Arlington Asset Investment Corp. - Quarter Report: 2019 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34374

ARLINGTON ASSET INVESTMENT CORP.

(Exact name of Registrant as specified in its charter)

Virginia

54-1873198

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

1001 Nineteenth Street North

Arlington, VA

22209

(Address of Principal Executive Offices)

(Zip Code)

(703) 373-0200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock	AI	NYSE
7.00% Series B Cumulative Perpetual Redeemable Preferred Stock	AI PrB	NYSE
8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	AI PrC	NYSE

Number of shares outstanding of each of the registrant’s classes of common stock, as of July 31, 2019:

Title		Outstanding
Class A Common Stock		36,659,233 shares

ARLINGTON ASSET INVESTMENT CORP.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

INDEX

			Page
PART I — FINANCIAL INFORMATION
	Item 1.	Consolidated Financial Statements and Notes — (unaudited)	1
		Consolidated Balance Sheets	1
		Consolidated Statements of Comprehensive Income	2
		Consolidated Statements of Changes in Equity	3
		Consolidated Statements of Cash Flows	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	44
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings	45
	Item 1A.	Risk Factors	45
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
	Item 3.	Defaults Upon Senior Securities	45
	Item 4.	Mine Safety Disclosures	45
	Item 5.	Other Information	45
	Item 6.	Exhibits	45
		Signatures	48

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	34,684		$	26,713
Interest receivable		12,471			13,349
Sold securities receivable		546,106			—
Mortgage-backed securities, at fair value
Agency		3,414,580			3,982,106
Private-label		26			24
Derivative assets, at fair value		6,243			438
Deposits		31,247			61,052
Other assets		18,535			15,768
Total assets	$	4,063,892		$	4,099,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	3,531,539		$	3,721,629
Interest payable		3,336			4,646
Accrued compensation and benefits		2,436			3,732
Dividend payable		8,392			11,736
Derivative liabilities, at fair value		3,131			6,959
Purchased securities payable		113,019			—
Other liabilities		3,534			2,200
Long-term unsecured debt		74,216			74,104
Total liabilities		3,739,603			3,825,006
Commitments and contingencies
Stockholders’ Equity:
Series B Preferred stock, $0.01 par value, 354,039 and 350,595 shares issued and outstanding, respectively (liquidation preference of $8,851 and $8,765, respectively)		8,296			8,245
Series C Preferred stock, $0.01 par value, 1,200,000 and -0- shares issued and outstanding, respectively (liquidation preference of $30,000 and $-0-, respectively)		28,944			—
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 36,572,617 and 30,497,998 shares issued and outstanding, respectively		366			305
Additional paid-in capital		2,047,616			1,997,876
Accumulated deficit		(1,760,933	)		(1,731,982	)
Total stockholders’ equity		324,289			274,444
Total liabilities and stockholders’ equity	$	4,063,892		$	4,099,450

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income
Agency mortgage-backed securities	$	32,275		$	29,940		$	65,845		$	60,665
Private-label mortgage-backed securities		14			10			15			14
Other		428			105			689			236
Total interest income		32,717			30,055			66,549			60,915
Interest expense
Short-term secured debt		24,866			17,936			49,509			33,261
Long-term unsecured debt		1,269			1,257			2,541			2,488
Total interest expense		26,135			19,193			52,050			35,749
Net interest income		6,582			10,862			14,499			25,166
Investment advisory fee income		—			—			250			—
Investment loss, net
Gain (loss) on trading investments, net		42,239			(20,892	)		111,407			(109,235	)
(Loss) gain from derivative instruments, net		(69,072	)		16,052			(124,277	)		56,206
Other, net		150			324			(10	)		374
Total investment loss, net		(26,683	)		(4,516	)		(12,880	)		(52,655	)
General and administrative expenses
Compensation and benefits		2,233			2,061			5,349			5,101
Other general and administrative expenses		1,191			1,400			2,451			2,657
Total general and administrative expenses		3,424			3,461			7,800			7,758
(Loss) income before income taxes		(23,525	)		2,885			(5,931	)		(35,247	)
Income tax provision		—			6,493			—			24,744
Net loss		(23,525	)		(3,608	)		(5,931	)		(59,991	)
Dividend on preferred stock		(774	)		(149	)		(1,052	)		(286	)
Net loss attributable to common stock	$	(24,299	)	$	(3,757	)	$	(6,983	)	$	(60,277	)
Basic loss per common share	$	(0.67	)	$	(0.13	)	$	(0.20	)	$	(2.14	)
Diluted loss per common share	$	(0.67	)	$	(0.13	)	$	(0.20	)	$	(2.14	)
Weighted-average common shares outstanding (in thousands)
Basic		36,533			28,210			34,803			28,204
Diluted		36,533			28,210			34,803			28,204

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands)

(Unaudited)

	Series B Preferred Stock (#)		Series B Preferred Amount ($)		Series C Preferred Stock (#)		Series C Preferred Amount ($)		Class A Common Stock (#)			Class A Amount ($)		Additional Paid-In Capital			Accumulated Deficit			Total
Balances, December 31, 2017		303,291	$	7,108		—	$	—		28,140,721		$	281	$	1,974,941		$	(1,596,013	)	$	386,317
Net loss		—		—		—		—		—			—		—			(56,383	)		(56,383	)
Issuance of Class A common stock		—		—		—		—		—			—		(23	)		—			(23	)
Issuance of preferred stock		19,431		459		—		—		—			—		—			—			459
Cumulative-effect of accounting change (see Note 7)		—		—		—		—		—			—		—			4,059			4,059
Stock-based compensation		—		—		—		—		—			—		451			—			451
Dividends declared ⁽¹⁾		—		—		—		—		—			—		—			(15,875	)		(15,875	)
Balances, March 31, 2018		322,722	$	7,567		—	$	—		28,140,721		$	281	$	1,975,369		$	(1,664,212	)	$	319,005
Net loss		—		—		—		—		—			—		—			(3,608	)		(3,608	)
Issuance of Class A common stock		—		—		—		—		66,989			1		710			—			711
Issuance of preferred stock		18,030		440		—		—		—			—		—			—			440
Repurchase of Class A common stock under stock-based compensation plans		—		—		—		—		(6,011	)		—		(67	)		—			(67	)
Stock-based compensation		—		—		—		—		—			—		297			—			297
Dividends declared ⁽¹⁾		—		—		—		—		—			—		—			(10,311	)		(10,311	)
Balances, June 30, 2018		340,752	$	8,007		—	$	—		28,201,699		$	282	$	1,976,309		$	(1,678,131	)	$	306,467

Balances, December 31, 2018		350,595	$	8,245		—	$	—		30,497,998		$	305	$	1,997,876		$	(1,731,982	)	$	274,444
Net income		—		—		—		—		—			—		—			17,594			17,594
Issuance of Class A common stock		—		—		—		—		6,000,000			60		48,750			—			48,810
Issuance of Class A common stock under stock-based compensation plans		—		—		—		—		74,619			1		(1	)		—			—
Issuance of preferred stock		2,035		45		1,200,000		28,880		—			—		—			—			28,925
Stock-based compensation		—		—		—		—		—			—		773			—			773
Dividends declared ⁽¹⁾		—		—		—		—		—			—		—			(14,135	)		(14,135	)
Balances, March 31, 2019		352,630	$	8,290		1,200,000	$	28,880		36,572,617		$	366	$	2,047,398		$	(1,728,523	)	$	356,411
Net loss		—		—		—		—		—			—		—			(23,525	)		(23,525	)
Issuance of Class A common stock		—		—		—		—		—			—		1			—			1
Issuance of preferred stock		1,409		6		—		64		—			—		—			—			70
Stock-based compensation		—		—		—		—		—			—		217			—			217
Dividends declared ⁽¹⁾		—		—		—		—		—			—		—			(8,885	)		(8,885	)
Balances, June 30, 2019		354,039	$	8,296		1,200,000	$	28,944		36,572,617		$	366	$	2,047,616		$	(1,760,933	)	$	324,289

(1)

The Board of Directors approved and the Company declared and paid dividends of $0.375 and $0.225 per common share for the three months ended March 31, 2019 and June 30, 2019, respectively, and $0.55 and $0.375 per common share for the three months ended March 31, 2018 and June 30, 2018, respectively. The Board of Directors approved and the Company declared and paid dividends of $0.4375 per Series B preferred share for the three months ended March 31, 2019, June 30, 2019, March 31, 2018 and June 30, 2018. The Board of Directors approved and the Company declared and paid dividends of $0.61875 per Series C preferred share for the three months ended June 30, 2019. For the three months ended March 31, 2019, includes a dividend accrual of $0.103125 per Series C preferred share that had not been declared.

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(5,931	)	$	(59,991	)
Adjustments to reconcile net loss to net cash provided by operating activities
Investment loss, net		12,880			52,655
Net premium amortization on mortgage-backed securities		13,142			16,199
Deferred tax provision		—			24,744
Other		1,112			799
Changes in operating assets
Interest receivable		878			(822	)
Other assets		(273	)		(255	)
Changes in operating liabilities
Interest payable and other liabilities		(1,808	)		(909	)
Accrued compensation and benefits		(1,296	)		(2,603	)
Net cash provided by operating activities		18,704			29,817
Cash flows from investing activities:
Purchases of agency mortgage-backed securities		(1,527,755	)		(1,858,387	)
Proceeds from sales of agency mortgage-backed securities		1,539,475			1,496,422
Receipt of principal payments on agency mortgage-backed securities		220,982			233,577
(Payments for) proceeds from derivatives and deposits, net		(104,830	)		40,002
Other		45			(15	)
Net cash provided by (used in) investing activities		127,917			(88,401	)
Cash flows from financing activities:
(Repayments of) proceeds from repurchase agreements, net		(190,090	)		85,401
Proceeds from issuance of common stock		48,811			688
Proceeds from issuance of preferred stock		28,995			899
Dividends paid		(26,366	)		(31,322	)
Net cash (used in) provided by financing activities		(138,650	)		55,666
Net increase (decrease) in cash and cash equivalents		7,971			(2,918	)
Cash and cash equivalents, beginning of period		26,713			21,614
Cash and cash equivalents, end of period	$	34,684		$	18,696
Supplemental cash flow information:
Cash payments for interest	$	53,248		$	36,327
Cash payments for taxes	$	—		$	—

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

Note 1. Organization and Basis of Presentation

Arlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the “Company”) is an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (“MBS”), consisting of “agency MBS” and “private-label MBS.” Agency MBS include residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. government agency, such as the Government National Mortgage Association (“Ginnie Mae”). Private-label MBS, or “non-agency MBS,” include residential MBS that are not guaranteed by a GSE or the U.S. government. Arlington Asset is a Virginia corporation that is internally managed.

For the Company’s tax years ended December 31, 2018 and earlier, the Company was taxed as a C corporation for U.S. federal tax purposes. Commencing with its taxable year ending December 31, 2019, the Company intends to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company will be required to distribute annually 90% of its REIT taxable income (subject to certain adjustments). So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. Federal or state corporate income taxes on its taxable income that it distributes to its shareholders on a timely basis. At present, it is the Company’s intention to distribute 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

The unaudited interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The Company’s consolidated financial statements include the accounts of Arlington Asset and all other entities in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Although the Company bases these estimates and assumptions on historical experience and all other reasonably available information that the Company believes to be relevant under the circumstances, such estimates frequently require management to exercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ from these estimates materially.

Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, total assets or total liabilities.

Note 2. Summary of Significant Accounting Policies

Cash Equivalents

Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three months or less. As of June 30, 2019 and December 31, 2018, approximately 98% and 99%, respectively, of the Company’s cash equivalents were invested in money market funds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.

Investment Security Purchases and Sales

Purchases and sales of investment securities are recorded on the settlement date of the transfer unless the trade qualifies as a “regular-way” trade and the associated commitment qualifies for an exemption from the accounting guidance applicable to derivative instruments. A regular-way trade is an investment security purchase or sale transaction that is expected to settle within the period of time following the trade date that is prevalent or traditional for that specific type of security. Any amounts payable or receivable for

unsettled security trades are recorded as “sold securities receivable” or “purchased securities payable” in the consolidated balance sheets.

Interest Income Recognition for Investments in Agency MBS

The Company recognizes interest income for its investments in agency MBS by applying the “interest method” permitted by GAAP, whereby purchase premiums and discounts are amortized and accreted, respectively, as an adjustment to contractual interest income accrued at each security’s stated coupon rate. The interest method is applied at the individual security level based upon each security’s effective interest rate. The Company calculates each security’s effective interest rate at the time of purchase by solving for the discount rate that equates the present value of that security's remaining contractual cash flows (assuming no principal prepayments) to its purchase price. Because each security’s effective interest rate does not reflect an estimate of future prepayments, the Company refers to this manner of applying the interest method as the “contractual effective interest method.” When applying the contractual effective interest method to its investments in agency MBS, as principal prepayments occur, a proportional amount of the unamortized premium or discount is recognized in interest income such that the contractual effective interest rate on the remaining security balance is unaffected.

Other Significant Accounting Policies

Certain of the Company’s other significant accounting policies are summarized in the following notes:

Investments in agency MBS, subsequent measurement	Note 3
Borrowings	Note 4
To-be-announced agency MBS transactions, including “dollar rolls”	Note 5
Derivative instruments	Note 5
Balance sheet offsetting	Note 6
Fair value measurements	Note 7

Refer to the Company’s 2018 Annual Report on Form 10-K for a complete inventory and summary of the Company’s significant accounting policies.

Recent Accounting Pronouncements

The following table provides a brief description of recently issued accounting pronouncements and their actual or expected effect on the Company’s consolidated financial statements:

Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
Recently Adopted Accounting Guidance
Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842)	This amendment replaces the existing lease accounting model with a revised model. The primary change effectuated by the revised lease accounting model is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases.	January 1, 2019	The primary impact of the adoption of ASU No. 2016-02 was the recognition of lease liabilities and associated right-of-use assets, as a component of “Other liabilities” and “Other assets,” respectively, on the Company’s consolidated balance sheets as of June 30, 2019. The adoption of ASU No. 2016-02 did not have an effect on the timing or amount of periodic lease expense recognized in net income. The adoption of ASU No. 2016-02 did not have a material effect on the Company’s consolidated financial statements.

Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
ASU No. 2017-08, Premium Amortization of Purchased Callable Debt Securities (Subtopic 310-20)	This amendment requires purchase premiums for investments in debt securities that are noncontingently callable by the issuer (at a fixed price and preset date) to be amortized to the earliest call date. Previously, purchase premiums for such investments were permitted to be amortized to the instrument’s maturity date.	January 1, 2019	Investments in prepayable financial assets, such as residential MBS, for which the embedded call options are not held by the issuer are not within the scope of ASU No. 2017-08. Accordingly, the adoption of ASU No. 2017-08 did not have an effect on the Company’s consolidated financial statements.

ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815)	This update made several targeted amendments to existing GAAP with the objectives of facilitating (i) financial reporting that more closely reflects entities’ risk management strategies and (ii) greater ease of understanding and interpreting the effects of hedge accounting on an entities’ reported results.	January 1, 2019	Hedge accounting pursuant to GAAP is an elective, rather than a required, accounting model. The Company does not elect to apply hedge accounting. The adoption of ASU No. 2017-12 did not have an effect on the Company’s consolidated financial statements.

Recently Issued Accounting Guidance Not Yet Adopted

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 606)	The amendments in this update require financial assets measured at amortized cost as well as available-for-sale debt securities to be measured for impairment on the basis of the net amount expected to be collected. Credit losses are to be recognized through an allowance for credit losses, which differs from the direct write-down of the amortized cost basis currently required for other-than-temporary impairments of investments in debt securities. This update also makes substantial changes to the manner in which interest income is to be recognized for financial assets acquired with a more-than-insignificant amount of credit deterioration since origination. This update will not affect the accounting for investments in debt securities that are classified as trading securities.	January 1, 2020	As of June 30, 2019, all of the Company’s investments in debt securities are classified as trading securities. Accordingly, the Company does not expect ASU No. 2016-13 to have a material impact on its consolidated financial statements.

Note 3. Investments in Agency MBS

The Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of June 30, 2019 and December 31, 2018, the Company had $3,414,580 and $3,982,106, respectively, of fair value in agency MBS classified as trading securities. As of June 30, 2019, all the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans.

All periodic changes in the fair value of trading agency MBS that are not attributed to interest income are recognized as a component of “investment gain (loss), net” in the accompanying consolidated statements of comprehensive income. The following table provides additional information about the gains and losses recognized as a component of “investment gain (loss), net” in the Company’s consolidated statements of comprehensive income for the periods indicated with respect to investments in agency MBS classified as trading securities:

	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
Net gains (losses) recognized in earnings for:
Agency MBS still held at period end	$	34,007	$	(17,876	)	$	79,206	$	(73,220	)
Agency MBS sold during the period		8,233		(3,005	)		32,199		(36,006	)
Total	$	42,240	$	(20,881	)	$	111,405	$	(109,226	)

The Company also invests in and finances fixed-rate agency MBS on a generic pool basis through sequential series of to-be-announced security transactions commonly referred to as “dollar rolls.” Dollar rolls are accounted for as a sequential series of derivative instruments. Refer to “Note 5. Derivative Instruments” for further information about dollar rolls.

Note 4. Borrowings

Repurchase Agreements

The Company finances the purchase of MBS through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells MBS to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same security at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. MBS sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such securities throughout the duration of the arrangement. Throughout the contractual term of a repurchase agreement, the Company recognizes a “repurchase agreement” liability on its consolidated balance sheets to reflect the obligation to repay to the counterparty the proceeds received upon the initial transfer of the MBS. The difference between the proceeds received by the Company upon the initial transfer of the MBS and the contractually agreed-upon repurchase price is recognized as interest expense ratably over the term of the repurchase arrangement.

Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.

As of June 30, 2019 and December 31, 2018, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10% of equity. The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated:

	June 30, 2019			December 31, 2018
Pledged with agency MBS:
Repurchase agreements outstanding	$	3,531,539		$	3,721,629
Agency MBS collateral, at fair value ⁽¹⁾		3,726,291			3,931,232
Net amount ⁽²⁾		194,752			209,603
Weighted-average rate		2.61	%		2.72	%
Weighted-average term to maturity	35.9 days			17.3 days

⁽¹⁾	As of June 30, 2019, includes $511,225 at sale price of unsettled agency MBS sale commitments which is included in the line item “sold securities receivable” in the accompanying consolidated balance sheets.

⁽²⁾	Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.

The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three and six months ended June 30, 2019 and 2018:

	June 30, 2019			June 30, 2018
Weighted-average outstanding balance during the three months ended	$	3,728,583		$	3,619,483
Weighted-average rate during the three months ended		2.64	%		1.96	%
Weighted-average outstanding balance during the six months ended	$	3,704,506		$	3,675,051
Weighted-average rate during the six months ended		2.66	%		1.80	%

Long-Term Unsecured Debt

As of June 30, 2019 and December 31, 2018, the Company had $74,216 and $74,104, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $1,084 and $1,196, respectively. The Company’s long-term debentures consisted of the following as of the dates indicated:

	June 30, 2019									December 31, 2018
	Senior Notes Due 2025			Senior Notes Due 2023			Trust Preferred Debt			Senior Notes Due 2025			Senior Notes Due 2023			Trust Preferred Debt
Outstanding Principal	$	35,300		$	25,000		$	15,000		$	35,300		$	25,000		$	15,000
Annual Interest Rate		6.75	%		6.625	%	LIBOR+ 2.25 - 3.00 %				6.75	%		6.625	%	LIBOR+ 2.25 - 3.00 %
Interest Payment Frequency	Quarterly			Quarterly			Quarterly			Quarterly			Quarterly			Quarterly
Weighted-Average Interest Rate		6.75	%		6.625	%		5.35	%		6.75	%		6.625	%		5.19	%
Maturity	March 15, 2025			May 1, 2023			2033 - 2035			March 15, 2025			May 1, 2023			2033 - 2035
Early Redemption Date	March 15, 2018			May 1, 2016			2008 - 2010			March 15, 2018			May 1, 2016			2008 - 2010

The Senior Notes due 2023 and the Senior Notes due 2025 are publicly traded on the New York Stock Exchange under the ticker symbols “AIW” and “AIC,” respectively. The Senior Notes due 2023 and Senior Notes due 2025 may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing these Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.

Note 5. Derivative Instruments

In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either “derivative assets” or “derivative liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.

Types and Uses of Derivative Instruments

Interest Rate Hedging Instruments

The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in certain MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate hedging instruments include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.

The Company exchanges cash “variation margin” with the counterparties to its interest rate hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s requirement.

Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.

To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”

In addition to interest rate hedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.

The Company’s agency MBS investment portfolio includes net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.

In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.

Under the terms of these forward commitments, the daily exchange of variation margin may occur based on changes in the fair value of the agency MBS commitments if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of TBA transactions is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to return cash collateral received by the Company in respect of TBA transactions is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.

Derivative Instrument Population and Fair Value

The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:

	June 30, 2019					December 31, 2018
	Assets		Liabilities			Assets		Liabilities
Interest rate swaps	$	1,220	$	—		$	—	$	(5,709	)
10-year U.S. Treasury note futures		—		(88	)		—		(1,250	)
TBA commitments		5,023		(3,043	)		438		—
Total	$	6,243	$	(3,131	)	$	438	$	(6,959	)

Interest Rate Swaps

The following table presents information about the Company’s interest rate swap agreements that were in effect as of June 30, 2019:

			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	1,675,000		1.64	%		2.46	%		0.82	%		1.5	$	369
3 to less than 7 years		500,000		1.67	%		2.40	%		0.73	%		6.1		309
7 to less than 10 years		400,000		2.88	%		2.52	%		(0.36	)%		9.4		439
10 or more years		25,000		2.96	%		2.42	%		(0.54	)%		28.7		103
Total / weighted-average	$	2,600,000		1.85	%		2.46	%		0.61	%		3.9	$	1,220

The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2018:

			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)		Fair Value
Years to maturity:
Less than 3 years	$	1,050,000		1.53	%		2.60	%		1.07	%		1.5	$	(152	)
3 to less than 7 years		325,000		2.00	%		2.73	%		0.73	%		4.4		(432	)
7 to less than 10 years		1,600,000		2.35	%		2.70	%		0.35	%		8.5		(4,572	)
10 or more years		125,000		3.02	%		2.66	%		(0.36	)%		29.6		(553	)
Total / weighted-average	$	3,100,000		2.07	%		2.67	%		0.60	%		6.6	$	(5,709	)

U.S. Treasury Note Futures

The Company’s 10-year U.S. Treasury note futures held as of June 30, 2019 are short positions with an aggregate notional amount of $155,000 that mature in September 2019. Upon the maturity date of these futures contracts, the Company has the option to either net settle each contract in cash in an amount equal to the difference between the then-current fair value of the underlying 10-year U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by delivering the underlying 10-year U.S. Treasury note. As of December 31, 2018, the Company held short positions of 10-year U.S. Treasury note futures with an aggregate notional amount of $320,000 with a maturity date in March 2019.

Options on 10-year U.S. Treasury Note Futures

The Company may purchase or sell exchange-traded options on 10-year U.S. Treasury note futures contracts with the objective of economically hedging a portion of the sensitivity of its investments in agency MBS to significant changes in interest rates. The Company may purchase put options which provide the Company with the right to sell 10-year U.S. Treasury note futures to a counterparty, and the Company may also write call options that provide a counterparty with the option to buy 10-year U.S. Treasury

note futures from the Company. In order to limit its exposure on its interest rate derivative instruments from a significant decline in long-term interest rates, the Company may also purchase contracts that provide the Company with the option to buy, or call, 10-year U.S. Treasury note futures from a counterparty. The options may be exercised at any time prior to their expiry, and if exercised, may be net settled in cash or through physical receipt or delivery of the underlying futures contracts.

As of June 30, 2019 and December 31, 2018, the Company had no outstanding options on 10-year U.S. Treasury note futures contracts.

TBA Commitments

The following tables present information about the Company’s TBA commitments as of the dates indicated:

	June 30, 2019
	Notional Amount: Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
2.5% 30-year MBS purchase commitments	$	300,000		$	297,223		$	297,625		$	402
2.5% 30-year MBS sale commitments		(100,000	)		(99,141	)		(99,266	)		(125	)
3.0% 30-year MBS purchase commitments		550,000			552,039			554,383			2,344
3.0% 30-year MBS sale commitments		(350,000	)		(351,324	)		(352,789	)		(1,465	)
3.5% 30-year MBS purchase commitments		300,000			305,703			306,656			953
3.5% 30-year MBS sale commitments		(50,000	)		(51,062	)		(51,109	)		(47	)
4.0% 30-year MBS purchase commitments		300,000			309,699			310,078			379
4.0% 30-year MBS sale commitments		(300,000	)		(310,164	)		(310,094	)		70
4.5% 30-year MBS purchase commitments		150,000			156,773			156,750			(23	)
4.5% 30-year MBS sale commitments		(250,000	)		(260,742	)		(261,250	)		(508	)
Total TBA commitments, net	$	550,000		$	549,004		$	550,984		$	1,980

	December 31, 2018
	Notional Amount: Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
5.0% 30-year MBS purchase commitments	$	100,000		$	103,750		$	104,047		$	297
5.0% 30-year MBS sale commitments		(100,000	)		(104,188	)		(104,047	)		141
Total TBA commitments, net	$	—		$	(438	)	$	—		$	438

Derivative Instrument Gains and Losses

The following tables provide information about the derivative gains and losses recognized within the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest rate derivatives:
Interest rate swaps:
Net interest income ⁽¹⁾	$	3,769		$	2,483		$	8,516		$	1,667
Unrealized (losses) gains, net		(18,759	)		3,780			(82,250	)		54,637
(Losses) gains realized upon early termination, net		(56,367	)		10,314			(55,189	)		20,483
Total interest rate swap (losses) gains, net		(71,357	)		16,577			(128,923	)		76,787
U.S. Treasury note futures, net		(7,021	)		6,160			(13,725	)		18,480
Options on U.S. Treasury note futures, net		76			—			76			—
Total interest rate derivative (losses) gains, net		(78,302	)		22,737			(142,572	)		95,267
TBA and specified agency MBS commitments:
TBA dollar roll income ⁽²⁾		1,995			6,742			3,415			13,385
Other gains (losses) on agency MBS commitments, net		7,235			(13,427	)		14,880			(52,446	)
Total gains (losses) on agency MBS commitments, net		9,230			(6,685	)		18,295			(39,061	)
Total derivative (losses) gains, net	$	(69,072	)	$	16,052		$	(124,277	)	$	56,206

(1)

Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Also includes “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrally cleared interest rate swap agreements.

(2)

Represents the price discount of forward-settling TBA purchases relative to a contemporaneously executed “spot” TBA sale, which economically equates to net interest income that is earned ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward-settling purchase.

