8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (date of earliest event reported): July 28, 2010

ARLINGTON ASSET INVESTMENT CORP.

(Exact name of Registrant as specified in its charter)

Virginia	54-1873198	000-50230
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)	(Commission File Number)

1001 Nineteenth Street North

Arlington, VA 22209

(Address of principal executive offices) (Zip code)

(877) 370-4413

(Registrant’s telephone number including area code)

N/A

(Former name or former address, if changed from last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On July 28, 2010, Arlington Asset Investment Corp. issued a press release announcing its financial results for the quarter ended June 30, 2010.  A copy of the press release is attached hereto as Exhibit 99.1.

The information in Item 2.02 of this Current Report on Form 8-K, including the exhibit furnished pursuant to Item 9.01, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section.  Furthermore, the information in Item 2.02 of this Current Report on Form 8-K, including the exhibit furnished pursuant to Item 9.01, shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933.

Item 8.01. Other Events.

On July 28, 2010, the Company announced that its board of directors has authorized a new share repurchase program (the “2010 Repurchase Program”), pursuant to which the Company may repurchase up to 500,000 shares of the Company’s Class A common stock.  The 2010 Repurchase Program replaces the Company’s prior repurchase program originally authorized in April 2003 (the “2003 Repurchase Program”), pursuant to which the Company was authorized to repurchase up to 5,000,000 shares of its Class A common stock.  The board of directors terminated the 2003 Repurchase Program and replaced it with the 2010 Repurchase Program in order to better position the Company to continue share repurchases while preserving its ability to use its net operating loss carryforwards and net capital loss carryforwards.

Repurchases under the 2010 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 purchased will depend upon market conditions and other factors.  The 2010 Repurchase Program will be funded using the Company’s cash on hand and cash generated from operations.  The 2010 Repurchase Program has no expiration date and may be suspended or discontinued at any time without prior notice.

During the three months ended June 30, 2010, the Company repurchased 29,022 shares of its Class A common stock at an average price of $18.87 per share and a total cost of $0.5 million.  Upon adoption of the 2010 Repurchase Program on July 28, 2010, the board determined to apply the repurchases made during the three months ended June 30, 2010 against the shares authorized under the 2010 Repurchase Program, instead of the 2003 Repurchase Program.  Consequently, at July 28, 2010, 470,978 shares of Class A common stock remained available for purchase under the 2010 Repurchase Program.

Item 9.01. Financial Statements and Exhibits.

(d)          Exhibits.

Exhibit No.	Description
99.1	Arlington Asset Investment Corp. Press Release dated July 28, 2010.

2

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

	ARLINGTON ASSET INVESTMENT CORP.
Date: July 29, 2010	By:	/s/ Kurt R. Harrington
	Name:	Kurt R. Harrington
	Title:	Executive Vice President, Chief Financial Officer and Chief Accounting Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Arlington Asset Investment Corp. Press Release dated July 28, 2010.

EX-99.1

Contacts:

Media: 877.370.4413 or ir@arlingtonasset.com 

Investors: Kurt Harrington at 877.370.4413 or ir@arlingtonasset.com

Arlington Asset Investment Corp. Reports Second Quarter 2010 Financial Results

Book value increase of $3.18 per share to $23.21 per share

Core Operating Income of $9.7 million or $1.23 per share (1)

Low leverage with debt equal to shareholder’s equity

Board authorizes 500,000 share repurchase program

ARLINGTON, VA, July 28, 2010 – Arlington Asset Investment Corp. (NYSE: AI) (the “Company”) today reported net income of $8.8 million for the quarter ended June 30, 2010, or $1.10 per share (diluted), compared to a net loss of $32.2 million, or $4.18 per share (diluted) for the quarter ended June 30, 2009. For the six months ended June 30, 2010, the Company reported net income of $13.4 million, or $1.70 per share (diluted), compared to net income of $69.4 million, or $9.04 per share (diluted) for the six months ended June 30, 2009.  The six months ended June 30, 2009 results included a pre-tax gain of $132.5 million from the extinguishment of trust preferred securities.  As of June 30, 2010, the Company’s book value per share was $23.21.

