Arlington Asset Investment Corp. - Quarter Report: 2021 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company

Emerging growth company

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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 March 31, 2021

☐	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.)

6862 Elm Street, Suite 320

McLean, VA

22101

(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	AAIC	NYSE
7.00% Series B Cumulative Perpetual Redeemable Preferred Stock	AAIC PrB	NYSE
8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	AAIC PrC	NYSE
6.625% Senior Notes due 2023	AIW	NYSE
6.75% Senior Notes due 2025	AIC	NYSE

Number of shares outstanding of each of the registrant’s classes of common stock, as of April 30, 2021:

Title		Outstanding
Class A Common Stock		33,481,181 shares

ARLINGTON ASSET INVESTMENT CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

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	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
	Item 4.	Controls and Procedures	52
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings	53
	Item 1A.	Risk Factors	53
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
	Item 3.	Defaults Upon Senior Securities	53
	Item 4.	Mine Safety Disclosures	53
	Item 5.	Other Information	54
	Item 6.	Exhibits	54
		Signatures	56

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	March 31, 2021			December 31, 2020
ASSETS
Cash and cash equivalents	$	48,198		$	28,796
Restricted cash of consolidated VIE		12,557			11,169
Interest receivable of consolidated VIE		309			545
Sold securities receivable		109,068			—
Agency mortgage-backed securities, at fair value		515,674			970,880
Mortgage credit securities, at fair value		16,405			26,660
Mortgage loans of consolidated VIE, at fair value		57,467			93,283
Mortgage loans, at fair value		44,914			45,000
MSR financing receivable, at fair value		36,005			9,346
Derivative assets, at fair value		2,280			258
Deposits		25,421			6,306
Other assets		15,046			20,146
Total assets	$	883,344		$	1,212,389
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	505,550		$	655,212
Secured debt of consolidated VIE, at fair value		58,654			93,627
Interest payable of consolidated VIE		201			321
Derivative liabilities, at fair value		4,267			221
Purchased securities payable		—			139,013
Other liabilities		2,111			4,698
Long-term unsecured debt		73,074			73,027
Total liabilities		643,857			966,119
Commitments and contingencies
Stockholders’ Equity:
Series B Preferred stock, $0.01 par value, 336,273 shares issued and outstanding (liquidation preference of $8,407)		7,933			7,933
Series C Preferred stock, $0.01 par value, 1,117,034 shares issued and outstanding (liquidation preference of $27,926)		27,356			27,356
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 33,481,181 and 33,517,018 shares issued and outstanding, respectively		335			335
Additional paid-in capital		2,040,898			2,040,918
Accumulated deficit		(1,837,035	)		(1,830,272	)
Total stockholders’ equity		239,487			246,270
Total liabilities and stockholders’ equity	$	883,344		$	1,212,389

	March 31, 2021			December 31, 2020
Assets and liabilities of consolidated VIE
Restricted cash	$	12,557		$	11,169
Interest receivable		309			545
Mortgage loans, at fair value		57,467			93,283
Secured debt, at fair value		(58,654	)		(93,627	)
Interest payable		(201	)		(321	)
Net investment in consolidated VIE	$	11,478		$	11,049

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 March 31,
	2021			2020
Interest income
Agency mortgage-backed securities	$	2,784		$	23,388
Mortgage credit securities		566			731
Loans		703			711
Mortgage loans of consolidated VIE		1,687			—
MSR financing receivable		358			—
Interest and other income		161			143
Total interest income		6,259			24,973
Interest expense
Short-term secured debt		488			14,592
Long-term unsecured debt		1,151			1,240
Secured debt of consolidated VIE		862			—
Total interest expense		2,501			15,832
Net interest income		3,758			9,141
Investment (loss) gain, net
(Loss) gain on mortgage investments, net		(21,665	)		3,094
Gain (loss) from derivative instruments, net		14,545			(102,600	)
Other, net		357			(562	)
Total investment (loss) gain, net		(6,763	)		(100,068	)
General and administrative expenses
Compensation and benefits		1,395			1,858
Other general and administrative expenses		1,242			1,385
Total general and administrative expenses		2,637			3,243
Loss before income taxes		(5,642	)		(94,170	)
Income tax provision		398			—
Net loss		(6,040	)		(94,170	)
Dividend on preferred stock		(723	)		(774	)
Net loss attributable to common stock	$	(6,763	)	$	(94,944	)
Basic loss per common share	$	(0.20	)	$	(2.59	)
Diluted loss per common share	$	(0.20	)	$	(2.59	)
Weighted-average common shares outstanding (in thousands)
Basic		33,181			36,711
Diluted		33,181			36,711

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, 2019		354,039	$	8,270			1,200,000	$	28,944			36,755,387	$	368	$	2,049,292		$	(1,759,626	)	$	327,248
Net loss		—		—			—		—			—		—		—			(94,170	)		(94,170	)
Issuance of Class A common stock under stock-based compensation plans		—		—			—		—			60,374		—		62			—			62
Stock-based compensation		—		—			—		—			—		—		393			—			393
Other		—		(6	)		—		(10	)		—		—		(6	)		—			(22	)
Dividends declared		—		—			—		—			—		—		—			(702	)		(702	)
Balances, March 31, 2020		354,039	$	8,264			1,200,000	$	28,934			36,815,761	$	368	$	2,049,741		$	(1,854,498	)	$	232,809

	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, 2020		336,273	$	7,933		1,117,034	$	27,356		33,517,018		$	335		$	2,040,918		$	(1,830,272	)	$	246,270
Net loss		—		—		—		—		—			—			—			(6,040	)		(6,040	)
Issuance of Class A common stock under stock-based compensation plans		—		—		—		—		101,818			1			(1	)		—			—
Repurchase of Class A common stock		—		—		—		—		(137,655	)		(1	)		(522	)		—			(523	)
Stock-based compensation		—		—		—		—		—			—			503			—			503
Dividends declared		—		—		—		—		—			—			—			(723	)		(723	)
Balances, March 31, 2021		336,273	$	7,933		1,117,034	$	27,356		33,481,181		$	335		$	2,040,898		$	(1,837,035	)	$	239,487

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities:
Net loss	$	(6,040	)	$	(94,170	)
Adjustments to reconcile net loss to net cash provided by operating activities
Total investment loss, net		6,763			100,068
Net (discount) premium (accretion) amortization		(357	)		4,587
Other		564			521
Changes in operating assets
Interest receivable		510			4,536
Other assets		(90	)		(86	)
Changes in operating liabilities
Interest payable and other liabilities		1,091			(3,282	)
Accrued compensation and benefits		(1,754	)		(2,794	)
Net cash provided by operating activities		687			9,380
Cash flows from investing activities:
Purchases of agency mortgage-backed securities		(354,417	)		(149,781	)
Purchases of mortgage credit securities		—			(49,353	)
Purchases of MSR financing receivables		(21,279	)		—
Proceeds from sales of agency mortgage-backed securities		517,200			1,762,433
Proceeds from sales of mortgage credit securities		11,978			30,054
Receipt of principal payments on agency mortgage-backed securities		14,305			121,715
Receipt of principal payments on mortgage credit securities		—			1
Receipt of principal payments on loans		85			—
Receipt of principal payments on mortgage loans of consolidated VIE		36,529			—
Payments for derivatives and deposits, net		(2,543	)		(100,818	)
Other		4,154			—
Net cash provided by investing activities		206,012			1,614,251
Cash flows from financing activities:
Repayments of repurchase agreements, net		(149,662	)		(1,544,771	)
Repayments of secured debt of consolidated VIE, net		(34,994	)		—
Repurchase of common stock		(523	)		—
Repurchase of long-term unsecured debt		(7	)		—
Dividends paid		(723	)		(9,098	)
Other		—			(22	)
Net cash used in financing activities		(185,909	)		(1,553,891	)
Net increase in cash, cash equivalents and restricted cash		20,790			69,740
Cash, cash equivalents and restricted cash, beginning of period		39,965			19,636
Cash, cash equivalents and restricted cash, end of period	$	60,755		$	89,376
Supplemental cash flow information:
Cash payments for interest	$	2,434		$	19,243
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 primarily on investing in mortgage related assets. The Company may also invest in other asset classes that its management team believes may offer attractive risk adjusted returns, such as real estate assets or investments outside the real estate or mortgage asset classes. The Company’s investment capital is currently allocated between agency mortgage-backed securities (“MBS”), mortgage credit investments and mortgage servicing right (“MSR”) related assets.

The Company’s agency MBS consist of 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”). The Company’s mortgage credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”). The principal and interest of the Company’s mortgage credit investments are not guaranteed by a GSE or a U.S government agency. The Company’s MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs.

Arlington Asset is a Virginia corporation. The Company is internally managed and does not have an external investment advisor.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company is 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, 2020.

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 March 31, 2021 and December 31, 2020, approximately 99% 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 and Mortgage Loans of a Consolidated VIE

The Company recognizes interest income for its investments in agency MBS and mortgage loans of a consolidated variable interest entity (“VIE”) 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 investment’s stated interest rate. The interest method is applied at the individual instrument level based upon each instrument’s effective interest rate. The Company calculates each instrument’s effective interest rate at the time of purchase or initial recognition by solving for the discount rate that equates the present value of that instrument's remaining contractual cash flows (assuming no principal prepayments) to its purchase cost. Because each instrument’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 and mortgage loans of a consolidated VIE, as principal prepayments occur, a proportional amount of the unamortized premium or unaccreted discount is recognized in interest income such that the contractual effective interest rate on any remaining security or loan balance is unaffected.

For mortgage loans of a consolidated VIE, the Company ceases the accrual of interest income (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. When a loan is placed in non-accrual status, all accrued but uncollected contractual interest as well as any discount accreted during the period of delinquency are reversed. While a loan is in non-accrual status, the Company recognizes interest income only when interest payments occur.

Interest Income Recognition for Investments in Mortgage Credit Securities and MSR Financing Receivables

The Company recognizes interest income for its investments in mortgage credit securities and MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment. The amount of periodic interest income recognized is determined by applying the investment’s effective interest rate to its amortized cost basis (or “reference amount”). At the time of acquisition, the investment’s effective interest rate is calculated by solving for the single discount rate that equates the present value of the Company’s best estimate of the amount and timing of the cash flows expected to be collected from the investment to its purchase cost. To prepare its best estimate of cash flows expected to be collected, the Company develops a number of assumptions about the future performance of the pool of mortgage loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses. In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the investment are re-estimated based upon current information and events. The following table provides a description of how periodic changes in the estimate of cash flows expected to be collected affect interest income recognition prospectively for investments in mortgage credit securities and MSR financing receivables:

Scenario:			Effect on Interest Income Recognition for Investments in Mortgage Credit Securities and MSR Financing Receivables:
Scenario:
A positive change in cash flows occurs. Actual cash flows exceed prior estimates and/or a positive change occurs in the estimate of expected remaining cash flows.			A revised effective interest rate is calculated and applied prospectively such that the positive change in cash flows will be recognized as incremental interest income over the remaining life of the investment.
			The amount of periodic interest income recognized over the remaining life of the investment will be reduced accordingly. Generally, the investment’s effective interest rate is reduced accordingly and applied on a prospective basis. However, if the revised effective interest rate is negative, the investment’s existing effective interest rate is retained while the reference amount to which the existing effective interest rate will be prospectively applied is reduced to the present value of cash flows expected to be collected, discounted at the investment’s existing effective interest rate.
An adverse change in cash flows occurs. Actual cash flows fall short of prior estimates and/or an adverse change occurs in the estimate of expected remaining cash flows.

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
Investments in mortgage credit securities, subsequent measurement Loans held for investment, subsequent measurement Investments in MSR financing receivables, subsequent measurement Consolidation of variable interest entities Borrowings	Note 4 Note 5 Note 6 Note 7 Note 8
To-be-announced agency MBS transactions, including “dollar rolls”	Note 9
Derivative instruments	Note 9
Balance sheet offsetting	Note 10
Fair value measurements Income taxes	Note 11 Note 12

Refer to the Company’s 2020 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 Issued Accounting Guidance Not Yet Adopted

ASU Nos. 2020-04 and 2021-01, Reference Rate Reform (Topic 848)

The amendments in these updates provide optional practical expedients and exceptions for applying GAAP to the modification of receivables, debt or lease contracts as well as cash flow and fair value hedge accounting relationships that reference a rate, such as the London Interbank Offered Rate (“LIBOR”), that is expected to be discontinued because of reference rate reform.