Derivative Instrument Activity

The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:

	For the Three Months Ended June 30, 2019
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	2,850,000	$	650,000	$	—		$	(900,000	)	$	2,600,000
10-year U.S. Treasury note futures		215,000		386,600		(340,000	)		(106,600	)		155,000
Sold call options on 10-year U.S. Treasury note futures		—		250,000		(250,000	)		—			—
Purchased call options on 10-year U.S. Treasury note futures		—		500,000		(500,000	)		—			—
Commitments to purchase (sell) MBS, net		900,000		2,570,000		(2,920,000	)		—			550,000

	For the Three Months Ended June 30, 2018
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	3,525,000	$	300,000	$	—		$	(500,000	)	$	3,325,000
10-year U.S. Treasury note futures		850,000		900,000		(1,050,000	)		—			700,000
Commitments to purchase (sell) MBS, net		1,415,000		3,865,000		(4,180,000	)		—			1,100,000

	For the Six Months Ended June 30, 2019
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	3,100,000	$	1,050,000	$	—		$	(1,550,000	)	$	2,600,000
10-year U.S. Treasury note futures		320,000		826,600		(730,000	)		(261,600	)		155,000
Sold call options on 10-year U.S. Treasury note futures		—		250,000		(250,000	)		—			—
Purchased call options on 10-year U.S. Treasury note futures		—		500,000		(500,000	)		—			—
Commitments to purchase (sell) MBS, net		—		4,720,000		(4,170,000	)		—			550,000

	For the Six Months Ended June 30, 2018
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	3,600,000	$	550,000	$	—		$	(825,000	)	$	3,325,000
5-year U.S. Treasury note futures		21,600		—		(21,600	)		—			—
10-year U.S. Treasury note futures		650,000		1,850,000		(1,800,000	)		—			700,000
Commitments to purchase (sell) MBS, net		1,265,000		8,120,000		(8,285,000	)		—			1,100,000

Cash Collateral Posted and Received for Derivative and Other Financial Instruments

The following table presents information about the cash collateral posted and received by the Company in respect of its derivative and other financial instruments, which is included in the line item “deposits, net” in the accompanying consolidated balance sheets, for the dates indicated:

	June 30, 2019		December 31, 2018
Cash collateral posted for:
Interest rate swaps (cash initial margin)	$	31,246	$	54,883
U.S. Treasury note futures (cash initial margin)		—		6,169
Unsettled MBS trades and TBA commitments, net		1		—
Total cash collateral posted, net	$	31,247	$	61,052

As of December 31, 2018, the Company had received $438 of cash collateral in respect of its forward-settling TBA commitments. The Company recognized a corresponding obligation to return this cash collateral to its counterparties, which is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

Note 6. Offsetting of Financial Assets and Liabilities

The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as collateralized short-term financing arrangements on a gross basis.

Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.

The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements, and associated collateral, including those subject to master netting (or similar) arrangements:

	As of June 30, 2019
	Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets					Net Amount
							Financial Instruments ⁽¹⁾			Cash Collateral ⁽²⁾
Assets:
Derivative instruments:
Interest rate swaps	$	1,220	$	—	$	1,220	$	—		$	—	$	1,220
TBA commitments		5,023		—		5,023		(3,043	)		—		1,980
Total derivative instruments		6,243		—		6,243		(3,043	)		—		3,200
Total assets	$	6,243	$	—	$	6,243	$	(3,043	)	$	—	$	3,200
Liabilities:
Derivative instruments:
10-year U.S. Treasury note futures	$	88	$	—	$	88	$	—		$	—	$	88
TBA commitments		3,043		—		3,043		(3,043	)		—		—
Total derivative instruments		3,131		—		3,131		(3,043	)		—		88
Repurchase agreements		3,531,539		—		3,531,539		(3,531,539	)		—		—
Total liabilities	$	3,534,670	$	—	$	3,534,670	$	(3,534,582	)	$	—	$	88

	As of December 31, 2018
	Gross Amount Recognized		Amount Offset in the Consolidated Balance Sheets		Net Amount Presented in the Consolidated Balance Sheets		Gross Amount Not Offset in the Consolidated Balance Sheets						Net Amount
							Financial Instruments ⁽¹⁾			Cash Collateral ⁽²⁾
Assets:
Derivative instruments:
TBA commitments	$	438	$	—	$	438	$	—		$	(438	)	$	—
Total derivative instruments		438		—		438		—			(438	)		—
Total assets	$	438	$	—	$	438	$	—		$	(438	)	$	—
Liabilities:
Derivative instruments:
Interest rate swaps	$	5,709	$	—	$	5,709	$	—		$	(5,709	)	$	—
10-year U.S. Treasury note futures		1,250		—		1,250		—			(1,250	)		—
Total derivative instruments		6,959		—		6,959		—			(6,959	)		—
Repurchase agreements		3,721,629		—		3,721,629		(3,721,629	)		—			—
Total liabilities	$	3,728,588	$	—	$	3,728,588	$	(3,721,629	)	$	(6,959	)	$	—

⁽¹⁾	Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

⁽²⁾	Does not include the amount of cash collateral pledged in respect of derivative instruments that exceeds the associated derivative liability presented in the consolidated balance sheets.

Note 7. Fair Value Measurements

Fair Value of Financial Instruments

The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest

priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:


	Level 1 Inputs -	Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company at the measurement date;


	Level 2 Inputs -	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and


	Level 3 Inputs -	Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use.

The Company measures the fair value of the following assets and liabilities:

Mortgage-backed securities

Agency MBS - The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement date.

Derivative instruments

Exchange-traded derivative instruments - Exchange-traded derivative instruments, which include U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices for identical instruments in liquid markets.

Interest rate swaps - Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally cleared interest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, three-month LIBOR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the overnight index swap rate curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value.

Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the commitment under measurement.

Other

Long-term unsecured debt - As of June 30, 2019 and December 31, 2018, the carrying value of the Company’s long-term unsecured debt was $74,216 and $74,104, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’s estimate of the fair value of long-term unsecured debt is $71,384 and $66,562 as of June 30, 2019 and December 31, 2018, respectively. The Company’s Senior Notes, which are publicly traded on the New York Stock Exchange, are classified within Level 1 of the fair value hierarchy. Trust preferred debt is classified within Level 2 of the fair value hierarchy as the fair value is estimated based on the quoted prices of the Company’s publicly traded Senior Notes.

Investments in equity securities of non-public companies and investment funds – As of June 30, 2019 and December 31, 2018, the Company had investment in equity securities and investment funds measured at fair value of $6,026 and $6,115, respectively, which is included in the line item “other assets” in the accompanying consolidated balance sheets. ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), effective January 1, 2018, requires entities to measure investments in equity securities at fair value, unless fair value measurement is impractical, with changes in fair value recognized in

current period earnings. Upon the adoption of ASU No. 2016-01, the Company recognized a cumulative-effect increase of $4,059 (net of taxes) in stockholders’ equity representing, as of January 1, 2018, the excess of fair value over historical cost of its investments in equity securities that were previously carried at their historical cost (net of impairments).

Investments in equity securities and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities and investment funds are not readily determinable. Accordingly, for its investments in equity securities, the Company estimates fair value by estimating the enterprise value of the investee which it then allocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration of recent investments in, or tender offers for, the equity securities of the investee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in estimating the fair value of an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value the equity cash flows available for distribution and the terminal value of the entity. As of June 30, 2019 and December 31, 2018, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were 91 percent, 8 percent, and 12 percent, respectively. For its investments in investment funds, the Company estimates fair value based upon the investee’s net asset value per share.

Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, deposits, receivables, repurchase agreements, payables, and other assets and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.

Fair Value Hierarchy

Financial Instruments Measured at Fair Value on a Recurring Basis

The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of June 30, 2019 and December 31, 2018. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2019
	Total			Level 1			Level 2			Level 3
MBS
Trading:
Agency MBS	$	3,414,580		$	—		$	3,414,580		$	—
Private-label MBS		26			—			—			26
Total MBS		3,414,606			—			3,414,580			26
Derivative assets		6,243			—			6,243			—
Derivative liabilities		(3,131	)		(88	)		(3,043	)		—
Other assets		6,026			—			—			6,026
Total	$	3,423,744		$	(88	)	$	3,417,780		$	6,052

	December 31, 2018
	Total			Level 1			Level 2			Level 3
MBS
Trading:
Agency MBS	$	3,982,106		$	—		$	3,982,106		$	—
Private-label MBS		24			—			—			24
Total MBS		3,982,130			—			3,982,106			24
Derivative assets		438			—			438			—
Derivative liabilities		(6,959	)		(1,250	)		(5,709	)		—
Other assets		6,115			—			—			6,115
Total	$	3,981,724		$	(1,250	)	$	3,976,835		$	6,139

Level 3 Financial Assets and Liabilities

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 investments that are measured at fair value on a recurring basis for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Beginning balance	$	5,904		$	5,926		$	6,139		$	515
Investments in equity securities measured at fair value beginning January 1, 2018		—			—			—			5,362
Included in investment gain (loss), net		149			312			(7	)		364
Purchases		—			—			—			—
Sales		—			—			—			—
Payments, net		(15	)		(13	)		(95	)		(20	)
Accretion of discount		14			10			15			14
Ending balance	$	6,052		$	6,235		$	6,052		$	6,235
Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date	$	149		$	312		$	(7	)	$	364

Note 8. Income Taxes

For its tax years ended December 31, 2018 and earlier, Arlington Asset was subject to taxation as a corporation under Subchapter C of the Internal Revenue Code. On December 27, 2018, the Company’s Board of Directors approved a plan for Arlington Asset to elect to be taxed and to operate in a manner that will allow it to qualify as a REIT under the Internal Revenue Code commencing with its taxable year ending December 31, 2019. As a REIT, the Company will be required to distribute annually 90% of its REIT taxable income. So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. Federal or state corporate income taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders on a timely basis. At present, it is the Company’s intention to distribute 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

As of June 30, 2019, the Company had estimated net operating loss (“NOL”) carryforwards of $14,543 that can be used to offset future taxable ordinary income. The Company’s NOL carryforwards begin to expire in 2028. As of June 30, 2019, the Company had estimated net capital loss (“NCL”) carryforwards of $411,434 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $128,170 in 2019, $102,322 in 2020, $66,862 in 2021, $3,763 in 2022 and $110,317 in 2023. If the Company were to use its NOL carryforwards to offset taxable ordinary income and/or use its NCL carryforwards to offset net capital gains, the Company’s required income distribution as a REIT would be reduced accordingly.

Through December 31, 2017, the Company was subject to federal alternative minimum tax (“AMT”) on its taxable income and gains that were not offset by its NOL and NCL carryforwards with any AMT credit carryforwards available to offset future regular tax liabilities. As part of the Tax Cuts and Jobs Act, the corporate AMT was repealed for tax years beginning after December 31, 2017 with any AMT credit carryforward after that date continuing to be available to offset a taxpayer’s future regular tax liability. In addition, for tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryforwards exceed the regular tax liability, 50% of the excess AMT credit carryforwards would be refundable in that year with any remaining AMT credit carryforwards fully refundable in 2021. As a result, the realizability of the Company’s AMT credit carryforward is certain and will be realized as either a cash refund or as an offset to future regular tax liabilities or a combination of both. As of June 30, 2019 and December 31, 2018, the Company had an AMT credit carryforward of $9,132 included as a receivable in “other assets” on the accompanying consolidated balance sheets.

The Company recognizes uncertain tax positions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return and the financial statements. As of June 30, 2019 and December 31, 2018, the Company assessed the need for recording a provision for any uncertain tax position and has made the determination that such provision is not necessary.

On May 29, 2018, the Company received an assessment of $9,380 from Arlington County, Virginia for a business, professional and occupation license (“BPOL”) tax for 2018. The BPOL tax is a local privilege tax on a business’ gross receipts for conducting

business activities subject to licensure within Arlington County. The Company has not been assessed or paid any such BPOL tax prior to 2018. The Company does not believe it is subject to the BPOL tax, and on June 28, 2018, the Company filed an administrative appeal with Arlington County. On August 1, 2018, the Company received a denial of its administrative appeal from Arlington County and, subsequently, the Company filed an administrative appeal with the Tax Commissioner of Virginia on September 27, 2018. On June 21, 2019, the Company received a determination from the Tax Commissioner of Virginia stating that it believes the Company is engaged in a licensable privilege subject to the BPOL tax, however it stated that certain gross receipts of the Company are exempt from the BPOL tax. The Tax Commissioner of Virginia requested that Arlington County adjust its BPOL tax assessment for 2018 to remove these certain gross receipts in the determination of the county’s assessment. On July 18, 2019, the Company received a preliminary revised assessment of $436 from Arlington County for BPOL tax for 2018. Also, on July 18, 2019, the Company received a preliminary assessment of $471 from Arlington County for BPOL tax for 2019. The Company intends to fully contest the 2018 and 2019 assessments. In addition, the tax years 2016 and 2017 remain subject to examination by Arlington County, although the county has previously informally indicated that it did not intend to pursue assessments for those years at such time. As of June 30, 2019, the Company does not believe that it is probable that is has incurred a BPOL tax liability. As such, the Company has not recognized a BPOL tax liability or an associated expense in its consolidated financial statements for the current or prior periods. If the Company were to become subject to the BPOL tax, the Company would be required to pay the full $907 of assessments for tax years 2018 and 2019 plus potential late penalty fees and interest charges.

Note 9. Earnings (Loss) Per Share

Basic earnings (loss) per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested shares of restricted stock and performance share units. The following tables present the computations of basic and diluted earnings (loss) per share for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
(Shares in thousands)	2019			2018			2019			2018
Basic weighted-average common shares outstanding		36,533			28,210			34,803			28,204
Performance share units and unvested restricted stock		—			—			—			—
Diluted weighted-average common shares outstanding		36,533			28,210			34,803			28,204
Net loss attributable to common stock	$	(24,299	)	$	(3,757	)	$	(6,983	)	$	(60,277	)
Basic loss per common share	$	(0.67	)	$	(0.13	)	$	(0.20	)	$	(2.14	)
Diluted loss per common share	$	(0.67	)	$	(0.13	)	$	(0.20	)	$	(2.14	)

The diluted loss per share for the three and six months ended June 30, 2019 did not include the antidilutive effect of 110,442 and 98,262 shares of unvested shares of restricted stock and performance share units, respectively. The diluted loss per share for the three and six months ended June 30, 2018 did not include the antidilutive effect of 252,962 and 242,925 shares of unvested shares of restricted stock and performance share units, respectively.

Note 10. Stockholders’ Equity

Common Stock

The Company has authorized common share capital of 450,000,000 shares of Class A common stock, par value $0.01 per share, and 100,000,000 shares of Class B common stock, par value $0.01 per share. Holders of the Class A and Class B common stock are entitled to one vote and three votes per share, respectively, on all matters voted upon by the shareholders. Shares of Class B common stock are convertible into shares of Class A common stock on a one-for-one basis at the option of the Company in certain circumstances including either (i) upon sale or other transfer, or (ii) at the time the holder of such shares of Class B common stock ceases to be employed by the Company. As of June 30, 2019 and December 31, 2018, there were no outstanding shares of Class B common stock. The Class A common stock is publicly traded on the New York Stock Exchange under the ticker symbol “AI.”