“In the second quarter, Arlington benefited from the positive impact of increased capital allocation to non-agency Re-REMIC mezzanine securities and continued strong performance in the non-agency MBS sector.  Non-agency MBS prices moved sharply higher early in the quarter, remained resilient through the European turmoil and are currently valued at or above prior high prices for 2010.  The Company was well positioned for the price rise and experienced a $3.18 per share increase in book value during the quarter, net of a $0.35 dividend.  In addition, the credit profile of the non-agency portfolio improved with total 60 day plus delinquencies and loss severities declining during the quarter,” said J. Rock Tonkel, Jr., President and Chief Operating Officer.  “Higher prices for non-agency MBS indicate that investors have begun to apply less severe expectations for credit losses and realizable value.  We believe the non-agency sector continues to be significantly undervalued and offers the opportunity for high loss adjusted yields and therefore, attractive risk-adjusted returns on new investments as well as the potential for reflation to prices more in line with other investment alternatives.  For Arlington, the potential for book value growth through reflation is represented by the $196 million purchase discount on the Company’s non-agency MBS.”

Second Quarter Highlights

Net interest income from the Company’s non-agency mortgage backed securities (“MBS”) portfolio was $8.1 million during the second quarter of 2010 compared to $7.6 million in the first quarter of 2010 driven primarily by increased investments in Re-REMIC mezzanine securities.  Realized gains from non-agency MBS during the second quarter of 2010 were $4.6 million compared to $1.5 million in the first quarter of 2010.  Cash expenses declined by $0.8 million from the first quarter of 2010 to $2.6 million for the second quarter of 2010.  Cash fixed expenses declined by $0.8 million from the first quarter of 2010 to $1.7 million in the second quarter of 2010.

During the quarter, the Company’s investable capital was deployed primarily in its non-agency MBS portfolio with a market value of $213 million at June 30, 2010.  The following table represents certain statistics of the Company’s non-agency MBS portfolio as of June 30, 2010 (dollars in millions):

	Senior Securities			Re-REMIC / Mezzanine Securities			Total non-agency MBS
2nd Qtr. yield (as a % of amortized cost)		16.2	%		20.1	%		18.6	%
Average cost (as a % of face value)		62	%		46	%		49	%
WAC		5.6	%		5.8	%		5.7	%
Face value	$	88		$	298		$	386
Amortized cost	$	54		$	129		$	183
Purchase discount	$	34		$	162		$	196
Fair market value	$	62		$	151		$	213

Key credit and prepayment measures in the Company’s non-agency MBS portfolio improved during the quarter driven by increased capital allocation to higher credit quality Re-REMIC mezzanine securities as well as decreases in trailing three month average loss severities across all segments of the portfolio.  Total 60 day plus delinquencies in the Company’s non-agency MBS portfolio declined to 20.8% at June 30, 2010 from 21.9% at March 31, 2010 and trailing three month average loss severities on liquidated loans declined to 42.8% at June 30, 2010 from 47.4% at March 31, 2010.

At June 30, 2010, the value of the Company’s agency MBS portfolio was $176 million with approximately $106 million subject to forward sale transactions generating a nominal impact on income and $70 million which was hedged in a similar amount using Eurodollar futures with a 48 month maturity and a weighted average rate of 2.43%.  The $70 million portion of the agency MBS portfolio not subject to forward sale transactions had a coupon of 5.00, a CPR of 4.4, and a yield of 4.8% at June 30, 2010.  Within the agency MBS portfolio, the Company intends to continue to migrate from an agency portfolio that in recent quarters has been structured to substantially eliminate price risk with limited economic benefit to a portfolio that is substantially hedged, yet provides a risk-adjusted return that takes advantage of attractive hedged net interest spreads in the current market.

The Company’s board of directors approved a $0.35 dividend for the second quarter of 2010.  The dividend will be paid on July 30, 2010 to shareholders of record on June 30, 2010.  This represented a 7.3% annualized dividend yield based on the Class A common stock closing price of $19.29 on July 28, 2010.

In addition, the board of directors has authorized a new share repurchase program pursuant to which the Company may repurchase up to 500,000 shares of its Class A common stock, of which 29,022 shares were repurchased during the second quarter of 2010.  The new share repurchase program replaces the Company’s prior share repurchase program.