The practical expedients and exceptions provided by these updates are effective from March 12, 2020 through December 31, 2022.

Not yet adopted.

To date, the Company has not made any modifications to contracts due to reference rate reform.

The Company has not elected to apply hedge accounting for financial reporting purposes.

The Company does not currently expect the adoption of ASU Nos. 2020-04 and 2021-01 to have an effect on its consolidated financial statements.

Note 3. Investments in Agency MBS

The Company has elected to classify its investments in agency MBS as trading securities. Accordingly, the Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of March 31, 2021 and December 31, 2020, the fair value of the Company’s investments in agency MBS was $515,674 and $970,880, respectively. As of March 31, 2021, 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 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:

	Three Months Ended March 31,
	2021			2020
Net gains (losses) recognized in earnings for:
Agency MBS still held at period end	$	(19,035	)	$	12,127
Agency MBS sold during the period		(10,180	)		11,391
Total	$	(29,215	)	$	23,518

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 9. Derivative Instruments” for further information about dollar rolls.

Note 4. Investments in Mortgage Credit Securities

The Company has elected to classify its investments in mortgage credit securities as trading securities. Accordingly, the Company’s investments in mortgage credit securities are reported in the accompanying consolidated balance sheets at fair value. As of March 31, 2021 and December 31, 2020, the fair value of the Company’s investments in mortgage credit securities was $16,405 and $26,660, respectively. As of March 31, 2021, the Company’s investments in mortgage credit securities primarily consist of non-agency MBS collateralized by pools of business purpose residential mortgage loans or smaller balance commercial mortgage loans.

All periodic changes in the fair value of mortgage credit securities 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 mortgage credit securities:

	Three Months Ended March 31,
	2021		2020
Net gains (losses) recognized in earnings for:
Mortgage credit securities still held at period end	$	551	$	(15,618	)
Mortgage credit securities sold during the period		840		(4,420	)
Total	$	1,391	$	(20,038	)

Note 5. Loans Held for Investment

As of March 31, 2021 and December 31, 2020, the Company held a loan secured by a first lien position in healthcare facilities and guaranteed by the operator of the facilities with an outstanding principal balance of $44,914 and $45,000, respectively. The loan bears interest at a floating note rate equal to one-month LIBOR plus 4.25% with a LIBOR floor of 2.00%. The maturity date of the loan is December 31, 2021 with a one-year extension available at the option of the borrower. The loan has an initial interest-only period of one year followed by principal amortization based upon a 30-year amortization schedule beginning in 2021 with the remaining principal balance due at loan maturity.

The Company has elected to account for its loan held for investment at fair value on a recurring basis with periodic changes in fair value recognized as a component of “investment gain (loss), net” in the accompanying consolidated statements of comprehensive income. As of March 31, 2021 and December 31, 2020, the Company’s investment was $44,914 and $45,000, respectively, at fair value. The Company recognizes interest income on its loan investment based upon the contractual note rate of the loan.

Note 6. Investments in MSR Financing Receivables

The Company does not hold the requisite licenses to purchase or hold MSRs directly. However, the Company has entered into agreements with a licensed, GSE approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. Under the terms of the arrangement, for an MSR acquired by the mortgage servicing counterparty (i) the Company purchases the “excess servicing spread” from the mortgage servicer counterparty, entitling the Company to monthly distributions of the servicing fees collected by the mortgage servicing counterparty in excess of 12.5 basis points per annum (and to distributions of corresponding proceeds of sale of the MSRs), and (ii) the Company funds the balance of the MSR purchase price to the parent company of the mortgage servicing counterparty and, in exchange, has an unsecured right to payment of certain amounts determined by reference to the MSR, generally equal to the servicing fee revenue less the excess servicing spread and the costs of servicing (and to distributions of corresponding proceeds of sale of the MSRs), net of fees earned by the mortgage servicing counterparty and its affiliates including an incentive fee equal to a percentage of the total return of the MSR in excess of a hurdle rate of return. Under the arrangement, the Company is obligated to provide funds to the mortgage servicing counterparty to fund its advances of delinquent payments on the serviced pool of mortgage loans with the mortgage servicing counterparty required to return to the Company any subsequent servicing advances collected. The Company has committed to invest a minimum of $25,000 in capital with the counterparty for a three-year period ending December 31, 2023.

Under GAAP, the Company accounts for transactions executed under its arrangement as financing transactions and reflects the associated financing receivables in the line item “MSR financing receivables” on its consolidated balance sheets. The Company has elected to account for its MSR financing receivables at fair value with changes in fair value that are not attributed to interest income recognized as a component of “investment gain (loss), net” in the accompanying consolidated statements of comprehensive income. As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment.

As of March 31, 2021 and December 31, 2020, the fair value of the Company’s investments in MSR financing receivables was $36,005 and $9,346, respectively. The following table presents activity related to the carrying value of the Company’s investments in MSR financing receivables:

	MSR Financing Receivables, at Fair Value
Balance as of December 31, 2020	$	9,346
Capital investments		20,344
Accretion of interest income		358
Changes in fair value due to:
Amortization of underlying MSRs		(1,276	)
Changes in valuation inputs and assumptions		7,233
Balance as of March 31, 2021	$	36,005

Note 7. Consolidation of Variable Interest Entities

The vehicles that issue the Company’s investments in securitized mortgage assets are considered VIEs. The Company is required to consolidate any VIE in which it holds a variable interest if it determines that it holds a controlling financial interest in the VIE and is, therefore, determined to be the primary beneficiary of the VIE. The Company is determined to be the primary beneficiary of a VIE in which it holds a variable interest if it both (i) holds the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The economic performance of the trusts that issue the Company’s investments in securitized mortgage assets is most significantly impacted by the performance of the mortgage loans that are held by the trusts. The party that is determined to have the most power to direct the loss mitigation actions that are taken with respect to delinquent or otherwise troubled mortgage loans held

by the trust is, therefore, deemed to hold the most power to direct the activities that most significantly impact the trust’s economic performance. As a passive investor, the Company does not have the power to direct the loss mitigation activities of most of the trusts that have issued its securitized mortgage assets.

On September 30, 2020, the Company acquired for $10,693 an investment that represents a majority interest in the first loss position of a securitized pool of business purpose residential mortgage loans. As majority holder of the first loss position, the Company is required to approve any material loss mitigation action proposed by the servicer with respect to a troubled loan. The Company also has the option (but not the obligation) to purchase delinquent loans from the trust. As a result of these contractual rights, the Company determined that it is the party with the most power to direct the loss mitigation activities and, therefore, the economic performance of the trust. As holder of the majority of the first loss position issued by the trust, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets. The carrying values of the assets and liabilities of the consolidated VIE, net of elimination entries, are as follows as of the dates indicated:

	March 31, 2021			December 31, 2020
Restricted cash of consolidated VIE ⁽¹⁾	$	12,557		$	11,169
Mortgage loans of consolidated VIE, at fair value		57,467			93,283
Interest receivable of consolidated VIE		309			545
Secured debt of consolidated VIE, at fair value		(58,654	)		(93,627	)
Interest payable of consolidated VIE		(201	)		(321	)
Investment in consolidated VIE	$	11,478		$	11,049

⁽¹⁾

Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection.

The pool of mortgage loans and the third-party held debt obligations of the consolidated VIE had aggregate unpaid principal balances of $59,519 and $58,838, respectively, as of March 31, 2021. The trust is contractually entitled to receive monthly interest payments on each underlying mortgage loan net of a loan-specific servicing and asset management fee that is not remitted to the trust but is, rather, retained by the servicer. As of March 31, 2021, the weighted average net note rate to which the VIE was entitled and the weighted average coupon rate of the debt obligations of the consolidated VIE were 6.03% and 4.01%, respectively. The debt of the consolidated VIE has recourse solely to the assets of the VIE; it has no recourse to the general credit of the Company.

The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan. Pursuant to the terms of certain of the mortgage loans, the borrower may draw upon a specified amount of additional funds as needed in order to finance construction on, or the repair or rehabilitation of, the mortgaged property (referred to as a “construction draw”). Pursuant to the terms of the securitization transaction, if the monthly principal repayments collected from the mortgage loan pool are insufficient to fund that month’s construction draws, such shortfall is to be funded by the holders of the first loss position on a pro rata basis. Any construction draws funded by holders of the first loss position accrue interest at the net note rate of the mortgage loan. The repayment of any construction draws funded by holders of the first loss position takes priority over the senior debt securities with respect to the cash flows collected from the mortgage loan pool in the following month. As of March 31, 2021, the aggregate unfunded construction draw balance commitment attributable to the Company’s subordinate debt security investment was $6,352.

The Company has elected to account for the mortgage loans and debt of the consolidated VIE at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, recognized as a component of “investment gain (loss), net” in the accompanying consolidated statements of comprehensive income.

As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for the mortgage loans of the consolidated VIE by applying the “interest method” permitted by GAAP, whereby the discount recognized at the initial recognition of each loan is accreted as an adjustment to contractual interest income accrued at the loan’s stated interest rate. The Company ceases the accrual of interest income for a mortgage loan (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan

assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded. The following table presents information about the accrual status of the mortgage loans of the consolidated VIE as of March 31, 2021:

	Aggregate Fair Value		Aggregate Unpaid Principal Balance		Difference
Less than 90 days past due and in accrual status	$	50,957	$	52,777	$	(1,820	)
90 days or more past due and in non-accrual status		6,510		6,742		(232	)
Total mortgage loans of consolidated VIE	$	57,467	$	59,519	$	(2,052	)

Note 8. Borrowings

Repurchase Agreements

The Company finances the purchase of mortgage investments through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells a mortgage investment to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same asset at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. Mortgage investments sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such assets 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 mortgage investment. The difference between the proceeds received by the Company upon the initial transfer of the mortgage investment 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.

The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from 30 to 60 days, but may be as short as one day or as long as one year. The Company’s mortgage loan repurchase agreement arrangement has a maturity date of November 11, 2021 and an interest rate that resets monthly at a rate equal to one-month LIBOR plus 2.00% with a LIBOR floor of 1.00%. Under the terms of the Company’s mortgage loan repurchase agreement, the Company may request extensions of the maturity date of the agreement for up to 364 days, subject to the lender’s approval.

As of March 31, 2021 and December 31, 2020, 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:

	March 31, 2021			December 31, 2020
Agency MBS repurchase financing:
Repurchase agreements outstanding	$	474,050		$	623,712
Agency MBS collateral, at fair value ⁽¹⁾		491,811			656,154
Net amount ⁽²⁾		17,761			32,442
Weighted-average rate		0.15	%		0.21	%
Weighted-average term to maturity	14.0 days			14.0 days
Mortgage loans repurchase financing:
Repurchase agreements outstanding	$	31,500		$	31,500
Mortgage loans collateral, at fair value		44,914			45,000
Net amount ⁽²⁾		13,414			13,500
Weighted-average rate		3.00	%		3.00	%
Weighted-average term to maturity	225.0 days			315.0 days
Total mortgage investments repurchase financing:
Repurchase agreements outstanding	$	505,550		$	655,212
Mortgage investments collateral, at fair value		536,725			701,154
Net amount ⁽²⁾		31,175			45,942
Weighted-average rate		0.33	%		0.34	%
Weighted-average term to maturity	27.1 days			28.5 days

⁽¹⁾	As of March 31, 2021, includes $85,002 at sale price of unsettled agency MBS sale commitments which are 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 months ended March 31, 2021 and 2020:

	March 31, 2021			March 31, 2020
Weighted-average outstanding balance during the three months ended	$	553,842		$	3,162,340
Weighted-average rate during the three months ended		0.35	%		1.83	%

Long-Term Unsecured Debt

As of March 31, 2021 and December 31, 2020, the Company had $73,074 and $73,027, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $678 and $732, respectively. The Company’s long-term debentures consisted of the following as of the dates indicated:

	March 31, 2021									December 31, 2020
	Senior Notes Due 2025			Senior Notes Due 2023			Trust Preferred Debt			Senior Notes Due 2025			Senior Notes Due 2023			Trust Preferred Debt
Outstanding Principal	$	34,931		$	23,821		$	15,000		$	34,931		$	23,828		$	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	%		2.99	%		6.75	%		6.625	%		2.99	%
Maturity	March 15, 2025			May 1, 2023			2033 - 2035			March 15, 2025			May 1, 2023			2033 - 2035

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, Senior Notes due 2025 and Trust Preferred Debt 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 the 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.

