Interest Rates and Economic Indicators - As of September 30, 2022, the 10-year U.S. Treasury rate increased by 82 basis points to 3.83% compared to the previous quarter[198]. - The average primary mortgage rate rose by 100 basis points to 6.70% during the third quarter of 2022[200]. - The Consumer Price Index increased by 8.2% for the twelve months ending September 30, 2022, marking one of the largest increases in over 40 years[200]. - The spread between the 2-year and 10-year U.S. Treasury rates inverted to a negative 45 basis points as of September 30, 2022[198]. - The Federal Reserve raised its target range for the federal funds rate by 75 basis points to a range of 3.00% to 3.25% on September 21, 2022[201]. - The market is anticipating additional interest rate hikes totaling approximately 150 basis points in the next six months[201]. Mortgage and Housing Market - Housing prices reported a 13.0% annual gain in August 2022, down from 15.6% in the previous month, indicating a deceleration in growth[203]. - Prepayment speeds in the fixed-rate residential mortgage market decreased during the third quarter of 2022 due to rising primary mortgage rates[202]. - Valuation multiples of mortgage servicing rights (MSRs) increased during the third quarter of 2022, driven by declining prepayment speed expectations[202]. - The average unpaid principal balance of underlying MSRs was $13.8 billion with a weighted average note rate of 3.14%[218]. - The annualized prepayment rate for agency MBS was 6.36% for the three months ended September 30, 2022, with approximately 29% in high loan-to-value pools and 18% in low balance loans[222]. Financial Performance - Interest and other income increased by $6.1 million, or 96.8%, from $6.3 million for the three months ended September 30, 2021, to $12.4 million for the same period in 2022[233]. - Net operating income for the three months ended September 30, 2022, was $6,647,000, compared to $4,396,000 for the same period in 2021, representing a 51.3% increase[232]. - The company reported a net income of $3,431,000 for the three months ended September 30, 2022, compared to a net loss of $250,000 for the same period in 2021[232]. - General and administrative expenses for the three months ended September 30, 2022, were $3,377,000, an increase from $2,897,000 in the same period of 2021[232]. - The company reported a net loss on agency MBS investments of $22.728 million for the three months ended September 30, 2022, compared to a loss of $2.447 million in 2021[243]. Debt and Financing - The total invested capital as of September 30, 2022, was $624.9 million, with a total investable capital of $301.5 million[216]. - The company had $15.0 million of junior subordinated debt outstanding requiring quarterly interest payments at three-month LIBOR plus a spread of 2.25% to 3.00%[212]. - As of September 30, 2022, the debt-to-equity leverage ratio was 3.5 to 1, indicating a significant reliance on debt financing[253]. - The company has a $75 million credit facility with its mortgage servicing counterparty, which was increased to $100 million on October 15, 2022[279]. - Total long-term unsecured debt as of September 30, 2022, was $86.3 million, with 6.75% Senior Notes due 2025 and 6.00% Senior Notes due 2026 outstanding[270]. Cash Flow and Liquidity - Cash used in operating activities during the nine months ended September 30, 2022, was $2.4 million, primarily due to net interest income less general and administrative expenses[256]. - Cash provided by investing activities during the nine months ended September 30, 2022, was $48.1 million, mainly from sales of agency MBS and credit securities[256]. - Cash used in financing activities during the nine months ended September 30, 2022, was $51.2 million, primarily from repayments of repurchase agreements and dividend payments to stockholders[256]. - The company believes that existing cash balances and other sources of liquidity will be sufficient to meet cash requirements for at least the next twelve months[255]. - The company's liquid assets totaled $45.9 million, consisting of cash and cash equivalents of $13.8 million and settled unencumbered agency MBS of $32.1 million at fair value[254]. Risk Management - The company manages interest rate risk through investment allocation and the utilization of interest rate hedging instruments[299]. - The company faces spread risk, which is the risk of an increase in the spread between market participants' required rate of return and prevailing benchmark interest rates[304]. - The company has credit risk exposure due to investments in non-agency MBS, which do not carry a credit guarantee from a GSE or government agency[308]. - The company attempts to manage credit risk through prudent asset selection and ongoing performance monitoring[311]. - The company does not guarantee the success of its credit risk management strategies, which could lead to substantial losses if credit performance falls short of expectations[312]. Shareholder and Equity Information - The company intends to distribute 100% of its taxable income to shareholders, in compliance with REIT distribution requirements[292]. - The Series C Preferred Stock has a liquidation preference of $24.1 million and pays a cumulative cash dividend at a fixed rate of 8.250% per annum until March 30, 2024[289]. - The company reported a net income available to common stock of $2.756 million for the three months ended September 30, 2022, compared to a net loss of $981,000 in the same period of 2021[248]. - As of September 30, 2022, the equity available to common stock was $181,575,000, with a 0.47% increase and a 0.21% decrease in response to a 50 basis point change in interest rates[302]. - The company has issued 6,058 shares of Series B preferred stock for proceeds net of selling commissions and expenses of $0.1 million during the nine months ended September 30, 2022[291].
Arlington Asset Investment(AAIC) - 2022 Q3 - Quarterly Report