Arlington Asset Investment(AAIC) - 2019 Q4 - Annual Report

Market Risks - The company is exposed to various market risks, including interest rate, prepayment, extension, spread, credit, liquidity, and regulatory risks, and employs strategies to manage these risks [38]. - Interest rate hedging instruments are used to mitigate exposure to potential mismatches between long-term investment earnings and short-term borrowing costs, with a majority of funding through repurchase agreements [39]. - Prepayment risk increases when interest rates decline, potentially leading to reinvestment at lower yields, which can adversely affect financial results [41]. - Extension risk arises when borrowers make only scheduled payments, leading to slower capital return than anticipated, particularly when interest rates rise [42]. - Spread risk is present due to fluctuations between market yields on investments and benchmark interest rates, which can impact the fair value of mortgage investments [43]. - Credit risk is associated with investments in residential and commercial mortgage loans, with the company managing this risk through asset selection and performance monitoring [44]. - Liquidity risk may arise from the inability to meet obligations due to difficulties in liquidating assets or obtaining funding, particularly upon the maturity of repurchase agreements [45]. REIT Compliance - The company intends to elect to be taxed as a REIT, requiring annual distribution of 90% of taxable income to avoid federal and state corporate income taxes [54]. - To qualify as a REIT, the company must derive at least 75% of gross income from real property investments or mortgages on real property [56]. - The company must satisfy five gross asset tests, including that at least 75% of the value of its assets must be represented by real estate assets, cash, U.S. Government securities, and other specified items [61]. - The aggregate value of all securities of all TRSs held by the company may not exceed 20% of the total value of its assets [63]. - The company intends to maintain its exclusion from regulation under the 1940 Act by ensuring that at least 55% of its assets consist of qualified assets [67]. - If the company fails to maintain its exclusion, it may be required to register as an investment company, which could limit its investment strategies and negatively impact its stock price [68]. Financial Performance - The company reported a book value per common share of $7.86 as of December 31, 2019, with a potential decrease of 9.56% under a 50 basis point increase in interest rates [305]. - Under a 100 basis point increase in interest rates, the book value per common share could decrease to $5.83, representing a decline of 25.78% [306]. - The company is exposed to interest rate risk in its MBS portfolio, with investments financed through short-term borrowing facilities, which are sensitive to interest rate fluctuations [301]. - The company utilizes interest rate hedging instruments, including swaps and U.S. Treasury note futures, to manage its exposure to interest rate changes [301]. - The company faces spread risk, which is the risk of an increase in the spread between market yields on MBS and prevailing benchmark interest rates [307]. - Agency MBS value as of December 31, 2019, is $3,768,496, with a 10 basis point increase in spreads resulting in a value of $3,749,061 [309]. - Equity available to common stock increased to $288,397 from $268,962, reflecting a positive trend [309]. - Book value per common share rose to $7.86 from $7.33, indicating a growth of 7.2% [309]. - Book value per common share experienced a percentage change of (6.74)% [309]. - Equity available to common stock decreased from $239,810 to $288,397, showing fluctuations in performance [310]. - Book value per common share increased to $7.86 from $6.54, representing a growth of 20.2% [310]. - Book value per common share percentage change was (16.85)% [310]. Credit Risk Management - The company accepts exposure to credit risk at levels deemed prudent within its overall investment strategy [312]. - Credit enhancements are present in some mortgage credit investments, mitigating exposure to credit risk [313]. - The company acknowledges that there is no guarantee that credit risk management efforts will be successful, which could lead to substantial losses [314].