During the three months ended March 31, 2021, the Company repurchased $7 in principal balance of Senior Notes due 2023 for a purchase price of $7. There were no repurchases of outstanding long-term unsecured debentures during the three months ended March 31, 2020.

Note 9. 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.

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.

Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments 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 agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

Derivative Instrument Population and Fair Value

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

	March 31, 2021					December 31, 2020
	Assets		Liabilities			Assets		Liabilities
Interest rate swaps	$	1,091	$	—		$	—	$	(147	)
Options on 10-year U.S. Treasury note futures		1		—			—		—
TBA commitments		1,188		(4,267	)		258		(74	)
Total	$	2,280	$	(4,267	)	$	258	$	(221	)

Interest Rate Swaps

The Company’s LIBOR based 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 as of the preceding reset date. The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make annual interest payments based upon a fixed interest rate and receive annual variable interest payments based upon the daily SOFR over the preceding annual period.

The following table presents information about the Company’s interest rate swap agreements that were in effect as of March 31, 2021:

			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	$	200,000		0.10	%		0.11	%		0.01	%		2.6	$	132
3 to less than 7 years		75,000		0.89	%		0.14	%		(0.75	)%		6.8		134
7 to less than 10 years		400,000		1.27	%		0.21	%		(1.06	)%		9.8		825
Total / weighted-average	$	675,000		0.88	%		0.17	%		(0.71	)%		7.3	$	1,091

The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2020:

			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	$	200,000		0.10	%		0.06	%		(0.04	)%		2.9	$	(40	)
3 to less than 10 years		75,000		0.74	%		0.22	%		(0.52	)%		9.5		(107	)
Total / weighted-average	$	275,000		0.28	%		0.10	%		(0.18	)%		4.7	$	(147	)

U.S. Treasury Note Futures

The Company may purchase or sell exchange-traded U.S. Treasury note futures with the objective of economically hedging a portion of its interest rate risk. 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 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.

As of March 31, 2021 and December 31, 2020, the Company had no U.S. Treasury note futures.

Options on U.S. Treasury Note Futures

The Company may purchase or sell exchange-traded options on 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 or call options which provide the Company with the right to sell to counterparty or purchase from a counterparty U.S. Treasury note futures, and the Company may also write put or call options that provide a counterparty with the option to sell to the Company or buy from the Company U.S. Treasury note futures. 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.

Information about the Company’s outstanding options on 10-year U.S. Treasury note futures contracts as of March 31, 2021 is as follows:

Notional Amount

Weighted-average Strike Price

Implied Strike

Rate ⁽¹⁾

Net Fair Value

Purchased call options:

April 2021 expiration

65,200

137.8

0.90

⁽¹⁾

The implied strike rate is estimated based upon the weighted average strike price per contract and the price of an equivalent 10-year U.S. Treasury note futures contract.

As of December 31, 2020, the Company had no outstanding options on U.S. Treasury note futures contracts.

TBA Commitments

The following table presents information about the Company’s TBA commitments as of the date indicated:

	March 31, 2021
	Notional Amount: Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
1.5% 30-year MBS purchase commitments	$	140,000		$	137,238		$	134,914		$	(2,324	)
1.5% 30-year MBS sale commitments		(140,000	)		(134,675	)		(134,914	)		(239	)
2.0% 30-year MBS purchase commitments		200,000			200,844			199,258			(1,586	)
2.0% 30-year MBS sale commitments		(100,000	)		(100,742	)		(99,672	)		1,070
Total TBA commitments, net	$	100,000		$	102,665		$	99,586		$	(3,079	)

	December 31, 2020
	Notional Amount: Purchase (Sale) Commitment			Contractual Forward Price			Market Price			Fair Value
1.5% 30-year MBS purchase commitments	$	50,000		$	50,281		$	50,539		$	258
1.5% 30-year MBS sale commitments		(50,000	)		(50,465	)		(50,539	)		(74	)
Total TBA commitments, net	$	—		$	(184	)	$	—		$	184

Derivative Instrument Gains and Losses

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

	Three Months Ended March 31,
	2021			2020
Interest rate derivatives:
Interest rate swaps:
Net interest (expense) income ⁽¹⁾	$	(710	)	$	592
Unrealized gains, net		21,065			5,945
Losses realized upon early termination, net		(13	)		(109,924	)
Total interest rate swap gains (losses), net		20,342			(103,387	)
U.S. Treasury note futures, net		2,619			(3,071	)
Options on U.S. Treasury note futures, net		(20	)		—
Total interest rate derivative gains (losses), net		22,941			(106,458	)
TBA commitments:
TBA dollar roll income ⁽²⁾		836			105
Other (losses) gains on TBA commitments, net		(9,232	)		4,793
Total (losses) gains on TBA commitments, net		(8,396	)		4,898
Other derivatives		—			(1,040	)
Total derivative gains (losses), net	$	14,545		$	(102,600	)

⁽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 March 31, 2021
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	275,000	$	450,000	$	—		$	(50,000	)	$	675,000
2-year U.S. Treasury note futures		—		50,000		(50,000	)		—			—
10-year U.S. Treasury note futures		—		375,100		(200,000	)		(175,100	)		—
Purchased call options on 10-year U.S. Treasury note futures		—		65,200		—			—			65,200
TBA purchase (sale) commitments, net		—		915,000		(815,000	)		—			100,000

	For the Three Months Ended March 31, 2020
	Beginning of Period		Additions		Scheduled Settlements			Early Terminations			End of Period
Interest rate swaps	$	2,985,000	$	—	$	(100,000	)	$	(2,285,000	)	$	600,000
2-year U.S. Treasury note futures		—		1,150,000		—			(1,150,000	)		—
10-year U.S. Treasury note futures		—		765,000		—			(765,000	)		—
TBA purchase (sale) commitments, net		—		100,000		(100,000	)		—			—
Put options on S&P 500 ETF		—		1,850		(1,850	)	—				—

Cash Collateral Posted and Received for Derivative and Other Financial Instruments

The following table presents information about the cash collateral posted 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:

	March 31, 2021		December 31, 2020
Cash collateral posted for:
Interest rate swaps (cash initial margin)	$	22,605	$	6,306
Unsettled MBS trades and TBA commitments, net		2,816		—
Total cash collateral posted, net	$	25,421	$	6,306

Note 10. 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 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 March 31, 2021
	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	$	1,091	$	—	$	1,091	$	—		$	—		$	1,091
Options on 10-year U.S. Treasury note futures		1		—		1		—			—			1
TBA commitments		1,188		—		1,188		(1,188	)		—			—
Total derivative instruments		2,280		—		2,280		(1,188	)		—			1,092
Total assets	$	2,280	$	—	$	2,280	$	(1,188	)	$	—		$	1,092
Liabilities:
Derivative instruments:
TBA commitments		4,267		—		4,267		(1,188	)		(2,816	)		263
Total derivative instruments		4,267		—		4,267		(1,188	)		(2,816	)		263
Repurchase agreements		505,550		—		505,550		(505,550	)		—			—
Total liabilities	$	509,817	$	—	$	509,817	$	(506,738	)	$	(2,816	)	$	263

	As of December 31, 2020
	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	$	258	$	—	$	258	$	(74	)	$	—		$	184
Total derivative instruments		258		—		258		(74	)		—			184
Total assets	$	258	$	—	$	258	$	(74	)	$	—		$	184
Liabilities:
Derivative instruments:
Interest rate swaps	$	147	$	—	$	147	$	—		$	(147	)	$	—
TBA commitments		74		—		74		(74	)		—			—
Total derivative instruments		221		—		221		(74	)		(147	)		—
Repurchase agreements		655,212		—		655,212		(655,212	)		—			—
Total liabilities	$	655,433	$	—	$	655,433	$	(655,286	)	$	(147	)	$	—

⁽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 11. 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 investments

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 and reviews their documented valuation methodologies 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.

Mortgage credit securities - The Company’s investments in commercial MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow measurement.

The Company’s non-agency MBS investment secured by a pool of business-purpose residential mortgage loans is classified within Level 3 of the fair value hierarchy. To measure the fair value of this investment, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business-purpose residential mortgage loans that serve as collateral, including assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement include the estimated rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represents a market participant’s current required rate of return for a similar instrument. The following table presents the significant unobservable inputs to the fair value measurement of the Company’s non-agency MBS secured by business-purpose residential mortgage loans as of the periods indicated:

	March 31, 2021			December 31, 2020
Annualized default rate		12.0	%		12.0	%
Loss-given-default		32.5	%		40.0	%
Discount rate		13.9	%		13.9	%

Loans – The Company’s mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the loan over its expected remaining life, discounted at a current market rate. The significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment are the estimated probability of default, remaining life of the loan and the discount rate, which is based on current market yields and interest rate spreads for a similar loan. As of March 31, 2021, the estimated probability of default, remaining life and discount rate for the Company’s mortgage loan investment were 0%, 0.8 year and 6.3%, respectively. As of December 31, 2020, the estimated probability of default, remaining life and discount rate for the Company’s mortgage loan investment were 0%, 1.0 year and 6.3%, respectively.

Mortgage loans and secured debt of consolidated VIE – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated VIE. The fair

value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE. Pursuant to the practical expedient, the Company measures the fair value of both the mortgage loans and the debt obligations of its consolidated VIE based upon the fair value of the debt obligations of the VIE, as the fair value of the debt securities issued by the VIE is more observable to the Company than the fair value of the underlying mortgage loans.

The senior debt obligations of the consolidated VIE are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the senior debt obligations of the consolidated VIE include quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics.

The subordinate debt obligation and the mortgage loans of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the subordinate debt obligation of the consolidated VIE, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business-purpose residential mortgage loans that serve as collateral, including assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement include the estimated rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represents a market participant’s current required rate of return for a similar instrument. The following table presents the significant unobservable inputs to the fair value measurement of the subordinate debt obligation as of the periods indicated:

	March 31, 2021			December 31, 2020
Annualized default rate		15.0	%		20.0	%
Loss-given-default		30.0	%		40.0	%
Discount rate		13.9	%		13.9	%

MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company uses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:

•

the discount rate, which represents a market participant’s current required rate of return for similar MSRs;

•

expected rates of prepayment within the serviced pools of mortgage loans;

•

the expected “recapture rate,” which represents the percentage of loans voluntarily prepaid-in-full that are expected to be refinanced by the servicer or subservicer; and

•

annual per-loan cost of servicing.

The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of March 31, 2021:

	March 31, 2021
Discount rate		9.5	%
Annualized prepayment rate		10.5	%
Recapture rate		10.0	%
Annual per-loan cost of servicing (current loans)	$	65.00

Pursuant to the Company’s MSR financing arrangement, upon the consummation of a three-year performance period ending December 31, 2023, the Company’s mortgage servicer counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its counterparty based upon the current fair value of the underlying MSRs. As of March 31, 2021, the present value of the expected incentive fee payment reflected in fair value of the Company’s MSR financing receivables was $1,118.

As of December 31, 2020, the fair value of the Company’s MSR financing receivable was its transacted purchase price, which occurred on 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 or SOFR 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 SOFR 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 March 31, 2021 and December 31, 2020, the carrying value of the Company’s long-term unsecured debt was $73,074 and $73,027, 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 $71,431 and $69,904 as of March 31, 2021 and December 31, 2020, 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 publicly-traded companies – As of March 31, 2021 and December 31, 2020, the Company had investments in equity securities of publicly-traded companies at fair value of $5,995 and $10,821, respectively, which is included in the line item “other assets” in the accompanying consolidated balance sheets. Investments in publicly traded stock are classified within Level 1 of the fair value hierarchy as their fair value is measured based on unadjusted quoted prices in active exchange markets for identical assets.