Common Stock Dividends

The Board of Directors evaluates common stock dividends on a quarterly basis and, in its sole discretion, approves the payment of dividends. The Company’s common stock dividend payments, if any, may vary significantly from quarter to quarter. The Board of Directors has approved and the Company declared and paid the following dividends on its common stock to date in 2019:

Quarter Ended

Dividend

Amount

Declaration Date

Record Date

Pay Date

June 30

0.225

June 24

July 5

July 31

March 31

0.375

March 18

March 29

April 30

The Board of Directors approved and the Company declared and paid the following dividends for 2018:

Quarter Ended	Dividend Amount		Declaration Date	Record Date	Pay Date
December 31	$	0.375	December 13	December 31	January 31, 2019
September 30		0.375	September 13	September 28	October 31
June 30		0.375	June 14	June 29	July 31
March 31		0.550	March 15	March 29	April 30

Common Equity Offerings

On February 22, 2019, the Company completed a public offering in which 6,000,000 shares of its Class A common stock were sold at a price of $8.16 per share for proceeds net of offering expenses of $48,827.

Common Equity Distribution Agreements

On February 22, 2017, the Company entered into separate common equity distribution agreements (the “Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 6,000,000 shares of the Company’s Class A common stock. On August 10, 2018, the Company entered into separate amendments to the Equity Distribution Agreements (the “Amended Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, B. Riley FBR, Inc. (formerly, FBR Capital Markets & Co.), JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to 12,597,423 shares of the Company’s Class A common stock.

Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.

The following table provides information about the issuances of common stock under the common equity distribution agreements for the periods indicated:

Class A Common Stock Issuances	Year Ended December 31, 2018
Shares issued		2,226,557
Weighted average public offering price	$	10.19
Net proceeds ⁽¹⁾	$	22,326

(1)

Net of selling commissions and expenses.

As of June 30, 2019, the Company had 11,302,160 shares of Class A common stock available for sale under the Amended Equity Distribution Agreements.

Common Share Repurchase Program

The Company’s Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to 2,000,000 shares of Class A common stock (the “Repurchase Program”). Repurchases under the Repurchase Program may be made

from time to time on the open market and in private transactions at management’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of Class A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded using the Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspended or terminated at any time without prior notice. There were no shares repurchased by the Company under the Repurchase Program during the three and six months ended June 30, 2019 and the year ended December 31, 2018. As of June 30, 2019, there remain available for repurchase 1,951,305 shares of Class A common stock under the Repurchase Program.

Preferred Stock

The Company has authorized preferred share capital of (i) 100,000 shares designated as Series A Preferred Stock that is unissued; (ii) 2,000,000 shares designated as 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”), par value of $0.01 per share; (iii) 2,500,000 shares designated as 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”), par value of $0.01 per share; and (iv) 20,400,000 shares of undesignated preferred stock. The Company’s Board of Directors has the authority, without further action by the shareholders, to issue additional preferred stock in one or more series and to fix the terms and rights of the preferred stock. The Company’s preferred stock ranks senior to its common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution, or winding up of the Company. The Company’s preferred stock ranks on parity with each other. The Series B Preferred Stock and Series C Preferred Stock are publicly traded on the New York Stock Exchange under the ticker symbols “AI PrB” and “AI PrC,” respectively.

The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option commencing on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. We have declared and paid all required quarterly dividends on the Company’s Series B Preferred Stock to date in 2019.

On March 12, 2019, the Company completed an initial public offering in which 1,200,000 shares of its Series C Preferred Stock were issued to the public at a public offering price of $25.00 per share for proceeds net of underwriting discounts and commissions and expenses of $28,944.

The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series C Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum of the $25.00 per share liquidation preference. Shares of Series C Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve the Company’s qualification as a REIT. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible into shares of the Company’s common stock. Dividends will be payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared, beginning on June 30, 2019. The first dividend of $0.61875 per share, paid on July 1, 2019, was considered a long first dividend period from the original date of issuance. We have declared and paid all required quarterly dividends on the Company’s Series C Preferred Stock to date in 2019.

Preferred Equity Distribution Agreements

On May 16, 2017, the Company entered into an equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC, pursuant to which the Company may offer and sell, from time to time, up to 1,865,000 shares of the Company’s Series B Preferred Stock. On March 21, 2019, the Company entered into an amended and restated equity distribution agreement (“Amended Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC, B. Riley FBR, Inc., Compass Point Research and Trading, LLC and Ladenburg Thalmann & Co. Inc. (collectively, the “Series B Preferred Equity Agents”), pursuant to which the Company may offer and sell, from time to time, up to 1,647,370 shares of the Company’s Series B Preferred Stock. Pursuant to the Amended Series B Preferred Equity Distribution Agreement, shares of the Company’s Series B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on

the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.

The following table provides information about the issuances of preferred stock under the preferred equity distribution agreements for the periods indicated:

Series B Preferred Stock Issuances	Six Months Ended June 30, 2019		Year Ended December 31, 2018
Shares issued		3,444		47,304
Weighted average public offering price	$	22.39	$	24.75
Net proceeds ⁽¹⁾	$	76	$	1,137

(1)

Net of selling commissions and expenses.

As of June 30, 2019, the Company had 1,645,961 shares of Series B Preferred stock available for sale under the Amended Series B Preferred Equity Distribution Agreement.

Shareholder Rights Agreement

On June 1, 2009, the Board of Directors approved a shareholder rights agreement (“Rights Plan”) and the Company’s shareholders approved the Rights Plan at its annual meeting of shareholders on June 2, 2010. On April 9, 2018, the Board of Directors approved a first amendment to the Rights Plan (“First Amendment”) to extend the term for an additional three years and the Company’s shareholders approved the First Amendment at its annual meeting of shareholders on June 14, 2018.

Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of 4.9% or more of the outstanding shares of our Class A common stock upon a determination by our Board of Directors (an “Acquiring Person”), all of our other Class A and Class B common shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person.

The Board of Directors adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOL carryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the Code. The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if it experienced an “ownership change” under Section 382 of the Code. In general, an “ownership change” would occur if there is a cumulative change in the ownership of the Company’s common stock of more than 50% by one or more “5% shareholders” during a three-year period. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock, each, an Acquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.

The Rights Plan, as amended, and any outstanding rights will expire at the earliest of (i) June 4, 2022, (ii) the time at which the rights are redeemed or exchanged pursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Code or any successor statute if the Board of Directors determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, or (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise requires or provides, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” refer to Arlington Asset Investment Corp. (“Arlington Asset”) and its subsidiaries. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The discussion of our consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, please see “Cautionary Statement About Forward-Looking Information” in Item 3 of Part I of this Quarterly Report on Form 10-Q and the risk factors included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.

Our Company

We are an investment firm that focuses on acquiring and holding a levered portfolio of residential mortgage-backed securities (“MBS”), consisting of agency MBS and private-label MBS. Agency MBS include residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government agency or government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Government National Mortgage Association (“Ginnie Mae”). Private-label MBS, or non-agency MBS, include residential MBS that are not guaranteed by a GSE or the U.S. government. As of June 30, 2019, nearly all of our investment capital was allocated to agency MBS.

We leverage prudently our investment portfolio so as to increase potential returns to our shareholders. We fund our investments primarily through short-term financing arrangements, principally through repurchase agreements. We enter into various hedging transactions to mitigate the interest rate sensitivity of our cost of borrowing and the value of our MBS portfolio.

For our tax years ended December 31, 2018 and earlier, we were taxed as a C corporation for U.S. federal tax purposes. Commencing with our taxable year ending December 31, 2019, we intend to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT we will be required to distribute annually 90% of our REIT taxable income (subject to certain adjustments). So long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate income taxes on our taxable income that we distribute to our shareholders on a timely basis. At present, it is our intention to distribute 100% of our taxable income, although we will not be required to do so. We intend to make distributions of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

We are a Virginia corporation that is internally managed and do not have an external investment advisor.

Factors that Affect our Results of Operations and Financial Condition

Our business is materially affected by a variety of industry and economic factors, including:

•

conditions in the global financial markets and economic conditions generally;

•

changes in interest rates and prepayment rates;

•

conditions in the residential real estate and mortgage markets;

•

actions taken by the U.S. government, U.S. Federal Reserve, the U.S. Treasury and foreign central banks;

•

changes in laws and regulations and industry practices; and

•

other market developments.

Current Market Conditions and Trends

The 10-year U.S. Treasury rate was 2.01% as of June 30, 2019, a 40 basis point decrease from the prior quarter end. Although the U.S. Treasury curve continues to remain relatively flat from a historical curve, the U.S. Treasury rate curve steepened during the second quarter as the spread between the 2-year and 10-year U.S. Treasury rate widened eleven basis points with the decline in the short-end outpacing the long-end of the interest rate curve. The spread between 10-year U.S. Treasury rates and interest rate swaps

widened five basis points during the second quarter of 2019 with the 10-year swap rate ending at 1.96% as of June 30, 2019. During the second quarter of 2019, higher market volatility and other factors led to the spread between the market yield on agency MBS and benchmark interest rates widening modestly resulting in the pricing of agency MBS underperforming interest rate hedges. In addition, lower mortgage rates have increased prepayment speed expectations of fixed-rate agency MBS. As a result, pay-up premiums for fixed-rate agency MBS backed by specified pools of mortgage loans selected for their lower propensity for prepayment increased meaningfully during the second quarter of 2019.

The Federal Open Market Committee (“FOMC”) announced on June 19, 2019 that it would maintain the target federal funds rate at the current range of 2.25% to 2.50%. In its statement, the FOMC stated it continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the FOMC’s symmetric 2% objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the FOMC stated that it will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective. Market reaction to the FOMC commentary was an increased expectation of rate cuts in the target federal funds rate. Based on federal fund futures prices, market participants currently expect that the FOMC will lower the target federal funds rate by approximately 75 basis points over the next six months.

Earlier in the year after its March 20, 2019 meeting, the FOMC also stated that it would modify its previously announced balance sheet normalization policy of gradually decreasing its reinvestment of U.S. Treasury securities and agency MBS. More specifically, the FOMC stated that it intends to slow the pace of reduction of its holdings of U.S. Treasury securities through the end of September 2019 with the goal of generally maintaining its aggregate securities holdings thereafter; however, the FOMC stated that it intends to continue to allow its holdings of agency MBS to decline with any principal payments from agency MBS reinvested in U.S. Treasury securities beginning in October 2019. At its June 19, 2019 meeting, the FOMC reaffirmed its current path of balance sheet normalization.

During the second quarter of 2019, prepayment speeds in the fixed-rate 30-year residential mortgage market increased meaningfully from the prior quarter. Prepayment speeds are expected to remain elevated in the near term in response to the decline in mortgage rates as a result of the decrease in the 10-year U.S. Treasury rate during 2019. Housing prices continue to increase at a pace in excess of the rate of inflation as evidenced by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA index reporting a 3.5% annual gain in April 2019. Although year-over-year price gains remain positive, the recent pace of home price gains has continued a trend of broad-based price moderation toward historical long-term average home price appreciation.

The following table presents certain key market data as of the dates indicated:

	June 30, 2018			September 30, 2018			December 31, 2018			March 31, 2019			June 30, 2019			Change - Second Quarter 2019

30-Year FNMA Fixed Rate MBS ⁽¹⁾
3.0%	$	96.80		$	95.64		$	97.36		$	99.58		$	100.80		$	1.22
3.5%		99.45			98.39			99.83			101.39			102.20			0.81
4.0%		101.92			100.95			101.83			102.86			103.33			0.47
4.5%		104.08			103.14			103.45			104.17			104.48			0.31

U.S. Treasury Rates (UST)
2-year UST		2.53	%		2.82	%		2.49	%		2.26	%		1.75	%		(0.51	)
3-year UST		2.62	%		2.88	%		2.46	%		2.21	%		1.71	%		(0.50	)
5-year UST		2.74	%		2.95	%		2.51	%		2.23	%		1.77	%		(0.46	)
7-year UST		2.82	%		3.02	%		2.59	%		2.31	%		1.88	%		(0.43	)
10-year UST		2.86	%		3.06	%		2.69	%		2.41	%		2.01	%		(0.40	)
30-year UST		2.99	%		3.21	%		3.02	%		2.82	%		2.53	%		(0.29	)
2-year UST to 10-year UST spread		0.33			0.24			0.20			0.15			0.26			0.11

Interest Rate Swap Rates
2-year swap		2.81	%		2.99	%		2.66	%		2.38	%		1.81	%		(0.57	)
3-year swap		2.86	%		3.05	%		2.59	%		2.31	%		1.74	%		(0.57	)
5-year swap		2.89	%		3.07	%		2.57	%		2.28	%		1.77	%		(0.51	)
7-year swap		2.90	%		3.09	%		2.62	%		2.32	%		1.84	%		(0.48	)
10-year swap		2.93	%		3.12	%		2.71	%		2.41	%		1.96	%		(0.45	)
30-year swap		2.93	%		3.13	%		2.84	%		2.58	%		2.21	%		(0.37	)
2-year swap to 2-year UST spread		0.28			0.17			0.17			0.12			0.06			(0.06	)
10-year swap to 10-year UST spread		0.07			0.06			0.02			-			(0.05	)		(0.05	)

London Interbank Offered Rates (LIBOR)
1-month LIBOR		2.09	%		2.26	%		2.50	%		2.49	%		2.40	%		(0.09	)
3-month LIBOR		2.34	%		2.40	%		2.81	%		2.60	%		2.32	%		(0.28	)

⁽¹⁾	Generic 30-year FNMA TBA price information, sourced from Bloomberg, provided for illustrative purposes only and is not meant to be reflective of the fair value of securities held by the Company.

