Arlington Asset Investment(AAIC) - 2022 Q4 - Annual Report

Financial Losses and Carryforwards - As of December 31, 2022, the company had estimated net operating loss (NOL) carryforwards of $162.5 million, with$ 14.6 million expiring in 2028 and $147.9 million having no expiration period[38] - The company reported estimated net capital loss (NCL) carryforwards of$ 155.7 million, with scheduled expirations of $110.3 million in 2023,$ 14.2 million in 2026, and $31.2 million in 2027[38] REIT Compliance and Requirements - The company intends to distribute 100% of its taxable income to maintain its REIT status, which requires an annual distribution of at least 90% of REIT taxable income[34] - The company must satisfy two gross income requirements annually to qualify as a REIT: at least 75% of gross income must come from real property investments, and at least 95% must come from a combination of qualifying income[36] - At the close of each calendar quarter, the company must meet five gross asset tests, including that at least 75% of asset value must be in real estate assets, cash, or U.S. Government securities[37] - The company aims to maintain its exclusion from regulation under the 1940 Act by ensuring that at least 55% of its assets consist of qualified assets[40] Market and Investment Risks - The company is exposed to various market risks, including interest rate, prepayment, extension, spread, credit, liquidity, and regulatory risks, which it manages through hedging instruments and investment strategies[32] - The company competes with various entities for targeted investments, including mortgage finance companies, banks, and institutional investors, which may impact its investment strategy and financing availability[33] Financing and Capital Management - The company has issued long-term unsecured notes as an additional source of financing, indicating a strategy to diversify funding sources[31] Employee and Workplace Policies - As of December 31, 2022, the company had nine employees and focuses on maintaining a workplace free from discrimination while ensuring fair compensation[42] Fair Value and Interest Rate Sensitivity - The fair value of Agency MBS as of December 31, 2022, is$ 443,540, with a projected decrease to $432,852 with a 50 basis point increase in interest rates and an increase to$ 453,192 with a 50 basis point decrease[262] - The estimated fair value of MSR financing receivables is $180,365, projected to increase to$ 183,526 with a 50 basis point decrease in interest rates and decrease to $177,422 with a 50 basis point increase[262] - Equity available to common stock is$ 183,920, with a projected increase of 0.39% under a 50 basis point increase in interest rates and a decrease of 0.25% under a 50 basis point decrease[262] - The analysis indicates that a 100 basis point increase in interest rates would decrease the fair value of Agency MBS to $421,404, while a decrease would increase it to$ 461,688[262] - Spread risk is highlighted, with the fair value of Agency MBS potentially declining independently of changes in benchmark interest rates, reflecting market conditions and monetary policy actions[263] - The fair value of Agency MBS is projected to decrease to $441,034 with a 10 basis point increase in spreads and increase to$ 446,046 with a 10 basis point decrease[264] Credit Risk Management - Credit risk is present in non-agency MBS investments, with potential losses if underlying mortgage loans default, and credit enhancements may mitigate some exposure[266] - The company accepts credit risk at levels deemed prudent within its overall investment strategy, with ongoing performance monitoring to manage exposure[266] Interest Rate Hedging - The company utilizes interest rate hedging instruments, including swaps and U.S. Treasury note futures, to manage interest rate risk[259] - The effective durations for interest rate sensitivity are based on observed fair value changes and historical prepayment patterns[259]