Investments in equity securities of non-public companies and investment funds – As of March 31, 2021 and December 31, 2020, the Company had investments in equity securities and investment funds measured at fair value of $6,796 and $6,869, respectively, which are included in the line item “other assets” in the accompanying consolidated balance sheets.

Investments in equity securities of non-public companies and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, 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 March 31, 2021, 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 95 percent, 10 percent, and 15 percent, respectively. As of December 31, 2020, 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 95 percent, 10 percent, and 15 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 (aside from those previously discussed) 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 March 31, 2021 and December 31, 2020. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	March 31, 2021
	Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	515,674	$	—	$	515,674	$	—
Mortgage credit securities		16,405		—		3,873		12,532
Mortgage loans of consolidated VIE		57,467		—		—		57,467
Loans		44,914		—		—		44,914
MSR financing receivable		36,005		—		—		36,005
Derivative assets		2,280		1		2,279		—
Other assets		12,791		5,995		—		6,796
Financial liabilities:
Secured debt of consolidated VIE		58,654		—		58,043		611
Derivative liabilities		4,267		—		4,267		—

	December 31, 2020
	Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	970,880	$	—	$	970,880	$	—
Mortgage credit securities		26,660		—		14,730		11,930
Mortgage loans of consolidated VIE		93,283		—		—		93,283
Loans		45,000		—		—		45,000
MSR financing receivable		9,346		—		—		9,346
Derivative assets		258		—		258		—
Other assets		17,690		10,821		—		6,869
Financial liabilities:
Secured debt of consolidated VIE		93,627		—		93,051		576
Derivative liabilities		221		—		221		—

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 financial assets that are measured at fair value on a recurring basis for the periods indicated:

	Three Months Ended March 31,
	2021			2020
Beginning balance	$	166,428		$	51,398
Net gain (loss) included in "Investment gain (loss), net"		6,318			(3,609	)
Purchases		20,344			11,995
Sales		—			—
Payments, net		(36,776	)		(410	)
Accretion of discount		1,400			218
Ending balance	$	157,714		$	59,592
Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date	$	6,318		$	(3,609	)

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

	Three Months Ended March 31,
	2021			2020
Beginning balance	$	576		$	—
Net gain (loss) included in "Investment gain (loss), net"		(39	)		—
Accretion of discount		74			—
Ending balance	$	611		$	—
Net unrealized gains (losses) included in earnings for the period for Level 3 liabilities still held at the reporting date	$	(39	)	$	—

Note 12. Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, the Company is 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 March 31, 2021, the Company had estimated net operating loss (“NOL”) carryforwards of $151,167 that can be used to offset future taxable ordinary income and reduce its REIT distribution requirements. NOL carryforwards totaling $14,588 expire in 2028 and NOL carryforwards totaling $136,579 have no expiration period. As of March 31, 2021, the Company had estimated net capital loss (“NCL”) carryforwards of $180,948 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $66,862 in 2021, $3,763 in 2022 and $110,323 in 2023.

The Company and subsidiaries have made joint elections to treat certain subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. As such, each of these TRSs is taxable as a C corporation and subject to federal, state and local income taxes based upon their taxable income. For the three months ended March 31, 2021, we recognized a provision for income taxes of $398 on the net income of our TRSs.

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 March 31, 2021 and December 31, 2020, 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. If the Company were to incur income tax related interest and penalties, the Company’s policy is to classify them as a component of provision for income taxes.

Note 13. 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, restricted stock units, 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 March 31,
(Shares in thousands)	2021			2020
Basic weighted-average common shares outstanding		33,181			36,711
Performance share units, unvested restricted stock units, and unvested restricted stock		—			—
Diluted weighted-average common shares outstanding		33,181			36,711
Net loss attributable to common stock	$	(6,763	)	$	(94,944	)
Basic loss per common share	$	(0.20	)	$	(2.59	)
Diluted loss per common share	$	(0.20	)	$	(2.59	)

The diluted loss per share for the three months ended March 31, 2021 and 2020 did not include the antidilutive effect of 263 and 106 shares of unvested shares of restricted stock, restricted stock units, and performance share units, respectively.

Note 14. 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 March 31, 2021 and December 31, 2020, 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 “AAIC.”

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. For the quarter ended March 31, 2021 and the year ended December 31, 2020, the Board of Directors determined that the Company would not declare a dividend on its common stock.

Common Equity Distribution Agreements

On August 10, 2018, the Company entered into separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., 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.

During the three months ended March 31, 2021 and the year ended December 31, 2020, there were no issuances of common stock under the common equity distribution agreements.

As of March 31, 2021, the Company had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.

Common Share Repurchase Program

On October 26, 2015, the Company announced that its 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”). On July 31, 2020, the Company announced that its Board of Directors authorized an increase in the Repurchase Program pursuant to which the Company may repurchase up to 18,000,000 shares of Class A common stock, inclusive of 56,090 shares previously available to be repurchased under the prior authorization. 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.

During the three months ended March 31, 2021 and the year ended December 31, 2020, the Company repurchased 137,655 and 3,662,566 shares of Class A common stock for a total purchase price of $523 and $10,377, respectively. As of March 31, 2021, there remain available for repurchase 16,094,994 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 “AAIC PrB” and “AAIC 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. The Company has declared and paid all required quarterly dividends on the Company’s Series B Preferred Stock to date in 2021.

There were no shares of Series B Preferred Stock repurchased by the Company during the three months ended March 31, 2021. During the year ended December 31, 2020, the Company repurchased 17,766 shares of Series B Preferred Stock for a total purchase price of $299.

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. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series C Preferred Stock to date in 2021.

There were no shares of Series C Preferred Stock repurchased by the Company during the three months ended March 31, 2021. During the year ended December 31, 2020, the Company repurchased 82,966 shares of Series C Preferred Stock for a total purchase price of $1,578.

Preferred Equity Distribution Agreements

On March 21, 2019, the Company entered into an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC, B. Riley FBR, Inc., Compass Point Research and Trading, LLC and Ladenburg Thalmann & Co. Inc., 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 Series B preferred equity distribution agreement, shares of the Company’s Series B Preferred stock may be offered and sold through the 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.

During the three months ended March 31, 2021 and the year ended December 31, 2020, there were no issuances of preferred stock under the Series B preferred equity distribution agreement. As of March 31, 2021, the Company had 1,645,961 shares of Series B Preferred stock available for sale under the 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 Internal Revenue 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 Internal Revenue 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 Internal Revenue 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, 2020.

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, 2020.

Our Company

We are an investment firm that focuses primarily on investing in mortgage related assets. We may also invest in other asset classes that our management team believes may offer attractive risk adjusted returns, such as real estate assets or investments outside the real estate or mortgage asset classes. Our investment capital is currently allocated between agency MBS, mortgage credit investments and MSR related assets.

Our agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either a 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”). Our mortgage credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”). The principal and interest of our mortgage credit investments are not guaranteed by a GSE or a U.S government agency. Our MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs.

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

We are 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;

•

the impacts of the coronavirus (“COVID-19”) pandemic;

•

changes in interest rates and prepayment rates;

•

conditions in the 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

During the first quarter of 2021, risk asset prices and bond yields rose amid a progressing global economic recovery, the approval of a $1.9 billion U.S. fiscal stimulus package, a broader rollout of COVID-19 vaccines, and expectations of an eventual full economic reopening.

The 10-year U.S. Treasury rate increased 83 basis points during the first quarter to 1.74% as of March 31, 2021. The U.S. Treasury curve steepened during the first quarter as the spread between the 2-year and 10-year U.S. Treasury rate widened 79 basis points resulting in a spread of 158 basis points as of March 31, 2021.

At its March 17, 2021 meeting, the Federal Open Market Committee (“FOMC”) stated that it expects to continue to maintain an accommodative monetary policy stance and will keep its target range for the federal funds rate at 0% to 0.25%. In addition, the FOMC reaffirmed that it will continue with its asset purchase program to help foster smooth market functioning and accommodative financial conditions by continuing to increase its holdings of Treasury securities by at least $80 billion per month and agency MBS by at least $40 billion per month.

Prepayment speeds in the fixed-rate residential mortgage market increased during the first quarter of 2021 in response to the decrease in mortgage rates to historically low levels in 2020. However, the rise in the 10-year U.S. Treasury rate during the first quarter of 2021 has led to a corresponding increase in mortgage rates. Looking forward, market expectations are that historically low interest rates will keep prepayment speeds elevated in the near term although they could begin to moderate with the recent increase in mortgage rates. Pay-up premiums on agency MBS, which represent the price premium of agency MBS backed by specified pools over a TBA security, declined slightly during the first quarter of 2021 as a result of the increase in long-term interest rates and reflecting a moderation of prepayment expectations.

Housing prices have strengthened significantly, as evidenced by the Standard & Poor’s CoreLogic Case-Shiller U.S. National Home Price NSA index reporting an 11.2% annual gain in January 2021 with the annual gain the highest recorded in nearly 15 years. The strong gains in housing continue to be driven by low mortgage rates and low supply of homes for sale as well as the impact of the COVID-19 pandemic increasing the number of potential home buyers moving from urban apartments to suburban homes.

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

	March 31, 2020			June 30, 2020			September 30, 2020			December 31, 2020			March 31, 2021			Change - First Quarter 2021

30-Year FNMA Fixed Rate MBS ⁽¹⁾
2.0%	NM			$	102.32		$	103.39		$	103.95		$	99.67		$	(4.28	)
2.5%		103.55			104.23			104.89			105.45			102.51			(2.94	)
3.0%		104.86			105.30			104.77			104.80			104.13			(0.67	)
3.5%		105.80			105.17			105.48			105.73			105.61			(0.12	)
4.0%		106.77			105.95			106.64			106.80			107.32			0.52
4.5%		107.64			107.45			108.17			108.39			108.87			0.48

Investment Spreads
FNMA Current Coupon vs. 10-year Swap Rate	108 bps			93 bps			69 bps			42 bps			26 bps			-16 bps
CMBS 2.0/3.0 BBB- vs. Swap Curve	1,100 bps			735 bps			500 bps			475 bps			390 bps			-85 bps

U.S. Treasury Rates (UST)
2-year UST		0.25	%		0.15	%		0.13	%		0.12	%		0.16	%	4 bps
5-year UST		0.38	%		0.29	%		0.28	%		0.36	%		0.94	%	58 bps
10-year UST		0.67	%		0.66	%		0.68	%		0.91	%		1.74	%	83 bps
2-year UST to 10-year UST spread	42 bps			51 bps			55 bps			79 bps			158 bps			79 bps

Interest Rate Swap Rates
2-year swap		0.49	%		0.23	%		0.22	%		0.20	%		0.29	%	9 bps
5-year swap		0.52	%		0.33	%		0.35	%		0.43	%		1.06	%	63 bps
10-year swap		0.72	%		0.64	%		0.71	%		0.93	%		1.78	%	85 bps
2-year swap to 2-year UST spread	24 bps			8 bps			9 bps			8 bps			13 bps			5 bps
10-year swap to 10-year UST spread	5 bps			-2 bps			3 bps			2 bps			4 bps			2 bps

London Interbank Offered Rates (LIBOR)
1-month LIBOR		0.99	%		0.16	%		0.15	%		0.14	%		0.11	%	-3 bps
3-month LIBOR		1.45	%		0.30	%		0.23	%		0.24	%		0.19	%	-5 bps
SOFR		0.08	%		0.09	%		0.09	%		0.07	%		0.01	%	-6 bps

⁽¹⁾	Generic 30-year FNMA TBA price information, sourced from Bloomberg, is 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

LIBOR Transition

The ICE Benchmark Administration Limited (“IBA”) is a benchmark administrator that is authorized and regulated by the U.K. Financial Conduct Authority (“FCA”) to administer the publication of LIBOR. On July 27, 2017, the FCA announced that it intends to stop persuading or compelling banks to submit LIBOR rates after December 31, 2021, which could either cause LIBOR to stop publication immediately or cause LIBOR’s regulator to determine that its quality had degraded to the degree that it is no longer representative of its underlying market. On November 30, 2020, the IBA announced that it intends to consult on its intention to cease publication of one-week and two-month LIBOR after December 31, 2021 and cease publication of overnight, one-month, three-month, six-month and twelve-month LIBOR after June 30, 2023. The consultation results have not yet been published, but it is unlikely that any setting of LIBOR will continue beyond June 2023. The U.S. Federal Reserve and the Federal Reserve Bank of New York jointly convened the Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of private sector entities, each with an important presence in markets effected by LIBOR, and official-sector entities, including banking and financial sector regulators. The ARCC’s initial objectives were to identify risk-free alternative reference rates for U.S. dollar LIBOR, identify best practices for contract robustness and create an implementation plan. The ARRC identified SOFR, a new index calculated by short-term repurchase agreements backed by U.S. Treasury securities, as the rate that represents the best replacement for U.S. dollar LIBOR in most U.S. dollar derivatives and other financial contracts. In April 2018, the Federal Reserve Bank of New York began publishing SOFR rates. The ARRC also published its transition plan with specific steps and timelines designed to encourage the adoption of SOFR. The likely market transition away from LIBOR and towards SOFR is expected to be gradual and complicated.