Recent Regulatory Activity

Fannie Mae and Freddie Mac commenced their “Single Security Initiative” on June 3, 2019. The Single Security Initiative is a joint initiative of Fannie Mae and Freddie Mac, under the direction of the Federal Housing Finance Committee, to develop a common MBS (referred to as a “Uniform MBS” or “UMBS”) to ultimately facilitate the combination of the separate TBA markets of each of the respective GSEs into a single, larger and more liquid market. Existing Freddie Mac pass-through MBS have a 45-day delay remittance cycle, in which principal and interest payments are remitted to holders 45 days after such payments are due on the underlying mortgage loans, while Fannie Mae MBS have a 55-day delay remittance cycle. As a means to conform existing Freddie Mac MBS to Fannie Mae MBS, beginning on May 7, 2019, Freddie Mac will offer holders of existing Freddie Mac MBS the option to exchange their 45-day delay MBS for a 55-day delay “mirror” MBS which is ultimately collateralized by the same pool of loans as the original 45-day delay MBS for which it was exchanged. For each 45-day MBS that a holder elects to exchange, at the time of the exchange, Freddie Mac will provide an upfront cash payment to the holder as compensation for the prospective 10-day monthly payment delay. We may elect to exchange some, or potentially all, of our existing Freddie Mac 45-day delay MBS for mirror 55-day delay MBS, depending upon our evaluation of the economics of the compensation payment, among other considerations. Any exchanges of Freddie Mac MBS that we may ultimately elect to perform are not expected to materially impact our financial performance or operations.

We expect vigorous debate and discussion in a number of areas, including residential housing and mortgage reform, fiscal policy, monetary policy and healthcare, to continue over the next few years; however, we cannot be certain if or when any specific proposal or policy might be announced, emerge from committee or be approved by Congress, and if so, what the effects on us may be.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large US financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate and SOFR a secured lending rate, and SOFR is an overnight rate and LIBOR reflects term rates at different

maturities. These and other differences create the potential for basis risk between the two rates. The impact of any basis risk between LIBOR and SOFR may negatively affect our operating results. Any of these alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results.

At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented in the U.K. or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations. More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”

Executive Summary

The following are some key financial highlights for the quarter ended June 30, 2019:

•

$7.80 per common share of book value as of June 30, 2019, a decrease of 10.3% from the prior quarter end, primarily driven by a net investment loss on the Company’s hedged investment portfolio due to the underperformance of the pricing of the Company’s agency MBS investments relative to its interest rate hedges due to MBS spread widening

•	$0.225 per common share dividend, resulting in an economic loss of 7.8% measured as the change in book value per common share plus dividends declared during the quarter

•	$0.67 per diluted common share of GAAP net loss

•	$0.23 per diluted common share of non-GAAP core operating income ⁽¹⁾

•	Net interest income of $6.6 million compared to $7.9 million in the first quarter of 2019, driven primarily by:

lower weighted average agency MBS asset yields (3.21% versus 3.36%) due primarily to an increase in prepayment rates (10.16% versus 7.55%, annualized), partially offset by

a 4 basis point decrease in weighted average short-term secured financing costs

•	Economic net interest income, which includes TBA dollar roll income and net interest income earned or expense incurred from interest rate swaps, of $12.3 million compared to $14.1 million in the first quarter of 2019 ⁽¹⁾

⁽¹⁾	For further information on the use of non-GAAP core operating income and economic net interest income, which are non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Non-GAAP Core Operating Income.”

Portfolio Overview

The following table summarizes our MBS investment portfolio at fair value as of June 30, 2019 and December 31, 2018 (dollars in thousands):

	June 30, 2019		December 31, 2018
Specified agency MBS	$	3,414,580	$	3,982,106
Net long agency TBA dollar roll positions ⁽¹⁾		550,984		—
Total agency investment portfolio		3,965,564		3,982,106
Private-label interest-only MBS		26		24
Total MBS investment portfolio	$	3,965,590	$	3,982,130

⁽¹⁾

Represents the fair value of the agency MBS which underlie our TBA forward purchase and sale commitments executed as dollar roll transactions. In accordance with GAAP, our TBA forward purchase and sale commitments are reflected on the consolidated balance sheets as a component of “derivative assets, at fair value” and “derivative liabilities, at fair value,” with a collective net asset carrying value of $1,980 and $438 as of June 30, 2019 and December 31, 2018, respectively.

Agency MBS Investment Portfolio

Our specified agency MBS consisted of the following as of June 30, 2019 (dollars in thousands):

	Unpaid Principal Balance		Net Unamortized Purchase Premiums		Amortized Cost Basis		Net Unrealized Gain (Loss)		Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
30-year fixed rate:
3.5%	$	388,090	$	8,866	$	396,956	$	2,239	$	399,195	$	102.86		3.50	%		5.0
4.0%		1,973,458		86,919		2,060,377		17,963		2,078,340		105.31		4.00	%		5.4
4.5%		875,207		42,723		917,930		19,101		937,031		107.06		4.50	%		4.8
5.5%		12		—		12		2		14		111.38		5.50	%		5.5
Total/weighted-average	$	3,236,767	$	138,508	$	3,375,275	$	39,305	$	3,414,580	$	105.49		4.08	%		5.2

	Unpaid Principal Balance		Net Unamortized Purchase Premiums		Amortized Cost Basis		Net Unrealized Gain		Fair Value		Market Price		Coupon			Weighted Average Expected Remaining Life
Fannie Mae	$	1,616,831	$	70,474	$	1,687,305	$	21,037	$	1,708,342	$	105.66		4.10	%		5.3
Freddie Mac		1,619,936		68,034		1,687,970		18,268		1,706,238		105.33		4.05	%		5.2
Total/weighted-average	$	3,236,767	$	138,508	$	3,375,275	$	39,305	$	3,414,580	$	105.49		4.08	%		5.2

The actual constant prepayment rate for the Company’s agency MBS was 10.16% for the three months ended June 30, 2019. As of June 30, 2019, the Company’s agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 87% in specified pools of low balance loans while the remainder includes specified pools of loans originated in certain geographical areas, loans refinanced through the U.S. Government sponsored Home Affordable Refinance Program or with other characteristics selected for their relatively lower propensity for prepayment.

Our agency MBS investment portfolio also includes net long TBA positions, which are primarily the result of executing sequential series of “dollar roll” transactions that are settled on a net basis. In accordance with GAAP, we account for our net long TBA positions as derivative instruments. Information about the Company’s net long TBA positions as of June 30, 2019 is as follows (dollars in thousands):

	Notional Amount:
	Net Long (Short)			Implied			Implied			Net Carrying
	Position ⁽¹⁾			Cost Basis ⁽²⁾			Fair Value ⁽³⁾			Amount ⁽⁴⁾
2.5% 30-year MBS purchase commitments	$	300,000		$	297,223		$	297,625		$	402
2.5% 30-year MBS sale commitments		(100,000	)		(99,141	)		(99,266	)		(125	)
3.0% 30-year MBS purchase commitments		550,000			552,039			554,383			2,344
3.0% 30-year MBS sale commitments		(350,000	)		(351,324	)		(352,789	)		(1,465	)
3.5% 30-year MBS purchase commitments		300,000			305,703			306,656			953
3.5% 30-year MBS sale commitments		(50,000	)		(51,062	)		(51,109	)		(47	)
4.0% 30-year MBS purchase commitments		300,000			309,699			310,078			379
4.0% 30-year MBS sale commitments		(300,000	)		(310,164	)		(310,094	)		70
4.5% 30-year MBS purchase commitments		150,000			156,773			156,750			(23	)
4.5% 30-year MBS sale commitments		(250,000	)		(260,742	)		(261,250	)		(508	)
Total net long agency TBA dollar roll positions	$	550,000		$	549,004		$	550,984		$	1,980

⁽¹⁾	“Notional amount” represents the unpaid principal balance of the underlying agency MBS.

⁽²⁾	“Implied cost basis” represents the contractual forward price for the underlying agency MBS.

⁽³⁾	“Implied fair value” represents the current fair value of the underlying agency MBS.

⁽⁴⁾

“Net carrying amount” represents the difference between the implied cost basis and the current fair value of the underlying agency MBS. This amount is reflected on the Company’s consolidated balance sheets as a component of “derivative assets, at fair value” and “derivative liabilities, at fair value.”

Economic Hedging Instruments

The Company attempts to hedge a portion of its exposure to interest rate fluctuations associated with its agency MBS primarily through the use of interest rate hedging instruments. Specifically, these interest rate hedging instruments are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on the Company’s short-term financing arrangements. As of June 30, 2019, the interest rate hedging instruments primarily used by the Company were centrally cleared interest rate swap agreements and exchange-traded 10-year U.S. Treasury note futures.

The Company’s interest rate swap agreements represent agreements to make semiannual interest payments based upon a fixed interest rate and receive quarterly variable interest payments based upon the prevailing three-month LIBOR on the date of reset. Information about the Company’s outstanding interest rate swap agreements in effect as of June 30, 2019 is as follows (dollars in thousands):

			Weighted-average:
	Notional Amount		Fixed Pay Rate			Variable Receive Rate			Net Receive (Pay) Rate			Remaining Life (Years)
Years to maturity:
Less than 3 years	$	1,675,000		1.64	%		2.46	%		0.82	%		1.5
3 to less than 7 years		500,000		1.67	%		2.40	%		0.73	%		6.1
7 to less than 10 years		400,000		2.88	%		2.52	%		(0.36	)%		9.4
10 or more years		25,000		2.96	%		2.42	%		(0.54	)%		28.7
Total / weighted-average	$	2,600,000		1.85	%		2.46	%		0.61	%		3.9

In addition to interest rate swap agreements, the Company also has exchange-traded U.S. Treasury note futures that are short positions that mature on a quarterly basis. Upon the maturity date of these futures contracts in September 2019, the Company has the option to either net settle each contract in cash in an amount equal to the difference between the current fair value of the underlying U.S. Treasury note and the contractual sale price inherent to the futures contract, or to physically settle the contract by delivering the underlying U.S. Treasury note. Information about the Company’s outstanding U.S. Treasury note futures contracts as of June 30, 2019 is as follows (dollars in thousands):

		Maturity Date		Notional Amount
10-year U.S. Treasury note futures		September 2019		$	155,000

Results of Operations

Net Interest Income

Net interest income determined in accordance with GAAP primarily represents the interest income recognized from our investments in specified agency MBS and private-label MBS (including the amortization of purchase premiums and accretion of purchase discounts), net of the interest expense incurred from repurchase agreement financing arrangements or other short- and long-term borrowing transactions.

Net interest income determined in accordance with GAAP does not include TBA agency MBS dollar roll income, which we believe represents the economic equivalent of net interest income generated from our investments in non-specified fixed-rate agency MBS, nor does it include the net interest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income and the net interest income or expense from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section.

Investment Gain (Loss), Net

“Investment gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of investments in MBS classified as trading securities and periodic changes in the fair value (whether realized or unrealized) of derivative instruments.

General and Administrative Expenses

“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annual cash incentive compensation is based on meeting estimated annual performance measures and discretionary components. Non-cash stock-based compensation includes expenses associated with stock-based awards granted to employees, including the Company’s performance share units to executive officers that are earned only upon the attainment of Company performance measures over the relevant measurement period.

“Other general and administrative expenses” primarily consists of the following:

•

professional services expenses, including accounting, legal, and consulting fees;

•

insurance expenses, including liability and property insurance;

•

occupancy and equipment expense, including rental costs for our facilities, and depreciation and amortization of equipment and software;

•

fees and commissions related to transactions in interest rate derivative instruments;

•

Board of Director fees; and

•

other operating expenses, including information technology expenses, business development costs, public company reporting expenses, proxy solicitation expenses, corporate registration fees, office supplies and other miscellaneous expenses.

Three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018

The following table presents the net income (loss) available (attributable) to common stock reported for the three and six months ended June 30, 2019 and 2018, respectively (dollars in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest income	$	32,717		$	30,055		$	66,549		$	60,915
Interest expense		26,135			19,193			52,050			35,749
Net interest income		6,582			10,862			14,499			25,166
Investment advisory fee income		—			—			250			—
Investment loss, net		(26,683	)		(4,516	)		(12,880	)		(52,655	)
General and administrative expenses		(3,424	)		(3,461	)		(7,800	)		(7,758	)
(Loss) income before income taxes		(23,525	)		2,885			(5,931	)		(35,247	)
Income tax provision		—			6,493			—			24,744
Net loss		(23,525	)		(3,608	)		(5,931	)		(59,991	)
Dividend on preferred stock		(774	)		(149	)		(1,052	)		(286	)
Net loss attributable to common stock	$	(24,299	)	$	(3,757	)	$	(6,983	)	$	(60,277	)
Diluted loss per common share	$	(0.67	)	$	(0.13	)	$	(0.20	)	$	(2.14	)
Weighted-average diluted common shares outstanding		36,533			28,210			34,803			28,204

GAAP Net Interest Income

Net interest income determined in accordance with GAAP (“GAAP net interest income”) decreased $4.3 million, or 39.4%, from $10.9 million for the three months ended June 30, 2018 to $6.6 million for the three months ended June 30, 2019 and decreased $10.7 million, or 42.5%, from $25.2 million for the six months ended June 30, 2018 to $14.5 million for the six months ended June 30, 2019.

The decrease from the comparative periods is primarily attributable to:

•

a 68 and 86 basis point increase for the three and six months ended June 30, 2019, respectively, in the average interest costs of our short-term secured financing arrangements due primarily to increases in prevailing benchmark short-term interest rates, partially offset by

•

a 21 and 29 basis point increase for the three and six months ended June 30, 2019, respectively, in the average asset yields of our specified agency MBS due to reinvestments from portfolio repositioning and monthly paydowns into

higher current investment yields as a result of a rise in long-term interest rates and widening agency MBS spreads as well as a modest reduction in prepayment rates.

