Investment Strategy - The company focuses primarily on investing in mortgage-related assets, with current capital allocated between agency mortgage-backed securities (MBS) and mortgage credit investments [141]. - The company leverages its investment portfolio to increase potential returns, primarily through short-term financing arrangements structured as repurchase agreements [142]. - The company does not have an external investment advisor, operating as an internally managed entity [144]. - The company aims to reduce risk by lowering leverage and increasing liquidity, impacting average investment balances [189]. - The company may seek debt or equity financings for corporate purposes and strategic business opportunities, including possible acquisitions [221]. Financial Performance - Net interest income for Q3 2020 was $3.8 million, a decrease of 19.1% from $4.7 million in Q3 2019 [189]. - Net interest income for the nine months ended September 30, 2020, was $16.7 million, down 13.0% from $19.2 million in the same period of 2019 [189]. - Interest income for Q3 2020 was $5.4 million, compared to $28.7 million in Q3 2019, reflecting a significant decline [186]. - Interest expense for Q3 2020 was $1.6 million, down from $24.0 million in Q3 2019 [186]. - Total net income available to common stock for Q3 2020 was $4.0 million, compared to a loss of $8.5 million in Q3 2019 [186]. - GAAP net income for the three months ended September 30, 2020, was $4.8 million, compared to a loss of $7.7 million for the same period in 2019 [211]. Asset Management - The company's liquid assets totaled $124.2 million, consisting of cash and cash equivalents of $8.9 million and unencumbered agency MBS of $115.3 million at fair value [172]. - The total mortgage investments amounted to $744.2 million as of September 30, 2020, a significant decrease from $3.8 billion as of December 31, 2019 [172]. - The specified agency MBS portfolio had a fair value of $617.2 million as of September 30, 2020, compared to $3.8 billion as of December 31, 2019 [173]. - The mortgage credit investment portfolio comprised $46.4 million in mortgage credit securities and $70.0 million in loans at fair value as of September 30, 2020 [177]. - The average balance of agency MBS for Q3 2020 was $539.1 million, yielding an income of $2.8 million at a yield of 2.08% [190]. Risk Management - The company is exposed to spread risk, which can affect the fair value of mortgage investments independent of changes in benchmark interest rates [259]. - The company has exposure to credit risk due to mortgage credit investments that do not carry a credit guarantee, which could lead to substantial losses if credit performance falls short of expectations [264][268]. - Credit enhancements are in place for some mortgage credit investments to mitigate exposure to credit risk, with losses allocated on a "reverse sequential" basis [265]. - The company emphasizes the importance of managing credit risks, including changes in default rates and the effect of governmental regulations on business operations [271]. Regulatory and Economic Environment - The Federal Open Market Committee (FOMC) maintained the target federal funds rate at 0% to 0.25% as of September 16, 2020, with expectations to keep it in this range for the next twelve months [149]. - The CARES Act, signed on March 27, 2020, authorized over $2 trillion in economic relief, including a foreclosure moratorium and borrower forbearance rights for federally-backed residential mortgages [156]. - The overall performance is sensitive to interest rate changes, which may not correlate with inflation rates [269]. Shareholder Information - The company changed its ticker symbol to "AAIC" on the NYSE on October 22, 2020, with trading under the new symbol commencing on October 26, 2020 [145]. - The company has authorized a share repurchase program allowing the repurchase of up to 18,000,000 shares of Class A common stock, with 16,746,801 shares remaining available for repurchase as of September 30, 2020 [247]. - The Series C Preferred Stock had a liquidation preference of $28.3 million and was entitled to a cumulative cash dividend of 8.250% per annum until March 30, 2024 [168]. Market Conditions - Prepayment speeds in the fixed-rate 30-year residential mortgage market increased, with the primary/secondary mortgage spread at 168 basis points as of September 30, 2020, significantly higher than the ten-year average of 118 basis points [152]. - The S&P CoreLogic Case-Shiller U.S. National Home Price NSA index reported a 4.8% annual gain in July 2020, indicating a modest increase in historical housing prices [153]. - The 10-year U.S. Treasury rate increased by 2 basis points to 0.68% as of September 30, 2020, with the spread between the 2-year and 10-year U.S. Treasury rate widening to 55 basis points [151].
Arlington Asset Investment(AAIC) - 2020 Q3 - Quarterly Report