On March 5, 2021, the FCA announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021, announcement of the IBA, indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and LIBOR reflects term rates at different maturities while SOFR is an overnight rate. 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 either higher or lower than if LIBOR were available in its current form, which could have a material adverse effect on our results. Although SOFR is the ARRC's recommended replacement rate, it is also possible that lenders may instead choose alternative replacement rates that may differ from LIBOR in ways similar to SOFR or in other ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.

We are party to various financial instruments which include LIBOR as a reference rate. As of March 31, 2021, these financial instruments include interest rate swap agreements, a mortgage loan investment, and preferred stock and unsecured notes issued by the Company.

As of March 31, 2021, we had $475 million notional amount of interest rate swaps outstanding that expire after 2021 in which we make semiannual interest payments based upon a fixed interest rate and receive quarterly interest payments based upon the prevailing three-month LIBOR on the date of reset. The interest rate swap agreements are centrally cleared by the Chicago Mercantile Exchange (“CME”) which acts as the calculation agent with the terms and conditions of each interest rates swap agreement defined in the CME Rulebook and supplemented by the rules published by the International Swaps and Derivative Association, Inc. (“ISDA”). The fallback terms of interest rate swap agreements that have LIBOR as a reference rate were not designed to cover a permanent discontinuation of LIBOR. Under the terms of the current ISDA definitions, if the publication of LIBOR is not available, the current fallback is for the calculation agent to obtain quotations for what LIBOR should be from major banks in the interbank market. If LIBOR is permanently discontinued, it is possible that major banks would be unwilling and/or unable to give such quotations. Even if quotations were available in the near-term after the permanent discontinuation, it is unlikely that they will be available for each future reset date over the remaining tenor of our interest rate swap agreements. ISDA is currently leading an effort to amend its definitions to include fallbacks for an alternative reference rate that would apply upon the permanent discontinuation of LIBOR. It is anticipated that the amended ISDA definitions would include a statement identifying the objective triggers that would activate a fallback alternative interest rate provision and a description of the fallback alternative interest rate, which is expected to be SOFR adjusted for the fact that SOFR is an overnight rate and the various premia included within LIBOR. It is expected that the CME Rulebook would incorporate any amendments to the ISDA definitions. However, under the terms of the CME Rulebook, if a fallback to an alternative interest rate has not been triggered under future amended ISDA definitions, the CME as the calculation agent has the sole discretion to select an alternative interest rate if it determines that LIBOR is no longer representative of its underlying market.

As of March 31, 2021, we had a mortgage loan investment with a principal balance outstanding of $44.9 million that bears interest at one-month LIBOR plus a spread of 4.25% with a LIBOR floor of 2.00%. The loan matures on December 30, 2021 with a

one-year extension available at the option of the borrower. Under the terms of the loan agreement, if the administrative agent of the loan determines that LIBOR cannot be determined and LIBOR has been succeeded by an alternative floating rate index (i) that is commonly accepted by market participants as an alternative to LIBOR as determined by the administrative agent, (ii) that is publicly recognized by ISDA as an alternative to LIBOR, and (iii) for which ISDA has approved an amendment to hedge agreements generally providing such floating rate index as a standard alternative to LIBOR, then the administrative agent would use such alternative floating rate index as the fallback rate. If the administrative agent determines that no alternative rate index is available, then the fallback interest rate would be based on the prime rate plus an applicable spread.

As of March 31, 2021, we had $15.0 million of junior subordinated debt outstanding that require quarterly interest payments at three-month LIBOR plus a spread of 2.25% to 3.00% and matures between 2033 and 2035. Under the terms of the indenture agreement for the notes, if the publication of LIBOR is not available, the current fallback is for the independent calculation agent to obtain quotations for what LIBOR should be from major banks in the interbank market. If the calculation agent is unable to obtain such quotations, then the LIBOR in effect for future interest payments would be LIBOR in effect for the immediately preceding interest payment period.

As of March 31, 2021, we had 1,117,034 shares of 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) outstanding with a liquidation preference of $27.9 million. The Series C Preferred Stock is entitled to receive a cumulative cash dividend (i) from and including the original issue to, but excluding, March 30, 2024 at a fixed rate of 8.250% per annum of the $25.00 per share liquidation preference, 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 liquidation preference. Under the terms of our Articles of Incorporation, if the publication of LIBOR is not available, the current fallback is for the Company to obtain quotations for what LIBOR should be from major banks in the interbank market. If we are unable to obtain such quotations, we are required to appoint an independent calculation agent, which will determine LIBOR based on sources it deems reasonable in its sole discretion. If the calculation agent is unable or unwilling to determine LIBOR, then the LIBOR in effect for future dividend payments would be LIBOR in effect for the immediately preceding dividend payment period. Notwithstanding the preceding section of this paragraph, if we determine that LIBOR has been discontinued, we will appoint an independent calculation agent to determine whether there is an industry accepted substitute or successor base rate to three-month LIBOR. If the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent shall use such substitute or successor base rate. If the calculation agent determines that there is not an accepted substitute or successor base rate, then the calculation agent will follow the original fallback language.

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. While we expect LIBOR to be available in substantially its current form until the end of 2021, and likely based on IBA's announced consultation through June 2023, if sufficient banks decline to make submissions to IBA, it is possible that LIBOR will become unavailable prior to that point. 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, loans, derivatives and other financial obligations on which the interest or dividend is determined by reference to LIBOR, which could negatively impact 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.”

COVID-19 Stimulus

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into legislation that authorizes more than $2 trillion in economic relief to individuals, businesses and government organizations due to the economic and health impacts of the COVID-19 pandemic. Among its many provisions, the CARES Act instituted a foreclosure moratorium and borrower right to request forbearance on any federally-backed residential mortgage, including mortgage loans in agency MBS. More specifically, commencing March 18, 2020, foreclosures were not allowed for 60 days. Subsequently, the FHFA announced that Fannie Mae and Freddie Mac had extended the moratorium on foreclosures until at least December 31, 2020. In addition, under the CARES Act, borrowers of federally-backed residential mortgages may request forbearance if the borrower has experienced financial hardship as a result of the COVID-19 pandemic. If forbearance is requested by the borrower, the loan servicer is required to grant forbearance for up to 180 days that can be extended for an additional 180 days at the borrower’s request. During the forbearance period, the servicer cannot charge or collect any fees, penalties, or interest beyond what could be charged if the borrower made all payments timely.

On January 20, 2021, President Biden signed an executive order to extend foreclosure moratoriums to at least March 31, 2021 for all federally-backed residential mortgages, and on February 9, 2021, the FHFA announced that Fannie Mae and Freddie Mac were extending foreclosure moratoriums until March 31, 2021 for mortgages guaranteed by Fannie Mae and Freddie Mac. On February 16,

2021, President Biden signed another executive order to further extend foreclosure moratoriums through June 30, 2021 for all federally-backed residential mortgages. In addition, the executive order extended the mortgage payment forbearance enrollment window until June 30, 2021 for borrowers of federally-backed residential mortgages who wish to request forbearance and provides up to six months of additional mortgage payment forbearance, in the three-month increments, for borrowers who entered forbearance on or before June 30, 2020. On February 25, 2021, the FHFA announced that Fannie Mae and Freddie Mac also extended their foreclosure and forbearance periods to align with the federal government’s new periods. On March 11, 2021, President Biden signed the $1.9 trillion American Rescue Plan Act of 2021 into law. This stimulus program furthered the federal government’s efforts to stabilize the economy and provide assistance to sectors of the population still suffering from the various physical and economic effects of the pandemic.

On September 4, 2020, the Centers for Disease Control and Prevention (“CDC”) issued a federal eviction moratorium that temporarily halted residential evictions of qualifying tenants for nonpayment of rent during the period from September 4, 2020 to December 31, 2020. In December 2020, the Consolidated Appropriations Act, 2021 was signed into law, which is an Omnibus spending bill that included a second COVID-19 stimulus bill (the “Second Stimulus”). In addition to providing stimulus checks for individuals and families, the Second Stimulus provides for, among other things, (i) an extension of federal unemployment insurance benefits, (ii) funding to help individuals connect remotely during the pandemic, (iii) tax credits for companies offering paid sick leave and (iv) funding for vaccine distribution and development. As further described below, the Second Stimulus provided an additional $25 billion in tax-free rental assistance and an executive order by President Biden extended the temporary eviction moratorium promulgated by the CDC through March 31, 2021. On April 13, 2021, the CDC issued a temporary eviction moratorium that extended eviction moratorium through June 30, 2021.

The CDC order will likely prevent some mortgagors from evicting certain tenants who are not current on their monthly payments of rent and who qualify for relief under the CDC order, which may present a greater risk that the mortgagor will stop making monthly mortgage loan payments. The CDC order by its terms does not preempt or preclude state and local jurisdictions from more expansive orders currently in place or from imposing additional or more restrictive requirements than the CDC order to provide greater public health protection and, across the country, similar moratoriums are in place in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by COVID-19. The CDC’s moratorium and any other similar state moratoriums or bans could adversely impact the cash flow on mortgage loans

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.

Portfolio Overview

Due in part to conditions created by the COVID-19 pandemic, during the year ended December 31, 2020 and continuing into the three months ended March 31, 2021, we took strategic actions to reduce our risk by lowering our leverage and increasing our liquidity position. We reduced our “at risk” leverage ratio to 1.4 to 1 as of March 31, 2021 by selling mortgage investments and reducing our repo borrowings. In order to preserve liquidity, our Board of Directors did not declare a dividend on our common stock during the first quarter of 2021. As of March 31, 2021, our liquid assets totaled $181.6 million consisting of cash and cash equivalents of $48.2 million and unencumbered agency MBS of $133.4 million at fair value. With our increased amount of available liquidity, we intend to identify, evaluate and potentially invest in new attractive investment opportunities that may be created in the current economic environment.

The following table summarizes our mortgage investment portfolio at fair value as of March 31, 2021 (dollars in thousands):

	March 31, 2021
	Assets		Capital Allocation ⁽¹⁾		Capital Allocation (%)			Leverage ⁽²⁾
Agency MBS and net long TBA commitments ⁽³⁾	$	615,260	$	235,258		75	%		1.8
Mortgage credit investments
Commercial mortgage loan		44,914		13,414		4	%		2.3
Business purpose loan residential MBS ⁽⁴⁾		22,163		22,163		7	%		—
Small balance commercial MBS		3,873		3,873		1	%		—
Other		1,847		1,847		1	%		—
Total mortgage credit investments		72,797		41,297		13	%		0.8
MSR financing receivable		36,005		36,005		12	%		—
Total mortgage investments	$	724,062	$	312,560		100	%		1.4

⁽¹⁾

Our investable capital is calculated as the sum of our shareholders’ equity capital and long-term unsecured debt.

⁽²⁾

Our leverage is measured as the ratio of the sum of our repurchase agreement financing, net payable or receivable for unsettled securities and net contractual forward purchase price of our TBA commitments less our cash and cash equivalents compared to our investable capital.

⁽³⁾

Includes our investment in net long TBA commitments totaling $99,586. 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 liability carrying value of $3,079.

⁽⁴⁾

Includes our net investment of $11,478 in a VIE with gross assets and liabilities of $70,333 and $58,855, respectively, that is consolidated for GAAP financial reporting purposes.