The components of GAAP net interest income from our MBS portfolio is summarized in the following tables for the periods indicated (dollars in thousands):

	Three Months Ended June 30,
	2019								2018
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	4,025,014	$	32,275			3.21	%	$	3,993,901	$	29,940			3.00	%
Other		—		442						—		115
	$	4,025,014		32,717			3.25	%	$	3,993,901		30,055			3.01	%
Short-term secured debt	$	3,728,583		(24,866	)		(2.64	)%	$	3,619,483		(17,936	)		(1.96	)%
Long-term unsecured debt		74,197		(1,269	)		(6.84	)%		73,973		(1,257	)		(6.80	)%
	$	3,802,780		(26,135	)		(2.72	)%	$	3,693,456		(19,193	)		(2.06	)%
Net interest income/spread ⁽¹⁾			$	6,582			0.61	%			$	10,862			1.05	%
Net interest margin ⁽¹⁾							0.78	%							1.21	%

	Six Months Ended June 30,
	2019								2018
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	4,011,527	$	65,845			3.28	%	$	4,061,987	$	60,665			2.99	%
Other		—		704						—		250
	$	4,011,527		66,549			3.32	%	$	4,061,987		60,915			3.00	%
Short-term secured debt	$	3,704,506		(49,509	)		(2.66	)%	$	3,675,051		(33,261	)		(1.80	)%
Long-term unsecured debt		74,169		(2,541	)		(6.85	)%		73,945		(2,488	)		(6.73	)%
	$	3,778,675		(52,050	)		(2.74	)%	$	3,748,996		(35,749	)		(1.90	)%
Net interest income/spread ⁽¹⁾			$	14,499			0.66	%			$	25,166			1.20	%
Net interest margin ⁽¹⁾							0.85	%							1.36	%

(1)

Net interest income/spread and net interest margin excludes interest on long-term unsecured debt.

The effects of changes in the composition of our investments on our GAAP net interest income from our MBS investment activities are summarized below (dollars in thousands):

	Three Months Ended June 30, 2019									Six Months Ended June 30, 2019
	vs.									vs.
	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Rate			Volume			Total Change			Rate			Volume			Total Change
Agency MBS	$	2,102		$	233		$	2,335		$	5,934		$	(754	)	$	5,180
Other		327			—			327			454			—			454
Short-term secured debt		(6,389	)		(541	)		(6,930	)		(15,982	)		(266	)		(16,248	)
Long-term unsecured debt		(8	)		(4	)		(12	)		(45	)		(8	)		(53	)
	$	(3,968	)	$	(312	)	$	(4,280	)	$	(9,639	)	$	(1,028	)	$	(10,667	)

Economic Net Interest Income

Economic net interest income, a non-GAAP financial measure, represents the interest income earned net of the interest expense incurred from all of our interest bearing financial instruments as well as the agency MBS which underlie, and are implicitly financed through, our TBA dollar roll transactions. Economic net interest income is comprised of the following: (i) net interest income determined in accordance with GAAP, (ii) TBA agency MBS “dollar roll” income, and (iii) net interest income earned or expense incurred from interest rate swap agreements. We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses. A full description of each of the three aforementioned components of economic net interest income is included within the “Non-GAAP Core Operating Income” section of this document.

The components of our economic net interest income are summarized in the following tables for the periods indicated (dollars in thousands):

	Three Months Ended June 30,
	2019								2018
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	4,025,014	$	32,275			3.21	%	$	3,993,901	$	29,940			3.00	%
TBA dollar rolls ⁽¹⁾		947,965		1,995			0.84	%		1,412,914		6,742			1.91	%
Other		—		442						—		115
Short-term secured debt		3,728,583		(24,866	)		(2.64	)%		3,619,483		(17,936	)		(1.96	)%
Interest rate swaps ⁽²⁾		2,895,663		3,769			0.52	%		3,415,591		2,483			0.29	%
Long-term unsecured debt		74,197		(1,269	)		(6.84	)%		73,973		(1,257	)		(6.80	)%
Economic net interest income/margin ⁽³⁾			$	12,346			1.10	%			$	20,087			1.58	%

	Six Months Ended June 30,
	2019								2018
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	4,011,527	$	65,845			3.28	%	$	4,061,987	$	60,665			2.99	%
TBA dollar rolls ⁽¹⁾		743,425		3,415			0.92	%		1,427,480		13,385			1.88	%
Other		—		704						—		250
Short-term secured debt		3,704,506		(49,509	)		(2.66	)%		3,675,051		(33,261	)		(1.80	)%
Interest rate swaps ⁽²⁾		2,995,537		8,516			0.57	%		3,507,796		1,667			0.10	%
Long-term unsecured debt		74,169		(2,541	)		(6.85	)%		73,945		(2,488	)		(6.73	)%
Economic net interest income/margin ⁽³⁾			$	26,430			1.22	%			$	40,218			1.56	%

(1)

TBA dollar roll average balance (average cost basis) is based upon the contractual price of the initial TBA purchase trade of each individual series of dollar roll transactions. TBA dollar roll income is net of implied financing costs.

(2)

Interest rate swap cost represents the weighted average net receive (pay) rate in effect for the period, adjusted for “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively.

(3)

Economic net interest margin rate excludes interest on long-term unsecured debt.

The effects of changes in the composition of our investments on our economic net interest income from our MBS investment and related funding and hedging activities are summarized below (dollars in thousands):

	Three Months Ended June 30, 2019									Six Months Ended June 30, 2019
	vs.									vs.
	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Rate			Volume			Total Change			Rate			Volume			Total Change
Agency MBS	$	2,102		$	233		$	2,335		$	5,934		$	(754	)	$	5,180
TBA dollar rolls		(2,528	)		(2,219	)		(4,747	)		(3,556	)		(6,414	)		(9,970	)
Other		327			—			327			454			—			454
Short-term secured debt		(6,389	)		(541	)		(6,930	)		(15,982	)		(266	)		(16,248	)
Interest rate swaps		1,664			(378	)		1,286			7,092			(243	)		6,849
Long-term unsecured debt		(8	)		(4	)		(12	)		(45	)		(8	)		(53	)
	$	(4,832	)	$	(2,909	)	$	(7,741	)	$	(6,103	)	$	(7,685	)	$	(13,788	)

Economic net interest income for the three and six months ended June 30, 2019 decreased relative to the comparative periods from the prior year due primarily to:

•

lower average leverage and portfolio volumes (primarily due to lower average TBA dollar roll volumes) and

•

higher financing costs on the unhedged portion of our short-term secured financing arrangements and implied TBA financing driven primarily by an increase in prevailing benchmark short-term interest rates, partially offset by

•

an increase in the average asset yields of our specified agency MBS due to reinvestments from portfolio repositioning and monthly paydowns into higher current investment yields as a result of a rise in long-term interest rates and widening agency MBS spreads as well as a modest reduction in prepayment rates.

Investment Advisory Fee Income

We formed a wholly-owned subsidiary, Rock Creek Investment Advisors, LLC (“Rock Creek”), which was approved as a registered investment adviser and is regulated under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), in the fourth quarter of 2018 and commenced operations in December 2018. Rock Creek provides investment advisory services to institutional clients on a separate account basis by investing primarily in agency MBS. Rock Creek earns investment management fee income based upon a percentage of the capital funded by a client to its separate managed account. During the six months ended June 30, 2019, we recognized $0.3 million in investment advisory fee income. No investment advisory fee income was recognized during the three months ended June 30, 2019.

Investment Gain (Loss), Net

As prevailing longer-term interest rates increase (decrease), the fair value of our investments in fixed rate agency MBS and TBA commitments generally decreases (increases). Conversely, the fair value of our interest rate hedging instruments increases (decreases) in response to increases (decreases) in prevailing interest rates. While our interest rate hedging instruments are designed to mitigate the sensitivity of the fair value of our agency MBS portfolio to fluctuations in benchmark interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, which is the risk of an increase of the market spread between the yield on our agency MBS and the benchmark yield on U.S. Treasury securities or interest rate swaps. Accordingly, irrespective of fluctuations in interest rates, an increase (decrease) in agency MBS spreads will generally result in the underperformance (outperformance) of the values of agency MBS relative to interest rate hedging instruments.

The following table presents information about the gains and losses recognized due to the changes in the fair value of our agency MBS, TBA transactions, and interest rate hedging instruments for the periods indicated (dollars in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Gains (losses) on trading investments, net	$	42,239		$	(20,892	)	$	111,407		$	(109,235	)
TBA and specified agency MBS commitments, net:
TBA dollar roll income		1,995			6,742			3,415			13,385
Other gains (losses) from TBA and specified agency MBS commitments, net		7,235			(13,427	)		14,880			(52,446	)
Total gains (losses) on TBA and specified agency MBS commitments, net		9,230			(6,685	)		18,295			(39,061	)
Interest rate derivatives:
Net interest income on interest rate swaps		3,769			2,483			8,516			1,667
Other (losses) gains from interest rate derivative instruments, net		(82,071	)		20,254			(151,088	)		93,600
Total (losses) gains on interest rate derivatives, net		(78,302	)		22,737			(142,572	)		95,267
Other, net		150			324			(10	)		374
Investment loss, net	$	(26,683	)	$	(4,516	)	$	(12,880	)	$	(52,655	)

During the three and six months ended June 30, 2019 and 2018, MBS spreads widened which resulted in the underperformance of our investments in agency MBS and TBA commitments relative to our interest rate hedging instruments.

General and Administrative Expenses

General and administrative expenses decreased by $0.1 million, or 2.9%, from $3.5 million for the three months ended June 30, 2018 to $3.4 million for the three months ended June 30, 2019. General and administrative expenses remained at $7.8 million for the six months ended June 30, 2019 and 2018.

Compensation and benefits expense increased by $0.1 million, or 4.8%, from $2.1 million for the three months ended June 30, 2018 to $2.2 million for the three months ended June 30, 2019. Compensation and benefits expense increased by $0.2 million, or 3.9%, from the $5.1 million for the six months ended June 30, 2018 to $5.3 million for the six months ended June 30, 2019.

Other general and administrative expenses decreased by $0.2 million, or 14.3%, from $1.4 million for the three months ended June 30, 2018 to $1.2 million for the three months ended June 30, 2019. Other general and administrative expenses decreased by $0.2 million, or 7.4%, from the $2.7 million for the six months ended June 30, 2018 to $2.5 million for the six months ended June 30, 2019.

Income Tax Provision

On December 27, 2018, our Board of Directors approved a plan for us to elect to be taxed and to operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2019. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate income taxes on our taxable income to the extent that we distribute 100% of our taxable income to our shareholders on a timely basis. For taxable years ended December 31, 2018 and prior, we were subject to taxation as a corporation under Subchapter C of the Internal Revenue Code.

Non-GAAP Core Operating Income

In addition to the results of operations determined in accordance with generally accepted accounting principles as consistently applied in the United States (“GAAP”), we reported “non-GAAP core operating income.” We define core operating income as “economic net interest income” and investment advisory fee income less “core general and administrative expenses.”

Economic Net Interest Income

We believe that economic net interest income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy, prior to the deduction of core general and administrative expenses.

•

Net interest income determined in accordance with GAAP. Net interest income determined in accordance with GAAP primarily represents the interest income recognized from our investments in specified agency MBS and private-label MBS (including the amortization of purchase premiums and accretion of purchase discounts), net of the interest expense incurred from repurchase agreement financing arrangements or other short- and long-term borrowing transactions.

•

TBA agency MBS dollar roll income. Dollar roll income represents the economic equivalent of net interest income (implied interest income net of financing costs) generated from our investments in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as “dollar roll” transactions). Dollar roll income is generated as a result of delaying, or “rolling,” the settlement of a forward-settling purchase of a TBA agency MBS by entering into an offsetting “spot” sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale. The price discount of the forward-settling purchase relative to the contemporaneously executed spot sale reflects compensation for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income as the excess of the spot sale price over the forward-settling purchase price, and recognize this amount ratably over the period beginning on the settlement date of the sale and ending on the settlement date of the forward purchase. In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section.

From time to time, we may enter into forward-settling TBA agency MBS sale commitments (known as a “net short” TBA position) as a means of economically hedging a portion of the interest rate sensitivity of our agency MBS investment portfolio. When we delay (or “roll”) the settlement of a net short TBA position, the price discount of the forward-settling sale relative to the contemporaneously executed spot purchase results in an implied net interest expense (i.e., “dollar roll expense”). In our presentation of non-GAAP core operating income, we present TBA dollar roll income net of any implied net interest expense that resulted from rolling the settlement of net short TBA positions.

•

Net interest income earned or expense incurred from interest rate swap agreements. We utilize interest rate swap agreements to economically hedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated with future roll-overs of our short-term financing arrangements. Accordingly, the net

interest income earned or expense incurred (commonly referred to as “net interest carry”) from our interest rate swap agreements in combination with interest expense recognized in accordance with GAAP represents our effective “economic interest expense.” In our consolidated statements of comprehensive income prepared in accordance with GAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “gain (loss) from derivative instruments, net” of the “investment gain (loss), net” section.

Core General and Administrative Expenses

Core general and administrative expenses are non-interest expenses reported within the line item “total general and administrative expenses” of the consolidated statements of comprehensive income less stock-based compensation expense.

Non-GAAP Core Operating Income

The following table presents our computation of non-GAAP core operating income for the three and six months ended June 30, 2019 and 2018 (amounts in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
GAAP net interest income	$	6,582		$	10,862		$	14,499		$	25,166
TBA dollar roll income		1,995			6,742			3,415			13,385
Interest rate swap net interest income		3,769			2,483			8,516			1,667
Economic net interest income		12,346			20,087			26,430			40,218
Investment advisory fee income		—			—			250			—
Core general and administrative expenses		(3,207	)		(3,162	)		(6,810	)		(7,008	)
Preferred stock dividend		(774	)		(149	)		(1,052	)		(286	)
Non-GAAP core operating income	$	8,365		$	16,776		$	18,818		$	32,924

Non-GAAP core operating income per diluted common share	$	0.23		$	0.59		$	0.54		$	1.16
Weighted average diluted common shares outstanding		36,644			28,463			34,901			28,447

The following table provides a reconciliation of GAAP pre-tax net income (loss) to non-GAAP core operating income for the three and six months ended June 30, 2019 and 2018 (amounts in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
GAAP (loss) income before income taxes	$	(23,525	)	$	2,885		$	(5,931	)	$	(35,247	)
Add (less):
Total investment loss, net		26,683			4,516			12,880			52,655
Stock-based compensation expense		217			299			990			750
Preferred stock dividend		(774	)		(149	)		(1,052	)		(286	)
Add back:
TBA dollar roll income		1,995			6,742			3,415			13,385
Interest rate swap net interest income		3,769			2,483			8,516			1,667
Non-GAAP core operating income	$	8,365		$	16,776		$	18,818		$	32,924

Non-GAAP core operating income is used by management to evaluate the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that non-GAAP core operating income assists investors in understanding and evaluating the financial performance of the Company’s long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as its earnings capacity.

