Amount

 

 

Net Fair Value

 

10-year U.S. Treasury note futures

 

December 2018

 

$

700,000

 

 

$

(219

)

 

The following table presents information about the components of the Company’s net deferred tax assets (liabilities) as of September 30, 2018 and June 30, 2018 (unaudited, dollars in thousands):

 

 

 

As of September 30, 2018

 

 

As of June 30, 2018

 

 

 

Gross Amount

 

 

Tax Effected

 

 

Gross Amount

 

 

Tax Effected

 

Ordinary deferred tax (liabilities) assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOL carryforward

 

$

27,988

 

 

$

7,204

 

 

$

40,318

 

 

$

10,378

 

Deferred net gain on designated hedges

 

 

(17,262

)

 

 

(4,443

)

 

 

(2,349

)

 

 

(605

)

Net unrealized gain on designated hedges

 

 

(148,457

)

 

 

(38,212

)

 

 

(137,071

)

 

 

(35,282

)

Stock-based compensation

 

 

6,707

 

 

 

1,726

 

 

 

7,134

 

 

 

1,836

 

Other, net

 

 

336

 

 

 

86

 

 

 

(563

)

 

 

(338

)

Total ordinary deferred tax liabilities, net

 

 

(130,688

)

 

 

(33,639

)

 

 

(92,531

)

 

 

(24,011

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital deferred tax assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCL carryforward

 

 

390,923

 

 

 

100,624

 

 

 

392,655

 

 

 

101,069

 

Net unrealized loss on investments

 

 

170,934

 

 

 

43,998

 

 

 

138,253

 

 

 

35,587

 

Valuation allowance

 

 

(561,857

)

 

 

(144,622

)

 

 

(530,908

)

 

 

(136,656

)

Total capital deferred tax assets, net

 

 

 

 

 

 

 

 

 

 

 

 

Total deferred tax liabilities, net

 

$

(130,688

)

 

$

(33,639

)

 

$

(92,531

)

 

$

(24,011

)

 

 

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