Agency MBS Investment Portfolio

Our specified agency MBS consisted of the following as of March 31, 2021 (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:
2.0%	$	253,517	$	10,779	$	264,296	$	(10,565	)	$	253,731	$	100.08		2.00	%		8.4
2.5%		253,377		14,089		267,466		(5,537	)		261,929		103.38		2.50	%		7.2
5.5%		12		—		12		2			14		116.07		5.50	%		5.0
Total/weighted-average	$	506,906	$	24,868	$	531,774	$	(16,100	)	$	515,674	$	101.73		2.25	%		7.8

	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	$	328,677	$	16,697	$	345,374	$	(10,652	)	$	334,722	$	101.84		2.28	%		8.0
Freddie Mac		178,229		8,171		186,400		(5,448	)		180,952		101.53		2.20	%		7.6
Total/weighted-average	$	506,906	$	24,868	$	531,774	$	(16,100	)	$	515,674	$	101.73		2.25	%		7.8

The annualized prepayment rate for our agency MBS was 5.26% for the three months ended March 31, 2021. As of March 31, 2021, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 69% in specified pools of low balance loans while the remainder includes specified pools of loans originated in certain geographical areas. Weighted average pay-up premiums on our agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately 0.94% as of March 31, 2021.

Our agency MBS 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 our net long TBA positions as of March 31, 2021 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⁾
1.5% 30-year MBS purchase commitments	$	140,000		$	137,238		$	134,914		$	(2,324	)
1.5% 30-year MBS sale commitments		(140,000	)		(134,675	)		(134,914	)		(239	)
2.0% 30-year MBS purchase commitments		200,000			200,844			199,258			(1,586	)
2.0% 30-year MBS sale commitments		(100,000	)		(100,742	)		(99,672	)		1,070
Total net long agency TBA dollar roll positions	$	100,000		$	102,665		$	99,586		$	(3,079	)

⁽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.”

Mortgage Credit Investment Portfolio

As of March 31, 2021, our mortgage credit investment portfolio was primarily comprised of a $44.9 million commercial mortgage loan secured by a first lien position in healthcare facilities and $26.0 million in non-agency MBS investments collateralized by pools of business purpose residential mortgage loans and small balance commercial mortgage loans, including an $11.5 million net investment in a consolidated variable interest entity (“VIE”). The following table presents further information about our mortgage credit investments as of March 31, 2021 (dollars in thousands):

	Unpaid Principal Balance		Net Unamortized Premiums (Discounts)			Amortized Original Cost Basis		Net Unrealized Gain (Loss)			Fair Value ⁽¹⁾		Market Price
Commercial mortgage loan	$	44,914	$	—		$	44,914	$	—		$	44,914	$	100.00
Business purpose residential MBS⁽²⁾		24,599		1,265			25,864		(3,701	)		22,163		90.64
Commercial MBS		6,000		(812	)		5,188		(1,315	)		3,873		64.03
Other		2,680		(794	)		1,886		(39	)		1,847		69.03
Total/weighted-average	$	78,193	$	(341	)	$	77,852	$	(5,055	)	$	72,797	$	93.23

⁽¹⁾	For investments in mortgage credit securities, includes contractual accrued interest receivable.

⁽²⁾	Includes our net investment of $11,478 in a VIE with gross assets and liabilities of $70,333 and $58,855, respectively, that is consolidated for GAAP financial reporting purposes.

MSR Financing Receivables

As of March 31, 2021, we had $36 million of MSR financing receivable investments at fair value. We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows us to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. The transactions are accounted for as a financing receivable in our consolidated financial statements. The following table presents further information about our MSR financing receivable investments as of March 31, 2021 (dollars in thousands):

Underlying MSR
Holder of Loans	UPB		Weighted-Average Note Rate			Weighted-Average Servicing Fee			Weighted-Average Loan Age	Price			Multiple ⁽¹⁾		Financing Receivable Fair Value
Fannie Mae	$	3,253,378		2.99	%		0.26	%	6 months		1.10	%		4.22	$	36,005

⁽¹⁾

Calculated as the underlying MSR price divided by the weighted-average servicing fee.

Economic Hedging Instruments

We attempt to hedge a portion of our exposure to interest rate fluctuations associated with our 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 our short-term financing arrangements. As of March 31, 2021, the interest rate hedging instruments primarily used by us were centrally cleared interest rate swap agreements.

Our LIBOR-based 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 as of the preceding reset date. Our SOFR-based interest rate swap agreements represent agreements to make annual interest payments based upon a fixed interest rate and receive annual variable interest payments based upon the daily SOFR over the preceding annual period. Information about our outstanding interest rate swap agreements in effect as of March 31, 2021 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	$	200,000		0.10	%		0.11	%		0.01	%		2.6
3 to less than 7 years		75,000		0.89	%		0.14	%		(0.75	)%		6.8
7 to less than 10 years		400,000		1.27	%		0.21	%		(1.06	)%		9.8
Total / weighted-average	$	675,000		0.88	%		0.17	%		(0.71	)%		7.3

In addition to interest rate swap agreements, we may also use 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, we have 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. As of March 31, 2021, we had no outstanding U.S. Treasury note futures.

Results of Operations

Net Interest Income

Net interest income determined in accordance with GAAP primarily represents the interest income recognized from our specified agency MBS, mortgage credit investments and MSR financing receivables (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 the Company’s mortgage investments 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 named 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, local license taxes, office supplies and other miscellaneous expenses.

Three months ended March 31, 2021 compared to the three months ended March 31, 2020

The following table presents the net income (loss) available (attributable) to common stock reported for the three months ended March 31, 2021 and 2020, respectively (dollars in thousands, except per share amounts):

	Three Months Ended March 31,
	2021			2020
Interest income	$	6,259		$	24,973
Interest expense		2,501			15,832
Net interest income		3,758			9,141
Investment loss, net		(6,763	)		(100,068	)
General and administrative expenses		(2,637	)		(3,243	)
Loss before income taxes		(5,642	)		(94,170	)
Income tax provision		398			—
Net loss		(6,040	)		(94,170	)
Dividend on preferred stock		(723	)		(774	)
Net loss attributable to common stock	$	(6,763	)	$	(94,944	)
Diluted loss per common share	$	(0.20	)	$	(2.59	)
Weighted-average diluted common shares outstanding		33,181			36,711

GAAP Net Interest Income

Net interest income determined in accordance with GAAP (“GAAP net interest income”) decreased $5.3 million, or 58.2%, from $9.1 million for the three months ended March 31, 2020 to $3.8 million for the three months ended March 31, 2021. The decrease from the comparative period is primarily the result of lower average investment balances resulting from our strategic actions to reduce our risk by lowering leverage and increasing our liquidity position.

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

	Three Months Ended March 31,
	2021								2020
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	717,089	$	2,784			1.55	%	$	3,311,638	$	23,388			2.82	%
Mortgage credit investments		64,541		1,269			7.86	%		87,057		1,442			6.63	%
Mortgage loans of consolidated VIE		83,261		1,687			8.10	%		—		—
MSR financing receivable		15,433		358			9.28	%		—		—
Other		—		161						—		143
	$	880,324		6,259			2.84	%	$	3,398,695		24,973			2.94	%
Repurchase agreements	$	553,842		(488	)		(0.35	)%	$	3,162,340		(14,592	)		(1.83	)%
Long-term unsecured debt		73,047		(1,151	)		(6.30	)%		74,365		(1,240	)		(6.67	)%
Secured debt of consolidated VIE		69,726		(862	)		(4.95	)%		—		—
	$	696,615		(2,501	)		(1.43	)%	$	3,236,705		(15,832	)		(1.94	)%
Net interest income/spread ⁽¹⁾			$	3,758			1.98	%			$	9,141			1.11	%
Net interest margin ⁽¹⁾							2.23	%							1.22	%

(1)

Net interest spread and net interest margin rates exclude interest on long-term unsecured debt.

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

	Three Months Ended March 31, 2021
	vs.
	Three Months Ended March 31, 2020
	Rate			Volume			Total Change
Agency MBS	$	(2,281	)	$	(18,323	)	$	(20,604	)
Mortgage credit investments		218			(391	)		(173	)
Mortgage loans of consolidated VIE		—			1,687			1,687
MSR financing receivable		—			358			358
Other		—			18			18
Repurchase agreements		2,067			12,037			14,104
Long-term unsecured debt		67			22			89
Secured debt of consolidated VIE		—			(862	)		(862	)
	$	71		$	(5,454	)	$	(5,383	)

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 general and administrative expenses. For a full description of each of the three aforementioned components of economic net interest income, see “Non-GAAP Core Operating Income” below.

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

	Three Months Ended March 31,
	2021								2020
	Average		Income			Yield			Average		Income			Yield
	Balance		(Expense)			(Cost)			Balance		(Expense)			(Cost)
Agency MBS	$	717,089	$	2,784			1.55	%	$	3,311,638	$	23,388			2.82	%
Mortgage credit investments		64,541		1,269			7.86	%		87,057		1,442			6.63	%
Mortgage loans of consolidated VIE		83,261		1,687			8.10	%		—		—
MSR financing receivable		15,433		358			9.28	%		—		—
TBA dollar rolls ⁽¹⁾		123,401		836			2.71	%		43,750		105			0.96	%
Other		—		161						—		143
Repurchase agreements		553,842		(488	)		(0.35	)%		3,162,340		(14,592	)		(1.83	)%
Interest rate swaps ⁽²⁾		505,799		(710	)		(0.56	)%		2,417,903		592			0.10	%
Long-term unsecured debt		73,047		(1,151	)		(6.30	)%		74,365		(1,240	)		(6.67	)%
Secured debt of consolidated VIE		69,726		(862	)		(4.95	)%		—		—
Economic net interest income/margin ⁽³⁾			$	3,884			2.01	%			$	9,838			1.29	%

(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)

Net interest spread and net interest margin rates exclude 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 March 31, 2021
	vs.
	Three Months Ended March 31, 2020
	Rate			Volume			Total Change
Agency MBS	$	(2,281	)	$	(18,323	)	$	(20,604	)
Mortgage credit investments		218			(391	)		(173	)
Mortgage loans of consolidated VIE		—			1,687			1,687
MSR financing receivable		—			358			358
TBA dollar rolls		540			191			731
Other		—			18			18
Repurchase agreements		2,067			12,037			14,104
Interest rate swaps		(835	)		(467	)		(1,302	)
Long-term unsecured debt		67			22			89
Secured debt of consolidated VIE		—			(862	)		(862	)
	$	(224	)	$	(5,730	)	$	(5,954	)

Economic net interest income for the three months ended March 31, 2021 decreased relative to the comparative period from the prior year primarily as a result of lower average investment balances resulting from our strategic actions to reduce our risk by lowering leverage and increasing our liquidity position.

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 derivative hedging instruments and MSR financing receivables generally increase (decrease) in response to increases (decreases) in prevailing interest rates. While our interest rate derivative hedging instruments are designed to mitigate the sensitivity of the fair value of our agency MBS portfolio to fluctuations in 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 investments and interest rate hedging instruments for the periods indicated (dollars in thousands):

	Three Months Ended March 31,
	2021			2020
(Losses) gains on agency MBS investments, net	$	(29,215	)	$	23,518
Gains (losses) on mortgage credit investments, net		1,593			(20,424	)
Gains on MSR financing receivables		5,957			—
TBA commitments, net:
TBA dollar roll income		836			105
Other (losses) gains from TBA commitments, net		(9,232	)		4,793
Total (losses) gains on TBA commitments, net		(8,396	)		4,898
Interest rate derivatives:
Net interest (expense) income on interest rate swaps		(710	)		592
Other gains (losses) from interest rate derivative instruments, net		23,651			(107,050	)
Total gains (losses) on interest rate derivatives, net		22,941			(106,458	)
Other derivatives, net		—			(1,040	)
Other investments, net		357			(562	)
Investment loss, net	$	(6,763	)	$	(100,068	)

As of the end of 2020, our agency MBS portfolio’s asset and hedge construct was modestly biased toward lower interest rates. As a result, during the three months ended March 31, 2021, our agency MBS investments and TBA commitments underperformed relative to our interest rate hedging instruments in response to increases in interest rates.