Periodic fair value gains and losses recognized with respect to our investments in MBS and our economic hedging instruments, which are reported in line item “total investment gain (loss), net” of our consolidated statements of comprehensive income, are

excluded from the computation of non-GAAP core operating income as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our agency MBS investment portfolio is to generate a net interest spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our agency MBS investments and our economic hedging instruments to largely offset one another over time.

A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for “non-core” events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. For example, the economic cost or benefit of hedging instruments other than interest rate swap agreements, such as U.S. Treasury note futures or options, do not affect the computation of non-GAAP core operating income. In addition, our calculation of non-GAAP core operating income may not be comparable to other similarly titled measures of other companies. Therefore, we believe that non-GAAP core operating income should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between non-GAAP core operating income and taxable income determined in accordance with the Internal Revenue Code. As a REIT, we will be required to distribute at least 90% of our REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of our taxable income in order to not be subject to any U.S. Federal or state corporate income taxes. Accordingly, non-GAAP core operating income may not equal our distribution requirements as a REIT.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, meet margin calls on our short-term borrowings and hedging instruments, and for other general business purposes. Our primary sources of funds for liquidity consist of existing cash balances, short-term borrowings (for example, repurchase agreements), principal and interest payments from our investments in MBS, and proceeds from sales of MBS. Other sources of liquidity include proceeds from the offering of common stock, preferred stock, debt securities, or other securities registered pursuant to our effective shelf registration statement filed with the Securities and Exchange Commission (“SEC”).

Liquidity, or ready access to funds, is essential to our business. Perceived liquidity issues may affect our counterparties’ willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. If we cannot obtain funding from third parties our results of operations could be negatively impacted.

As of June 30, 2019, our debt-to-equity leverage ratio was 11.1 to 1 measured as the ratio of the sum of our total debt to our shareholders’ equity as reported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” short-term financing to investable capital ratio. Our “at risk” short-term financing to investable capital ratio is measured as the ratio of the sum of our short-term recourse financing (i.e., repurchase agreement financing), net payable or receivable for unsettled securities, net contractual forward price of our TBA commitments less our cash and cash equivalents compared to our investable capital. Our investable capital is calculated as the sum of our stockholders’ equity and long-term unsecured debt. As of June 30, 2019, our “at risk” short-term recourse financing to investable capital ratio was 9.1 to 1.

Cash Flows

As of June 30, 2019, our cash and cash equivalents totaled $34.7 million, representing a net increase of $8.0 million from $26.7 million as of December 31, 2018. Cash provided by operating activities of $18.7 million during the six months ended June 30, 2019 was attributable primarily to net interest income less our general and administrative expenses. Cash provided by investing activities of $127.9 million during the six months ended June 30, 2019 was primarily generated by sales of agency MBS and receipt of principal payments from agency MBS partially offset by purchases of new agency MBS and net payments for settlements and deposits for margin on our interest rate derivative instruments. Cash used in financing activities of $138.6 million during the six months ended June 30, 2019 was primarily generated by repayments of repurchase agreements used to finance a portion of our MBS investment portfolio and dividend payments to stockholders partially offset by proceeds received from issuance of common and preferred stock.

Sources of Funding

We believe that our existing cash balances, net investments in MBS, cash flows from operations, borrowing capacity, and other sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities,

including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we believe that substantially most of our investments could be sold, in most circumstances, to provide cash. However, we may be required to sell our assets in such instances at depressed prices.

As of June 30, 2019, liquid assets consisted primarily of cash and cash equivalents of $34.7 million and unencumbered agency MBS of $121.4 million at fair value. Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government.

Debt Capital

Long-Term Unsecured Debt

As of June 30, 2019, we had $74.2 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.1 million. Our trust preferred debt obligations with an aggregate principal amount of $15.0 million outstanding as of June 30, 2019 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature between 2033 and 2035. Our 6.625% Senior Notes due 2023 with a principal amount of $25.0 million outstanding as of June 30, 2019 accrue and require payment of interest quarterly at an annual rate of 6.625% and mature on May 1, 2023. Our 6.75% Senior Notes due 2025 with a principal amount of $35.3 million outstanding as of June 30, 2019 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025.

Repurchase Agreements

We have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our investments in MBS. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financing objectives. Funding for MBS through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.

Our repurchase agreements include provisions contained in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association (“SIFMA”) and may be amended and supplemented in accordance with industry standards for repurchase facilities. Our repurchase agreements include financial covenants, with which the failure to comply would constitute an event of default under the applicable repurchase agreement. Similarly, each repurchase agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. As provided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination, the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us to the counterparty.

Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (commonly referred to as a “margin call”), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBS investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates or prepayments. Our repurchase agreements generally provide that valuations for MBS securing our repurchase agreements are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances and under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the MBS securing our repurchase agreements. In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in the event of a margin call, we must provide additional securities or cash on the same business day that the margin call is made if the lender provides us notice prior to the margin notice deadline on such day.

To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should we encounter increases in interest rates or prepayments, margin calls on our repurchase agreements could result in a material adverse change in our liquidity position.

Our repurchase agreement counterparties apply a “haircut” to the value of the pledged collateral, which means the collateral is valued, for the purposes of the repurchase agreement transaction, at less than fair value. Upon the renewal of a repurchase agreement financing at maturity, a lender could increase the “haircut” percentage applied to the value of the pledged collateral, thus reducing our liquidity.

Our repurchase agreements generally mature within 30 to 60 days, but may have maturities as short as one day and as long as one year. In the event that market conditions are such that we are unable to continue to obtain repurchase agreement financing for our investments in MBS in amounts and at interest rates consistent with our financing objectives, we may liquidate such investments and may incur significant losses on any such sales of MBS.

The following table provides information regarding our outstanding repurchase agreement borrowings as of the date and period indicated (dollars in thousands):

	June 30, 2019
Repurchase agreements outstanding	$	3,531,539
Agency MBS collateral, at fair value ⁽¹⁾		3,726,291
Net amount ⁽²⁾		194,752
Weighted-average rate		2.61	%
Weighted-average term to maturity	35.9 days
Maximum amount outstanding at any month-end during the period	$	3,964,127

⁽¹⁾	As of June 30, 2019, includes $511,225 at sale price of unsettled agency MBS sale commitments which is included in the line item “sold securities receivable” in the accompanying consolidated balance sheets.

⁽²⁾	Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.

To limit our exposure to counterparty risk, we diversify our repurchase agreement funding across multiple counterparties and by counterparty region. As of June 30, 2019, we had outstanding repurchase agreement balances with 15 counterparties and have master repurchase agreements in place with a total of 18 counterparties located throughout North America, Europe and Asia. As of June 30, 2019, no more than 6.4% of our stockholders’ equity was at risk with any one counterparty, with the top five counterparties representing approximately 26.3% of our stockholders’ equity. The table below includes a summary of our repurchase agreement funding by number of counterparties and counterparty region as of June 30, 2019:

	Number of		Percentage of Repurchase
	Counterparties		Agreement Funding
North America		9		64.9	%
Europe		2		14.0	%
Asia		4		21.1	%
		15		100.0	%

Derivative Instruments

In the normal course of our operations, we are a party to financial instruments that are accounted for as derivative financial instruments including (i) interest rate hedging instruments such as interest rate swaps, U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, put and call options on U.S. Treasury note futures, and options on agency MBS, and (ii) derivative instruments that economically serve as investments such as TBA purchase and sale commitments.

Interest Rate Hedging Instruments

We exchange cash variation margin with the counterparties to our interest rate hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the central clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requires market participants to deposit and maintain an “initial margin” amount which is determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse from the maximum estimated single-day price movement in that market participant’s contracts. However, the futures commission merchants (“FCMs”) through which we conduct trading of our cleared and exchanged-traded hedging instruments may require incremental initial margin in excess of the clearinghouse’s requirement. The clearing exchanges have the sole discretion to determine the value of our hedging instruments, for the purpose of setting initial and variation margin requirements or otherwise. In the event of a margin call, we must generally provide additional collateral on the same business day. To date, we have not had any margin calls on our hedging agreements that we were not able to satisfy. However, if we encounter significant decreases in long-term interest rates, margin calls on our hedging agreements could result in a material adverse change in our liquidity position.

As of June 30, 2019, we had outstanding interest rate swaps and U.S. Treasury note futures with the following aggregate notional amount and corresponding margin held in collateral deposit with the custodian (dollars in thousands):

	June 30, 2019
	Notional		Collateral
	Amount		Deposit
Interest rate swaps	$	2,600,000	$	31,246
10-year U.S. Treasury note futures		155,000		—

The FCMs through which we conduct trading of our hedging instruments may limit their exposure to us (due to an inherent one business day lag in the variation margin exchange process) by applying a maximum “ceiling” on their level of risk, either overall and/or by instrument type. The FCMs generally use the amount of initial margin that we have posted with them as a measure of their level of risk exposure to us. We currently have FCM relationships with four large financial institutions. To date, among our four FCM arrangements, we have had sufficient excess capacity above and beyond what we believe to be a sufficient and appropriate hedge position. However, if our FCMs substantially lowered their risk exposure thresholds, we could experience a material adverse change in our liquidity position and our ability to hedge appropriately.

TBA Dollar Roll Transactions

TBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments. In a TBA dollar roll transaction, we do not intend to take physical delivery of the underlying agency MBS and will generally enter into an offsetting position and net settle the paired-off positions in cash. However, under certain market conditions, it may be uneconomical for us to roll our TBA contracts into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA contract, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted.

Our TBA commitments and our commitments to purchase and sell specified agency MBS are subject to master securities forward transaction agreements published by SIFMA as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to our counterparty in the event the fair value of our agency MBS commitments decline and such counterparty demands collateral through a margin call. Margin calls on agency MBS commitments are generally caused by factors such as rising interest rates or prepayments. Our agency MBS commitments provide that valuations for our commitments and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the agency MBS commitment and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.

Equity Capital

Common Equity Offerings

On February 22, 2019, we completed a public offering in which 6,000,000 shares of our Class A common stock was sold at a price of $8.16 per share for proceeds net of offering expenses of $48.8 million.

Common Equity Distribution Agreements

On February 22, 2017, we entered into separate common equity distribution agreements (the “Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, FBR Capital Markets & Co., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which we may offer and sell, from time to time, up to 6,000,000 shares of our Class A common stock. On August 10, 2018, we entered into separate amendments to the Equity Distribution Agreements (the “Amended Equity Distribution Agreements”) with equity sales agents JMP Securities LLC, B. Riley FBR, Inc. (formerly, FBR Capital Markets & Co.), JonesTrading Institutional Services LLC and Ladenburg Thalman & Co. Inc. pursuant to which we may offer and sell, from time to time, up to 12,597,423 shares of our Class A common stock.

Pursuant to the common equity distribution agreements, shares of our common stock may be offered and sold through the equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. During the six months ended June 30, 2019, there were no issuances of common stock under the common equity distribution agreements.

As of June 30, 2019, we had 11,302,160 shares of Class A common stock available for sale under the Amended Equity Distribution Agreements.

Preferred Stock

As of June 30, 2019, we had Series B Preferred Stock outstanding with a liquidation preference of $8,851. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AI PrB.” The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series B Preferred Stock have no voting rights, except under limited conditions and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on May 12, 2022 or earlier upon the occurrence of a change in control. Dividends are payable quarterly in arrears on the 30th day of each December, March, June and September, when and as declared. We have declared and paid all required quarterly dividends on our Series B Preferred Stock to date in 2019.

As of June 30, 2019, we had Series C Preferred Stock outstanding with a liquidation preference of $30,000. The Series C Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AI PrC.” The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series C Preferred Stock have no voting rights except under limited conditions and will be entitled to receive cumulative cash dividends (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum. Shares of Series C Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve our qualification as a REIT. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible into shares of the Company’s common stock. Dividends will be payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared, beginning on June 30, 2019. The first dividend of $0.61875 per share was paid on July 1, 2019 was considered a long first dividend period from the original date of issuance. We have declared and paid all required quarterly dividends on our Series C Preferred Stock to date in 2019.

Preferred Equity Distribution Agreement

On May 16, 2017, we entered into a preferred equity distribution agreement (the “Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC, pursuant to which we may offer and sell, from time to time, up to 1,865,000 shares of our Series B Preferred Stock. On March 21, 2019, we entered into an amended and restated equity distribution agreement (“Amended Series B Preferred Equity Distribution Agreement”) with JonesTrading Institutional Services LLC, B. Riley FBR, Inc., Compass Point Research and Trading, LLC and Ladenburg Thalmann & Co. Inc. (collectively, the “Series B Preferred Equity Agents”), pursuant to which we may offer and sell, from time to time, up to 1,647,370 shares of our Series B Preferred Stock. Pursuant to the Amended Series B Preferred Equity Distribution Agreement, shares of our Series B Preferred stock may be offered and sold through the Series B Preferred Equity Sales Agents in transactions that are deemed to be “at the market” offerings as defined

in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions.

The following table provides information about the issuances of preferred stock under the Series B Preferred Equity Distribution Agreement for the period indicated (dollars in thousands):

Series B Preferred Stock Issuances	Six Months Ended June 30, 2019
Shares issued		3,444
Weighted average public offering price	$	22.39
Net proceeds ⁽¹⁾	$	76

⁽¹⁾	Net of selling commissions and expenses.

As of June 30, 2019, we had 1,645,961 shares of Series B Preferred stock available for sale under the Amended Series B Preferred Equity Distribution Agreement.