 (1)  Non-GAAP Financial Measures

In addition to the financial results reported in accordance with generally accepted accounting principles as consistently applied in the United States (GAAP), the Company has disclosed non-GAAP core operating income for the quarter ended June 30, 2010 in this press release. This non-GAAP measurement is used by management to analyze and assess the operating results and dividends. In determining this non-GAAP core operating income, the Company has excluded the following non-cash expenses: (1) compensation costs associated with stock-based awards, (2) accretion/amortization of MBS purchase discounts/premiums adjusted for principal repayments in excess of invested capital, and (3) unrealized mark-to-market adjustments on the trading MBS and interest rate hedge instruments.  The Company has also excluded non-recurring costs.  Management believes that this non-GAAP measurement assists investors in understanding the impact of these non-core items and non-cash expenses on the performance of the Company and provides additional clarity around the Company's forward earnings capacity and trend.

A limitation of utilizing this non-GAAP measure is that the GAAP accounting effects of these events do in fact reflect the underlying financial results of Arlington Asset Investment Corp.’s business and these effects should not be ignored in evaluating and analyzing the Company's financial results. Therefore, management believes net income on a GAAP basis and core operating income on a non-GAAP basis should be considered together.

The following table presents a reconciliation of the GAAP financial results to non-GAAP measurements discussed above (dollars in thousands):

GAAP net income	$	8,773
Adjustments:
Non-recurring costs		(167	)
Stock compensation		726
Net unrealized mark-to-market gain on trading MBS and interest rate hedge instruments		708
Adjusted interest related to purchase discount accretion / premium amortization		(297	)
Non-GAAP core operating income	$	9,743
Non-GAAP core operating income per share (diluted)	$	1.23

About the Company

Arlington Asset Investment Corp. (NYSE: AI) is a principal investment firm that invests primarily in mortgage-related assets. The Company is headquartered in the Washington, D.C. metropolitan area. For more information, please visit www.arlingtonasset.com.

Statements concerning future performance, returns, plans and steps to position the Company to realize value, and any other guidance on present or future periods, constitute forward-looking statements that are subject to a number of factors, risks and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These factors include, but are not limited to, changes in interest rates, increased costs of borrowing, decreased interest spreads, changes in default rates, preservation of our net operating loss and net capital loss carry-forwards, impacts of regulatory changes and changes to Fannie Mae and Freddie Mac, availability of opportunities that meet or exceed our risk adjusted return expectations, ability and willingness to make future dividends, ability to generate sufficient cash through retained earnings to satisfy capital needs, changes in mortgage pre-payment speeds, risks associated with merchant banking investments, the realization of gains and losses on principal investments, available technologies, competition for business and personnel, and general economic, political, regulatory and market conditions. These and other risks are described in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q that are available from the Company and from the SEC and you should read and understand these risks when evaluating any forward-looking statement.

Financial data follows

ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)	Quarter Ended
(Unaudited)	June 30,
	2010			2009
INTEREST INCOME
Interest on mortgage-backed securities	$	10,049		$	1,280
Dividends		-			108
Other interest income		-			1
Total interest income		10,049			1,389
INTEREST EXPENSE
Interest on short-term debt		137			79
Interest on long-term debt		139			504
Total interest expense		276			583
Net interest income		9,773			806
OTHER INCOME, NET
Investment gain		2,378			38
Other loss		(3	)		(4	)
Total other income, net		2,375			34
Income from continuing operations before other expenses		12,148			840
OTHER EXPENSES
Compensation and benefits		2,379			2,363
Professional services		90			4,891
Business development		19			5,533
Occupancy and equipment		88			174
Communications		58			82
Other operating expenses		492			995
Total other expenses		3,126			14,038
Income (loss) from continuing operations before income taxes		9,022			(13,198	)
Income tax provision (benefit)		249			(501	)
Net income (loss) from continuing operations		8,773			(12,697	)
Loss from discontinuing operations, net of taxes		-			(24,019	)
Net income (loss)		8,773			(36,716	)
Net loss attributable to non-controlling interests		-			(4,559	)
Net income (loss) attributable to Arlington Asset Investment Corp.	$	8,773		$	(32,157	)
EARNINGS (LOSS) PER SHARE - BASIC
Income (loss) from continuing operations attributable to Arlington Asset Investment Corp. shareholders	$	1.12		$	(1.65	)
Discontinued operations attributable to Arlington Asset Investment Corp. shareholders		-			(2.53	)
Net income (loss) attributable to Arlington Asset Investment Corp. shareholders	$	1.12		$	(4.18	)
EARNINGS (LOSS) PER SHARE - DILUTED
Income (loss) from continuing operations attributable to Arlington Asset Investment Corp. shareholders	$	1.10		$	(1.65	)
Discontinued operations attributable to Arlington Asset Investment Corp. shareholders		-			(2.53	)
Net income (loss) attributable to Arlington Asset Investment Corp. shareholders	$	1.10		$	(4.18	)
Weighted average shares  - basic (in thousands)		7,815			7,696
Weighted average shares  - diluted (in thousands)		7,952			7,696

ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)	Six Months Ended
(Unaudited)	June 30,
	2010			2009
INTEREST INCOME
Interest on mortgage-backed securities	$	19,250		$	3,861
Dividends		-			108
Other interest income		1			20
Total interest income		19,251			3,989
INTEREST EXPENSE
Interest on short-term debt		227			304
Interest on long-term debt		277			2,790
Total interest expense		504			3,094
Net interest income		18,747			895
OTHER INCOME, NET
Gain on extinguishment of long-term debt		-			132,453
Investment gain		2,731			44
Other loss		(7	)		(143	)
Total other income, net		2,724			132,354
Income from continuing operations before other expenses		21,471			133,249
OTHER EXPENSES
Compensation and benefits		5,299			10,502
Professional services		760			5,119
Business development		39			7,883
Occupancy and equipment		204			322
Communications		112			148
Other operating expenses		1,297			2,696
Total other expenses		7,711			26,670
Income from continuing operations before income taxes		13,760			106,579
Income tax provision		361			8,445
Net income from continuing operations		13,399			98,134
Loss from discontinuing operations, net of taxes		-			(40,186	)
Net income		13,399			57,948
Net loss attributable to non-controlling interests		-			(11,459	)
Net income attributable to Arlington Asset Investment Corp.	$	13,399		$	69,407
EARNINGS PER SHARE - BASIC
Income from continuing operations attributable to Arlington Asset Investment Corp. shareholders	$	1.72		$	12.82
Discontinued operations attributable to Arlington Asset Investment Corp. shareholders		-			(3.76	)
Net income attributable to Arlington Asset Investment Corp. shareholders	$	1.72		$	9.06
EARNINGS PER SHARE - DILUTED
Income from continuing operations attributable to Arlington Asset Investment Corp. shareholders	$	1.70		$	12.78
Discontinued operations attributable to Arlington Asset Investment Corp. shareholders		-			(3.74	)
Net income attributable to Arlington Asset Investment Corp. shareholders	$	1.70		$	9.04
Weighted average shares  - basic (in thousands)		7,774			7,657
Weighted average shares  - diluted (in thousands)		7,899			7,678

ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
ASSETS	June 30, 2010			December 31, 2009
Cash and cash equivalents	$	8,579		$	10,123
Receivables
Interest		2,447			2,011
Other		43			20
Mortgage-backed securities, at fair value
Available-for-sale		212,950			295,600
Trading		175,783			-
Other investments		2,105			2,580
Equipment and software, net		95			114
Prepaid expenses and other assets		3,813			3,201
Total assets	$	405,815		$	313,649
LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements	$	176,244		$	126,830
Interest payable		141			124
Accrued compensation and benefits		4,769			5,921
Dividend payable		2,791			-
Derivative liability		1,881			-
Accounts payable, accrued expenses and other liabilities		22,298			13,904
Long-term debt		15,927			16,857
Total liabilities		224,051			163,636
Equity:
Common stock		79			80
Additional paid-in capital		1,509,021			1,507,394
Accumulated other comprehensive income		29,327			7,015
Accumulated deficit		(1,356,663	)		(1,364,476	)
Total equity		181,764			150,013
Total liabilities and equity	$	405,815		$	313,649
Book Value per Share	$	23.21		$	19.54
Shares Outstanding (in thousands)		7,830			7,679