During the three months ended March 31, 2020, agency MBS spreads widened significantly which resulted in the underperformance of our investments in agency MBS and TBA commitments relative to our interest rate hedging instruments. Non-agency MBS prices declined substantially during the three months ended March 31, 2020 as spreads widened significantly due to severe dislocations in the market for non-agency MBS along with uncertainty surrounding the extent of potential credit losses due to the economic downturn.

General and Administrative Expenses

General and administrative expenses decreased by $0.6 million, or 18.8%, from $3.2 million for the three months ended March 31, 2020 to $2.6 million for the three months ended March 31, 2021. The decrease in general and administrative expenses for the three months ended March 31, 2021 is primarily due to a decrease in compensation and benefits expense.

Compensation and benefits expense decreased by $0.5 million, or 26.3%, from $1.9 million for the three months ended March 31, 2020 to $1.4 million for the three months ended March 31, 2021. The decrease in compensation and benefits for the three months ended March 31, 2021 is primarily due to a decrease in management cash incentive compensation.

Other general and administrative expenses decreased by $0.2 million, or 14.3%, from $1.4 million for the three months ended March 31, 2020 to $1.2 million for the three months ended March 31, 2021.

Income Tax Provision

Our taxable REIT subsidiaries (“TRSs”) are subject to U.S. federal and state corporate income taxes. As a result, for the three months ended March 31, 2021, we recognized a provision for income taxes of $0.4 million on the pre-tax net income of our TRSs. As noted in “Non-GAAP Core Operating Income” below, our computation of non-GAAP core operating income includes a provision for income taxes on the core operating income of our TRSs. TRS core operating income is comprised of net interest income generated by TRSs net of the TRSs’ general and administrative expenses. In our consolidated financial consolidated statements of comprehensive income prepared in accordance with GAAP, the “income tax provision (benefit)” includes (i) the income tax provision for TRS core operating income and (ii) an income tax provision for (or benefit from) periodic increases (or decreases) in the fair value of the investments of our TRSs, which are recognized in net income as a component of “investment gain (loss) net.” Below is a reconciliation of the income tax provision for TRS core operating income, a non-GAAP financial measure, to the income tax provision determined in accordance with GAAP:

	Three Months Ended March 31,
	2021		2020
Income tax provision for TRS core operating income	$	11	$	—
Income tax provision for TRS investment gains, net		387		—
GAAP income tax provision	$	398	$	—

Non-GAAP Core Operating Income

In addition to the results of operations determined in accordance with GAAP, we also report “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” and preferred stock dividends.

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 our 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, mortgage credit investments and MSR financing receivables (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 income.

•

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.

Income Tax Provision for TRS Core Operating Income

Our TRSs are subject to U.S. federal and state corporate income taxes. Our computation of core operating income includes a provision for income taxes on the core operating income of our TRSs. The core operating income of our TRSs is comprised of net interest income generated by our TRSs net of our TRSs’ general and administrative expenses. In our consolidated statements of comprehensive income prepared in accordance with GAAP, the “income tax provision (benefit)” includes (i) the income tax provision for TRS core operating income and (ii) an income tax provision for (or benefit from) periodic increases (or decreases) in the fair value of the investments of our TRSs, which are recognized in net income as a component of “investment gain (loss) net.”

Non-GAAP Core Operating Income

The following table presents our computation of non-GAAP core operating income for the three months ended March 31, 2021 and 2020 (amounts in thousands, except per share amounts):

	Three Months Ended March 31,
	2021			2020
GAAP net interest income	$	3,758		$	9,141
TBA dollar roll income		836			105
Interest rate swap net interest (expense) income		(710	)		592
Economic net interest income		3,884			9,838
Core general and administrative expenses		(2,134	)		(2,850	)
Preferred stock dividend		(723	)		(774	)
Income tax provision for TRS core operating income		(11	)		—
Non-GAAP core operating income	$	1,016		$	6,214

Non-GAAP core operating income per diluted common share	$	0.03		$	0.17
Weighted average diluted common shares outstanding		33,444			36,817

The following table provides a reconciliation of GAAP net income (loss) to non-GAAP core operating income for the three months ended March 31, 2021 and 2020 (amounts in thousands):

	Three Months Ended March 31,
	2021			2020
GAAP net loss	$	(6,040	)	$	(94,170	)
Add (less):
Total investment loss, net		6,763			100,068
Stock-based compensation expense		503			393
Income tax provision for TRS investment gain (loss)		387			—
Preferred stock dividend		(723	)		(774	)
Add back:
TBA dollar roll income		836			105
Interest rate swap net interest (expense) income		(710	)		592
Non-GAAP core operating income	$	1,016		$	6,214

Non-GAAP core operating income is used by management to evaluate the financial performance of our 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 our 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 mortgage investments and 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 mortgage 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 mortgage investments and 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 are 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 mortgage investments, and proceeds from sales of mortgage investments. 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 March 31, 2021, our debt-to-equity leverage ratio was 2.7 to 1 measured as the ratio of the sum of our total debt to our stockholders’ equity as reported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” leverage ratio. Our “at risk” leverage ratio is measured as the ratio of the sum of our 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 March 31, 2021, our “at risk” leverage ratio was 1.4 to 1.

As of March 31, 2021, the Company’s liquid assets totaled $181.6 million consisting of cash and cash equivalents of $48.2 million and unencumbered agency MBS of $133.4 million at fair value. Cash equivalents consist primarily of money market funds invested in debt obligations of the U.S. government.

Due to the ongoing economic impact of the COVID-19 pandemic on the financial markets, we may experience increased difficulty in our financing operations. During the period immediately after the beginning of the COVID-19 pandemic, mortgage REITs experienced severe disruptions in financing operations (including the cost, attractiveness and availability of financing), in particular the ability to utilize repurchase financing and the margin requirements related to such financing. While funding conditions have improved significantly since mid-2020, if the ongoing economic impact of COVID-19 again cause severe disruptions in financing operations, we could experience an unwillingness or inability of our potential lenders to provide us with or renew financing, increased margin calls, and/or additional capital requirements. These conditions could force us to sell our assets at inopportune times or otherwise cause us to potentially revise our strategic business initiatives, which could adversely affect our business.

We are continuing to monitor the rapid developments around COVID-19 and the related impacts to our business. In response to the economic uncertainty that has unfolded as a result of COVID-19, we took steps to lower our repurchase agreement leverage and increase our liquidity position to $181.6 million as of March 31, 2021, as noted above.

Sources of Funding

We believe that our existing cash balances, net investments in mortgage investments, 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 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.

Cash Flows

As of March 31, 2021, our cash totaled $60.8 million, which included cash and cash equivalents of $48.2 million and restricted cash of a consolidated VIE of $12.6 million, representing a net increase of $20.8 million from $40.0 million as of December 31, 2020. Cash provided by operating activities of $0.7 million during the three months ended March 31, 2021 was attributable primarily to net interest income less our general and administrative expenses. Cash provided by investing activities of $206.0 million during the three months ended March 31, 2021 was primarily generated by sales of agency MBS and mortgage credit securities, receipt of principal payments from agency MBS, and principal receipts on mortgage loans of a consolidated VIE, partially offset by purchases of new agency MBS and MSR financing receivables and net payments for settlements and deposits for margin on our interest rate derivative instruments. Cash used in financing activities of $185.9 million during the three months ended March 31, 2021 was primarily from repayments of repurchase agreements, net repayments of secured debt of a consolidated VIE, dividend payments to stockholders, and from repurchases of our common stock.

Debt Capital

Long-Term Unsecured Debt

As of March 31, 2021, we had $73.1 million of total long-term unsecured debt, net of unamortized debt issuance costs of $0.6 million. Our 6.625% Senior Notes due 2023 with a principal amount of $23.8 million outstanding as of March 31, 2021 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 $34.9 million outstanding as of March 31, 2021 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025. Our trust preferred debt with a principal amount of $15.0 million outstanding as of March 31, 2021 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature between 2033 and 2035. Each of our unsecured notes may be redeemed in whole or part at any time and from time to time at our option at a redemption price equal to the principal amount plus accrued and unpaid interest.

Repurchase Agreements

We have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our mortgage investments. 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 mortgage investments through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.

Our repurchase agreements to finance our acquisition of MBS 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. Certain of our repurchase agreements include financial covenants, with which the failure to comply would constitute an event of default. 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.

Our repurchase agreement to finance our acquisition of mortgage loans is subject to a master repurchase agreement between a wholly-owned subsidiary of the Company, for which we provide a full guarantee of performance, and a third party lender. The agreement contains financial covenants including our maintenance of a minimum level of net worth, liquidity and profitability, with which the failure to comply would constitute an event of default. Similarly, the agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. Upon the occurrence of an event of default or termination, the counterparty has the option to terminate all other indebtedness arrangements with us and to demand immediate payment of any amount due from us.

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 mortgage investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates, higher prepayments or higher actual or expected credit losses. Our repurchase agreements generally provide that valuations for mortgage investments 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 mortgage investments 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 cash or additional securities 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 mortgage investments 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 mortgage investments.

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

	March 31, 2021
Agency MBS repurchase financing:
Repurchase agreements outstanding	$	474,050
Agency MBS collateral, at fair value ⁽¹⁾		491,811
Net amount ⁽²⁾		17,761
Weighted-average rate		0.15	%
Weighted-average term to maturity	14.0 days
Mortgage loans repurchase financing:
Repurchase agreements outstanding	$	31,500
Mortgage loans collateral, at fair value		44,914
Net amount ⁽²⁾		13,414
Weighted-average rate		3.00	%
Weighted-average term to maturity	225.0 days
Total mortgage investments repurchase financing:
Repurchase agreements outstanding	$	505,550
Mortgage investments collateral, at fair value		536,725
Net amount ⁽²⁾		31,175
Weighted-average rate		0.33	%
Weighted-average term to maturity	27.1 days
Maximum amount outstanding at any month-end during the period	$	606,186

⁽¹⁾	Includes $85,002 at sale price of unsettled agency MBS sale commitments which are 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 March 31, 2021, we had outstanding repurchase agreement balances with 7 counterparties and have master repurchase agreements in place with a total of 17 counterparties located throughout North America, Europe and Asia. As of March 31, 2021, no more than 1.8% of our stockholders’ equity was at risk with any one counterparty, with the top five counterparties representing approximately 6.5% of our stockholders’ equity. The table below includes a summary of our repurchase agreement funding by number of counterparties and counterparty region as of March 31, 2021:

	Number of		Percentage of Repurchase
	Counterparties		Agreement Funding
North America		4		51.0	%
Europe		1		20.8	%
Asia		2		28.2	%
		7		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, put and call options on U.S. Treasury note futures, Eurodollar futures, interest rate swap 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 March 31, 2021, we had outstanding interest rate swaps with the following aggregate notional amount and corresponding initial margin held in collateral deposit with the custodian (dollars in thousands):

	March 31, 2021
	Notional		Collateral
	Amount		Deposit
Interest rate swaps	$	675,000	$	22,605

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.

Margin Requirements for Agency MBS Purchase and Sale Commitments

Our commitments to purchase and sell agency MBS, including TBA commitments, 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 the agency MBS

underlying our purchase and sale commitments change 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.

MSR Financing Receivable Commitments

We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enables us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. We have committed to invest a minimum of $25 million of capital with the mortgage servicing counterparty for a three-year period ending December 31, 2023. As of March 31, 2021, we have fully funded the minimum commitment. At any time prior to December 31, 2023, we have the option to request the mortgage servicing counterparty to sell the related MSR investments and repay us amounts owed to us under the MSR financing transaction less a minimum fee the mortgage servicing counterparty would have earned over the remaining original commitment period.

At our election, the mortgage servicing counterparty could utilize leverage on the MSRs that are subject to our MSR financing receivables to finance the purchase of additional MSRs to increase potential returns to us. The lender providing the leverage to our mortgage servicing counterparty would have a secured interest in the MSRs pledged under a credit facility between the lender and our mortgage servicing counterparty. Under the credit facility, if the fair value of the pledged MSR collateral declines and the lender demands additional collateral from our mortgage servicing counterparty through a margin call, we would be required to provide the mortgage servicing counterparty with additional funds to meet such margin call. If we were unable to satisfy such margin call, the lender could liquidate the MSR collateral position that are referenced to our MSR financing receivable to satisfy the loan obligation and thereby reducing the value of our MSR financing receivable. As of March 31, 2021, we have not requested the mortgage servicing counterparty to utilize any leverage on the MSRs that are subject to our MSR financing receivable.