REIT Distribution Requirements

Commencing with our taxable year ending December 31, 2019, we intend to elect to be taxed as a REIT under the Internal Revenue Code. As a REIT, we will be required to distribute annually 90% of our REIT taxable income (subject to certain adjustments) to our shareholders. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate income taxes on our taxable income that we distribute to our shareholders on a timely basis. At present, it is our intention to distribute 100% of our taxable income, although we will not be required to do so. We intend to make distributions of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

Off-Balance Sheet Arrangements

As of June 30, 2019 and December 31, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities (“VIEs”), established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Our economic interests held in unconsolidated VIEs are limited in nature to those of a passive holder of MBS issued by a securitization trust. As of June 30, 2019 and December 31, 2018, we had not consolidated for financial reporting purposes any securitization trusts as we do not have the power to direct the activities that most significantly impact the economic performance of such entities. Further, as of June 30, 2019 and December 31, 2018, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. The primary market risks that we are exposed to are interest rate risk, prepayment risk, extension risk, spread risk, liquidity risk and regulatory risk. See “Item 1 — Business” in our Annual Report on Form 10-K for the year ended December 31, 2018 for a description of our risk management strategies. The following is additional information regarding certain of these market risks.

Interest Rate Risk

We are exposed to interest rate risk in our MBS portfolio. Our investments in MBS are financed with short-term borrowing facilities such as repurchase agreements, which are interest rate sensitive financial instruments. Our exposure to interest rate risk fluctuates based upon changes in the level and volatility of interest rates, mortgage prepayments, and in the shape and slope of the yield curve, among other factors. Through the use of interest rate hedging instruments, we attempt to economically hedge a portion of our exposure to changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on our short-term financing arrangements. Our primary interest rate hedging instruments include interest rate swaps as well as U.S. Treasury note futures, options on U.S. Treasury note futures, and options on agency MBS. Historically, we have also utilized Eurodollar futures and interest rate swap futures.

Changes in both short- and long-term interest rates affect us in several ways, including our financial position. As interest rates increase, the fair value of fixed-rate agency MBS may be expected to decline, prepayment rates may be expected to decrease and

duration may be expected to extend. However, an increase in interest rates results in an increase in the fair value of our interest rate hedging instruments. Conversely, if interest rates decline, the fair value of fixed-rate agency MBS is generally expected to increase while the fair value of our interest rate hedging instruments is expected to decline.

The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS and derivative instruments under several hypothetical scenarios of interest rate movements. For the purposes of this illustration, interest rates are defined by the U.S. Treasury yield curve. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” Our estimate of the change in the fair value of agency MBS is based upon the same assumptions we use to manage the impact of interest rates on the portfolio. The interest rate sensitivity of our agency MBS and TBA commitments is derived from The Yield Book, a third-party model. Actual results could differ significantly from these estimates. The effective durations are based on observed fair value changes, as well as our own estimate of the effect of interest rate changes on the fair value of the investments, including assumptions regarding prepayments based, in part, on age and interest rate of the mortgages underlying the MBS, prior exposure to refinancing opportunities, and an overall analysis of historical prepayment patterns under a variety of historical interest rate conditions.

The interest rate sensitivity analyses illustrated by the tables that follow have certain limitations, most notably the following:

•

The 50 and 100 basis point upward and downward shocks to interest rates that are applied in the analyses represent parallel shocks to the forward yield curve. The analyses do not consider the sensitivity of stockholders’ equity to changes in the shape or slope of the forward yield curve.

•

The analyses assume that spreads remain constant and, therefore, do not reflect an estimate of the impact that changes in spreads would have on the value of our MBS investments or our LIBOR-based derivative instruments, such as our interest rate swap agreements.

•

The analyses assume a static portfolio and do not reflect activities and strategic actions that management may take in the future to manage interest rate risk in response to significant changes in interest rates or other market conditions.

These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):

	June 30, 2019
				Value			Value
				with 50			with 50
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	3,414,580		$	3,363,305		$	3,448,136
TBA commitments		1,980			(10,941	)		11,006
10-year U.S. Treasury note futures		(88	)		6,003			(6,179	)
Interest rate swaps		1,220			47,664			(45,224	)
Equity available to common stock		285,438			273,778			275,485
Book value per common share	$	7.80		$	7.48		$	7.53
Book value per common share percent change					(4.15	)%		(3.51	)%

	June 30, 2019
				Value			Value
				with 100			with 100
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	3,414,580		$	3,293,357		$	3,473,745
TBA commitments		1,980			(27,646	)		16,761
10-year U.S. Treasury note futures		(88	)		12,095			(12,271	)
Interest rate swaps		1,220			94,108			(91,668	)
Equity available to common stock		285,438			239,660			254,313
Book value per common share	$	7.80		$	6.55		$	6.95
Book value per common share percent change					(16.06	)%		(10.94	)%

Spread Risk

Our investments in MBS expose us to “spread risk.” Spread risk, also known as “basis risk,” is the risk of an increase in the spread between market participants’ required rate of return (or “market yield”) on our MBS and prevailing benchmark interest rates, such as the U.S. Treasury or interest rate swap rates.

The spread risk inherent to our investments in agency MBS and the resulting fluctuations in fair value of these securities can occur independent of changes in prevailing benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U. S. Federal Reserve, liquidity, or changes in market participants’ required rates of return on different assets. While we use interest rate hedging instruments to attempt to mitigate the sensitivity of our net book value to changes in prevailing benchmark interest rates, such instruments are generally not designed to mitigate spread risk inherent to our investment in agency MBS. Consequently, the value of our agency MBS and, in turn, our net book value, could decline independent of changes in interest rates.

The tables that follow illustrate the estimated change in fair value for our investments in agency MBS and TBA commitments under several hypothetical scenarios of agency MBS spread movements. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” The sensitivity of our agency MBS and TBA commitments to changes in MBS spreads is derived from The Yield Book, a third-party model. The analysis to follow reflects an assumed spread duration for our investment in agency MBS of 4.5 years, which is a model-based assumption that is dependent upon the size and composition of our investment portfolio as well as economic conditions present as of June 30, 2019.

These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):

	June 30, 2019
			Value with			Value with
			10 Basis Point			10 Basis Point
			Increase in			Decrease In
			Agency MBS			Agency MBS
	Value		Spreads			Spreads
Agency MBS	$	3,414,580	$	3,398,950		$	3,430,210
TBA commitments		1,980		(914	)		4,874
Equity available to common stock		285,438		266,914			303,962
Book value per common share	$	7.80	$	7.30		$	8.31
Book value per common share percent change				(6.49	)%		6.49	%

	June 30, 2019
			Value with			Value with
			25 Basis Point			25 Basis Point
			Increase in			Decrease In
			Agency MBS			Agency MBS
	Value		Spreads			Spreads
Agency MBS	$	3,414,580	$	3,375,505		$	3,453,655
TBA commitments		1,980		(5,254	)		9,215
Equity available to common stock		285,438		239,129			331,748
Book value per common share	$	7.80	$	6.54		$	9.07
Book value per common share percent change				(16.22	)%		16.22	%

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors in its sole discretion; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Cautionary Statement About Forward-Looking Information

When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission (“SEC”) or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following:

•

the availability and terms of, and our ability to deploy, capital and our ability to grow our business through our current strategy focused on acquiring primarily residential mortgage-backed securities (“MBS”) that are either issued by U.S. government agencies or guaranteed as to principal and interest by U.S. government agencies or U.S. government sponsored agencies (“agency MBS”), and MBS issued by private organizations (“private-label MBS”);

•

our ability to qualify and maintain our qualification as a real estate investment trust (“REIT”);

•

our ability to forecast our tax attributes, which are based upon various facts and assumptions, and our ability to protect and use our net operating losses (“NOLs”) and net capital losses (“NCLs”) to offset future taxable income, including whether our shareholder rights plan (“Rights Plan”) will be effective in preventing an ownership change that would significantly limit our ability to utilize such losses;

•

our business, acquisition, leverage, asset allocation, operational, investment, hedging and financing strategies and the success of, or changes in, these strategies;

•

the effect of changes in prepayment rates, interest rates and default rates on our portfolio;

•

the effect of governmental regulation and actions on our business, including, without limitation, changes to monetary and fiscal policy and tax laws;

•

our ability to quantify and manage risk;

•

our ability to roll our repurchase agreements on favorable terms, if at all;

•

our liquidity;

•

our asset valuation policies;

•

our decisions with respect to, and ability to make, future dividends;

•

investing in assets other than MBS or pursuing business activities other than investing in MBS;

•

our ability to successfully operate our business as a REIT;

•

our ability to maintain our exclusion from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”); and

•

the effect of general economic conditions on our business.

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results to vary from our forward-looking statements, before making an investment in our securities:

•

the overall environment for interest rates, changes in interest rates, interest rate spreads, the yield curve and prepayment rates, including the timing of increases in the Federal Funds rate by the U.S. Federal Reserve;

•

current conditions and further adverse developments in the residential mortgage market and the overall economy;

•

potential risk attributable to our mortgage-related portfolios, including changes in fair value;

•

our use of leverage and our dependence on repurchase agreements and other short-term borrowings to finance our mortgage-related holdings;

•

the availability of certain short-term liquidity sources;

•

competition for investment opportunities;

•

the U.S. Federal Reserve’s balance sheet normalization program of gradually reducing its reinvestment of principal payments of U.S. Treasury securities and agency MBS;

•

the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government;

•

mortgage loan prepayment activity, modification programs and future legislative action;

•

changes in, and success of, our acquisition, hedging and leverage strategies, changes in our asset allocation and changes in our operational policies, all of which may be changed by us without shareholder approval;

•

failure of sovereign or municipal entities to meet their debt obligations or a downgrade in the credit rating of such debt obligations;

•

fluctuations of the value of our hedge instruments;

•

fluctuating quarterly operating results;

•

changes in laws and regulations and industry practices that may adversely affect our business;

•

volatility of the securities markets and activity in the secondary securities markets in the United States and elsewhere;

•

our ability to qualify and maintain our qualification as a REIT for federal income tax purposes;

•

our ability to successfully expand our business into areas other than investing in MBS and our expectations of the returns of expanding into any such areas; and

•

the other important factors identified in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018 under the caption “Item 1A — Risk Factors”.

These and other risks, uncertainties and factors, including those described elsewhere in this Quarterly Report on Form 10-Q, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 4. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer, J. Rock Tonkel, Jr., and our Chief Financial Officer, Richard E. Konzmann, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time involved in civil lawsuits, legal proceedings and arbitration matters that we consider to be in the ordinary course of our business. There can be no assurance that these matters individually or in the aggregate will not have a material adverse effect on our financial condition or results of operations in a future period. We are also subject to the risk of litigation, including litigation that may be without merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect our financial condition, results of operations and liquidity. Furthermore, we operate in highly-regulated markets that currently are under intense regulatory scrutiny, and we have received, and we expect in the future that we may receive, inquiries and requests for documents and information from various federal, state and foreign regulators. In addition, one or more of our subsidiaries have received requests to repurchase loans from various parties in connection with the former securitization business conducted by a subsidiary. We believe that the continued scrutiny of MBS, structured finance, and derivative market participants increases the risk of additional inquiries and requests from regulatory or enforcement agencies and other parties. We cannot provide any assurance that these inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or that, if any such investigation or proceeding were to arise, it would not materially adversely affect our Company.

Item 1A. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number		Exhibit Title

3.01		Amended and Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on November 9, 2009).

3.02		Articles of Amendment to the Amended and Restated Articles of Incorporation designating the shares of 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock, $0.01 par value per share (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 8-A filed on May 9, 2017).

3.03		Articles of Amendment to the Amended and Restated Articles of Incorporation of Arlington Asset Investment Corp. designating the Company’s 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form 8-A filed on March 11, 2019).

3.04		Articles of Amendment to the Amended and Restated Articles of Incorporation of Arlington Asset Investment Corp. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 25, 2019).

Exhibit Number		Exhibit Title
3.05		Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 28, 2011).

3.06		Amendment No. 1 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on February 4, 2015).

3.07		Amendment No. 2 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 26, 2016).

3.08		Amendment No. 3 to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on January 17, 2019).

4.01		Form of Indenture governing the Senior Debt Securities by and between the Company and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30, 2016).

4.02		Form of Indenture governing the Subordinated Debt Securities by and between the Company and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30, 2016).

4.03		Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 1, 2013).

4.04		First Supplemental Indenture dated as of May 1, 2013 between the Company and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on May 1, 2013).

4.05		Second Supplemental Indenture, dated as of March 18, 2015, between the Company, Wells Fargo Bank, National Association, as Trustee and The Bank of New York Mellon, as Series Trustee (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-A filed on March 18, 2015).

4.06		Form of Senior Note (incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30, 2016).

4.07		Form of Subordinated Note (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (File No. 333-215384) filed on December 30, 2016).

4.08		Form of 6.625% Senior Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed by the Company on May 1, 2013).

4.09		Form of 6.750% Notes due 2025 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed by the Company on March 17, 2015).

4.10		Form of Certificate for Class A common stock (incorporated by reference to Exhibit 4.01 of the Company’s Annual Report on Form 10-K filed with the SEC on February 24, 2010).

4.11		Form of specimen certificate representing the shares of 7.00% Series B Perpetual Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on May 9, 2017).

4.12		Form of specimen certificate representing the shares of 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A filed on March 11, 2019).

4.13		Shareholder Rights Agreement, dated June 5, 2009 (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the SEC on June 5, 2009).

4.14		First Amendment to Shareholder Rights Agreement, dated as of April 13, 2018 (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed with the SEC on April 13,2018).

10.01		Retirement and Consulting Agreement dated June 6, 2019, by and between Arlington Asset Investment Corp. and Eric F. Billings (incorporated by reference to the Company’s Current Report on Form 8-K filed on June 6, 2019).

31.01		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

Exhibit Number		Exhibit Title
31.02		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.01		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.02		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

101.INS		INSTANCE DOCUMENT***

101.SCH		SCHEMA DOCUMENT***

101.CAL		CALCULATION LINKBASE DOCUMENT***

101.LAB		LABELS LINKBASE DOCUMENT***

101.PRE		PRESENTATION LINKBASE DOCUMENT***

101.DEF		DEFINITION LINKBASE DOCUMENT***

*	Filed herewith.

**	Furnished herewith.

***

Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at June 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and 2018 and for the Three Months Ended June 30, 2019 and 2018; and (iv) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ARLINGTON ASSET INVESTMENT CORP.
	By:	/s/ RICHARD E. KONZMANN
		Richard E. Konzmann
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal Financial Officer)
Date: August 9, 2019