Arlington Asset Investment (AI) Q2 2012 Earnings Call July 31, 2012 9:00 am ET Executives Kurt Ross Harrington - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer
These and other risks are described in the company's annual report on Form 10-K for the year ended December 31, 2011 that are available from the company and from the SEC. And you should read and understand these risks when evaluating any forward-looking statement.I would now like to turn the call over to Eric Billings for his remarks. Eric F. Billings Thank you, Kurt. Good morning, and welcome to the second quarter earnings call for Arlington Asset. I am Eric Billings, Chief Executive Officer of Arlington Asset. And joining me on the call today are Rock Tonkel, President and Chief Operating Officer; and Brian Bowers, our Chief Investment Officer. Thank you for joining us today. You can see from last night's press release that Arlington reported core operating earnings of $11.3 million, or $1.16 per share-diluted, for the second quarter. Overall, this was a positive quarter for the company. Return on equity from core operating earnings -- operating income of 20.5% was driven by several factors. The deployment of the proceeds from our first quarter capital raise took full effect from the end of April onward and added spread income without increasing our G&A expense. Continued low prepayment speeds in the company's agency mortgage-backed securities portfolio and high unleveraged cash yields from the private-label mortgage-backed securities portfolio were an important contributor again this quarter. Finally, the company recorded realized net cash gains from the sales of agency mortgage-backed securities during the quarter of [ph] $0.14 per share. We are seeing very encouraging performance from both our agency and our private-label portfolios. In the agency portfolio, all of our assets were specifically selected for prepayment protection of some type. Approximately 53% of our portfolio was originated under HARP programs. And our remaining assets consist of either low-balanced loans, low-FICO loans, high-LTV loans or loans with other prepayment protective features.
These loan characteristics significantly reduced the economic incentive to the borrower to refinance or constrain the borrower's ability to refinance. And because the loans underlying our agency portfolio on average were originated in the last 12 months, borrowers were able to take advantage of already low rates and consequently may have less incentive to refinance now when compared to loans originated in the earlier years.Over the last year, our agency portfolio demonstrated the value of asset selection, which has resulted in low portfolio CPRs in the range of 4% to 7%. That trend continued this quarter with a portfolio CPR of 4.4% versus CPRs of 26% on the Fannie Mae 4.5% universe. For Arlington, the concentration of our portfolio in prepayment-protected mortgage-backed securities below CPRS has a significant positive impact on the consistency of our asset yield and spread income as well on the preservation of book value. Prices for assets with these particular characteristics have risen sharply as the positive impact of the prepayment performance has become apparent. As our agency assets have appreciated, we have selectively taken the opportunity to further improve our asset profile as well as expected CPR performance and resulting spread income from the portfolio. Read the rest of this transcript for free on seekingalpha.com