Our mortgage servicing counterparty may also pledge MSRs subject to other similar MSR financing receivable relationships with other third parties as collateral under the same credit facility that have a pledge of the MSRs referenced to our MSR financing receivable. If such third party to another MSR financing receivable were unable to satisfy a margin call on its referenced pool of MSRs and the value of such MSRs were insufficient to satisfy the corresponding debt obligation to the lender, the lender would have recourse to the MSRs referenced to our MSR financing receivable. In such case, if the mortgage servicing counterparty to our MSR financing receivable fails to satisfy such third party’s shortfall, the lender could liquidate the MSRs referenced to our MSR financing receivable if we did not fund such remaining margin deficiency. As a result of this cross collateralization of our mortgage servicing counterparty’s credit facility, the value of our MSR financing receivables may be adversely impacted by the inability of our mortgage servicing counterparty’s other contracted parties to meet their margin calls. As of March 31, 2021, there are no borrowings outstanding under our mortgage servicing counterparty’s credit facility.

Under the arrangement, we are obligated to provide funds to the mortgage servicing counterparty to fund its advances of delinquent payments on the serviced pool of mortgage loans within the referenced MSR with the mortgage servicing counterparty required to return to us any subsequent servicing advances collected. At our option, we could instruct the mortgage servicing counterparty to fund any servicing advances with draws under its credit facility, subject to available borrowing capacity, while we would be required to fund such financing costs.

Equity Capital

Common Equity Distribution Agreements

On August 10, 2018, we entered into separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & 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 three months ended March 31, 2021, there were no issuances of common stock under the common equity distribution agreements.

As of March 31, 2021, we had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.

Preferred Stock

As of March 31, 2021, we had Series B Preferred Stock outstanding with a liquidation preference of $8.4 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC 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. There were no shares of Series B Preferred Stock repurchased by us during the three months ended March 31, 2021.

As of March 31, 2021, we had Series C Preferred Stock outstanding with a liquidation preference of $27.9 million. The Series C Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC 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 our 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. We have declared and paid all required quarterly dividends on our Series C Preferred Stock to date. There were no shares of Series C Preferred Stock repurchased by us during the three months ended March 31, 2021.

Preferred Equity Distribution Agreement

On March 21, 2019, we entered into an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC, B. Riley FBR, Inc., Compass Point Research and Trading, LLC and Ladenburg Thalmann & Co. Inc., 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 Series B preferred equity distribution agreement, shares of our Series B Preferred stock may be offered and sold through the 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.

During the three months ended March 31, 2021, there were no issuances of preferred stock under the Series B preferred equity distribution agreement. As of March 31, 2021, we had 1,645,961 shares of Series B Preferred stock available for sale under the Series B preferred equity distribution agreement.

Common Share Repurchase Program

As of March 31, 2021, we had remaining availability of 16,094,994 shares of Class A common stock remain available for repurchase under the Repurchase Program.

REIT Distribution Requirements

We have elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, we are 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 and Other Commitments

As of March 31, 2021 and December 31, 2020, 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 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 generally limited in nature to those of a passive holder of beneficial interests in securitized financial assets. As of March 31, 2021 and December 31, 2020, we had consolidated for financial reporting purposes one securitization trust for which we determined that our investment provided us with both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We were not required to consolidate for financial reporting purposes any other VIEs as of March 31, 2021 and December 31, 2020, as we did not have the power to direct the activities that most significantly impact the economic performance of such entities. As of March 31, 2021 and December 31, 2020, 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, credit risk, liquidity risk and regulatory risk. See “Item 1 — Business” in our Annual Report on Form 10-K for the year ended December 31, 2020 for discussion of our risk management strategies related to these market risks. The following is additional information regarding certain of these market risks.

Interest Rate Risk

We are exposed to interest rate risk in our agency MBS portfolio. Our investments in agency 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. We also manage our interest rate risk through investment allocation between our agency MBS and MSR related assets. As interest rates rise, the value of our MSR financing receivables is generally expected to increase due to lower expectations of prepayments in the referenced pools of mortgage loans. Conversely, as interest rates fall, the value of MSR financing receivables is generally expected to decline due to higher expectations of prepayments in the referenced pools of mortgage loans. Accordingly, our MSR financing receivables that derive value from the value of a related MSR can be a fair value hedge of our fixed-rate agency MBS.

The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS, MSR financing receivable 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. The interest rate sensitivity of our MSR financing receivable is derived from an internal 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 agency 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- or SOFR-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.

•

The yield curve that results from applying an instantaneous parallel decrease in interest rates reflects an interest rate of less than 0% in certain points of the curve. The results of the analyses included in the tables below reflect the effect of these negative interest rates.

•

The analyses do not reflect any estimated changes in our income tax provision.

•

The analyses do not reflect any estimated changes in the fair value of our mortgage credit investments.

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):

	March 31, 2021
				Value			Value
				with 50			with 50
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	515,674		$	498,891		$	530,186
TBA commitments		(3,079	)		(6,034	)		(550	)
MSR financing receivable		36,005			37,527			32,814
Interest rate swaps		1,091			23,800			(21,616	)
Options on U.S. Treasury note futures		1			—			88
Equity available to common stock		203,154			207,644			194,383
Book value per common share	$	6.12		$	6.26		$	5.86
Book value per common share percent change					2.21	%		(4.32	)%

	March 31, 2021
				Value			Value
				with 100			with 100
				Basis Point			Basis Point
				Increase in			Decrease in
	Value			Interest Rates			Interest Rates
Agency MBS	$	515,674		$	480,583		$	541,734
TBA commitments		(3,079	)		(9,285	)		1,372
MSR financing receivable		36,005			38,383			25,607
Interest rate swaps		1,091			46,508			(44,324	)
Options on U.S. Treasury note futures		1			—			1,161
Equity available to common stock		203,154			209,650			179,011
Book value per common share	$	6.12		$	6.32		$	5.40
Book value per common share percentage change					3.20	%		(11.88	)%

Spread Risk

Our mortgage investments 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 mortgage investments 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 7.0 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 March 31, 2021.

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):

	March 31, 2021
				Value with			Value with
				10 Basis Point			10 Basis Point
				Increase in			Decrease In
				Agency MBS			Agency MBS
	Value			Spreads			Spreads
Agency MBS	$	515,674		$	511,979		$	519,369
TBA		(3,079	)		(3,699	)		(2,459	)
Equity available to common stock		203,154			198,838			207,470
Book value per common share	$	6.12		$	5.99		$	6.25
Book value per common share percent change					(2.12	)%		2.12	%

	March 31, 2021
				Value with			Value with
				25 Basis Point			25 Basis Point
				Increase in			Decrease In
				Agency MBS			Agency MBS
	Value			Spreads			Spreads
Agency MBS	$	515,674		$	506,436		$	524,912
TBA commitments		(3,079	)		(4,630	)		(1,528	)
Equity available to common stock		203,154			192,365			213,943
Book value per common share	$	6.12		$	5.80		$	6.45
Book value per common share percent change					(5.31	)%		5.31	%

Credit Risk

Unlike our agency MBS investments, our mortgage credit investments do not carry a credit guarantee from a GSE or government agency. Accordingly, our mortgage credit investments expose us to credit risk. Credit risk, sometimes referred to as non-performance or non-payment risk, is the risk that we will not receive, in full, the contractually required principal or interest cash flows stemming from our investments due to an underlying borrower’s or issuer’s default on their obligation. Upon a mortgage loan borrower’s default, a foreclosure sale or other liquidation of the underlying mortgaged property will result in a credit loss if the liquidation proceeds fall short of the mortgage loan’s unpaid principal balance and unpaid accrued interest.

Some of our mortgage credit investments have credit enhancements that mitigate our exposure to the credit risk of the underlying mortgage loans. Credit losses incurred on the underlying mortgage loans collateralizing our investments in non-agency MBS are allocated on a “reverse sequential” basis. Accordingly, any credit losses realized on the underlying mortgage loans are first absorbed by the beneficial interests subordinate to our non-agency MBS, if any, to the extent of their respective principal balance, prior to being allocated to our investments.

Other of our non-agency MBS investments represent “first loss” positions. Accordingly, for such investments, credit losses realized on the underlying pool of mortgage loans are first allocated to the Company’s security, to the extent of its principal balance, prior to being allocated to the respective securitization’s more senior credit positions.

We accept exposure to credit risk at levels we deem prudent within our overall investment strategy and our evaluation of the potential risk-adjusted returns. We attempt to manage our exposure to credit risk through prudent asset selection resulting from pre-acquisition due diligence, on-going performance monitoring subsequent to acquisition, and the disposition of assets for which we identify negative credit trends.

There is no guarantee that our attempts to manage our credit risk will be successful. We could experience substantial losses if the credit performance of the mortgage loans to which we are exposed falls short of our expectations.

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 pursuant to our variable dividend policy; 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 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 either (i) agency MBS or (ii) mortgage credit investments that generally consist of mortgage loans secured by either residential or commercial real property or MBS collateralized by such mortgage loans, and debt securities secured by MSRs;

•

the uncertainty and economic impact of the ongoing COVID-19 pandemic and the measures taken by the government to address it, including the impact on our business, financial condition, liquidity and results of operations due to a significant decrease in economic activity and disruptions in our financing operations, among other factors;

•

our ability to qualify and maintain our qualification as a 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, as amended (“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;

•

credit risks underlying our assets, including changes in the default rates and management’s assumptions regarding default rates on the mortgage loans securing our non-agency MBS;

•

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 mortgage investments or pursuing business activities other than investing in mortgage investments;

•

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; 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 changes in the Federal Funds rate by the U.S. Federal Reserve;

•

the effect of any changes to LIBOR and SOFR and establishment of alternative reference rates;

•

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;

•

U.S. Federal Reserve monetary policy;

•

the federal conservatorship of Fannie Mae and 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 our Annual Report on Form 10-K for the year ended December 31, 2020 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 March 31, 2021 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

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Purchases of Equity Securities by the Issuer

On October 26, 2015, we announced that our Board of Directors authorized a share repurchase program pursuant to which we may repurchase up to 2,000,000 shares of Class A common stock (the “Repurchase Program”). On July 31, 2020, we announced that our Board of Directors authorized an increase in the Repurchase Program pursuant to which we may repurchase up to 18,000,000 shares of Class A common stock, inclusive of 56,090 shares previously available to be repurchased under the prior authorization. As of March 31, 2021, we had repurchased 1,905,006 shares of Class A common stock and there remain available for repurchase 16,094,994 shares of Class A common stock under the Repurchase Program.

The following table presents information with respect to our purchases of our Class A common stock during the three months ended March 31, 2021 by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act:

Settlement Date	Total Number of Shares Purchased		Average Net Price Paid Per Share		Total Number of Shares Repurchased as Part of Repurchase Program		Maximum Number of Shares that May Yet be Purchased Under the Repurchase Program
January 1, 2021 - January 31, 2021		132,447	$	3.78		132,447		16,100,202
February 1, 2021 - February 28, 2021		—		—		—		16,100,202
March 1, 2021 - March 31, 2021		5,208		3.85		5,208		16,094,994
Total		137,655	$	3.78		137,655		16,094,994

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).

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).

3.09		Amendment No. 4 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 December 13, 2019).

4.01		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. 333-235885) filed on January 10, 2020).

4.02		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. 333-235885) filed on January 10, 2020).

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		Form of Senior Note. (incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (File No. 333-235885) filed on January 10, 2020).

4.06		Form of Subordinated Note. (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-3 (File No. 333-235885) filed on January 10, 2020).

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

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

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

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

4.11		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).

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

4.13		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).

4.14		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).

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.*

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		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.***

101.SCH		Inline XBRL Taxonomy Extension Schema Document***

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document***

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document***

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document***

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document***

104		The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, has been formatted in Inline XBRL.

*	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 March 31, 2021, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at March 31, 2021 and December 31, 2020; (ii) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020; and (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020.

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: May 10, 2021